ECO102H1 Lecture Notes - Lecture 18: European Debt Crisis, Automatic Stabilizer, Shortage
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ECO102H1 Full Course Notes
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Us housing markets were booming and mortgages were being given at high rates to people. Housing prices were appreciating by 10%+ / year. Mortgages loans were made to risky borrowers. Key components leading to the crises included: mortgage backed securities (mbss) Mortgages sold by banks to investment bankers, who bundle them into mbss and sell to investment community: collateralized debt obligations (cdos) Financial instrument secured by mbss (not mortgages: security ratings. Priced under assumptions that housing prices would rise. Some tranches were labeled as aaa even then they had subprime mortgages: credit default swaps. Insure against default on mbss protection against the chance that they can"t repay loans. Only a problem if all bonds (mbss) default at the same time . Government action: sept 2008 allows bank to fail and cause bank runs , oct 2008 bailout. Some institutions too big to fail (i. e. can"t let them fail)