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The current financial crisis

The current financial crisis. Points covered in this lecture: Background to the crisis (debt; aftermath of recession in early 2000 s). Banks and mortgages. Subprime, securitization and credit default swaps. Collapse and bailout. Globalization of the crisis. The background.

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The current financial crisis

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  1. The current financial crisis Points covered in this lecture: • Background to the crisis (debt; aftermath of recession in early 2000s). • Banks and mortgages. • Subprime, securitization and credit default swaps. • Collapse and bailout. • Globalization of the crisis.

  2. The background Debt: real wage decline and increased indebtedness since 1970s. 2000-02: stock market crash prompting low interest rates. Rising house prices as collateral on loans (rising household debt).

  3. Banking: “old style” Mortgages were held by the bank which issued them. 1933: Glass-Steagall Act (repealed 1999)

  4. The brave new world of banking 1999: Gramm-Leach-Blilely Act “New-style” banking and mortgage products. What happens to a mortgage in “new style” banking?

  5. Subprime and securitization What happens to a mortgage once it has been made? Why do banks lend to high-risk (“sub-prime”) customers? Who buys “toxic” assets and why?

  6. Rating agencies Standard & Poor Moody’s Fitch What do they do? How well do they do it?

  7. Credit default swaps Insurance Gambling The demise if AIG (2008)

  8. Why did it collapse and what happened in the aftermath? Housing market collapse and foreclosure “Bail-out”: was there an alternative and whom did it help? Were there alternatives?

  9. Globalizing the crisis Iceland, Greece, Spain When will it all lead? When will it end? Austerity, stimulus, etc.

  10. Who was/is to blame? Mortgage brokers? Mortgage holders? Investment bankers? Regulators? The Fed?

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