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Notes from the 2008 Financial Crisis Video.docx

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University of British Columbia
ECON 255
Ashok Kotwal

ECON 255: Notes from “Overdose: The Next Financial Crisis” − Affecting: Home loan, saving, stocks, bonds − Method used didn’t solve the problem  “Alcohol given to the drunk”: the solution used only exacerbates the problem − Bailing out the Auto Workers  also hints the failure of Congress to give a proper response  seeking someone to blame  possible politically motivated strategy − Dangers of protecting consumers [2001 – 2007] − Gerald Celente: September 11, 2001  the date marked the fall of the WTC, which is the symbol of the economy of the United States  coincide with the Dot Com bubble where the US was facing recession − Spring 2001: Federal Reserve lowered the interest rate  continued doing so to: 1) lower unemployment, 2) to save companies at the brink (of bankruptcy)  2001 interest rate: 6.5% to 1.75%  2003: 1% and remained for a while − Alan Greenspan: low interest rate may cause a bubble (It’s Party Time)  when the Party’s over, the Central Bank will remove the low interest rate and the low interest rate can’t remain low for too long as it will lead to unwanted consequences  BUT: Greenspan argued that the Fed should never remove the low interest rate, but keep refilling when the impact of the low interest rate is starting to slow down, the mess will be handled by the Fed  this part is most loved by banks and speculators  so, with this thinking, they take greater risk because if they win, they make profit but if they lose, the Fed will rescue them − Peter Schiff: Fed Alcohol - Americans spend and borrow in a large amount to buy stuffs − Vernon Smith (Bubble Expert) – “If you can buy a home with almost nothing down, then you’ll do well if the prices continue to go up”… and he said something about let the Bank do something about it − Housing Bubble: caused by the low interest rate  cheap loan causes people to buy more and own bigger home  housing price increased by 10% a year, so, many took out mortgage on the old house to fund consumption − Home Equity Loan: the Bank granted loan to almost anyone  doesn’t need strong income etc  NINA loans: No Income No Assets, No Problem. You’ll Get a Loan − Legislation: push lenders to easily lend to the people, even to low income people: 80% of the median income or below  Politically: the left and the right wing encourage home ownership  Method of encouragement: deduction, subsidies, insurances AND create 2 huge mortgage finance companies:1) Fannie Mae and 2) Freddie Mac  Main Functions: Insure loans for those who can’t get those loans in the open markets  − Robert Order: GSE means they are private companies with special charters from the governments  this creates an impression that their transactions are guaranteed by the government  another initiative of GSE is Federal Home Loan banks  others: FreddieMac and FannieMae have donated millions of money to the politicians a.k.a Enterprise Sponsored Governments  − Robert Order: regulatory for GSE is not “that bad” but the regulatory was compromised − Peter Schiff: Moral Hazard #1  when government started to guarantee the 2 mortgages, then lenders won’t have to feel insecure about not getting back their money because the gov assures that they will def get their money back − Vernon Smith: “Greed has to be balanced with a certain amount of fear”  getting rich by reselling home and buying it at a higher price  the barrier to homeownership is payment for the downpayment − Peter Schiff: Moral Hazard #2  when the gov assures the people that the gov will lift the down payment  you’re telling the borrowers that there is no risk to borrowing money  the person will not care if the price of the house goes up because the person will continue on making money but if the price falls, bank loses money  Government: guarantees the deposit in the bank and when this happens, people won’t care what actually happened to their deposits − Peter Schiff: “Why can’t we let mortgages be financed in a private sector?”  Reason: private financial companies won’t finance this kind of mortgages and real estate prices will have to come down to the levels that people can actually − Big banks make riskier loans: by making stock repackaging loans and sell them to others as securities  Big banks sell the securities to: 1) each other, 2) FreddieMac and FannieMae and 3) Norway, Germany, China  if the loan turns out bad, someone else will have to face consequences  High Rating: high rating given by rating companies cause people to want to buy the securities. Reason: it offers huge return at 0 risk  Factors leading to high rate: 1) assumption that the price of houses will continue to increase, 2) high rating given by the rating company (there’s money factor involved) − Peter Schiff: the process was corrupted  Description: the gov licenses rating agencies like Moody’s. The market of rating agency wasn’t that free market.  Wall Street was paying these rating agencies to rate the products that they structured  Market on Steroid: loans were cheap enough to stimulate the housing market  2006: the interest rate returned to its normal rate and bad things ensued except for Ben Bernanke (the next Fed Chairperson after Alan Greenspan)  bad things happened because people cant make loans to pay the old ones and those who’d been given mortgages couldn’t afford to stay (due to the increasingly high interest rate)  the price of mortgages decreasing, causing the __________ worthless (17:00) − [Something happened here. Too sleepy to listen at that time] − The US inflated a new bubble and hence creating a much larger bubble [2008 – 2009] − Dot Com Bubble burst  created another bubble through real estate market which also bursts  then created: the bubble of all bubbles which is the Global Bubble /the Bailout Bubble. No worries, there’s stimulus packages to help us out. Australia can ask for help from the UK to US etc − Sept. 2008: US economy nearly collapses, FannieMae and FreddieMac were taken over by the US gov, the Lehman Bros collapses after a monumental bet on real estate, AIG (the largest insurance company) collapsed the next day  fear sets in as it is obvious that anyone is not coll
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