The great recession and financial crisis
Brief description
Background:
Crisis:
Background:
- Low fed funds rate following 2001 recession + global savings glut = massive inflow of capital into US housing market as investors seek high returns
- Lowering of credit standards
- Financial institutions become more risky with activities, employ use of leveraging. Financial institutions began borrowing to purchase huge amounts of mortgages, which they then repackaged into financial instruments such as Mortgage-Backed Securities (MBS), which were sold to investors
- Purchases of MBS fueled demand for mortgages, which thus furthered desire to lend more to increasingly credit-risky borrowers. This lending fueled demand for housing, further increasing bubble
- Low interest rates enabled borrowers to borrow easily
Crisis:
- Housing prices began declining in 2006 as combination of fed funds rate increases and mortgage defaults begin to rise
- Lower housing prices causes more borrowers to default as they become "underwater" (owes more on their mortgage than house is worth)
- Lower housing prices causes pullbacks in consumer spending via wealth effect
- Drying up of mortgage payments causes value of MBS and other securities to decline, lowering the net worth of financial institutions
- Lower net worth of financial institutions causes them to rein in lending
- Credit freezes across the economy, causing further declines in investment, hiring, and consumption
- Economy enters recession in December 2007
- Lower net worth of financial institutions causes a run on them by other short-term creditors, causing these institutions to fail
Critique of Fed policies following the 2007 recession
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Unintended Consequences (critique) of ZIRP (Zero Interest Rate Policy)
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Critique of LSAP (Large Scale Asset Purchase)
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Overview of Fed's policies, outlook and the economic condition during and post 2007 recession
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What happens to Fed's balance sheet if it returns to historical norm?
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Overview of Fed's QE policy and the current economic condition
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Timeline of 2007 financial crisis
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Science of monetary policy strategy post 2007 recession
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Getting up to speed on the financial crisis
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Overview of the Dodd-Frank Reform
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Lecture series on the 2007 recession
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Lecture by Bernanke on the 2007 financial crisis
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Carmen Reinhart lecture on financial crises
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