Lecture 1 - SubprimeSP2011

Lecture 1 - SubprimeSP2011 - Economics 330 Money and...

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Economics 330 Money and Banking T and Th from 9:30am to 10:45am Text: Mishkin, Frederic: The Economics of Money, Banking, and Financial Markets , Addison-Wesley, Business School Edition 2nd edition, 2010 . A used copy of the Alternate Edition of the 8th edition is a reasonable cheaper substitute - only if you get the Alternate Edition.
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Course Webpage http://www.terpconnect.umd.edu/~jneri/Econ330 NOTE: upper-case E
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Who am I ? Dr. John Neri Ph D - a while ago in monetary economics Energy consulting since 1973 Office Hours: T and Th from 11:00am to 12 noon or by appointment. Office: Morrill Hall, Room 1102B
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Who Are these Guys?
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Alan Greenspan - former chairman of the board of governors of the United States Federal Reserve Ben Bernanke - Chairman of the board of governors for the United States Federal Reserve Mervyn King - Governor of the Bank of England Jean-Claude Trichet - President of European Central Bank
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The Sub-Prime Market, Financial Crisis and Federal Reserve Policy Actions
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Financial Crisis Most financial crises involve asset-price crashes, failures (insolvency) of financial institutions, or both. Great Depression 1929-1933 Subprime crisis that began in mid - 2007. The response of the central bank is the key to controlling the economic damage from a crisis
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The Mechanics of Financial Crises: Asset-Price Crashes Asset-price crashes are sudden large drops in asset prices, such as stock or real estate Crashes may follow a bubble: sentiment shifts and asset prices fall, often causing a vicious cycle of selling and panic
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House Prices
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House Prices - Annual Percentage Increases
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Stock Market Prices Dow Jones Industrial Average
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Insolvency of Financial Institution A financial institution is insolvent when the value of its assets is less than its liabilities, making net worth negative Regulators force closure of insolvent banks Insolvency can spread between institutions because they are connected; for example, banks have deposits in and make loans to other banks
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Liquidity Crises Bank run: Commercial banks may lack enough liquid assets to meet depositors’ demands forcing sales of assets at fire-sale prices and resulting in losses that can cause insolvency Investment banks, such as Lehman Brothers, that raise funds by borrowing, experience liquidity crises when creditors lose confidence and stop lending, forcing asset sales Crises can spread to other financial institutions as depositors and creditors lose confidence, spreading a crisis throughout the economy
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Financial Crises and the Economy – Direct Cost The direct costs of a crisis are: Asset holders suffer losses when asset prices fall Homeowners, owners of common stock Owners of financial institutions lose their equity Creditors of financial institutions lose the funds they have lent When banks fail, uninsured depositors and the FDIC incur losses Losses on assets reduce aggregate expenditure
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Lecture 1 - SubprimeSP2011 - Economics 330 Money and...

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