the financial crisis Flashcards
how is the state of an economy measured ?
by looking at the macroeconomic indicators : output, unemployment, inflation, budget deficit and balance of payments.
before 2006 what was the state of
a. advanced economies
b. developing economies
a. stable growth
b. rapid growth
what led to the crash in 2008 ?
investors had lots of money but wanted more so they went to the federal reserve and brought a very safe treasury bill. but after the .com bust of 2001 the iR fell very low and investors started to go elsewhere to make money and banks borrowed more because it was cheaper. banks and investors went crazy with leverage.
investors decide to buy mortgages from banks in the form of CBOs collateralised debt obligations (groups of safe ok and risky mortgages)
investors had these insured by banks so that credit raters rated the cbos well to make them more attractive.
banks and investors who thought they were too big to fail took up some of the risky mortgages but they were greedy and started lending out subprime mortgages. which they thought that due to the growth, people would be able to pay. but they couldn’t and started to default.
what happened during the crash of 2008 ?
home owner default - abundance of houses - house prices fell - mortgages became more expensive than house prices - led to more defaults.
banks and investors are left with houses not money and they have to default on their loans and go bankrupt.
people didn’t trust financial institutions and so withdrew their money from banks who were not liquid enough because of the loans and they went bankrupt and money disappeared.
leman brothers closed and iceland went bankrupt
how was the crash dealt with ?
it required monetary policy interventions. tried to lower IR but the trust was so lost it didn’t encourage spending at al. and they got so low that it was ineffective. caused the mpc leader to resign
we had to start using the unconventional methods.
what is the eu’s stance on monetary policy now ?
there is a drive by the eu to taper off QE so that ir can be raised and conventional monetary policy can be used in the future if nessecary.
tapering off has upset the emerging economies ( emerging economies taper tantrum ) because less QE means less money to invest into the developing countries and they will be left with current and capital account deficits due to capital outflows.
what is the uk’s status now ?
labour production is down and unemployment below pre 2007 levels, inflation is at a similar level.
what is the usa’s status now ?
currently trying to decide whether or not they should raise ir by 0.25% to raise unemployment to a sustainable level. trump wants to de regulate banks again.
what is china’s status now?
from the 70’s onwards they have always been export driven but recently they have been turning inwards to try and restrict their reliance on other economies helpful for the possible trade wars that lead to currency wars.
