The global credit bubble started with US policies rather than the savings of China and oil exporters, a leading World Bank economist said.

"The global credit bubble started with US policies," David Dollar, World Bank's country director for China, said in an exclusive interview with China Daily yesterday.

The Financial Times on Jan 2 cited US Treasury Secretary Hank Paulson as saying, "In the years leading up to the crisis, super-abundant savings from fast-growing emerging nations such as China and oil exporters ... put downward pressure on yields and risk spread everywhere."

Paulson said this laid the seeds of a global credit bubble, the newspaper reported.

US Federal Reserve Chairman Ben Bernanke, according to the Financial Times, largely endorsed Paulson's argument.

"After 2001, the US stimulated its economy by reducing taxes and increasing government spending," Dollar said. "This was appropriate for a short time, but the US stuck with the stimulus for too long."

After the burst of the Internet bubble in 2000, the Federal Reserve slashed interest rates 13 times to a record low of 1 percent, trying to give a boost to the economy. The low borrowing cost then led to an investment binge in the real estate sector, which later turned out to be another bubble.

The blame on China's surplus as the cause of the bubble is absurd, Albert Keidel, a senior fellow with Carnegie Endowment for International Peace, a Washington think-tank, said in an earlier interview with China Daily. "China's exchange reserve only started to grow after its entry into the WTO in 2001, but before that the bubble in the US was already brewing," he said.

Keidel reckons excessive deregulation of the financial market, which then allowed banks to lower oversight on mortgage applications, is the main reason for the subprime crisis.

In testimony last year before the US House Oversight Committee, former Federal Reserve Chairman Alan Greenspan acknowledged he had made a "mistake" in believing that banks operating in their own self-interest would be sufficient to protect their shareholders and the equity in their institutions. Greenspan said that he had found "a flaw in the model that I perceived is the critical functioning structure that defines how the world works".

"When the US stimulus continued for too long, normally interest rates would have risen and that would have slowed the US bubbles," Dollar said. "But the large trade surpluses in China, Japan, Germany, and the oil exporters provided lots of low-interest lending to the US, enabling the bubbles to keep growing."

(China Daily January 16, 2009)