Question

In: Economics

How did information asymmetries in the home mortgage market contribute to the financial crisis of 2007-2009?

How did information asymmetries in the home mortgage market contribute to the financial crisis of 2007-2009?

Solutions

Expert Solution

The mortgage market was the starting point for many post-Lehman crises: the subprime crisis, the crisis in Ireland, the crisis in Spain and several others. It is a market typified by large knowledge asymmetries and it has been argued that during the first half of the last decade, a market focused on highly asymmetric information has led to the buildup of bad mortgage debt.

The financial crisis of 2007 is the breakdown of confidence which occurred between banks the year before the financial crisis of 2008. This has been caused by the subprime mortgage crisis, triggered by the uncontrolled use of derivatives itself. The timeline includes the symptoms, triggers and symptoms of an early warning breakdown. This also lists the actions the U.S. has taken. To avoid an economic crisis, the Treasury and the Federal Reserve Notwithstanding these efforts, the financial crisis has brought the Great Depression to the fore.

The subprime mortgage crisis began in 2007 when an asset bubble burst in the housing industry.
With the rising home values and low mortgage rates from the previous years, houses were purchased not as places to live in, but as investments. Public agencies such as Fannie Mae and Freddie Mac offered mortgage insurance, even though they were subprime or lent to individuals who would not usually qualify for loans.
Since the financial sector had invested heavily in mortgage-backed derivatives, the collapse of the housing industry was the tragedy of the financial industry. The financial crisis of 2007 precipitated the Great Recession of 2008.


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