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Current Account Deficits

In: Business and Management

Submitted By turnermx
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1.Read the article Asset Price Booms and Current Account Deficits. Explain the basic premise of the article and describe the impact of the real estate and financial asset prices on the U.S. current account deficit.
The U.S. stock market experienced pronounced growth preceding the crisis which hit its peak in 2008. This growth coincided with reduced rates of savings (even a negative savings rate at times) as assets were valued highly and used as collateral for additional debt taken on by consumers to purchase additional goods. Those private investors leveraged heavily in the market and feeling perhaps ‘overly’ confident because of the impressive growth and also the rising value of their real estate, were especially vulnerable when the recession hit. Institutional investors such as Fannie Mae and Freddie Mac were induced by the government to issue loans to lesser qualified applicants. This created a massive asset price bubble which culminated in the economic crisis. This recession coincided with jobs losses, sharp declines in real estate values to the point where mortgages went ‘underwater’ (meaning that the value of the real estate was to a certain extent less than remaining amount owed for the property), and a sharp contraction on Wall Street. Paul Bergin, UC-Davis professor and visiting scholar in the Economic Research Department of the Federal Reserve Bank of San Francisco, states that “Rising asset values in the United States permitted households to borrow more easily to boost consumption, while the net sale of debt securities abroad financed current account deficits. The fall in some asset values since the crisis (of 2006-2008) can make it easier to reduce current account imbalances” (Bergin, 2011).
While I agree with this premise and certainly hope that it holds, it does appear that the current account deficit grew from the sharp decline and appears…...

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