24Lecture24

Banks lend cautiously given the recent crisis and so

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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 credit-rating agencies. “[w]here once more marginal applicants would simply have been denied credit, lenders are now able to qu...
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