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Bertonomics

Looking at the world through the lenses of Singapore A level Economics =D

Month

November 2015

Winter is Coming…

Winter is coming (PUN INTENDED). As the world approaches the Christmas season, a storm is brewing in the financial world.

On Dec 16, the Federal Open Market Committee will hold a meeting that may signal the end of cheap credit in the financial world. Unemployment is dropping, wages are rising and the US economy seems to show signs of finally emerging from the historical crisis in 2008. Given the positive local climate, all eyes are on Janet Yellen, chair of the Federal Reserve, as she may potentially raise interest rates to prevent future inflation.

This week, we look at what exactly is the rate hike? Why raise rates now? What is its impact to the world economy? How will Singapore be affected?

What rate are we referring to?

The rate simple refers to the raise of short-term interest rates. in USA. Interest rates in the US have been close to 0 since the outbreak of the global financial crisis in 2008.

Federal Reserve Funds Rate
By pushing the rate to historically low levels, it increased the money supply and also encouraged banks to lend out enthusiastically to raise consumption and investment. The Feds also intervened to lower long-term interest rates through Quantitative Easing(QE), printing artificial liquidity and buying long-term mortgage securities and treasury bonds to lower borrowing costs. It spurred borrowing and lending, a stock market boom and the Fed contends that it was pivotal in pulling the economy out of a depression.

Why raise interest rates now?

The US economy seems to be picking up from the crisis that erupted in 2008. The Feds decision of whether to raise rates are dependent on key factors such as unemployment figures, real GDP growth, inflation and wage rises.

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Unemployment rates have fallen to below 5% which is widely seen as a benchmark of low unemployment thus a reflection of a buoyant economy and efficient usage of resources.

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US average hourly wages have also seen the most significant increase in percentage in the month of October. Conventionally, if you recall the AD-AS model, rising wages are a reflection of a gradual dwindling of spare capacity in the economy as firms experience an unplanned decrease in stocks and bid up factors of production, including labor to keep up with the economic growth. Since one of the central bank main objectives is to ensure sustainable low inflation of around 2%, the rate hike appears to be justified.

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However, the US inflation rates are at historically low levels. Moreover, the Fed’s favoured inflation measure, the index of personal consumption expenditure(PCE), is at near zero and far below the target of 2%.

Nonetheless, markets expect rates to be rising by this December.  “Inflation is not a problem now, but zero rates are a recipe for excess inflation down the road. The longer the wait, the higher the risks. If inflation does break out, the Fed will be forced to tighten aggressively, causing far more damage to the US and global economy than starting now,” says Deutsche Bank’s chief economist David Folkerts-Landau.

Secondly, a rate hike can remove much of the market volatility that has been pre-existing since news of the tapering of QE emerged. Investors have been frightened by the repeated news of possible rate hikes that have fueled massive ‘hot money’ outflow. The gradual rate hikes will signal a reversion back to conventional monetary policy and set the tone for future stability.

Given the evidence put forward, we believe a rate hike is necessary and inevitable. The follow up question one must ask is thus who will catch a frostbite? Who will brace the cold with few worries? Who may potentially end up like Ned Stark?

 

Are we heading towards an Icelandic Meltdown?

http://www.forbes.com/sites/jessecolombo/2014/01/13/why-singapores-economy-is-heading-for-an-iceland-style-meltdown/

This week we look at a question posed by Forbes contributor, Jesse Columbo, 2 years ago as he predicted the eventual bursting of a property bubble that was emerging in Singapore and a subsequent meltdown akin to the breakdown of Iceland’s banking crisis in 2008.(Check out the article above). While not all of his points are valid, the writer does make certain intriguing observations of the potential risk that Singapore suffers from as a financial center in Southeast Asia.

What happened in Iceland?

In 2008, after the sub-prime mortgage crisis and the shrinkage of short-term debt financing, the three Iceland banks – Glitner, Kaupthing Bank and Landaski – experienced severe shortages of liquidity. From the 1980s to 2000s, Iceland emerged from a small fishing state to an economy that averaged nearly 8% growth every year.

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Its rise was largely a result of a property bubble boom that was fueled by massive credit expansion. From the 1980s to 2000s, as a result of the ‘Great Moderation’, the opening up of China, the world experienced long periods of stable low inflation and high GDP growth. However, there was also a dropping of long-term interest rate yield across the developed nations. In the case of America, it was largely a result of a global savings glut central in Asia while in the case of Iceland, much of the capital came from the Eurozone, especially Germany due to its close relations to the Euro. Low interest rates did not fuel productive investments but were instead concentrated in the property sector. It is quite blatantly obvious in the graph below that housing prices increased up to 300%,

Given the profitability of mortgage loans, the financial sector expanded indefinitely. Cheap credit from abroad was pumped into real-estates with banks acting as intermediates. It led to an delusional rise in wages, tax revenues and consumption that further fueled the credit boom and the housing market. The three big banks seemingly profited from this dangerous feedback loop.

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They massively expanded their balance sheets and by the end of 2007, their total assets were nearly 12 times the country’s GDP. Thus, with the bursting of the bubble in US, it triggered a chain reaction of liquidity shortage and a banking crisis in Iceland. Leverages were so high among Icelandic banks to the extent that the Central Iceland Bank(CIB) could not intervene to bail them out and were forced to allow them to default on their loans. What followed was an extended period of high unemployment and low standards of living.

 Is a housing bubble emerging in Singapore?

The question to ask is thus whether a housing bubble is emerging and to what extent is the financial sector exposed to such a threat.

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The residential property index(Good indicator of property prices) is showing quite a dangerous rise in property prices since 1975. The rise was especially significant after 2008 as a construction boom fueled property prices. As stated by the writer, this was largely a result of QE enacted all over the world which resulted in the fall of long-term interest rates.  

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The Singapore’s interest rate(SIBOR) is close pegged to the US inter-bank funds rate. Thus with the introduction of quantitative easing, rates have hovered below 1% from 2010 to 2014.

With property prices rising nearly 3 times since the 1990s(identical to the Icelandic situation), we should thus be worried about a potential bubble formation. However, the government has made conscientious effort to deflate any further formation of a property bubble. SIBOR has crept back to 1.5% which is likely to depress private property prices.Every percentage point increase in interbank rates raises repayments on a S$1 million property by 12 per cent, assuming an 80 per cent loan-to-value ratio and a 25-year loan duration, according to Maybank Kim Eng Securities.

Moreover, unlike what the writer claims on the Fed’s decision to raise rates only in 2017, it is highly likely the Fed Reserve led by Janet Yellen will raise the Fed’s inter-bank rates by this Dec. Thus, expect the SIBOR to rise further which will depress prices significantly. Turbulent times lie ahead for the property sector but from a macro-economist perspective, the gradual fall in property rises is to be welcomed..

What are the measures taken up by the Singapore government? How effective are they? 

Though due to the different reasons, both Singapore and the eurozone countries do not have the freedom to set interest rates. Thus, macro-prudential policies play and important role in ensuring the controlled expansion of the economy. The term seems complex but just think of them as policies/laws such as capital ratios, loan requirements that aim to control credit expansion within the economy. The difference between Iceland and Singapore is simply that the Singapore government has played a more active role in controlling property prices.

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Since 2009, the government has released almost 9 rounds of property curbs to control the rise of property prices, a contentious issue during the 2008 General Elections. For example:

  1. In August 2013, the government shortened the maximum loan tenure to 25 years from 30 years, and reducing the mortgage ratio limit against the borrower’s salary to 30 percent from 35 percent previously, effectively making it harder to service mortgage debts.
  2. The Total Debt Service Ratio (TDSR) framework was also introduced on 23 June 2013 by The Monetary Authority of Singapore to impact all property loans granted by financial institutions (FIs) to individuals. This will require FIs to take into consideration borrowers’ other outstanding debt obligations when granting property loans. Simply put, banks only can lend you an additional 60% of your gross monthly income but this lending must include all existing loans including – student loans, credit card debts, car loans, any other forms of loans.

This series of property curbs were placed after previous 7 curbs already enacted which shows the resolve of the Singapore government at controlling property prices. However, it is worth mentioning,and worrying that property prices only started decreasing towards the end of 2013. The evidence suggest that while macro-prudential policies can aid prices control. It will appear that interest rates tend to have a more adverse impact on property prices. The fall in prices seems to coincide with the tapering of QE in the USA beginning in 2013. While it may be possible that the curbs take time to surface, evidence suggest that local property prices may be severely affected by macroeconomic policies enacted by large countries. Domestic property prices are increasingly affected by foreign macro policies.

How exposed is our financial sector?

It is undeniable that Singapore faces risk given its big banking sector region. Singapore’s financial sector is nearly 6 times its economy and its financial services industry grew 163% from 2008 to 2012. Its growing role as a banking hub in Asia has resulted in a gradual increase in the management of assets in Southeast Asia. Many of the Southeast Asia countries are developing countries which have experienced a commodity boom and a liquidity surge as extended periods of low growth and quantitative easing has resulted in ‘hot money’ to flow excessively to the region. However, with potential interest rates rising in US, the liquidity can easily dry up the region, resulting in volatility and asset repricing due to large cross-border financing.

Moreover, according to the IMF, “70 percent of local housing loans at variable rates, most of which reset every six months, the transmission from higher interest rates to higher debt servicing costs would likely occur swiftly. According to a MAS survey, if interest rates rose to 3.5 percent (about 200 basis points above current levels), the debt servicing costs of some 5–10 percent of households would rise above 60 percent of income.” The risk is thus present that given an expected rise in inter-bank rates in the next few months, we may see an increase in mortgage defaults that will pose a risk to local banks.

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However, in a 2013 report(Table 5) by IMF that looked at the sustainability of local banks, the Singapore’s banking sector is well poised to handle the turbulent times ahead. Capital to risk-weighted assets, effectively a measure of the liquidity present to handle bank runs are above 16%, well above the Basel III requirements of 8%. Right before the crisis in 2007, Iceland had a ratio of 7.4%. Moreover, non-performing loans are only at 1.1% thus there is still space for maneuver.

Yet, we must be wary of Jesse Colombo’s words where it can be seen that Construction + Housing industry constitute up to 35% of bank loans. These 2 sectors are close knitted and a spike in housing defaults will increase the systematic risk of defaults across the whole real estate industry.

Fundamentally, he financial sector was always fragile. Acting as financial intermediaries that capitalize on short-term deposits to lend out for long-term profits always suffered from a possibility of liquidity shortages. Singapore made a conscientious decision to expand its financial sector despite knowing the risk that it may pose. Given the healthy labour pool and our enhanced infrastructure, the potential benefits of acting as a financial hub in Southeast Asia is too much to be foregone. Hence, we can see the importance of the MAS and the government in extending financial oversight to ensure that banks are well-versed to tackle a crisis.

What can we expect in the near future?

Quantitative easing has proven to be effective as a monetary policy in combating liquidity pressures in a severe financial crisis and we will expect this policy tool to be possibly becoming common in the days ahead. While policymakers have emphasized on it being a ‘last resort’ policy, market expectations may force them to adjust. While a fall in interbank funds rate previously entailed a expansionary response, investors now may increasingly view QE as a norm and thus reduce the long-term effectiveness of interest rate changes. This consequence remains to be seen.

But, it is clear that the artificial creation of liquidity posed serious threats to global economies. Easy credit has created property bubbles in the US and the Eurozone before 2008. Following the crash of the financial industry in the developed world, it shifted to developing countries and fueled massive credit expansion and dangerous debts financing. With the rate hikes ahead, they are likely to now shift course once more. Such free capital especially in a world of large investment banking can easily fuel property and credit bubbles that are unsustainable and detrimental to any economy.

Singapore, given its market openness and large financial sector is prone to such liquidity risks and we must constantly ensure a group of world-class leaders who are at the forefront of preventing the creation of such credit bubbles. Do expect to see the real estate industry to experience falling housing prices over the coming of years. The government is likely to relax property curbs gradually perhaps after the fall of another 20-30% in prices to ensure the wealth of Singaporeans are maintained. There is a delicate balance that must be drawn.

Third Inter-Governmental Project based in Chongqing

The biggest news this week is indisputably the visit by Chinese’s President Xi Jinping to Singapore. The visit is a historical moment. Besides the increase in economic cooperation that China will continue to have with Singapore, Singapore also acts as a 3rd party facilitator to the meeting between Chinese President, Xi Jinping, to Taiwan’s president, Ma Ying-jeou. However, what particularly caught my attention was also the decision by China and Singapore to embark on a third inter-governmental development project.

A Look at Historical Project between China and Singapore

Given the close bilateral ties between Singapore and China, Singapore has been a forefront of China’s development as it seeks to reform its economy at different stages. Given Singapore’s experience in this area, from the 1960s to now, we have aimed to share our experience with the Chinese government.

  1. Suzhou Industrial Par– The Suzhou industrial park emerged as a concept in 1994 where after the famous Southern visit by Deng Xiaoping in 1992, the government was looking to further open up to investments after the ideological crisis previously. The Chinese government was particularly impressed during the Singapore visit by the formation of various industrial parks by Jurong Town Corporation(JTC) and was considering the replication of this model to China. Contrary the popular belief, the project was not a complete success. Cultural reasons and also misunderstanding from the emergence of a similar industrial park in Suzhou known as the Suzhou New District resulted in increased competition and the lack of complete success to the project. In 1999, current Transport Minister, Khaw Boon Wan, declared that Singapore will sell 30% of its share in the project to the Suzhou managerial board and retreat from the majority shareholder to that of a minority. Nonetheless, the project was an important stepping stone to future collaborations between both nations. Singapore will learn from the experience.
  2. Tianjin Eco-City– In 2007, as China’s manufacturing economy had fundamentally matured. A new problem emerged for the administration. Economic development had largely come at the expense of the environment. Various food safety issues emerged and 7 of the world’s 10 most polluted cities were situated in China. The Sino-Singapore Tianjin Eco-City was declared as a second governmental-project that serves to act as a model for sustainable development in China. Singapore had a massive edge in the development of clean-water technology(Hyflux), urban planning and transport planning. The project aimed to capitalize on this areas to develop a sustainable city-model that could be potentially replicated across various areas in China.
  3. Guangzhou Knowledge City – By 2009, many of the coastal cities were experiencing slowing growth. This was surprising given Guangzhou’s undisputed status as China’s fasting growing region. Guangzhou is as the forefront of China’s development but many of its capital-intensive industries were gradually shifting out. In 2011, the Guangzhou Knowledge City emerged as a possible growth model for the wealthier regions. Its focus were high end manufacturing industries such as Information & Communication Technology (ICT), Biotechnology and Pharmaceuticals, Culture & Creative Industries, and Science & Education service. The project was a private sector initiative supported by the government. Though it is not considered an inter-governmental project, it still holds particular significance as it reflects Singapore’s position in every stage of China’s development. The Guangzhou Knowledge City is clearly a reflection of China’s intention to reform its coastal economies to high-end technological manufacturing to sustain its economic growth.

Where are we headed?

The next inter-governmental project will be officially known as the “China-Singapore (Chongqing) Demonstration Initiative on Strategic Connectivity”. Chongqing, with a population of 33 million, beat Chengdu and Xi’an to secure the project. The fact that all 3 possible locations for the collaboration are situated in the western region of China is no plain coincidence.

Firstly, as China now revises its growth towards 6.5%, it is clear that it is at an important crossroad where it must reform its economy to avoid the middle-income trap. The middle-income trap is a situation faced by developing countries where they experience sluggish growth as they are sandwiched in between the undeveloped high-end manufacturing sector, financial and service sector and the gradual erosion of their comparative advantage in labour-intensive industries. Many of its coastal cities are already experiencing diminishing growth, it must thus inject new energy into the economy by improving urbanization, resource allocation and encouraging innovative SMEs.

The Western regions of China is often considered less developed due to its distance away from the central capital and its lack of basic infrastructure. That’s how the idea of ‘1 China, 3 worlds apart’ emerged by the way. But, it is also an untapped region filled with precious water, metal, oil and natural gas reserves. Thus, China desperately need to improve the connection between its Western poorer regions and its rich coastal regions. This can improve trade, investment and narrow the development gap between the 2 regions. That is the fundamental reason behind why all 3 possible cities Xi’an, Chengdu and Chongqing are situated at a strategic linkage between the 2 regions.

Chongqing is probably chosen as it was ranked first in GDP development recently and many Singapore companies are already established within the city. Chengdu already hosts the Singapore-Sichuan High Tech Innovation Park and Xi’an state of development is slower as compared to Chongqing thus they may not attract as many profitable investments.

The project will also serve as a milestone to China’s regional strategie- the “One Belt, One Road” initiative which aim to boost trade and investment along the overland Silk Road Economic Belt and the 21st Century Maritime Silk Road connecting China with South-east Asia, Africa and Europe.

Which industries will stand to benefit:

The official statement declared that the four priority areas of collaboration are in financial services, aviation, transport and logistics, and information and communications technology.

While I may not be an expert in investment, we can expect the 3 local banks to be benefit from such establishments. They already have separate branches in Chongqing and the collaboration will provide opportunities for the further opening up China’s financial sector in terms of issuing corporate bonds denominated in RMB. There may also be increased application for loans as the western regions have massively untapped investments and need for financial services. Moreover, it is quite likely that Chongqing may emerge as a third financial centre after Shanghai and Hong Kong due to its proximity to the western regions and China’s desire to gradually internationalize the Yuan.

I am also drawn to the immense potential of Chongqing becoming a transport and logistics hub. While there is possibility as it emerging as an aviation manufacturing centre or in the areas of data centres as envisioned by its local government, it have an immense potential in becoming a logistical base. It stands at a strategic location bridging the gap between the coastal regions and the less developed areas. Moreover, it can also act as a center to the urbanization trend across the less developed areas. As such, it becomes a perfect place as a logistical base if key infrastructures are in placed for the distribution of goods and services especially with the emergence of online shopping and regional supply chains.

What we can expect

The new project is an important point to a further improvement of bilateral relations between both nations. However, we must be cautious as previous governmental projects have all been situated at the coastal regions, where there is inter-connectivity to global markets, while the Chongqing initiative more likely requires local investments and support. We must also be reminded that the waves of governmental projects and their increased complexity is a reminder that Singapore needs to constantly innovate to be at the forefront of the product life-cycle or we may be left behind. China proves both as an opportunity an a threat to our comparative advantage and we must improve ahead with the times.

In a Nutshell(Part 3) – A MICRO-economist’s View of the Sub-Prime Mortgage Crisis

Part 1        Part 2         Part 3

In this last part in the analysis, lets look at the Micro causes that contributed to the crisis.

BEWARE: MANY FINANCE TERMS AHEAD!(Click on the hyperlink to get a succinct explanation)

  1. Financial Deregulation

In 1933, after the outbreak of the Great Depression, Congress fundamentally reformed banking with the Glass-Steagall act. A key feature of the act  prohibited banks from being “engaged principally” in non-banking activities, such as the securities or insurance business. Firms were thus forced to choose between becoming a bank engaged in simple lending or an investment bank engaged in securities underwriting and dealing.

However, faced by a deregulation spree during Reagan’s time as a need to combat stagflation, financial institutions used this opportunity to campaign against the need for greater oversight. The act was finally repealed in 1990s as commercial banks were allowed to hold 25% of their revenues in investment banking, which were deemed to be more risky and susceptible to panic. This led to the increased involvement of commercial banks in the ‘shadow banking’ industry. This increased the risk of systematic failure as the funds from Main Street which were deposited into commercial banks were brought into the unconventional areas of financial innovation. The credit expansion resulted in massive leverage across major banks, fueling the bubble while increasing the possibility of systematic default.

  1. Market Failure – Asymmetric Information

As a result of the financial deregulation that occurred, financial innovation led to the expansion of the security market and the creation of complex financial products such as collaterized debt obligations(CDOs) and credit-default swaps.

For example, CDO was a structured financial product that brought together various cash-flow generating assets such as mortgages, bonds which were essentially debt obligations acted as collateral(essentially something you lay claim on if the borrower fail to repay you). They were sold to investors with various returns, the higher the returns the less they were protected if the borrower were to default. [BY NOW, JUDGING FROM THE DIFFICULTY I EXPERIENCE IN PUTTING IT INTO LAYMAN’S TERM, YOU UNDERSTAND HOW COMPLEX IT IS]

These financial products were seldom understood by investors and many failed to take into account the risk that they were holding. It was a classical example of the principal-agent problem where sellers understood the financial products than the buyers. Moreover, credit-rating agencies gave these financial products AAA profile which was a signal to investors as safe investment.They should be acting as an independent oversight but lacked credible information in assessing the concentrated risks that these financial products posed. Moreover, there was a conflict of interest as credit rating agencies were paid by the banks who issued these financial products. Thus, they lack incentives to scrutinize the system.

Insurance companies(AIG) joined into the mayhem through the selling of credit-default swaps(CDS). Simply put, a CDS is an insurance policy against a default. Click the diagram below for a hypothetical situation:

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However, while most insurance situations such as car insurance or life insurance are isolated cases. Mortgage defaults are cumulative situations. As the prices of mortgages fall, more individuals end up in liquidity crisis thus the risk of market default grow exponentially with each individual default. In other words, blinded by profit, insurance companies failed to evaluate the risk they were taking, another case of asymmetric information.

The various degrees of asymmetric information between investors and banks, between credit-rating agencies and banks, between banks and insurance companies misallocated large amount of capital into the industry. These financial products were deemed safe and provided massive yield to various parties. However, in actual fact, they were all dependent on the growth of the real estate industry. As long as housing prices rose, the game was on. But, once the music stop, the massive panic triggered a feedback loop that involved the fire-selling of financial assets and the  massive fall in prices and liquidation. The result is an expansion of a real estate bubble that was intertwined with the financial industry and thus will destroy the financial sector as the bubble pops.

  1. ‘Too Big To Fail’ – Moral Hazard

There is a common consensus that the financial deregulation that occurred in the 1990s resulted in the rapid expansion of banks and their role in the global economy. Large corporations such as Goldman Sachs and Citibank opened up branches all over the world and they acted as key financial intermediaries to the global economy. However, their size became a major liability to the global economy. Since they were overly large, they were deemed to be overly important to the US economy for them to fail. Thus, this resulted in a form of moral hazard. Understanding that the US government will intervene provide liquidity during a financial crisis, it encouraged these major corporations to excessively pick up risks, further destabilizing the financial sector.

Loan to deposit ratio were over 100% in 2007 just before the break up of the crisis which effectively meant that banks were incapable of providing liquidity in the event of massive defaults. The default of Lehman Brothers or Northern Rock is largely a result of overly leverage portfolio that led to their susceptibility to bank runs. Moral hazard thus encouraged unwanted risk taking.

  1. Market-distorting American legalization

While there is a common consensus that the cause of the crisis was a housing bubble, the massive defaults were largely a result of the fact that 40% of all U.S. mortgages were held by sub-prime borrowers- individuals who had low credit ratings and low income who would not have acquired loans without the aid of the government and the government state-enterprises(GSEs) Fannie Mae and Freddie Mac. In 1992, Congress gave a ‘new affordable housing’ mission to both GSEs. Thereafter, it made its first ‘trillion dollar commitment’ to provide affordable housing, often to sub-prime borrowers who ran a high risk of defaulting on their debts.

Moreover, possibly politically motivated, the Community Reinvestment Act was enacted in 1995 which required that banks displayed proof that they were providing loans to underserved communities. However, though well intended to prevent racially discriminating practices, these communities were filled with large percentages of borrowers who have low credit standing that did not qualify them for a conventional mortgage loan.

To meet this new requirement and to achieve ‘affordable housing’ for various communities, GSEs bought mortgages from banks and property developers and sold them to sub-prime borrowers at discounted rates, approving lending practices that they once denounced. The erosion of credit standards posed systematic risk to the whole real estate industry.

Shortly after these new mandates went into effect, the nation’s homeownership rate–which had remained at about 64% since 1982 increased to 67.5% in 2000 under President Clinton, and an additional 1.7% during the Bush administration.

The percentage of mortgages held by GSEs over all mortgage originations increased from 37% to 57% from 1994 to 2003. Leverage ratios reached 75 to 1 which were a clear sign of government support but triggered systematic risk. Since many of these loans were offered to borrowers with low credit ratings, the result was a rapid expansion of default risk across the whole real estate industry. It thus destabilize the whole real estate industry and capital was misallocated into the industry further encouraging the bubble.

Conclusion

By now, you would have realized that the global financial crisis in 2008 was a result of a myriad of factors in which some I have failed to mention. Though it has been 7 years since the collapse of Lehman Brothers, we must not forget to draw important lessons from the crisis to avoid a repeat of such a disaster.

Final Pondering Questions:

  1. Is there any justification to prosecute bankers for their mistakes given the complexity of the crisis and the various groups of individuals contributing to the crisis?
  2. How has the study of Economics been affected by the crisis? Check out Behavioural Economic.
  3. An going hypothesis claims that the period of sustained economic growth and low inflation from 1987 to 2003 – ‘The Great Moderation’ resulted in the crisis? How is this possible in terms of human perceptions?

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