The 2007 financial crisis and U.S. household debt and credit trends

Abstract

The 2007 financial crisis started in the USA but its impact spread throughout the world and led to a fully fledged global recession which we have only just begun to recover from a year ago. Studies have tried to explain why it happened and why its impact on the financial economy and the real economy was so deep. Causes of the crisis stem from various factors: lowering of interest rates, subprime mortgage crisis, house price bust, deregulation, financial innovation. However, the factor that has made recovery so slow, particularly in the USA, is the amount of debt held by U.S. households and the composition of household debt in the U.S. credit market. Government and monetary authorities usually adopt a fiscal policy in the short term and a monetary policy for long term recovery goals. However, these do not work as effectively when there is a situation of household over-indebtedness. This study aims to illustrate the trends of U.S. household debt and credit demand and supply trends. It also shows the effects of over-indebtedness on the financial market and the economy.