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Lecutre 1 BA 131 Questions on Financial Crisis.ppt -...

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1Questions on the CurrentState of Economy and onFinancial Crisis of 2008Avinash VermaWe shall discuss answers to these questions in the class.Financial crisis showed, among other things, that what happens in the financialmarkets can have an impact on everybody, even on those who are not invested in themarket. A school district in Norway can be affected by the real estate prices inFlorida.Therefore, answers to some of these questions belong in a high school Civics course.BA 131 is an elective and I therefore assume that all students have takenintroductory finance (BA 103 at Haas, UC Berkeley).Those majoring in business or finance should be able to answer all conceptualquestions.No questions on homework by email.
Current State of the EconomyWhat is the current state of theeconomy?What are main concerns of:CitizensInvestorsPolicy MakersInflationAssets of the Federal Reserve2
Precipitating Events of 2008What were the events thatprecipitated the financial crisis?When did these events occur?Were there foreboding eventsearlier?Why did economists, investmentmanagers, regulators fail toanticipate the impending crisis?3
Outline of CrisisUSD is reserve currency for the entire world (Why not Euro/CNY/JPY?)Oil and Commodities trade is denominated in USD (Norway)All countries hold USD and US had large Balance of Payments deficitsChina and OPEC had very large USD holdingsInterest rates on USD very low in early 2000sMBS yielded higher return and became very popular with China/OPECInvestment Banks started creating MBS, CMOs, CDOs to meet demandYou need mortgages to create MBSBanks and Mortgage lenders started making imprudent loans (subprime,NINJA)There was no problem so long as real estate prices were going upBear Stearns and Lehman Brothers Balance Sheets (Shadow Banking)Lehman bankruptcy led to breaking a buck for a large MMFCommercial Paper market frozeInterbank lending froze4

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Term
Fall
Professor
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Tags
Monetary Policy, Debt, Federal Reserve System, Citizens

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