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Unformatted text preview: 1 1 Lecture 17: The Global Financial Crisis ECON435: Financial Markets and the Macroeconomy Anton Korinek Spring 2011 2 Capital Inflows to the US Export-oriented growth (China, Vietnam, ) Precautionary savings (East Asia, oil exporters, ) Large capital inflows to the US in late 1990s Internet bubble & bust Aggressive interest rate cuts by Fed, but the corporate sector was still hurting Consumers took advantage of low rates 3 Deregulation After the fall of communism, capitalism was triumphant belief that the market was infallible Zealous deregulation prepared ground for securitization, credit default swaps etc. 4 Financial Innovation squeezing the most AAA from a pool of underlying assets wrong models attempt to diversify systematic risk agency problems between home owners mortgage brokers banks investment banks investors 5 Case-Shiller Home Price Index 100.00 120.00 140.00 160.00 180.00 200.00200....
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- Spring '11