'The Making of America’s Imbalances'

Via Menzie Chinn at Econbrowser, Paul Wachtel and Moritz Schularick look at the evidence for Bernanke's savings glut hypothesis, and find that "the American credit boom of the 2000s had few direct links to reserve accumulation in emerging markets. The mortgage boom was financed by the US financial sector which intermediated foreign funds from private sources." Thus, if there is blame here, it should be assigned to private markets -- they are not as infallible as some woud like you to believe -- rather than government behavior:

Guest Contribution: The Making of America’s Imbalances, by Paul Wachtel and Moritz Schularick: Many observers in the West have embraced a reading of the financial crisis in which global imbalances and the surge in uphill net capital flows from poor to rich countries play a dominant role. ... Such explanations conveniently blame events that took place outside of the advanced economies for at least providing the initial impetus for the economic and financial mess Ben Bernanke’s savings glut hypothesis (Bernanke 2005) skillfully argues that a large and sudden rise of desired savings from developing countries – a savings glut – flooded the US economy. The implication is that low American interest rates and, ultimately, the financial crisis were due to the unusual saving behavior elsewhere.

Others disagree with such an imbalance-centered view of the crisis. ... This debate suggests that a closer look at the composition and role of imbalances in the run up to the crisis is warranted. ...

In our new paper -- “The Making of America’s Imbalances” -- we examine the evolution of sectoral financial balances in the US economy in the past 50 years using the Flow of Funds accounts. ... What do we find? ... Who financed the household borrowing binge of the 2000s? China and other emerging markets played virtually no direct role in the financing flows behind the American credit bubble. In brief, the U.S. financial sector provided the financing for mortgage-hungry America (until it collapsed with the crisis). But where did Wall Street find the savings to fuel to fire?

In the 2000s, the American financial system fed the credit hunger of the American economy mainly by issuing debt liabilities in international financial markets; but it was the foreign private sector, not foreign governments, that provided most of the fuel for the fire. Foreign official inflows went almost exclusively into Treasury securities while private investors bought bonds and other instruments issued by U.S. financial. In other words, those who are looking for international drivers of the American credit bubble, should not look to Beijing and Riyadh, but to international private capital markets. The capital inflow bonanza of the 2000s that enabled the American credit bubble (Chinn and Frieden 2011) was primarily a private sector inflow... Beijing may have financed the war in Iraq at low cost while Wall Street, foreign banks and private investors fueled the housing bubble. ...

As they emphasize in the paper, "the flows that fed the bubble were private, not official. ... Our results ... stand in clear opposition to arguments that link the bubble in US housing markets in the 2000s with the global glut of savings (Bernanke 2005). The increase in leverage in the US plays as important a role as the capital inflows from the rest of the world."