Global Imbalances: Links to Economic and Financial Stability
Ben Bernanke:
FRB: Speech--Bernanke, Global Imbalances: Links to Economic and Financial Stability--February 18, 2011: [T]he United States--the recipient of the largest capital inflows in the world--has also faced challenges coping with capital inflows. Notably, the failures of the U.S. financial system in allocating strong flows of capital, both domestic and foreign, helped precipitate the recent financial crisis and global recession. Why was the United States, a mature economy, the recipient of net capital inflows that rose to as much as 6 percent of its gross domestic product prior to the financial crisis?... [C]apital flows from emerging markets to advanced economies will tend to be directed to the safest and most liquid assets, of which... there is a relative shortage in emerging markets.... [S]ome emerging Asian economies and Middle Eastern oil exporters did indeed evince a strong preference for very safe and liquid U.S. assets in the middle of the past decade, especially Treasury and agency securities.... European investors [also] placed a high value on safety and liquidity in their U.S. investments....
The preferences of foreign investors for highly rated U.S. assets, together with similar preferences by many domestic investors, had a number of implications, including for the relative yields on such assets. Importantly, though, the preference by so many investors for perceived safety created strong incentives for U.S. financial engineers to develop investment products that "transformed" risky loans into highly rated securities. Remarkably, even though a large share of new U.S. mortgages during the housing boom were of weak credit quality, financial engineering resulted in the overwhelming share of private-label mortgage-related securities being rated AAA. The underlying contradiction was, of course, ultimately exposed, at great cost to financial stability and the global economy....
Our collective challenge is to reshape the international monetary system.... [C]ountries with excessive and unsustainable trade surpluses will need to allow their exchange rates to better reflect market fundamentals and increase their efforts to substitute domestic demand for exports.... [C]ountries with large, persistent trade deficits must find ways to increase national saving, including putting fiscal policies on a more sustainable trajectory...
