User:Nick Gardner /Sandbox: Difference between revisions

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The origins of the crisis lay in our inability to cope with the
Beginning in 1997, the U.S. witnessed house price appreciation that was highly unusual in
consequences of the entry into the world trading system of countries such as China, India,
historical terms. Between 1997 and 2006, real home prices increased by nearly 85 percent.1
and the former Soviet empire – in a word, globalisation. The benefits in terms of trade
Sustained price increases near this magnitude have only been observed once during the twentieth
were visible; the costs of the implied capital flows were not.
century, in the period immediately after World War II2 (See Figure 1). In fact, during the period 2001 through 2005, the annual rate of house price appreciation accelerated. The
The new entrants adopted a strategy of expanding manufactured exports to create
S&P/Case-Shiller® Home Price Index shows annual price appreciation rising from slightly
employment. High rates of saving depressed domestic demand. So substantial trade
over eight and one-half percent in 2001 to more than 15 percent in 2005.
surpluses were required to keep total demand in line with supply. Equally, the countries
importing those manufactured goods ran trade deficits and required low saving rates to
maintain balance in their economies. Everyone seemed to gain. High-saving countries
created employment, and low-saving countries enjoyed faster consumption growth as
cheap imports meant that living standards rose by more than the increase in production –
worth around half a percentage point a year in the United Kingdom. These were the
benefits of greater trade.
But the pattern of poor countries saving a lot and rich countries borrowing was not
sustainable. The consequences of our inability to cope with these capital flows did not show


A key driver of those imbalances has been very high savings rates in countries like
http://jec.senate.gov/archive/Documents/Reports/10.25.07OctoberSubprimeReport.pdf    JEC Oct 2007
China; since these high savings exceed domestic investment, China and other
countries must accumulate claims on the rest of the world. But since, in addition,
China and several other surplus countries are committed to fixed or significantly
managed exchange rates, these rising claims take the form of central bank reserves.6
The Review then noted that these were “typically invested not in a wide array of equity,
property or fixed income assets—but almost exclusively in apparently risk-free or close to
risk-free government bonds or government-guaranteed bonds”.7 This then led to “a
reduction in real risk-free rates of interest to historically low levels”.8 Professor Willem
Buiter of the London School of Economics observed that this reduction in the worldwide




http://www.fsa.gov.uk/pubs/other/turner_review.pdf The Turner Review
 
Thttp://www.fsa.gov.uk/pubs/other/turner_review.pdf The Turner Review
A regulatory response to the
A regulatory response to the
global banking crisis
global banking crisis

Revision as of 16:16, 16 March 2010

Beginning in 1997, the U.S. witnessed house price appreciation that was highly unusual in historical terms. Between 1997 and 2006, real home prices increased by nearly 85 percent.1 Sustained price increases near this magnitude have only been observed once during the twentieth century, in the period immediately after World War II2 (See Figure 1). In fact, during the period 2001 through 2005, the annual rate of house price appreciation accelerated. The S&P/Case-Shiller® Home Price Index shows annual price appreciation rising from slightly over eight and one-half percent in 2001 to more than 15 percent in 2005.

http://jec.senate.gov/archive/Documents/Reports/10.25.07OctoberSubprimeReport.pdf JEC Oct 2007


Thttp://www.fsa.gov.uk/pubs/other/turner_review.pdf The Turner Review A regulatory response to the global banking crisis March 2009 FSA real interest rate allowed the “US to continue on this low-interest, high-liquidity asset boom”.9

Bank Crises Database World Bank 2003</ref>

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