Bernanke: "saving glut" a root cause of crisis

WASHINGTON (Reuters) - Four years ago to the day, Ben Bernanke famously identified a global "saving glut" as the cause of a mammoth U.S. current account deficit that was fueling a red-hot housing market, but played down the risks.

On Tuesday, the Federal Reserve chairman delivered an elegant mea culpa for pinpointing the massive capital inflows as a force lifting the U.S. economy, but failing to stop Americans from going on a destructive spending spree.

"The global imbalances were the joint responsibility of the United States and our trading partners, and although the topic was a perennial one at international conferences, we collectively did not do enough to reduce those imbalances," the Fed chief told the Council on Foreign Relations.

"However, the responsibility to use the resulting capital inflows effectively fell primarily on the receiving countries, particularly the United States," he said.

Concern over the deficit in the U.S. current account -- a broad trade measures that includes investment flows -- and its flip side, a massive Chinese surplus, used to dominate meetings of the rich Group of Seven nations, before a credit crisis and global recession gave policy-makers something else to ponder.

U.S. officials did not see the fact that their country was the destination of choice for world lenders as being a big problem. Bernanke said he now knew otherwise. The flood of cheap foreign capital fueled a housing boom that belatedly and painfully was later found to have been a bubble.

"The risk-management systems of the private sector and government oversight of the financial sector in the United States and some other industrial countries failed to ensure that the inrush of capital was prudently invested," he said.

That failure has destroyed investor confidence and frozen credit markets worldwide now that the bubble has burst, while relegating the United States to a similar position suffered by Asian nations during the crisis that wrecked their economies in the late 1990s. With one important difference, at least so far.

"Unlike in the Asian crisis, investors have not fled U.S. markets. They have, however, fled from many private credit markets," Bernanke said in a footnote to his prepared remarks. In the current episode, investors seeking a safe haven from market turmoil have rushed into U.S. government bonds, giving a big lift to the dollar.

The "saving glut" had not seemed such a destabilizing force to Bernanke back in March 2005.

He discussed how the increased supply of saving had boosted the stock market and helped drive up U.S. home prices, encouraging households to spend more. But he saw this mainly as a diversion of resources to less-productive sectors of the economy that could unwind safely over time.

"Fundamentally, I see no reason why the whole process should not proceed smoothly," Bernanke said in 2005.

"However, the risk of a disorderly adjustment in financial markets always exists, and the appropriately conservative approach for policy-makers is to be on guard for any such developments," he hedged.

(Reporting by Alister Bull; Editing by Jonathan Oatis)