The U.S. economy is clearly in terrible shape. What is less clear is how we got here.
Opinions vary on when and where to begin the story, but manyexperts trace the origins of the current economic situation to thehousing bubble that came about earlier this decade.
Housingprices jumped at a rate above 6 percent in 1999 and increased rapidlyand steadily as the decade turned, according to a recent study by theBrookings Institution.
“After the mid-1990s … real houseprices went on a sustained surge through 2005, making residential realestate not only a great investment, but it was also widely perceived asa very safe investment,” the study said.
The prices eventually moved “out of line with fundamentals like household income” and the bubble formed, the study said. Read the complete Brookings study
There were two trends developing at that time that contributed to the housing bubble, experts said.
The Federal Reserve Board, to combat the recession of 2000-01 and theeconomic effects of the September 11 terrorist attacks, begandrastically slashing interest rates.
Consequently, it was very easy to borrow money, especially if you wanted to buy a home.
Meanwhile, global investors — flush with cash from the worldwideeconomic boom of the 1990s and ’00s — were looking to the U.S. economyto make even more money.
“You have a group of people growingricher by leaps and bounds,” said Peter Rodriguez, an economist at theUniversity of Virginia. “And they liked the idea of parking some cashin the biggest, safest economy in the world.”
Enter mortgage-backed securities
Wall Street firms sought to connect the rich investors with the rapidlyexpanding housing market with the help of complicated financialinstruments.