Causes of the financial crisis

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THE FINANCIAL CRISIS Preparing the grounds: The role of global macro policies and the poor US regulatory framework Introduction The financial crisis from 2007-2009 is beeing caused at two levels: global macro policies affecting liquidity and a poor regulatory framework 1 The policies affecting liquidity created a situation like a dam overfilled with flooding water 2 The regulatory system have been the faults in the dam, directing the liquidity into the real estate market Source: „The Current Financial Crisis: Causes and Policy Issues“ by Adrian Blundell-Wignall, Paul Atkinson and Se Hoon Lee Introduction Global macro policies affecting liquidity played a major role in the built up to the finacial and…show more content…
enneth Rogoff Global imbalances In the US low interest rates fed into powerful multiplier mechanism 1 Description 2 Comment Expectations of future housing price appreciation 1 • 1% increase of current account deficit à10% increase in real estate prices • US home prices rose at double digit rates in 04/05 • US mortgage quality declined “American Dream Housing bubble policy” 3 Financial innovations 2 Source: „Global Imbalances and the Financial Crisis: Products of Common Causes“ by Maurice Obstfeld and Kenneth Rogoff 1 2 Global macro policies affecting liquidity • The increasing global imbalances • Loose monetary policy by Fed Source: „The Current Financial Crisis: Causes and Policy Issues“ by Adrian Blundell-Wignall, Paul Atkinson and Se Hoon Lee Fed policy The FED overflowed the US economy with cheap money in order to support the economy 1 2 May 2000: 6.5% June 2003: 1% Until 2006 • Dot-com crash • 9/11 • Fear of deflation • Unchanged rates for one year • Interest rates remained too low (Taylor rule) • Expansion of housing market Too low interest rates over a too long period was a major cause for the genisis of the housing bubble Source: „Global Imbalances and the Financial Crisis: Products of Common Causes“ by Maurice Obstfeld and Kenneth Rogoff Fed policy The interest rates set by the fed were far below what the Taylor rule would suggest 1 2
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