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Credit bubbleThe financial and economic crisis began with a credit bubble in the United States and Europe Credit spreads narrowed significantly meaning that the cost of borrowing to finance risky investments declined relative to safe assets such as US Treasury securities The most notable of these risky investments were high-risk mortgages MSNBCGlobal capital flows Savings glut in Asia pushed down global interest rates EconomistStarting in the late 1990s China other large developing countries and the big oil-producing nations consumed and invested domestically less than they earned MSNBCExcess of saving over investment in emerging economies especially China EconomistCapital flooded into safe American-government bonds driving down interest rates EconomistMassive amounts of inexpensive capital flowed into the United States making borrowing inexpensive Americans used the cheap credit to make riskier investments than in the past The same dynamic was at work in Europe Germany saved and its capital flowed to Ireland Italy Spain and Portugal MSNBCGlobal financial flows have been characterized in recent years by an unsustainable pattern some countries China Japan and Germany run large surpluses every year while others like the US and UK run deficits The US external deficits have been mirrored by internal deficits in the household and government sectors US borrowing cannot continue indefinitely the resulting stress underlies current financial disruptions CRSSteady and large increases in capital inflows into the US and European economies encouraged significant increases in domestic lending especially in high-risk mortgages MSNBCRepricing of RiskOver time investors lowered the return they required for risky investments Their preferences may have changed they may have adopted an irrational bubble mentality or they may have mistakenly assumed that the world had become safer This inflated prices for risky assets MSNBCHousing BubbleWith its easy money policies the Federal Reserve allowed housing prices to rise to unsustainable levels The crisis was triggered by the bubble bursting as it was bound to do CRSIn addition to the credit bubble the proliferation of nontraditional mortgage products was
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