Do you have a dumb question that you're kind of embarrassed to ask in the main thread? Is there something you're just not sure about?
This is your opportunity to ask questions. No question too simple or too silly.
Culture war topics are accepted, and proposals for a better intro post are appreciated.
Jump in the discussion.
No email address required.
Notes -
Got an economics question:
I was watching 'Margin Call' the other day, and there is a scene where two day traders are lamenting the (then incipient) 2008 financial crisis. The senior of the two gives his justification for existing to the other:
Is there anything to this? if so, how does that work? I always assumed that day traders basically created no value and just shuffled wealth around to nobody's benefit.
Here's how it works: Most mortgages are 30-year loans. This means that the person giving the loan isn't made whole for thirty years. Nobody wants to wait that long to get their money back, not even banks. The only reason ordinary people can get mortgage loans at palatable interest rates (5-8%) is because of the secondary market for mortgage debt. The bank that gives you a mortgage doesn't hold that loan on their books for 30 years, they sell it almost immediately to a firm like the one in Margin Call, and the only reason firms like that are willing to pay so much for mortgages is that they can do Wall Street Magic™ like chop them up into highly liquid, officially rated, mortgage-backed-securities that can be easily sold to pension funds, other banks, or whoever else wants to buy it.
This whole process dramatically increases the demand for mortgage debt, which drives the price of mortgages up and the interest rate charged to the consumer down. Thus, we arrive at the scene in question. The only reason people are able to afford anything as extravagant as a 30-year mortgage is because of the very bankers and processes that caused the financial crisis.
Firstly, the widespread availability of mortgages for ordinary people predates the boom in MBS issuance by decades. The boom in MBS issuance occurred as a result of the GLB Act in 1999. There was a specific period of a few years when the vast majority of (certainly privately-issued) MBS ever issued were issued (or, from Wikipedia). Certainly, securitization (including of mortgages, although usually commercial mortgages) had a very long history, but the MBS market that exacerbated/caused the financial crisis wasn't responsible for people "being able to afford" a 30-year mortgage, no.
Secondly, while MBS prices certainly affect interest rates on new mortgages, I'm less sure that the existence of the MBS market itself was 'responsible' for rates being lower than they would otherwise have been in the early 2000s. That's an unfalsifiable thesis in any case, but I think the default view should be that the lending environment of the pre-crash age was more dependent upon the government, on the Fed and on the wider macroeconomic landscape than it was on the existence of the MBS market.
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link