The massive inflow of foreign capital in the 2000s that enabled the American credit bubble was primarily from the private sector, not governments

In recent years, central bankers in the West have become proponents of the theory that a glut of savings from the developing world led to huge capital inflows into the US in the early 2000s. But did a hunger for investment from the developing world really fuel America’s housing boom? Moritz Schularick and Paul Wachtel take a close look at the recent history of financial flows between sectors of the U.S economy, finding that the American financial sector provided funding for domestic mortgages, which was in turn funded by foreign private investors, not foreign governments.