Economics Forum

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  • During the early 2000s, housing prices were rising 10-15 percent a year. The housing market seemed like the perfect way to make fast cash!
  • This belief (that housing prices would continue to increase) created a BUBBLE: “Unsustainable rapidly rising prices of some type of asset (such as stocks or houses).”
  • LEVERAGE: “Borrowing to make investments.”
  • HERDING: “The human tendency to follow the crowd.”
  • The anatomy of a BUBBLE includes:
  • NINJA loans – No Income, No Job Applicants. People bought houses that they couldn’t really afford.
  • SUBPRIME MORTAGES: granted mortgages to people who did not have the financial assets or earnings to pay off the loan unless housing prices rose
  • This type of lending made the housing price situation “unsustainable”.
  • There was a sudden large supply to the market because people had to sell their houses- ultimately depressing prices, and causing the bubble to BURST
  • Dangerous St.
  • Government bailouts may cause a MORAL HAZZARD: participating in riskier behavior because the expectation is that one will be rescued, or bailed out
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