EC250 Lecture 3: The Great Recession
Document Summary
1. 1 lehman brothers went into liquidation: bad investments in real estate, deteriorating assets led to bankruptcy. March 2008 - fed arranged for jp morgan to buy bear sterns. Feds were concerned that they would have to save more failing investment banks which would lead to moral hazards: largest bankruptcy: billion in assets. Feds then bailed out aig a few days later (3 times bigger: decided risk was too big to let aig fail. 1. 2 credit panic: tangled web of financial obligations between financial institutions. Creditworthiness of potential borrowers difficult to asses. Banking system froze difficult to obtain credit: lead to recession two consecutive quarters of falling output. Most economic activities require credit, without credit: decline in investment, consumption, rise in unemployment. 1. 3 the policy response: recession not as bad. Main monetary policy: reduce short-term nominal interest rates. Central bank has direct control of those rates.
