1. Credit and Liquidity: Cause and Resolution of the 2008 Financial Crisis John Cappellucci, John Piirainen, Rodolfo Rosas Ben Ashton

2. Conditions Before the Crisis: Interest Rates 2000-2003: Federal Reserve lowers federal funds rate from 6.5% to 1.0% Further downward pressure on interest rates due to U.S. rising deficit

3. Conditions Before the Crisis: Lending Sub-prime loans rise to $1.3 trillion in 2007 Predatory lending involving mortgages

4. Housing and Credit Bubbles Substantial inflow of foreign funds Already low interest rates Consumers face easy credit conditions and are able to take on significant debt

5. Road to Financial Collapse Housing Bubble Bursts (housing prices decline) Inability to Refinance Mortgage Banks Collapse (debt from mortgages) Loss of Solvency and Liquidity Financial Crisis!

6. Spread to the EU Loss in consumer confidence Similar housing bubbles lead to large public debt and further risk in financial markets

7. Bailout, Stimulus, and Precautionary Regulations President Obama’s stimulus package Eurosystem/ European Central Bank Response

8. Bibliography Slide 1 http://www.nytimes.com/2011/01/26/business/economy/26inquiry.html?_r=2&scp=1&sq=financial%20crisis%20was%2 0avoidable,%20inquiry%20finds&st=cse Slide 2 http://www.federalreserve.gov/newsevents/speech/bernanke20090414a.htm Slide 3 http://online.wsj.com/article/SB119845906460548071.html?mod=googlenews_wsj Slide 4 http://online.wsj.com/article/SB119845906460548071.html?mod=googlenews_wsj Slide 5 http://www.matissecapitalmanagement.com/.a/6a00d83452bb8769e20147e0314980970b-550wi Slide 6 http://www.telegraph.co.uk/finance/financetopics/financialcrisis/8144558/European-Central-Bank-tightens-screw-on- Ireland-Portugal-and-Spain.html The ECB's response to the crisis, Statement by Jean-Claude Trichet, President of the ECB at the European American Press Club Paris, 20 February 2009