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Unformatted text preview: dit. A social good?
Loans go bad. Lending contracts quickly & severely.
Banks lend cautiously given the recent crisis.
. . . and so it begins . . . Fixed Income VII: R. J. Hawkins Econ 136: Financial Economics 12/ 35 Financial Crisis: A Hardy Perennial Four “waves” of ﬁnancial crisis since the 1970s:
Each wave of crisis followed a wave of credit bubbles.
Credit bubbles involve cross-border ﬂows of money.
Bubbles in real estate always result from bubbles in the
growth of credit.
“The term ’bubble’ is a generic term for the increases in asset
prices in the mania phase of the cycle that cannot be explained by
changes in the economic fundamentals.” Fixed Income VII: R. J. Hawkins Econ 136: Financial Economics 4/ 7 The non-Agency MBS Market: Validation
From 2000 to 2005 the 3-year cumulative default rate for
ﬁxed-rate subprime loans dropped steadily from about 6% to
slightly over 2%: from worse than BB to nearly BBB.
MBS backed by these loans were given high credit ratings by
“[w]here once more marginal applicants would
simply have been denied credit, lenders are now able
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- Fall '08