Transcript Great Depression II (averted)

Great Depression II (averted)
June 2, 2010
CLUE Final Review
Tuesday June 8th
6:30-8:00 PM
Mary Gates Hall room 242
The Financial Crisis, Put Simply
• Overborrowing and overlending
• Private debts (of banks and people) assumed
by governments
Background
• Housing bubble
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Low interest rates
“Chimerica”
Rising home prices
Credit flowed into “sub-prime” mortgages. Why?
• Banks: up-front fee, low risk with rising home prices
• Buyers: greedy, ignorant, or calculating
• Complex financial instruments to share (hide) risk
• Deregulation and rise of “shadow banking”
Ticking time bomb: unsustainable system
House Prices
Short-term Precipitates
• House prices slow
Irresponsible investment banks collapse
Banks stop lending to each other
Economy freezes, stock market falls 7%
9/29/08
http://www.youtube.com/watch?v=h4Ns4ltUvfw&feature=related
US Response
• Low interest rates
• TARP (Troubled Asset Relief Program) for
injecting credit and buying “toxic assets”
• Stimulus bill ($790 billion)
• Nationalize US auto companies
• Incentives to buy cars, houses
International Repercussions
• China, India, Brazil: not too bad
• Booming economies with debt (Russia, Dubai,
Las Vegas): steep fall
• Low-income countries: poverty, protectionism
• European Union: uncompetitive economies,
states had to cut spending (PIIGS)
Implications
• Victory for “state capitalism”; death of
neoliberalism?
• IMF is back
• Let’s all be Canadian (i.e. boring)
• Political backlash milder than 1930s (so far)
• Rise of the Rest
• Is the US a future Greece (national debt: $13
trillion; 84% of GDP)?
• Future of economics?
• Is it really over?