Lecture 10 Thursday, February 16 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 System

Trend #1: Financialization

Real Corporate Profits, financial versus nonfinancial sectors Financial sector profits 1980=100 Nonfinancial profits

2009

Down Jones Stock Index 1947- 2017 20,000 2009

Trend #2: Rapid growth of earnings in the financial sector

Trend #3: Declining regulation

Trend #4: Growth in size and concentration of financial institutions

Changes over time in concentration of banking, 1935-2007   Repeal of Glass-Steagall banking restrictions Total assets of top three U.S. banks as a percent of total commercial banking assets

Asset Concentration of the 5 largest banks in the United States: Continued concentration after the Great Recession Percent

Trend #5: Financial Innovation

The Financial Crisis of 2007-2009

The nature of the housing market Mortgage loans Risks and Foreclosures Derivatives: Mortgage-backed securities Speculative markets in housing & in derivatives

What happened? Changes in the mortgage market fueled house price rise. Key innovation was the derivatives market in Mortgage- backed securities Result was rapid growth in sub-prime mortgages among other instruments Investment banks got heavily into the speculative market The speculation became increasingly leveraged (borrowing to invest) When prices started declining, the whole structure unraveled, beginning with Lehman Brothers Bailout needed to prevent total financial system collapse

What happened? Changes in the mortgage market fueled house price rise. Key innovation was the derivatives market in Mortgage- backed securities Result was rapid growth in sub-prime mortgages among other instruments Investment banks got heavily into the speculative market The speculation became increasingly leveraged (borrowing to invest) When prices started declining, the whole structure unraveled, beginning with Lehman Brothers Bailout needed to prevent total financial system collapse

What happened? Changes in the mortgage market fueled house price rise. Key innovation was the derivatives market in Mortgage- backed securities Result was rapid growth in sub-prime mortgages among other instruments Investment banks got heavily into the speculative market The speculation became increasingly leveraged (borrowing to invest) When prices started declining, the whole structure unraveled, beginning with Lehman Brothers Bailout needed to prevent total financial system collapse

What happened? Changes in the mortgage market fueled house price rise. Key innovation was the derivatives market in Mortgage- backed securities Result was rapid growth in sub-prime mortgages among other instruments Investment banks got heavily into the speculative market The speculation became increasingly leveraged (borrowing to invest) When prices started declining, the whole structure unraveled, beginning with Lehman Brothers Bailout needed to prevent total financial system collapse

What happened? Changes in the mortgage market fueled house price rise. Key innovation was the derivatives market in Mortgage- backed securities Result was rapid growth in sub-prime mortgages among other instruments Investment banks got heavily into the speculative market The speculation became increasingly leveraged (borrowing to invest) When prices started declining, the whole structure unraveled, beginning with Lehman Brothers Bailout needed to prevent total financial system collapse

What happened? Changes in the mortgage market fueled house price rise. Key innovation was the derivatives market in Mortgage- backed securities Result was rapid growth in sub-prime mortgages among other instruments Investment banks got heavily into the speculative market The speculation became increasingly leveraged (borrowing to invest) When prices started declining, the whole structure unraveled, beginning with Lehman Brothers Bailout needed to prevent total financial system collapse

What happened? Changes in the mortgage market fueled house price rise. Key innovation was the derivatives market in Mortgage- backed securities Result was rapid growth in sub-prime mortgages among other instruments Investment banks got heavily into the speculative market The speculation became increasingly leveraged (borrowing to invest) When prices started declining, the whole structure unraveled, beginning with Lehman Brothers Bailout needed to prevent total financial system collapse

What happened? Changes in the mortgage market fueled house price rise. Key innovation was the derivatives market in Mortgage- backed securities Result was rapid growth in sub-prime mortgages among other instruments Investment banks got heavily into the speculative market The speculation became increasingly leveraged (borrowing to invest) When prices started declining, the whole structure unraveled, beginning with Lehman Brothers Bailout needed to prevent total financial system collapse

Magnitude of the crisis

What Can be done? Strengthen and enforce Dodd-Frank regulations, End Too-Big-To-Fail: break up the Monster Banks. Build a more community-rooted financial system.

What Can be done? Strengthen and enforce Dodd-Frank regulations. End Too-Big-To-Fail: break up the Monster Banks. Build a more community-rooted financial system.

What Can be done? Strengthen and enforce Dodd-Frank regulations. End Too-Big-To-Fail: break up the Monster Banks. Build a more community-rooted financial system.

What Can be done? Strengthen and enforce Dodd-Frank regulations. End Too-Big-To-Fail: break up the Monster Banks. Build a more community-rooted financial system.

http://www.youtube.com/watch?feature=player_embedded&v=qOP2V_np2c0