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– 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 slowIrresponsible investment banks collapseBanks stop lending to each otherEconomy 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?