Thursday, August 23, 2012

China's savings, not banking products, caused the financial crisis - Heleen Mees

Heleen-MeesThe first summaries of economist Heleen Mees' PhD in Dutch media caused already a little uproar this week. Not evil banking products, but China's high savings rate  are the base of the ongoing financial crisis, is the short story. The whole story is slightly more complicated. 

Heleen Mees:
Chapter 2 proves the central thesis of this thesis, namely that China’s boom caused the 2008 financial crisis and ensuing recession. It builds on the work by Taylor (2008), Obstfeld and Rogoff (2010), Bernanke (2005), Greenspan (2011) and Warnock and Warnock (2009). Its main  contribution is that it shows that the built-up of total debt securities, rather than foreign purchases of U.S. Treasuries, depressed 10-year Treasury yields from 2004 on. In addition, I show that the Fed, with its excessively loose monetary policy in the early 2000s, contributed to a large extent to the housing bubble and current debt overload of U.S. households.
That global drop in interest rates was caused by China's huge savings. China's savings were not high as a percentage of its total GDP, because that is comparable to other developing countries. But because of its size a huge amount of cheap capital was available, says Heleen Mees. Problematic mortgages in the US did not cause the financial crisis, since they were less than five percent of the total amount of mortgages between 2000 and 2006.

The increase wealth in China, and the capacity to save, is partly caused by the American spending habits, Heleen Mees added. She does not support the suggestion China had a deliberate policy of undermining US and European economies.

Heleen Mees' PdH "Changing Fortunes - How China's Boom Caused the Financial Crisis" will be available online next week.

Heleen Mees is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers' request form.
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