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SEOWON KIM, JUNGMIN CHAE

GOVERNMENT cannot finance its
regular activities, including providing
social services, paying for defense, and
managing other government functions

Asset price bubble’s collapse
Cozy relation between bank and
corporates
Increase inter-bank lending rate
Burst of bubbles & Collapse in
Japanese stock market
US Plaza Agreement
Strong Yen
Decline in export
GDP is not growing like before
GDP deflator declining
Monetary
policy
• Quantitative easing
• Open-ended asset purchasing
and buying long-dated bonds
Fiscal
policy
• Fiscal stimulus
• Public spending on infrastructure
and renewable energy
Structure
reform
• Regulatory reform
• Creating economic partnerships
with other countries

Giving loans to people who have difficulty in
maintaining the repayment schedule

Characterized by
- higher interest rates
- poor quality collateral
- less favorable terms
in order to compensate for higher credit risk
Lending decision
by Financial
institution
Housing
Bubble
formation
Borrowing
decision by
individuals
1
• Low interest rates, high house prices
• Relaxation in lending regulations
• Poor creditworthiness of borrowers
2
• Interest rates moved up
• Borrowers unable to pay
3
• The house bubble popped
• Failure of banks and financial institutions
Financial Institutions – Bankruptcy







New Century Financial (USA) – 2.4.2007
American Home Mortgage (USA) – 6.8.2007
Sentinel management Group (USA) – 17.8.2007
Ameriquest (USA) – 31.8.2007
NetBank (USA) – 30.9.2007
Terra Securities (Norway) – 28.11.2007
American Freedom Mortgage Inc. (USA) – 30.1.2007
Immediate Effects – US index
 Slowdown in GDP
 Consumer confidence lowest since 1978
- October 2008 consumer sentiment index :
57.5 from 70.3 in September
 Construction activity much worse
- New constructions starts are 40% less than 2007
 The unemployment rate rose from 5% in 2008 precrisis to 10% by late 2009
1)
Federal Reserve and central bank
“Broadly, the Federal Reserve's response followed two tracks:
efforts to support market liquidity and functioning and the pursuit
of our macroeconomic objectives through monetary policy.”
- Ben Bernanke (Federal Reserve Chairman), 2008
2)
Economic Stimulus
- On 13 February 2008, President George W. Bush signed into law
a $168 billion economic stimulus package
- On 17 February 2009, U.S. President Barack Obama signed
the American Recovery and Reinvestment Act of 2009, an $787
billion stimulus package with a broad spectrum of spending and
tax cuts