Tuesday, October 14, 2008

2 studies on the role of subprime mortgages and the current crisis

Two recent papers have appeared on the causes of this the mortgage crisis. Gary Gorton of Yale has a very detailed one that describes the role of derivatives and Stan Liebowitz of UT-Dallas has another. They both pin the cause on the growth of subprime lending. Liebowitz attributes the disaster specifically on ARM's.

Gorton's paper is rich in data. For example on page 72 he shows the mind-boggling loss of $3.2 trillion in the sub-prime market. On page 52 he tracks the increases in defaults from 2003 to late 2007. For the prime market it went from 2.62 to 3.24%. For the subprime one it went from 13.04 to 17.31%.

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