Global economy
Ben Bernanke (1953–)
2000 US economists Maurice Obstfeld and Kenneth Rogoff raise concerns about the large US trade deficit.
2008 British historian Niall Ferguson describes a world of crisis because of overuse of credit.
2009 US economist John B. Taylor argues against the existence of a savings glut.
2011 Economists Claudio Borio of Italy and Piti Disyatat of Thailand argue that it is wrong to think that global imbalances in savings triggered the financial crisis.
In February, 2012, 111 million Americans watched the Superbowl on television. At halftime an advertisement for Chrysler cars was shown. It was to become a national talking point. “It’s halftime in America, too,” said the ad. “People are out of work and they’re hurting… Detroit’s showing us it can be done. This country can’t be knocked down with one punch.”
The unashamedly patriotic implication of the ad—to buy Chrysler because it would save American jobs—was in tune with the feeling among many Americans that the US had let economic power slip into foreign, especially Chinese, hands. It was this type of feeling that made the explanations of the 2008 global financial crisis offered by US Federal Reserve chairman Ben Bernanke so widely appealing. He had developed his argument from 2005 onward, before the crisis really hit, and his thesis focused on global imbalances in savings and spending.
"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
Central to Bernanke’s idea is America’s balance of payments (BOP). A country’s BOP is the account of all money transactions between that country and the rest of the world. If a country imports more than it exports, its trade balance is in deficit, but the books must still balance. The shortfall is made up in some other way—for example, by funds from foreign investments or by running down central bank reserves.
Bernanke pointed out that the US deficit rose sharply in the late 1990s, reaching $640 billion, or 5.5 percent of GDP, in 2004. Domestic investment remained fairly steady at this time, but domestic saving dropped from 16.5 percent of GDP to 14 percent between 1996 and 2004. If domestic savings fell yet investment remained steady, the deficit can only have been financed using foreign money.
Bernanke argued that the deficit was being funded by a “global savings glut”—an accumulation of savings in countries other than the US. For instance the Chinese, who have a huge positive trade surplus with the US, were neither putting all their American export earnings into investment at home nor buying things; they were simply squirreling it away in savings and currency reserves. Bernanke highlights a number of reasons for the global savings glut besides Chinese frugality, including the rising oil prices and the building up of “war-chests” to guard against future financial shocks.
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.
Since the closure of plants such as this Chrysler factory in Detroit, the US has been running trade deficits, meaning that it has been importing more than it has been exporting.
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.
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.
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, 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.”
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 saving and investment—so the idea of a world awash with cheap cash is false.
"I don’t think that Chinese ownership of US assets is so large as to put our country at risk economically."
Ben Bernanke
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.
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.
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.
2002 Deflation: Making Sure It Doesn’t Happen Here
2005 The Global Saving Glut and the US Current Account Deficit
2007 Global Imbalances