Saturday 21 Jul 2018 | 09:33 | SYDNEY
Saturday 21 Jul 2018 | 09:33 | SYDNEY

The GFC blame game: China or Wall St?


Stephen Grenville

6 July 2009 16:17

The belief that the world ‘savings glut’ played a key role in the global financial crisis has become part of the received wisdom — excess savings are said to have pushed down world interest rates and encouraged excessive lending. First put forward by Ben Bernanke (now Fed Chairman) in 2005, it has been endorsed by top commentators (notably the FT’s Martin Wolf) and policy makers such as former US Treasury Secretary Hank Paulson.

The argument is routinely made specific by pointing the finger at China, with its huge external surplus and over-flowing foreign exchange reserves. The Chinese, not surprisingly, have resisted this conclusion, and now former WTO head and influential senior Thai official Supachai has joined the push-back with the blunt statement that 'the crisis originated from Wall Street'. 

Not everyone gives the savings glut such a prominent place in explaining the disaster. It may well be in China’s own interest to reduce its external surplus over time, but a well-functioning international capital market should be able to accommodate countries that have different saving/investment balances without threatening the entire international financial edifice.

As the amazing story of greed and incompetence in the financial sector unfolds, with its epicenter in the US, it would seem more fruitful to focus on problems closer to home (for those of you with Vanity Fair subscriptions, you can find Michael Lewis’ latest instalment here).

Former top US Treasury and Fed official Ted Truman, who spent his long career telling other countries that they should behave more like the US, seems to have nuanced his earlier view that we are all equally at fault. While maintaining that '(i)n my view, macroeconomic policies in the United States and the rest of the fully developed world were jointly responsible for the crisis', he does acknowledge that 'the proximate origins of the crisis were in the United States to a greater degree than with other crises.' Perhaps he has noticed that, right next door, Canada’s financial sector is functioning just fine.

Photo by flickr user massmatt, used under a Creative Commons license.