Causes and Dynamics of the Global Financial Crisis
10 important questions on Causes and Dynamics of the Global Financial Crisis
Name a couple old bubles, manias, and crashes:
- Dutch Tulipmania (1637)
- South Sea Bubble (1710-1720)
- Great crash 1929
- Japan boom bust
- etc
Name the six stages of the financial crises:
- July 2007-March 2008 ( From subprime to Bear sterns)
- March-mid-september 2008 ( Liquidity or solvency crisis)
- September-oktober 2008 ( Lehman and the collapse of confidence)
- November 2008-march 2008 (Markets adjust to uncertainty
- March-December 2009 (Cautions optimism)
- 2010 - Recent ( The sovereign euro debt crisis)
Explain what happend in stage 1: From subprime to Bear sterns (july "07 - march "08)
- Concerns over losses on US subprime mortgage loans escalate into widespread financial distress. (1) Problem of small part US financial system spreads widely because of complex linkages credit and funding markets. (2) USS subprime market --> interbank market --> liquidity shortage at investment bank (bear sterns) --> derivatives market suffer.
- Financial system left badly weakened
- But Robust economic growth
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Explain what happend in stage 2: Liquidity or solvency crisis? " march -mid-sep "08
- Economic outlook deteriorates
- Interbank markets under stress
- Increasing concerns over banks capital positions
- Pressure on US housing GSEs leads to bailout
Explain what happend in stage 3: The crisis of overconfidence ( Sept-Oct "08)
- Lehman failure --> counterparty risk soars. AIG
- Investors run on money market funds
- Turmoil quickly spreads trough global financial system
- Initial policy reactions
- Coordinated policy reactions
- Actions by central banks ( suspension of trading, guarantees, liquidity injections, capital injections/nationalisation's)
Explain what happend during stage 4: Markets adjust to uncertainty (end-oct "08 - mid march "09)
- Recession fears
- Asset prices fall
- Inflation expectations decline
- Trade falls
- More evidence of weakness in the financial sector
Explain what happend during stage 5: Cautious optimism "march-dec "09
- Signs that markets are starting to show some optimism in the face of "green shoots" in the real economy (helped by the continuing policy intervention)
- Improving but still largely negative financial news
- Normalisation (the end of the crisis) still appears way off
Explain what happend during stage 6: The sovereign debt crisis in Europe
- Recovery led by financial markets, threatened by concerns about the sustainability of public finances and bank health
- Leads to an increase of financial market volatility
- Large cross-country divergences
- Fragile recovery in major advanced economies and signs of overheating in large EMEs
- Build-up of government debt and slowing growth fuel concerns about sovereign risk
- European sovereign debt markets under stress
- Spillover to the banking sector, which remains fragile:"the diabolic loop"
- Financial markets in the euro area have become fragmented
- Monetary policy provides stimulus while fiscal policy tightens
What are were the triggers of the crisis?
-subprime mortgages and the US housing market
-Lehman Brothers
-Iceland
-Greece
Near misses or failed triggers:
- enron scandal
- currency crash Iceland
-currency markets hit by unwiring of carry trades
The prices of many financial assets were unusually high for an extended period before the crisis. Name four examples
- Risk spreads on other sovereign debt, high-yield corporate bonds and other risky assets fell to record low levels
- Equity prices rallied
- Real estate prices at record levels
- Cost of insurance very low
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