From this consumer credit panel data, we conclude that between 2004 and 2006, households were increasing their cash flow by over $ billion a year by borrowing against their housing equity collateral. They supplemented that with another $ billion through non-mortgage borrowing. So, at the height of the boom, annual consumption was being supplemented by around $ billion in cash flow from debt, much of it collateralized by housing. As we now know, homeowners were mistaken in viewing the home price increases during the boom as permanent. Things turned quickly as housing supply increased, home prices softened and mortgage underwriting standards tightened sharply as credit losses on residential mortgage lending climbed. The rise and fall of mortgage securitization activity marked by tranching mortgage cash flows into collateralized debt obligations (CDOs) exacerbated the downturn. Home values began to fall in mid-2006. By 2008, we saw a massive reversal in the way people used their housing equity to finance consumption. People went from borrowing hundreds of billions of dollars per year and increasing their mortgage debt, to paying back hundreds of billions dollars and reducing their mortgage debt. Households deleveraged even apart from the decline in household debt associated with the charge-offs from foreclosures. Instead of $ billion in net cash flow from increased borrowing, this net cash flow sharply reversed to negative $ billion by 2010, with increased residential mortgage debt pay-down being the main source.
The case of Europe is comparable, and that is why the euro has also depreciated against other currencies, not only the peso. In order for growth of developed countries to improve and the overall world economy to pick up, the domestic demand of countries in a strong cyclical position needs to be redirected to imports, while at the same time those countries with weak domestic demand increase their exports. The second factor advocated to intervene the forex market is the need to hoard international reserves. This, for protection against a further worsening of the external scenario. Over the past several years, the Central Bank has increased its level of reserves significantly. The interventions of 2008 and 2011 increased the reserves by nearly 18 billion dollars, to twice the level of December 2007. Thus, at July this year, our reserves amounted to close to 15% of GDP. Certainly, there are benefits associated with hoarding international reserves. An economy with a higher level of international reserves reduces the probability of sudden changes in its external credit conditions, moderates its effects and provides room for policy makers to take offsetting measures. By the same token, it is important that the level and management of international reserves are such that they can be readily available whenever it is deemed necessary. Still, the gains obtained in the margin are lower the greater the amount accumulated.