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In: Economics

A column in the New York Times noted that during the housing boom that ended in...

A column in the New York Times noted that during the housing boom that ended in 2006: open double quote“Global banks had loaded up on these supposedly safe securities, and were at risk of becoming insolvent when their true value became known. Some banks blew up; others were bailed out.

Source: Neil Irwin, open double quote“What 'The Big Short' Gets Right, and Wrong, About the Housing Bubble, close double quote” New York Times ,December 22, 2015.

Which of the following are the securities the columnist is referring to?

A.

Mortgage-backed securities.

B.

Commercial paper.

C.

Tax-deferred annuities.

D.

Government bonds.

What caused the value of these securities to decline?

A.

Lower interest rates.

B.

Recession.

C.

Declining property values.

D.

Inflation.

Expert Solution

The security being referred to is:-

MORTAGE BACKED SECURITIES.

The value of these securities declined because of:-

DECLINING PROPERTY VALUES.

Mortgage backed securities were considered safe and reliable because of the assumption that property values will never decrease and in fact will keep on increasing like it did prior to the bubble burst. Due to this many people got lured into MBS, people bought homes taking loans. But when property prices started declining after its peak in 2006, by 2008 it came approx 20% down and in some places it was even more.

People who took loans by MBS realised that there remaining loan value is even more than the market vaue of the house and defaults in MBS began. In case of sub prime lending things were even worse as it is given to financially lesser people initially at a very less interest rate but after some time the payback value increased. The default increased tremendously and bubble bursted.

Rahul Sunny answered 2 years ago

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