13_The_Financial_Crisis_2007-09

13_The_Financial_Crisis_2007-09 - 13 INTRODUCTION TO THE...

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Unformatted text preview: 13. INTRODUCTION TO THE FINANCIAL CRISIS 2007-09 Torsten Jochem Intro to Macro The Financial Crisis 2007-09 b Introduction b Over the last weeks we have learned a lot about the U.S. economy & its financial and monetary system. b 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. b Goals: s 1. Understanding what led to the financial crisis. s 2. Being able to discuss policy proposals to avoid a repeat. b Overview b 1. Early Origins b 2. Structured Finance . Subprime Lending The Financial Crisis 2007-09 b 3. Subprime Lending b 4. The Housing Bubble Bursts b 5. The Debt Market Freezes b 6. Macro Effects b 7. The Government’s Reaction. Did it work? b 8. The Financial Reform (as of June 2010) 1. Subprime Accumulation 2. Subprime borrowers default. The Financial Crisis 2007-09 b 0. Overview 3. Investors’ balance sheets get hit. 4. Debt markets freeze. 5. Stock market plunges. 1. Subprime Accumulation 2. Subprime borrowers default. The Financial Crisis 2007-09 b 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 b 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 1. Flight into 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 b 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 1. Flight into Liquidity/low-risk. 2. Unemployment 3. Uncertainty & Increase in Savings Rate 4. Drop in aggregate demand. The Financial Crisis 2007-09 b 1. Early Origins b To understand the origin of the crisis, we need to go back to the late 1990s and the technology boom. b 1. Early Origins b As the technology bubble burst, the recession hit in late 2000: growth went negative & unemployment rose. The Financial Crisis 2007-09 b 1. Early Origins b 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 b 1. Early Origins b …and – as Keynesians would be happy to hear – growth picked up quickly....
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This note was uploaded on 03/26/2012 for the course ECON 0100 taught by Professor Kenkel during the Spring '08 term at Pittsburgh.

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13_The_Financial_Crisis_2007-09 - 13 INTRODUCTION TO THE...

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