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Dive into fundamental financial concepts like money, investment, credit, assets, and securities. Explore the role of banks, risks in loans, and solutions like deposit insurance and regulation. Learn about financial crises and the impact of financialization.
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Lecture 10 Thursday, 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
Real Corporate Profits, financial versus nonfinancial sectors Financial sector profits 1980=100 Nonfinancial profits
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
The nature of the housing market • Mortgage loans • Risks and Foreclosures • Mortgage backed securities • Speculative markets in housing & Mortgage backed securities
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