First, global imbalances especially between the leading emerging economies and the United States developed as globalization continued. Accumulating surpluses in the emerging economies increased their demand for (seemingly) safe assets.4 Partly as a response to this growing demand, the advanced western financial markets offered financial innovations that increasingly utilized securitization of previously illiquid assets such as (subprime) mortgages.
In Europe, imbalances started to develop within the euro area, with many countries experiencing overheating of their property markets. Another important macroeconomic factor was that, in the aftermath of the slower economic growth of the early 2000, the monetary policy stance both in the US and Europe was relatively light. Finally, the wide-spread consensus of “the great moderation” fostered expectations of declining macroeconomic risks.