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The Foreign Capital Flow and Domestic Drivers of the US Financial Crisis and Its Spread Globally

  • Jeffrey R. Shafer
Chapter

Abstract

Jeffrey Shafer discusses the prelude to the 2008 financial crisis during the Great Moderation in the United States. Lax monetary policy, fiscal stimulus, a current account deficit and innovations in financial markets set the stage for the crisis. The capital flowing into the United States fuelled a house price boom that came to a halt in 2006. Several factors contributed to the boom and bust. Long-standing government policy provided support for housing and homeownership; government sponsored Fannie and Freddie aggressively expanded; refinancing to withdraw equity became common; innovations in the retail mortgage-backed securities market enabled mortgages to be packaged with tranches that were rated as equivalent to US Treasuries for which there was strong foreign demand; the risks introduced by packaging and distribution of RMBS was not well understood; underwriting standards deteriorated markedly; and, finally, the losses from bad credit decisions were multiplied by the collapse of vulnerable sources of liquidity in non-banks and off balance sheet entities.

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Copyright information

© The Author(s) 2019

Authors and Affiliations

  • Jeffrey R. Shafer
    • 1
  1. 1.JRShafer InsightNew YorkUSA

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