Transcript The crisis
THE BUSINESS CYCLE Good news or bad news for GDP? recession peak expansion upturn depression downturn contraction trough downswing recovery slump boom The economy ... ...peaks ...contracts ...recovers ...expands ...booms ...works at full capacity/at below its potential Keynesianism & Monetarism Make full sentences: • durable equilibrium/produce/high unemployment / market forces /reduced income and investment • counteract the business cycle/ managing the demand/ governments/ • excess savings / interest rates / cause / in the long run / investment / fall / increase • dead / in the long run • neutral / money supply / constant / government noninflationary / government /no effect /output & employmemt • governments / too late / fiscal & monetary measures / recession / foresee / take effect. MK, pp.117-118 The Crisis The Economist, 20 Sept 2008 • “Ten short days saw the nationalisation, failure or rescue of what was once the world’s biggest insurer, two of the world’s biggest investment banks, and two giants of America’s mortgage markets” • “Regulation is necessary and much must now be done to improve the laws of finance”: better oversight, more transparency, supervision of giants, accounting that values risk better, safer financial transactions (derivatives). Source: http://www.economist.com/node/12263158?story_id=12263158 What is the chronology of the events below? 1. Poor borrowers go bankrupt, so houses are returned to lenders. 2. Central banks help to prevent system collapse. 3. Poor borrowers can no longer repay their loans. 4. Some lenders go bust as they cannot sell the property, and some lenders sell loan obligations to investors. 5. Poor borrowers buy houses with loans. 6. Because of low interest rates, it is easy to borrow. 7. But after some time, interest rates go up. (R:p.43-44) The Financial Crisis • • • • • Mortgage lenders Subprime borrowers Hedge funds Default (n.), to default on mortgage (v.) To release liquidity R: p. 43 Paul Krugman • Nobel Prize in Economic Sciences 2008 • The New York Times columns R.pp.43-44 Optional reading (R: pp.43-44) What did Krugman mean by the following? • Vodoo economics • Toxic assets • N-word Source: Paul Krugman, NY Times More about the financial crisis 1. The subprime crisis and the credit crunch (MK, p.75) 2. Northern Rock (Banking Crisis) – home! R: p.28 3. http://vimeo.com/3261363 (optional material) • sovereign funds, T-bills • down payment • leverage • forsaken, foreclosed, forlorned • collateralized debt obligations • credit default swaps Northern Rock: A case study of a banking crisis Do you know the meaning of the words below? • • • • • • Shake-out Credit squeeze Run on a bank (bank run) Solvency (being solvent) Deposits Emergency funding Which of the previous words are defined here? • Government measures designed to limit the supply of credit in the economy (e.g. by restricting bank lending)………….. • A loan to finance the purchase of real estate……………… • The ability of a corporation to meet its long-term fixed expenses …………….. • the decline in the number of commercial banks (bigger banks acquire weaker competitors who verge with bankruptcy)……….. • Government measures designed to limit the supply of credit in the economy (e.g. by restricting bank lending) CREDIT SQUEEZE • Loan to finance the purchase of real estate MORTGAGE • The ability of a corporation to meet its long-term fixed expenses SOLVENCY • The decline in the number of commercial banks (bigger banks acquire weaker competitors who verge with bankruptcy) SHAKE-OUT Northern Rock - Basics • What happened to Northern Rock? • What did the bank’s customers do and why? • Who helped and how (2 ways)? Text 2 • • • • • • • • • Go bust Securities (e.g. bonds, …) The Treasury The Chancellor (of the Exchequer) Subordinated debt Piece of legislation Bailout In a transparent manner Banking regulator A banking crisis: the worst-case scenario Put the following statements in the chronological order: • The Financial Services Authority and the Bank of England do not spot the trouble in time. • The banks goes bankrupt. • The government (the Treasury) steps in and guarantees 100 per cent of the deposits, but repays only investors who made unsecured loans to the bank, and not those who bought the bonds issued by the bank. • The bank management borrows over their heads.