1 Intro - Why Study Money and Banking? A Motivation Prof....

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Why Study Money and Banking? A Motivation Prof. Irina A. Telyukova UBC Economics 345 Fall 2008
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2 ± Recent macroeconomic events (possibly a recession) in the U.S., and consequently in much of the world, have originated in financial markets: ± U.S. housing market – subprime crisis ± Credit crunch ± Value of the dollar (U.S., Canadian) ± As economists, we want to both understand what is happening and how to prevent such events in the future: analysis and policy recommendations. ± To do this, we need to understand the structure of financial markets, their functions, and problems that they face. ± This course is a broad introduction to these topics. Outline
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3 The Housing Market: U.S. and Canada ± Homeownership rate is about 64-70% in the U.S., and 66-67% in Canada (soared in recent years). This is high by world standards. ± Housing – vast majority of household wealth in U.S. and Canada. ± Typically, a household buys a house by financing it through a mortgage contract – agreeing to pay out the house’s value with interest over a 30-year period, while the bank owns the house in the interim. ± Thus a household’s wealth position in the housing market is measured by the value of the home that it owns outright (home equity), the total value of its home, and its mortgage debt.
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4 The U.S. Housing Market: What Went Wrong ± Bank has to select customers for the mortgage loans. ± Subprime lending– lending to uncreditworthy customers, often at teaser rates that are meant to re-set to very high rates. ± Mortgages re-sold as mortgage-backed securities – involves the whole financial system. ± Housing prices down (city avg -24%; national median -14%) and re-sets – massive defaults on subprime mortgages and foreclosures. ± Creditworthy homeowners suffer as well: large loss of wealth. ± Bankruptcies of subprime lenders; huge losses among banks and investors who invested in the mortgage-backed securities. ± Starting in July 2008: failures of some banks (Indie Mac). ± Even government-sponsored Fannie Mae and Freddie Mac are saddled with too much subprime debt. Æ Credit Crunch.
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5 Meanwhile, in Canada ± There was no subprime crisis in this country. ± However, there are now worries of contagion: ± Sales began dropping in Canada, notably in Western provinces, and especially in large cities: Vancouver -44% in June. ± Prices began falling as well in June and July: average -3.6% in July compared to July 2007.
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6 The Credit Crunch ± A depressed housing market (declining sales, new home construction, unsold inventories) Æ ± Spread to many other industries that are connected to housing (furniture, durables, etc.) ± Enormous losses among banks caused them to raise standards
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This note was uploaded on 06/21/2011 for the course ECON 345 taught by Professor Sumaila during the Spring '09 term at The University of British Columbia.

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1 Intro - Why Study Money and Banking? A Motivation Prof....

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