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Bernanke Blames the Global Financial Crisis on China
Another example of the “it is never the Fed’s fault” disease reared its ugly head in the context of the G20 meetings. The big row is over global imbalances with the US mad at China for not doing enough to rebalance its economy (code for consume more, export less). China is admittedly trying to take the barmy position that its huge reserves really don’t count (huh?) so I suppose the Fed thinks it can trot out some whoppers of its own.
Actually, this is an old whopper, since the Fed has maintained for some time that the “savings glut,” meaning emerging markets and in particular China saving too much, had a lot to do with the crisis. From the Financial Times:
Foreign investors’ hunger for safe US assets helped to cause the 2007-2009 crisis by encouraging banks to turn risky mortgages into AAA rated bonds, Ben Bernanke, US Federal Reserve chairman, argued in Paris on Friday.Help me. If this really passes for analysis at the Fed, as opposed to a mere cynical effort to create a talking point, no wonder we had a global crisis.
“The preference by so many investors for perceived safety created strong incentives for US financial engineers to develop investment products that ‘transformed’ risky loans into highly rated securities,” said Mr Bernanke, presenting a new research paper that he co-wrote with other Fed economists.
Mr Bernanke has previously argued that a “global savings glut” led emerging markets to send large amounts of capital to the US in the 2000s, pushing down US interest rates. His new paper says that those emerging markets wanted safe assets – and US regulators failed to keep the financial system from creating them.
“In analogy to the Asian crisis, the primary cause of the breakdown was the poor performance of the financial system and financial regulation in the country receiving the capital inflows, not the inflows themselves,” Mr Bernanke said, adding that the US crisis had given him new sympathy for developing countries that have to manage large capital inflows.
This argument supports Mr Bernanke’s view that low Fed interest rates did not make an important contribution to the financial crisis and the main errors were in regulation.
According to the paper, more than 75 per cent of investment from “savings glut” countries was in AAA rated US assets in 2007, whereas such assets accounted for only 36 per cent of total US securities.
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