Week 1: Introduction to the global Financial Crisis

Question 1

When was the financial crisis?

Answer 1

2008

Question 2

How often has there been a global financial crisis in the last 200 years?

Answer 2

4 times

Question 3

What are they trying to teach ?

Answer 3

What lessons we can learn from the crisis

Question 4

Why should we study the financial crisis?

Answer 4

1. It could happen again
2. The most important economic event since the crisis in the 1930s
3. We should be better prepared if it happens again

Question 5

What happens prior to all financial crises?

Answer 5

There is a large increase in the price of at least one asset class.

Question 6

What do we name this increase when prices later fall?

Answer 6

We retroactively label the original increase to be a “bubble”.

Question 7

In which sector was the bubble in 2008?

Answer 7

In the housing sector

Question 8

All major crises after WWII have been associated with..

Answer 8

housing bubbles.

Question 9

Through the histories of civilisation we have mostly used…

Answer 9

metal based currencies.

Question 10

All financial crises are stories of …

Answer 10

new money gone bad…

Question 11

What is different about this financial crises in terms of panic

Answer 11

Panic used to be very was to spot. People would run to banks and exchange their banknotes to gold.The Global Financial Crisis was different, with the panics occurring out of public sight, in the non-bank part of the financial sector. This area of the financial system is often called the “shadow banking” system.

Question 12

Why were governments ill-prepared?

Answer 12

They were prepared for bank runs but not for a modern crisis.

Question 13

Where is almost all of the wealth on Earth embodied?

Answer 13

In long-live assets that pay off slowly over time

Question 14

What can we not do collectively?

Answer 14

Convert all of our assets into money

Question 15

When does a panic happen?

Answer 15

When enough people want to convert. It used to be gold. Nowadays it is maybe government bonds. Any type of claim they can be 100% sure about.

Question 16

When does a financial crisis happen

Answer 16

When this panic affects the overall financial system.

Question 17

Why do we study the financial crises?

Answer 17

1. Because it is an important part of history and by far the most important economic event since the 1930s. It is crucial to understand the world that followed.
2. It could happen again and we need to recognise what it is.
3. We would like to prevent it from happening again.
4. If it dos happen again we need to be prepared to take actions.

Question 18

What are the course themes

Answer 18

1. Asset classes

2. New kinds of money

Question 19

What is fiat money?

Answer 19

Fiat money is a currency established as money by government regulation or law. It is backed by the human capital and that the government

Question 20

how can countries
leverage their understanding of the housing bubble, for instance, the
bubble before the global financial crisis, in addressing or
mitigating today’s markets and bubbles?

Answer 20

• Total borrowing grew relative to income and this was financed by banks and other institutions with a lot of risk etc. So the consequence would be that banks should run with less leverage, less money.

Question 21

What is another measure that they are proposing?

Answer 21

To increase downplay requirements. For example: you must have at least 20% down etc.

Question 22

What is the problem with downpayment requirements?

Answer 22

That you can get financed by the private market which does not have this downpayment (or lower) requirement. This is therefore very difficult to stop because we live with a system of competition.

Question 23

could the Fed have
incentivized the flow of money out of the real estate bubble (or any bubble
in that matter) prior to it popping?

Answer 23

The FED did raise interest rates between 03/04 and 07. It raised several 100 basis points because the economy was expanding. It’s important to remember that at the same time we did that, the long rate, which probably affects the price at which most people can borrow to support a house, was flat, unchanged, or falling, even in the face of that. nd that’s a symptom of a whole bunch of other things that are happening around the world, including the fact that a bunch of countries like China with large savings and a new ability to deploy those savings outside China were investing in US financial assets. So, even as the Fed was raising rates, the long term rates and therefore mortgage rates did not rise. In some ways, they fell, even as we tightened. And that overall context of interest rates was absolutely a contributing factor to why people decided To borrow so much against their house, and it helped feed the rise in house prices, and definitely helped make investors more willing to lend against someone’s house.

Question 24

couldn’t effective ongoing transparency have headed the global financial crisis off, well before it reached epic proportions bank off balance sheet investment vehicles, several major players at the time not being aware
of the scale of the problem, etc.?

Answer 24

Transparecy is always good but the crisis was not caused by a lack of transparency but rather because of uncertainty. Things have never been transparent. You could look into these CDO etc. and many people did that and they still both these things because they thought that they would safe.

Question 25

the course only indicates policies
as the solution to crisis. What about solutions in
reforming the banking system and making it more transparent? Or preventing leverage
strategies (multiplication) of investments/loans, etc.?

Answer 25

want to design a system or your regulations in a system to prevent the failure of financial institutions or to prevent losses to investors in a recession or to prevent prices of equities or from falling. You might think that would be a good thing because it would take out a bunch of risk, but that would be a bad system for a bunch of different reasons. So, your system should be based on the recognition, there’s a desirable amount of failure
that should happen in a market economy. Good comparison to highways -> reducing speed

Question 26

the justification for
the choice of actions during the crisis is that the ones taken were
those which preserved more jobs. However, the distributional effects
of the actions taken during and after the crisis
disproportionately preserved and then deepened the wealth of the 1% and
they kept their jobs, while ordinary Americans were not helped
with their personal deleveraging as much. In future crises, do you believe that this
single focused mandate around job creation is the correct thing to target? If so, why? If not,
what should the alternative target be?

Answer 26

We were trying to reduce the amount
of damage that happened to the average citizen of the country,
and the average business. Reduce the risk that people lose their
jobs, reduce the risk that income would fall precipitously, reduce the risk that
people’s savings would be destroyed. Reduce the risk that businesses
would cut investment, cut deeply into the bone of not just
in the muscle and the fat of companies. Now it’s true that recessions themselves
are regressive in their impact. They’re going to hurt the poor much
more than the relatively well off. That’s just a sad,
tragic fact of recessions.