325
saving and investment—so
the idea of a world awash with
cheap cash is false.
Other economists point out that
the current account deficits in the
US and other countries amounted
to much less than 2 percent of the
money flow, so surely would have
only a marginal affect. The savings
glut theory also becomes harder to
sustain when applied to Europe.
Germany, for instance, in the years
leading up to the 2008 crisis, was
savings-rich. The savings glut
theory would imply that German
savers took up speculative financial
arrangements in Ireland and Spain
rather than put their money in
institutions at home in Germany,
which seems highly unlikely.
A “banking glut”?
Princeton University economics
professor Hyun Song Shin
has argued that the floods of
speculative money chasing after
mortgage securities came not
from a savings glut but the
“shadow” banking system—
the complex variety of financial
entities that fall outside the
normal banking system, including
hedge funds, money markets,
and structured investment
vehicles. European and American
shadow banks were eager to
find these securities and found
them in Ireland and Spain as well
as the US.
The markets played in by these
shadow banks are dominated by
derivatives. These are “financial
instruments”—bets upon bets
as to which way markets will
go, underpinned by ingenious
mathematical formulas. The
charge here is that derivatives
trading can encourage excessive
risk-taking. It also creates a
market in which financial
institutions can make massive
profits by betting on failures,
including the failure of
mortgage-backed securities.
The extra reserves of a savings
glut might be irrelevant in this
virtual casino. Indeed, the problem
seems to have been that the banks
were trading without sufficient
cash backup. Bernanke points out
that while Chinese and Middle
Eastern buyers bought into
American securities with funds
from trade surpluses and oil
exports, the European banks had
to borrow money to buy in, leaving
them exposed when the crisis hit.
Economists differ in their
views about the trade imbalances
that underlie the savings glut.
Some have argued that the US
trade deficit can be sustained, and
that it would always be funded
easily by foreign savings. Others
worry about a hard landing for
the US economy if capital flows
were to dry up. Much of this
has become a political issue
between the US and China since
US politicians have charged China
with keeping its currency unfairly
low in order to support
its trade surplus. ■CONTEMPORARY ECONOMICS
I don’t think
that Chinese ownership
of US assets is so
large as to put our
country at risk
economically.
Ben BernankeBen Bernanke
Ben Shalom Bernanke was
born and raised in South
Carolina. In the early 1970s
Bernanke went to Harvard
University and then to the
Massachusetts Institute
of Technology, where he
received a PhD in economics
under the supervision of
Stanley Fischer, future
governor of the Bank
of Israel.
Bernanke joined the US
Federal Reserve in 2002. In
2004, he proposed the idea
of the Great Moderation,
which suggested that modern
monetary policies had virtually
eliminated the volatility of the
business cycle. In 2006,
Bernanke was made chairman
of the Federal Reserve. His
tenure as chairman of the
Reserve has not been smooth,
and he has been criticized for
failing to foresee the financial
crisis and for bailing out Wall
Street financial institutions.Key works2002 Deflation: Making Sure
It Doesn’t Happen Here
2005 The Global Saving
Glut and the US Current
Account Deficit
2007 Global Imbalances