When the problems in the subprime mortgage market began to emerge and delinquencies exceeded rating agency estimates and the defaults predicted by limited historical data, we had moved beyond our past experience with these instruments. Information was not readily available about the extent to which the economic context had changed, or even whether underlying loans would or could be modified to prevent default.
Historically, extended periods with very low unemployment rates tend to be associated with below-average spreads of expected returns on risky assets over safe interest rates—low bond risk premiums, for example, or low equity premiums.