Econ 1-12 2008 Financial Crisis

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STANDARD:
GE.6.3 Demonstrate how banks create money through the principle of fractional reserve banking.
GE.6.4 Describe the structure and functions of the Federal Reserve System. (E)
GE.7.1 Define and explain fiscal policy and its tools. (E)
GE.7.2 Define and explain monetary policy and its tools. (E)
GE.7.3 Analyze how the government uses fiscal policy to promote price stability, full employment, and economic growth.
GE.7.4 Explain how the use of fiscal policy affects budget deficits or surpluses and the national debt.
GE.7.5 Analyze how the Federal Reserve uses monetary policy to promote price stability, full employment, and economic growth. (E)

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Lance Hiles

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Econ 1-12 2008 Financial Crisis


Econ 1-12 2008 Financial CrisisOnline version STANDARD: GE.6.3 Demonstrate how banks create money through the principle of fractional reserve banking. GE.6.4 Describe the structure and functions of the Federal Reserve System. (E) GE.7.1 Define and explain fiscal policy and its tools. (E) GE.7.2 Define and explain monetary policy and its tools. (E) GE.7.3 Analyze how the government uses fiscal policy to promote price stability, full employment, and economic growth. GE.7.4 Explain how the use of fiscal policy affects budget deficits or surpluses and the national debt. GE.7.5 Analyze how the Federal Reserve uses monetary policy to promote price stability, full employment, and economic growth. (E) by Lance Hiles A B C D E F G H I K L M O P R T U V W Z Starts with A During the 2008 crisis, credit ratings agencies gave ALL mortgage backed securities a ____ ____ . Agencies told lenders that mortgage backed securities were risk free, borrowers with the best credit, a safe investment. Contains B Investors were desperate for more mortgage backed securities, but for lenders to create more, they needed more mortgages. So lenders loosened standards & made loans to people with low income & poor credit. These are called _____ mortgages. Contains C Government response in 2008: large numbers of federal ____ inspected bank balance sheets. They determined which banks were solvent & which needed money. Then they publicized the results, hoping to end the uncertainties that was scaring borrowers. Starts with D When you borrow money to buy a house, you make monthly payments to whoever possesses the mortgage, a piece of paper that proves ownership. Sometimes people ____ on a mortgage, which means they no longer make monthly payments. Contains E Government response in 2008: The ____ ____ made emergency loans to banks that were functional, hoping to keep these banks from closing; Lots of frightened depositors were withdrawing their money. Contains F Government response in 2008: Legislators enacted the ____-____ law. This stopped banks from making risky loans, set up a protection bureau to stop predatory lending, & required financial derivatives be observable by all. Contains G To explain the 2008 Financial crisis, we have explain about _____ . You might know this, but someone that wants to buy a house will borrow thousands of dollars from a bank. In return, the bank gets a piece of paper, called a [same] . Contains H Perverse incentives lead to a ____ ____ . This is when we take on risk, because someone else bears the burden of that risk. Banks lent to subprime borrowers because they planned to sell those subprime mortgages to somebody else. Contains I When a borrower stops making monthly payments for their home, whomever holds the mortgage gets the house. The original lender often sells that mortgage to a third party. I've had my house for nine months & three ____ ____ have had the mortgage. Contains K Government response in 2008: Congress passed a ____ ____ in January 2009. This pumped $800 billion into the economy, through spending and tax cuts. This slowed the free fall of spending, output, and employment. Contains L Rapid increases, driven by irrational decisions are called _____ . They have an annoying tendency to burst. And this one did. People just couldn't pay for their incredibly expensive houses, or keep up with their ballooning mortgage payments. Starts with M Buying 1 small mortgage from a single borrower is not worth the trouble for large international institutions, so they bought several mortgages in something called ____ ____ securities. Contains O Once the adjustable rate mortgage payments rose too high, most borrowers couldn't pay & the home was for sale again (supply high). But we'd run out of buyers (demand low). So house prices started _____ . Supply high, demand low = low prices Starts with P ____ ____ is when banks loan money to borrowers without confirming the borrower's job, & offering VERY low interest rates. These adjustable rate mortgages begin with small payments, but in a few months the payment is VERY larger. Contains R A government report placed blame on years of _____ in the financial industry. It blamed regulators for not doing more. But everyone in the financial system was to blame, from institutions to individuals, borrowing too much, taking too much risk. Starts with T Government response in 2008: Congress earmarked $700 billion to bail out the banks, later expanding it to help auto makers, AIG, and homeowners. This was called "troubled assets relief program", or ____ , or the bank bailout. Starts with U When studying massive systemic failure, know that systems are made up of people, who are not perfect. Some didn't understand. Some ignored the problems. And some were _____ , motivated by massive amounts of money. Contains V One key factor leading to the 2008 crisis was ____ incentives: a policy that ends up having a negative effect, opposite of what was intended. e.g. mortgages brokers got bonuses for lending money, which encouraged them to make risky loans. Contains W All these bets & financial instruments resulted in a ____ ____ of assets, liabilities, and risks. So when things went bad, they went bad for the entire financial system. They were all tangled, so they all went down together. Contains Z Mortgage backed securities are created when financial institutions _____ mortgages: They buy thousands of individual mortgages, bundle them, & sell shares of that pool to investors. put eggs in different baskets

Econ 1-12 2008 Financial Crisis

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Econ 1-12 2008 Financial CrisisOnline version

by Lance Hiles

Starts with A

During the 2008 crisis, credit ratings agencies gave ALL mortgage backed securities a ____ ____ . Agencies told lenders that mortgage backed securities were risk free, borrowers with the best credit, a safe investment.

Contains B

Investors were desperate for more mortgage backed securities, but for lenders to create more, they needed more mortgages. So lenders loosened standards & made loans to people with low income & poor credit. These are called _____ mortgages.

Contains C

Government response in 2008: large numbers of federal ____ inspected bank balance sheets. They determined which banks were solvent & which needed money. Then they publicized the results, hoping to end the uncertainties that was scaring borrowers.

Starts with D

When you borrow money to buy a house, you make monthly payments to whoever possesses the mortgage, a piece of paper that proves ownership. Sometimes people ____ on a mortgage, which means they no longer make monthly payments.

Contains E

Government response in 2008: The ____ ____ made emergency loans to banks that were functional, hoping to keep these banks from closing; Lots of frightened depositors were withdrawing their money.

Contains F

Government response in 2008: Legislators enacted the ____-____ law. This stopped banks from making risky loans, set up a protection bureau to stop predatory lending, & required financial derivatives be observable by all.

Contains G

To explain the 2008 Financial crisis, we have explain about _____ . You might know this, but someone that wants to buy a house will borrow thousands of dollars from a bank. In return, the bank gets a piece of paper, called a [same] .

Contains H

Perverse incentives lead to a ____ ____ . This is when we take on risk, because someone else bears the burden of that risk. Banks lent to subprime borrowers because they planned to sell those subprime mortgages to somebody else.

Contains I

When a borrower stops making monthly payments for their home, whomever holds the mortgage gets the house. The original lender often sells that mortgage to a third party. I've had my house for nine months & three ____ ____ have had the mortgage.

Contains K

Government response in 2008: Congress passed a ____ ____ in January 2009. This pumped $800 billion into the economy, through spending and tax cuts. This slowed the free fall of spending, output, and employment.

Contains L

Rapid increases, driven by irrational decisions are called _____ . They have an annoying tendency to burst. And this one did. People just couldn't pay for their incredibly expensive houses, or keep up with their ballooning mortgage payments.

Starts with M

Buying 1 small mortgage from a single borrower is not worth the trouble for large international institutions, so they bought several mortgages in something called ____ ____ securities.

Contains O

Once the adjustable rate mortgage payments rose too high, most borrowers couldn't pay & the home was for sale again (supply high). But we'd run out of buyers (demand low). So house prices started _____ . Supply high, demand low = low prices

Starts with P

____ ____ is when banks loan money to borrowers without confirming the borrower's job, & offering VERY low interest rates. These adjustable rate mortgages begin with small payments, but in a few months the payment is VERY larger.

Contains R

A government report placed blame on years of _____ in the financial industry. It blamed regulators for not doing more. But everyone in the financial system was to blame, from institutions to individuals, borrowing too much, taking too much risk.

Starts with T

Government response in 2008: Congress earmarked $700 billion to bail out the banks, later expanding it to help auto makers, AIG, and homeowners. This was called "troubled assets relief program", or ____ , or the bank bailout.

Starts with U

When studying massive systemic failure, know that systems are made up of people, who are not perfect. Some didn't understand. Some ignored the problems. And some were _____ , motivated by massive amounts of money.

Contains V

One key factor leading to the 2008 crisis was ____ incentives: a policy that ends up having a negative effect, opposite of what was intended. e.g. mortgages brokers got bonuses for lending money, which encouraged them to make risky loans.

Contains W

All these bets & financial instruments resulted in a ____ ____ of assets, liabilities, and risks. So when things went bad, they went bad for the entire financial system. They were all tangled, so they all went down together.

Contains Z

Mortgage backed securities are created when financial institutions _____ mortgages: They buy thousands of individual mortgages, bundle them, & sell shares of that pool to investors. put eggs in different baskets

During the 2008 crisis, credit ratings agencies gave ALL mortgage backed securities a . Agencies told lenders that mortgage backed securities were risk free, borrowers with the best credit, a safe investment.

Government response in 2008: The made emergency loans to banks that were functional, hoping to keep these banks from closing; Lots of frightened depositors were withdrawing their money.

Government response in 2008: Legislators enacted the - law. This stopped banks from making risky loans, set up a protection bureau to stop predatory lending, & required financial derivatives be observable by all.

Perverse incentives lead to a . This is when we take on risk, because someone else bears the burden of that risk. Banks lent to subprime borrowers because they planned to sell those subprime mortgages to somebody else.

When a borrower stops making monthly payments for their home, whomever holds the mortgage gets the house. The original lender often sells that mortgage to a third party. I've had my house for nine months & three have had the mortgage.

Government response in 2008: Congress passed a in January 2009. This pumped $800 billion into the economy, through spending and tax cuts. This slowed the free fall of spending, output, and employment.

Buying 1 small mortgage from a single borrower is not worth the trouble for large international institutions, so they bought several mortgages in something called securities.

is when banks loan money to borrowers without confirming the borrower's job, & offering VERY low interest rates. These adjustable rate mortgages begin with small payments, but in a few months the payment is VERY larger.

All these bets & financial instruments resulted in a of assets, liabilities, and risks. So when things went bad, they went bad for the entire financial system. They were all tangled, so they all went down together.