November 14 notes

November 14 notes - Monetary Policy and the Economy...

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Monetary Policy and the Economy Additional Required Reading Chap. 15, pp. 303-312 •I n s e r t b e f o r e t h e l a s t 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 •F i n a n c i a l M a r k e t s i n t h e U S a n d A b r o a d a r e i n a Crisis •W h y ? h a t h a s b e e n d o n e ? h a t e l s e c a n b e d o n e ? •S e e t h e C o u r s e W e b s i t e f o r R e c o m m e n d e d 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 ± ±p ² p ² 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 p
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Background Material- Not on Final Exam Credit Market Effects Subprime Mortgage Crisis •W h a t i s a S u b p r i m e M o r t g a g e ? • Mortgage to a borrower: ¾ Weak Credit History ¾ Does not qualify for a Conventional Mortgage •H i s t o r y : S u b p r i m e M o r t g a g e s ¾ Prior to 2000: Less than 10% of mortgage market ¾ By 2004: More than 20% of mortgage market
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Background Material- Not on Final Exam •P r o s : ¾ Allows Households with temporary problems to borrow and buy a home ¾ Expands level of home ownership •C o n s : ¾ Borrowers may not be able to handle monthly payments ¾ Loose Oversight on Terms of Mortgages and Credit Risks of Borrowers ¾ 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 •T r a d i t i o n a l P r o c e d u r e : B a n k s i s s u e d Mortgages and held them as Investments •L a s t d e c a d e : ¾ Banks largely sold Mortgages to Financial Firms for a fee ¾ Financial Firms created Mortgage-Backed Securities (MBS’s)
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Background Material- Not on Final Exam Mortgage-Backed Securities •F i r m p o o l s t o g e t h e r a l a r g e n u m b e r o f m o r t g a g e s •O b j e c t i v e : D i v e r s i f y o r S p r e a d R i s k s ¾ Combine Risky Subprime Mortgages with Relatively Safe Conventional Mortgages ¾ Combine Mortgages from different Locations •S o l d a s S e c u r i t i e s , l i k e B o n d s , w h i c h g e n e r a t e i n c o m e a n d
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This note was uploaded on 01/20/2012 for the course ECON 180.101 taught by Professor Maccini during the Fall '08 term at Johns Hopkins.

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November 14 notes - Monetary Policy and the Economy...

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