Macroeconomic Paper Essay Example | Topics and Well Written Essays - 500 words

Macroeconomic Paper - Essay Example Homeowners increasingly use them to refinance and consolidate household debts when their credit scores fall in the wake of bankruptcy, high medical bills, or other setbacks. (Blanton). It is generally believed that the subprime borrowers emerge due to lack of the good credit history on their back and since there number grew historically therefore banks and financial institutions by spotting the opportunity started lending to them at higher interest rates due to the perceived risks involved in these subprime loans. Having defined what subprime mortgages are, this article has articulately put forward the theory of predictable surprise in order to discuss the clues which the economic trends in US suggested specially after the collapse of dot com companies during 1990s. Due to the lack of policy attention by the government especially FED, the lowered interest rates in the economy created an inflated housing markets which thrived on the equity cushion created through the artificial and speculative surge in the market. The consequences of such behavior helped create a predictable surprise in the economy. Article has further discussed the role of securitization and its impact on the economy as a whole. The securitization through financial derivatives produced the results which authors predicted in their theory of predictable surprises. With the advent of innovation into the financial industry, Financial Derivatives provided a very efficient and effective tool to the financial managers to effectively manage these kinds of risks. However, financial derivatives itself are considered as detrimental if their use is made in more superficial way. Banks, in order to recoup the lost liquidity drained into the subprime mortgage loans have securitized them against the payments and real estate properties offered as securities in those mortgage loans. The process of