The Economics Book

324

Saving seems, at first sight, a
prudent thing to do, a safeguarding
of the future. However, savings in
the global capitalist world is a
mixed blessing. Any money that
goes into savings is money lost
to direct investment or consumer
spending, but it doesn’t just vanish.
Bernanke’s argument is that money
from the savings glut overseas
ended up flooding the financial
markets of the US.

An abundance of money
All this money damped down
interest rates and reduced the
incentive for Americans and
Europeans to save. With loan
markets apparently awash with
easy money, lenders bent over
backward to offer deals. To meet
the demand for outlets for the
foreign cash, America’s financial
engineers came up with products
such as collateralized debt
obligations (CDOs), which packaged
high-risk mortgages with lower-risk
debts to make bonds that were
given AAA credit ratings, meaning
that they were rated very low-risk.
Meanwhile, house prices boomed
in two dozen countries, as even

those on lower incomes were able

to find a foot on the property ladder.

Some of the mortgages granted

to fund this boom—the so-called

“subprime” mortgages in the

US—were given to people who

could not pay them back.

The crisis

In 2008, a cluster of subprime

mortgage failures exposed how

massively many financial

institutions had invested many

times more than the value of their

capital. The Lehman Brothers

investment bank collapsed in

2008, and many other financial

institutions seemed in such great

danger of going into meltdown

that they had to be rescued by

government bailout packages in

most of the world’s rich countries.

The simple thrust of Bernanke’s

message seemed to be that the

financial crisis all came down to

Chinese saving and American

overspending. This was also the

message in Niall Ferguson’s

Ascent of Money (2008), in which

he analyzed the credit crunch and

focused on the fated “Chimerica”

—the symbiotic (or, as some saw it,

GLOBAL SAVINGS IMBALANCES

parasitic) link between China and

the US. The notion appealed to

many in American financial circles

since it seemed to imply that it was

the frugal Chinese who were to

blame for the financial crisis.

Bernanke is adamant that it

was Chinese cash that stoked

American fires, though he argues

that only a small portion went into

high-risk assets. In 2011, he said,

“China’s current account surpluses

were used almost wholly to

acquire assets in the United

States, more than 80 percent of

which consisted of very safe

Treasuries and Agencies.”

The vanishing glut

Many economists have challenged

Bernanke’s theory. In the financial

blog “Naked Capitalism,” Yves

Smith has suggested that the

global savings glut is a myth,

noting that global savings have

stayed almost rock steady since

the mid-1980s. US economist

John B. Taylor argues that although

there was increased saving outside

the US, the decline in saving

within the US meant that there

was no global gap between

In the 1990s a new financial instrument called a collateralized debt

obligation (CDO) was invented. High-risk mortgages were combined

with low-risk bonds to create the illusion of low-risk debt. These debt

obligations were central to the failure of the credit system in 2007–08.

Mortgage High-ranking debt Credit rating

In the longer term the

industrial countries as a

group should be running

current account surpluses

and lending... to the

developing world, not

the other way around.

Ben Bernanke

Low-risk

loan

Rating

granted as

if combined

debt was

low-risk

High-risk loan

AAA