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The crisis

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					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 non-
  inflationary / 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.

				
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posted:7/26/2011
language:English
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