Federal Reserve, led by Chairman Ben Bernanke, faced a difficult dilemma: raising interest rates to combat inflation risked exacerbating the financial crisis, while cutting rates to support the housing market could fuel further inflation. The integration of the global financial system meant that a crisis originating in suburban American neighborhoods quickly became a concern for regulators and investors in London, Tokyo, and beyond.
2007 Subprime Lender Failures: New Century Financial and the Housing Market Collapse
This led to a crisis of confidence among banks, which suddenly found it difficult to trust the value of assets on their balance sheets. The subsequent credit crunch plunged the world into the Great Recession, characterized by massive job losses, plunging asset values, and severe government debt crises.
The United States GDP growth remained positive, though it began to slow toward the end of the year. By mid-2007, it was becoming clear that the housing market was nearing its peak, and the valuation of these mortgage-backed assets was about to be questioned.
2007 Subprime Lender Failures: New Century Financial and the Housing Market Collapse
Home prices had been rising steadily for years, creating a wealth effect that encouraged both consumer spending and speculative investment. Global economic activity in 2007 was characterized by a paradox of prosperity.
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