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Global Savings Glut Floods Markets With Cash, Low Rates

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By CARTER DOUGHERTY, The New York Times

Published: September 12, 2007

BERLIN - Federal Reserve Chairman Ben Bernanke said Tuesday that heavy saving by oil producers and Asian nations has helped depress interest rates by keeping financial markets flush with cash. But he warned against banking on this effect - one that probably helped create the current financial crisis - for the long term.

In an annual lecture sponsored by Germany's central bank, Bernanke skirted direct mention of the recent turmoil in financial markets, choosing instead to update a speech he gave two years ago. He cautioned that this influx of money is likely to taper off 'over the next few decades' as countries such as China save less and consume more.

Financial markets, however, have kept long-term interest rates low, a sign they apparently expect this effect to continue.

'We are again reminded of the need to maintain appropriate humility in forecasting returns and asset prices,' Bernanke said.

The 'global savings glut,' a term that Bernanke coined two years ago to describe the historically peculiar phenomenon of an industrialized world awash in cash saved by developing countries, has helped fuel financial speculation by keeping interest rates low. Those low rates ensured that investors could borrow cheaply and invest in higher-yielding assets, including the securities backed by the now crisis-ridden subprime lending market in the United States that is threatening to drag down growth.

Bernanke met with German Chancellor Angela Merkel to discuss the U.S. mortgage market crisis and the need for greater financial market transparency. But he declined to discuss these issues in remarks, citing the Fed's silent period ahead of its upcoming policy meeting Tuesday.

The Fed is expected to consider reducing its benchmark interest rate, from 5.25 percent, amid mounting signs the U.S. economy may slow as the credit crunch that roiled global markets tightens.

The dollar has sunk in recent weeks as investors anticipate an interest rate cut, which would erode the value of dollar-denominated assets, and Tuesday was no exception to the trend. The dollar fell against the euro to within a few hundredths of a cent of the record low of $1.38 that it hit in late July.

Though the crisis has been felt worldwide, policymakers in Europe on Tuesday struck a largely upbeat tone, saying the European economy can weather the storm. But they warned in a new report that the financial market turmoil has 'tilted the balance of risks clearly to the downside.'

In a revised economic forecast released Tuesday, the European Commission said the 13-nation euro area will expand 2.5 percent in 2007, down from a prediction of 2.6 percent earlier this year.

The full 27-nation European Union will grow by 2.8 percent instead of 2.9 percent, it said. It also revised its forecast for inflation slightly upward.

'Looking at these figures we can conclude that maybe the peak of the cycle is behind us but we have still possibilities for a favorable situation in the coming quarters,' said the European Union's economic and monetary affairs commissioner, Joaquin Almunia.

A fuller picture should emerge as credit markets, which have periodically seized up as investors lost the appetite for lending to anyone with exposure to the subprime market, begin to relax, the commission said.

Jean-Claude Trichet, president of the European Central Bank, also said the credit crunch has not affected Europe's major players in finance. 'It is important to remark that credit losses were not significant enough to materially impact the soundness of core financial institutions,' Trichet told the European Parliament.

In his remarks, Bernanke said that his thesis of a global savings glut helped keep down interest rates for the 10 years through 2004 is still broadly true. Though the mixture of current account surpluses and deficits in the world has shifted, the countries in surplus - notably China and major oil exporters - continue to invest that cash in the financial markets of the industrialized world.

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