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After the Music Stopped

The Financial Crisis, the Response, and the Work Ahead

Von Alan S. Blinder
13 Minuten
After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead von Alan S. Blinder

After The Music Stopped explains and analyzes the causes of the last decade’s great financial crisis. It details the mechanics of the underlying problems as well as the sequence of events as panic began to set in. Finally, it also explains how the US government managed to halt the chaos and rescue the economy.

  • Investors, bankers, government financial regulators
  • Anyone interested in the causes of one of the biggest financial crises of all time
  • Anyone interested in how the US government stepped in to alleviate the situation

Alan S. Blinder is an American economist and professor at Princeton University who has published dozens of works on economics and economic policy. He has served at the US Federal Reserve and was one of President Bill Clinton’s economic advisers.

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After the Music Stopped

The Financial Crisis, the Response, and the Work Ahead

Von Alan S. Blinder
  • Lesedauer: 13 Minuten
  • 8 Kernaussagen
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After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead von Alan S. Blinder
Worum geht's

After The Music Stopped explains and analyzes the causes of the last decade’s great financial crisis. It details the mechanics of the underlying problems as well as the sequence of events as panic began to set in. Finally, it also explains how the US government managed to halt the chaos and rescue the economy.

Kernaussage 1 von 8

After the year 2000, enormous price bubbles developed in the housing and mortgage-bond markets.

Before the financial crisis first became evident in 2007, buying a house or investing in bonds seemed like a very profitable investment. (In case you’re wondering, bonds are financial instruments for which the issuing company pays you an annual fixed rate of interest).

But underneath this positive outlook both markets were in fact in serious trouble.

First of all, a price bubble developed in the housing market, meaning that the prices had risen to wholly unsustainable levels. Indeed, between 1997 and 2006, house prices had risen by an average of 85 percent.

Despite this rise, or perhaps because of it, people kept investing in houses, naively believing that the prices would just keep rising year after year.

This was shown by a survey of Los Angeles’ home buyers, many of whom believed that their house values would rise by 22 percent each year, so that if they were to buy a house for $500,000, it would be worth over $3.6 million in ten years. Clearly these expectations were delusional.

Meanwhile, the bond market had also developed a price bubble.

To bounce back from a slump in the economy in 2001, the US Federal Reserve cut the interest rates at which banks could borrow money from each other to just one percent. The idea was that banks themselves would begin paying lower interest on people’s bank accounts, thus encouraging people to spend rather than save money. At the same time, the cut was reflected in the interest rate that investors got from buying government bonds, so they looked for more profitable investments.

What they found were bonds known as Mortgage Backed Securities (MBS) – essentially pools of mortgages from which the investor buys a slice as a bond and then earns money from the interest payments homeowners make on their mortgages.

At the time the housing market was booming, so MBSs were highly profitable, and hence desirable. This fuelled a price bubble in the mortgage-bond market too.

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