How did the US financial sector get to this point?

1987 –Jan. 1993 –Feb. 1994 –May 1998 –Sept. 1998 –Dec. 1998 –1999 – Mar. 2000 –May 2000 – 2001-2006 –

Video is posted at http://www.pbs.org/wgbh/pages/frontline/warning/cron/

Financial Sector Reform

• Make a list of problems in the financial sector.• Make a list of costs & benefits of banking regulation.• Financial reform is complicated

– Eight major components.– Evaluate as overall

if proposal will prevent new financial crisis if proposal will NOT prevent new financial crisis

• Systemic risk ~ interdependence in a market where single failure (or cluster) can cause a cascading series of failures, bringing down entire market.

• Moral hazard ~ an individual or institution does not bear the full consequences and responsibilities of its doings, and therefore has a tendency to act less carefully

SUMMARY: Restoring American Financial Stability http://banking.senate.gov/public/_files/FinancialReformSummary23

1510FINAL.pdf

1. Consumer protections with authority and independence:

2. Ends too big to fail:3. Advanced warning system:4. Transparency & accountability for exotic

instruments:5. Federal bank supervision:6. Executive compensation and corporate governance:7. Protects investors:8. Enforces regulations on the books:

Financial Sector Reform

• Summary of proposed banking reform– Copy the heading for the proposed change.– Find information 3-5 facts about what it will do.– Evaluate good/bad of proposed change. Give your

opinion…– Post information for classmates walking tour.– Evaluate proposal…

if proposal will prevent new financial crisis if proposal will NOT prevent new financial crisis

“Fear the Boom and Bust”

• Watch rap1. How should the economy be “steered”

according to Keynes?2. Hayek wants to “set markets free” from

what?3. Explain the implications these opposing

economic viewpoints have for policymakers?

Video is posted at nreconomics.wikispaces.com under Unit 6

Credit Crisis Visualized

1. Define leverage.

2. Define CDO.(collaterized debt obligation)

3. Explain credit default swaps.

4. What role did the rating system play in the crisis?

5. Define subprime mortgage.

6. How did CDOs become riskier?

7. Define “underwater”.

Video is posted at nreconomics.wikispaces.com under Unit 7 parts 1 & 2

How did the US financial sector get to this point?

1987 –Jan. 1993 –Feb. 1994 –May 1998 –Sept. 1998 –Dec. 1998 –1999 – Mar. 2000 –May 2000 – 2001-2006 –

Video is posted at http://www.pbs.org/wgbh/pages/frontline/warning/cron/

Financial Sector Reform

• Make a list of problems in the financial sector.• Make a list of costs & benefits of banking regulation.• Financial reform is complicated

– Eight major components.– Evaluate as overall

if proposal will prevent new financial crisis if proposal will NOT prevent new financial crisis

• Systemic risk ~ interdependence in a market where single failure (or cluster) can cause a cascading series of failures, bringing down entire market.

• Moral hazard ~ an individual or institution does not bear the full consequences and responsibilities of its doings, and therefore has a tendency to act less carefully

SUMMARY: Restoring American Financial Stability http://banking.senate.gov/public/_files/FinancialReformSummary23

1510FINAL.pdf

1. Consumer protections with authority and independence:

2. Ends too big to fail:3. Advanced warning system:4. Transparency & accountability for exotic

instruments:5. Federal bank supervision:6. Executive compensation and corporate governance:7. Protects investors:8. Enforces regulations on the books:

Financial Sector Reform

• Summary of proposed banking reform– Copy the heading for the proposed change.– Find information 3-5 facts about what it will do.– Evaluate good/bad of proposed change. Give your

opinion…– Post information for classmates walking tour.– Evaluate proposal…

if proposal will prevent new financial crisis if proposal will NOT prevent new financial crisis

Federal Budget & National debt

• Federal budget = – tax revenues - expenditures

• Balanced budget: taxes = expenditures• Budget deficit: taxes < expenditures • Budget surplus: taxes > expenditures• Government spending is independent of

output (RGDP) while taxes rise/fall with changes in RGDP.

FY 2010 budget

http://research.stlouisfed.org/fred2/series/FYFSD?cid=5

Is the Federal Government budget deficit a problem?

YES NO

Would a law or Constitutional Amendment requiring a balanced budget be a good idea?

How does the government eliminate it’s budget deficit?

• Someone has to pay more, propose 1 tax increase. – Why did you select this tax?

– How would the tax increase impact people in different income groups?

• Someone has to get less, propose 1 spending decrease. – Why did you select this expenditure?

– How would this spending decrease impact people?

• What would be the impact of your proposal?

National Debt

• Will the national debt cause the U.S. government to go bankrupt?

• Q: How does the government pay for it’s budget deficit?– A: It borrows money (issues bonds, treasury bills)

– “Crowding out” means it costs average U.S. citizen & businesses more to take out a loan.

• How does the U.S. debt compare to other countries?