A New Policy Paradigm
KDI series in Economic Policy and Development
Edited by Susan Wachter, Man Cho and Moon Joong Tcha
Chapter 6: Transatlantic mortgage credit boom and bust - the impact of market structure and regulation
More than four years have elapsed since the U.S. subprime crisis broke out in 2007, taking with it hundreds of mortgage lenders. Since 2010 we find ourselves in a fully blown sovereign debt crisis in Europe, which to a substantial extent was caused by local mortgage credit booms with lending patterns and house price inflation very similar to those in the U.S. European countries in mortgage crisis include Ireland, Spain and Hungary. Waiting in the wings are others sitting on inflated house prices and hoping for a 'soft landing'. Even though European mortgage default rates are below U.S. rates, the scale of problems, and as we will see the analogies of their causes, suggest that it is fair to speak of a transatlantic crisis. The weight of residential mortgage lending in balance sheets invariably means banking crisis, and where regulated banking has been replaced 'shadow banking' crisis. As governments rescue lenders, the resulting pressure for fiscal and wage austerity, as well as higher unemployment, in a feedback effect enhances pressure on house prices and portfolio quality. With the two largest reserve currencies being affected, USD and EUR, systemic risk implications globally follow suit.
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