3. Let’s take a look at financial intermediation and the financial crisis of 200

Question

3. Let’s take a look at financial intermediation and the financial crisis of 2007–2009. Using the FRED economic database (https://fred.stlouisfed.org/), search for “all sectors total loans”; you should find a series, All Sectors; Total Loans; Liability. This series is all the lending in the U.S. economy from banks and all other financial intermediaries. When you graph the series you will see that it increases quite smoothly, rising almost without exception every single year from 1945 to 2008. In the third quarter of 2008 the series begins to drop tremendously, and in an unprecedented way—this is the financial crisis.

a. At the peak, in the third quarter of 2008, how much was being lent in the U.S. economy? [Hint: Be careful of the units. The data is given in millions of millions; a million million is a trillion.]

b. In the third quarter of 2011 how much was being lent in the U.S. economy?

c. In the space of just three years approximately how much lending disappeared from the U.S. economy? d. In May 2009 Congress passed a bill protecting credit card users from “unfair” lending practices in the credit card industry – in particular, restrictions on raising interest rates, late fees, and other penalties were part of the bill. Since this is unsecured debt, the risk of these loans is high. How will this bill affect consumers? Will it make it harder to get credit? If so, is this a good thing? How does all of this relate to the effect of usury laws? Please provide reasoning and explanations to support answer.

Explanation / Answer

Based on the data available on the FRED economic database:

a) 24,171,671 millions of dollars were being lent in the US economy at the end of Q3 2008.

b) 21,158,733 millions of dollars were being lent in the US economy at the end of Q3 2011.

c) In the space of just three years lending worth, approximately 3,012,938 millions of dollars disappeared from the U.S. economy.

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