1. GLOBALIZATION LESSON 3 GLOBAL FINANCIAL CRISIS

2. OBJECTIVES Review events leading up to financial crisis that struck the US in 2008. Explore the reverberations of said crisis on Europe and the global economy. Identify if we have learned any lessons in the past 5 years.

3. WARM UP What have we learned about globalization so far? Cultural, economic, political? Effects on people? Benefits? Downsides?

4. SUBPRIME MORTGAGE CRISIS Global Pool of Money World’s total investments Doubled 2000 ($35t) – 2006 ($70t) b/c BRICS Invested in US housing market via Mortgage-Backed Securities (MBS). Investments insured via Credit Default Swaps (CDS).CDS US Housing Bubble Bursts Speculative – drove up prices, artificial values Extended mortgages to subprime borrowers ARM’s, NINA loans Bubble bursts 06-07 – Values fall, ppl underwater or default on loan payments, banks see cash flow dry up, investors withdraw $

5. SUBPRIME MORTGAGE CRISIS Collapse US Economy Major US investment banks (Lehman Bros, Bear Sterns) assume massive losses, declare bankruptcy. AIG taken over by US govt. Fed Reserve (TARP) & EU inject billions Decline in production = loss of jobs = decline in spending Global Effects Banks unwilling to lend, economies slow as credit tightened Internatl trade declines (decline US imports = decline global GDP = decline US exports = decline US GDP…) Drop in US demand hurts rising economies Stock values all over world drop w/loss confidence Low interest rates = weaker $ = less profit trade partners Too Big To Fail Explains It All

6. LESSONS LEARNED? Dodd-Frank reforms not enacted Big Banks Bigger No prosecutionprosecution Wall St Recovery, Main St Struggles Debt Persists Debt Ceiling Crisis

7. EUROZONE EU (28) European Commission Eurozone Same currency (euro) European Central Bank (monetary policy) Separate national fiscal policies (budgets)

8. EUROZONE DEBT CRISIS When: Late 2009 Why: Government Debts, Banking & Housing Crisis (similar to US – pool & securitize investments) & Slow, Uneven Economic Growth Where: PIIGS and others Who’s In Charge: European Commission, European Central Bank, IMF Relief: Bailout, Loans, Lower Interest Rates, Austerity Budgets Consequences: Economic & Political Changes, Social Upheaval

9. ACTIVITY “Read” Interactive Charts on NY Times.com “It’s All Connected: An Overview of the Euro Crisis” http://www.nytimes.com/interact ive/2011/10/23/sunday- review/an-overview-of-the-euro- crisis.htmlhttp://www.nytimes.com/interact ive/2011/10/23/sunday- review/an-overview-of-the-euro- crisis.html and “Datapoints: It’s All Connected: A Spectator’s Guide to the Euro Crisis” http://www.nytimes.com/imagep ages/2011/10/22/opinion/201110 23_DATAPOINTS.html?ref=sunday- review Identify and define any terms with which you are unfamiliar! I know there will be some! WHO called the euro zone “the ultimate contagion machine”? WHAT are the major components of the debt crisis in Europe? WHAT does “debt exposure” mean? WHERE in Europe and around the world is the crisis having impact? WHEN was the euro established as a form of currency? WHY might rising borrowing costs, runs on banks and other financial troubles happen in certain European countries? HOW much do borrowers in various European countries owe to banks of other nations?