As was clear from general news reports, the world-wide crises
and recession of the later part of the first decade of the 21st
century resulted from the issuance large quantities of of high-risk,
zero-downpayment mortgages to householders in the United States and
the bundling of those mortgages into derivative securities that were
widely purchased by major banks and financial institutions both in the
U.S. and in the rest of the world. When the U.S. housing market turned
down and large quantities of those mortgages became of lower value
than the houses they were attached to, house owners simply walked
away, leaving the lending institutions and everone holding securities
that were liabilities of those institutions with huge losses.
It turns out the the Canadian financial institutions, being more
carefully regulated, were not much burdened with securities that
declined in value as a result of those mortgages. As an exercise,
analyse the effects on the Canadian price level, monetary aggregates
and money multiplier of these developments using the data in
the Excel spreadsheet-file pmbsdata.xls
For those who use Gretl,
the Gretl data file pmbsdata.gdt
is also provided.
Click here to check your analysis.