Rethinking Housing Bubbles: The Role of Household and Bank Balance Sheets in Modeling Economic CyclesBalance sheet crises, in which the prices of widely held and highly leveraged assets collapse, pose distinctive economic challenges. An understanding of their causes and consequences is only recently developing, and there is no agreement on effective policy responses. From backgrounds in experimental economics, Steven Gjerstad and Nobel laureate Vernon L. Smith examine events that led to and resulted from the recent U.S. housing bubble and collapse, as a case study in the formation and propagation of balance sheet crises. They then examine all previous downturns in the U.S. economy, including the Great Depression, and document substantive differences between the recurrent features of economic cycles and financial crises and the beliefs that public officials hold about them, especially within the Federal Reserve System. They conclude with an examination of similar events in other countries and assess alternative strategies to contain financial crises and to recover from them. |
Contents
Goods and Services Markets versus Asset Markets | 20 |
2 | 35 |
Housing and the Great Recession | 49 |
6 | 70 |
Interpretations of the Great Depression | 85 |
The Postwar Recessions | 122 |
What May Have Triggered or Sustained the Housing Bubble | 146 |
Subprime Mortgages Derivatives | 173 |
Common terms and phrases
asset market Available average Bair balance sheets bank balance sheets began Bernanke billion borrowers buyers capital Chapter collapse collateral consumer durables crash decline in housing default deficits delinquent Depression derivatives downturn economic cycle expenditures experience Fannie Mae Fed’s federal funds rate Federal Reserve fell Figure financial markets firms fixed investment flow of mortgage FOMC foreclosure Freddie Mac Ginnie Mae Gjerstad Goldman Sachs growth home prices home sales homeowners house prices housing bubble housing market incentive income increased inflation interest rates investors issued lenders lending liquidity loans losses median monetary policy mortgage credit mortgage debt mortgage funds mortgage market mortgage origination negative equity payments percent of GDP percentage period postwar recessions purchase quarters real estate recession recovery reduced residential construction risk sector securities sellers Smith stock market subprime lending trading trillion United Vernon L