Chapter 10 - 10.1 Introduction In this chapter, we learn:...

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1 Chapter 10 The Great Recession Recession: A First Look Charles I. Jones 10.1 Introduction • In this chapter, we learn: – The causes of the financial crisis that began in the summer of 2007 and where the economy currently stands. – How the current financial crisis compares to previous recessions and to previous financial crises in the United States and around the world. – The financial crisis that started in the summer of 2007 and intensified in September 2008 marked the end of an era for U.S. investment banking. – Several important concepts in finance, including balance sheet and leverage . – The National Bureau of Economic Research determined that a recession began in December 2007 and was the worst recession since the Great Depression of the 1930s. 10.2 Recent Shocks to the Macroeconomy • What shocks to the macroeconomy have caused the global financial crisis? – Housing prices Housing prices – Global saving glut – Subprime lending and rise in interest rates – Previous financial turmoil – Oil prices Housing Prices • Housing prices tripled between 1996 and 2006. – “Housing bubble” Between mid 2006 and February 2009 • Between mid-2006 and February 2009, housing prices plummeted by 31.6 percent. – The bubble “burst”
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2 The Global Saving Glut • The current financial turmoil was caused partly by prior financial crises. – Ben Bernanke March 2005: “global saving glut” – Glut = “excess” • The United States had an excess of savings with desire to invest. • Higher investment demand contributed to rising asset prices in the housing market. Subprime Lending and the Rise in Interest Rates • The savings glut led to low interest rates, and many borrowers took out mortgages to buy homes between 2000 and 2006. Many of these borrowers were “subprime” • Many of these borrowers were subprime – poor credit records – high debt-to-income ratios. • Between 2004 and 2006, the Fed raised its
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This note was uploaded on 08/23/2011 for the course ECON 3203 taught by Professor Robertpennington during the Summer '11 term at University of Central Florida.

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Chapter 10 - 10.1 Introduction In this chapter, we learn:...

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