“Global Imbalances: Is the World Economy Really at Risk?” Dexia SA. 2  Bartolini, Leonardo and Amartya Lahiri. 2006. Twin Deficits, Twenty Years Later, Federal Reserve Bank of New York Current Issues in Economics and Finance, 12, no. 7 (October). BIS Review 41/2010  3  estate assets induced entrepreneurs to produce more of those assets. In the housing market, this increase in prices was helped along by the relaxation of loan underwriting standards, which made it easier to obtain a mortgage and become a homeowner. Credit growth was the strongest among households with relatively low credit scores (Chart 5). The homeownership rate rose after being relatively stagnant for two decades (Chart 6). The increased availability of credit to lower income borrowers and the sharp rise in housing values contributed to the rise of consumption as a share of GDP and the decline of the personal saving rate 3 (Chart 7). Now, with the aid of hindsight, it is clear that we built too many houses, invested in too much commercial real estate and overvalued both significantly. The market overshot for several reasons. First, there was rampant speculative behavior. The longer these asset prices continued to rise, the stronger the belief became that they would keep rising in the future. Second, the rise in prices reinforced the initial relaxation of underwriting standards. During the period of rising prices, defaults and loan losses were very low. A homeowner who had difficulty servicing the debt could typically sell the home for a profit and pay off the loan.
In a rather arbitrary exercise I have looked at the return from investing in 7-10 year government bonds in different countries from mid-1986 (selected only because it was the starting point of the particular data set) to the present. The assumption is that the non-dollar currencies were purchased out of US dollars at the outset and changed back at the end, so that the comparison is on a US dollar basis. It emerges that the average annual return for the period was nearly 12% for Australia, 11% UK, 10.5% Japan, 10% Canada, 8% Germany and 6.5% Switzerland - with the US itself at 8%. How many of you would have got this right ex ante? I hesitate to try to draw any profound conclusions from this, other than that, with US inflation averaging about 3%, there was clearly a reasonable real return to be had everywhere. You did not have to be greedy to survive. The argument of the monetarist school that - to put it in a slightly condensed form - monetary factors do not have a lasting effect on real developments, was especially fashionable during the 1970s when governments were criticised for conceding to inflation in the mistaken belief that they could thereby sustain or stimulate activity. Subsequent experience has proved, if anything, that the optimal monetary stance is, quite simply, a continuing steady one, and that variance on either side - whether too tight or too loose and after allowing for any real shocks - may incur lasting economic losses.