Upload
erna
View
27
Download
0
Tags:
Embed Size (px)
DESCRIPTION
How the Housing Market is Supposed to Work (absent government intervention). Safe Borrowers. Commercial Banks. Safe Mortgage. Risky Mortgage. Risky Borrowers. Safe Borrowers. Investment Banks (Lehmann Brothers). Commercial Banks. Hedge Funds. Safe Mortgage. Risky Mortgage. - PowerPoint PPT Presentation
Citation preview
How the Housing Market is Supposed to Work(absent government intervention)
Risky Borrowers
Commercial Banks
Safe Borrowers
Safe Mortgage
Risky Mortgage
Risky Borrowers
Commercial Banks
Safe Borrowers
Safe Mortgage
Risky Mortgage
Safe Mortgage
Risky Mortgage
Commercial BanksMortgage Backed
SecurityHedge Funds
Investment Banks(Lehmann Brothers)
Moody’sStandard & Poors
Commercial BanksMortgage Backed
Security
Investment Banks(Lehmann Brothers)
Hedge Funds
Pension Funds
Other Large Savers
Reinsurance Companies(AIG)
Commercial Banks
Reinsurance Companies(AIG)
Pension Funds
Other Large Savers
Investment Banks(Lehmann Brothers)
Hedge Funds
Risky Mortgage
Risky Borrowers
Safe Borrowers
Commercial Banks
Safe Mortgage
Risky Borrowers
Safe Borrowers
Safe Mortgage
Risky Mortgage
Mortgage Backed Security
Commercial Banks
Removing the intermediaries, we see that the end result is that entities with large
amounts of savings loan to people who, in turn, buy houses.
Risky Borrowers
Safe Borrowers
Reinsurance Companies(AIG)
Pension Funds
Other Large Savers
Safe Mortgage
Risky Mortgage
Safe Mortgage
Risky Mortgage
Mortgage Backed Security
Mortgage Backed Security
Mortgage Backed Security
Mortgage Backed Security
How the Market Polices Itself(absent government intervention)
Risky Mortgage
Risky Borrowers
Commercial Banks
Risky Borrowers
What if banks started making too many risky loans?
Risky Mortgage
Risky Borrowers
Risky Borrowers
Lenders would demand a higher interest rate to compensate for the greater risk.
This would increase the cost of borrowing andso fewer people would borrow.
Reinsurance Companies(AIG)
Pension Funds
Other Large Savers
Mortgage Backed Security
Risky Borrowers
Risky Borrowers
Reinsurance Companies(AIG)
Pension Funds
Other Large Savers
With less borrowing, demand for houses would be reduced.
Mortgage Backed Security
With a reduced demand for housing, housing prices would not inflate and no price bubble would form.
Summary: How the Market Polices Itself
More risky borrowers means lenders demand higher interest rates.
Higher interest rates limits the number of risky borrowers.
Limited number of risky borrowers means stable demand for houses.
Stable demand for houses means stable housing prices.
Stable housing prices means no housing bubble forms.
How the Housing Market Did Work(behold government intervention)
Two government (or government-type) players enter the game.
Lowers interest rates making borrowing less
expensive.
At the direction of Congress, buys mortgages with little regard for risk.
Risky Borrowers
Safe Borrowers
As the Fed lowers interest rates, more people seek loans.
Safe Borrowers
Safe Borrowers
Safe Borrowers
Risky Borrowers
Risky Borrowers
Risky Borrowers
As Fannie and Freddie ignore borrowers’ riskiness, risky borrowers find it very easy to get loans.
Risky Borrowers
Risky Borrowers
Risky Borrowers
Risky Borrowers
Commercial Banks
Summary: How the Government Short-Circuited the Market
The Fed drove interest rates to low levels encouraging people to borrow.
Fannie and Freddie bought high-risk loans from banks thereby encouraging the banks to make more high risk loans.
The resulting surge in demand for housing drove housing prices up making housing appear to be a good investment.
Encouraged by this apparent good investment, more people bought houses driving prices higher.
Data source: U.S. Census Bureau
On average, every 1% increase in the size of the Federal government (relative to the economy) reduces per-capita GDP by $4,000 (in 2008 dollars).
0%
10%
20%
30%
40%
50%
60%
70%
80%
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Federal Tax Revenue as % of GDP Top Marginal Income Tax Rate
But, over that same period, Federal tax revenue has averaged a constant 18% of GDP (plus/minus 2.3%).
Data source: Bureau of Labor Statistics, National Taxpayers Union
Since 1969, the top income tax bracket has ranged from a high of 77% to a low of 28%.
Source: www.treasurydirect.com and CIA World Factbook
$0
$10
$20
$30
$40
$50
$60
$70
Tota
l Deb
t an
d U
nfun
ded
Obl
igati
ons
Wor
ld G
DP
Wor
ld G
DP
(exc
ludi
ng U
S)
Unf
unde
d M
edic
are
Obl
igati
ons
Euro
pean
Uni
on G
DP
Unf
unde
d So
cial
Sec
urity
O
blig
ation
s
Uni
ted
Stat
es G
DP
Deb
t Hel
d by
the
Publ
ic
Japa
n G
DP
Chin
a G
DP
Inte
rgov
ernm
enta
l Deb
t
Ger
man
y G
DP
Trill
ions
$The total amount of money the U.S. government has either borrowed or owes retirees exceeds the size of the economy of planet Earth.
$100
$10,000
A stack of $100 bills, ½ inch high.
Adapted from pagetutor.com
$1 million
100 packets of $10,000.
Adapted from pagetutor.com
$100 million
$100 million fits on a standard pallet.
Adapted from pagetutor.com
$1 billion
Adapted from pagetutor.com
$1 trillion
Adapted from pagetutor.com
About twice the amount of money the U.S. government spends on interest on the national debt in one year.
$12 trillion
The value of all goods and services produced in the United States in one year.Also, the U.S. national debt (as of 2009). Adapted from pagetutor.com
$65 trillion
Total debt and unfunded Social Security and Medicare obligations (as of 2009).Adapted from pagetutor.com