POSC 182 Lecture 24 2010

POSC 182 Lecture 24 2010 - POSC 182 Politics and Economic...

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POSC 182: Politics and Economic Policy Unit 4: The Current Crisis Lecture 24: The Financial Crisis March 3, 2010
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The Current Crisis: The Origins Bubble : When people invest in something because they believe prices will go up, not based on the actual value of the underlying asset. Or a self-perpetuating increase in prices. The Tech Bubble (1995-2000) was fueled by a growth in productivity from the IT sector and a new internet-based industry: dot-coms In March 2000, the tech (dot-com) bubble burst and was parlayed into the housing bubble with lowered interest rates: People moved money from stocks to housing
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Nasdaq Composite Index & Interest Rates (Fed Funds Rate) Source: MSN Money Tech Bubble Bursting of Tech Bubble
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The Housing Bubble In order to prevent recession after the tech bubble burst, the fed lowered interest rates. Investors began to “speculate” (invest in assets based on the prediction that prices would continue to go up) rather than invest based on the underlying value of the assets With low interest rates, people could borrow more, fueling demand for houses. Housing prices went up. If people think housing prices will continue to go up, lenders are willing to loan and home buyers are willing to borrow, perhaps more than they can afford. Subprime mortgages became popular (risky with little collateral and adjustable interest rates)
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This note was uploaded on 10/05/2010 for the course POSC 182 taught by Professor Schuelenberg during the Spring '08 term at UC Riverside.

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POSC 182 Lecture 24 2010 - POSC 182 Politics and Economic...

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