Roubini Global Economics – U.S. EconoMonitor

Based on a new research paper, Bernanke extends his GSG hypothesis by considering the type of assets desired by these emerging economies as they invested in the U.S. economy. He shows that investors from these countries, as well as from Europe, had a strong appetite for AAA-rated assets which were in short supply elsewhere. The U.S. financial system responded by transforming risky assets into safe assets.

And so, we have a theory that nicely ties together global economic imbalances, developments in structured finance, and the U.S. housing boom. Note, though, that the GSG hypothesis places no culpability on the Fed. Instead, blame is placed on the failings of the U.S. private sector and foreigners who save too much. How convenient for Ben Benanke and the Fed.