Why Did the Mortgage Crisis Happen, Part 2
Submitted by Businomics Blog
Yesterday I posed the question of why the mortgage mess happened, and why at the time that it did. There were two fundamental building blocks of the crisis: the Great Moderation and Securitization. The aftermath of the 2001 recession provided the trigger for the mortgage mess. In this post, I explain the role of The Great Moderation.
The Great Moderation is the new world of macroeconomic cycles that began in 1983. In the United States and around the world, recessions became milder and less frequent. (There’s a great interview with Mark Thoma about this topic in the Businomics Audio Magazine.) The chart of rolling 20-quarter standard deviation of real GDP changes illustrates the calming of the economy:
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