The Current Account Deficit and the Housing Boom

  • Daniel Aronoff


There is a near consensus among financial journalists, economists, and policymakers that the US housing boom—which started just after the turn of the millennium and ended by mid-20071—and the financial crisis that followed were caused by loose monetary policy and negligent financial regulation, aided and abetted by avarice and dishonesty among bankers and their borrowers.2 Many people believe that these errant practices enabled reckless financial leverage, easy credit, and fraud to proliferate, which generated an unsustainable boom that, because of its unstable foundation, was destined to end in a calamitous crisis. That was the core conclusion of the Financial Inquiry Commission appointed by the US Congress to investigate the causes of the crisis.3 “We conclude a combination of excessive borrowing, risky investments and lack of transparency put the financial system on a collision course with crisis.”4


Gross Domestic Product Financial Crisis Current Account Capital Inflow Current Account Deficit 
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