China not the source of excess capital flows to the US

Global imbalances and the financial crisis

Claudio Borio and Piti Disyatat

BIS

PDF alert

“We conjecture that the main contributing factor to the financial crisis was not “excess saving”…the monetary and financial regimes in place failed to restrain the build-up of unsustainable credit and asset price booms (“financial imbalances”). Credit creation, a defining feature of a monetary economy, plays a key role in this story.”

The source of excess credit was European banks with their 69:1 leverage and not the Chinese. IMO, invalidates Brad Setser’s whole line of reasoning spelled out on his blog before him going silent(Brad Setser Follow the Money).

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