There are certain features of the 2008 financial crisis that require a closer look than what was discussed in class. Here we discuss two such topics – deleveraging by financial institutions and the role of the shadow banking system – and their respective roles in the financial crisis.
Deleveraging
Please watch the following video for context:
https://www.youtube.com/watch?v=PD-EWxl_s4o
In the video, Paul Krugman, 2008 Nobel Prize winner in Economics, discusses the role of deleveraging in setting off the financial crisis.
Please answer the following questions on deleveraging. You may use any source of information you like to answer the questions but please cite your sources in your answer.
What is deleveraging?
What are the consequences of deleveraging by banks and financial institutions that lend mortgages and other loans? Also, discuss the economy-wide implications of deleveraging by big banks and financial institutions (e.g., financial institutions deemed ‘too big to fail’).
How did deleveraging by financial institutions reck havoc in the mortgage market, eventually playing a pivotal role in setting off the financial crisis?
Shadow Banking System
Please read the following article for context:
https://newrepublic.com/article/157455/shadow-banks-back-still-big-fail
This article points out fundamental flaws of the ‘lightly regulated financial intermediaries’ in the mortgage market.
Please answer the following questions on the shadow banking system/shadow banks. You may use any source of information you like to answer the questions but please cite your sources in your answer.
What role do shadow banks play in the mortgage markets?
What are the perils of an unregulated shadow banking system? Discuss their part in the 2008 financial crisis and the continuing threat they pose to financial stability of the U.S. economy.
Lessons from the sub-prime crisis
Discuss some lessons from the 2008 financial crisis that apply to the housing market today.
To answer this question, please discuss lessons for the housing market, in general, and specific lessons for the covid pandemic. Substantiate your answer with examples. Cite sources wherever needed.
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