Global Interdependence: Are the U.S and Other Markets \'Sowing the Seeds\' for t

Question

Global Interdependence: Are the U.S and Other Markets 'Sowing the Seeds' for the Next Crisis?” found online athttp://knowledge.wharton.upenn.edu/article.cfm?articleid=2405.

Background: Excerpts from Textbook’s Ch. 12 Case Study “The Global Crisis of 2007” (pp. 291-295)

The most recent financial crisis began in the United States in the fall of 2007. The first visible stage was called the subprime crisis in reference to housing loans made in the United States that were given to borrowers with less than prime credit ratings. When home prices started falling, refinancing became difficult or impossible for homeowners who now owed more than their houses were worth. Problems in the housing sector quickly spread through the banking sector and into other parts of the financial services industry such as insurance companies and investment banks that had bought mortgage- backed assets.

By early 2008, the subprime crisis had spread beyond the United States. In the United States, home prices rose nearly 90 percent between 2000 and 2006, and the United Kingdom, Spain, and a number of other markets experienced increases as large or larger. These increases fed on themselves as they pulled more finance into the housing market.

Three critical factors or preconditions turned a national, U. S. problem into a global one. First, the world’s financial markets had undergone a relatively steady transformation over several decades with the development of new and innovative financial products. Second, financial markets had become much more integrated. The growing international integration of financial services meant that capital for home loans could be moved from one country to another, and that the United States, Spain, Irelandand other locations where there were rapid increases in home prices could continue to borrow to purchase even more homes. Third, a spirit of deregulation had captured the thinking of many economists, politicians, and regulators. This permitted new forms of very risky finance to develop without close supervision, and without consideration for the fact that some of the new forms of finance posed risks not only for the individual financial institutions using them, but to the entire economic system as well.

Questions: According to the interview...

a)      How were U.S. commercial banks able to survive the 2007 financial crisis?

b)      What was the response in China? (i.e., was China affected? If so, how?)

c)      What was the response in Japan? (i.e., was Japan affected? If so, how?)

d)      What was the response in the rest of Asia such as Korea? (i.e., was Korea affected? If so, how?)

e)      What is the future outlook for the U.S. economy?

Can you please

Explanation / Answer

1.Central banks have just gone wild in terms of the amount of credit and liquidity they are providing. This has stopped the crisis. the banks are doing so well is that the rates they are lending at have not come down nearly as much as the short-term rates. When interest rates start going up again, it is going to cause a change, and it will be interesting to see how strong indeed the banks are.

2.Yes,China was affected and it actually rebounded in a healthier way.China can stimulate the economy easily because it is in avery strong fiscal position and has a relatively low government debt and has tremendous control over the economy.

3.Japan was affected and did not resurge as well.It had a huge outstanding debt rigt from 1990's o 2000s.If interest rate rose then it would have a huge intrest rate bill.Japan was doing well since China was doing well.

4.Rest of the Asia was affected and is doin well by large.It has among the best of all countries to have survived the crisis — especially given that it has an export profile like Japan and Germany have, it hasn’t been nearly as badly hit. Some of the other countries have long-running problems. The Philippines is not doing so well.

2.

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