ABS Inflows to the United States and the Global Financial Crisis

Carol Bertaut, Laurie Pounder DeMarco, Steven B. Kamin and Ralph W. Tryon

No 17350, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F3 G1 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-cba and nep-ifn
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Published as ABS Inflows to the United States and the Global Financial Crisis , Carol Bertaut, Laurie Pounder DeMarco, Steve Kamin, Ralph Tryon. in Global Financial Crisis , Engel, Forbes, and Frankel. 2012
Published as Carol Bertaut & Laurie Pounder DeMarco & Steven Kamin & Ralph Tryon, 2012. "ABS inflows to the United States and the global financial crisis," Journal of International Economics, vol 88(2), pages 219-234.

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