Heleen Mees is an Adjunct Associate Professor at NYU Wagner Graduate School of Public Service and Assistant Professor in Economics at Tilburg University. Mees is also a contributing editor to Foreign Policy magazine.[Photo/Cynthia van Elk, via heleenmees.com]

The U.S. Federal Reserve's decision to slash its basic Fed funds rate from 6.75 percent in late 2000 to 1 percent by June 2003 may have had more to do with China's rise as opposed to U.S. economic conditions at the time and the lack of U.S. banking regulations, New York University adjunct associate professor and Foreign Policy magazine contributing editor Heleen Mees asserts in new research for her doctoral thesis.

The rate cut influenced millions of Americans to purchase a new home or refinance their mortgage, which was the prime cause of the housing bubble ― the major catalyst for the 2008 financial crisis.

As China's economy grew by double-digit rates for most of the 2000s, its overall savings rate grew from 38 percent in 2000 to 54 percent in 2006. Mees argued in a January 2012 article for Foreign Policy magazine entitled "How China's Boom Caused the Financial Crisis" that because China's financial markets were relatively underdeveloped at the time, Chinese investors, via China's central bank, poured money into supposedly "risk-free" securities such as U.S. treasury bonds.

"The large buildup of savings in China and other emerging economies (mostly oil exporters) depressed interest rates worldwide from 2004 on, as too much money was chasing U.S. Treasury bonds and other supposedly risk-free securities, driving up the price of bonds and driving down interest rates. Thus, by the time the Fed started to worry about rising inflation by mid-2004, leading the Fed to try to put the brakes on the economy, it was already too late," she wrote.

While subprime and other ‘exotic' mortgages exacerbated the problem, they were not the determining factor in creating the mid-2000s housing bubble, Mees says. She points out that in 2006, the peak of the housing and refinance boom, subprime and ‘Alt-A' loans accounted for only 7.7 percent of all mortgages in the U.S., up from 5 percent in 2005 and less than 1 percent in 2003. Mees asserts, therefore, that it was ‘stubbornly low' interest rates fueled by investment from emerging economies, rather than subprime loans that caused the bubble to spiral out of control. China's large trade surplus, fueled by low production costs and a steady international demand for affordably-priced goods, allowed it to heavily invest in U.S. debt securities.

"China is the cause [of the financial crisis] without being to blame for it," Mees said at a lecture Thursday in Beijing, sponsored by the China Foreign Correspondents Club and hosted at the Embassy of the Kingdom of the Netherlands.

She also noted that the relaxation of U.S. banking regulations championed by both former fed chairman Alan Greenspan and two decades of presidential administrations since the 1980s "were not the cause" of the crisis, but stricter regulation "could have prevented it."

On the topic of China's own housing bubble, Mees said that the current situation in China is very different to the one which faced the U.S. and Europe in the late 2000s, since the Chinese migration from rural to urban areas will eventually create "a huge internal engine" of economic growth once investment in the real estate market shifts to consumption of more goods and services. The development of a service-oriented economy, as well as the relaxation of China's hukou, or permanent residence system, would help maintain China's competitiveness in the long run, she said.

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