Amir Sufi and Atif Mian write that “debt contracts have large negative externalities on the…

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Question 1 (a) – Amir Sufi and Atif Mian write that “debt contracts have large negative

externalities on the economy that are not properly priced among private parties”. Apply the

analysis of externalities as discussed in this course to the case of standard debt mortgage.

That is, make a clearly labelled diagram in which you show the demand and supply curves

for standard debt mortgage and show how the externality affects the diagram. Provide a

brief explanation.

Question 1 (b) – Discuss the applicability of the Coase theorem in mitigating the negative

externality associated with the standard debt mortgage contract.

Question 2 – Very briefly explain how shared responsibility mortgages mitigate the negative

externality associated with standard debt mortgages.

Question 3 – In the diagram that you drew in question 1, show the effect of securitization

(you can draw a new diagram here). Atif Mian and Amir Sufi write that by securitizing debt

mortgages and not securitizing shared responsibility mortgages, the govt. tilts the field in

the favour of debt mortgages. Briefly explain this statement.

Question 4 – By using the concept of aggregate demand and aggregate supply as discussed

in this course, explain what caused the crisis in Amir Sufi and Atif Mian’s view and how

shared responsibility mortgages would prevent such crises in the future.

Question 5 – Australian government mailed people checks worth $900 each in 2009 and the

interest rates were slashed. Show the impact of these changes in an aggregate demand –

aggregate supply diagram. Briefly explain.

Question 6 – Suppose shared responsibility mortgages are widely adopted and they are

securitized to create safe debt as Amir Sufi and Atif Mian are demanding. Would that

prevent a future financial crisis according to the authors of article 3 (Hammad Siddiqi) and

article 4 (Ricardo Caballero) listed above? Briefly explain.

Question 7 – Reflect on the main question (Did financial innovations aimed at creating safe

debt cause the crisis or was it primarily caused by the collapse of the housing bubble?) in

the light of your reading of Ricardo Caballero’s article (first 30 pages).

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