Question

Tragedy of Commons and the Housing Bubble crash in 2008.

Using the Tragedy of Commons as your reference, provide a brief and simplified 400-500 word description of what happened with the housing market and the Subprime mortgage fiasco.

Answer 1

The tragedy of the commons is an economics problem in which every individual has an incentive to consume a resource, but at the expense of every other individual -- with no way to exclude anyone from consuming. Initially it was formulated by asking what would happen if every shepherd, acting in their own self-interest, allowed their flock to graze on the common field. If everybody does act in their apparent own best interest, it results in harmful over-consumption (all the grass is eaten, to the detriment of everyone).The problem can also result in under investment (since who is going to pay to plant new seed?), and ultimately total depletion of the resource. As the demand for the resource overwhelms the supply, every individual who consumes an additional unit directly harms others -- and themselves too -- who can no longer enjoy the benefits. Generally, the resource of interest is easily available to all individuals without barriers (i.e. the "commons").

The United States subprime mortgage crisis was a nationwide financial crisis that occurred between 2007 and 2010, and contributed to the U.S. financial crisis.it was triggered by a large decline in home prices after the collapse of a housing bubble, leading to mortgage delinquencies, foreclosures, and the devaluation of housing-related securities. Declines in residential investment preceded the Great Recession and were followed by reductions in household spending and then business investment. Spending reductions were more significant in areas with a combination of high household debt and larger housing price declines.The housing bubble preceding the crisis was financed with mortgage-backed securities (MBSes) and collateralized debt obligations (CDOs), which initially offered higher interest rates (i.e. better returns) than government securities, along with attractive risk ratings from rating agencies. While elements of the crisis first became more visible during 2007, several major financial institutions collapsed in September 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession.

There were many causes of the crisis, with commentators assigning different levels of blame to financial institutions, regulators, credit agencies, government housing policies, and consumers, among others. Two proximate causes were the rise in subprime lending and the increase in housing speculation. The percentage of lower-quality subprime mortgages originated during a given year rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S.The crisis had severe, long-lasting consequences for the U.S. and European economies. The U.S. entered a deep recession, with nearly 9 million jobs lost during 2008 and 2009, roughly 6% of the workforce.