factors. 4 a potential explanation is that individual home buyers often falsely indicated on their mortgage applications that the property they were buying would be their primary residence. using an extensive set of data on loan performance that we have developed with equifax, we find that multiple first mortgage lien holders – that is, people owning more than one home – account for about 40 percent of the dollar volume of seriously delinquent mortgage balances, up from about 5 percent in 2004 ( chart 10 ). there are a few caveats to note about this trend. first, there are several categories of spending by households that are lumped into the personal consumption expenditures category in our official gdp statistics that can fairly be counted as investment. these include spending on consumer durable goods, education, and, possibly, medical care, and their combined share of total personal consumption expenditures ( pce ) rose over the period in which the saving rate declined. second, other forces were at work to push down the personal saving rate. prominent among these is a secular decline in the share of health care expenditures paid out - ofpocket by consumers, lessening the motivation for precautionary savings. haughwout, andrew, richard peach, and joe tracy. 2008. “ juvenile delinquent mortgages : bad credit or bad economy. ”, journal of urban economics, 64, no. 2 ( september ) : 246 – 57. as delinquency and foreclosure rates rose, structured finance products backed by riskier mortgage loans performed particularly poorly. the securitization market for non - conforming mortgages collapsed. credit availability tightened as underwriting practices became much more restrictive, even for plain vanilla mortgages. the cascading effect of the sharp increase in mortgage delinquencies and the resulting steep decline in the market value of mortgage assets was a key contributing factor to the financial crisis. as the financial crisis intensified and the economic outlook deteriorated, equity prices eventually declined by 50 percent from their late 2007 peak before bottoming out about one year ago. but while the value of real estate and equities plunged, the debt incurred to acquire those assets remained, leaving households very highly leveraged. according to the flow of funds accounts, the ratio of household liabilities to net worth rose from around 20 percent to nearly 30 percent in just three years ( chart 11 ). the result was a sharp decline in desired investment relative to saving. the number of housing starts plunged, commercial real

in exports relative to imports. let ’ s now apply this framework to evaluate what happened over the past decade and what it implies for the economic outlook. the last three decades have been marked by a shortage of u. s. domestic saving relative to investment. the united states has almost continuously run a current account deficit since the early 1980s ( chart 1 ). in 2005 and 2006 that current account deficit averaged around 6 percent of gdp. yet, the real exchange value of the dollar today is not terribly different from what it was in the early 1990s ( chart 2 ). a massive flow of saving into the united states from around the world offset forces that otherwise would have driven the exchange value of the dollar lower. in addition to its sheer size, this inflow of saving into the united states is significant in several respects. first, note the direction of the flow. one might expect that capital would flow from the developed world to the developing world, but just the opposite has been the case. in addition, foreign savers have been willing to lend to the united states in the u. s. currency. this means that foreign savers are exposed to the exchange rate risk that the dollar ’ s value might change relative to their own currencies. finally, one might expect that over time, as their holdings of dollar - denominated assets increased, foreign savers would demand higher interest rates, but, in fact, u. s. interest rates – in both nominal and real terms – have been generally declining over the past three decades 1 ( chart 3 ). these facts are at odds with the prevailing view that spendthrift u. s. consumers and governments are pulling those savings into the united states. indeed, for some time the “ twin deficits ” view held that large fiscal deficits in the united states were causing large u. s. current account deficits. however, even when the federal government ran surpluses in the late 1990s, our current account deficit continued to increase. subsequent research at the federal reserve bank of new york indicates that the link between fiscal deficits and capital inflows is not as strong as commonly suggested. 2 before proceeding, a few important qualifications are in order. first, despite the large flow of foreign saving into the united states, our international financial position does not appear precarious at the present time. the united states still has substantial investments in foreign countries, and income from u. s. investments abroad still exceeds the income generated by u. s