George C Wallace Community College Dothan The Fed and Housing Bubble Discussion Required to make an initial post that answers the questions below.Please an

George C Wallace Community College Dothan The Fed and Housing Bubble Discussion Required to make an initial post that answers the questions below.Please answer the following questions in your initial post:Describe how the Federal Reserve can use its authority to attempt to stimulate the economy. Be sure to include how interest rates are used to accomplish this.One of the major problems that led to the financial crisis was the housing bubble. What is meant by the term “housing bubble”? Be sure to identify how subprime mortgages played a part. https://www.viddler.com/embed/9fb50991/?f=1&autopl… CHAPTER 20: MONEY, FINANCIAL INSTITUTIONS, AND THE FEDERAL
RESERVE
Financial Crisis – Banking Disaster
Time: 12:15
Learning objectives:


Classify the various institutions in the U.S. banking system
Briefly trace the causes of the banking crisis starting in 2008 and explain how the
government protects your funds during such crises
Key people and companies
Ben Shapiro—Partner, Belongia Shapiro & Franklin, LLP
Robert Klamp—Banking Industry Consultant
U.S. Congress
Investment Banks
Securities and Exchange Commission
Federal Reserve
Overview
The video provides an overview of the causes of the financial crisis of 2008-2011. Beginning
with the tech stock bubble bursting in 2000 and the ethics violations of companies such as
Enron, WorldCom, Global Crossing, and Tyco, the origins of the most recent crisis are
discussed. As of 2011, millions have lost homes, many are facing foreclosure, businesses have
failed, and unemployment remains around 9 percent.
A discussion of the 2008 banking crisis shows that it was avoidable. The housing bubble,
easing of interest rates and leverage requirements, and substantial increase of subprime
mortgages combined to create a situation ripe for crisis. In 2007, the housing bubble burst and
the number of foreclosures was 79 percent higher than it was in the previous year.
The government’s response, including TARP and the economic stimulus package, are
discussed. The impact on global economies is also covered. The video concludes by noting that
over 4 million people have lost homes due to the crisis and the long-term effects of the financial
crisis are not yet known.
Preparing students before the video
Have students do some research on the financial crisis, the Congressional Committee’s
recommendations, and the current controversy surrounding the Dodd-Frank bill adopted by
Congress and signed by the president.
Major issues in the case

The role of Federal Reserve in setting interest rates

The role of the SEC in establishing leverage rates for banks

The role of the federal government in spending and stimulating the economy

The causes of the housing bubble

The interconnectedness of the global economy

Explain the concepts of leverage, sub-prime, and investment risk

Explain the role of rating agencies
Video Case: The Financial Crisis
Looking back a few years ago in 2011, millions had lost homes, businesses had failed,
foreclosures were at an all-time record high, and unemployment remained very high at 9
percent. These outcomes were due, in large part, to the financial crisis of 2006-2010.
In the year 2000, the tech stock bubble burst, which sent markets plummeting around the
globe. Around the same time, ethics violations surfaced for major companies including Enron,
WorldCom, Global Crossing, and Tyco. With the economy in a slump, the government wanted
to stimulate consumer spending and business investment. To do this, the Federal Reserve
lowered the prime interest rate from 6.5% to 1%. This ease of credit made mortgages, credit
cards, and other consumer loans easy to get. In fact, the average household debt to disposable
income in 2007 was 127 percent.
The U.S. Congress, through the 2010 financial crisis investigating committee, determined
that the crisis was avoidable. Some of the factors identified as leading to the crisis included the
proliferation of subprime mortgages that, in the period between 2004 and 2006, comprised
about 20 percent of all mortgages. This was a twofold increase in subprime loans.
The SEC lowered the leverage requirements for investment banks, leading banks to borrow
significantly more than they had in reserves. During this period of time, mortgage-backed
securities (MBSs) were bundled and sold to investors. These MBS products included subprime
mortgages as well. During this same period of time, the major financial rating agencies such as
Moody’s and Standard and Poor’s continued to provide AAA ratings (the highest rating) for MBS
products, assuring investors of their value.
In 2007, the housing bubble bursts with housing prices tumbling and the value of MBS
products falling in some cases, to worthless status. Many people found themselves “under
water,” meaning that they owed more on their houses than they were worth. These folks and
many who had subprime mortgages defaulted on their obligations. As the MBS declined in
value, investment banks and other financial firms began to fail, as their debt was higher than the
value of their assets.
This financial crisis had global consequences. The failure of very large (or “too big to fail”)
investment banks could not be allowed to stand; thus, the federal government intervened with a
$700 billion bailout for banks called the Troubled Asset Relief Program (TARP), designed to bail
out troubled banks and prevent further failures. In 2009, the president signed an $800 billion
stimulus designed to help stimulate the economy, help businesses borrow and invest, and as a
result, create jobs.
The global crisis of confidence described in the video represents the largest economic
failure since the great depression of the 1930s. The long-term effects of the financial crisis are
yet to be determined.
Multiple Choice Questions
1.
In 2007, due to the ease and availability of credit, what was the average household
debt load compared to disposable income?
a. 95%
b. 127%
c. 75%
d. 200%
e. None of the above
2.
Which of the following represents the unemployment rate in 2011?
a. 8%
b. 9%
c. 3%
d. 5.6%
e. 7%
3.
Historically, which of the following factors are taken into consideration when a bank
evaluates an individual for a mortgage?
a. Value of the house or property
b. Borrower’s ability to pay
c. Borrowers income
d. None of the above
e. All of the above
CHAPTER 20: MONEY, FINANCIAL INSTITUTIONS, AND THE FEDERAL
RESERVE
Financial Crisis – Banking Disaster
Time: 12:15
Learning objectives:


Classify the various institutions in the U.S. banking system
Briefly trace the causes of the banking crisis starting in 2008 and explain how the
government protects your funds during such crises
Key people and companies
Ben Shapiro—Partner, Belongia Shapiro & Franklin, LLP
Robert Klamp—Banking Industry Consultant
U.S. Congress
Investment Banks
Securities and Exchange Commission
Federal Reserve
Overview
The video provides an overview of the causes of the financial crisis of 2008-2011. Beginning
with the tech stock bubble bursting in 2000 and the ethics violations of companies such as
Enron, WorldCom, Global Crossing, and Tyco, the origins of the most recent crisis are
discussed. As of 2011, millions have lost homes, many are facing foreclosure, businesses have
failed, and unemployment remains around 9 percent.
A discussion of the 2008 banking crisis shows that it was avoidable. The housing bubble,
easing of interest rates and leverage requirements, and substantial increase of subprime
mortgages combined to create a situation ripe for crisis. In 2007, the housing bubble burst and
the number of foreclosures was 79 percent higher than it was in the previous year.
The government’s response, including TARP and the economic stimulus package, are
discussed. The impact on global economies is also covered. The video concludes by noting that
over 4 million people have lost homes due to the crisis and the long-term effects of the financial
crisis are not yet known.
Preparing students before the video
Have students do some research on the financial crisis, the Congressional Committee’s
recommendations, and the current controversy surrounding the Dodd-Frank bill adopted by
Congress and signed by the president.
Major issues in the case

The role of Federal Reserve in setting interest rates

The role of the SEC in establishing leverage rates for banks

The role of the federal government in spending and stimulating the economy

The causes of the housing bubble

The interconnectedness of the global economy

Explain the concepts of leverage, sub-prime, and investment risk

Explain the role of rating agencies
Video Case: The Financial Crisis
Looking back a few years ago in 2011, millions had lost homes, businesses had failed,
foreclosures were at an all-time record high, and unemployment remained very high at 9
percent. These outcomes were due, in large part, to the financial crisis of 2006-2010.
In the year 2000, the tech stock bubble burst, which sent markets plummeting around the
globe. Around the same time, ethics violations surfaced for major companies including Enron,
WorldCom, Global Crossing, and Tyco. With the economy in a slump, the government wanted
to stimulate consumer spending and business investment. To do this, the Federal Reserve
lowered the prime interest rate from 6.5% to 1%. This ease of credit made mortgages, credit
cards, and other consumer loans easy to get. In fact, the average household debt to disposable
income in 2007 was 127 percent.
The U.S. Congress, through the 2010 financial crisis investigating committee, determined
that the crisis was avoidable. Some of the factors identified as leading to the crisis included the
proliferation of subprime mortgages that, in the period between 2004 and 2006, comprised
about 20 percent of all mortgages. This was a twofold increase in subprime loans.
The SEC lowered the leverage requirements for investment banks, leading banks to borrow
significantly more than they had in reserves. During this period of time, mortgage-backed
securities (MBSs) were bundled and sold to investors. These MBS products included subprime
mortgages as well. During this same period of time, the major financial rating agencies such as
Moody’s and Standard and Poor’s continued to provide AAA ratings (the highest rating) for MBS
products, assuring investors of their value.
In 2007, the housing bubble bursts with housing prices tumbling and the value of MBS
products falling in some cases, to worthless status. Many people found themselves “under
water,” meaning that they owed more on their houses than they were worth. These folks and
many who had subprime mortgages defaulted on their obligations. As the MBS declined in
value, investment banks and other financial firms began to fail, as their debt was higher than the
value of their assets.
This financial crisis had global consequences. The failure of very large (or “too big to fail”)
investment banks could not be allowed to stand; thus, the federal government intervened with a
$700 billion bailout for banks called the Troubled Asset Relief Program (TARP), designed to bail
out troubled banks and prevent further failures. In 2009, the president signed an $800 billion
stimulus designed to help stimulate the economy, help businesses borrow and invest, and as a
result, create jobs.
The global crisis of confidence described in the video represents the largest economic
failure since the great depression of the 1930s. The long-term effects of the financial crisis are
yet to be determined.
Multiple Choice Questions
1.
In 2007, due to the ease and availability of credit, what was the average household
debt load compared to disposable income?
a. 95%
b. 127%
c. 75%
d. 200%
e. None of the above
2.
Which of the following represents the unemployment rate in 2011?
a. 8%
b. 9%
c. 3%
d. 5.6%
e. 7%
3.
Historically, which of the following factors are taken into consideration when a bank
evaluates an individual for a mortgage?
a. Value of the house or property
b. Borrower’s ability to pay
c. Borrowers income
d. None of the above
e. All of the above

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