ABSTRACT
The historical character of any economic crisis is always determined by the nature of the preceding economic boom. The worldwide economic boom preceding the subprime crisis was led mainly by the U.S. economic recovery and growth from 2002 onward. As about 40 percent of U.S. economic growth in this period is estimated to have depended on the housing sector, the housing boom and the associated financial expansion to mobilize idle global funds into U.S. consumer credit obviously formed the major source of prosperity.2 The housing boom in the U.S. started anew in 1996, along with the New Economy (Information Technology, or IT) boom, and lasted for ten years. After the burst of the New Economy bubble in 2001, the housing boom became the main driving engine for the U.S. economic recovery. It was widely promoted by housing finance. U.S. housing loans are divided into prime and subprime; the latter is typically loans to people of lower income with low creditworthiness. More concretely, subprime loans are made to people with a record of delayed repayment on past loans, or an estimated FICO credit score of under 660 (in a credit scoring system initiated by Fair Isaac Co., with a maximum score of 900), or even debt repayments comprising more than 50 percent of their income. In the past people classed as subprime were mostly excluded from housing loans. But after 2001 there was a rapid growth of housing loans, and especially of subprime loans in the U.S. The growth of lending promoted, and was also facilitated by, steadily rising house prices, until by 2006 their level was on average double that of 1996. Total outstanding U.S. housing loans reached $13 trillion (almost equivalent to GDP) at the end of 2006. The proportion of subprime loans increased continuously to 20 percent of the flow – and 13 percent of the entire stock ($1.7 trillion in real terms) – of housing loans.3
