Lorenzo Bini Smaghi: the Financial Crisis and Global Imbalances – Two Sides of the Same Coin

When analysing the current financial crisis the temptation might arise to attribute all the responsibilities to the excesses of the US financial system. I think this would be a mistake. While excessive debt creation and risk mispricing are clearly the root cause of the crisis, we should not forget that in order to make a market you need buyers and sellers. And this crisis is as much a crisis of sellers as of buyers. True, most of the toxic assets were originated in the major financial centres. But they were distributed not only in the US but also in other advanced economies as well as in emerging markets. Market participants in these countries have often bought assets without fully understanding their risk profile. Furthermore, there has been an insufficient production of alternative assets around the world, compared to the large amount of savings available.