This, of course, is just the story of subprime mortgages in another guise. The result was increased US spending and the descent of measured household savings into negative territory.

Income inequality grew rapidly in the last decade, but consumption inequality did not. The reason easy credit, especially subprime mortgages, which helped those without means to keep up with the Joneses.

Moreover, because there are no subprime mortgages in China and down payments are as high as 50 60 , even a significant fall in housing prices will not seriously damage China s mega banks.

And essentially the same happened with US subprime mortgage lending and with the Spanish banking system in the 2000 s. In both cases, banks took excessive risks in the expectation eventually vindicated that governments would bail them out.

Although the Federal Reserve kept interest rates low for a protracted period, the corporate sector did not increase its investment. The recovery was ultimately fueled by so called subprime mortgages home purchase loans extended to borrowers with lower credit ratings.

Regulators primary tool to enforce compliance was their authority to reject non CRA compliant banks requests for new branches or mergers. During the subprime boom, large banks were more likely to want to expand, and thus had greater incentive to comply.

In August 2007, the decision by BNP Paribas to close two of its hedge funds exposed to the subprime sector precipitated a liquidity crisis for all European banks during that summer. This year, BNP s great rival, Société Générale, has been in the spotlight.

If the problem is excess saving, and if uncertainty erodes confidence, a massive injection of liquidity such as the ECB s in response to the subprime crisis may be necessary but not sufficient. A rate cut also may be required to restore confidence.

While financial institutions tried to mitigate risks by bundling subprime mortgages, Fukushima s cooling system was able to cope with either a blackout and an earthquake or a tsunami. But, in both cases, the failure probabilities were correlated, and their joint occurrence led to catastrophe.

Yes, China is paying a price for aggressive economic stimulus undertaken in the depths of the subprime crisis. The banking system funded the bulk of the additional spending, and thus is exposed to any deterioration in credit quality that may have arisen from such efforts.

The continent shuts down on the assumption that nothing of consequence will happen until everyone returns, suitably tanned, in September. Never mind the subprime crisis of August 2007 or, closer to home, the European monetary crisis of August 1992 the August holiday is a venerable tradition.

But the minute the sub prime crisis subsides, anxieties about SWF s will return. For the emergence of this vast and growing pool of state controlled funds may have implications more far reaching, and certainly more politically sensitive, than the hopefully temporary distress caused by the subprime crisis.

Unfortunately, the Commission composed mostly of elected officials, rather than experts wasted its time in political squabbles. Its members could not agree even on how to define subprime mortgages and calculate how many such mortgages there were in the United States at the time of the crisis.

But, with the possible exception of Thailand in 1997, the IMF s long time resident historian, James Boughton, finds little evidence for that view in internal documents. The IMF s Internal Evaluation Office is more directly scathing in its assessment of the Fund s obliviousness to the US subprime crisis as it emerged.

Given the nature of market turmoil, an early warning system for financial tsunamis may be difficult to create but the world needs one today more than ever. Few people foresaw the subprime crisis of 2008, the risk of default in the eurozone, or the current turbulence in financial markets worldwide.

As a result, by 2006, global liquidity amounted to more than twice the value of world GDP. Add to that the American financial sector s untenable subprime and securitization activities, and it is not surprising that the next two years brought the global financial system to the brink of outright collapse.

Since the subprime crisis, ultra low interest rates in the rich world have caused emerging market firms to borrow like never before. Some of the debt does not even appear in the official statistics of borrowing countries, because it was often taken on not by domestically based firms, but by their offshore subsidiaries.

Chinese officials faced the risk of a dangerous interplay of political and economic instability. Hit by a second external demand shock in three years first, America s subprime crisis, and now Europe s sovereign debt crisis any outbreak of internal political instability would pose a far greater threat than might otherwise be the case.

The Germans want the ECB to focus only on large systemic banks, and leave smaller savings banks (like those that invested heavily in subprime mortgages) to national authorities. The United Kingdom and Sweden argue that they cannot be made subservient to a central bank of which they are, at best, semi detached members.

The left has dismissed any claim that the CRA played a role in the housing boom by pointing out that it was enacted in 1977, while the subprime boom played out in the early 2000 s. But this ignores the possibility that regulators may have started to enforce the CRA rigorously only later.

In practice, their implementation was, until recently, left to national regulators, who applied very different standards. Most important, while state subsidies in all other sectors are forbidden, they are commonly accepted in banking not only explicit subsidies, such as Germany s bailout of several Landesbanks after the American subprime mortgage crisis, but implicit subsidies as well.

Rather, they were the gross flows of finance from the US to Europe that allowed European banks to leverage their balance sheets, and the large, matching flows of money from European banks into toxic US subprime linked securities. Both critics and defenders of global imbalances almost entirely overlooked these gross flows in both directions across the North Atlantic.

A similar outcome cannot be ruled out in the months ahead. After tumbling sharply in 2008 2009, the export share of emerging Asia is back up to its earlier high of around 44 of GDP leaving the region just as exposed to an external demand shock today as it was heading into the subprime crisis three years ago.

After all, when the global financial crisis erupted in 2008 from the bowels of the American subprime mortgage market, global investors responded by fleeing to the US, not from it. They obviously still regard US Treasury bills as a safe haven and the dollar as the top international currency, especially given the absence of good alternatives.

It is often suggested that what is called the subprime crisis was the result of lax monetary policies that led to excess liquidity in financial markets. But there is an obvious paradox here, because how can an excess of liquidity result ultimately in a shortage of liquidity that has to be made up by central banks?

Failure to recognize the fundamental slowdown that is occurring is reinforcing the expectation that old models can revive growth an approach that will only create new fragilities. Atif Mian and Amir Sufi warn that US consumers purchases of cars and other durables have been bolstered by the same unsustainable subprime lending practices that were used to finance home purchases before the crisis.

Millions of American homes that were purchased with subprime mortgages have been foreclosed in recent years, forcing their owners, unable to service their debt, to leave. But, as a result of no recourse mortgages in many US states, the entire mortgage debt was then extinguished, even if the value of the home was too low to cover the balance still due.

If the shadow banking system collapses, the consequences for the financial system will be much graver than the problems caused by underground credit networks and local government finance platforms, which were much discussed in 2012. No wonder, then, that one influential banker regarded as a possible successor to PBOC Governor Zhou Xiaochuan has warned of the possibility of a Chinese style subprime crisis.

Although QE may be justified by weak economic and growth fundamentals, keeping rates too low for too long can eventually feed such bubbles. That is what happened in 2000 2006, when the US Federal Reserve aggressively cut the federal funds rate to 1 during the 2001 recession and subsequent weak recovery and then kept rates down, thus fueling credit housing subprime bubbles.

A grave reality is that these people bought their houses when the economy was prosperous, so the money to pay the mortgage is also calculated based on their better income. When the income declined, the pressure on the mortgage increased as a result of floating nature of some subprime mortgage plans. Thus, the real estate problems of these American families gradually evolved into a real estate crises.

By late 2007, for example, the Fed and the US Treasury had most likely already seen at least one report arguing that only massive intervention to support subprime loans could forestall a catastrophe. The idea was to save the financial system from having to deal with safely dismantling the impossibly complex contractual edifices which did not allow for the possibility of systemic collapse that it had constructed.

Third, if you plug an unemployment rate of 10 to 11 into any model of loan defaults, you get ugly figures not just for residential mortgages (both prime and subprime), but also for commercial real estate, credit cards, student loans, auto loans, etc. Thus, banks losses on their toxic assets and their capital needs will be much larger than recently estimated, which will worsen the credit crunch.

In 2008, when the Landesbanks were found to be full of American subprime mortgages, the German government bailed them out with a 500 billion ( 650 billion) rescue package at its taxpayers expense. In 2010, when German banks were badly over exposed to the tune of 704 billion to Greece, Ireland, Italy, Portugal, and Spain, European taxpayers and the ECB helped them to bring most of that money home.

The policy and regulatory mistakes that contributed to the subprime mortgage crisis and thus to the US financial system s near meltdown and the eurozone s travails have brought the issue of optimal economic regulation and its relation to democracy to the fore once again. In the US, a significant share of the Republican Party favor abolishing not only the Department of Energy and the Environmental Protection Agency, but also the Federal Reserve!

HONG KONG When the US investment bank Lehman Brothers collapsed five years ago, emerging market economies did not hold many of the toxic financial assets mainly American subprime mortgages that fueled the subsequent global financial crisis. But they were deeply affected by the drop in world trade, which recorded a peak to trough decline of at least 15 , with trade finance also contracting sharply, owing to a shortage of dollar liquidity.

After the subprime crisis erupted, mortgage and consumer debt was paid down by households either with their savings or by default. The fall in US total debt, and the narrowing of the financing gap between total debt and domestic funds, led to a significant improvement in the US current account deficit in 2008 2009, disproving US Federal Reserve Board Chairman Ben Bernanke s claim that the deficit was caused by a global saving glut.

What is trendy at Davos this year is to view the crisis as reflecting two deep global trends for example, the declining clout of the United States. After the war in Iraq and the Bush administration s slow reaction to Hurricane Katrina, America s subprime mortgage crisis is perceived by many as simply accelerating the irresistible rise of Asia and the shift from a unipolar to a multipolar world, even if the wider financial crisis will equally affect Asia s growth.