The Crisis and How It Unfolded in the Industrial Countries

John Malcolm Dowling and Pradumna Bickram Rana

Chapter 2 in Asia and the Global Economic Crisis, 2010, pp 14-35 from Palgrave Macmillan

Abstract: Abstract The run up in housing prices in the United States and Great Britain at the end of the 1990s that continued until 2006 culminated in what would come to be known as the worst global recession since the great depression on the 1930s. In response to slower activity in the economy during the recession of 2001 the United States had taken an accommodative monetary stance. The prime lending rate fell from around 9% in 2001 to 4% by 2004 as the federal funds rate came down from 6% in early 2001 to an all time low of 1% by mid-2003. While moderating somewhat in 2004 and 2005 the monetary base grew by over 6% in 2002 and 2003. Lower interest rates and aggressive lending fueled a housing boom that lasted for a decade beginning in 1997. Whereas housing prices had risen in line with the cost of living for more than a decade from the mid-1980s to 1997 they accelerated rapidly thereafter. The Case-Shiller index of housing prices (available at www.standardandpoors.com /home/en/us) had increased from 62.8 in January 1984 to 74.8 in January 1997, an annual rate of less than 2%. Between January 1997 and June, 2006 it went from 74.8 to 226.17, an annual rate of around 30%. This resulted in a tripling of average home values in less than a decade and an enormous windfall in wealth for home owners. A real estate and stock market boom of unprecedented strength and breadth ensued. Interest rates on risky assets also fell. One year adjustable rate US mortgage came down from 7.25% in late 2000 to 3.5% in mid-2004. Some home owners refinanced and used the proceeds to buy durable goods, vacations and other luxury items. The rapid increase in housing values prompted many households to enter the housing market and take out mortgages even though their incomes and savings were not strong enough to qualify for a conventional mortgage. They were lured by teaser rates and liberal down payment terms.

Keywords: Housing Price; Housing Market; Commercial Bank; Credit Default Swap; Investment Bank (search for similar items in EconPapers)
Date: 2010
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-30702-5_2

Ordering information: This item can be ordered from
http://www.palgrave.com/9780230307025

DOI: 10.1057/9780230307025_2

Access Statistics for this chapter

More chapters in Palgrave Macmillan Books from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().