Lecture 10Thursday, October 2
Finance
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
BANKS•A key idea: Banks create money. How?•A problem: inherent risks in loans•Banking panics: a run on the bank•Solution: deposit insurance + regulation•Investment banks •Bank speculation & Financial Crisis•Core solution in the 1930s: Glass-Steagall act separating commercial and investment banking
BANKS•A key idea: Banks create money. How?•A problem: inherent risks in loans•Banking panics: a run on the bank•Solution: deposit insurance + regulation•Investment banks •Bank speculation & Financial Crisis•Core solution in the 1930s: Glass-Steagall act separating commercial and investment banking
BANKS•A key idea: Banks create money. How?•A problem: inherent risks in loans•Banking panics: a run on the bank•Solution: deposit insurance + regulation•Investment banks •Bank speculation & Financial Crisis•Core solution in the 1930s: Glass-Steagall act separating commercial and investment banking
BANKS•A key idea: Banks create money. How?•A problem: inherent risks in loans•Banking panics: a run on the bank•Solution: deposit insurance + regulation•Investment banks •Bank speculation & Financial Crisis•Core solution in the 1930s: Glass-Steagall act separating commercial and investment banking
BANKS•A key idea: Banks create money. How?•A problem: inherent risks in loans•Banking panics: a run on the bank•Solution: deposit insurance + regulation•Investment banks •Bank speculation & Financial Crisis•Core solution in the 1930s: Glass-Steagall act separating commercial and investment banking
BANKS•A key idea: Banks create money. How?•A problem: inherent risks in loans•Banking panics: a run on the bank•Solution: deposit insurance + regulation•Investment banks •Bank speculation & Financial Crisis•Core solution in the 1930s: Glass-Steagall act separating commercial and investment banking
BANKS•A key idea: Banks create money. How?•A problem: inherent risks in loans•Banking panics: a run on the bank•Solution: deposit insurance + regulation•Investment banks •Bank speculation & Financial Crisis•Core solution in the 1930s: Glass-Steagall act separating commercial and investment banking
BANKS•A key idea: Banks create money. How?•A problem: inherent risks in loans•Banking panics: a run on the bank•Solution: deposit insurance + regulation•Investment banks •Bank speculation & Financial Crisis•Core solution in the 1930s: Glass-Steagall act separating commercial and investment banking
The U.S. Financial SystemThe U.S. Financial System
Trend #1:Trend #1:FinancializationFinancialization
1980=100
Financial sector profits
Nonfinancial profits
Real Corporate Profits, financial versus nonfinancial sectors
2009
Trend #2:Trend #2:Rapid growth of earnings Rapid growth of earnings
in the financial sectorin the financial sector
Trend #3:Trend #3:Declining regulationDeclining regulation
Trend #4:Trend #4:Growth in size of financial Growth in size of financial
institutionsinstitutions
Repeal of Glass-Steagall banking restrictions
Changes over time in concentration of banking, 1935-2007
Total assets of top three U.S. banks as a percent of total commercial banking assets
Trend #5:Trend #5:Financial InnovationFinancial Innovation
The Financial Crisis of The Financial Crisis of 2007-20092007-2009
The nature of the housing marketThe nature of the housing market
•Mortgage loans Mortgage loans •Risks and ForeclosuresRisks and Foreclosures•Mortgage backed securities Mortgage backed securities •Speculative markets in housing & Speculative markets in housing & Mortgage backed securitiesMortgage backed securities
What happened?What happened?•Changes in the mortgage market fueled house price rise.Changes in the mortgage market fueled house price rise.•Key innovation was the derivatives market in Mortgage-backed Key innovation was the derivatives market in Mortgage-backed securitiessecurities•Result was rapid growth in sub-prime mortgages among other Result was rapid growth in sub-prime mortgages among other instrumentsinstruments•Investment banks got heavily into the speculative marketInvestment banks got heavily into the speculative market•The speculation became increasingly leveraged (borrowing to The speculation became increasingly leveraged (borrowing to invest)invest)•When prices started declining, the whole structure unraveled, When prices started declining, the whole structure unraveled, beginning with Lehman Brothersbeginning with Lehman Brothers•Bailout needed to prevent total financial system collapseBailout needed to prevent total financial system collapse
What happened?What happened?•Changes in the mortgage market fueled house price rise.Changes in the mortgage market fueled house price rise.•Key innovation was the derivatives market in Mortgage-backed Key innovation was the derivatives market in Mortgage-backed securitiessecurities•Result was rapid growth in sub-prime mortgages among other Result was rapid growth in sub-prime mortgages among other instrumentsinstruments•Investment banks got heavily into the speculative marketInvestment banks got heavily into the speculative market•The speculation became increasingly leveraged (borrowing to The speculation became increasingly leveraged (borrowing to invest)invest)•When prices started declining, the whole structure unraveled, When prices started declining, the whole structure unraveled, beginning with Lehman Brothersbeginning with Lehman Brothers•Bailout needed to prevent total financial system collapseBailout needed to prevent total financial system collapse
What happened?What happened?•Changes in the mortgage market fueled house price rise.Changes in the mortgage market fueled house price rise.•Key innovation was the derivatives market in Mortgage-backed Key innovation was the derivatives market in Mortgage-backed securitiessecurities•Result was rapid growth in sub-prime mortgages among other Result was rapid growth in sub-prime mortgages among other instrumentsinstruments•Investment banks got heavily into the speculative marketInvestment banks got heavily into the speculative market•The speculation became increasingly leveraged (borrowing to The speculation became increasingly leveraged (borrowing to invest)invest)•When prices started declining, the whole structure unraveled, When prices started declining, the whole structure unraveled, beginning with Lehman Brothersbeginning with Lehman Brothers•Bailout needed to prevent total financial system collapseBailout needed to prevent total financial system collapse
What happened?What happened?•Changes in the mortgage market fueled house price rise.Changes in the mortgage market fueled house price rise.•Key innovation was the derivatives market in Mortgage-backed Key innovation was the derivatives market in Mortgage-backed securitiessecurities•Result was rapid growth in sub-prime mortgages among other Result was rapid growth in sub-prime mortgages among other instrumentsinstruments•Investment banks got heavily into the speculative marketInvestment banks got heavily into the speculative market•The speculation became increasingly leveraged (borrowing to The speculation became increasingly leveraged (borrowing to invest)invest)•When prices started declining, the whole structure unraveled, When prices started declining, the whole structure unraveled, beginning with Lehman Brothersbeginning with Lehman Brothers•Bailout needed to prevent total financial system collapseBailout needed to prevent total financial system collapse
What happened?What happened?•Changes in the mortgage market fueled house price rise.Changes in the mortgage market fueled house price rise.•Key innovation was the derivatives market in Mortgage-backed Key innovation was the derivatives market in Mortgage-backed securitiessecurities•Result was rapid growth in sub-prime mortgages among other Result was rapid growth in sub-prime mortgages among other instrumentsinstruments•Investment banks got heavily into the speculative marketInvestment banks got heavily into the speculative market•The speculation became increasingly leveraged (borrowing to The speculation became increasingly leveraged (borrowing to invest)invest)•When prices started declining, the whole structure unraveled, When prices started declining, the whole structure unraveled, beginning with Lehman Brothersbeginning with Lehman Brothers•Bailout needed to prevent total financial system collapseBailout needed to prevent total financial system collapse
What happened?What happened?•Changes in the mortgage market fueled house price rise.Changes in the mortgage market fueled house price rise.•Key innovation was the derivatives market in Mortgage-backed Key innovation was the derivatives market in Mortgage-backed securitiessecurities•Result was rapid growth in sub-prime mortgages among other Result was rapid growth in sub-prime mortgages among other instrumentsinstruments•Investment banks got heavily into the speculative marketInvestment banks got heavily into the speculative market•The speculation became increasingly leveraged (borrowing to The speculation became increasingly leveraged (borrowing to invest)invest)•When prices started declining, the whole structure unraveled, When prices started declining, the whole structure unraveled, beginning with Lehman Brothersbeginning with Lehman Brothers•Bailout needed to prevent total financial system collapseBailout needed to prevent total financial system collapse
What happened?What happened?•Changes in the mortgage market fueled house price rise.Changes in the mortgage market fueled house price rise.•Key innovation was the derivatives market in Mortgage-backed Key innovation was the derivatives market in Mortgage-backed securitiessecurities•Result was rapid growth in sub-prime mortgages among other Result was rapid growth in sub-prime mortgages among other instrumentsinstruments•Investment banks got heavily into the speculative marketInvestment banks got heavily into the speculative market•The speculation became increasingly leveraged (borrowing to The speculation became increasingly leveraged (borrowing to invest)invest)•When prices started declining, the whole structure unraveled, When prices started declining, the whole structure unraveled, beginning with Lehman Brothersbeginning with Lehman Brothers•Bailout needed to prevent total financial system collapseBailout needed to prevent total financial system collapse
What happened?What happened?•Changes in the mortgage market fueled house price rise.Changes in the mortgage market fueled house price rise.•Key innovation was the derivatives market in Mortgage-backed Key innovation was the derivatives market in Mortgage-backed securitiessecurities•Result was rapid growth in sub-prime mortgages among other Result was rapid growth in sub-prime mortgages among other instrumentsinstruments•Investment banks got heavily into the speculative marketInvestment banks got heavily into the speculative market•The speculation became increasingly leveraged (borrowing to The speculation became increasingly leveraged (borrowing to invest)invest)•When prices started declining, the whole structure unraveled, When prices started declining, the whole structure unraveled, beginning with Lehman Brothersbeginning with Lehman Brothers•Bailout needed to prevent total financial system collapseBailout needed to prevent total financial system collapse
Magnitude of the crisisMagnitude of the crisis
What Can be done?
1.Strengthen and enforce Dodd-Frank regulations,
2.End Too-Big-To-Fail: break up the Monster Banks.
3.Build a more community-rooted financial system.
What Can be done?
1.Strengthen and enforce Dodd-Frank regulations.
2.End Too-Big-To-Fail: break up the Monster Banks.
3.Build a more community-rooted financial system.
What Can be done?
1.Strengthen and enforce Dodd-Frank regulations.
2.End Too-Big-To-Fail: break up the Monster Banks.
3.Build a more community-rooted financial system.
What Can be done?
1.Strengthen and enforce Dodd-Frank regulations.
2.End Too-Big-To-Fail: break up the Monster Banks.
3.Build a more community-rooted financial system.
http://www.youtube.com/watch?feature=player_embedded&v=qOP2V_np2c0