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 DISSENTING STATEMENT

China and other Asian economies grew, their savings grew as well. In addition,
boosted by high global oil prices, the largest oil-producing nations built up large cap-
ital surpluses and looked to invest in the United States and Europe. Massive amounts
of inexpensive capital flowed into the United States, making borrowing inexpensive.
Americans used the cheap credit to make riskier investments than in the past. The
same dynamic was at work in Europe. Germany saved, and its capital flowed to Ire-
land, Italy, Spain and Portugal.
Fed Chairman Ben Bernanke describes the strong relationship between financial
account surplus growth (the mirror of current account deficit growth) and house
price appreciation: “Countries in which current accounts worsened and capital in-
flows rose . . . had greater house price appreciation [from  to ] . . . The rela-
tionship is highly significant, both statistically and economically, and about 
percent of the variability in house price appreciation across countries is explained.” 
Global imbalances are an essential cause of the crisis and the most important
macroeconomic explanation. Steady and large increases in capital inflows into the
U.S. and European economies encouraged significant increases in domestic lending,
especially in high-risk mortgages.

The repricing of risk
Low-cost capital can but does not necessarily have to lead to an increase in risky in-
vestments. Increased capital flows to the United States and Europe cannot alone ex-
plain the credit bubble.
We still don’t know whether the credit bubble was the result of rational or irra-
tional behavior. Investors may have been rational—their preferences may have
changed, making them willing to accept lower returns for high-risk investments.
They may have collectively been irrational—they may have adopted a bubble mental-
ity and assumed that, while they were paying a higher price for risky assets, they
could resell them later for even more. Or they may have mistakenly assumed that the
world had gotten safer and that the risk of bad outcomes (especially in U.S. housing
markets) had declined.
For some combination of these reasons, over a period of many years leading up to
the crisis, investors grew willing to pay more for risky assets. When the housing bub-
ble burst and the financial shock hit, investors everywhere reassessed what return they
would demand for a risky investment, and therefore what price they were willing to
pay for a risky asset. Credit spreads for all types of risk around the world increased
suddenly and sharply, and the prices of risky assets plummeted. This was most evident
in but not limited to the U.S. market for financial assets backed by high-risk, nontradi-
tional mortgages. The credit bubble burst and caused tremendous damage.

Monetary policy
The Federal Reserve significantly affects the availability and price of capital. This
leads some to argue that the Fed contributed to the increased demand for risky in-