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Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-1 What Cannot Keep Going
Eventually Stops
Slide
20.2
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-1 What Cannot Keep Going
Eventually Stops
Slide
20.3
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-1 What Cannot Keep Going
Eventually Stops (Continued)
Slide
20.4
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-1 What Cannot Keep Going
Eventually Stops (Continued)
Slide
20.5
Figure 20.2b The economic crisis of 2007–2009 and its effect on the global
economy
The world economy in the crisis
Source: IMF World Economic Outlook 2009
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-2 Households ‘Under Water’
Slide
20.6
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-2 Households ‘Under Water’
(Continued)
Slide
20.7
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
Securitisation is a Great Invention –
Provided it is Done Right
Slide
20.9
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-3 Leverage And Amplification
Slide
20.10
Figure 28 – 4
Bank assets, capital,
and liabilities.
The two banks have the same assets. But
Bank B has a smaller capital ratio—
equivalently a higher leverage ratio than
Bank A.
Bank A has assets of 100, liabilities of
80, and capital of 20. Its capital ratio is
defined as the ratio of capital to assets
and is thus equal to 20%. Its leverage
ratio is defined as the ratio of assets to
capital (the inverse of the capital ratio)
and is thus equal to 5. Bank B has
assets of 100, liabilities of 95, and
capital of 5. Thus, its capital ratio is
equal to 5%, and its leverage ratio to
20.
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
28-3 Amplification Mechanisms. Leverage, Complexity,
and Liquidity
Leverage
Slide
20.12
Figure 28 – 4 (continued)
Bank assets, capital,
and liabilities.
Now suppose that some of the assets
in each of the two banks go bad. For
example, some borrowers go bankrupt
and cannot repay their loans.
Suppose, as a result, that for both
banks, the value of the assets
decreases from 100 to 90. Bank A now
has assets of 90, liabilities of 80, and
capital of 90 – 80 = 10. Bank B has
assets of 90, liabilities of 95, and thus
negative capital of 5 (90-95). Its
liabilities exceed its assets: In other
words, it is bankrupt.
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
28-3 Amplification Mechanisms. Leverage, Complexity,
and Liquidity
Leverage
Slide
20.13
Figure 28 – 4 (continued)
Bank assets, capital,
and liabilities.
Higher leverage means higher expected
profit. Suppose for example that assets
pay an expected rate of return of 5%,
and liabilities pay an expected rate of
return of 4%. Then the owners of bank A
have an expected rate of return on their
capital of (100 * 5% – 80 * 4%)/20 = 9%,
the owners of Bank B have an expected
rate of return of (100 * 5% – 95 * 4%)/5 =
24%, so more than twice as high.
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
28-3 Amplification Mechanisms. Leverage, Complexity,
and Liquidity
Leverage
Slide
20.14
When the value of their assets fell, some banks with high leverage went
bust. These obviously stopped lending. But also the banks which had
enough capital and survived started worrying.
The result was a credit freeze and a fire sale in the stock market.
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-4 Investment Demand, with
Banks as Intermediaries
Slide
20.16
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-4 Investment Demand, with Banks
as Intermediaries (Continued)
Slide
20.17
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-5 international Contagion
Slide
20.19
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-5 international Contagion
(Continued)
Slide
20.20
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-6 Policy Response to the Crisis
Slide
20.21
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-6 Policy Response to the Crisis
(Continued)
Slide
20.22
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-6 Policy Response to the Crisis
(Continued)
Slide
20.23
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-7 The Legacy of the Crisis
Slide
20.24
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
20-7 The Legacy of the Crisis
(Continued)
Slide
20.25
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
Key Terms
Slide
20.26
• Sub-prime mortgages
• Regulation
• Quantitative easing
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010