Econ. Frontline, Friday 11/19

Directions: Watch the video below, take notes, and be able to answer the following question IN CLASS.

Inside The Meltdown

http://www.pbs.org/wgbh/pages/frontline/meltdown/

  • What happened to make the firm Bear Stearns go out of business?
  • What are credit default swaps? What role did they play in the meltdown?
  • What is the Federal Reserve Bank? What role did it play when Bear Stearns was in financial trouble?
  • What is the Treasury Department? What role did it play with Bear Stearns’ financial troubles?
  • What is systemic risk?
  • Free-market capitalism dictates that markets create efficient solutions and businesses that fail should be left to fail. Secretary Paulson was concerned about “moral hazard” after helping Bear Stearns. What did this mean?
  • The film follows people who took out mortgages they couldn’t afford in the hopes that their home values would increase and they would become rich. Why did the banks give these people mortgages?
  • Should there be laws to restrict the value of houses people buy and the amount of leverage used to buy the house? What is the problem with having such laws in a free market?
  • Why did the federal government take over Fannie Mae and Freddie Mac?
  • Secretary Paulson decided not to guarantee a government loan for Lehman Brothers as he had for Bear Stearns with the JPMorgan takeover. What happened as a result of that decision?
  • Why did the government give AIG a loan of $85 billion after refusing to loan money for the Lehman Brothers acquisition?
  • What is capital injection?
  • The last scene in the film shows the leaders of the largest banks being told by Henry Paulson that they would have to accept government capital injections. What was the rationale for that decision?

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