1. Lecture 10 Thursday, October 2 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. 1980=100 Financial sector profits Nonfinancial profits Real Corporate Profits, financial versus nonfinancial sectors

25. 2009

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

28. Trend #3: Declining regulation

31. Trend #4: Growth in size of financial institutions

33. 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

34. Trend #5: Financial Innovation

35. The Financial Crisis of 2007-2009

36. The nature of the housing market Mortgage loans Mortgage loans Risks and Foreclosures Risks and Foreclosures Mortgage backed securities Mortgage backed securities Speculative markets in housing & Mortgage backed securities Speculative markets in housing & Mortgage backed securities

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

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

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

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

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

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

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

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

46. Magnitude of the crisis

52. 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.

53. 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.

54. 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.

55. 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.

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