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The Financial Meltdown, 2/1/09
Overview:
The U.S. Economy is experiencing one of the most profound structural changes in history. From the housing debacle to the credit crisis, the impact has been felt in just about every corner of the world. Join Active Minds as we seek to understand how we got here and where we are headed. We will explain the origins of the current situation and examine the proposed remedies of the new Obama administration.
Key Lecture Points:
• The early 2000s were a period of unprecedented growth in the American financial services and housing sectors. Related to the growth was the lack of regulation of these burgeoning markets which fed upon each other, creating what many commentators called the Housing Bubble and the Banking Bubble. Using sophisticated investment tools like Collateralized Debt Obligations, which relied upon mortgages, major banks increased their profits significantly. The demand for mortgages provided easier access to credit for many who could not otherwise have afforded homeownership. Unfortunately, this also led to ever greater amounts of debt both in the banking and housing sectors, at the institutional and individual level.
• Home prices began to decline in the middle of 2006, with a national decline of 18% from Oct. 2007 to Oct. 2008. Associated with this phenomenon was the fact that many loans that had been taken out to support the housing boom began to adjust upward in a way that triggered increased default rates which, in turn, began to affect the value of the investment tools which banks had created based upon mortgages. As the value of those investments declined, the major banks began to see their credit faltering.
• In September of 2008, credit markets stopped working, after a year of building turmoil. This caused Congress to pass a $700 Billion bailout package for the financial industry. The failure of the credit markets has affected all types of businesses, as availability to obtain capital is essential for day to day operations.
• In November 2008, the National Bureau of Economic Research declared that the US economy has been in recession since December 2007 (note: traditional definition of recession is 2 or more quarters of declining GDP, but NBER looks at a much broader set of data). Stock markets in the US have dropped about 40% off their peaks in late 2007. Markets in developing countries (Russia, China) have fallen even more.
• Since taking over in January 2009, the Obama administration and the 111th Congress have prioritized passing legislation that focuses on supporting the banking sector, in the name of getting credit flowing again. On February 17, 2009 (in Denver) President Obama signed into law a $787 billion stimulus bill. In addition, new Secretary of the Treasury Timothy Geithner has proposed using the remaining $350 Billion from the TARP funds as well as additional public funds to encourage private investment in the “Toxic Assets” that are at the root of the problem.
Exploration Questions:
• The Financial meltdown has so many contributing factors. What are the reasons which you think most explain why things have gone wrong.
• President Obama faces immense challenges to address the spiraling crisis. What actions do you think he should advocate going forward. Explain your reasoning.
• Is doing nothing an option that is ferasible, in your opinion. Explain your reasoning.
Reflective Questions:
• Do you have any memories of the Great Depression or another economic downturn? Describe what life was like for you and your family.
• There have been many movies that depict life in an economic downturn. What was your favorite? Why?
• Are there any “silver linings” to an economic crisis? What, if any, are they?
More to Explore:
• New York Times Coverage of US Economy: http://topics.nytimes.com
• The Economist Magazine Coverage: www.economist.com
Books For Further Reading:
• Bernanke, Ben S. Essays on the Great Depression. Princeton University Press, 2004. 320 pages. Bernanke argues that while the Great Depression was an unparalleled disaster, some economies pulled up faster than others, and some made an opportunity out of it. By comparing and contrasting the economic strategies and statistics of the world's nations as they struggled to survive economically, the fundamental lessons of macroeconomics stand out in bold relief against a background of immense human suffering. The essays in this volume present a uniquely coherent view of the economic causes and worldwide propagation of the depression. Click here to order.
• Morris, Charles R. The Trillion Dollar Meltdown. PublicAffairs, 2008. 194 pages. According to Morris, the astronomical leverage at investment banks and their hedge fund and private equity clients virtually guarantees massive disruption in global markets. The crash, when it comes, will have no firebreaks. A quarter century of free-market zealotry that extolled asset stripping, abusive lending, and hedge fund secrecy will come crashing down with it. Click here to order.
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