1. Phase 1 - 2008 in the US March Bear Sterns bought by J. P. Morgan September Merril Lynch sold to Bank of America Fannie Maedifficulties with 5 trn USD mortages Freddie Mac September 15Lehman Brothers goes for Chapter 11 October TARP Troubled Assets Relief Program, 700 bn USD

2. Phase 2 –In Europe: late 2009 september 2012 Remember: ECB established 1 June 1998 Euro 1 January 1999, notes in 2002 17 countries + Kosovo and Montenegro 2009-2010 Increase in D/Y in all the world Large asymmetries among euro-zone economies some countries with very high D/Y and Current Account Deficits May 2010 August 2011 ECB buys sovereign bonds February 2012

3. Phase 2 –In Europe: how much? 9 may 2010 European Financial Stability Facility-EFSF has the possibility to issue bonds and raise money, limit 440 bn 10 may 2010 European Financial Stabilisation Mechanism- EFSM EU countries confer money which is then used to help countries in difficulties, 60 bn Both should be substituted by European Stability Mechanism decided september 2012

4. Phase 2 –In Europe: how much? Long Term Refinancing Operation- LTRO ECB refinances Euro banks 21 December 2011 489 bn + 29 February 2012 529 bn for 3 years 26 July 2012 Draghi: BCE will do whatever it takes to save the euro

5. Phase 1 - In the US: 2007 -2009 Local bank Wall street bank I want home! Freddie Mac Fannie Mae save us!! Bush Obama 650 bn $ But Lehman Bros

6. Phase 2 - In Europe: late 2009 september 2012 Wall street/city/EU banks saving banks Toxic bond Sell PIIGS Bonds and buy German Bund “ flight to quality”! Break the euro PIIGS EU-IMF-ECB Fiscal austerity EFSF/EFSM

7. The national accounting in an indebted open economy Y = C + I + (X-M) (Y - C) – I = (X-M) S – I = X – M (S – I) + (T – G) = X – M

8. The national accounting in an indebted open economy Current Account + Capital Account = Changes in reserves = 0 [(X-M) - iD] + ΔD = 0 (X-M) = iD - ΔD (S – I) + (T – G) = iD - ΔD