Class notes
EC104 notes: Americas since 2001
- Course
- Institution
Revision notes with content from lectures and seminars for EC104 topic 19: the Americas since 2001
[Show more]
Seller
Follow
bethwalton03
Reviews received
Content preview
The Americas since 2001The Great Recession in the US
Changing financial intermediation
● Adrian and Shin (2010) - post-1980s, securitisation transformed the US
mortgage market
○ A bank sells mortgages into a “mortgage pool” - a passive firm holding
securities
○ The mortgages are repackaged into mortgage-backed securities
■ Liabilities are issued against the mortgage assets
○ MBSs are owned by a company that issues asset-backed securities
(CDOs)
○ A securities firm (investment bank) buys the ABSs
■ Finances the purchase via a repurchase agreement with a larger
commercial bank - supposed to be SR and relatively safe
○ Commercial banks finance the repurchase agreement by issuing
commercial paper
■ Bought by money-market mutual funds (e.g. for retirement)
○ Households then own shares of these funds
● By 2007, mortgage pools and government-sponsored enterprises held more
assets than banks e.g. the Federal National Mortgage Association
Phase 1 - the subprime mortgage crisis
● Mishkin (2011) - US house prices peaked in 2005 and MBSs experienced
losses
○ Buyers could walk away from mortgages
○ Subprime - paying higher than prime mortgage rates
■ “Teaser” rates for the first few years ended
● 07/08/07 - BNP Paribas suspends redemption of some shares in its money
market funds
● 2007/8 - runs on financial institutions, starting with money market funds
● The value of MBSs fell and the “haircut” demanded rose as high as 50%
○ Haircut - when borrowers have collateral worth more than the loan
○ Caused a “fire sale” dynamic - selling assets to generate the collateral
which decreases the value of assets further
● 03/08 - Bear Stearns collapses
○ The Fed brokers a deal for JPM to buy Bear and takes on $30 billion of
its toxic assets
● Forecasters think the worst is over - subprime mortgages were only a small
part of capital markets
○ Losses seemed manageable
, Phase 2 - the Global Financial Crisis
● Mishkin (2011) - 15/09/08 - Lehman Brothers filed for bankruptcy
○ Treasury and Fed let Lehman fail (moral hazard)
● American International Group (AIG) had written over $400 billion in credit
default swaps (insurance contracts paying out when MBSs suffer losses)
○ 16/09/08 - the Fed pays $85 billion to keep AIG afloat
● 16/09/08 - run on the Reserve Primary Fund (money market fund holding
$785 billion of Lehman paper)
○ Causes a run on other money market funds
● US GDP declined at an annualised rate of 6.4% in Q1 2009
○ UE reached 10% by 10/09
● The real economy was affected because:
○ Credit spreads rose
■ If the Fed cut interest for Treasury bonds, interest rates faced by
households / businesses rise
○ Declining asset prices reduced the value of collateral
■ Reduced access to credit for non-financial firms (credit crunch)
○ Greater uncertainty increased asymmetric information and decreased
access to credit
Who suffered?
● Hoynes et al (2012) - median family income fell by 6% (2007-10)
○ Poverty rose from 12.5% to 15.1%
● Largest impacts for men, black/Hispanic workers, youth and low-education
workers
○ Due to the variation in cyclicality across industries
● Construction and manufacturing are more cyclical than services
○ Similar pattern to previous business cycles but larger and longer
■ Deeper trough in 2008
China and the US economy
China’s rise
● Autor et al (2016) - Wall Street Journal predicts Bangladesh, Thailand and
Zimbabwe will be growth leaders in the next 25 years - China would lag
● Chinese hardliners re-established control over economic policy
○ Exports took off
○ Deng’s 1992 “Southern tour” highlighted SEZ success
■ Expanded from 20 to 150 (1991-2010)
● China has an advantage in industrial goods
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller bethwalton03. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $3.93. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
57114 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now