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School
The University of Hong Kong**We aren't endorsed by this school
Course
ECON 2220
Subject
Economics
Date
Dec 20, 2024
Pages
9
Uploaded by ChefUniverseWolverine43
6 1. CDO is a financial instrument that pays investors from a pool of revenue-generating sources. They are mortgage-backed securities backed by pooled mortgage. including mortgages backed by poor credit score borrowers. It can be divided into tranches based on the degree of exposure. The reason why the people think it is safe is because of the credit rating assigned. The triple A (AAA) credit rating assigned make people think that it is safe. 2. CDOs were priced based on the assumption that each loan is independent of the others. However, this assumption is in correct as there is systematic risk. For example, when the housing price fell, the risks of all loans increased since many loans has included housing as collaterall. In order to finance the purchase of CDOs, investors use high levels of leverage which leads to an even higher risk. 3. Low interest rate 4. CDO and the other mortgage-backed securities become worthless. Banks hold the securities but not able to sell the asset. Also, the ‘mark to market’ accounting rule require the banks to revalue their assets in current price, leading to a lost in paper for bank. 5. The low interest rate was maintained for too long and the housing bubble was inflated before the crisis. Also the allowance for the imbalance in the world’s current accounts would be the mistakes the regulator make in the run-up to the crisis.Neither the Fed nor the European Central Bank attempted to contain the housing bubble or the out-of control credit expansion. The error that the regulators commit would be letting Lehman Brothers go bankrupt, which worsened panic in the market and eroded trust in the financial system
Ques%on 3: 1.Output is procyclical. The economy of Hong Kong was considered to be in a recession in 1998, 2009 and possibly 2019, the growth rate of output (Y) was also decrease during these recession periods. This means that output moves together with GDP. 2.Consump%on is procyclical. The economy of Hong Kong was considered to be in a recession in 1998, 2009 and possibly 2019, the growth rate of consump%on (C) was also decrease during these recession periods. This means that consump%on moves together with GDP. People spent less during the periods of recession. 3.Investment is procyclical. The economy of Hong Kong was considered to be in a recession in 1998, 2009 and possibly 2019, the growth rate of investment (I) was also decrease during these recession periods. Investments are more vola%le than other variables and fall more sharply. 4.Government expenditure is acylical. The economy of Hong Kong was considered to be in a recession in 1998, 2009 and possibly 2019. However, the growth rate of government expenditure (G) was decrease in 1998, increase in 2009 and 2019. This indicates that government expenditure does not follow the paPerns of recession. It moves independently of GDP. 5.Unemployment rate is countercyclical. The economy of Hong Kong was considered to be in a recession in 1998, 2009 and possibly 2019. The unemployment rate rise during these recession periods. There was a opposite direc%on to output and GDP.