1. Lecture 10
Thursday, February 16
Finance

2. Some Basic Concepts Money Investment Credit Assets and Capital gains
Securities: Stocks, bonds, derivatives, etc.
Leverage
Speculation
Bubbles

3. Some Basic Concepts Money Investment Credit Assets and Capital gains
Securities: Stocks, bonds, derivatives, etc.
Leverage
Speculation
Bubbles

4. Some Basic Concepts Money Investment Credit Assets and Capital gains
Securities: Stocks, bonds, derivatives, etc.
Leverage
Speculation
Bubbles

5. Some Basic Concepts Money Investment Credit Assets and Capital gains
Securities: Stocks, bonds, derivatives, etc.
Leverage
Speculation
Bubbles

6. Some Basic Concepts Money Investment Credit Assets and Capital gains
Securities: Stocks, bonds, derivatives, etc.
Leverage
Speculation
Bubbles

7. Some Basic Concepts Money Investment Credit Assets and Capital gains
Securities: Stocks, bonds, derivatives, etc.
Leverage
Speculation
Bubbles

8. Some Basic Concepts Money Investment Credit Assets and Capital gains
Securities: Stocks, bonds, derivatives, etc.
Leverage
Speculation
Bubbles

9. Some Basic Concepts Money Investment Credit Assets and Capital gains
Securities: Stocks, bonds, derivatives, etc.
Leverage
Speculation
Bubbles

10. Some Basic Concepts Money Investment Credit Assets and Capital gains
Securities: Stocks, bonds, derivatives, etc.
Leverage
Speculation
Bubbles

11. Some Basic Concepts Money Investment Credit Assets and Capital gains
Securities: Stocks, bonds, derivatives, etc.
Leverage
Speculation
Bubbles

12. 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

13. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. The U.S. Financial System

22. Trend #1: Financialization

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

25. 2009

26. Down Jones Stock Index 1947- 2017
20,000
2009

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

29. Trend #3: Declining regulation

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

34. 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

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

36. Trend #5: Financial Innovation

37. The Financial Crisis of 2007-2009

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

39. 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

40. 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

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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

48. Magnitude of the crisis

54. 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.

55. 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.

56. 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.

57. 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.