Balance Sheet Economics of the Subprime Mortgage Crisis
This paper is an attempt to describe the US subprime mortgage crisis in the framework of ‘balance sheet economics’, which was originally proposed by Stone (1966) and Klein (1977; 1983). Since it is almost impossible to collect all the balance sheets of economic entities, we use flow-of-funds accounts instead to simulate the negative consequences resulting from home mortgage delinquencies. We show that the pass-through sequence converges when the original delinquency is made up by loss of net worth in any of the economic entities. Most of the eventual loss is incurred by ‘Households and Nonprofit Organizations’ and ‘Rest of the World’. A portion of pass-through loss is eventually incurred by foreign countries with excess external assets, such as Japan, Ireland, etc.