Re: How does the credit crisis fit into the macroeconomic picture?

Question: How does the credit crisis fit into the macroeconomic picture?

Thomas Cooley:  Yes, so the question is, I gather your question is how did this happen?  So there were three-- there were several ingredients.  Okay, one ingredient was, there was a bubble in housing prices.  People assumed that housing prices would just continue to go up and up and up and that they could take on unrealistic amounts of debt because the appreciation and the value of their houses would make it possible for them to deal with that amount of debt.  The other thing that happened was that there was a break down in lending practices by mortgage lenders.  So there was not sufficient oversight.  The fee structure for people issuing mortgages was such that their only incentives were to get mortgages out there, to grant them.  And then the other ingredient was sort of the rapid securitization of lending throughout the economy and throughout the world.  So what happened is, these mortgages got bundled and sliced into different pieces that supposedly represented different risk characteristics.  And then there's the vast machinery of the securitization industry, which rated a lot of these things as triple A or very, very safe securities, when they, in fact, they were not.  And so there was a whole un-virtuous circle of things that resulted from this.  That meant when housing prices began to fall, this whole business collapsed and that caused panic essentially in the credit markets because many people found themselves holding these exotic securities that were these bundled mortgages or pieces of them that they could not sell.

Recorded: 3/21/08

NYU's Thomas Cooley explains the credit crisis.

LinkedIn meets Tinder in this mindful networking app

Swipe right to make the connections that could change your career.

Getty Images
Sponsored
Swipe right. Match. Meet over coffee or set up a call.

No, we aren't talking about Tinder. Introducing Shapr, a free app that helps people with synergistic professional goals and skill sets easily meet and collaborate.

Keep reading Show less

4 reasons Martin Luther King, Jr. fought for universal basic income

In his final years, Martin Luther King, Jr. become increasingly focused on the problem of poverty in America.

(Photo by J. Wilds/Keystone/Getty Images)
Politics & Current Affairs
  • Despite being widely known for his leadership role in the American civil rights movement, Martin Luther King, Jr. also played a central role in organizing the Poor People's Campaign of 1968.
  • The campaign was one of the first to demand a guaranteed income for all poor families in America.
  • Today, the idea of a universal basic income is increasingly popular, and King's arguments in support of the policy still make a good case some 50 years later.
Keep reading Show less

A world map of Virgin Mary apparitions

She met mere mortals with and without the Vatican's approval.

Strange Maps
  • For centuries, the Virgin Mary has appeared to the faithful, requesting devotion and promising comfort.
  • These maps show the geography of Marian apparitions – the handful approved by the Vatican, and many others.
  • Historically, Europe is where most apparitions have been reported, but the U.S. is pretty fertile ground too.
Keep reading Show less

Why I wear my life on my skin

For Damien Echols, tattoos are part of his existential armor.

Videos
  • In prison Damien Echols was known by his number SK931, not his name, and had his hair sheared off. Stripped of his identity, the only thing he had left was his skin.
  • This is why he began tattooing things that are meaningful to him — to carry a "suit of armor" made up the images of the people and objects that have significance to him, from his friends to talismans.
  • Echols believes that all places are imbued with divinity: "If you interact with New York City as if there's an intelligence behind... then it will behave towards you the same way."
Keep reading Show less