owed the bank was more than what their home was worth. Many banks believed that they had diversified by selling

their individual loans and instead buying securities based on mortgage loans from all over the country. After all,

banks thought back in 2005, the average house price had not declined at any time since the Great Depression in the

1930s. These securities based on mortgage loans, however, turned out to be far riskier than expected. The bust in

housing prices weakened both bank and household finances, and thus helped bring on the 2008–2009 Great

Recession.

The Tradeoffs between Return and Risk

The discussion of financial investments has emphasized the expected rate of return, the risk, and the liquidity

of each investment. Table 17.3 summarizes these characteristics.

Financial Investment

Return

Risk

Liquidity

Checking account

Very low

Very little

Very high

Savings account

Low

Very little

High

Certificate of deposit

Low to medium Very little

Medium
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