Ben Bernanke, Chairman of the U.S. Federal Reserve, said that challenges to macroeconomic adjustment and financial stability such as those seen during the financial crisis of 2008, arose in part because “the rules of the game of the international monetary system... are either poorly articulated or not observed by key countries.”
In a speech this week at the Banque de France Financial Stability Review launch event, Mr. Bernanke did not name any country in particular but said that emerging market economies had not followed through with “the policy responses that countries are expected to take to help foster a balanced global economy over time.”
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Quoting a recent paper that he had authored, in which he identified a “global savings glut” as one of the factors that created some of the pre-conditions for the crisis, he said that it was an empirical fact that the global saving glut countries including “emerging Asian economies and Middle Eastern oil exporters” evinced a “strong preference for very safe and liquid U.S. assets... especially Treasury and agency securities.”
However, Mr. Bernanke added, the preference by many investors for perceived safety had created strong incentives for U.S. financial engineers to develop investment products that “transformed” risky loans into highly rated securities.
Thus, he said, it was remarkable that even though a large share of new U.S. mortgages during the housing boom were of weak credit quality, financial engineering resulted in the overwhelming share of private-label mortgage-related securities being rated AAA. “The underlying contradiction was, of course, ultimately exposed, at great cost to financial stability and the global economy,” Mr. Bernanke noted.
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Touching upon recent macroeconomic concerns the Fed Chairman cautioned that while the global financial crisis was receding, capital flows were “once again posing some notable challenges for international macroeconomic and financial stability.”
Negative spillovers
He said that such capital flows reflected in part the “continued two-speed nature of the global recovery, as economic growth in the emerging markets is far outstripping growth in the advanced economies.”
Warning of some of the dangers of capital from advanced economies flooding emerging markets Mr. Bernanke said that some observers argued that monetary policies in advanced economies were generating “negative spillovers.”
“In particular, concerns have centred on the strength of private capital flows to many emerging market economies, which, depending on their policy responses, could put upward pressure on their currencies, boost their inflation rates, or lead to asset price bubbles,” he said.