Econ310_Notes20101209 - T he Subprime Crisis 310-004...

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The Subprime Crisis (12/9/2010) Econ 310-004 Definitions recession – two consecutive quarters where GDP falls depression – recession where unemployment hits 10%; recession where GDP falls 10% fixed rate mortgage – interest rate stays the same adjustable rate mortgage (ARM) – interest rate fixed initially, then adjusts to market rate later subprime loan – loan to people with bad credit (credit score below 640) NINJA loan – no income, no job, no assets mortgage backed securities (MBS) – break up mortgage into tiny pieces, then bundle many mortgages together to diversify risk and sell them off Greenspan put – using monetary policy to prevent asset price deflation (i.e., reflate asset bubbles) mark to market accounting (fair value accounting) – valuing assets based on their current market price rather than their historical price credit default swap (CDS) – bet on whether a loan will be repaid; type of insurance that allows hedging Principles Our current financial crisis is called the Great Recession or the Subprime Crisis. According to the definitions, the recession began in December 2007 and ended in June 2009. Freddie Mac and Fannie Mae would implicitly guarantee mortgages from banks (moral
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This note was uploaded on 01/26/2011 for the course ECON 310 taught by Professor Staff during the Fall '08 term at George Mason.

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Econ310_Notes20101209 - T he Subprime Crisis 310-004...

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