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Lecture17 - Capital Inflows to the US Lecture 17 The Global...

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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 100.00 120.00 140.00 160.00 180.00 200.00 220.00 240.00 260.00 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03
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