This would progressively reduce the demand for safe debt instruments issued by advanced economies and eventually contribute to greater financial stability worldwide.10 It would also allow a better channelling of domestic credit to investment and consumption, which in turn would promote growth driven by domestic demand, thereby reducing the incentive to pursue export-led models based on undervalued exchange rates.
At the beginning of the chain of causation is the housing cycle in the United States. Chip Case points out the difference between this housing cycle and others over past decades and asks why the difference developed. One culprit he identifies is changes in the financial system that affected the way that mortgage credit is made available to borrowers.