The financial crisis was triggered by a crisis in the sub-prime mortgage market in the USA. When interest rates rose, many homeowners who were unable to meet their increased repayments defaulted. This led to banks having to write off billions. Confidence and lending evaporated and a crisis began.
The reason for increased homeownership in the USA can be understood through political motives (in terms of getting votes). In an attempt to tackle the rising inequality in America, politicians faced several options. They could improve the failing education sector - but this was the hard option that would not breed instant results. They could increase taxation and redistribution - but this would be politically unpopular. Therefore, they were left with their option, the one with the least political resistance - cheap credit.
Cheap credit seemed like the panacea. It would push up house prices creating a positive wealth effect. Households, feeling richer, would consume more. It would create jobs in the real estate and housing construction. And, best of all, the costs lay in the future. This was a politician's perfect scenario: cheap credit would yield large, instant and widely distributed benefits.
Unfortunately, the expansion of cheap credit would soon catch up with us. Household debt became untenable. A prime example where good politics can make bad economics...
The reason for increased homeownership in the USA can be understood through political motives (in terms of getting votes). In an attempt to tackle the rising inequality in America, politicians faced several options. They could improve the failing education sector - but this was the hard option that would not breed instant results. They could increase taxation and redistribution - but this would be politically unpopular. Therefore, they were left with their option, the one with the least political resistance - cheap credit.
Cheap credit seemed like the panacea. It would push up house prices creating a positive wealth effect. Households, feeling richer, would consume more. It would create jobs in the real estate and housing construction. And, best of all, the costs lay in the future. This was a politician's perfect scenario: cheap credit would yield large, instant and widely distributed benefits.
Unfortunately, the expansion of cheap credit would soon catch up with us. Household debt became untenable. A prime example where good politics can make bad economics...
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