Rising imbalances in credit flows

The household, business, and financial sectors posted dramatic increases in debt in the decade before the crisis. Rising mortgage borrowing and the use of home equity loans fed a housing bubble that eroded households’ disposable income while a decline in saving and higher debt lowered their net worth. Business borrowing surged as corporations issued bonds to finance stock buy-backs, replacing equity with debt as they had in the 1980s. The debt of the financial sector rose by 222 percent from 1990 to 2000 and rose further in the years before the crisis. Explosive growth in security repurchase agreements financed banks’ leveraged speculation, mortgage activity by the government-sponsored agencies (GSEs), and the proliferation of other asset-based securities issuers. The shift in foreign investments from a dwindling supply of low-yield US treasuries to higher-yielding GSE securities also channeled credit to housing.