[Update inserted at the end]
The U.S. Fed chairman Bernanke gave some amazing recycled remarks to the International Monetary Conference on June 3, 2008. In that speech, he offered some gems of wisdom such as:
In the financial sphere, the three longer-term developments I have identified are linked by the fact that a substantial increase in the net supply of saving in emerging market economies contributed to both the U.S. housing boom and the broader credit boom. The sources of this increase in net saving included rapid growth in high-saving East Asian countries and, outside of China, reduced investment rates in that region; large buildups in foreign exchange reserves in a number of emerging markets; and the enormous increases in the revenues received by exporters of oil and other commodities. The pressure of these net savings flows led to lower long-term real interest rates around the world, stimulated asset prices (including house prices), and pushed current accounts toward deficit in the industrial countries–notably the United States–that received these flows. … The housing boom came to an end because rising prices made housing increasingly unaffordable. The end of rapid house price increases in turn undermined a basic premise of many adjustable-rate subprime loans–that home price appreciation alone would always generate enough equity to permit the borrower to refinance and thereby avoid ever having to pay the fully-indexed interest rate. When that premise was shown to be false and defaults on subprime mortgages rose sharply, investors quickly backpedaled from mortgage-related securities. The reduced availability of mortgage credit caused housing to weaken further.
As Mike Whitney so nicely summarized for Bernanke: “It’s all China’s fault. Really.”
Whew. That’s a pretty long-winded way of saying the Chinese are to blame for everything that’s gone wrong in the markets for the last 10 months.
So China, by willingly lending so much to the U.S., is the real culprit for the sub-prime crisis. The bad China is not only responsible for stealing jobs from hard working Americans, but also for kicking many of them out of the home as well. No wonder Liao Min, director-general and acting head of the general office of the China Banking Regulatory Commission, was caught in the Financial Times article “China rebukes west’s lack of regulation” eagerly deflecting the blame:
I feel the western consensus on the relation between the market and the government should be reviewed. … In practice, they tend to overestimate the power of the market and overlook the regulatory role of the government and this warped conception is at the root of the subprime crisis.
And those sub-prime crisis’ collateral damage victims all over the world, as described by Steve Clemons in “America exported poisoned financial products“, are wrong as well.
I have been on a lot of international travel lately — to Beijing, Mumbain, Tokyo, Berlin, London, Brussels, and Tel Aviv. In all of these places, I met angry and frustrated finance ministry bureaucrats, central bankers, retail bankers, investment bankers, and other fund managers.
All of them had a single message that rang a bit like the US accusing China of shipping out poisoned pet food and lead-paint covered toys. They said American regulators failed. “You exported poisoned financial products.”
If nothing else, Bernanke’s speech bookends well with his boss’ words two weeks prior, in which Bush attributed the rising food price to audacity of the Indian middle class to eat better and more.
I must say that the China Vortex blog was rather prescient with the following observation two months earlier.
Now, when it comes to the credit bubble problem … the culprit is … American. For a problem of such immense proportions, which is getting bigger and bigger by the day, amazingly, no one has identified the human culprits responsible for the bad decisions. But then, accountability never been a strong point for this US administration.
[UPDATE] Daniel Gross’ take on Bernanke’s “saving glut” theory in the Slate Magazine three years ago was even more prescient:
The savings-glut meme changes the terms of the conversation about global imbalances. It’s not our fault that we rely on foreigners to fund our desire to spend in excess of our resources. Au contraire. Our extreme consumption and failure to save become something of a virtue. Somebody has to keep the world’s factories humming and absorb all the products made in Japan, China, and elsewhere. And until the rest of the world becomes More Like Us in its consuming habits, the imbalances are likely to persist.
The savings glut may be an accurate and subtle take on the world’s economic imbalances. But less subtly, it minimizes the impact of the potentially destructive monetary and fiscal policies pursued by the U.S. over the last five years. It also lays the responsibility for change squarely on the backs of foreigners and makes a virtue out of what appear to be our own failings. No wonder Bernanke is so popular at the White House.