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Lecture 1 - Econ 520 Money and Banking Prof J H McCulloch...

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Econ 520 Money and Banking Prof. J. H. McCulloch
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Lecture 1 The Current Crisis in the American Economy
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Origin of Crisis For decade prior to 2007 – Many mortgages “subprime” little if any equity excessive payments relative to income often no documentation of value or income NINJA mortgages: No Income, No Job, No Assets Encouraged by Fannie Mae and Freddie Mac Govt sponsored mortgage intermediaries Led to self-sustaining bubble in house prices
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2007-2008 Borrowers realized they were overextended Cut back on spending, borrowing Housing bubble stalled, then started to shrink Delinquencies and foreclosures spread Washington Mutual Savings & Loan failed Fannie and Freddie had long been insolvent, taken over by Fed in 2008 Investment banks Bear Stearns, Lehman Bros failed Bank Holding Companies in trouble GDP fell, Unemployment rose. How serious compared to past recessions? Pundits often say worst since Great Depression of 1930s. Is this true?
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