Crime and 2008 Recession

Question 1

8 factors that contributed to crime reduction in US in 1990’s

Answer 1

1. Stronger law enforcement agencies
2. administration and investigative fields in policing
3. citizens attitude towards crime
4. economic conditions
5. culture, education, and religion
6. family conditions
7. weapons
8. policies in criminal justice system

Question 2

Gramm-Leach Bliley Act of 1999

Answer 2

Removed barriers in market for commercial banking, investment banks, and insurance companies. Allowed one institution to act as a combination of two.

Question 3

Concerns about ARRA

Answer 3

• Stimulus too small or large
• Not well designed
• Opposition to any stimulus

Question 4

Role of Federal Reserve in dealing with financial crisis

Answer 4

• Had to rescue failed financial institutions
• Brought Fed fund rate down to 0, or close to.
• Bought long term treasury bonds, gov agencies debt, and MBS

Question 5

ARM (Adjustable Rate Mortgages)

Answer 5

Interest rates on mortgage is connected to market interest rate. Borrowers would pay only for interest for first few years but paid “ballooned” amount later on

Question 6

AIG (American International Group)

Answer 6

Finance and insurance company that had 10th largest revenue in 2007. Faced financial difficulties and was unable to meet obligations to $400 billion CDS that it issued.

Question 7

Causes of Housing Bubble in 2008?

Answer 7

• High GDP in 1990’s
• Lax lending standards
• Expansionary monetary policy by Fed
• Deregulation of financial market

Question 8

Glass-Steagall Act 1933

Answer 8

Limited securities, activities, and affiliations with commercial banks and security firms in response to Great Depression. Set clear barriers between institutions.

Question 9

Cost of ARRA

Answer 9

$787 billion

Question 10

Role of credit rating agencies

Answer 10

S&P and Moody’s have majority of power in credit rating. Overrated instruments, gave AAA rating when it should have been rated non-investment grade
Gave financial advice to companies whose securities they were rating

Question 11

Role of federal government in dealing with crisis

Answer 11

Took over AIG, Fannie Mae, and Freddie Mac

Question 12

Cause of bubble bursting

Answer 12

Federal Funds Rate rose, so did interest rate on mortgages
Loans started defaulting and foreclosures shot up

Question 13

Kinked demand curve for marijuana consumption

Answer 13

going after dealers increases profits
- Focus on demand so it shifts left and decreases supply to become less elastic

Question 14

Opportunity cost and crime

Answer 14

explicit: Cost of land and seeds to grow marijuana
implicit: Dealer goes to jail and doesn’t make money

Question 15

Dodd-Frank Act 2010

Answer 15

Close regulatory gaps and end speculative trading practice at the cost of tax payer

Question 16

Study by Kim, Ben, and Raz

Answer 16

If drug crime receives more attention, non-drug related crimes will increase

Question 17

Fannie Mae and Freddie Mac

Answer 17

Gov agencies that purchase loans from banks, then sold loans in second market repackaged as security backed mortgages to investors

Question 18

Originate to Distribute Model

Answer 18

Bank originate loans to sell to investors, passed on risk

Question 19

Impact of ARRA on GDP and unemployment

Answer 19

GDP: falled by 1.2-3.2%
Unemployment: grown by 0.5- 1.7%
…If stimulus package was not implemented

Question 20

Definition of crime

Answer 20

Acts that are illegal or criminal are designated as such by legislative bodies such as city, council, state, and congress

Question 21

Macroeconomic imbalance

Answer 21

Spike in price of oil and gas > families had difficulty paying mortgage > decrease spending on automobiles > less disposable income

Question 22

MBS (Mortgage-Backed Securities)

Answer 22

Packages of home mortgages bundles together and sold in secondary market

Question 23

ABS (Asset-Backed Securities)

Answer 23

Consisted of subprime loans and/ or other assets such as credit card loans, car loans, and even student loans

Question 24

CDO (Collateralized Debt Obligation)

Answer 24

Different types of fixed assets are collectively held with the aim of mitigating risk. Contains different ABS.

Question 25

CDS (Credit Default Swaps)

Answer 25

Instrument used to insure CDO’s against default of principle or interest.