Popularized by Ben Bernanke, the global savings glut hypothesis has been used in explaining the global financial crisis. From the global perspective, the world has been suffering from serious global imbalance and subprime mortgages due to the current account deterioration of the world’s largest economic power. Ben Bernanke has articulated in his thesis that the source of the trade imbalance is the flood of foreign capital into the US, creating an avenue for certain countries, to save too much. Such as the ASEAN 5 (Indonesia, Malaysia, the Philippines, Singapore and Thailand), China and Middle East who were coined by Bernanke as the “GSG countries”.
Niall Ferguson in The Ascent of Money (2008) refers that Asian savings glut were the main reason of the subprime mortgage crisis due to the influx of easy money. Meanwhile, some economists went further and started to point out the Global Savings Glut Hypothesis as one of the explanations for the financial crisis.
However, in this article we aim to give some insights to help us to understand the other side of the ‘savings glut’ story.
A paper by Claudio Borio and Piti Disyatat argued that the main contributing factor to the current financial crisis was excess elasticity of the international monetary and financial system translating to what they call ‘financial imbalances’. From 1998-2007, financial flows expanded by almost four times relative to GDP and then fell by 75% in 2008. Bulk of these inflows came from Europe. The only difference for Asian countries like China and Japan is for the fact that they accumulate large financial reserves.
Professor Max Cordem, in the November 2009 Economic Journal, wrote that savings need not – and should not – lead to crisis. In his opinion, it is not correct to point the finger to the countries mentioned before for the excessive credit expansion created in the US. Instead he argued that we should see the financial crisis as a result of the poor role of the financial system. In order to justify that, he showed that in 2007 China’s current account surplus was only just over a fifth of the total surplus of all surplus countries and that increases in the Chinese surplus – from 3.6% of GDP in 2004 to 7.2% in 2005 and 10% in 2008 – was not a result of deliberate Chinese policy. Rather, it rose because of improvements in the productivity.
Other fact that highlighted this point of view came from the Treasury data which showed that the most important source of foreign capital for the US was not Asia but European countries. For instance, the United Kingdom accounted for 25% of all foreign capital inflows in 2007.
Therefore, it is argued that the main reason for the financial crisis of 07-08 can be explained by the “global banking glut“, an argument posed by Hyun Song Shin during the 2011 IMF Annual Research Conference. The “global banking glut” can be defined as gross flows from international banks into mortgage products, even in the absence of corresponding net imbalances (Shin, 2012).
Earlier we have mentioned the concept of excess elasticity, a concept used by the Bank for International Settlements. It is defined to be the degree which the monetary and financial regimes constrain the credit creation process and the availability of external funding. Other economists agree that the elasticity of the current international monetary and financial system may be too high. In the case of the US, the Federal Reserve has lowered its interest rates below the policy norms. Lower interest rates have urged financial investors to look for other investment opportunities outside the country, specifically in emerging market economies.
For the past years, the financial system has not created a sufficient mechanism to prevent uncontrolled credit expansion and rise in asset prices. This should have an implication for policymakers to try taking into account how far the financial system has improved in the context of efficiency. The financial system might have been too confident with its ability to sustain such expansion. Policymakers have often divulged and concentrated in improving fiscal policies that they forgot to incorporate the monetary and financial factors in the current macroeconomic situation. Another thing to look at is that big economies have their own financial and policy regulations, but as the economy greatly expands in the global realm, we should consider creating an integrated policy across economies. If the economy is working within the international sphere, it would be quite plausible to formulate international regulations that would benefit what we call the global economy.
Bank for International Settlements, Global imbalances and the financial crisis: Link or no link?, May 2011
Chawin Leenabanchong, East Asia and Global Imbalances: Saving Glut Economies Perspective, October 2012