econ101fall11lecture19

econ101fall11lecture19 - Monetary Policy and the Economy...

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Monetary Policy and the Economy Additional Required Reading Chap. 15, pp. 303-312 • Insert before the last Nine Slides of Lecture 18: Monetary Policy & the Economy-Part III
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Financial Market Crisis Required Reading Chap. 14, pp. 288-293 Chap 15, pp. 299-303 Recommended Reading Chap. 14, pp. 279-288
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Financial Market Crisis • Financial Markets in the US and Abroad are in a Crisis •W h y ? • What has been done? • What else can be done? • See the Course Website for Recommended Readings
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Major Causes of the Recession 0 0 0 Decline in Housing Prices and Stock Market caused a Decline in Nominal Wealth, A A Financial Crisis caused : One Cause : Another Potential Cause A C P  a "Tightening" of Credit Markets How? What were the effects on the Macro Economy?
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Graph: Effects of (From Previous Lecture) o A
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Background Material- Not on Final Exam Credit Market Effects Subprime Mortgage Crisis • What is a Subprime Mortgage? • Mortgage to a borrower: Weak Credit History Does not qualify for a Conventional Mortgage • History: Subprime Mortgages Prior to 2000: Less than 10% of mortgage market By 2004: More than 20% of mortgage market
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Background Material- Not on Final Exam •P r o s : Allows Households with temporary problems to borrow and buy a home Expands level of home ownership • Cons : Borrowers may not be able to handle monthly payments Loose Oversight on Terms of Mortgages and Credit Risks of Borrowers Many were Adjustable Rate Mortgages (ARM’s) where Interest Rates can rise Sharply after 2 or 3 Yrs
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Background Material- Not on Final Exam Financial Innovation Securitization of Mortgages • Traditional Procedure: Banks issued Mortgages and held them as Investments • Last decade: Banks largely sold Mortgages to Financial Firms for a fee Financial Firms created Mortgage-Backed Securities (MBS’s)
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Background Material- Not on Final Exam Mortgage-Backed Securities • Firm pools together a large number of mortgages • Objective: Diversify or Spread Risks Combine Risky Subprime Mortgages with Relatively Safe Conventional Mortgages
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This note was uploaded on 01/12/2012 for the course ECON AS.180.101 taught by Professor Maccini during the Fall '08 term at Johns Hopkins.

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econ101fall11lecture19 - Monetary Policy and the Economy...

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