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The Great Recession

The Great Recession. “…the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages;

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The Great Recession

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  1. The Great Recession “…the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels." Financial Crisis Inquiry Commission (FCIC) report

  2. Regulatory Negligence Moves in the Economy Financial Innovation The Spark The Government Response Political Response Financial Crisis Basics

  3. Regulatory Negligence Deregulation 1999 Repeal of the Glass-Steagall Act Allowance of shadow banking Low interest rates Fannie Mae and Freddie Mac Appointing lobbyists to regulatory positions Credit Rating Bureaus Financial Crisis Basics

  4. Moves in the Economy Stagnant Middle Class incomes Two income families Increase in housing prices Easy credit Low savings rate Huge debt Tech Bubble burst in 2000 hurt stocks Move to real estate investment Sub-Prime Loans ARM Loans Housing Bubble burst in 2007 Financial Crisis Basics

  5. Financial Innovation Banks selling loans Mortgage-Backed Securities (MBS) Collateralized Debt Obligations (CDO) Credit Default Swaps (CDS) Changes in corporate governance (stock options) Massive corporate debt changes (off-balance sheet) Rise of Shadow Banking (unregulated banking-like activity) http://www.youtube.com/watch?v=bx_LWm6_6tA Financial Crisis Basics

  6. The Spark Bear Stearns saved Lehman Brothers allowed to fail AIG saved Freezing of credit Fannie and Freddie backed Commodities price spike Stock Market plunge Financial Crisis Basics “Too big to fail”

  7. The Government Response Troubled Asset Relief Program (TARP) Fed Loans Stimulus (Demand-Siders) Dodd-Frank Henry Paulson [Sec. of Treas] Goldman Sachs Timothy Geithner [Sec. of Treas.] Goldman Sachs Paul Volcker [Chair of Econ. Adv.] Ben Bernanke [Fed. Chair] Financial Crisis Basics

  8. Political Response Tea Party Supply-Siders Goldman Sachs and Wall Street “[We] do God’s Work.” Liberal Criticisms (Paul Krugman) Financial Crisis Basics

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