Bernanke Says Foreign Investment Was Major Cause Of Credit Crisis

Ben Bernanke charged that investments from abroad helped cause the credit crisis. “Excess savings”, money credited in emerging nations, sought save haven investments. Among these were mortgage-backed securities that they credit ratings agencies had labeled “AAA”

Bernanke does not take the credit ratings to task at all in his analysis–a mistake that allows the agencies off the hook.

like the global saving glut countries, European investors placed a high value on safety and liquidity in their U.S. investments; however, relative to purchases by emerging markets, those of European investors encompassed a broader range of U.S. securities, including sizable amounts of private-label mortgage-backed securities (MBS) as well as other highly rated asset-backed securities.

The preferences of foreign investors for highly rated U.S. assets, together with similar preferences by many domestic investors, had a number of implications, including for the relative yields on such assets. Importantly, though, the preference by so many investors for perceived safety created strong incentives for U.S. financial engineers to develop investment products that “transformed” risky loans into highly rated securities. Remarkably, even though a large share of new U.S. mortgages during the housing boom were of weak credit quality, financial engineering resulted in the overwhelming share of private-label mortgage-related securities being rated AAA. The underlying contradiction was, of course, ultimately exposed, at great cost to financial stability and the global economy.

In other words, foreign invests did not conduct adequate due diligence on these assets. The credit rating agencies were mistaken about their ratings, but no one is at fault.

Douglas A. McIntyre