US Fed Chairman Bernanke says, Foreign investors fueled financial crisis....
Foreign investors' thirst for safe US assets helped cause the Y's 2007-2009 crisis by encouraging banks to turn risky mortgages into AAA rated bonds, Ben Bernanke, US Federal Reserve Chairman, argued in Paris Friday.
The preference by so many investors for perceived safety created strong incentives for US financial engineers to develop investment products that 'transformed' risky loans into highly rated securities, said Bernanke, presenting a new research paper that he co-wrote with other Fed economists.
Mr. Bernanke has argued that a Global savings glut led emerging markets to send large amounts of capital to the US in the 2000's, pushing down US interest rates.
His new paper says that those emerging markets wanted safe assets, and US regulators failed to keep the financial system from creating them.
In analogy to the Asian crisis, the primary cause of the breakdown was the poor performance of the financial system and financial regulation in the country receiving the capital inflows, not the inflows themselves, Mr. Bernanke said, adding that the US crisis had given him new sympathy for developing countries that have to manage large capital inflows.
This argument supports Chairman Bernanke's POV that low Fed interest rates did not make an important contribution to the financial crisis, and the main errors were in regulation.
According to the paper, more than 75% of investment from Savings Glut countries was in AAA rated US assets in Y 2007, whereas such assets accounted for only 36% of total US securities.-Paul A. Ebeling, Jnr. www.livetradingnews.com