Impact of Mounting Sovereign Debts - "Autodidact" - Goodfellows > .
b. In 2000s investors in the US and abroad, looking for low-risk, high-return investments, started throwing money at the US housing market.
2). Mortgage back securities are created when large financial institution securitize mortgages.
a. Securitize - the process of taking an illiquid asset and transforming it into a security.
b. They gave a lot of mortgage backed-securities AAA-ratings - the best of the best. And back when mortgages only for borrowers with good credit, mortgage debt was a good investment.
3) Subprime mortgage - a loan granted to individuals with poor credit history.
a. The new lax lending requirements and low interest rates drove housing prices higher, which only made mortgage backed securities and CDOs seem like an even better investment.
b. As people stopped buying houses and paying mortgages, the big financial institutions stopped buying subprime mortgages and subprime lenders were getting stuck with bad loans. By 2007 some really big lenders had declared bankruptcy.
c. Credit default swaps were also turned into other securities - that essentially allowed traders to bet huge amounts of money on whether the value of mortgage securities would go up or down.
d. No one knew exactly how bad the balance sheets at some of these financial institutions really were - these complicated, unregulated assets made it hard to tell.
4) Perverse incentive - when a policy ends up having a negative effect, opposite of what is intended.
5) Moral hazard - when one person takes on more risk because someone else bears the burden of that risk.
a. Blaming the government: "The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets, and the ability of financial institutions to effectively police themselves."
The 2008 financial crisis began with home mortgages, and the use of mortgages as an investment instrument. For years, it seemed like the US housing market would go up and up. Like a bubble or something. It turns out it was a bubble. But not the good kind. And the government response was ... interesting.
1) Default - when a debtor is unable to meet the legal obligation of debt repayment.
a. Traditionally it was pretty hard to get a mortgage if you had bad credit or didn't have a steady job. Lenders just didn't want to take the risk that you might "default" on your loan.b. In 2000s investors in the US and abroad, looking for low-risk, high-return investments, started throwing money at the US housing market.
2). Mortgage back securities are created when large financial institution securitize mortgages.
a. Securitize - the process of taking an illiquid asset and transforming it into a security.
b. They gave a lot of mortgage backed-securities AAA-ratings - the best of the best. And back when mortgages only for borrowers with good credit, mortgage debt was a good investment.
3) Subprime mortgage - a loan granted to individuals with poor credit history.
a. The new lax lending requirements and low interest rates drove housing prices higher, which only made mortgage backed securities and CDOs seem like an even better investment.
b. As people stopped buying houses and paying mortgages, the big financial institutions stopped buying subprime mortgages and subprime lenders were getting stuck with bad loans. By 2007 some really big lenders had declared bankruptcy.
c. Credit default swaps were also turned into other securities - that essentially allowed traders to bet huge amounts of money on whether the value of mortgage securities would go up or down.
d. No one knew exactly how bad the balance sheets at some of these financial institutions really were - these complicated, unregulated assets made it hard to tell.
4) Perverse incentive - when a policy ends up having a negative effect, opposite of what is intended.
5) Moral hazard - when one person takes on more risk because someone else bears the burden of that risk.
a. Blaming the government: "The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets, and the ability of financial institutions to effectively police themselves."
Financial Crisis Inquiry Report: http://www.gpo.gov/fdsys/pkg/GPO-FCIC... .
TAL: Giant Pool of Money: http://www.thisamericanlife.org/radio... .
Timeline of the crisis: https://www.stlouisfed.org/financial-... .
http://www.economist.com/news/schools... .
TAL: Giant Pool of Money: http://www.thisamericanlife.org/radio... .
Timeline of the crisis: https://www.stlouisfed.org/financial-... .
http://www.economist.com/news/schools... .
