Global imbalances and the accumulation of risk

In his latest Policy Brief, Daniel Gros gives a new angle on why the existence of current account ‘imbalances’ should provoke the greatest financial crisis in living history if the raison d’être of a financial system is to deal with imbalances (between savers and investors). He argues that one has to take into account the way current account deficits are financed and how flow imbalances accumulated into large stock disequilibria. In his view, the crisis was the product of a mismatch between the demand for safe, liquid and short-term assets by foreign central banks, which were accumulating large reserves, and the huge supply provided by US households of long-term US mortgage debt.

• Primary Source