in those countries never recovered enough to absorb their strong saving. for china, investment spending was very strong, but it was outpaced by even greater increases in saving, reflecting, among other factors, the weak social safety net and an underdeveloped financial sector. in these countries, economic growth heavily depended on external demand, in part reflecting policies to keep exchange rates artificially low through intervention in currency markets. to some extent, the resulting rapid accumulation of official reserves was welcomed as a buffer against the possibility of another sudden reversal of capital flows, as had occurred in the 1990s. but by resisting appreciation of their currencies, these countries, to some degree, circumvented the usual balancing mechanism for economies that run increasingly large current account surpluses. germany and japan significantly depended on the views expressed in these remarks are my own and not necessarily those of my colleagues on the board of governors. trevor reeve of the board ’ s staff contributed to these remarks. by 2006, the personal saving rate in the united states had declined to 2 - 1 / 2 percent, well below the 8 percent average between 1975 and 1995. the u. s. federal fiscal balance moved from a surplus of 2 – 1 / 2 percent of gdp in 2000 to a deficit of almost 2 percent in 2006. exports as a source of economic growth and ran large current account surpluses as well. finally, surpluses of oil exporters rose sharply with the escalation in oil prices, as their spending lagged rapid income gains. as a result of this pattern of surpluses and deficits, capital flowed strongly to the united states from rapidly growing emerging market economies and some advanced economies. observers feared that, at some point, investors would decide they had enough dollar assets in their portfolios and pull back abruptly from financing the burgeoning u. s. current account deficit, triggering a sharp decline in the dollar, a spike in interest rates, and widespread economic distress. discussions among policymakers at that time focused on reducing current account imbalances to stave off such stresses. 3 the united states was encouraged to increase national saving, both public and private. countries with persistent current account surpluses were encouraged to reduce their dependence on external demand by implementing structural reforms to boost domestic demand, including investing in social programs and infrastructure and reforming labor, product, and financial markets. it was understood that by reducing distortions, these reforms might also boost productivity and improve macroeconomic performance. for some countries, especially china

, increasing the flexibility of exchange rates was a key policy recommendation. despite the considerable attention paid to these issues, limited progress was made in actually implementing this agenda or in reducing global imbalances. as is well known, the crisis did not follow this script. in the event, the dollar weakened in the years leading up to the onset of the crisis in 2007, but once the crisis deepened, the dollar was pushed up sharply by safe - haven flows as investors sought refuge in u. s. treasury securities from dysfunctional markets and stressed institutions around the world. adding to upward pressures on the dollar was a severe dollar funding shortage that arose because global banks had been funding long - term asset positions with short - term dollar borrowing in wholesale markets, resulting in a significant funding crunch when these markets froze up. instead, the main causes of the crisis originated in the financial sector and stemmed from a widespread underappreciation and underpricing of risk. failures of risk - management systems, incentive problems in securitization and compensation structures, and regulatory shortcomings and gaps led to a vulnerable, overleveraged financial system with inadequate capital and liquidity buffers. these problems were amplified by the eagerness of u. s. households to take on huge amounts of mortgage debt and of lenders to advance them the credit, justified by overly optimistic expectations for house price appreciation as the real estate boom progressed. but these financial sector problems were enabled, if not encouraged, by developments in the global economy. the capital outflows associated with the persistent current account surpluses were large even in net terms and, combined with relatively restrained business capital spending in many advanced economies ( including the united states ), put downward pressure on real interest rates globally. 4 from a purely theoretical perspective, there is no compelling reason to believe that low real interest rates, by themselves, pose a particular risk to global economic and financial stability, as real interest rates should be driven by underlying forces to balance the global demand for saving and investment. capital inflows from abroad can be beneficial if they are invested the leading example of these policy discussions was the international monetary fund ’ s multilateral consultation on global imbalances. participants included china, the euro area, japan, saudi arabia, and the united states. this outcome is commonly referred to as the “ global saving glut ”. see ben s. bernanke ( 2005 ), “ the global saving glut and the u. s. current account deficit