Tuesday, December 20, 2011

Yves Smith | Naked Capitalism | Global Glut - Savings OR Banking?


Global Savings Glut or Global Banking Glut?

Yves here. It has been striking how little commentary a BIS paper by Claudio Borio and Piti Disyatat, “Global imbalances and the financial crisis: Link or no link?” has gotten in the econoblogosphere, at least relative to its importance.
As most readers probably know, Ben Bernanke has developed and promoted the thesis that the crisis was the result of a “global savings glut,” which is shorthand for the Chinese are to blame for the US and other countries going on a primarily housing debt party. This theory has the convenient effect of exonerating the Fed. It has more than a few wee defects. As we noted in ECONNED:
The average global savings rate over the last 24 years has been 23%. It rose in 2004 to 24.9%. and fell to 23% the following year. It seems a bit of a stretch to call a one-year blip a “global savings glut,” but that view has a following. Similarly, if you look at the level of global savings and try deduce from it the level of worldwide securities issuance in 2006, the two are difficult to reconcile, again suggesting that the explanation does not lie in the level of savings per se, but in changes within securities markets.
Similarly, the global savings glut thesis cannot explain why banks created synthetic and hybrid CDOs (composed entirely or largely of credit default swaps, which means the AAA investors did not lay out cash for their position) which as we explained at some length, were the reason that supposedly dispersed risks in fact wound up concentrated in highly leveraged financial firms.
By contrast, the Borio/Disyatat paper tidily dispatches the savings glut story, and develops a more persuasive argument, that the crisis was due to what they call excess financial elasticity, which means it was way too able to accommodate bubbles. From Andrew Dittmer’s translation of the paper from economese to English:
The idea of “national savings” or “current account surplus” refers to the total amount of exports sold minus the total amount of imports sold (more or less). The “excess savings” theory holds that this excess had to have been financed somehow, and so presumably by countries in surplus, like China.

No comments: