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Global Financial Crisis. Don Kopka , PhD Management Dept Towson University. Types of Financial Crises. Currency – Sharp currency depreciation Banking – Loss of confidence in banking system Foreign Debt – Country unable to service foreign debt obligations. Previous Financial Crises.

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Global financial crisis

Global Financial Crisis

Don Kopka, PhD

Management Dept

Towson University


Types of financial crises
Types of Financial Crises

Currency – Sharp currency depreciation

Banking – Loss of confidence in banking system

Foreign Debt – Country unable to service foreign debt obligations


Previous financial crises
Previous Financial Crises

Mexico 1995

Asia 1997


Shared macroeconomic causes of financial crises
Shared Macroeconomic Causes of Financial Crises

High inflation

Asset price inflation, especially housing and real estate

Excessive expansion of domestic borrowing, often against real property assets

Excessive real estate investment

Widening current account deficits

People unable to make mortgage and debt payments

Culminates in burst of real estate bubble


International monetary fund world s monetary policeman
International Monetary Fund World’s “Monetary Policeman”

  • Typical Policy Measures – “Washington Consensus”

  • - Tight macroeconomic policies in return for adjustment financing

  • Cuts in public spending

  • Increased interest rates

  • Tight monetary policy

  • Deregulation

  • Privatization


United states and global financial crisis 2008 to present global economic meltdown
United States and Global Financial Crisis 2008 to Present“Global Economic Meltdown”

  • Simple Ideological Explanations

    • Insufficient government regulation

    • Government interference in the market

    • Greed


United States and Global Financial Crisis 2008 to Present

  • Multiple Factors – No Simple Explanations

    • Subprime loans to not necessarily low income home buyers

    • Community Reinvestment Act for 1977 for minority housing – LIMITED IMPACT

    • Fannie Mae and Freddie Mac mortgage programs – LATE TO SUBPRIME LENDING

    • Federal Reserve‘s loose monetary policy – money too easy to borrow and invest/relend

    • Congress and Executive Branch goals for home ownership inappropriate


United States and Global Financial Crisis 2008 to Present

  • Multiple Explanations (cont.)

    • Relaxed regulatory standards, especially capital requirements

    • Collaterized Debt Obligations (CDOs) – packages of mortgages with various risks

    • Credit Default Swaps (CDSs) – insufficient funds to cover issued CDSs

    • “Mark to Market” accounting, reducing values of bank mortgages to less than real value


United States and Global Financial Crisis 2008 to Present

  • Multiple Explanations (cont.)

    • Statistical Models with unrealistic assumptions

      • “Quants”

      • Mathematicians, engineers, physicists

    • Bond rating services giving good ratings to high risk CDOs

    • High Debt – real estate, government, international borrowing, consumer

    • Organizational expectations for employees – “make the numbers”


United States and Global Financial Crisis 2008 to Present

  • Multiple Explanations (cont.)

    • “Shadow Financial System,” 40% of credit not from publicly traded financial institutions

    • Greed

    • Balance Sheet Solvency Crisis NOT a Liquidity Crisis – financial institutions’ assets lost value and insufficient to cover debt obligations –”zombie banks”


United States and Global Financial Crisis 2008 to Present

  • Multiple Explanations (cont.)

    • Moral Hazard – behave badly but size and importance requires support, “too big to fail”

    • Loss of integrity – banking mentality

    • Stagnant incomes leading to excessive borrowing to support consumption


Shared macroeconomic causes of american financial crisis with previous crises
Shared Macroeconomic Causes of American Financial Crisis with Previous Crises

Asset price inflation, especially housing

Excessive expansion of domestic borrowing, especially against real property assets

Excessive consumer credit – between 2000 and 2007, U.S. consumption grew by 9% but median income only grew by 3%

Excessive real estate investment

Widening current account deficits

Culminates in burst of real estate bubble


United States and Global Financial Crisis 2008 to Present with Previous Crises

  • Contagion – spread of the crisis

    • Interlinked global financial markets

    • Global financial institutions

    • Collapse of credit

    • Recession

    • Collapse of trade

    • Local government investments

      • Reduced spending

      • Reduced employment

      • Aggravate economic decline


Dealing with the present global financial crisis
Dealing with the Present with Previous Crises Global Financial Crisis

  • Developed country governments and evolution to “Austerity-led Growth”

  • Bank bailouts, government lending keep banks solvent and to support credit

  • Central banks maintain low interest rates

  • High government expenditures to replace lost consumer spending

  • Deleveraging, saving replacing debt – “paradox of thrift”

  • Increased regulation of financial industry

  • Executive compensation


For more see
For more, see with Previous Crises

Crisis Economics: A Crash Course in the Future of Fianance by NourielRoubini and Stephen Mihm, The Penguin Press, New York, 2010.

This Time Is Different by Carmen M. Reinhart and Kenneth S. Rogoff, Princeton University Press, Princeton, NJ, 2009.

All The Devils Are Here: The Hidden History of the Financial Crisis, by Bethany McLean and Joe Nocera, Portfolio/Penguin, London, 2010.

Freefall: America, Free Markets and the Sinking of the World Economy by Joseph Stiglitz, W. W. Norton & Company, New York, 2010.


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