Bernanke, Ben S., Carol C. Bertaut, Laurie Pounder DeMarco, and Steven Kamin. "International Capital Flows and the Returns to Safe Assets in the United States, 2003-2007". International Finance Discussion Papers, No.1014 (2011).

Bernanke, Ben S., Carol C. Bertaut, Laurie Pounder DeMarco, and Steven Kamin. "International Capital Flows and the Returns to Safe Assets in the United States, 2003-2007". International Finance Discussion Papers, No.1014 (2011).

• The US housing crisis was caused by the interaction of a number of factors, including problems with the distribution of mortgage loans, lower standards for these loans, poor risk management among financial institutions, perverse incentives among government-sponsored enterprises, deficient regulation and supervision of financial markets, and the international capital flows of the 'global savings glut' that financed the housing bubble (1).
• The demand for safe investments has led foreigners to purchase large amounts of debt denominated in US dollars, including not only US Treasury bonds and Agency debts, but also private debt assets like mortgage-backed securities (1-2). Between 2003 and 2007, foreigners purchased 55% of all highly rated US securities, up from 22% between 1998 and 2002 (8).
• Demand for US dollar assets, which has driven down longterm interest rates on debt and thus facilitated the US housing bubble, has come not only from the 'global savings glut' countries of East Asia and major oil exporters, but also from developed economies (2). The pressure of capital inflows from emerging economies would not have, on its own, been enough to force down interest rates on private debt (8). Additionally, the trade surplus countries' demand for Treasury bonds was so great that it led European and American investors to purchase privately-issued securities (3).
• Europe was the largest purchaser of US AAA-rated securities among developed economies in the 2000s and it purchased as most as many of these assets as did emerging economies. If other safe assets, like corporate bonds, are included, then Europe was the largest purchaser of safe US assets in the 2000s. These assets were more spread out and included more private debt assets, whereas emerging economies tended to focus on Treasury bonds and Agency debts (9).
• US financial institutions reacted to the immense demand for US dollar assets by further increasing supply through increasingly risky assets, such as subprime mortgages (3), as well as artificially increasing the supply of these 'safe' assets by falsely uprating less secure assets (13-14).
• This process was so popular because there was a lot of demand for very secure US assets, rated A or higher, but relatively little demand for riskier assets, like BBB mortgage-backed securities. There was thus a massive market incentive to have riskier assets fraudulently marked as secure (14-15).
• In the decade prior to the 2008 financial crisis, the US economy experienced two strange economic phenomenon: very low yields on long-term Treasury bond and low mortgage interest rates, despite an expansion of the mortgage market from $6.4 trillion in 2002 to $11.1 trillion in 2008 (3-4).
• The low yields on treasury bonds are due to a combination of factors, including declining risk premiums, the preference of pensions and retirement savings for stable investments, and the large-scale purchase of securities by emerging economies with trade surpluses (4).
• The demand among emerging economies for Treasury bonds created an sense of scarcity that boosted their market price and reduced their yield (7).
• The high demand for US Treasury bonds and Agency debts led to higher prices, which led other investors to purchase more debt assets from the private market, such as mortgage-backed securities. This higher demand for private debt assets deflated interest rates, including on mortgages (7).
• The large savings glut in emerging market economies and oil economies is due to a general increase in the price of oil and other commodities in the past decade, combined with high rates of savings and reserves following the 1997 Asian Financial Crisis (5).
• This savings glut was largely spend on safe assets from US financial markets because the trade surplus allowed them to and such assets were not widely available on domestic financial markets. Most emerging market economies were willing to run current accounts surpluses to purchase these safe assets (5-6). Most countries balanced between European and American safe assets, but focused on the USA, with China in particular spending its current account surplus almost entirely on US assets (6).
• That is savings glut was spent largely on safe assets is demonstrated by the concentration of these assets in Treasury bonds and Agency debts, which constituted 75% of all trade surplus countries' holdings, despite only making up 36% of all American liabilities (6).
• Demand for safe assets, like Treasury bonds, among emerging economies was not reduced despite low yields because they were not purchased as investments, but primarily to serve as reserves (7).
• Unlike Asian countries, European acquisition of US assets was not motivated by a desire for secure liquid assets. Since it did not have a savings glut, its increased purchases of US assets during the 2000s is instead explained by a dramatic expansion of the balance sheets of European banks and an attraction to higher US yields (10).
• This massive expansion of the balance sheets of European banks was facilitated by external borrowing, so that European banks borrowed cheaply and invested that money in US assets, seeking to profit from the difference in interest rates. European banks sold equities and sovereign debt, as well as used short-term assets like US dollar bank deposits, to buy complex financial assets on US markets (11-12).
• Just like many emerging economies in the 1990s, the 2008 financial crisis in the USA was caused by poor financial practices in the private sector and massive international capital inflows facilitated by financial globalization (16).
• Tables and charts with financial data about the period preceding the 2008 financial crisis is available on pages 20 to 30.