Dr. Wendy A. Stock

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The Economic Financial Crisis

• Dr. Wendy A. Stock
• Co-Department Head Professor of Economics

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The Economic Financial Crisis
How did we get into this mess? Can we get out of
it?
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Outline
The Economic Financial Crisis
CausesConsequencesSolutionsWho Cares?
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Economics Topics Covered
The Economic Financial Crisis
Borrowing LendingDemand SupplyThe
Importance of ExpectationsThe Money Supply
Money CreationThe Great DepressionEconomic
Policy Monetary FiscalNational Deficits Debt
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Outline
The Economic Financial Crisis
CausesConsequencesSolutionsWho Cares?
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How do people buy houses?
Borrow Money Mortgages
The amount, interest rate, monthly payments
depend on the price of the house and the
borrowers income.
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What are houses for?
Investment
Shelter
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Houses as Investments
When house price ? (appreciate)

• Can be sold for a gain Pay off mortgage have
  leftover

• Can be refinanced Bigger mortgage based on ?
  priceHome equity loan based on ? price

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What are the normal trends in house prices?
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Normal House Prices?

• Ave. Annual Increase after Inflation
• 1890-2007 0.4 per Year
• 1960-2000 0.2 per Year
• This Decade
• Jan, 2000 Jan, 2006 11.2 per Year
• Aug, 2003 Aug, 2004 17.3 per Year

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(No Transcript)
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Expectations Since House Prices Always Go Up

• Many buyers were able to refinance after a few
  years (and buy a new truck, too!)
• Both borrowers and lenders worried less about
  borrowers ability to repay loans
• ?Lower lending standards

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• Demand and Supply in the Housing Market

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Positive Feedback Loop
? Home Prices ? ? Demand for loans and even
lower lending standards ? ? Demand for Homes ?
? Home Prices
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But what if interest rates rise or prices fall at
some point?
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Housing Bubble

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Negative Feedback Loop
? Defaults ? ? Home Prices ? More Defaults ? ?
Home Prices
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What does a housing bubble have to do with the
financial crisis?
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What Do Financial Institutions Do?

• Channel funds from lender-savers to
  borrower-spenders
• Create money
• Crucial for economic performance

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Where Does Money Come From?
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Where Does Money Come From?
Most of the money in our money supply is created
by banks
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Where Does Money Come From?
Bank History Goldsmiths
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Where Does Money Come From?
Bank History Goldsmiths
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Creating Money
Bank History Goldsmiths

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Creating Money
Bank History Fractional Reserve Banking

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Creating Money
Fractional Reserve Banking Example

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Creating Money
What if someone doesnt pay back their loan?
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Bank Failure
1930s Bank Run
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Bank Failure
Great Depression Solutions
Suspend Withdrawals
Federal Deposit Insurance (FDIC)
The Federal Reserve (Fed)
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Bank Failure
Great Depression Solutions
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What does all this Ancient Great Depression
History have to do with the Current Situation?
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Current Situation Bank Failures
LEHMAN BROTHERS
FDIC 66 failures since January 1, 2009.
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• Demand and Supply in the Lending Market

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Outline
The Economic Financial Crisis
CausesConsequencesSolutionsWho Cares?
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Consequences of Mortgage Crisis?

• Potential for severe economic contraction
• Credit freeze impacts
• Short-run business activity
• Investment spending
• Consumption spending

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Stock Market
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Source The Conference Board
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I am not a home owner, stock market investor, or
employee. Why should I care about this stuff?
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Outline
The Economic Financial Crisis
CausesConsequencesSolutionsWho Cares?
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Solutions

Timothy Geithner Treasury Secretary
Ben Bernanke Fed Chairman
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Solution I Financial Bailout
Emergency Economic Stabilization Act of 2008

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Components
Emergency Economic Stabilization Act of 2008

• Troubled Asset Relief Program
• Purchase troubled assets from financial
  institutions
• Government equity interests in participating
  firms
• Executive pay limits
• Foreclosure avoidance homeowner assistance

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• Monetary Policy Stimulus

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Impacts?
Emergency Economic Stabilization Act of 2008

• Foreclosures down 9.6 December 2008 to January
  2009
• Increased scrutiny of mortgages

Source realtytrac.com
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Solution II Economic Stimulus
American Recovery and Reinvestment Act of 2009

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American Recovery and Reinvestment Act of 2009

Source wikipedia.org
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• Fiscal Policy Stimulus

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Impacts?
American Recovery and Reinvestment Act of 2009
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Source The Conference Board
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The Costs of Recovery?
U.S. NATIONAL DEBT CLOCK The Outstanding Public
Debt as of 15 June 2009 at 55330 PM GMT is
YOUR SHARE of this debt?
37,177.54
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The Economistcover story this week
The Biggest Bill in History

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The Economic Financial Crisis

• Dr. Wendy A. Stock
• Co-Department Head Professor of Economics