SEOWON KIM, JUNGMIN CHAE

 GOVERNMENT cannot finance its regular activities, including providing social services, paying for defense, and managing other government functions

 Asset price bubble’s collapse

Cozy relation between bank and corporates Increase inter-bank lending rate Burst of bubbles & Collapse in Japanese stock market

US Plaza Agreement Strong Yen Decline in export

GDP is not growing like before GDP deflator declining

Quantitative easing Open-ended asset purchasing and buying long-dated bonds Monetary policy Fiscal stimulus Public spending on infrastructure and renewable energy Fiscal policy Regulatory reform Creating economic partnerships with other countries Structure reform

The housing bubble burst (U.S. subprime mortgage crisis)

 Giving loans to people who have difficulty in maintaining the repayment schedule  Characterized by - higher interest rates - poor quality collateral - less favorable terms in order to compensate for higher credit risk

Lending decision by Financial institution Borrowing decision by individuals Housing Bubble formation

1 Low interest rates, high house prices Relaxation in lending regulations Poor creditworthiness of borrowers 2 Interest rates moved up Borrowers unable to pay 3 The house bubble popped Failure of banks and financial institutions

Financial Institutions – Bankruptcy  New Century Financial (USA) –  American Home Mortgage (USA) –  Sentinel management Group (USA) –  Ameriquest (USA) –  NetBank (USA) –  Terra Securities (Norway) –  American Freedom Mortgage Inc. (USA) –

Immediate Effects – US index  Slowdown in GDP  Consumer confidence lowest since October 2008 consumer sentiment index : 57.5 from 70.3 in September  Construction activity much worse - New constructions starts are 40% less than 2007  The unemployment rate rose from 5% in 2008 pre- crisis to 10% by late 2009

1) Federal Reserve and central bank “Broadly, the Federal Reserve's response followed two tracks: efforts to support market liquidity and functioning and the pursuitmarket liquidity of our macroeconomic objectives through monetary policy.” - Ben Bernanke (Federal Reserve Chairman), ) Economic Stimulus -On 13 February 2008, President George W. Bush signed into law a $168 billion economic stimulus package -On 17 February 2009, U.S. President Barack Obama signed the American Recovery and Reinvestment Act of 2009, an $787 billion stimulus package with a broad spectrum of spending and tax cutsAmerican Recovery and Reinvestment Act of 2009