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1-Page Summary of Fault Lines

Overview

Even though years have past, many of us are still feeling the effects of the financial crisis that rocked the world in 2008. There are still unanswered questions about what caused it and how exactly it happened.

It’s easy to blame the bankers for the financial crisis, but we have to look deeper into where it stems from.

Think of a crisis as an earthquake. Earthquakes don’t destroy buildings, they cause destruction because something bigger is happening beneath the surface.

The author explains that there were many deep flaws in the U.S. economy and the world’s economy, which contributed to the crisis. The faults were not immediately apparent, but they had been present for some time before they caused a major problem with both economies.

Unemployment is a problem that has been getting worse, and this book will explain why. It will also discuss how the global economy contributed to unemployment as well as other factors.

In this article, you will learn how German and Japanese auto manufacturing contributed to the crisis. You’ll also discover how bankers can be incentivized to tone down risky behavior with certain bonuses. In addition, you’ll find out why people were blind to the financial crisis growing right before their eyes.

Big Idea #1: The advent of cheap loans was one fault line of the crisis, and banks and politicians were complicit.

The economic crisis was caused by a number of factors, but one of them was growing income inequality. Top earners were making more money while the average median income stayed nearly the same. For example, in 1997, the median household income was $51,704 and by 2009 it had barely budged to $52,196.

The gap between the rich and poor is growing. The reason for this is that there isn’t enough qualified labor to meet market demands, so employers are forced to pay more for workers with a higher education. It also explains why the income gap was related to education level: In 2008, high school graduates earned $28 per hour on average while college graduates made about $48 an hour, or 72% more than those with just a high school diploma.

Politicians know that every worker is a potential vote, so they encourage cheap loans.

Politicians supported banks in their expansion of credit to low-income households. This type of lending became very popular, while interest rates were lowered.

The effects were immediate: more money was being spent, which meant that the economy grew. However, this growth was fueled by debt; people were essentially just putting off paying their bills.

As you will see in the following points, America’s spending spree did not only affect America but also the rest of the world.

Big Idea #2: Exporting countries tried to shove their surpluses at the U.S., but the U.S. could only absorb so much.

You may have heard that your cell phone was made in China, your car in Japan and your shirt in India. However, did you know that the manufacturing of these products contributed to the 2008 financial crisis?

In the years before 2008, there was a huge imbalance between nations that export more than they import and those who import more than they export. The problem at the time was that there were too many exporters.

After World War II, Germany and Japan’s economies were in bad shape. They had to focus on producing goods that could be sold to other countries in order to recover economically. Exporting goods made them wealthier as they grew their economy.

Germany and Japan were the first countries to have success in exporting goods. China and India followed suit, as did other developing nations around the world. These countries used cheap labor to produce competitive products, which they then exported to earn a surplus of capital. They eventually earned so much money from exports that they wanted to invest back into their own country by building factories or buying property, but following the financial crisis in Asia in 1997, investors became wary of doing business with Asian companies since there was no transparency about their financial systems. Thus investment flowed into America because Americans consumed more than they should have been consuming during an economic boom; while most of the rest of the world wasn’t receiving enough stimulus for them to consume at a level where global imbalances could be corrected.