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ABS Inflows to the United States and the Global Financial Crisis

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

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17350.

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    Date of creation: Aug 2011
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    Publication status: published as Carol Bertaut, Laurie Pounder DeMarco, Steve Kamin, Ralph Tryon . "ABS Inflows to the United States and the Global Financial Crisis," in Charles Engel, Kristin Forbes, and Jeffrey Frankel, organizers, "Global Financial Crisis" Elsevier, Journal of International Economics 88(2) (2012)
    Handle: RePEc:nbr:nberwo:17350

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    Cited by:
    1. Gourinchas, Pierre-Olivier & Rey, Hélène & Truempler, Kai Alexander, 2011. "The Financial Crisis and the Geography of Wealth Transfers," CEPR Discussion Papers 8567, C.E.P.R. Discussion Papers.
    2. Joshua Gallin, 2013. "Shadow Banking and the Funding of the Nonfinancial Sector," NBER Chapters, in: Measuring Wealth and Financial Intermediation and Their Links to the Real Economy National Bureau of Economic Research, Inc.
    3. Bertaut, Carol & DeMarco, Laurie Pounder & Kamin, Steven & Tryon, Ralph, 2012. "ABS inflows to the United States and the global financial crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 219-234.

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