Bernanke says world's financial crisis is worst since the 1930s

12 March 2009

US Federal Reserve chief Ben Bernanke said on Tuesday that the world is suffering through the worst financial crisis since the 1930s, a crisis that has precipitated a sharp downturn in the global economy.

Claiming that the fundamental causes remain in dispute, but according to him, it is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s.

In the simplest terms, these imbalances reflected a chronic lack of savings relative to investment in the US and some other industrial countries, combined with an extraordinary increase in saving relative to investment in many emerging market nations.

The increase in excess saving in the emerging world resulted in turn from factors such as rapid economic growth in high-saving East Asian economies accompanied, outside of China, by reduced investment rates, large buildups in foreign exchange reserves in a number of emerging markets, and substantial increases in revenues received by exporters of oil and other commodities.

Like water seeking its level, saving flowed from where it was abundant to where it was deficient, with the result that the US and some other advanced countries experienced large capital inflows for more than a decade, even as real long-term interest rates remained low.

Admitting that the global imbalances were the joint responsibility of the US and its trading partners, Bernanke said that we collectively did not do enough to reduce those imbalances. However, the responsibility to use the resulting capital inflows effectively fell primarily on the receiving countries, particularly the US.