Political Science 2211E Lecture Notes - Lecture 8: Economic Globalization, Wall Street Crash Of 1929, Real Estate Bubble

• School: Western University
• Department: Political Science
• Course: Political Science 2211E
• Professor: Adam Harmes

Document Summary

Business cycle recessions: central banks maintain a balance between inflation and unemployment, recession can occur when central bank raises interest rates to fight inflation. Oil shock recessions: war, weather, etc. causes sharp rise in oil prices, oil prices lead to inflation, central bank raises interest rates to fight inflation. Asset bubble recessions: a. k. a (cid:858)(cid:271)ala(cid:374)(cid:272)e sheet re(cid:272)essio(cid:374)(cid:859) Involve high levels of private debt: start with bursting of an asset bubble. Asset bubble: prices rise far above fundamentals, fundamentals = real economic conditions, occurs when people borrow money to speculate, rising assets used as collateral. Bubble bursts, crisis begins: prices crash, those who borrowed to speculate defaults on loans, some banks fail and this causes panic and bank runs. Bank runs and credit crises: collapse of one bank creates domino effect and more collapse, depositors panic and ask for money back, bank has to sell assets at panic prices and goes bust, banks stop lending.