Class Notes (807,723)
Canada (492,830)
Economics (219)
ECON 1020 (99)
Lecture 71

ECON 1020 Lecture 71: Lecture 71

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University of Manitoba
ECON 1020
Ryan A.Compton

o982 Made banks go under or have high costs Many Causes of Mortgage Default Crisis: Government programs that encouraged home ownership Subprime loans Subprime borrowers very risky borrowers (low income, bad credit rating, bad candidates to get loans) At this time, the banks were lending a lot of mortgages to subprime borrowers Bad incentives provided by mortgagebacked bondssecurity Mortgageback securities are being bought for when they have to pay back the mortgages with interest Banks started selling off the risk as mortgagebacked securities Value of mortgagebacked securities decrease in value when people cant pay back the mortgages Securitization The process of slicing up and bundling groups of loans into new securities o As loans defaulted, the system collapsed o Underwater homeowners abandoned homes and mortgages (US) In Canada you cant just walk away from homes and mortgages Blame is put mostly on banks (for offering high loans to risky borrowers), but also on the borrowers (for taking the huge loans) Chartered Banks and the Creation of Money: Creation of money is done with the help of Canadas chartered banks Creation of money relies on The Fractional Reserve System Allows us to take part of demand deposit and lend it out to create new money Significant Characteristics of Fractional Reserve Banking: 1. Money creation and reserves Hold part of money as reserve, and lend part of excess reserve
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