Many investors found themselves trapped with securities that they couldn't sell. Bond prices and interest rates are inversely related. So when selling pressure puts downward pressure on bond prices interest rates rise. On some of the mortgage backed securities, the interest rate was 30%.
Inflation favors the debtor. But when housing prices were falling, debtors had to pay the interest and the debt tax that comes from a loss of purchasing power. This caused mortgage defaults. The resulting credit crunch caught many in a illiquidity trap.
Just found your site, love the application of Economics 101, its the only class in economics I ever had.
ReplyDeletethank you...if you want to go deeper into theory, use my blogroll...tim schilling and jason welker give very thorough insights....flad
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