Crime and 2008 Recession Flashcards
8 factors that contributed to crime reduction in US in 1990’s
- Stronger law enforcement agencies
- administration and investigative fields in policing
- citizens attitude towards crime
- economic conditions
- culture, education, and religion
- family conditions
- weapons
- policies in criminal justice system
Gramm-Leach Bliley Act of 1999
Removed barriers in market for commercial banking, investment banks, and insurance companies. Allowed one institution to act as a combination of two.
Concerns about ARRA
- Stimulus too small or large
- Not well designed
- Opposition to any stimulus
Role of Federal Reserve in dealing with financial crisis
- 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
ARM (Adjustable Rate Mortgages)
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
AIG (American International Group)
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.
Causes of Housing Bubble in 2008?
- High GDP in 1990’s
- Lax lending standards
- Expansionary monetary policy by Fed
- Deregulation of financial market
Glass-Steagall Act 1933
Limited securities, activities, and affiliations with commercial banks and security firms in response to Great Depression. Set clear barriers between institutions.
Cost of ARRA
$787 billion
Role of credit rating agencies
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
Role of federal government in dealing with crisis
Took over AIG, Fannie Mae, and Freddie Mac
Cause of bubble bursting
Federal Funds Rate rose, so did interest rate on mortgages
Loans started defaulting and foreclosures shot up
Kinked demand curve for marijuana consumption
going after dealers increases profits
- Focus on demand so it shifts left and decreases supply to become less elastic
Opportunity cost and crime
explicit: Cost of land and seeds to grow marijuana
implicit: Dealer goes to jail and doesn’t make money
Dodd-Frank Act 2010
Close regulatory gaps and end speculative trading practice at the cost of tax payer
Study by Kim, Ben, and Raz
If drug crime receives more attention, non-drug related crimes will increase
Fannie Mae and Freddie Mac
Gov agencies that purchase loans from banks, then sold loans in second market repackaged as security backed mortgages to investors
Originate to Distribute Model
Bank originate loans to sell to investors, passed on risk
Impact of ARRA on GDP and unemployment
GDP: falled by 1.2-3.2%
Unemployment: grown by 0.5- 1.7%
…If stimulus package was not implemented
Definition of crime
Acts that are illegal or criminal are designated as such by legislative bodies such as city, council, state, and congress
Macroeconomic imbalance
Spike in price of oil and gas > families had difficulty paying mortgage > decrease spending on automobiles > less disposable income
MBS (Mortgage-Backed Securities)
Packages of home mortgages bundles together and sold in secondary market
ABS (Asset-Backed Securities)
Consisted of subprime loans and/ or other assets such as credit card loans, car loans, and even student loans
CDO (Collateralized Debt Obligation)
Different types of fixed assets are collectively held with the aim of mitigating risk. Contains different ABS.
CDS (Credit Default Swaps)
Instrument used to insure CDO’s against default of principle or interest.
