Texas Council on Economic Education Laura Ewing/President 1801 Allen Parkway Houston, TX 77019 713.655.1650 www.economicstexas.org
Transcript
Slide 1
Texas Council on Economic Education Laura Ewing/President 1801
Allen Parkway Houston, TX 77019 713.655.1650
www.economicstexas.org
Slide 2
Slide 3
If a presidential election were held tomorrow, what would be
three issues of concern for you that would impact your vote? 1. 2.
3.
Slide 4
Ask a person who is at least 18 years of age the following
question: Please indicate the three issues that are most important
to you as you decide who will get your vote in a U. S. presidential
election. 1. 2. 3. Due Date;
________________________________________________
Slide 5
1. What are the common answers? 2. What do you think about the
answers? 3. How many are economic answers?
Slide 6
What do the indicators indicate about the economy?
Slide 7
Visual 8.1 Economic IndicatorsStatistics Based on Indicators
Unemployment Rate Inflation rate Growth rate in per capita GDP
Misery Index Growth rate in real GDP
Slide 8
1. Unemployment rate: the percentage of people in the labor
force who are unemployed. 2. Inflation rate: The percentage
increase in the overall price level. 3. Real GDP: the value of all
final goods and services produced in a country in a year, expressed
in terms of constant dollars.
Slide 9
1. Misery Index: The sum of the unemployment rate and the
inflation rate. 2. Real Per Capita GDP Growth Rate: The percentage
change in real GDP per person
Slide 10
Think, Pair, Share 1. 1. What do you see on the chart? 2. 2.
What year since 1957 has the unemployment rate been the highest? 3.
3. What year had the highest inflation rate? 4. What year had the
highest Misery Index?
Slide 11
Did the incumbent win? Did the in office party win?
Slide 12
Unemployment Rate: The percentage of people in the labor force
who are unemployed Inflation Rate: The percentage increase in the
overall price level Real GDP: The value of all final goods and
services produced in a country in a year, expressed in terms of
constant dollars. T WO S TATISTICS B ASED ON T HESE I NDICATORS
Misery Index: The sum of the unemployment rate and the inflation
rate. Growth rate in real GDP per capita: The percentage change in
the real GDP per person. LESSON 8 ECONOMIC MISERY AND PRESIDENTIAL
ELECTIONS VISUAL 8.1 SOME KEY ECONOMIC INDICATORS E LECTION L
ESSONS C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY
Slide 13
A Real GDP per capita growth rule: The incumbent party usually
wins if The growth rate of real GDP per capita is greater than 0%
during the year of the election VISUAL 8.2 AN ECONOMIC RULE THAT
DOES NOT WORK WELL E LECTION L ESSONS C OUNCIL FOR E CONOMIC E
DUCATION, N EW Y ORK, NY LESSON 8 ECONOMIC MISERY AND PRESIDENTIAL
ELECTIONS
Slide 14
A Real GDP per capita growth rule: The incumbent party usually
wins if The growth rate of Real GDP per capita is greater than or
equal to 2.5% during the year of the election. A Misery Index rule:
The incumbent party usually wins if The Misery Index has not
increased from the year prior to the election. VISUAL 8.3 SOME
ECONOMIC RULES THAT WORK WELL E LECTION L ESSONS C OUNCIL FOR E
CONOMIC E DUCATION, N EW Y ORK, NY LESSON 8 ECONOMIC MISERY AND
PRESIDENTIAL ELECTIONS
Slide 15
VISUAL 8.3 SOME ECONOMIC RULES THAT WORK WELL E LECTION L
ESSONS C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY LESSON 8
ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS Students: Write winners
of elections. Apply rules.
Slide 16
VISUAL 8.3 SOME ECONOMIC RULES THAT WORK WELL E LECTION L
ESSONS C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY LESSON 8
ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS
Slide 17
Predict who you think will win based on the data on Activity
8.2. Write two or more rules that demonstrated how to apply the
data Share your rules and evaluate them.
Slide 18
Review the rules on 8.2 and 8.3. Which of these rules serve as
a strong predictor? Which ones do not?
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A Real GDP per capita growth rule: The incumbent party usually
wins if The growth rate of Real GDP per capita is greater than or
equal to 2.5% during the year of the election. VISUAL 8.3 SOME
ECONOMIC RULES THAT WORK WELL E LECTION L ESSONS C OUNCIL FOR E
CONOMIC E DUCATION, N EW Y ORK, NY LESSON 8 ECONOMIC MISERY AND
PRESIDENTIAL ELECTIONS The Real GDP per capita growth rule
predicted 10 of last 13 elections
Slide 20
A Misery Index rule: The incumbent party usually wins if The
Misery Index has not increased from the year prior to the election.
VISUAL 8.3 SOME ECONOMIC RULES THAT WORK WELL E LECTION L ESSONS C
OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY LESSON 8 ECONOMIC
MISERY AND PRESIDENTIAL ELECTIONS The Misery Index rule has
predicted 11 out of the last 13 elections
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VISUAL FOR STEP 16 Predicting the Next Election E LECTION L
ESSONS C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY LESSON 8
ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS YearGrowt h in Real GDP
per Capita Unem ploym ent Rate Inflati on Rate Misery Index Growt h
Rule Misery Index Rule Candid ates Incum bent Party Wins or Loses?
2009-4.39.3-0.48.9 20102.29.61.611.2 20110.98.93.212.1 2012???
Obama vs. Romne y
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VISUAL FOR STEP 16 Predicting the Next Election E LECTION L
ESSONS C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY LESSON 8
ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS YearGrowt h in Real GDP
per Capita Unem ploym ent Rate Inflati on Rate Misery Index Growt h
Rule Misery Index Rule Candid ates Incum bent Party Wins or Loses?
2009-4.39.3-0.48.9 20102.29.61.611.2 20110.98.93.212.1 2012 Current
Data ??? 0.6 ??? Romne y Win Obama vs. Romne y ???
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VISUAL FOR STEP 16 Predicting the Next Election E LECTION L
ESSONS C OUNCIL FOR E CONOMIC E DUCATION, N EW Y ORK, NY LESSON 8
ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS YearGrowt h in Real GDP
per Capita Unem ploym ent Rate Inflati on Rate Misery Index Growt h
Rule Misery Index Rule Candid ates Incum bent Party Wins or Loses?
2009-4.39.3-0.48.9 20102.29.61.611.2 20110.98.93.212.1 2012 Current
Data ??? 0.6 ??? 8.1 ??? 1.7 ??? 9.8Romne y Win Obama Win Obama vs.
Romne y ???
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Spring 2008
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Spring 2012
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Do economics play a role in presidential elections?
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Do you believe the data we have studied shows that economic
conditions impact presidential elections? Is it fair to blame or
give credit to the incumbent ?
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Laura Ewing Texas Council on Economic Education
[email protected]
www.economicstexas.orgwww.economicstexas.org smartertexas.org P:
713.655.1650 F: 713.655.1655 28 STAAR Lessons for HS US History and
Economics
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PowerPoint Adapted From A Presentation By Jean Walker West
Texas Center for Economic Education College of Business West Texas
A&M University Canyon, Texas 29 Lessons for HS US
EconomicsSTAAR
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Teaches teachers who teach students who are the future of Texas
Provides interesting hands-on lessons that develop critical
thinking skills for students in Economics, Social Studies, Math,
and Career/Technical Education classes.
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This workshop and the accompanying materials are made available
to teachers through the generous support of State Farm and the
Council for Economic Education.
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Workshop and Materials Funded and/or Sponsored by: 32
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Economics Challenge Fall and Spring Online Testing In Micro,
Macro and International Economics Adam Smith Division 2nd place
national champs Bellaire HS 2010/3 rd 2012 David Ricardo Division 3
rd place national champs Plano HS 2010/4 th place 2012 State
competition in Austin
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Personal Financial Literacy Challenge Middle and High School
Fall and spring online challenges will determine state finalist
candidates State Play-Offs in Austin with cash awards for two top
teams HS national finals at Fed in St. Louis Bellaire HS Houston 2
nd in nation 2012
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10 week Student Session
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How Do You Get These Materials? www.economicstexas.org
Slide 37
Teaching Financial Crises lessons: Common elements of financial
crises worldwide throughout history Lesson 1 compares 1907 &
2007 crises Lesson 2 compares 2007 crisis with: (emphasis on
reading eco. Data) Recession of 2001(Dot-Com bubble burst, Enron,
Worldcom, et.) Recession of 1990-1991(oil price shock due to Gulf
War) Recession of 1981-82(tight money to control inflation)
Recession of 1973-75(stagflation; OPEC oil embargo spiked oil
prices) Great Depression 1929-38(stock market crash; falling
demand) Lesson 3 a historical look at five bubbles & panics:
Tulipmania in the Dutch Republic 1630s The South Sea Bubble Great
Britain 1711-1721 The Roaring 20s Stock Bubble 1920s Japans Bubble
Economy 1985-90 The Dot-Com Bubble 1990s Lesson 4 comparison to
Lost Decade in Japan 37
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Teaching Financial Crises:... presents an organizing framework
for putting into context the media attention that has been paid to
the 2008 financial crisis... This publication, in its entirety, is
included on the Virtual Economics CD, version 4. 38
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Teaching Financial Crises lessons: Specific focus on the recent
financial crisis Lesson 5 focuses on monetary policy Students role
play as Federal Reserve Board governors Lesson 6 examines the
housing bubble Heavy use of supply/demand graphs Securitization
simulation for students Lesson 7 helps students learn terminology
about modern financial markets Quiz bowl game on terminology Lesson
8 interaction between modern financial markets and monetary and
fiscal policies Students take part in mock trial 39
Slide 40
Lesson 1, Activity 3, page 11 Introduce the 2007 Financial
Crisis with Activity 3 Characters in the Financial Crisis Announcer
Joe, who needs money for his kids college tuition Bruce, the
mortgage banker/mortgage broker Mortimer, the old-time banker Uncle
Sam Wall Street banker Investment salesman Village treasurer of
Narvik, Norway Bruces boss The World (all together) (Nine
characters plus the world) 40
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Lesson 1, Activity 1, page 15 Have students complete Activity 1
as you progress through the slides of visual 1. If you have not
taught about the recent financial crisis, you will find information
in other lessons to assist with explanations. FYI: The slides for
Activity 1 are available in powerpoint on
www.councilforeconed.org/financialcris es 41
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THE PANIC OF 1907 THE FINANCIAL CRISIS OF 2007 PANDEMONIUM IN
THE MARKETS
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DEVASTATION SAN FRANCISCO EARTHQUAKE Shortly after 5 a.m. on
April 18, a 7.8-magnitude quake, unleashed offshore, shook the city
for just less than a minute. EVENTS IN 1906
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UNCONTROLLABLE BLAZE 80% OF THE CITY DESTROYED Though the
damage from the quake was severe, the subsequent fires from broken
gas lines caused the vast majority of the destruction. SAN
FRANCISCO EARTHQUAKE 1906
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3,000 PEOPLE DIED THE FIRES RAGED FOR FOUR DAYS REMEMBERING THE
SAN FRANCISCO EARTHQUAKE OF 1906
Slide 46
TOUGH BALANCING ACT INFLEXIBLE CURRENCY Between 1870 and 1914,
many countries adhered to a gold standard. This strictly tied
national money supplies to gold stocks. Currency was redeemed for
gold at a fixed exchange rate. THE GOLD STANDARD
Slide 47
THE WORLDS FINANCIAL SYSTEM HAD BECOME COMPLEX &
INTERRELATED At the end of 1905, nearly 50% of the fire insurance
in San Francisco was underwritten by British firms. The earthquake
gave rise to a massive outflow of fundsof gold from London. The
magnitude of the resulting capital outflows in late summer and
early autumn 1906 forced the Bank of England to undertake defensive
measures to maintain its desired level of reserves. The central
bank responded by raising its discount rate 2.5% in 1906. Actions
by the Bank of England attracted gold imports and sharply reduced
the flow of gold to the United States. Interest rates rose and by
May 1907, the United States had fallen into one of the shortest,
but most severe, recessions in American history.
Slide 48
GREAT ECONOMIC PROMISE At the beginning of the century, the
nation was brimming with a great amount of optimism. Here is a list
of familiar companies founded between 1900 and 1905. Eastman Kodak
Firestone Tire Ford Motors Harley-Davidson Hershey U.S. Steel J.C.
Penney Pepsi-Cola Texaco Sylvania Electric
Slide 49
EVENTS IN 1907 In October 1907 two brothers, Otto and F.
Augustus Heinze, attempted to manipulate the stock of a copper
company. They planned to corner the market in the copper company's
shares by buying aggressively in hopes they could later force short
sellers to buy them at high prices. The plan did not have
sufficient backing and failed.
Slide 50
PANIC IN THE STREETS News a number of prominent New York
bankers were involved in the failed scheme began a crisis of
confidence among depositors. As additional institutions were
implicated, queues formed outside numerous banks as people
desperately sought their savings.
Slide 51
FURTHER COMPLICATING MATTERS Trust companies were a financial
innovation of the 1890s. They had many functions similar to state
and national banks but were much less regulated. KNICKERBOCKER
TRUST COMPANY
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GREATER RISKS WERE TAKEN They were able to hold a wide array of
assets and were not required to hold reserves against deposits.
They earned a higher rate of return on investments and paid out
higher rates, but, to do this, they had to be highly leveraged.
They took more risks than traditional banks. Illustration from
Harper's Weekly December 20, 1913 by Walter J. Enright
Slide 53
A NEW YORK CITY BANK RUN IN NOVEMBER 1907 The runs on deposits
that sparked the Panic of 1907 were at two of the largest New York
City trust companies: Knickerbocker Trust and Trust Company of
America.
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THE IMPACT The crash and panic of 1907 had a dramatic effect on
the health of the American and worldwide economies. In the United
States: Commodity prices fell 21 %. Industrial production fell more
than in any other crisis in American history to that point. The
dollar volume of bankruptcies declared in November was up 47 % from
the previous year. The value of all listed stocks in the U.S. fell
37 %. In October and November 1907, 25 banks and 17 trust companies
failed. Thousands of depositors lost their life savings. Gross
earnings by railroads fell by 6 % in December and production fell
11%. Wholesale prices fell 5 %. Imports shrank 26 %. In a few short
months, unemployment rose from 2.8 % to 8%. Immigration reached a
peak of 1.2 million in 1907 but fell to around 750,000 by
1909.
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J.P. MORGAN NEITHER ELECTED NOR APPOINTED, HE FELT IT WAS HIS
TIME TO ACT In the absence of a strong federal regulatory structure
or any safety nets, the response to this crisis had to be delivered
by a private citizen, J.P. Morgan, the worlds most powerful banker.
He used all of his influence to convince fellow titans of industry
to pool their resources and salvage the nation. The Panic subsided
after six weeks. WHAT WAS DONE?
Slide 56
SPECULATION IN OFF- STREET MARKETS A BUCKET SHOP IN 1907
LESSONS FROM THE PANIC OF 1907 Bucket shops were blamed for fueling
the speculation in 1907. They enabled people to speculate on the
value of a stock without having to purchase the stock itself. The
actual order to purchase went in the bucket. Beginning in 1909, New
York banned bucket shops and other states followed.
Slide 57
THE WORLD MADE HUGE INVESTMENTS IN THE U.S. HOUSING MARKET .AND
LOST!! By ignoring risk, remaining irrationally optimistic, and
forgoing transparency through an array of fantastically complicated
investment vehicles, the worlds financial markets were extremely
dependent on housing prices. The underlying assumptions were (1)
that housing prices never fall and (2) homeowners almost always pay
their mortgages. THE FINANCIAL CRISIS OF 2007
Slide 58
DURING AND AFTER THE MILD RECESSION OF 2001, THE FED LOWERS
INTEREST RATES FORMER FED CHAIRMAN ALAN GREENSPAN THE ORIGINS OF
THE CRISIS
Slide 59
FORMER PRESIDENT GEORGE BUSH STRONGLY PROMOTED HOMEOWNERSHIP We
can put light where theres darkness, and hope where theres
despondency in this country. And part of it is working together as
a nation to encourage folks to own their own home President Bush,
October 15, 2002. THE ORIGINS OF THE CRISIS
Slide 60
HIGHLY COMPLEX FORMS OF FINANCING THIS WAS TOO TEMPTING FOR THE
FINANCIAL INSTUTIONS The momentum behind the expansion of
homeownership led the government to reduce regulations and capital
requirements for making loans. This led to a dizzying number of
innovative ways to get less-qualified borrowers a mortgage and
seemed to reduce risk for the lender. Mortgages could be bundled
and sold around the world as securities. CAUSES OF THE CRISIS
Slide 61
TRUSTED AGENCIES FAILED TO WARN INVESTORS RISK-RATING AGENCIES
Mortgage-backed securities were constructed of mortgages of
differing quality levels. The obligations of solid and sub- prime
borrowers were mixed in a manner that made it very difficult for
experts to calculate risk. The assumption that U.S. housing prices
would continue to rise and incentives to provide good ratings led
agencies to rate these securities as AAA, lowering investors
concerns. CAUSES OF THE CRISIS
Slide 62
WHAT WERE WE THINKING? THE PERFECT STORM Homeownership peaks in
early 2005 at 70% of households. The Fed raises interest rates.
Home prices fall. Higher adjustable interest rates increase
payments for borrowers. Borrowers default in waves. Dozens of
subprime lenders file for bankruptcy. Mortgage-backed securities
lose value as investors question their contents. Financial
institutions struggle to find buyers for the MBSs. EFFECTS OF THE
CRISIS
Slide 63
FINANCIAL WEAPONS OF MASS DESTRUCTION Financial institutions
could purchase credit default swaps. A CDS is a private insurance
contract that paid off if the investment failed. One did not
actually have to own the investment to collect on the insurance.
These promises were unregulated, and the sellers did not have to
set aside money to pay for losses.
Slide 64
THE FINANCIAL CRISIS OF 2007-2009 Bank failures: 183 (2%)
12/07- 2/10 (No deposits lost) Unemployment rate: 10.1% (10/09)
Economic decline: -4.1% (4Q 2007-2Q 2009) Biggest drop in DJIA:
-53.8% (12/07-3/09) Emergency spending and tax reduction programs:
2.5% of GDP in 2008 and in 2009 Aggressive increase in monetary
stimulus by the Fed
Slide 65
THE FINANCIAL CRISIS OF 2007-2009 6.7 million jobs lost in 2008
and 2009 Capital investment levels lowest in 50 years Domestic
demand declines 11 consecutive quarters Industrial production down
worldwide: Japan 31%, South Korea 26%, Russia 16%, Brazil 15%,
Italy 14%, Germany 12%
Slide 66
The federal government unleashed a series of remedies in an
attempt to limit the contagion. Massive sums of bank reserves were
created to ease fears. In the process, the taxpayers took over or
funded several familiar financial and nonfinancial companies. This
time the government bails out the economy and business leaders and
bankers are criticized.
Slide 67
1907 2007 Highly complex and linked financial system Strong
growth in the economy starting in 1900 Many people and institutions
highly leveraged Innovative form of finance: trust companies Stock
market setting all-time highs A limited role for government Markets
swing from great optimism to great pessimism Global interdependent
financial system Vibrant economic recovery after recession in 2001
Lenders willing to take more risk in making loans Unregulated
financial institutions: hedge funds Companies reporting record
earnings Absence of many safety buffers Dow 14,164 to 6,500 in 16
months SIMILARITIES
Slide 68
1907 2007 J.P. Morgan, a private citizen, orchestrated the
bailout The Panic lasted for six weeks, though the economy didnt
return to pre- Panic levels until 1909 Many banks were closed and
many depositors lost their savings The nation was on the gold
standard and the supply of money was fixed The San Francisco
earthquake was a catalyst for the Panic The climate toward business
was hostile prior to crisis The Federal Reserve and Treasury
Department organize the reaction The event has been unfurling for
more than five years Many banks closed and folded into healthier
banks, but depositors did not lose any of their savings The nation
uses Federal Reserve notes, creating a flexible money supply
Hurricane Katrina was generally benign as a catalyst The climate
toward business was friendly prior to crisis DIFFERENCES
Slide 69
FYI: Community Reinvestment Act signed in 1977 by Jimmy Carter
Induced lenders to enter underserved or red-lined areas. 1993
-1995, President Clinton asked regulators to reform the CRA to
"deal with the problems of the inner city and distressed rural
communities--availability of credit should not depend on where a
person lives. The Interstate Banking and Branching Efficiency Act
of 1994, which repealed restrictions on interstate banking, used
CRA ratings as a consideration when determining whether to allow
interstate branches George Bush, as early as 2002, pushed home
ownershipan ownership nation. In 2007 Ben Bernanke suggested
further increasing the presence of Fannie Mae and Freddie Mac in
the affordable housing market to help banks fulfill their CRA
obligations by providing them with more opportunities to securitize
CRA-related loans. 69
Slide 70
What do all of the explanations show? The rise in housing
prices represented a bubble. A price bubble is a situation where
increases in price are not justified by fundamental factors
affecting supply or demand, and therefore not sustainable. A price
bubble is often caused by contagion, which is prices increasing
because people observe them going up and think they will continue
to go up. At one point, people who couldnt pay their mortgages were
taking out home equity lines of credit and using the cash to pay
the mortgages! They could do this because equity in homes rose as
home prices rose, and personal bankers were pushing home equity
lines of credit. This causes people to purchase houses with the
expectation that they will be able to sell them for a higher price
in a relatively short time. It was a speculative bubble. When the
bubble burst in 2006, house prices tumbled. 70
Slide 71
A Look at Historical Homeownership - USA 71
Slide 72
How does home ownership in the US compare to the world? U.S.
Homeownership rate: 2000 67.4% 2004 69.0% 201066.9% 72
Slide 73
Mortgage-backed securities: Positives: Spreads risk. Not all
eggs in one basket. Diversified. Made a liquid investment from an
illiquid investment. Allowed smaller investors to invest in
housing. Meant more money flowed into mortgage markets. Negatives:
Reduced the incentive for investors to be concerned about the
creditworthiness of borrowers. Reduced the incentive for banks and
mortgage brokers to be concerned with creditworthiness. Exported
the risk around the world because the MBS securities were stamped
AAA by the ratings agencies and sold worldwide. 73