Global imbalances and the financial crisis

Did global imbalances cause the financial crisis? A number
of influential figures have argued that inflows of foreign capital into
the US due to the current account deficit helped to trigger the crisis.
This paper argues that the evidence for this position is weak. The
capital inflows into the US associated with the current account deficit
were also not the key factor driving foreign purchases of US toxic
assets. The so-called global savings glut was not as significant a
pattern as is often presented. Macroeconomic policies that reduced
global imbalances could have been adopted but these would
probably not have prevented the crisis. Global policy efforts to
prevent a recurrence of the financial crisis need to focus on improved
banking regulation. Reducing global imbalances should be of
secondary importance.