Lecture 1The Current Crisis in the American Economy
Origin of CrisisFor decade prior to 2007 –Many mortgages “subprime”little if any equityexcessive payments relative to incomeoften no documentation of value or incomeNINJA mortgages:No Income, No Job, No AssetsEncouraged by Fannie Mae and Freddie MacGovt sponsored mortgage intermediariesLed to self-sustaining bubble in house prices
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2007-2008Borrowers realized they were overextendedCut back on spending, borrowingHousing bubble stalled, then started to shrinkDelinquencies and foreclosures spreadWashington Mutual Savings & Loan failed Fannie and Freddie had long been insolvent, taken over by Fed in 2008Investment banks Bear Stearns, Lehman Bros failedBank Holding Companies in troubleGDP fell, Unemployment rose.How serious compared to past recessions? Pundits often say worst since Great Depression of 1930s. Is this true?