Glenn Hubbard on the global savings glut

To what extent is weak financial intermediation in Asia part of the problem?

The Japanese case illustrates a general point absent from a discussion of a savings glut. The Keynesian reasoning assumes a simple black box between desired saving and investment--the financial system at home and abroad costlessly transforms lenders' funds between savers and borrowers. A weak financial system--reflecting an underperforming banking system, poor investor protection and corporate governance, or fragile securities markets--yields a high cost of financial intermediation. For any given return on an investment project, savers' net return is lowered by the high costs of intermediating funds. More broadly, regulatory restrictions in goods markets and labor markets reduce returns on domestic investment.

In a closed economy, high costs of financial intermediation increase the relative attractiveness of liquid, safe government obligations. (Again, household purchases of JGBs in Japan come to mind.) In an open economy, the international capital market offers the possibility of investing domestically generated savings in countries with a low cost of financial intermediation and/or a safe nominal anchor in government bonds--the U.S., for example.

Here is the full argument.