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The Growth Blog is a forum for you - the policy maker, the academic, the student, and the interested citizen of the world - to agree, disagree, or simply to engage current practitioners on policies and issues critical to development. This platform was inspired by the series of meetings that the Commission on Growth and Development held around the world over the course of the last two years. Of the many lessons that emerged in the deliberations, the one that stands out is that inclusive growth requires inclusive thinking, and inclusive discussion.

 

Housing

Causes of the Financial Crisis

Submitted by Viral Acharya on Wed, 04/08/2009 - 20:12.

By Viral Acharya and Matthew Richardson

(forthcoming, Critical Review)

Access full length article:

http://growthcommissionblog.org/files/Acharya Richardson Critical Review Article.pdf

There is almost universal agreement that the fundamental cause of the crisis was the combination of a credit boom and a housing bubble.

In the five-year period covering 2002-2007, the ratio of debt to national income increased from 3.75 : 1 to 4.75 : 1. It had taken the prior full decade to accomplish an increase in debt of this magnitude, and it had taken fifteen years prior to that. Moreover, from 2002 to 2007, house prices grew at an unprecedented rate of 11 percent per year.

When the “bubble” burst, a severe economic crisis was bound to come. The median family, whose house was highly leveraged and whose equity represented 35 percent of its wealth, would not be able to continue to consume as it did through 2007. The economy was going to feel the brunt of it.

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