This is one of the most interesting things I have read all year.
According to Hyun Song Shin, giving the 2011 Mundell Lecture earlier this month, it is not the global savings glut emanating from the trade surplus countries of Asia that created the conditions for the sub-prime crisis, but a banking glut emanating from Europe.
European banks vastly expanded their dollar-denominated balance sheets in the early years of this century by borrowing short-term from money market funds in order to invest in a variety of asset-backed securities.
The catalysts for this explosion in cross-border lending were (probably) the introduction of the Euro in 1999, which contributed to an environment of cross-border lending, and (more importantly) the more permissive banking environment in Europe (but not the US) after the adoption of Basel II.
In other words, the current financial crisis that began with US sub-prime mortgages in 2007 was caused above all by under-regulated and out-of-control European banks, operating outside the jurisdiction of US banking regulators.
Chinese and Japanese surpluses, that were largely invested in US government securities, are not really implicated.
The upshot is that it is the Europeans that have been the primary source of our problems, with their combination of insanely lax banking standards and a misconceived currency union that has caused a series of credit crises first in the US and then in Europe.
Not only have northern European banks lent euros to Southern Europe that will not be repaid, but they have funded sub-prime investments in US dollars with short-term paper that is now not being rolled over.
What a bloody mess.