The noise ringing around the globe, only two short years ago, was the sound of overheated property markets crashing firmly down to earth. And following them down, in no short shrift, were the stock markets and economies of much of the world’s developed and developing nations. That sound is still echoing now, both across the real estate market and the wider economy, but despite glimmers of recovery, the mood music remains very negative. What hope is there that the lasting legacy of the real estate bubble won’t be a stagnating housing market and an enfeebled economy?

Pass the parcel- or pass the bomb?

The reasons why the pricking of this particular real estate bubble led to such a global financial trauma can be found in the machinations of the investment banks and their financial whiz kids. These so-called financial engineers, seeking to hook into the vast pools of capital looking for good returns, spent much of the last two decades finding new ways of spicing up dull financial assets. Collateralized Mortgage Obligations were one such toxic asset.

By wrapping up individual mortgages into financial instruments that appealed to investors, these modern day alchemists transformed lead into gold, and earned their banks vast profits in fees. But tucked into these parcels were interests in the real estate market, including the now notorious sub-prime mortgages. These instruments were further wrapped up, resold, and passed around, like a global game of pass the parcel; but a ticking time bomb was being passed from financial institution to financial institution.

These creative approaches to snaring credit, and making banks big bucks, also drove up the US property market to dizzying levels. But with the real estate market being inflated by an oversupply of credit, it only took a little knock to bring the whole mess tumbling down. That came courtesy of rising commodity prices, an incipient slowdown, and a tightening job market. As jobs were lost, foreclosures rose, and suddenly a thousand financial institutions across the world were staring aghast at those pretty parcels they had bought.

Is the bubble machine broken?

This was where a little local trouble became a global financial meltdown. The consequent loss of confidence, and the saddling of US taxpayers with massive debts, for generations to come, are the reasons why real estate continues to flounder. The government cannot sustain its support for the housing market and is withdrawing its tax concessions. And the consumer, faced with long term rising tax bills, is in no mood to pump up the economy. It seems as if the contamination of the last real estate bubble will persist for a long time in the suppressing of another.