Fed Paper Links Falling Asset Prices to Current-Account Deficit
Declining stock and housing prices after the 2007-2009 financial crisis may be helping to reduce the current-account deficits of the U.S. and other countries, according to a paper by the Federal Reserve Bank of San Francisco.
“Falling asset prices have brought current-account deficits back to more sustainable levels and helped restore a better global financial balance,” said Paul Bergin, a professor at the University of California, Davis, who is a visiting scholar at the bank. Bergin’s comments were made in a paper released by the San Francisco Fed today.
The author links rising property and equity prices before 2007 to higher consumer borrowing and consumption, along with a widening shortfall in the U.S. current account, the broadest measure of a country’s net exports to the rest of the world. The gap widened from 1991 to 2006, reaching more than 6 percent of national output, and has shrunk by half since the crisis, he said.
“Current-account imbalances should be taken seriously as warning signs of potential future financial crises,” Bergin wrote. “It also suggests that the sharp fall in asset prices stemming from the 2007-2009 financial crisis has served as a mechanism of global financial adjustment.”
To contact the editor responsible for this story: Christopher Wellisz at email@example.com