Wednesday, 29 Aug 2012 12:17 PM

By Julie Crawshaw

Wall Street did not cause the U.S. housing bubble and its collapse. China did, according to a new study from the Erasmus Research Institute of Management.

Heleen Mees, assistant professor of economics at Tilburg University and author of the study, explains that exotic mortgage products could not have caused the U.S. housing market bubble and its collapse because mortgages with those special features, such as mortgage-backed securities and collateralized debt obligations, represented less than 5 percent of the total number of new mortgages from 2000 to 2006.

Mees says the Federal Reserve’s loose monetary policy at the beginning of the decade fueled a refinancing boom and increased personal spending in the United States in 2003 and 2004.

In turn, this U.S. spending fueled economic growth in China, which boosted total savings in that country.

The study, which compared financial market responses to U.S., Chinese and German quarterly gross domestic product from 2006 through 2009, reveals that the Chinese were saving more than 50 percent of their GDP during that time, savings that were mostly invested in government bonds.

Interest rates around the world fell, setting off a boom in the U.S. housing market because borrowing money was cheap.

Mees also says that Fed chairman Ben Bernanke set the world up for the Great Recession by providing the “intellectual backing for the aggressive rate cuts in the early 2000s,” according to CNBC.

Applications for home mortgages fell last week, Reuters reported, as demand for refinancing dropped for the fourth week in a row, according to the Mortgage Bankers Association.

However, interest in purchases rose, as the seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 4.3 percent in the week ended Aug 24.

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