Econ 104-2 - Impact of Financial Regulation and...

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Econ 104-2 18:30 Midterm is Monday October 24 th   What caused the economic crisis? Why “introductory thoughts”? What is the economic crisis? Don’t expect to understand in ne class But by the end of the class Readings: they just get started But you don’t need the books to tell you the basic facts Political/economic situation Survey Financial/economic crises are “business as usual” Recent crises  2001 – Dot com bubble 1997-1998 – East Asia and Long-Term Capital Management LTCM led by 2 Nobel Prize Winners in Finance/Economics 1989-1990 – Savings and Loan Crisis - $150 billion bailout 1987 – Stock Market Crash – 23% decline 10/19/87 Historical Pattern Kindleberg, Manias, Crashes and Panics Crisis Every 8.5 years from 1770 – present Basic pattern: “overleveraging” Borrowing to much in pursuit of new profit opportunities Creates self-reinforcing bubble Crisis begins when bubble bursts
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Unformatted text preview: Impact of Financial Regulation and Deregulation Bipartisan support for deregulation Clinton Economic Advisors on Financial Deregulation 2001 Economic Report of the President Given the massive financial instability of the 1930s, narrowing the range of banks activities was arguably important for that day and age. But those rules are not needed today. What was different this time? Subprime mortgage market and housing bubble Bundling and securitizing mortgages Why it was supposed to reduce risk Why it actually increased risk Impact of Collapse of Household Wealth Creates macroeconomic vicious cycle Households less willing/able to spend Leads to: Businesses less willing to invest to expand business Leads to: less job creation Leads to: Markets are less buoyant How to break vicious cycle? 18:30 18:30...
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This note was uploaded on 10/24/2011 for the course ECON 104 taught by Professor Dolenc during the Fall '08 term at UMass (Amherst).

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Econ 104-2 - Impact of Financial Regulation and...

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