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32 Cards in this Set
- Front
- Back
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Who caused the Crisis?
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Homebuyers (Bad Loans/Greed)
Lenders (Mortgage Originators) Predatory, Sold away risk Federal Reserve (Interest Rates too Low) Fannie and Freddie (Bought MBS's, encouraged home ownership) Credit Rating Agencies (Conflict of Interest!) FDIC Investment and Commercial Banks |
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Why buy a house?
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Can be cheaper than renting, ownership value, tax benefits etc. BUT YOU MIGHT SELL IT FOR A PROFIT! (GREED)
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What was incentive to buy a house?
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Prices on houses kept rising and borrowing costs fell
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Why did loans go bad?
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A lot of people who shouldn't have gotten the loans they had did, and they had little paid down they had little invested. The banks sold off their assets so had little reason to care about creditworthiness of borrowers
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What did Federal Reserve do to cause it?
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They had low interest rates for a long time (Greenspan)
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What did Freddie and Fannie do?
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They facilitated home ownership by buying loans and MBS's, . These securities had implicit guarantee of US Govt.
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The Credit Rating Agencies
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Most to blame (Teacher). They would assess the creditworthiness of an MBS as high as possible, they had a huge conflict of interest, being paid by those they assess.
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What about the FDIC?
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They prevent runs on banks.
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Who took losses on the loans they had, and their instability caused widespread fear in the financial markets?
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The investment banks, they began taking huge losses. There were many mergers.
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What did the Govt do?
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Fed Funds Rate lowered to .25%. The Fed took steps to facilitate credit. And the Treasury made large banks take TARP money. Businesses need access to credit.
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What next?
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Should huge "Too big to fail" banks be broken up? Or should their be better processes in place to manage a crisis? Dodd Frank seems to do the latter.
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A measure of money supply in an economy
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MONETARY AGGREGATE
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Currency, transaction accounts, traveler's checks
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M1
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M2
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M1 + Savings deposits, small denomination CD's, MMMF's.
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Demand for Money
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The quantity of Assets (cash and checking accounts) that people hold.
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What does Higher Price Level's do?
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Creates greater demand for money. There needs to be more money to make transaction's.
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What does Higher Real Income cause?
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A greater demand for money. More income means more transactions, more demand for liquidity.
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What does Higher Interest Rate on money do?
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Causes a greater demand for money.
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What causes less demand for money?
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A higher interest rate on bonds and other securities.
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Md = P x L (Y, i)
Md/P = L (Y, r + piE) |
Money demand Function. P is price, Y is income (Output) and i is the nominal interest rate on non monetary assets.
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What is the nominal interest rate?
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real interest rate + inflation
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What is the demand for real balances called?
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Md/P
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What causes the asset market to be in equilibrium?
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When Ms/P = L (Y, r + piE)
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What is the equilibrium condition for money?
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REAL MONEY SUPPLY = REAL MONEY DEMAND
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Growth Rate Form. What does Growth Rate Prices equal?
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Growth Rate Nominal Money Supply - Growth Rate Real Money Demand
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How does the money supply change
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The Fed conducts open market operations
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What increases the money supply and what does it cause?
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The Fed buys bonds, putting cash into the markets, and the real interest rates fall.
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Decreasing the money supply?
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The Fed sells some of these bonds, decreasing the supply, and real interest rate rises
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Describe the Money Supply and Demand Graph
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The real interest rate is on Y, demand for real balances on X. Md/P is this it slopes down and the Ms/P is vertical line intersecting this. The Fed keeps this rate within small parameters on graph.
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What causes money demand to fall.
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An increase in the real interest rate. This makes people want to switch to other assets, not money.
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What causes Income to rise less than proportionally?
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An increase in Real Income, Y. This implies more transactions, more demand for liquidity.
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What does an increase in Price Level do?
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Causes Money demand to rise proportionally. Doubling it doubles the number of dollars needed for transactions.
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