Business cycle dating committee wiki
Finance is the largest sector of the US economy, so college graduates believe the road to riches lies with pushing paper, creating complex financial securities, and jockeying risk-management models.These products served to grow Wall Street exponentially.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.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.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.
Finance was once just a small portion of the US economy, but by 2007 it had mushroomed into being over a quarter of the S&P 500, after being only 5 percent of the index back in 1980 — and this doesn't count the financial affiliates of companies like GE.Sean Corrigan pointed to the blooming real estate business among all the bankruptcies, and noted that real estate bubbles tend to pop several years after stock market bubbles, and that mortgages may fare much worse compared to stocks... In 2004, Mark Thornton wrote that higher interest rates (indicated by the Fed) "should trigger a reversal in the housing market and expose the fallacies of the new paradigm, including how the housing boom has helped cover up increases in price inflation.Unfortunately, this exposure will hurt homeowners and the larger problem could hit the American taxpayer, who could be forced to bailout the banks and government-sponsored mortgage guarantors who have encouraged irresponsible lending practices." In 2005, Doug French after observing the mania in Vegas, quipped "condos are the last segment of the housing market to catch fire in a boom and the first to crater in a bust.", and concluded that the bust must be close.So instead of making short-term, self-liquidating business lines of credit, bankers opted for making real-estate loans.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.
Former Fed chairman Alan Greenspan would suggest that "irrational exuberance" has the power to escalate asset prices.