1. Bernanke “The Global Savings Glut and the U.S. Current Account Deficit” (2005) Vaughan / Economics 639 1

2. Research Question Why was the U.S. current account deficit so large? – Related question: Why was U.S. savings rate so low? Note: – Current Account = Exports - Imports – U.S. Net Foreign Borrowing = U.S. Current Account Deficit 2

3. World Savings Glut Story Developing world moved from net user to net supplier of funds in international capital markets in the late 1990s/early 2000s, largely in response to financial crises. Savings flowed into the U.S., to take advantage of innovation/rising productivity (also because of sophistication of U.S. financial markets and special role of dollar as a reserve currency), which fueled an increase in equity prices (1996- 2000). After stock market correction (post 2000), inflow of savings pushed down real interest rates, which led to an increase in housing demand (rise in home prices). 3

4. World Savings Glut Story ↑ Demand for U.S. financial assets → ↑ Price of the Dollar ↑ Price of Dollar → ↑ Imports, ↓ Exports [Current Account Deficit ↑ ] ↑ U.S. Household Wealth (higher stock/house prices) → ↑ Consumption, ↓ Saving (also fueled import demand and contributed to current account deficit) 4

5. Ingredients in Housing Bubble Roberts: Households wanted to gamble with other people’s money. Kling: Basle made mortgage-related securities attractive. Taylor: Fed kept U.S. interest rates artificially low. Bernanke: World savings glut pushed interest rates to record low levels in U.S. 5 This time is different?

6. Reinhart & Rogoff: Predictors of Financial Crises Surge in Capital Inflows Note that U.S. current account (capital inflow) was significantly larger. 6