1. DO THIS NOW… Sit in assigned groups
Then, take out your homework reading, questions, and answers
As a group, compare your answered to the questions
Make sure everybody agrees on the answers
Resolve any differences
You have five minutes

2. Does the implementation of government financial regulations do more to help or hurt the economy?

3. What is the “Great Recession?”
Decline of speculative markets in 2007
Bursting of the real estate bubble
Decline in credit, even with cheap money
Decline in circulating money
Drop in production & job losses
High unemployment
Low growth & growing government debts

4. Let’s go back to the beginning
Consumption in the U.S. has been subsidized by low-cost imports from China
Wages had more buying power & hardly grew
In 2000, Fed lowered interest rates
This made loans cheap
Cheap money seeks to earn high returns
Real estate looked good

5. Economy grows via increases in consumption of goods & services
Real estate became focus of investment & cheap loans
Low interest rates & high growth in housing prices
Homeowners could take out cheap loans to consume
Speculators could realize high returns from flipping houses

6. Mortgages used to be held by lenders
Home buyer went to bank to borrow funds
Bank held a lien on the house to secure loan
Mortgage owned by bank
But bank can only loan out 10x its deposits
If it can sell mortgage, it gets new money to loan
And it can further leverage its assets

7. When money is cheap, highly-secure mortgages don’t return much
But they can return more if they are high-risk
Sub-prime mortgages
Lenders can borrow low and sell high (8-10%)
To mitigate risk, they bundle them with low-risk mortgages
These packages are sold to investors as CDOs
“Collateralized Debt Obligations”

8. This is how a CDO works…

9. So investors, speculators, pension funds, hedge funds, banks, etc
So investors, speculators, pension funds, hedge funds, banks, etc. bought CDOs
The market in CDOs took off and their prices rose
Each CDO is made of layers of low- & high risk mortgages
Combined return can be high
But what happens if the high risk mortgages go bad?
No one wants to buy them—so their “real” value is uncertain
If there is no market, there is no price
As assets, CDOs suddenly become worthless
Banks don’t know how much money they have

10. The Great Recession is the result of a sudden collapse in the global money supply
The “real” economy was supported by cheap money
Speculative economy took up excess money supply
Inflation & interest rates were low
When securities markets froze up, paper had no clear value
This made financial actors insolvent
Money stopped moving

11. What happens next? Speculators continue to look for places to invest
Investment in such markets does not create jobs
Governments (UK) seek ways to reduce budget deficits
They lay off large numbers of employees
Consumption & wages are stagnant, so little growth
Prices could begin to decline: deflation
Even less consumer spending
What is to be done?

12. Exhibit 1: House Price Change
Housing prices were relatively stable during the 1990s, but they began to rise toward the end of the decade.
Between January 2002 and mid-year 2006, housing prices increased by a whopping 87 percent.
The boom had turned to a bust, and the housing price declines continued throughout 2007 and 2008.
By the third quarter of 2008, housing prices were approximately 25 percent below their 2006 peak.
Annual Existing House Price Change
Source: S and P Case-Schiller Housing Price Index.
rev200902
The Economic Crisis of 2008: Cause and Aftermath

13. Exhibit 2a: The Default Rate
The default rate fluctuated, within a narrow range, around 2 percent prior to 2006.
It increased only slightly during the recessions of 1982, 1990, and
The rate began increasing sharply during the second half of 2006
It reached 5.2 percent during the third quarter of 2008.
Default Rate
Source: mbaa.org, National Delinquency Survey.
rev200902
The Economic Crisis of 2008: Cause and Aftermath

14. Exhibit 2b: Foreclosure Rate
Housing prices were relatively stable during the 1990s, but they began to rise toward the end of the decade.
Between January 2002 and mid-year 2006, housing prices increased by a whopping 87 percent.
The boom had turned to a bust, and the housing price declines continued throughout 2007 and 2008.
By the third quarter of 2008, housing prices were approximately 25 percent below their 2006 peak.
Foreclosure Rate
Source: National Delinquency Survey.
rev200902
The Economic Crisis of 2008: Cause and Aftermath

15. Exhibit 3: Stock Market Returns
As of mid-December of 2008, stock returns were down by 37 percent since the beginning of the year.
This is nearly twice the magnitude of any year since 1950.
This collapse eroded the wealth and endangered the retirement savings of many Americans.
S and P 500 Total Return
Source:
rev200902
The Economic Crisis of 2008: Cause and Aftermath

16. Does the implementation of government financial regulations do more to help or hurt the economy?

17. Question Creation
Your group will be provided with a brief definition and defining purpose of the concept discussed in the article you DID NOT read
Then, your group will be provided with the question matrix
You will create as many questions as your can about the concept using the question matrix
Each person needs to create his or her own questions
Leave room under each question for answers
You have 15 minutes

18. Refining Questions Look through your questions
Identify the ones that can realistically be answered and circle them
You have 5 minutes

19. Interview Panels Form new assigned groups
Using your questions interview the other team about the concept you did not read about
Experts – answer the questions of the interviewers
Interviewers – write answers to your questions and ask probing questions is something is unclear
Switch roles when finished asking questions
You have 20 minutes – about 10 minutes for each side to conduct an interview
If you finish early, debate whether or not you think the government should make use of financial regulations

20. Should the U.S. government institute financial regulations?
Discussion
Should the U.S. government institute financial regulations?

21. Arguments for Financial Regulations
Creates stability in financial sector
Prevents risk taking behavior in economic matters
Protects consumer money
Provides more accurate reading of health of economy
Limits bad loans
Limits social costs

22. Arguments Against Financial Regulations
Makes it harder for businesses to grow and compete
Makes things less efficient
Leads to increase in expenses
Expenses are usually passed off on to consumers
Can make it more difficult for earnings to grow

23. Remainder of class to complete reflection journal

24. Finish journal entry if you did not do so in class
Reminders
Finish journal entry if you did not do so in class 
Have a great weekend