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"The origins of the housing bubble are complex, but they are worth understanding if we want to know how things will progress. The housing bubble is not merely the result of low interest rates and shabby lending practices. As Liu says, “the bubble was caused by creative housing finance made possible by the emergence of a deregulated global credit market through finance liberalization. The low cost of mortgages lifted all US house prices beyond levels sustainable by household income in otherwise disaggregated markets” The deregulated cross-border flow of funds (via the yen low interest “carry trade” or the $800 billion current account deficit) have played a major role in inflating the US real estate market.

Liu adds, “Since the money financing this housing bubble is sourced globally, a bursting of the US housing bubble will have dire consequences globally.” Since nearly 50% of “securitized” mortgage debt is owned by foreign investors; the subprime meltdown is bound send tremors through the entire global financial system.

The housing decline is further complicated by Wall Street innovations in derivatives trading which has generated trillions of dollars in “virtual” wealth and is affecting the Feds ability to control inflation through interest rate manipulation. As Kenneth Heebner said, “You have hedge funds buying these subprime and Alt-A loans and leveraging them at 10 to 1. They buy a pool of mortgages at 8% and they borrow against it in yen for 3% and then lever it at 10 to 1so you have a lucrative profit.”

In other words, low interest foreign capital has flooded US markets and contributed to distortions in housing prices. "