POLSCI 4750 final exam study guide

POLSCI 4750 final exam study guide - Financial Crisis Read...

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Financial Crisis Read the assigned chapter. Do you believe you now have an answer to why the U.S. entered a financial crisis? Why or why not? http://www.southparkstudios.com/episodes/220760 Read section P.3 carefully. What were the primary causes of the U.S. financial crisis? o The credit boom – excessive "cheap" money; we used savings from the rest of the world, and an expansionary monetary policy—low interest rates (2% by 2001)—created a lot of loans The housing bubble – An "irrational exuberance," Figure P.3 showed that the ratio of housing price to rent rate increased dramatically. .. the housing price was steady from 1970-1996, then increased from around $150,000 to $275,000 U.S. savings – 1960s-1980s there was an annual average savings of 10%, that number declined to 1% by 2000 Read section P.5 carefully. The chapter assesses the federal government’s actions to address systemic liquidity, systemic solvency, and the housing crisis. On which dimension do the authors give the government the most credit? Describe one criticism they pose for each of the three dimensions. Systemic Liquidity: They created many institutions to provide loans to investors (there's a huuuge list in the reading from our book). These are minor loans, unlike the bailout, and a problem arose when they had to decide where the line should be drawn. What companies are worth lending money to, and what companies are just going to go bankrupt. The author specifically says that this is very effective. o Loans between banks. Systemic Solvency: This is action like the bailout. Problems arise when the government has to decide which companies to bailout. Bear Stearns vs. Lehman Brothers, why one over the other? o Loans to people or corporations. The Housing Crisis: They made some modifications to the loans on housing, like agreeing to accept money later from a home owner when they sell instead of foreclosing on the house. The author points to these actions as the most unclear, the government didn't really know how to intervene in the housing crisis and was therefore not as effective.
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Ø What are the three fundamental roots of the crisis? Explain in a sentence why each was important in reducing demand among consumers and decreasing the financial health of the banking sector. The credit boom – excessive "cheap" money; we used savings from the rest of the world, and an expansionary monetary policy—low interest rates (2% by 2001)—created a lot of loans The housing bubble – An "irrational exuberance," Figure P.3 showed that the ratio of housing price to rent rate increased dramatically. .. the housing price was steady from 1970-1996, then increased from around $150,000 to $275,000. Federal government essentially subsidized housing purchases above their economically optimal level. U.S. savings – 1960s-1980s there was an annual average savings of 10%,
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This note was uploaded on 04/22/2010 for the course POL SCI 4750 taught by Professor Krieckhaus during the Fall '09 term at Missouri (Mizzou).

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POLSCI 4750 final exam study guide - Financial Crisis Read...

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