lec00_02 - ECON 4721H Money and Banking Lecture 00_02...

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Unformatted text preview: ECON 4721H Money and Banking Lecture 00_02 Satoshi Tanaka University of Minnesota September 9, 2011 Satoshi Tanaka ECON 4721H Money and Banking Lecture 00_02 Introduction Global Financial Crisis II Satoshi Tanaka ECON 4721H Money and Banking Lecture 00_02 The Bubble Got Burst Satoshi Tanaka ECON 4721H Money and Banking Lecture 00_02 Points of Today's Lecture How the mortgage crisis turned into a nancial crisis ? What is credit crunch ? Why it has a severe e ect on the economy? What the government can do when the nancial market is screwed up? Satoshi Tanaka ECON 4721H Money and Banking Lecture 00_02 How Things Went Wrong Home prices grew faster than people's incomes Rule of thumb: if have annual income x, buy a house for at most 3x In 2006 median house price became > 4 times higher than median annual income Prices stopped growing: too much supply too small demand Once prices stopped growing, ARMs became a ticking bomb This occurred in late 2006 Satoshi Tanaka ECON 4721H Money and Banking Lecture 00_02 Downward Spiral on Housing Market Falling house prices made re nancing and HELOCs unavailable options Many people started to default on ARMs Many people went underwater - their house is now worth less than they own on mortgage This pushed default rates further up - some people just walked away from their houses Which, in turn, forced house prices to go further down ... and so on......
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This note was uploaded on 02/07/2012 for the course ECON 4721H taught by Professor Tanaka during the Fall '11 term at Minnesota.

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lec00_02 - ECON 4721H Money and Banking Lecture 00_02...

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