Furthermore, nearly four million existing homes were for sale, of which almost 2. 9 million were vacant. This overhang of unsold homes lowered house prices. As prices declined, more homeowners were at risk of default or foreclosure. House prices are expected to continue declining until this inventory of unsold homes (an instance of excess supply) declines to normal levels. A report in January 2011 stated that U. S. home values dropped by 26 percent from their peak in June 2006 to November 2010, more than the 25. 9 percent drop between 1928 and 1933 when the Great Depression occurred.

Homeowner speculation Speculative borrowing in residential real estate has been cited as a contributing factor to the subprime mortgage crisis. Housing prices nearly doubled between 2000 and 2006, showing a vastly different trend from the historical appreciation at roughly the rate of inflation. While homes had not traditionally been treated as investments subject to speculation, this behavior changed during the housing boom. Media widely reported condominiums being purchased while under construction, then being “flipped” (sold) for a profit without the seller ever having lived in them.

Some mortgage companies identified risks inherent in this activity as early as 2005, after identifying investors assuming highly leveraged positions in multiple properties. High-risk mortgage loans and lending/borrowing practices In the years before the crisis, the behavior of lenders changed dramatically. Lenders offered more and more loans to higher-risk borrowers, including undocumented immigrants. Subprime mortgages amounted to $35 billion (5% of total originations) in 1994, 9% in 1996, $160 billion (13%) in 1999, and $600 billion (20%) in 2006.

A study by the Federal Reserve found that the average difference between subprime and prime mortgage interest rates (the “subprime markup”) declined significantly between 2001 and 2007. The combination of declining risk premiums and credit standards is common to boom and bust credit cycles. What is more, lenders had offered increasingly risky loan options and borrowing incentives. Securitization practices Securitization meant that those issuing mortgages were no longer required to hold them to maturity.

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By selling the mortgages to investors, the originating banks replenished their funds, enabling them to issue more loans and generating transaction fees. This created a moral hazard in which an increased focus on processing mortgage transactions was incentivized but ensuring their credit quality was not. Inaccurate credit ratings Credit rating agencies are now under scrutiny for having given investment-grade ratings to MBSs (mortgage-backed security) based on risky subprime mortgage loans. These high ratings enabled these MBS to be sold to investors, thereby financing the housing boom.

These ratings were believed justified because of risk reducing practices, such as credit default insurance and equity investors willing to bear the first losses. However, there are also indications that some involved in rating subprime-related securities knew at the time that the rating process was faulty. Impacts Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. By early November 2008, a broad U. S. stock index, the S&P 500, was down 45 percent from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30-35% potential drop.

Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8. 8 trillion by mid-2008 and was still falling in late 2008. Total retirement assets, Americans’ second-largest household asset, dropped by 22 percent, from $10. 3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement savings) lost $1. 2 trillion and pension assets lost $1. 3 trillion. Taken together, these losses total $8. 3 trillion.

Members of USA minority groups received a disproportionate number of subprime mortgages, and so have experienced a disproportionate level of the resulting foreclosures. The crisis had a devastating effect on the U. S. auto industry. New vehicle sales, which peaked at 17 million in 2005, recovered to only 12 million by 2010. Source: Federal Reserve Flow of Funds Report Q2 2011 Sustained effects In spring, 2011 there were about a million homes in foreclosure in the United States, several million more in the pipeline, and 872,000 previously foreclosed homes in the hands of banks.

Sales were slow; economists estimated that it would take three years to clear the backlogged inventory. According to Mark Zandi, of Moody’s Analytics, home prices were falling and could be expected to fall further during 2011. However, the rate of new borrowers falling behind in mortgage payments had begun to decrease. Economist Carmen Reinhart stated in August 2011: “Debt de-leveraging [reduction] takes about seven years…

And in the decade following severe financial crises, you tend to grow by 1 to 1.5 percentage points less than in the decade before, because the decade before was fueled by a boom in private borrowing, and not all of that growth was real. The unemployment figures in advanced economies after falls are also very dark. Unemployment remains anchored about five percentage points above what it was in the decade before. ” Responses Various actions have been taken since the crisis became apparent in August 2007. In September 2008, major instability in world financial markets increased awareness and attention to the crisis.

Various agencies and regulators, as well as political officials, began to take additional, more comprehensive steps to handle the crisis. To date, various government agencies have committed or spent trillions of dollars in loans, asset purchases, guarantees, and direct spending. 8. CONCLUSION This paper has attempted to provide a comprehensive review on the euro vs dollar debate. It is a summary of economic, political and social variables that need to be considered to fully apprehend the euro’s challenge to the dollar in all its dimensions.

In the first part it has presented the euro-optimist and euro-sceptical hypotheses on the subject within the Economics literature and their underlying arguments focused on economic size, financial market sophistication, confidence in the value of the currency and network externalities. Current data on the international use of the dollar and the euro show that the euro-optimists were too optimistic about the European currency. The dollar dominates roughly two-thirds of global activity versus the euro’s less than one-third. However, these numbers alone do not explain why the euro has underperformed.

The IPE literature shows that a currency can only become the top international currency if there is an active political commitment by the issuing authorities to make this currency the leading currency, an aspect that the Economics literature has not explored with sufficient rigour. This political commitment is non-existent within the EMU at present. The EMU is politically too fragmented to allow the euro to challenge the dollar’s predominance. Nonetheless, the euro has offered its member states more protection from dollar dominance, and this newly-acquired autonomy has in turn aggravated the dollar’s weaknesses.

Up to this point the existing IPE literature offers a very accurate picture of the structural conditions of the international monetary system. Where it lacks nuance is in identifying the social impact of the euro. Using structural and material analyses it asserts that the euro, while on the rise, is unable to reach the dollar, while, the dollar, despite descending in absolute terms, is still dominant. However, this macro approach does not discern how these relative ascents and descents are socially constructed by key agencies at the micro level.

This can only be done through a constructivist approach which focuses on how the impact of the euro in the IMS has been intersubjectively constructed. The last part of the paper focuses on these social dimensions. It shows how the euro has become a truly global currency in the social sense with great symbolic effects and how key agents in private banking and public foreign reserve management institutions are gradually seeing the development from a unipolar system dominated by the dollar to a bipolar system where a mildly descending senior pole (the dollar) and a mildly ascending junior pole (the euro) compete against each other.

The current sovereign debt crisis in the EZ and the willingness of key players such as China and Japan to invest further in euro-denominated debt in order to diversify away from the dollar just shows how systemically important the European currency has become. In this regard, subjective interpretations of the reality are very different depending on the vantage point.

While from the point of view of the US, the dollar is still dominant, with everyone else far behind, as has been the case over the past five decades, from the point of view of the policymakers and financial elites of key emerging markets there is now the dollar and the euro, midway, far behind the dollar, but also far ahead of their own currencies. This change in the framework has incentivised them to develop their own monies as international currencies.

Now, from the perspective of the Chinese and others, there is one currency still far ahead in the race, though losing ground, and another that is gradually leaving the pack behind, which is good because it reduces the difference with the leader, but is also a wake-up call. From the point of view of perspectives, the current IMS is very different from having one currency ahead and all the rest more or less at the same distance. No wonder then that the Chinese want to catch up by promoting the renminbi. Their idea is that in the future there might be room for more suns than just the current two.

BIBLIOGRAPHY

1. www. finance. yahoo. com; 2. www. realinstitutoelcano. org; 3. www. forex. ro; 4. “Exchange Rate Flexibility across Financial Crises”, Virginie Coudert, Ci?? cile Couharde, Vali?? rie Mignon; 5. Harvard University-The State of the Nation’s Housing-2008; 6. Michael Burry-Vanderbilt Magazine-Missteps to Mayhem-Summer 2011;

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