This is the macroeconomic causes which contributed to the United States housing bubble were low U.S. interest rates and a large U.S. trade deficit. Low interest rates made bank lending more profitable, while Trade deficits resulted in large capital inflows to the U.S. Both made funds for borrowing plentiful and relatively inexpensive.
There were early signs of distress: by 2004, U.S. homeownership had peaked at 70%; no one was interested in buying or eating more candy. Then, The event that precipitated the crisis was the overvaluation of the United States housing market in 2006 and the subsequent crash. Housing prices were driven upwards by easy credit and over speculation on the belief in the false truism that housing …show more content…
Home Construction Index during 2006. Not only were new homes being affected, but many subprime borrowers now could not withstand the higher interest rates and they started defaulting on their loans.
This caused 2007 to start with bad news from multiple sources. Every month, one subprime lender or another was filing for bankruptcy. According to 2007 news reports, financial firms and hedge funds owned more than $1 trillion in securities backed by these now-failing subprime mortgages - enough to start a global financial tsunami if more subprime borrowers started defaulting.
The subprime crisis's unique issues called for both conventional and unconventional methods, which were employed by governments worldwide. In a unanimous move, central banks of several countries resorted to coordinated action to provide liquidity support to financial institutions. The idea was to put the interbank market back on its feet.
The Fed started slashing the discount rate as well as the funds rate, but bad news continued to pour in from all sides. Lehman Brothers filed for bankruptcy, Indymac bank collapsed, Bear Stearns was acquired by JP Morgan Chase, Merrill Lynch was sold to Bank of America, and Fannie Mae and Freddie Mac were put under the control of the U.S. federal …show more content…
The banks, according to this argument, could not have expanded their balance sheets in recent years without borrowing from abroad, which kept interest rates low, and allowed them to engage in riskier, higher-yielding assets which were facilitated by the financial innovations in advanced countries. These imbalances are not just due to US deficits financed by Chinese surpluses. While Europe has an overall current account balance, there are sharp differences within the region: the UK and Spain being large borrowers while Germany’s large current account surpluses fund the consumption of Southern Eurozone countries. The problems with global macroeconomic imbalances are two-fold: the absolute size of current account surpluses (and also deficits elsewhere) has expanded very rapidly, placing a severe burden on the financial systems which has to intermediate the capital flows. The surge of these imbalances is seen as the result of financial deregulation, since the removal of capital controls and advances