Modeling the Meltdown; Part 7: Five Easy Pieces

We currently envision five steps to creating the full mortgage meltdown model. As we implement the model, we’ll likely learn new things that revise how we go about these steps. Our initial plan is outlined below.

1. Mortgage Core: Households, financial firms (banks), homes and mortgages. Also the government and regulations it applies to the mortgage and banking system.2. Employment: Adds businesses that produce goods. Allows for the modeling expenses (buying goods) and income (employment) for households. (The new elements added in each step are highlighted in yellow).3. Investment: Adds a stock market. Each firm issues stock, and households and firms invest in that stock.4. Structured Finance: Adds the secondary debt market, where mortgage and non-mortgage debt is resold to other financial firms. These other firms securitize the debt they buy into structured finance products such as Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDO). Via a market for these vehicles, financial firms buy and sell these structured finance products.5. Financial Insurance: Additional financial firms, such as AIG, create insurance products such as Credit Default Swaps (CDS) to insure the MBS and CDO.
In the next post, we'll start designing the specific behaviors and relationships for the first step, the Mortgage Core model.