China—Not Wall Street—Caused 2008 Crisis: Study
Thought the global financial crisis in 2008 was caused by subprime bonds, collateralized debt obligations (CDOs) and other Wall Street engineering? Think again.
The study from the Erasmus Research Institute of Management said the saving frenzy of the Chinese created the cheap money, which fueled the U.S. housing bubble and its collapse.
Heleen Mees, writer of the study and adjunct associate professor at the NYU Wagner Graduate School of Public Service, said that exotic mortgage products could hardly have been the cause of the U.S. housing market bubbleand its ultimate collapse.
According to the study, mortgages with those special features — like mortgage-backed securities (learn more) and CDOs (learn more) — accounted for less than five percent of the total number of new mortgages from 2000 to 2006.
Mees, who also is the author of three books and contributor for Foreign Policy magazine, says it was the “loose” monetary policy of the U.S. Federal Reserve (learn more) at the beginning of the decade which sparked a refinancing boom in the U.S. in 2003 and 2004 and a growth in personal spending. This U.S. spending binge fueled economic growth in China and in turn boosted total savings in that country.
The study, which compared financial market responses to U.S., Chinese, and German quarterly gross domestic product (learn more) from 2006 through 2009, shows that the Chinese have been saving more than half of their GDP during that time. Those savings were heavily skewed towards fixed-income assets, like government bonds, and depressed interest rates worldwide from 2004 on.
Falling interest rates sparked a boom in the U.S. housing market due to the availability of cheap money.
The study also argued that Ben Bernanke, chairman of the Fed, set the world up for the Great Recession by providing the “intellectual backing for the aggressive rate cuts in the early 2000s.”
With so many books out on the financial crisis, Mees recommends people read “Economic Development with Unlimited Supplies of Labor” by Arthur Lewis and she says people should avoid one of the blockbusters on the crisis, “The Big Short by Michael Lewis.”
—By CNBC.com’s Liza Jansen; Follow Her on Twitter @lizajansen