The Subprime Crisis: What Happened and What Should Be Fixed?

According to the Case-Shiller Index, median housing prices doubled from 1987 to 2000 in major housing markets, including L.A., Miami, D.C. and San Diego. In less than half that time, from 2001 to 2006, housing prices in L.A. and Miami almost doubled, while prices in D.C. and San Diego shot up 1.5 times. Overall, nationwide median housing prices doubled from 2001 to 2006. In an economy as mature and developed as the United States, how could nationwide housing prices almost double in a span of only six years? As emerging nations (particularly China) expanded, they exported more and more to the developing world. By the early 2000s, these nations were awash with unprecedented amounts of cash. Not wanting to re-invest in their own or other developing economies, foreign governments and investors began throwing cash back into the safest, most stable economy of them all: the U.S. economy. This windfall of foreign capital changed the investment landscape on Wall Street, making money cheaper by driving down interest rates and yields on various fixed-income securities, including U.S. Treasuries. At the same time, from 2001 to 2003, the Federal Reserve cut interest rates from 6.5% down to 1% and kept it at this 50-year low for an entire year. By the end of 2003, yields for U.S. Treasuries were so low that, after inflation adjustment, they were actually negative. Meanwhile, Americans began...

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