13_The_Financial_Crisis_2007-09

13_The_Financial_Crisis_2007-09 - The Financial Crisis...

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13. INTRODUCTION TO THE FINANCIAL CRISIS 2007-09 Torsten Jochem Intro to Macro The Financial Crisis 2007-09 box2 Introduction box5 Over the last weeks we have learned a lot about the U.S. economy & its financial and monetary system. box5 This week we’ll look at the 2007-09 U.S. financial crisis, thereby combining what we have learnt within a practical and relevant example. box5 Goals: square6 1. Understanding what led to the financial crisis. square6 2. Being able to discuss policy proposals to avoid a repeat. box2 Overview box5 1. Early Origins box5 2. Structured Finance box5 3. Subprime Lending The Financial Crisis 2007-09 box5 4. The Housing Bubble Bursts box5 5. The Debt Market Freezes box5 6. Macro Effects box5 7. The Government’s Reaction. Did it work? box5 8. The Financial Reform (as of June 2010) 1. Subprime Accumulation 2. Subprime borrowers default. The Financial Crisis 2007-09 box2 0. Overview 3. Investors’ balance sheets get hit. 4. Debt markets freeze. 5. Stock market plunges.
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1. Subprime Accumulation 2. Subprime borrowers default. The Financial Crisis 2007-09 box2 0. Overview 3. Investors’ balance sheets get hit. 4. Debt markets freeze. 5. Stock market plunges. Firms & Consumers cannot obtain new debts/rollover debt. Wealth (e.g., 401K) falls Banks stop giving credit. 1. Subprime Accumulation 2. Subprime borrowers default. The Financial Crisis 2007-09 1. Flight into box2 0. Overview 3. Investors’ balance sheets get hit. 4. Debt markets freeze. 5. Stock market plunges. Firms & Consumers cannot obtain new debts/rollover debt. Wealth (e.g., 401K) falls Liquidity/low-risk. 2. Unemployment 3. Uncertainty & Increase in Savings Rate 4. Drop in aggregate demand. Banks stop giving credit. 1. Subprime Accumulation 2. Subprime borrowers default. The Financial Crisis 2007-09 1. Flight into box2 0. Overview 3. Investors’ balance sheets get hit. 4. Debt markets freeze. 5. Stock market plunges. Banks stop giving credit. Firms & Consumers cannot obtain new debts/rollover debt. Wealth (e.g., 401K) falls Government stimulates Demand FED & Gov’t provide liquidity Liquidity/low-risk. 2. Unemployment 3. Uncertainty & Increase in Savings Rate 4. Drop in aggregate demand. The Financial Crisis 2007-09 box2 1. Early Origins box5 To understand the origin of the crisis, we need to go back to the late 1990s and the technology boom.
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box2 1. Early Origins box5 As the technology bubble burst, the recession hit in late 2000: growth went negative & unemployment rose. The Financial Crisis 2007-09 box2 1. Early Origins box5 The FED under Alan Greenspan swiftly decreased the federal fund rate from about 6.5% to 1%(!) and kept them low until 2005… The Financial Crisis 2007-09 box2 1. Early Origins box5 …and – as Keynesians would be happy to hear – growth picked up quickly. box5 Greenspan’s aggressive move had seemed to pay off: The Financial Crisis 2007-09 it turned out to be the shortest recession in U.S. history lasting only 3 quarters!
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