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The Economy in Crisis

Explore the factors that led to the 2008 financial crisis, potential warning signals in the current economy, and the implications for the future. Analyze the role of banks, real estate, unemployment, and inequality in shaping the crisis. Discuss key legislation and programs implemented to address the aftermath.

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The Economy in Crisis

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  1. The Economy in Crisis Eco 352 Winter 2019

  2. Lehman BrothersSeptember 15, 2008

  3. Could it Happen Again?Source: https://www.bloomberg.com/news/articles/2017-08-25/wall-street-banks-are-sending-warning-signals

  4. S&P 500

  5. NBER Business Cycle Data • http://www.nber.org/cycles/cyclesmain.html

  6. Some Economic IndicatorsReal GDP Per Capita

  7. Employment

  8. Unemployment Broadly Defined

  9. Long-term Unemployed

  10. Employment Rate

  11. Weak Recovery

  12. Inequality and Weak Recovery • Rising Inequality Is Holding Back the U.S. Economy http://www.newsweek.com/rising-inequality-holding-back-us-economy-354777

  13. Case-Shiller U.S. Home Price Index, 1890-2016(January 2000 = 100)

  14. Case-Shiller 10-City Composite Home Price Index

  15. Real Mortgage Rates30-year conventional mortgage rate-CPI inflation

  16. Time Line (1) • November 1999: The Gramm-Leach-Bliley Act (Financial Services Modernization Act) passes. It repeals the Glass-Steagall Act of 1933. • August 2005: RaghuramRajan delivers his paper "Has Financial Development Made the World Riskier?", warning about credit default swaps, at the Jackson Hole Economic Symposium. His arguments are rejected by attendees, including Alan Greenspan, Donald Kohn, and Lawrence Summers

  17. Timeline (2) • August 9, 2007: French investment bank BNP Paribas suspends three investment funds that invested in subprime mortgage debt, due to a "complete evaporation of liquidity" in the market. The bank's announcement is the first of many credit-loss and write-down announcements by banks, mortgage lenders and other institutional investors, as subprime assets went bad, due to defaults by subprime mortgage payers. This announcement compels the intervention of the European Central Bank, pumping 95 billion euros into the European banking market. • September 15, 2008: Lehman Brothers files for bankruptcy protection.

  18. Diagnoses • Panic. A diagnosis preferred by Geithner, et al. Once confidence is restored, normality will follow • Debt overhang. A diagnosis preferred by Krugman, et al. Need for debt relief and fiscal stimulus* • Shadow banks • Insolvency vs. illiquidity • Classics: • Walter Bagehot, Lombard Street: A description of the Money Market • Movie: It’s a Wonderful Life • *Does He Pass the Test? Paul Krugman, The New York Review of Books, July 10, 2014, Stress Test: Reflections on Financial Crises, by Timothy F. Geithner. Crown, 580 pp., $35.00

  19. TARPTroubled Asset Relief Program • a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector that was signed into law by U.S. President George W. Bush on October 3, 2008. It was a component of the government's measures in 2008 to address the subprime mortgage crisis.

  20. Dodd–Frank Wall Street Reform and Consumer Protection Act (7/2/2010) • an Act to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail", to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

  21. American Recovery and Reinvestment Act of 2009 • Emergency Economic Stabilization Act, 2008 • Home Affordable Modification Program

  22. Asset Concentration

  23. Top 5 Banks as of end of 2014 • JPMorgan Chase $2.60 • Bank of America $2.10 • Citigroup $1.89 • Wells Fargo $1.69 • The Bank of NY Mellon $0.374

  24. Stress Test(Kugman, Paul, “Does He Pass the Test?” New York Review of Books, July 10, 2014, pp. 6-10.)

  25. Subprime Mortgages and Race(Source: http://www.huffingtonpost.com/2014/07/02/civil-rights-act-anniversary-racism-charts_n_5521104.html)

  26. Subprime Mortgages and Race (2)

  27. Robosigning • Wells Fargo's Master Spin Job • http://www.rollingstone.com/politics/news/wells-fargos-master-spin-job-20151002

  28. Rating Agencies • The Last Mystery of the Financial Crisis • http://www.rollingstone.com/politics/news/the-last-mystery-of-the-financial-crisis-20130619

  29. Too big to fail, too big to jail • Ben Bernanke: More execs should have gone to jail for causing Great Recession • http://www.usatoday.com/story/news/politics/2015/10/04/ben-bernanke-execs-jail-great-recession-federal-reserve/72959402/ • Gangster Bankers: Too Big to Jail • http://www.rollingstone.com/politics/news/gangster-bankers-too-big-to-jail-20130214

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