The imbalances and the low interest rates led to an increased demand for financial assets with a higher yield, which contributed to pushing down risk premiums to untenably low levels. Low risk premiums and low interest rates in turn contributed to overheating in the US housing market. Expansionary housing policy in the United States One important factor in triggering the crisis was the adjustment in the US housing market that began in autumn 2005. The housing market has been stimulated by an expansionary housing policy over a long period of time. The aim was that more households would own their own homes. To achieve this, targets were set for how much of the mortgage institutions’ lending would be granted to wage-earners with medium and low incomes. These targets were then gradually raised. The demand for owning one’s own home increased, and thus housing prices and household indebtedness also increased. Moreover, an increasing number of households had gained access to credit as a result of the deregulation of the financial markets. New financial products were created that enabled mortgages to be put together, repackaged and then sold on the financial markets. The idea behind these financial innovations was to spread the risks over more counterparties. Unfortunately the new instruments also reduced the possibility to assess where the risks lay. When the housing market bubble burst and house prices began to fall, the underlying problems rose to the surface.
If one can identify the excesses, why couldn’t the market correct them itself? This could be a question of what economists call market failure. Market participants act in a way that is rational from the point of view of each individual participant, but taken together the outcome is bad for all. As long as investors continue to earn money, the demand for credit can continue to grow, even if the signs of a bubble are strong. On such occasions, intervention by public authorities may lead to a better outcome not just for the economy as a whole, but also for the individual market participants. If one looks at Swedish monetary policy over the past decade, one can actually claim that it has been characterised by some “leaning against the wind”. The published minutes of the monetary policy meetings in Sweden in 2003 and 2004 indicate that rising house prices, high growth in credit and an increased burden of debt among households were put forward by several Executive Board members as arguments in favour of conducting a less expansionary monetary policy. The message is even clearer during the period March 2005 until the end of September 2007, when the Riksbank gave consideration to house prices and growth in lending in its monetary policy decisions. However, the decisions to take into account house prices and credit growth were not made on the basis of the Riksbank including asset prices as a further target variable for monetary policy.