Interest Rate Policy, Housing Prices, and the Credit Crunch
On September 12, 2001, the day after the terrorist attacks in New York, the European Central Bank (ECB) lent 69.3 billion euros to its members to provide liquidity in a time of crisis. On August 9, 2007, in its largest open-market move since its inception almost a decade earlier, the ECB lent 94.8 billion euros to its members as part of an attempt to curb the credit crisis sparked by falling U.S. home and mortgage derivative prices. What could have convinced the monetary authority that oversees the largest single economy in the world that the credit crunch of 2007 was the biggest crisis it had ever faced?
The answer to that question begins with a misjudgment made by the ECB’s U.S. ...