Download The crisis

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 noninflationary / 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
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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?
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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
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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.