lecture 10 thursday, october 2 finance. some basic concepts money investment credit assets and...
TRANSCRIPT
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Lecture 10Thursday, October 2
Finance
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Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
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Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
![Page 4: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/4.jpg)
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
![Page 5: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/5.jpg)
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
![Page 6: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/6.jpg)
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
![Page 7: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/7.jpg)
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
![Page 8: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/8.jpg)
Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
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Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
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Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
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Some Basic Concepts•Money•Investment•Credit•Assets and Capital gains•Securities: Stocks, bonds, derivatives, etc.•Leverage•Speculation•Bubbles
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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
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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
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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
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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
![Page 17: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/17.jpg)
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
![Page 18: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/18.jpg)
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
![Page 19: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/19.jpg)
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
![Page 20: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/20.jpg)
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
![Page 21: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/21.jpg)
The U.S. Financial SystemThe U.S. Financial System
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Trend #1:Trend #1:FinancializationFinancialization
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1980=100
Financial sector profits
Nonfinancial profits
Real Corporate Profits, financial versus nonfinancial sectors
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2009
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Trend #2:Trend #2:Rapid growth of earnings Rapid growth of earnings
in the financial sectorin the financial sector
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Trend #3:Trend #3:Declining regulationDeclining regulation
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Trend #4:Trend #4:Growth in size of financial Growth in size of financial
institutionsinstitutions
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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
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Trend #5:Trend #5:Financial InnovationFinancial Innovation
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The Financial Crisis of The Financial Crisis of 2007-20092007-2009
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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
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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
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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
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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
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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
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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
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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
![Page 44: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/44.jpg)
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
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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
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Magnitude of the crisisMagnitude of the crisis
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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.
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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.
![Page 54: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/54.jpg)
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.
![Page 55: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/55.jpg)
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.
![Page 56: Lecture 10 Thursday, October 2 Finance. Some Basic Concepts Money Investment Credit Assets and Capital gains Securities: Stocks, bonds, derivatives, etc](https://reader036.vdocuments.site/reader036/viewer/2022062516/56649d765503460f94a56f90/html5/thumbnails/56.jpg)
http://www.youtube.com/watch?feature=player_embedded&v=qOP2V_np2c0