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Sub-primes and the Credit Crisis

Sub-primes and the Credit Crisis. PLS/EC 480 Greed and Need Dr. Emerson. The Great Depression. Stock Market Crash Banks loose capital Decline in market activity Government inaction FDR and try anything approach. Regulation. FDIC Security & Exchange Commission Glass Steagall

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Sub-primes and the Credit Crisis

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  1. Sub-primes and the Credit Crisis PLS/EC 480 Greed and Need Dr. Emerson

  2. The Great Depression Stock Market Crash Banks loose capital Decline in market activity Government inaction FDR and try anything approach

  3. Regulation • FDIC • Security & Exchange Commission • Glass Steagall • Freddie Mac/ Fannie Mae

  4. Deregulation • Deregulation of thrifts[Savings and Loans] • No regulation of “derivatives” • Mortgages sold in fractions- precursor of CDO. • Gramm Leach Bliley

  5. Federal Reserve Bank Policies • Low interest • Sub primes unregulated • No action on defaults • Fed vs. Congress

  6. EVIDENCE: Sub Prime Problem • Delinquency rate is 2 tenths of 1 % in 1979 • Today 2% (10 times higher): 2,820,000 households and rising.

  7. Foreclosures and Sub Prime Rates of loss by mortgage type.

  8. Default Consequences • GAO report: • No piggyback and documentation0% • Piggyback OR little documentation 25-31% • Piggyback AND no documentation = 60%

  9. Evolution of Crisis • Rotten apple parallel • Sub prime and impact on prime

  10. Jobs in the aftermath • 2009, 0% job growth

  11. OECD • Rate of US recovery versus other industrial democratic countries.

  12. Cost of gambling The Credit Crisis by J. Jarvis http://www.getrichslowly.org/blog/2009/02/25/the-credit-crisis-visualized/

  13. Break • Be back in 10 minutes for the analysis

  14. The Micro Economic and Political Consequences • Bill Moyer’s Report http://www.pbs.org/moyers/journal/07182008/watch.html

  15. 1930s SAME as today’s crisis • Unregulated market • Commercial and high risk investments • Worldwide crisis • Downward spiraling • Income disparities

  16. Differences? • Starts as homeowner crisis • US a global power • US government reacts with TARP bailout • FDIC protects depositors • No tariffs • OTHER

  17. Inside the Meltdown: Bush Administration, TARP 1 and CongressMatrix of Events –see web page

  18. Suggested Reforms Financial reporting No mart to marketing Accounting regulations No off shore companies Intelligible instruments Reinstate Glass Steagall Insurance reform Credit default swaps End “too big to fail”

  19. JONCO and other reforms: --In Dodd We Trust http://www.thedailyshow.com/watch/tue-march-16-2010/in-dodd-we-trust (Firefox)

  20. National Responsibility • Federal Government

  21. What should States do?

  22. Citations • Alford, Rob (2003). What are the origins of Freddie Mac and Fannie Mae. Accessed August 28, 2008 at http://hnn.us/articles/1849.html. • Bitner, Richard (2008). Inside the Subprime Debacle. U.S. News and World Report. 145 (2) 12. • GAO Report (2007) Briefing to the Committee on Financial Service, House of Representatives. GPO: Washington, D. C.

  23. Citations • Jost, Kenneth (2008). Financial Crisis. CQ Researcher 18(18), 409-422 • Phillips, Kevin (2002). Wealth and Democracy. New York: Random House. • Stigliz, Joseph 2010. Freefall: America, free markets and the sinking of the world economy. New York: Norton Press.

  24. Q and A

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