MODULE 55: Mortgage Backed Securities and Root Causes of
the “Great Recession”
Core Module Issues:
• What causes contributed to the recession?
• Which of them are most responsible?
Module Teaching Notes
At the time of this writing, the economy has been sputtering along for a couple of years. When you are
teaching this module, you may need to soften (harden) some of the descriptions in the book to reflect
whether things are better or worse than they are here in January, 2011. Hopefully, they will be better where
you are and you can talk about emerging from the mess that this module (and most of this new unit)
describes.
Anything as big as a global economic collapse has lost of causes. Although commentators on the left and
right will isolate individual specific causes, lots of factors were at work.
This module looks at several things that played a part in crashing the economy. The basic progression, as I
see it, is:
1. The government encouraged banks to make mortgage loans to people with borderline credit scores.
2. Banks ran with the idea and made loans to people with genuinely bad credit scores, who were quite
unlikely to pay the money back.
3. But banks didn’t mind, because they would unload newly-made loans soon after they were made.
4. Investment houses bundled bad loans into mortgage backed securities and other even more exotic types
of investments.
5. People bought much more house than they could afford – many of them knowing full well that they were
biting off more than they could chew.
6. Investors bought MBS and the like, ignoring the “if it’s too good to be true…” pillar of common sense
investing.
7. When large numbers of people started to default, everything fell apart.
The scenario in this module is designed to help students see the big picture, and also make a first effort at
laying relative blame. What causes are most at fault? Who bears some but not much responsibility?
These themes will repeat in other modules in this unit, but the focus will be more specific later on.
Discussion Points for Scenario Questions
For questions 1 and 2, please circle the response you most agree with. If you disagree with
the first three choices, circle the fourth option, and fill in the blank with your answer.
1. In encouraging lenders to make more mortgage loans, the government was:
a. Advancing sound policy that was misapplied by the banks
b. Advancing a well-intentioned but misguided policy
c. Advancing an inappropriate policy
d. _<FIB>_______________________________________
[LET THE STUDENTS GIVE THEIR ANSWERS AND RESPOND TO ONE
ANOTHER.]
2. Focusing now on the bank that made loans to people who couldn’t afford them and then sold
the loans to investment banks, the institution:
a. Did nothing wrong
b. Acted unethically toward its own customers
c. Acted unethically toward the investors who ultimately bought the questionable loans
d. __<FIB>___________________________________________
3. Assume that Harry and Carol are unable to consistently make their mortgage payments and
that they lose their home to foreclosure after two years. How much blame falls on them for
taking out the loan when they knew they might have problems repaying it? One hundred
percent? Some smaller figure? What if they had been less realistic about their finances and had
completely believed that they would be able to repay the loan? Does any additional blame for the
foreclosure go elsewhere?
A. LOTS OF BLAME – BUT DIDN’T THE SYSTEM KIND OF “SET THEM UP
TO FAIL”
B. LITTLE BLAME – ISN’T IT UP TO ADULTS TO MAKE RESPONSIBLE
FINANCIAL CHOICES?
4. Assume that Danny the investor sticks with the mortgage-backed securities. Over the next six
months, he loses two-thirds of his money. What percentage of blame for his losses rests on his
shoulders? One hundred percent? Some smaller figure?
A. LOTS OF BLAME – BUT DIDN’T THE SYSTEM KIND OF “SET HIM UP TO
FAIL”
5. Rank the four characters featured in this module. Place a #1 by the character who seems most
to blame for the mortgage meltdown, a #2 by the second most blameworthy actor, and so forth.
_____ Government officials who encouraged loans to borderline borrowers
_____ Banks that made loans to borrowers who could not afford them
_____ Borrowers who took out loans they eventually could not repay
_____ Investment banks that created mortgage-backed securities
_____ Investors who bought and held mortgage-backed securities
[LET THE STUDENTS GIVE THEIR ANSWERS AND RESPOND TO ONE
ANOTHER.]