The Financial Crisis and its Aftermath 2007-2011 011011--student

The Financial Crisis and its Aftermath 2007-2011 011011--student

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Unformatted text preview: The Financial Crisis of 2007-2009 and its Aftermath January 2011 Dan Giedeman, Ph.D. Associate Professor of Economics Grand Valley State University Outline of Talk Where have we been and how did we get there? Where are we now? What is being done? Where are we going? Where Have We Been? Financial Crisis of 2007-2009 How did we get there? A glut of global liquidity A Glut of Liquidity (Effective Federal Funds Rate) Source: Board of Governors of the Federal Reserve System 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 A Glut of Liquidity Source: United Nations Statistics Division Chinese GDP (Millions of U.S. Dollars, inflation-adjusted) 500 1000 1500 2000 2500 1980 1985 1990 1995 2000 2005 A Glut of Liquidity Source: U.S. Department of Treasury Chinese Holdings of U.S. Securities (Billions of U.S. Dollars) 100 200 300 400 500 600 700 800 900 1000 Jan-90 Jul-92 Jan-95 Jun-97 Dec-99 May-02 Nov-04 Apr-07 How did we get there? A glut of global liquidity Misaligned incentives in the "originate-to-distribute" lending model Information problems in the market for mortgage-backed (and related) assets Information Problems in Asset Markets Source: Modified from Gorton, Gary B. "The Panic of 2007." NBER Working Paper #14358, September 2008. Collateralized Debt Obligations http://www.portfolio.com/interactive- features/2007/12/cdo/ Information Problems in Asset Markets Source: Modified from Gorton, Gary B. "The Panic of 2007." NBER Working Paper #14358, September 2008. Housing Prices (Case-Shiller Composite 10 Index) Source: www.macromarkets.com 50.00 75.00 100.00 125.00 150.00 175.00 200.00 225.00 250.00 J a n- 9 J a n- 9 1 J a n- 9 2 J a n- 9 3 J a n- 9 4 J a n- 9 5 J a n- 9 6 J a n- 9 7 J a n- 9 8 J a n- 9 9 J a n- J a n- 1 J a n- 2 J a n- 3 J a n- 4 J a n- 5 J a n- 6 J a n- 7 J a n- 8 J a n- 9 J a n- 1 House Price to Rent Ratio Source: Modified from: Congressional Budget Office, Testimony Statement of Peter R. Orszag, Director, "The Current Economic Situation" before the Committee on the Budget U.S. House of Representatives, December 5, 2007 Housing Prices (Case-Shiller Composite 10 Index) Source: www.macromarkets.com 50.00 75.00 100.00 125.00 150.00 175.00 200.00 225.00 250.00 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 How did we get there? A glut of global liquidity Misaligned incentives in the "originate-to-distribute" lending model Information problems in the market for mortgage-backed (and related) assets Colossal failure of risk-management Failure of Risk Management "Well, because the investors and creditors did not do their due diligence and check that the banks that were the ultimate holders of derivative securities had done their due diligence and checked that the financiers who had created the derivatives had done their due diligence and checked that the purchasers of the securities had done their due diligence and checked that securitizers had done...
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The Financial Crisis and its Aftermath 2007-2011 011011--student

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