Housing Boom or Addiction to Safety

Housing Boom or Addiction To Safety 1
HOUSING BOOM OR ADDICTION TO SAFETY
By (Student’s Name)
Professor’s Name
College
Course
Date

Housing Boom or Addiction To Safety 2
HOUSING BOOM OR ADDICTION TO SAFETY
Abstract
This paper examined global downturn since the great depression to establish whether it
was addiction to safety or housing bubble. It is determined in this paper that housing bubble was
the immediate cause of the global downturn but the addiction to safety played the major role
leading to the downturn as financial institutions failed to create safe debt. The financial
innovations aimed at creating safe debt triggered the crisis of the downturn while the housing
bubble was the immediate cause.

Housing Boom or Addiction To Safety 3
Table of Contents
Abstract............................................................................................................................................2
Introduction......................................................................................................................................4
Question 1 (a)..................................................................................................................................4
Question 1 (b):.................................................................................................................................5
Question 2:.......................................................................................................................................6
Question 3:.......................................................................................................................................6
Question 4:.......................................................................................................................................7
Question 5:.......................................................................................................................................9
Question 6:.....................................................................................................................................10
Question 7:.....................................................................................................................................11
Conclusion and Recommendations................................................................................................13
References......................................................................................................................................15

Housing Boom or Addiction To Safety 4
Introduction
This paper looks at global downturn since the great depression to determine whether it
was addiction to safety or housing bubble. It is established in this paper that housing bubble was
the immediate cause of the global downturn but the addiction to safety played the major role
leading to the downturn as financial institutions failed to create safe assets. Thus, the financial
innovations aimed at creating safe debt triggered the crisis of the downturn while the housing
bubble was the immediate cause (Taillard nd).
Question 1 (a)
The standard mortgage contracts lacks the ability to adjust to the changing macro-
economic environment which devastated the United States economy and American middle class
through the amplification of losses of wealth via foreclosure externalities and translate wealth
losses into weak Aggregate Demand alongside and high unemployment via aggregate demand
externality (Siddiqi 2017). The big loss in wealth amongst indebted household compel them to
cut back on general spending (from AD0 to AD1) since they feel the need to save due to wealth
loss and also have poorer access to credit markets because of housing collateral loss (Engel,
George and Keller 2016). Propensity to cut back expenditure in face wealth losses remains
thrice as big for poorer households who also have high leverage levels. The aggregate demand
decreases because of wealth loss for indebted household which immediately becomes a challenge
to everyone in economy-whether they initially borrowed or not. For instance, a sharp decline in
spending by households who suffered the loss in wealth led to a sudden drop in employment
everywhere in the economy. The Joblessness in the US in between 2006 and 2009 was fueled by
such aggregate demand externality.