^aPolitics Department, PO Box 400787, University of Virginia, Charlottesville, VA 22904-4787, USA. E-mail: schwartz@virginia.edu, http://www.people.virginia.edu/~hms2f

Abstract

How did US housing markets articulate both with global financial flows and US domestic politics? During the long 1990s, the US economy benefited from a system of global financial arbitrage in which the US economy as a whole borrowed short term, at low interest rates, from the rest of the world, while lending back long term at higher returns. A temporarily self-sustaining housing market boom in the US based on declining nominal interest rates emerged from these flows. This boom favored employment and gross domestic product (GDP) growth in the US at the expense of some but not all advanced economies. The more that housing market financial structures in an economy approximated those in the US (wide-spread homeownership, high levels of mortgage debt to GDP, low transaction costs for mortgage refinance, and mortgage loan securitization), the better that economy performed in GDP and employment terms during the 1990s. While falling interest rates could have benefited all economies, US style housing markets proved better at translating disinflation into new aggregate demand. This situation consolidates voter preferences around a continued low inflation environment, continuation of US financial arbitrage, and maintenance of high housing prices.