Outgoing US Treasury Secretary Hank Paulson said that a failure to address the rise of emerging markets and resulting imbalances was partly to blame for the global financial crisis, according to an interview published Friday.
Paulson told the Financial Times that the imbalances between fast-growing nations which save, such as China, and those who spent were at the root of the problem. He said that in the years leading up to the crisis, savings from nations such as China and oil exporters - at a time of low inflation and booming trade and capital flows - exerted downward pressure on yields everywhere.
This pushed down interest rates and drove investors to riskier assets, sowing the seeds of a global credit bubble that extended beyond the US subprime or high-risk home loan market and eventually burst.
"Excesses ... built up for a long time, (with) investors looking for yield, mis-pricing risk," Paulson told the FT. "It could take different forms. For some of the European banks it was eastern Europe. Spain and the UK were much more like the US with housing being the biggest bubble.
"With Japan it may be banks continuing to invest in equities." Paulson's argument suggests that the roots of the crisis do not lie only within the financial system and that avoiding a future breakdown will require not only better financial regulation and risk-management but also global macroeconomic co-operation.