Savings Glut Caused Financial Crisis? Get Real!

Ace! NewsFlash

Asian officials and scholars are pushing back against the notion that their countries' high savings helped cause the financial crisis by flooding the world with cash and driving down interest rates, arguing that lax U.S. financial regulation should bear most of the blame. The comments at a weekend conference in Beijing came just before Chinese President Hu Jintao left for Italy, where he and the leaders of other major emerging economies this week hold a summit with the Group of Eight advanced nations. Mr. Hu, who arrived in Italy Sunday, is expected to argue that improving regulation in rich Western countries should be a bigger international priority than criticizing emerging economies that save and invest a lot.

"Asians financed cheap consumption in the rest of the world, this is what they say. This is something I just cannot understand," Supachai Panitchpakdi, the head of the United Nations Conference on Trade and Development, and a former Thai government official, told the Global Think Tank Summit in Beijing on Friday. "This is another theory we have to debunk. Asians have not been oversaving and underconsuming." The idea of a "savings glut" -- an excess of cash in Asian countries and oil exporters that pushed down global interest rates and encouraged riskier investments -- was first popularized by Ben Bernanke in 2005, before he was chairman of the Federal Reserve. Economic officials in the Bush administration later endorsed the idea that it contributed to the financial crisis. [Note from Ace! ... What are Paul Krugman's views on this issue?]

Critics of the savings-glut thesis have often argued that it simply pushes responsibility for U.S. policy mistakes onto other countries. Supporters reply that China's huge trade surpluses -- a reflection of its large savings -- clearly had real effects on the global economy. "It is just as silly to deny any role for Asian savings in funding the U.S. savings shortfall, as it would be to blame the imbalance entirely on an Asian savings glut. It takes two to tango," said David Cohen of Action Economics in Singapore. Mr. Supachai argued that the real difference between Asians and Americans is that U.S. consumers borrowed heavily to finance their spending while those in Asian nations mostly didn't. He said that consumption levels in Asia are "normal," averaging about 40% of gross domestic product. He acknowledged that household consumption in China is relatively low, around 36% of GDP. But he said that's because growth in investment and exports have been very strong, not because consumption has been weak.

Chinese central bank governor Zhou Xiaochuan, speaking to the same conference, said that China's savings ratio does need to fall and its consumption needs to increase. But he argued that focusing too much on "macro" issues like savings imbalances risks diverting needed attention from "micro" factors such as financial regulation. "The crisis originated from Wall Street and many indisputable facts have established that micro factors had played an overwhelmingly important role in causing this crisis," he said, naming issues such as accounting rules, credit-rating agencies, securitized lending and lax standards at banks.

"People outside China need a better insight into the high savings rate in China," Mr. Zhou said. The increase in the nation's overall savings rate in recent years hasn't actually come from households, but mostly from corporate savings in the form of retained profits, he said. Still, household savings rates do tend to be higher in China and other Asian countries, said the head of China's statistics bureau, Ma Jiantang. "In East Asia we tend to be frugal and thrifty. This contributes to the high savings rate in the region," he told the conference Saturday.

Lawrence Lau, an economist and vice-chancellor of the Chinese University of Hong Kong, argued that China's trade surplus couldn't have contributed to the U.S. housing bubble. He said China didn't have a large trade surplus until 2005, when , after hovering around 2% of GDP for several years, it jumped to about 5% of GDP. But U.S. housing prices peaked in 2006 and declined after that, even as China's trade surplus continued to expand dramatically. The rise and subsequent collapse of American house prices, he said, "has nothing to do with the difference in savings rates between the U.S. and China."

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