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1. Which of the following are not examples of a vicious cycle of deleveraging? Explain.
a. Your university decides to sell several commercial buildings in the middle of town
in order to upgrade buildings on campus.
1. a. This is not an example of a vicious cycle of deleveraging. The university is volun-
tarily selling its commercial buildings in order to improve its campus.
b. This is an example of a vicious cycle of deleveraging. If a company sells a large
2. In the following figure showing the Case–Shiller U.S. Home Price Index from 2000 to
2010, did housing prices peak before or after the financial crisis in the United States?
Explain your answer.
Case–Shiller
U.S. Home
Price Index
200
180
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Crises and Consequences 17
CHAPTER
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S-228 CHAPTER 17 CRISES AND CONSEQUENCES
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2. In the United States, housing prices peaked in 2006, two years before the height of
the financial crisis in October 2008. As in Sweden, Japan, and Finland, the fall in
housing prices caused many borrowers to default on their mortgages. This led to
massive losses in the financial sector and precipitated the financial crisis of 2008.
3. Figure 17-2 tracks the unemployment rate in the years before and after the Panic of
1893 in the United States, the banking crisis of 1991 in Sweden, and the American
3. a. From the figure, it appears that unemployment peaked in 1894, one year after the
panic. However, although unemployment dropped in 1895, it went up again in
1896 and peaked at levels very close to 1894 levels.
4. In 2007–2009, the Federal Reserve, acting as a lender of last resort, stepped in to
4. Answers will vary. The rate of bank failures continued to rise in 2010, with 157 fail-
ures. However, since then, the rate of bank failures has decreased. Only 17 banks
failed in 2014.
5. During the financial crisis in October 2008, the federal government could borrow
at a rate of 2.73% (the yield on five - year Treasury securities). During October 2008,
though, Baa borrowers (corporate borrowers rated by Moody’s as not being completely
reliable) had to pay 8.88%.
a. What was the difference in borrowing costs for these corporate borrowers and the
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CHAPTER 17 CRISES AND CONSEQUENCES S-229
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5. a. The difference in borrowing costs between Baa borrowers and the federal govern-
ment was 8.88% − 3.81% = 5.17 percentage points.
b. At the time of this writing (December 2014), the yield on ten - year Treasury
6. Go to www.federalreserve.gov and click on the tab “Banking Information &
Regulation.” Then select the links “Banking Data” followed by “Large Commercial
Banks.” Once there, choose the latest release of quarterly data.
a. Which bank has the largest consolidated assets?
6. a. On June 30, 2014, JP Morgan Chase was the bank with the largest consolidated
assets.
7. Go to www.fdic.gov and click on the tab “Industry Analysis” and then on the link
“Research & Analysis.” Select “The First Fifty Years: A History of the FDIC 1933–
1983.” Open Chapter 3, “Estab lish ment of the FDIC,” and scroll down to the sec-
tion entitled “The Banking Crisis of 1933” and the section entitled “Federal Deposit
Insurance Legislation.” Read the section and then answer these questions.
a. President Roosevelt was sworn in on March 4, 1933. What was one of his first
7. a. President Roosevelt declared a national bank holiday that was to begin on March 6
and last for four days. This holiday was subsequently extended in order to give
officials time to reopen the banks.
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S-230 CHAPTER 17 CRISES AND CONSEQUENCES
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8. The U.S. Government Accountability Office (GAO) does research to support congres-
sional decision making. After the Long Term Capital Management (LTCM) crisis,
8. a. LTCM lost more than 90% of its capital in 1998.
b. The GAO concluded that LTCM was able to establish extraordinarily large trad-
9. Which of the following are examples of debt overhang? Which examples are likely to
lead to a cutback in spending? Explain.
a. Your uncle starts a restaurant, borrowing to fund his investment. The restaurant
9. a. This is an example of debt overhang because your uncle is left with high debt and
diminished assets. Your uncle will likely cut back on his spending in order to repay
the debt from the failed restaurant and to rebuild his assets.
b. This is not an example of debt overhang because your parents can sell the house
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