1010b 20b Causes of Financial Crisis

Chapter 20: The Financial System: Opportunities and Dangers
Part B: Causes of the Financial Crisis Prof. Chris Foote

Harvard University Department of Economics
April 19, 2012
Foote (Ec 1010b)
Financial System: Part B
April 19, 2012
1 / 68
Outline
1
Financial Crises (Section 20-2): Anatomy of a Crisis
The Proximate Cause of the Crisis: Falling House Prices
The Ultimate Cause of the Crisis Two potential explanations for the housing cycle Facts about the mortgage market
The Role of The Fed in the Housing Cycle (time permitting)
Foote (Ec 1010b)
April 19, 2012
2 / 68
Mankiws Six Elements of a Financial Crisis

1 2 3 4 5 6
Asset-price boom and bust Insolvencies at some nancial institutions Falling condence at many nancial institutions Credit crunch (lenders become unwilling to lend) Recession (think lower a and from IS-LM model) The Vicious Cycle asset prices fall further, and cycle continues
Foote (Ec 1010b)
April 19, 2012
4 / 68
Foote (Ec 1010b)
April 19, 2012
5 / 68
Asymmetric Information and Falling Condence

Recall that nancial crises are times in which asymmetric information problems become especially severe.
In this case, potential lenders do not not whether a potential borrower is close to bankruptcy, due to its bad investments. Who is most likely to try to borrow in a credit crisis? The sickest borrowers. If a lender does decide to lend, then he demands a high interest rate to compensate him for the now-elevated level of risk. Condence in many nancial institutions and rms declines
In the most recent crisis, a huge problem was CDOs on the balance sheets of big nancial institutions (more on this later).
Foote (Ec 1010b)
April 19, 2012
6 / 68
Risk Spreads
One way to measure the elevated level of risk in the economy is to look at risk spreads. These spreads measure the difference between interest rates paid by risky borrowers relative to rates by safe borrowers. There are a number of potential risk spreads to use, depending on the part of the nancial system we are investigating.
1 2
Banking system/TED Spread: Difference between three-month interbank lending rate (LIBOR) and three-month Treasury rate. Corporate sector/Bond Spreads: Difference between rate paid by (say) Baa-rated corporate borrowers and Aaa-rated corporate borrowers.
Foote (Ec 1010b)
April 19, 2012
7 / 68
The TED Spread

6 3Month London Interbank Offered Rate (LIBOR) 3Month Treasury Bill Yield Percent 01jan2007 0 2 4
01jan2008
01jan2009
01jan2010
01jan2011
01jan2012
TED Spread
01jan2007
Percent 2 3
01jan2008
01jan2009
01jan2010
01jan2011
01jan2012
Foote (Ec 1010b)
April 19, 2012
8 / 68
Corporate Bond Yields and Spread

10 Baarated Corporate Bond Yield Aaarated Corporate Bond Yield Percent 6 8 01jan2007 4
01jan2008
01jan2009
01jan2010
01jan2011
01jan2012
BaaAaa Spread
01jan2007
Percent 2 3
01jan2008
01jan2009
01jan2010
01jan2011
01jan2012
Foote (Ec 1010b)
April 19, 2012
9 / 68
Knock-on Effects on Asset Markets

A key part of the vicious cycle is that nancial crises further reduce the prices of assets, such as equities (that is, stocks) There are at least two reasons for this:
People know that nancial crises are associated with recessions, so corporations are likely to earn smaller prots after a nancial crisis hits. People having nancial problems have to unload their assets in re sales. They have to accept low prices for these assets in order to sell them quickly.
Foote (Ec 1010b)
April 19, 2012
10 / 68
Equity Markets
1600 S&P 500 Stock Index
01jan2007
600
800
Percent 1000 1200
1400
01jan2008
01jan2009
01jan2010
01jan2011
01jan2012
Foote (Ec 1010b)
April 19, 2012
11 / 68
The Housing Cycle

Real House Prices
100 120 140 160 100 110 120 130 140
PriceIncome Ratio
80 1990q1
1997q1
2004q1
2011q1
1990q1
1997q1
2004q1
2011q1
PriceRent Ratio
100 110 120 130 140 100 150 200 250
Housing Sales
New Homes Existing Homes
1990q1
1997q1
2004q1
2011q1
50 1990q1
1997q1
2004q1
2011q1
Note: All series end in 2011q4, except for the priceincome ratio, which ends in 2010q3. Nominal house prices are measured by the FHFA national quarterly index. The general price level is the CPI and nominal rents are also from the BLS. Income is nominal median household income measured yearly by the Census Bureau (interpolated to quarterly values). Series are indexed to equal 100 in 1990q1.
Foote (Ec 1010b)
April 19, 2012
13 / 68
A Long-History of Housing Prices

Source: Robert Shiller
250 1000 900 200 Index or Interest Rate 800 Population in Millions
14 / 68
700 150 Home Prices 100 g Costs Building 50 Interest Rates 0 1880 Population 600 500 400 300 200 100 0 2020
1900
1920
1940 Year
1960
1980
2000
Foote (Ec 1010b)
April 19, 2012
State-Level House Prices

725 United States CPI Massachusetts
100 1980q1
Rescaled Price Index (1980:I = 100) 225 350 475 600
1990q1
2000q1
2010q1
Foote (Ec 1010b)
April 19, 2012
15 / 68
State-Level House Prices

725 United States Massachusetts Nevada CPI Arizona Florida
100 1980q1
Rescaled Price Index (1980:I = 100) 225 350 475 600
1990q1
2000q1
2010q1
Foote (Ec 1010b)
April 19, 2012
16 / 68
Foreclosures and 30Day Delinquencies in the United States: 19722009

4.5
4.0
3.5
3.0
Percent
2.5
30day Delinquencies
2.0
1.5
1.0 Foreclosures Started
0.5
0.0 Q1:1972 Q1:1977 Q1:1982 Q1:1987 Q1:1992 Q1:1997 Q1:2002 Q1:2007

April 19, 2012 17 / 68
Foote (Ec 1010b)
House Prices and Delinquencies

Index: Jan 2000 = 100 100 150 200 200 CaseShiller National HousePrice Index Index: Jan 2000 = 100 150 100
1998q1
2001q3
2005q1
2008q3
2012q1 15
90Day Delinquency Rate: Prime (left scale) 90Day Delinquency Rate: Subprime (right scale)
Percent 10 5
Percent 2
1998q1
2001q3
2005q1
2008q3
2012q1
Foote (Ec 1010b)
April 19, 2012
18 / 68
Unemployment and Delinquencies

12 12 Recession Bar Unemployment Rate 10 10
Percent 6 8
8 Percent 6 4
1998q1
2001q3
2005q1
2008q3
2012q1 15
90Day Delinquency Rate: Prime (left scale) 90Day Delinquency Rate: Subprime (right scale)
Percent 10 5
Percent 2
1998q1
2001q3
2005q1
2008q3
2012q1
Foote (Ec 1010b)
April 19, 2012
19 / 68
Asymmetric Information and Mortgage-Related Investments

As losses on subprime securities mounted, the complexity of structured nance began to cause big problems People began to realize that they didnt know how to value different tranches of complex CDOs (or CDO-squareds)
None of the previous copula-based CDO pricing models had allowed for big declines in housing prices All Wall Street knew was these assets were falling in valuebut they didnt know by how much
Wall Street also didnt know who held the worst assetsthat is, who was most likely to go bankrupt next
This raised the amount of counterparty risk in nancial markets In other words, asymmetric information problems intensied.
Foote (Ec 1010b)
April 19, 2012
20 / 68
The Ultimate Cause of the Crisis
Two potential explanations for the housing cycle
Two Potential Explanations for the Housing Cycle

1
Asymmetric Information and Bad Incentives:

At rst: Asymmetric information/bad incentives crazy lending higher housing prices Later: Unaffordable mortgages defaults and foreclosures lower housing prices
Housing Cycle as Classic Asset Bubble:

At rst: Bubble fever expectations of ever-rising housing prices crazy lending Later: Bursting bubble lower house prices defaults and foreclosures
Foote (Ec 1010b)
April 19, 2012
23 / 68
Foote (Ec 1010b)
April 19, 2012
24 / 68
Thaler and Sunstein on the Crisis

A main cause of the mortgage crisis is that borrowers did not understand the terms of their loans. Even those who tried to read the ne print felt their eyes glazing over, especially after their mortgage broker assured them they had an amazing deal.
Richard Thaler and Cass Sunstein Human Frailty Caused the Crisis Financial Times November 11, 2008
Foote (Ec 1010b)
April 19, 2012
25 / 68
Stiglitz on the Crisis

Executives [like Citigroup Chairman Richard] Parsons are blaming the borrowers for buying houses they could not afford, but many of these borrowers were nancially illiterate and did not understand what they were getting into.
Joseph E . Stiglitz Freefall: America, Free Markets, and the Sinking of the World Economy (p. 78, insertion added)
Foote (Ec 1010b)
April 19, 2012
26 / 68
Asymmetric Information and Crazy Lending
Insiders
Borrowers Mortgage Brokers
Investment Bankers
Lenders/ Investors
Asymmetric information allowed insiders to deceive investors and borrowers Brokers pushed exploding" mortgages Bankers created toxic" securities with hidden problems
Foote (Ec 1010b) Financial System: Part B April 19, 2012 27 / 68
Asymmetric Information and Crazy Lending
Insiders
Investment Bankers
Lenders/ Investors
What if mortgages didnt explode What if banks and investors knew what was going on?
Foote (Ec 1010b)
April 19, 2012
28 / 68
An Alternative Explanation
Bubble Fever
Investment Bankers
Lenders/ Investors
So what was the problem? Borrowers and lenders were trying to cash in on the biggest real estate boom in American history It is hard to stop consenting adults.
Formal Denition of an Asset Bubble

Denition
An asset bubble exists when an asset trades at a price that is above its fundamental value. The fundamental value is the present-discounted value of the income stream that the asset is expected to generate over its lifetime.
Foote (Ec 1010b)
April 19, 2012
30 / 68
How Bubbles Often Arise

In general, bubbles occur when agents use past information about the asset incorrectly as they decide how much to pay for the asset today. One way in which this often happens is extrapolation bias.
People notice that the price of the asset has risen in the past year. People then assume that the asset price will continue to go up next year, extrapolating past price increases into the future. Based on that optimistic price expectation for the future, people are willing to pay a lot of the asset today. The optimistic price expectation become self-fullling, as the asset price rises.
Extrapolation bias might arise from using only a subset of relevant information as price expectations are formed For example, buyers might only look at the past prices of the asset. They ignore supply-and-demand factors that might affect the price of the asset in the future.
Famous Bubbles in History
Tulipmania (1630s)
South Sea Bubble (1710s)
Florida Real Estate (1920s)
Foote (Ec 1010b)
April 19, 2012
32 / 68
Famous Bubbles in Recent History
Beanie Babies (mid-1990s)
Internet Stocks (late 1990s)
U.S. Housing Market (early 2000s)
Foote (Ec 1010b)
April 19, 2012
33 / 68
Why is this question important?

If the Asymmetric Information/Bad Incentives story is true, then economic policy should improve disclosure requirements and build in policies to reduce incentive problems
Originators of mortgages need to keep skin in the game Borrowers need to qualify for loans based on post-reset interest rates
If the Bubble story is true, then policy should ensure that nancial institutions and individual families can ride out large an unexpected declines in asset prices
Capital regulations for nancial institutions Larger downpayments required for home purchases Some economists have also suggested house-price insurance for homeowners
Foote (Ec 1010b)
April 19, 2012
34 / 68
A Big Problem with the Asymmetric Information Story

Remember Akerlof: Under asymmetric information, buyers dont get eeced. Rather, they refuse to participate in the market, and trade breaks down. The cost of asymmetric information is that Pareto-improving trades to not take place.
For example, young healthy people do not get insurance. ... or people who would like to lend to U.S. home buyers do not do so.
To revive the asymmetric information market, you have to argue that investors didnt know what they didnt know. Maybe they didnt realize that securitization gave insiders an opportunity to cheat them, so they participated in the market.
Foote (Ec 1010b)
April 19, 2012
35 / 68
Some Questions
Did investors know about the potential for asymmetric information? How much information were investors given about mortgage investments? Did subprime mortgages really explode? How long has the originate-to-distribute model been operating? How long have exotic mortgage products been used? Is there any contemporary evidence that mortgage investors were optimistic about housing prices?
Foote (Ec 1010b)
April 19, 2012
36 / 68
Facts about the mortgage market
Interest-Rate Resets and the Crisis

Claim: Mortgages exploded when interest rates reset.
Typical subprime mortgage was a 30-year 2/27 or a 3/27. These mortgages had xed interest rates for 2 or 3 years. Initial interest rate is often called a low teaser rate (thought it was often quite high). After that, the interest rate reset to a oating rate over some index (like 6-month LIBOR). Many claim that the crisis was sparked by a wave of interest-rate resets.
What does the data say?
Foote (Ec 1010b)
April 19, 2012
38 / 68
Interest Rates and Defaults for Subprime 2/28s

January 2005 Vintage
11 10 9 8 7 ylabel1 6 text2 11 10 9 8 7 ylabel1 6 text1 text1 45 45 text2
30
text3
30
15 text3 0 2005 2006 2007 2008 2009 ylabel2 2005 2006 2007 2008 2009
15
ylabel2

y11 y10 y9 y8 y7 ylabel1 y6 text1 45 text2
text3
30
15
0 2005 2006 2007 2008 2009
ylabel2
Foote (Ec 1010b)
April 19, 2012
39 / 68
Teaser Interest Rates?

Initial interest rates on subprime 2/28 mortgages were not that low
Interest Rates for Subprime 2/28 Mortgages, by Year of Origination
Year of Origination 2004 2005 2006 2007
Initial (pre-reset) interest rate 7.3 7.5 8.5 8.6
1-year prime ARM rate 3.9 4.5 5.5 5.7
Margin of fully-indexed (post-reset) rate over benchmark rate 6.1 5.9 6.1 6.1
Fully indexed interest rate 11.5 10.5 9.1 9.1
Note: The 2006 and 2007 cohorts of mortgages reset in 2008 and 2009. For these mortgages, the 6-month LIBOR two years after origination is assumed to be 3.0 percent (the April 2008 value) to allow comparison with other cohorts.
Foote (Ec 1010b)
April 19, 2012
40 / 68
Many so-called exotic mortgages have long histories

Low-doc loans and Option ARMs have been around for many years But their use increased as house prices rose
Foote (Ec 1010b)
April 19, 2012
41 / 68
Low Documentation Mortgage

January 9, 1985
Foote (Ec 1010b)
April 19, 2012
42 / 68
Option ARM
Invented in 1980, approved by FHLBB and OCC in 1981, accounted for half of all ARMs in CA by 1996
Foote (Ec 1010b)
April 19, 2012
43 / 68
Originate to Distribute is not new

From the top: ...by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust. (Geithner and Summers, 6/15/2009) Originate-to-Distribute" (OTD) is a psuedo-technical term Suggests moral hazard (originator does not adequately screen borrower) But the link between borrower and lender was broken long ago Buyers of mortgages held them as whole loans before securitization, however
Foote (Ec 1010b)
April 19, 2012
44 / 68
Originate to Distribute is not new (cont)

Mortgage companies (MCs): Stand-alone companies that originate but dont hold mortgages
As far back as the 1950s, MCs accounted for 25 percent of new originations By the mid-1980s, they were more than half of all originations What about savings and loans (S&Ls)?
Foote (Ec 1010b)
April 19, 2012
45 / 68
In the 1980s: S&Ls become MCs

200
in Billions of Dollars
150 S&L Originations S&L Sales 50 S&L Purchase 0 1970 1975 1980 1985 1990 1995
100
Foote (Ec 1010b)
April 19, 2012
46 / 68
When did the borrower-lender link break?

Only the phrase originate-to-distribute is new The ultimate investor changed over time:
1950: Life Insurance Company 1985: Agencies (Fannie Mae and Freddie Mac) 2000: Private-label securitizer (Lehman, Bear, etc.)
If you want to make the case that private-label securitization was the problem, you need a more subtle argument than the originator did not take on any credit risk
Foote (Ec 1010b)
April 19, 2012
47 / 68
Did lenders try to hide toxic loans?

From the WSJ in 2005
Big U.S. mortgage lenders are selling most of the riskier loans they have been making, and some are nding other ways to protect themselves from the possibility of a surge in defaults once the housing market simmers down....In its most recent conference call, Washington Mutual said it has decided to sell all the subprime loans originated in the second quarter. In their latest quarterly conference call, Countrywide ofcials said they dont plan to retain any subprime loans. Were looking to hold only pristine product on the balance sheet, said Stanford Kurland, Countrywides president. How American Lenders Shelter Themselves by Ruth Simon and James R. Hagerty Wall Street Journal, page C1 September 22, 2005
What were potential investors told about loans in securities?

A lot.
At origination: http://www.sec.gov/Archives/edgar/data/1375560/000119312506194735/dfwp.htm After origination: http://www.ctslink.com/
Foote (Ec 1010b)
April 19, 2012
49 / 68
Investors knew that lower HPA big losses

HPA = House Price Appreciation
Brookings Papers on Economic Activity, Fall 2008: 69145. Lehman Brothers: U.S. ABS Weekly Outlook," August 15, 2005. HEL [Subprime] Bond Prole Across HPA Scenarios"
# (1) (2) (3) (4) (5) Name Aggressive Base Pessimistic Meltdown Scenario 11% HPA over the life of the pool 8% HPA for life HPA slows to 5% by end-2005 0% HPA for the next 3 years 5% thereafter -5% for the next 3 years, 5% thereafter Loss 1.4% 3.2% 5.6% 11.1% 17.1% Probability 15% 15% 50% 15% 5%
Foote (Ec 1010b)
April 19, 2012
50 / 68
Wall Street Over-Optimism about HPA

Consensus was that decline on the order we have seen was highly unlikely. No national decline in history...
...the risk of national decline in home prices appears remote. The annual HPA has never been negative in the United States going back at least to 1972.
Regional falls:
In each one of these regional corrections, the decline of home prices coincided with a deep regional recession.
few economists predict a near-term recession in the U.S.(Citi, December 2, 2005.)
Foote (Ec 1010b)
April 19, 2012
51 / 68
Adaptive Expectations
JPMorgan HPA Update"
Date of 12/8/06 1/10/07 2/6/07 3/12/07 9/20/07 11/2/07 Data from 10/06 11/06 12/06 1/07 7/07 9/07 Title More widespread declines with early stabilization signs Continuing declines with stronger stabilization signs Tentative stabilization in HPA Continued stabilization in HPA Near bottom on HPA UGLY! Double digit declines in August and September
JP Morgan, May 16, 2008.: We expect another 15% drop in home prices over the next 12 months.
Foote (Ec 1010b)
April 19, 2012
52 / 68
The Taylor Rule and the Housing Cycle
John Taylor (1946-
Foote (Ec 1010b)
April 19, 2012
54 / 68
The Interest-Rate-Based View of the Crisis

[The gure] shows that the actual interest-rate decisions fell well below what historical experience suggest policy should be. It thus provides an empirical measure that monetary policy was too easy during this period ... This deviation of monetary policy from the Taylor rule was unusually large; no greater or more persistent deviation of actual Fed policy had been seen since the turbulent days of the 1970s. This is clear evidence of monetary excesses during the period leading up to the housing boom. John B. Taylor Getting Off Track p. 2
Foote (Ec 1010b)
April 19, 2012
55 / 68
Evaluation of the Interest-Rate Theory

Pro:
Formal theory implies that lower r does drive up prices and investment I Prices will then fall if new houses are built in response to the rise in the price of houses. Thus, the interest-rate theory is qualitatively consistent with the boom-bust housing cycle.
Con:
Using forecasts and real-time data for output gaps and ination rates suggests that policy was not that loose after all. The actual rise in prices is too large to be explained in theoretical terms by the drop in either short-term or long-term interest rates. The actual rise in prices is also inconsistent with past statistical relationships between house prices and interest rates. Other countries with very different monetary policies also experienced housing booms as well as busts.
Foote (Ec 1010b)
April 19, 2012
56 / 68
Real-Time Data and Ination Forecasts: Theory

Recall that Taylor rule calls for higher i when ination is too high or when output is above potential Taylor (1993) formulation: i = + 2.0 + Here,
i = nominal Fed Funds rate 2.0 = estimate of long-run real rate, r = Feds ination target Why 1 2 as the weights? Why not?
1 1 ( ) + (Y Y ) 2 2
Foote (Ec 1010b)
April 19, 2012
57 / 68
Using Real-Time Data and Forecasts

i = + 2.0 + 1 1 ( ) + (Y Y ) 2 2
Taylors formulation uses time-t levels of and Y Y In other words, time-t values used to make the chart, and are calculated with the most recent vintage of data
Example: What does Taylor rule say that i have been in 2004? Taylor uses revised, 2010-vintage data to measure to calculate the 2004 ination rate i2004 = 2004 + 2.0 + 1 1 (2004 ) + (Y2004 Y ) 2 2
Foote (Ec 1010b)
April 19, 2012
58 / 68
Using Real-Time Data and Forecasts (cont)

1 1 it = t + 2.0 + (t ) + (Yt Y ) 2 2 1 e 1 e it = t +1 + 2.0 + (t +1 ) + (Yt Y ) 2 2
A better way to use the rule might be to use both a forecast of ination and real-time data to generate both expected ination and the output gap Second line above uses ination forecast rather than time-t value of Also, both expected ination and the output gap can be calculated with real-time data, rather than revised data.
Using Real-Time Data and Forecasts (cont)

1 1 it = t + 2.0 + (t ) + (Yt Y ) 2 2 1 e 1 e it = t +1 + 2.0 + (t +1 ) + (Yt Y ) 2 2
In practice, the use of ination forecast matters more than the use of real-time data
Consider a temporary oil-price shock raises ination today, but not expected ination tomorrow. Using the time-t value of in the rule would call for higher i . Using the forecasted value of future ination would not.
Foote (Ec 1010b)
April 19, 2012
60 / 68
Foote (Ec 1010b)
April 19, 2012
61 / 68
Foote (Ec 1010b)
April 19, 2012
62 / 68
Interest Rates and Housing Prices: Theory

Formal theory predicts that a drop in the short-term interest rate should have only a moderate effect on housing prices.
Housing is a long-lived asset, so the long-term interest rate is more important than the short-term rate. Long-term rates are an average of many future short-term rates, so a few too-low short-term rates will not have a big effect on the long-term rate. Even if the long-term rates fall and housing prices rise, fully rational agents will expect the price to fall later, as new houses are built. This expected capital loss reduces the benets of owning a home today and thereby limits the willingness of people to bid up the price of houses immediately after an interest-rate decline.
Foote (Ec 1010b)
April 19, 2012
63 / 68
U.S Interest Rates

20 Federal Funds Rate 30yr Fixed Mortgage Rate
Foote (Ec 1010b)
0 1980m1 1984m1 1988m1 1992m1 1996m1 2000m1 2004m1 2008m1
Percent 10
15
April 19, 2012
64 / 68
Interest Rates and Housing Prices: U.S. Data

Predictions from an empirical U.S. model of housing
Foote (Ec 1010b)
April 19, 2012
65 / 68
Interest Rates and Housing Prices: U.S. Data (cont)

As is clear from the gure, the housing market developments over 2003 through 2008 were far outside the 2-standard deviation condence bands based on observed macro variables, including the federal funds rate and the [empirical models] estimated parameters. With that said, it is important to note that the condence interval for the share of residential investment in GDP includes 5 percent for much of the period up to 2006 which would have been the highest realized share in over 20 years; in this respect, accommodative monetary policy was certainly supportive of macroeconomic activity and a source of strength in the housing market.
Foote (Ec 1010b)
April 19, 2012
66 / 68
Interest Rates and Housing Prices: U.S. Data (cont)

Nonetheless, the simulation suggests that macroeconomic conditions did not drive the housing market developments in this period at least not in a historically typical manner, as captured by the [empirical model].
Jane Dokko et al. (2009) Monetary Policy and the Housing Bubble Board of Governors of the Federal Reserve System Finance and Economics Discussion Series Paper 2009-49 p. 29
Foote (Ec 1010b)
April 19, 2012
67 / 68
Interest Rates and Housing Prices: International Data

House Prices, 2002, Q1=100 200 France 180 160 UK 140 US 120 100 Ofcal Bank Rate (UK) 4 Main Re. Rate (ECB) Fed Funds Rate 2002 2003 2004 2005 2006 2007 2008 2009 2 0 Rate in %
April 19, 2012
Ireland
Foote (Ec 1010b)
68 / 68

1010b 20b Causes of Financial Crisis

Uploaded by

Copyright:

Available Formats

You might also like

1010b 20b Causes of Financial Crisis

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

1010b 20b Causes of Financial Crisis

Uploaded by

Copyright:

Available Formats

Chapter 20: The Financial System: Opportunities and Dangers

Part B: Causes of the Financial Crisis Prof. Chris Foote

April 19, 2012

Foote (Ec 1010b)

Financial System: Part B

April 19, 2012

Financial Crises (Section 20-2): Anatomy of a Crisis

The Proximate Cause of the Crisis: Falling House Prices

The Role of The Fed in the Housing Cycle (time permitting)

Foote (Ec 1010b)

Financial System: Part B

April 19, 2012

Financial Crises (Section 20-2): Anatomy of a Crisis

Mankiws Six Elements of a Financial Crisis

Foote (Ec 1010b)

Financial System: Part B

April 19, 2012

Financial Crises (Section 20-2): Anatomy of a Crisis

Foote (Ec 1010b)

Financial System: Part B

April 19, 2012

Financial Crises (Section 20-2): Anatomy of a Crisis

Asymmetric Information and Falling Condence

Foote (Ec 1010b)

Financial System: Part B

April 19, 2012

Financial Crises (Section 20-2): Anatomy of a Crisis

Foote (Ec 1010b)

Financial System: Part B

April 19, 2012

Financial Crises (Section 20-2): Anatomy of a Crisis

The TED Spread

Foote (Ec 1010b)

Financial System: Part B

April 19, 2012

Financial Crises (Section 20-2): Anatomy of a Crisis

Corporate Bond Yields and Spread

Foote (Ec 1010b)

Financial System: Part B

April 19, 2012

Financial Crises (Section 20-2): Anatomy of a Crisis

Knock-on Effects on Asset Markets

Foote (Ec 1010b)

Financial System: Part B

April 19, 2012

Financial Crises (Section 20-2): Anatomy of a Crisis

Percent 1000 1200

Foote (Ec 1010b)

Financial System: Part B

April 19, 2012

The Proximate Cause of the Crisis: Falling House Prices

The Housing Cycle

Foote (Ec 1010b)

Financial System: Part B

April 19, 2012

The Proximate Cause of the Crisis: Falling House Prices

A Long-History of Housing Prices

Foote (Ec 1010b)

Financial System: Part B