Former U.S. Secretary of the Treasury Timothy F. Geithner and Professor Andrew Metrick survey the causes, events, policy responses, and aftermath of the recent global financial crisis.
Lecture: Global Savings Glut Data, Part I
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The Global Financial Crisis
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Andrew MetrickMichael H. Jordan Professor of Finance and Management
Yale School of Management
Timothy GeithnerLecturer in Management, Yale SOM, Former U.S. Secretary of the Treasury
Yale School of Management
[MUSIC]
All right, let's look at some of the data.
What we'll see is that countries,
that Bernanke called the the global savings glut countries,
did predominantly demand safe government and agency debt from the United States.
Here's our picture that shows that.
We have three groups.
On the left is China, in the middle is other Asian countries, and
all the way over on the right are OPEC countries.
The blue bar reflects the cumulative current account balance over
the four-year period, 2003 to 2007.
So, during these four years, you read this picture as saying,
China had $900 billion of cumulative current account balance.
This is like savings.
From the perspective of a household, this would be, I am selling more things than I
am spending, and so I need to save this somewhere.
What did China do with this $900 billion?
First, the red bar, which makes up a large majority of the overall $900 billion,
was spent on acquisitions of U.S. Treasury securities and agency debt.
The green bar, net acquisitions of other U.S. assets and
the yellow is net flows to Europe.
So really, this is United States, China is putting its money into the United States.
How about other parts of Asia?
For other parts of Asia, we see about $600 billion of current
account assets, and there it's split a little more evenly,
about half and half between the United States and Europe.
But the majority of the United States assets that were acquired are safe U.S.
Treasury securities and agency debt.
OPEC countries, it is less severe,
although they did have about $700 billion of current account deficits.
In that case, the majority is not spent in the United States but
it is still the case that $100 billion of safe government debt is demanded.
All together, we're just under a trillion during these four years,
just under a trillion from these three places of demand for U.S.
government debt and agency securities.
What's interesting is, as we will see,
this was precisely the time when there's not all that much of it being created.
So the data show that global savings glut countries
predominantly demanded safe government and agency debt, in particular China.
In addition to the global savings glut countries, though, we're gonna see
an interesting type of financial intermediation coming from Europe.
Non-global savings glut European countries,
while they didn't run total current account deficits or surpluses,
they also demanded government debt and other AAA rated substitutes.
AAA being the safest type of debt that's privately produced.
They finance these purchases with deposits and commercial paper often issued
in their own countries, so think of this as being almost like a banking activity.
I'm going to take in deposits, and then, instead of investing those deposits
in other people's houses, I'm going to buy safe securities from the United States.
Here's the picture which shows us this and
now we're gonna break it up into two different time periods.
On the left, is the time period from 1998 to 2002 and
here, we're gonna add up totals.
This is just who is buying, in the United States,
AAA-rated securities of four different types.
Treasury securities which are in green, agency debt,
that's Fannie Mae and Freddie Mac, that's in blue.
Other corporate debt, which is in red, and
residential mortgage backed securities, commercial mortgaged backed securities and
other asset backed securities, more on those later today.
For now, just think of them as other forms of very highly rated debt and
they are in the purple.
So between 1998 and 2002, the total change in the holdings of such things
from global savings glut countries is relatively small and
overall, they're buying the blue and the green stuff.
That's the bar that's furthest over to the left.
Similarly, the change in European holdings right next to it is not,
on net, very large.
The total change in foreign holdings, which is the third bar,
works out to certainly, under $1 trillion,
roughly $600 billion.
At the same time, the change in the total amount of these things, outstanding,
in the United States, note the green, the green is negative.
During the time from 1998 to 2002, when the world was starting to demand a lot of
these securities, the United States government was running surpluses.
This may seem like a very funny historical artifact.
But at this time, many of the discussions were,
what are we gonna do once we've retired all of our long term debt?
Funny to think about that now but indeed, we were retiring debt and so
the change in the total amount outstanding was low.
Where it was being built up is the blue.
We were adding over this time period
roughly 2.5 trillion to the total amounts outstanding of agency debt.
In fact, around this time, the discussions were about how agency debt was going to
replace U.S. government debt as the benchmark for risk free assets.
It's a very different picture when we look at the 2003 to 2007 global
savings glut period.
This is the right side of your picture and
the first bar there is a summary of what we saw in the previous picture.
This is the total change in total savings glut holdings of U.S.
AAA securities and as you can see, it's just under $1 trillion.
Most of it is green but there is a big chunk that is also blue.
They're not the only ones,
European countries also greatly increased their demand.
Looking back at the 98 to 2002 period, we don't see very much either from
global savings glut countries or European countries.
But here we have European countries coming in themselves at roughly $600 billion.
Looking next to the right, we are going to sum up global savings glut, European,
and all other countries.
And here we see about 2.5 trillion total increase in the amount
that's been purchased during this time period from abroad, 2.5 trillion.
Now that's 2.5 trillion at the same time we were only producing
about 1 trillion of new government debt.
That's the green bar, that's all the way over to the right and
another 1.5 trillion approximately of agency debt.
So all of the new debt produced in the United States by the government and
by the government agencies was effectively soaked up during this time period
by foreign buyers, leaving no additional capacity for
investors in the United States.
What were they to do?
We can see what they actually did do.
They bought other AAA stuff, not this little sliver of red,
which is corporate highly rated bonds.
Those are limited, there's just not that many of them out there.
Instead, what they bought was this purple and
the purple here is residential mortgage backed securities.
That had to fill the overall gap between the amount that was demanded from abroad
and domestically, and the total amount that was being produced naturally without
thinking about the market's needs by the U.S. government and its agencies.
[MUSIC]
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