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Jan 28 - The Recession of 2008-2009 Recent Events Policy...

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Part I. Tracing the History of the Financial Crisis - The Housing Market Home prices ↑ annually across U.S. from mid-1990s until 2006 - Low interest rates on home mortgages - Growth of innovative lending practices: ARMS, sub-prime loans, etc. - U.S. government policies support home ownership Did a “speculative bubble” develop in the U.S. housing market? Speculative bubble = a sustained increase in the price of an asset that does not reflect the underlying, instrinsic value of the asset. - Price increase b/c people believe price will continue to rise. Herding behavior of buyers (and lenders). - In a 2003 survey by Case and Shiller, house prices were thought to go up, so more people bought homes. They expected prices to increase 6-15% annually so everyone bought houses. - Controversial; difficult to identify: cannot truly identify until bubble bursts. - Some indicators of bubble- o Housing prices were increasing much faster than income. People were stretching to buy property. o Lax lending standards and borrowers. And fraud by lenders. o Increased speculative buying (buying houses not to live in, more likely to default on loan if not living in home.) Home prices in some parts of U.S. began to ↓ in late 2006, and declines became more
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Jan 28 - The Recession of 2008-2009 Recent Events Policy...

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