ABS Inflows to the United States and the Global Financial Crisis

70 Pages Posted: 21 Aug 2011 Last revised: 10 Nov 2013

See all articles by Carol C. Bertaut

Carol C. Bertaut

Board of Governors of the Federal Reserve System

Laurie DeMarco

Board of Governors of the Federal Reserve System

Steven B. Kamin

Board of Governors of the Federal Reserve System

Ralph W. Tryon

Government of the United States of America - Division of International Finance (IFDP)

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Date Written: August 17, 2011

Abstract

The "global saving glut" (GSG) hypothesis argues that the surge in capital inflows from emerging market economies to the United States led to significant declines in long-term interest rates in the United States and other industrial economies. In turn, these lower interest rates, when combined with both innovations and deficiencies of the U.S. credit market, are believed to have contributed to the U.S. housing bubble and to the buildup in financial vulnerabilities that led to the financial crisis. Because the GSG countries for the most part restricted their U.S. purchases to Treasuries and Agency debt, their provision of savings to ultimately risky subprime mortgage borrowers was necessarily indirect, pushing down yields on safe assets and increasing the appetite for alternative investments on the part of other investors. We present a more complete picture of how capital flows contributed to the crisis, drawing attention to the sizable inflows from European investors into U.S. private-label asset-backed securities (ABS), including mortgage-backed securities and other structured investment products. By adding to domestic demand for private-label ABS, substantial foreign acquisitions of these securities contributed to the decline in their spreads over Treasury yields. Through a combination of empirical estimation and model simulation, we verify that both GSG inflows into Treasuries and Agencies, as well as European acquisitions of ABS, played a role in contributing to downward pressures on U.S. interest rates.

Keywords: capital flows, global saving glut, financial crisis, asset-backed securities, interest rates

JEL Classification: F3, G1

Suggested Citation

Bertaut, Carol C. and DeMarco, Laurie and Kamin, Steven B. and Tryon, Ralph, ABS Inflows to the United States and the Global Financial Crisis (August 17, 2011). FRB International Finance Discussion Paper No. 1028. Available at SSRN: https://ssrn.com/abstract=1912839 or http://dx.doi.org/10.2139/ssrn.1912839

Carol C. Bertaut (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Laurie DeMarco

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Steven B. Kamin

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-3339 (Phone)
202-736-5638 (Fax)

Ralph Tryon

Government of the United States of America - Division of International Finance (IFDP) ( email )

Stop 24
Washington, DC 20551
United States
202-452-2368 (Phone)
202-736-5638 (Fax)

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