Explaining the U.S. Housing Bubble: Are CDOs to Blame?
47 Pages Posted: 6 Apr 2016
Date Written: March 1, 2016
I argue that a credit supply shift, originating in the CDO market in 2004, was a significant causal factor in the unsustainability of the credit driven housing boom of the early 2000’s. This paper sheds light on when credit booms become bubbles and why. Not all credit driven asset price growth need be problematic, and not all unsustainable credit expansions need affect asset prices. My results suggest that the credit fueled housing price growth prior to 2004 may have been the result of sustainable innovations in meeting the needs of credit constrained borrowers. I argue that the CDO market was the critical link along the credit chain both in terms of its unsustainability as well as the causal role it played in effecting home price appreciation. The central implication for regulatory policy is that credit chains with appreciable assets as collateral are potentially greater sources of instability, and may need to be regulated differently than other types of credit chains.
Keywords: CDO, Credit Supply, Housing Bubble, Securitization
JEL Classification: G21, G23, G01, E51
Suggested Citation: Suggested Citation