Bank lending to consumers and business have experienced a huge spike in growth over the past decade. There are many reasons for these explosive gains. According to some experts, such as Nassim Nicholas Taleb author of The Black Swan, one of the principal causes driving this explosion in lending was the fact that more disposable income was chasing safe investment havens.
According to Taleb, this may appear to be a contradiction, but with the Fed keeping treasury securities yields low the sudden influx of investment money began to look elsewhere. It didn't take long for investors to realize that mortgages were a relatively solid investment opportunity. The only problem with mortgages was management: How do you manage 1,000 or more mortgages? International investors were looking for safe havens, not increased complexity. Not to worry, new investment vehicles were created through which mortgages could be bundled as investment instruments, rather than landlord headaches. Soon, bundles of mortgages were further bundled, these bundles were tied into other assets and, as we all now know, a house of cards was created.
Immediately afterwards, bank lending was drastically curtailed due in large part to the collapse of the US mortgage backed securities. These securities are now deemed 'toxic'. Certainly, government intervention and the propping up of the financial sector should help the financial services sector rebound. However, stricter regulation will limit the more creative approaches to financial services.
Key Financial Services Vocabulary
house of cards
influx of investment
mortgage backed security
spike in growth
to bundle mortgages
to curtail lending
to prop something up
ExerciseUse the following words or phrases to fill in the blanks. Each word or phrase is used once, except for one word or phrase which is used twice.
house of cards
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