Holes in the Dike: The Global Savings Glut, U.S. House Prices and the Long Shadow of Banking Deregulation

49 Pages Posted: 7 May 2015

See all articles by Mathias Hoffmann

Mathias Hoffmann

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Iryna Stewen

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management

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Date Written: April 30, 2015

Abstract

We explore empirically how capital inflows into the US and financial deregulation within the United States interacted in driving the run-up (and subsequent decline) in US housing prices over the period 1990-2012. To obtain an ex ante measure of financial liberalization, we focus on the history of interstate-banking deregulation during the 1980s, i.e. prior to the large net capital inflows into the US from China and other emerging economies. Our results suggest a long shadow of deregulation: in states that opened their banking markets to out-of-state banks earlier, house prices were more sensitive to capital inflows. We provide evidence that global imbalances were a major positive funding shock for US wide banks: different from local banks, these banks held a geographically diversified portfolio of mortgages which allowed them to tap the global demand for safe assets by issuing private-label safe assets backed by the country-wide US housing market. This, in turn, allowed them to expand mortgage lending and lower interest rates, driving up housing prices.

Keywords: house prices, savings glut, global imbalances, credit constraints, state banking deregulation

JEL Classification: G100, G210, G280, F200, F320, F400

Suggested Citation

Hoffmann, Mathias and Stewen, Iryna, Holes in the Dike: The Global Savings Glut, U.S. House Prices and the Long Shadow of Banking Deregulation (April 30, 2015). CESifo Working Paper Series No. 5332, Available at SSRN: https://ssrn.com/abstract=2603594

Mathias Hoffmann (Contact Author)

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Iryna Stewen

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management ( email )

Mainz
Germany

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