"Over the past decade a combination of diverse forces has created a significant increase in the global supply of saving - a global saving glut - which helps to explain both the increase in the US current account deficit and the relatively low level of long-term real interest rates in the world today." Ben Bernanke, chairman of the Federal Reserve.* Has the Federal Reserve been a serial bubble-blower? Or has it been responding to exceptional macroeconomic conditions? Not surprisingly, the implication of Ben Bernanke's celebrated speech on the global "savings glut" implies the second view. Yet his self-exculpatory perspective is far from universally shared. So who is right? My answer is both. The Fed can indeed be accused of being a serial bubble-blower. But this is not because it has been managed by incompetents. It is because it has been managed by competent people responding to exceptional circumstances.

The savings glut is a palpable reality. But it is important to be precise about what it means. What one means by a global savings glut is an excess of savings over investment (or income over spending) in much of the world, largely offset by an excess of investment over savings (or spending over income) in a limited number of countries among which the US is predominant. In 2006, the current account surpluses - or excess of savings over investment - in the countries with surpluses was about $1,300bn, or a sixth of the gross savings of the world, excluding the US. The US current account deficit absorbed close to two-thirds of this surplus. The US has been the world's spender and borrower of last resort.