The subprime mortgage market was deregulated and the Securities and Exchange Commission decided in 2004 to allow banks to triple their leverage ratios (that is, the ratio measuring the amount of risk to capital), which appeared benign at the time.
Capital inflows pushed up borrowing and asset prices while reducing spreads on all sorts of risky assets, leading the International Monetary Fund to conclude in April 2007, in its twice-annual World Economic Outlook, that risks to the global economy had become extremely low and that, for the moment, there were no great worries.
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In the case of the housing sector, people failed to understand that demand for real estate is only sustainable if the ultimate reason for purchasing a property is to actually reside in it.
Only savings can allow for sustainable economic growth.
Deposit insurance started at ,500 in the Great Depression and has increased in fits and starts to 0,000 in 2009.
With the increase in deposit insurance there was no need to maintain liquidity.
This shift over the decade (2000s) was reflected in numbers from the FDIC: at the end of the third quarter of 1999, the assets of the nation's banks totaled .5 trillion.
All stocks in the S&P in 1957 had a market value of 0 billion.
By the end of 2008, that index had a value of trillion, but the real action was in derivatives, which totaled 8 trillion that year, "or about ten times the Gross Global Product." Credit Default Swaps (CDS) owners jumped on this opportunity to profit and the CDS market grew to trillion at its peak, while the entire market for home mortgages was only trillion.
Former Fed chairman Alan Greenspan would suggest that "irrational exuberance" has the power to escalate asset prices.
He could certainly claim exuberance, but there is nothing irrational in investing in higher-yield projects instead of watching your idle savings lose their purchasing power because of inflation.