Outgoing US Treasury Secretary Henry Paulson has said that a failure to address the rise of emerging markets and resulting imbalances is partly to blame for the global financial crisis.
In an interview published today, Mr Paulson told the Financial Times that imbalances between fast-growing nations that save (such as China), and those who spend are at the root of the problem.
He said that in the years leading up to the crisis, savings from nations such as China and oil exporters - at a time of low inflation and booming trade and capital flows - exerted downward pressure on yields everywhere.
This pushed down interest rates and drove investors to riskier assets, sowing the seeds of a global credit bubble that extended beyond the US subprime or high-risk home loan market and eventually burst.
'Excesses... built up for a long time, (with) investors looking for yield, mis-pricing risk,' Secretary Paulson told the FT.
'It could take different forms. For some of the European banks it was eastern Europe. Spain and the UK were much more like the US with housing being the biggest bubble.'
'With Japan it may be banks continuing to invest in equities.'
Mr Paulson's argument suggests that the roots of the crisis do not lie only within the financial system and that avoiding a future breakdown will require not only better financial regulation and risk-management but also global macroeconomic cooperation.
'A lot more needs to be learned about global imbalances,' Mr Paulson said.
He added that a strengthened role for the International Monetary Fund (IMF) - which had sounded the alarm about the imbalances for many years - was insufficient to deal with the problem alone.
He said the G20, which includes both developed and emerging nations, was the appropriate international grouping to lead the global response to the crisis.
Treasury Secretary Paulson, who steps down on January 20 as US president-elect Barack Obama takes office, will be replaced by New York Federal Reserve president and former Treasury official Timothy Geithner.
