Scarica industrial organization notes e più Appunti in PDF di Economia Industriale solo su Docsity! 3rd December Not on the exam Bankruptcy of Lehman Brothers (15/09/2008) Financial crisis: 1. Banking crisis: bankruptcy in a major bank (systemic bank) 2. Sovereign debt crisis: the state doesn’t succeed to pay part of its debt in due time (Greece, Argentina, Russia). 3. Rate of exchange: dramatic devaluation of the currency value American Banking crisis and then it became a worldwide and real crisis Large bank that had a lot of relationships → chain effect on other financial institutions. GDP fell in the next few years, why? Liquidity, banks stop trying one another and can hardly access their value and stop lending money to each other. This entails a problem for firms and households as well (companies may depend on banks for liquidity). Consequences of fall in GDP: fiscal revenue and everything else falls, increase in social expenditure. Economists didn’t forecast anything Why did it happen? What are the most important factors? - Banking crisis, so what happened to the banking sector around the world before the crisis? What was new? → Important innovations in financial instruments, the banker should allocate the risks. The bank should create credit and hold it, then it should be create and distribute it. - Policy makers: since the crisis started in the US, what happened there? The economic policy of the US for 10 years had been promoting and accommodating factors that contributed to this crisis. To sustain growth accomodative monetary policy fixing low interest rates (incentive to buy) - Congress passed the Glass-Steagall Act (1933) a law which prohibited mixed activities (either commercial banks collecting money from the people or investment banks). Residual debt adding up while you are trying to pay the loan (underwater → the price of your assets has less value than residual debt) maybe the house is worth 110 and you still have to pay 130, so the bank takes your house. In 2007 the bubble exploded. Americans spend on loans and credit cards. 72 rule it (rate of interest and time) 100 (1+i)t = 200 How long does it take to duplicate 100? Depending on the interest rate using the 72 rule, whatever the interest rate you use this approximation interest rate x time = 72 (if the interest rate is 6% it takes 12 years) The growth the US experienced affected only the top 20% of the population (middle class is those people that are not part of the 20% at the top nor the 20% at the bottom). The income of the
