President Trump and prominent progressives such as Sen. Bernie Sanders have long argued that U.S.-negotiated trade deals have harmed American workers and local economies. Now, a new study from government researchers appears to bolster their case, arguing that the flood of imports in an era of free trade pacts may have exacerbated the 2007 mortgage crisis, which led to the financial meltdown and Great Recession.

The new analysis from the Federal Reserve reviewed local economies whose industries were most vulnerable to competition from foreign imports. In general, researchers found that in the lead-up to the 2007 housing market collapse, household debt in those areas grew faster than in locales more insulated from import pressure. Those imports surged after the passage of NAFTA, the Central American Free Trade Agreement and Permanent Normal Trade Relations with China.

The Fed researchers found that “import competition explains a significant portion of the regional differences in debt growth seen across the country during that period” before the mortgage crisis — and they found that such debt growth “was principally the result of households increasing leverage on existing homes.”

Taken together, the Federal Reserve researchers concluded that “displacement of workers exposed to import competition fueled their demand for mortgage credit, which left many households more vulnerable to the eventual downturn in the housing market.”

They also offered a potential policy prescription: more robust unemployment benefits.

"Households increased borrowing to a lesser extent in areas with more generous unemployment benefits, suggesting that social safety nets like unemployment insurance can reduce the risky use of housing equity to buffer against labor market shocks," they wrote.



This is not the first time the Federal Reserve has identified seemingly unrelated policies that may have stealthily intensified the housing crisis. A 2009 Fed study found evidence that 2005 legislation limiting bankruptcy protections substantially increased foreclosure rates.

Researchers noted that the law — backed by Republicans and leading Democrats such as then-Sen. Joe Biden — made it harder to discharge credit card debt, leaving debtors with less money to pay their mortgages. In all, they found that the law resulted in “over 32,000 more subprime foreclosures nationwide per quarter.”

A related 2008 study by then-Treasury Department economist David Bernstein summarized the trend, concluding that “many households who might have sought the protection of the bankruptcy court under the old bankruptcy regime are now simply walking away from their financial obligations or choosing to sell their homes.”

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