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MSU - IS 315 - ISS Study Guide for Exam 2 - Study Guide

Created by: Samantha Shea Elite Notetaker

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MSU - IS 315 - ISS Study Guide for Exam 2 - Study Guide

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background image Enlightenment  thinkers  focused  on  public  domain What’s  good  for  society  is  good  for  me  as  an  individual § Self-­‐interest  married  to  the  public  good Enlightenment  and  Public  vs.  Private  domains Enlightened  self-­‐interest-­‐ realize  welfare  is  tied  to  welfare  of  society  you   find  yourself  in Self-­‐interest  isn't  same  thing  as  selfishness Individual  should  realize  their  interest  overlap  with  the  interest  of   society  at  large Self-­‐interest  links  the  individual  to  wider  community  interests 'Self-­‐Interest' Women  should  have  more  concern  for  children § Voice  putting  men's  individualism  in  check § Idea  that  even  though  women  were  excluded  form  public  involvement,   they  still  had  a  public  role Women  were  excluded  from  politics  during  this  era  but  not  totally   excluded  from  public  discourse More  concerned  with  welfare  of  entire  community  and  not  just   their  own  narrow  interest § Sexist  idea  during  a  sexist  time § Women  are  naturally  more  nurturing  in  their  attitude  than  men Women  were  concerned  with  welfare  of  all  children § Men  concerned  for  welfare  of  all  wives  and  children  of  the   community § Both  men  and  women  were  responsible  for  the  interest  of  community  in   general Women  +  Civic  Morality Checks  on  Individualism: Religion 1. Charity § Putting  a  limit  on  individual  self-­‐interest Community  aid § Won't  have  more  than  one  church  in  a  village  or  town § Not  segregated  by  class Caring  about  community  at  large You  would  see  the  poor  people  and  all  kinds  of  people  coming   together  which  fostered  sense  of  obligation  towards  poor  and   children  of  community § Churches  tended  not  to  be  segregated,  community  based focus  of  religion  in  early  American  republic  was  to  get  people  engaged  in  their   civic  obligations Politics 2. Voting  because  good  for  country  and  good  for  everybody  which  means  it   was  good  for  an  individual acting  for  the  good  of  all Economics 3. Got  you  interested  in  how  they  were  doing   § Fostered  sense  of  community  between  people § Economic  deals  tended  to  be  long  term  relationship   Most  Americans  were  subsistence  farmers § Site  of  where  you  worked  was  done  at  home § Gender  roles  were  not  defined most  economic  activities  were  face  to  face  activities ○ Idea  that  in  pre  modern  times,  majority  of  people  were  working  on  family   owned  farm ○ Work  place  is  home,  home  is  workplace
○ No  clear  cut  gender  roles
○ No  such  thing  as  men  vs.  women's  work
Domestic  Mode  of  Production 1870s More  private  views § People  weren't  concerned  with  public  reform 'Gilded  Age' No  longer  concerned  with  social  reform § Concern  shifted  from  trying  to  better  the  community  and  now   focused  on  their  own  family  and  lives  and  friends § 1870-­‐1890:  middle  class  retreated  from  public  engagement Middle  Class  Retreats  from  Public  Engagement Concern  shifted  from  trying  to  better  the  community  and  now  focused  on   their  own  family  and  lives  and  friends Focus  on  family America  became  exceedingly  polarized Between  rich  and  poor Diseases  increased § Poverty  increased § Without  unions  and  such,  the  poor  had  very  unhealthy  standards  of  living Polarization  of  Rich/Poor Explain  why  government  was  reluctant  to  help  out  the  poor § Genetically  inferior § Idea  was  that  helping  the  poor  would  spread  bad  genes  and   instead  we  should  let  them  die Goal  of  charity  was  to  help  elevate  the  middle  class Even  people  who  wanted  to  give  to  charities  were  encouraged  to   give  to  libraries  and  museums,  not  to  help  the  poor § Social  Darwinism  became  prominent  feature  of  American  political  life Each  economic  group  became  segregated  between  one  another Middle  class  along  with  every  other  class  became  a  distinct  segment Social  Darwinism,  Segregation  of  Society ○ Religion  started  to  focus  on  personal  vice  rather  than  community   betterment Religion  was  used  to  encourage  political  activism Focus  was  on  Law  and  Order Morality  became  an  individual  and  family  issue,  not  so  much  a  civic   concern Religion  focus  on  Personal  Vice  (not  civic  morality) Rich  and  poor  were  concerned  simply  with  their  own  pleasure Middle  class  thought  they  were  moral  unlike  the  rich  and  poor  people Middle  Class  see  themselves  as  only  moral  groups Money  spent  on  family  or  household  were  seen  as  good No  longer  seen  as  representative  of  virtue Role  of  women  changed Children  were  forced  to  work  as  a  way  of  supplementing  family   income Women  were  accused  of  neglecting  children 1880s:  rich  and  poor  were  bad Consumerism  +  the  family 1980s Reagan  Year Poor  were  seen  as  bad  but  rich  were  seen  as  good If  poor  would  shape  up  and  create  stable  households  we  would  not  have  a   problem  with  poverty  or  drugs Poor  could  not  adopt  middle  class  family  lifestyle  because  they  were  poor Poor  women  were  forced  to  work  outside  of  household  leaving  children  at   home  by  themselves Women  were  accused  of  neglecting  children 2nd  Gilded  Age 1980s:  public  domain  became  exclusively  the  domain  of  restrained  self-­‐ interest All  social  issues  now  are  framed  from  individual  choice Inappropriate  for  politician  to  be  doing "politicians  are  public  figures  not  your  drinking  buddy" "I  feel  your  pain" What  were  looking  for  is  somebody  to  do  public  good Politicians  or  public  figures  have  to  talk  to  us  as  if  they  are  our  friends Checks  on  individual  self-­‐ interest  have  become  eroded Focus  on  individual  doesn't  allow  us  to  see  structural  problems Private  morality  of  the  family  ends  up  feeding  individualism  itself Public  domain  no  longer  a  check  on  individualism Checks  on  individual  self-­‐ interest  have  become  eroded Focus  on  individual  doesn't  allow  us  to  see  structural  problems Private  morality  of  the  family  ends  up  feeding  individualism  itself Gender  Roles  +  America  today ○ Article  by  Thomas  Friedman    came  from  that  book World  is  flat More  things  started  to  be  controlled  by  the  government As  technology  of  war  got  more  advanced,  many  more  sectors  of  economy   were  pulled  into  military  complex Becomes  possible  to  break  up  a  job  and  farm  it  out  to  wherever  in   the  world  it  is  cheapest  to  do  that  specific  part  of  the  job Computers  an  internet  made  anyone  around  the  world  able  to  work  with   each  other Interconnection  of  world  (computers)  means  Production  is  Global America  was  willing  to  side  with  dictators   Called  the  United  Fruit  Company   Led  to  civil  war  there  that  lasted  decades § Government  of  Guatemala  were  labeled  as  communist  so  we   orchestrated  a  cue  that  put  a  right  wing  dictatorship  in  power Americans  sold  a  ton  of  military  equipment  to  government  of   Guatemala The  majority  of  the  land,  example  Guatemala,  was  owned  by  one   American  company Iran's  oil  fields  were  controlled  by  American  and  British  companies Iran  hates  us  because  we  intervene  in  their  country America  actively  supported  dependent  economies   Before  large  companies  had  to  employ  many  people  form  their   country  but  today  the  largest  American  company  do  not  employ   many  people  directly  because  all  of  the  manufacturing  are  done   abroad Now  we  have  very  efficient  companies  but  do  no  generate  a  lot  of   jobs  in  America Companies  do  not  produce  a  ton  of  jobs  in  own  country Western  markets Developing  countries  experienced  economic  boom Companies  not  loyal  to  Country   Fairly  beneficial  to  global  economy § Globalization  had  it's  problems  but  it  seemed  to  be  a  good  things Rationality  of  Globalization ○ Idea  that  call  centers  will  teach  their  employees  to  sound  American 'Accent  Neutralization  Classes' ○ Led  to  era  of  globalization 1917  USSR  communist  revolution/  got  rid  of  czar Communism:  everything  is  regulated  by  central  government,  not  supply   and  demand Repressive  towards  people Most  nations  throughout  world  fell  somewhere  between  U.S  and  U.S.S.R.   views World  switch  over  to  mainly  capitalism   § 1989:  collapse  of  U.S.S.R:  they  couldn't  keep  with  the  needs  of  people Collapse  of  U.S.S.R  in  1991 New  independent  organizations  like  the  W.T.O  were  set  up  as   independent  judges  of  the  fairness  of  government  and  policies  when  it   came  to  trade W.T.O:  World  Trade  Organization No  longer  block  a  company  from  entering  your  country  just  to  protect   your  country's  economy W.T.O Agriculture  was  exempt  from  free  market  openness When  global  economy  opened  up,  developing  countries  were  flooded   with  Western  goods Only  thing  they  had  to  trade  were  agricultural  products § Newly  independent  countries  had  nothing  to  sell  because  of   the  exception § During  colonial  era,  many  developing  colonies  were  forced  into  cash   crop  farming One  exception  to  free  trade  colonies:  agricultural  sector Agriculture  excluded  from  global  free  trade ○ The  shift  of  where  things  are  made  so  essentially  people  lost  jobs Disruption  of  Globalization ○ Idea  that  the  manufacturing  jobs  that  are  created  these  days  tend  not  to   employ  many  people New  manufacturing  +  jobs ○ Represented  an  alternate  model  to  capitalism U.S  would  give  to  dictatorship  countries  as  long  as  they  supported  the  U.S They  didn't  want  people  to  revolt  to  communism  so  they  gave  weapons  to   the  dictator Cold  War:  U.S  vs.  U.S.S.R More  efficient  =  cheaper  it  is  to  produce  a  good Efficient  means  that  rationality  will  generate  more  wealth § Economic  theory  is  all  about  economic  rationality:  more  rational=   more  efficient Goal  of  economics:  maximize  profit,  minimize  cost  of  production Made  not  be  good  for  everybody  in  short  run  but  in  the  long   run  is  beneficial  to  everybody § Trade  generates  more  profit   Ideally  everybody  should  benefit  but  more  than  likely  a  sector   of  the  country  could  keep  it  al  for  themselves § Trade  might  increase  overall  wealth  of  country  but  it  is  up  to  each   individual  country  to  decide  where  extra  wealth  is  distributed Win-­‐win  situation  for  both  countries Free  trade  is  important  because… U.S.  stood  for  democracy  +  free  trade Totalitarian-­‐ left  leaning  dictatorships  were  not  good We  made  a  distinction  between  authoritarian  and  totalitarian   governments   ○ Distinction  between  left  and  right
○ Authoritarian  =  good
Authoritarian  vs.  Totalitarian Middle  of  WWI  (1917),  Russia  had  a  communist  revolution,  got  rid   of  their  king  (czar) Saw  free  market  capitalism  as  one  of  the  great  evils  of  the   world § Marx  felt  capitalism  was  unequal § He  said  it  promotes  inequality   § Gets  rid  of  any  institutions  that  interfere  with  free   market  exchanges He  said  capitalism  promotes  alienation § Capitalism  is  all  about  rational  economic  exchanges § Derives  from  theories  of  Karl  Marx "Communist  block" Centralize  directed  economic  control Regulated  by  centralized  director  of  some  sort  (in  other  words,   government) Instead  of  market  forces  determining  economic  factors,  now  it  was   being  directed  by  the  central  government Russia,  a  communist  country,  tried  to  set  up  and  alternate  model  to   capitalism Communism  +  Centrally  directed  economy Invisible  hand  gone Costs  and  profits  determined  by  the  government,  not  supply  and  demand No  market  correction  for  things "centralized  planning" Every  aspect  of  the  economy  was  all  under  the  control  of  a  government Problems  with  gov.  control  of  economy First  time  in  human  history Different  from  older  cities § Massive § No  electricity No  sewage No  access  to  clean  water Rapidly  growing  cities  have  overwhelmed  many  countries § Lead  to  creation  of  mega-­‐cities Today,  majority  of  the  world  live  in  cities Globalization  +  Urbanization Ex.  Apple Cannot  generate  jobs  like  other  companies  used  to  do Even  though  they  are  American  companies  and  successful  did  not   generate  middle  class  jobs Some  companies  have  been  exceedingly  successful Everything  has  become  global Wages  are  as  low  as  they  have  ever  been  even  though  we  are  the  most   efficient  we  have  ever  been Corrupt  officials § Money  not  going  where  it  was  supposed  to  be  going § All  of  these  projects  had  very  little  affect  in  reducing  global  poverty Made  UN  goal  without  all  of  the  projects § With  globalization,  poverty  has  been  cut  in  half   Bi-­‐product  of  globalization § Goal  that  seemed  so  distance  actually  happened Countries  that  most  embraced  globalization  experienced  the  most   dramatic  decreases  in  poverty   Years  ago,  UN  set  up  a  goal  to  reduce  global  poverty  in  half ○ Net  affect  of  globalization  is  decrease  in  poverty Globalization  +  Poverty Great  shock  to  most Started  as  financial  meltdown  in  America Problems  in  America  quickly  became  global  problems § Quickly  spread  to  other  parts  of  the  world  because  the  world  was   interconnected Global  recession  started  in  2008 Recession  of  2008 Free  markets  have  been  characterized  by  boom  and  bust   cycles § Markets  have  gone  up  and  down  since  the  beginning  of  capitalism New  Economic  Model-­‐ supposed  to  put  an  end  to  business  cycles ○ Deregulate  the  markets  because  the  markets  could  take  care  of   themselves The  'New  Economy'  +  Free  trade Economic  downturn § When  bubble  in  market,  market  itself  will  pop  the  bubble   New  economic  model  was  supposed  to  ensure  that  markets  would  not  do   market  corrections  and  their  would  not  be  a  downturn  in  the  market Deregulation  of  businesses  would  mean  markets  would  be  better  at   managing  risks Markets  would  be  better  at  correcting  themselves  before  bubbles  were   formed Argued  that  the  less  government  interference  the  better Government  involvement  should  be  minimal  in  the  market  because   it  was  assumed  that  markets  were  self-­‐correcting Approach  to  economic  policies  was  that  government  should  be  as  free  of   economic  involvement  as  they  possibly  could  be East  Asia  Crisis  of  1997:  could  not  pay  back  loans  they  had  from   Western  banks 1980s:  Policies  of  Ronald  Reagan-­‐ government  should  not  interfere  with   market R.Reagan,  A.  Green  Span  +  the  self-­‐correcting  market People  were  paying  large  sums  of  money  for  flower § First  bubble  in  1600s:  Great  Tulip  Bubble Market  bubble:  one  sector  of  economy  will  forever  increase  in  value .com  bubble:  when  computers  first  came  on  to  market,  a  lot  of  tech   companies  opened  up  and  each  thought  they  would  always  make  money   because  computers  were  here  to  stay   Market  'bubble' Depends  on  us  buying  stuff Without  Americans  regularly  buying  stuff,  the  entire  global   economy  would  collapse We  have  to  consumer  stuff  at  and  ever  increasing  rate  for  model  to   sustain  itself Buy  more  stuff  every  year  for  global  economy  to  keep  coming  along Entire  global  economy  is  dependent  on  American  consumerism American  Consumerism  +  Globalization Contradiction § Can't  afford  to  buy  what  is  needed  to  be  bought § Bulk  of  stuff  consumed  in  America  is  consumed  by  middle  and  lower   class  people The  income  for  middle  and  lower  class  Americans  has  been  stagnate  for   decades Stagnant  wages  of  American  Middle/lower  class You  wouldn't  have  to  pay  as  much  money  for  the   money  that  you  borrowed Federal  reserve  (so  not  really  government)  lowered  the   interest  rate  to  encourage  borrowing § Government  deregulated  institutions  that  lend  money  so  that   there  is  less  oversight  to  who  was  lending  out  the  money § Government  had  to  step  in   Solution:  let  middle  and  lower  class  borrow  money  to  fuel  global   consumption Borrowing  +  the  Middle  Class Everybody  assumed  that  home  prices  would  continue  to  go  up   because  they  have  been  for  decades It  got  so  bad  that  a  simple  two  bedroom  house  could  go  for  as   much  as  a  million  dollars § HOUSING  BUBBLE Some  people  didn't  care  because  they  figured  no  matter  what   they  paid  for  a  house,  they  knew  the  value  would  go  up  the   next  year  and  they  could  get  back  their  money § It  didn't  matter  if  people  borrowed  a  lot  of  money  for  their  house   because  value  would  go  up  and  they  would  be  able  to  pay  back   their  own Regulators  and  banks  thought  this  was  a  good  idea When  one  sector  collapses,  the  entire  economy  did A  lot  of  people  lost  their  houses § When  price  of  houses  fell,  people  could  no  longer  make  borrow   money  against  the  equity  of  their  home  so  could  no  longer  pay  their   mortgages Banks  now  did  not  know  how  much  money  they  actually  had Housing  bubble  crashed  and  it  affected  the  entire  American  economy  not   just  housing  economy Housing  bubble,  along  with  lower  interest  rates,  fuel  American   consumerism American  Housing  market  +  the  bubble Global  credit  crisis:  nobody  was  willing  to  take  the  chance  to  lend   money  to  anybody  else Banks  very  quickly  realized  they  could  not  trust  other  banks  either   because  other  banks  were  doing  the  same  thing Global  Credit  Crisis  +  importance  of  banks Did  not  stimulate  the  economy § People  just  saved  their  money  instead  of  using  it  to  buy  goods § Tax  cut  didn't  help They  let  Leeman  Brothers  fail  because  they  just  assumed  market   would  correct  itself 2007:  Bush  administration  responded  by  giving  a  tax  cut  to  people   (everybody) They  already  have  what  they  need  so  will  just  save  that  extra  money   instead  of  spend  it The  poor  are  more  likely  to  need  stuff Tax  cuts  to  the  wealthy  has  a  minimal  multiplier  effect Tax  cuts  +  the  economy Banks  focused  on  securitization  of  mortgages Banks  facilitate  transactions  &  manage  risk  and  make  loans Securitization  of  mortgages You  can  go  here  to  take  out  money  whenever  you  feel § Commercial  bank  is  the  bank  you  think  of  when  you  think  of  a  bank Handle  stocks  and  bonds,  etc § You're  giving  money  to  a  financial  advisor  who  will  then  invest   it  into  something  you  tell  them  to  and  you  could  potentially   lose  that  money § Investment  banks:  things  that  manage  people's  portfolios Supposed  to  keep  these  banks  separate   Glass-­‐ Stegall  Act  1933:  split  commercial  banks  from  investment  banks If  gambles  did  not  pay  off  than  the  bank  did  not  have  enough   money  to  pay  back  depositors § 1990:  repealed  so  they  could  now  do  both  at  any  bank If  these  banks  collapsed,  they  would  hurt  the  entire  economy Government  has  no  choice  but  to  make  sure  that  these  banks  don't   collapse If  banks  fail,  we  have  to  bail  them  out § Traditionally,  government  has  insured  commercial  banks  but  now  that   they  do  both  they  insure  all  banks Glass-­‐Stegall  Act.  (commercial  vs.  investment  banks) Aggregate  demand:  people  willing  to  buy  stuff Aggregate  demand ○ Idea  that  the  interest  rate  of  bonds  went  down  to  1%  and  foreign   investors  thought  it  was  too  low  so  they  invested  in  the  housing  market   instead Foreign  investment  in  American  housing  sector Banks  quit  trusting/loaning  money  to  each  other Because  banks  didn't  know  their  own  finances,  they  figured  other  banks   didn't  either Banks  didn't  lend  to  each  other Gov.  bail  out  of  banks He  did  a  government  stimulus Government  was  willing  to  start  spending  money  to  simulate  the   economy Increase  in  demand  helped Obama  administration  took  a  different  approach  than  Bush States  in  America  were  doing  austerity What  states  were  doing  was  out  of  sink  with  what  federal   government  was  doing Stimulus  Obama  was  able  to  get  from  Congress  wasn't  large  enough   Obama  stimulus  wasn't  big  enough  to  pull  economy  out  of  depression Obama  +  stimulus  spending Obama  administration  used  tax  payer  money  to  bail   Government  felt  they  had  to  bail  out  banks  and  insurance  companies  that   insured  investment  banks Bankers  have  always  argued  that  they  are  better  at  managing  risk  than   the  government  is   Revolving  door  between  financial  sector  and  government  bureaucrats Government  bail  out  of  investment  banks/  insurance  co. Banks  weren't  restructured  so  heir  shareholders  didn't  lose  any  money Banks  said  if  they  were  going  to  regulate  them,  it  would  tamper  the   system Obama  administration  went  to  federal  reserve  to  get  money  to  bail  out The  whole  point  to  saving  banks  was  to  make  sure  they  would  lend  money Global  aggregate  demand  was  very  weak   Banks  not  re-­‐structured/  not  forced  to  cut  wages/  pay  more  taxes Ensures  money  can  be  paid  back  to  people  (tax  payer  money) Bank  pays  the  corporation Gives  depositors  confidence  in  financial  sector Even  with  federal  government,  if  all  banks  failed  at  once,  they   wouldn't  have  enough  money Government  set  of  Federal  Deposit  Insurance  Corporation  (FDIC)1933 The  F.D.I.C. By  2009:  economy  was  rising  a  little  but  still  very  weak   2009  +  end  of  recession ○ Bailed  out  the  banks People  lose  confidence  in  the  economy  and  tend  to  become  less   willing  to  spend  money A  crisis  is  created  when  people  spend  money  on  the  wrong  stuff Economic  crisis:  consistent  feature  of  capitalism  from  the  beginning Multipliers:  for  every  government  dollar  that  is  spent,  it  should  promote   spending  of  3,4,  or  5  dollars  in  the  economy Econ.  Crisis  and  the  gov. States  were  cutting  back  on  spending  while  government  was  increasing  it States  cut  spending Decrease  in  regulation § 1999:  Glass  -­‐Stegall  Act,  that  stated  commercial  and   investment  banks  had  to  be  separate,  was  repealed § Government  still  had  to  pay  but  increasingly  government  had  no  say   in  what  the  banks  were  doing Banks  lobbied  to  have  less  regulation  from  the  government Now,  government  also  had  to  ensure  investment  banks Commercial  banks  could  also  be  investment  banks  because  of   deregulation Deregulation  of  the  1980s Banks  had  new  revenue  streams Could  put  fee  on  mortgages,  transactions,  even  some  charge  a  fee   for  going  to  the  teller Fees 1. So  if  something  happened  the  banks  would  not  care Bank  is  no  longer  holding  your  mortgages § Banks  would  bundle  mortgages  together  and  sell  it  to  anyone  who   wanted  to  invest  in  those  mortgages Bank  has  no  incentive  to  make  sure  you  were  a  good  credit   risk § The  investor  of  the  mortgage  is  on  the  hook § No  longer  held  the  mortgage  so  they  did  not  care  if  you  could  pay   your  mortgage "liar  loans":  banks  would  encourage  you  to  tell  them  you  were  good   for  your  money   Securitization 2. Instead  of  80/20 Banks  were  willing  to  give  you  100%  of  the  value  of  the  house 100%  mortgage  loans:  during  housing  bubble 3. Liars  loans,  100%  mortgages  etc.  (bank  'innovations') • When  interest  rates  got  low  on  bonds,  foreign  investors  went  to  invest  in   housing Everybody  assumed  housing  prices  would  not  go  down Dramatic  collapse  in  price  of  housing  in  America Fed  +  foreign  investment  in  American  housing This  caused  the  credit  rating  agencies  to  rate  the  banks  well  no   matter  what  because  that  mean  they  would  be  paid  well Credit  rating  agencies  rated  banks  credits  but  banks  were  the  ones  who   paid  these  agencies Credit  rating  agencies  +  banks A  lot  of  unemployment  because  businesses  couldn't  pay  employees People  couldn't  buy  a  lot  of  stuff  and  economy  was  in  a  downturn Banks  refused  to  loan  money  because  they  didn't  trust  anyone  but  big   businesses Credit  freeze  +  the  Recovery If  you  lend  money  to  larger  corporations,  you  can  get  a  bigger  return Banks  focus  on  big  business Could  put  fee  on  mortgages,  transactions,  even  some  charge  a  fee   for  going  to  the  teller Fees Banks  +  fees Glass-­‐ Steagall  Act-­‐ separated  investment  banks  from  commercial   banks Every  bank  now  is  an  investment  bank Investment  banks  are  not  covered  by  government  insurance  but   once  we  got  rid  of  separation  they  had  to   "Too  big  to  fail"   1999:  Congress  repealed  Glass-­‐ Steagall  Act  and  replaced  by  Gramm-­‐ Leach-­‐ Bliley  Act Banks  too  big  to  fail/  restructure Short-­‐term  benefits  by  artificially  inflating  the  price  of  their   company  stock Not  just  CEOs CEO  has  every  incentive  to  think  in  terms  of  short-­‐term Distorted  incentives  (C.E.O's  think  in  terms  of  short  term) CEO  are  corrupt They  didn't  care  about  how  well  the  stock  was  doing  because  they  got   paid  either  way Corporate  boards  decide  CEO  salary  but  CEO  picks  the  corporate  board C.E.O.  pay  debt  by  corporate  boards/  appointed  by  C.E.O. A  kind  of  insurance § Derivative:  essentially  betting  that  the  cost  of  a  commodity  will   either  go  up  or  down  at  a  future  date No  logical  connection  or  relationship  to  bank  or  corporation   in  order  to  take  out  a  derivative  on  that  product A  derivative  can  be  taken  out  by  anybody All  of  these  major  banks  were  heavily  involved  in  derivatives Derivatives Late  payments Transactions Credit  card  companies  have  all  sorts  of  hidden  fees Banks  fine  businesses  to  accept  credit  cards Study  Guide  for  Exam  #2 Thursday,  November   3,  2016 12:42  PM
background image Enlightenment  thinkers  focused  on  public  domain What’s  good  for  society  is  good  for  me  as  an  individual § Self-­‐interest  married  to  the  public  good Enlightenment  and  Public  vs.  Private  domains Enlightened  self-­‐interest-­‐ realize  welfare  is  tied  to  welfare  of  society  you   find  yourself  in Self-­‐interest  isn't  same  thing  as  selfishness Individual  should  realize  their  interest  overlap  with  the  interest  of   society  at  large Self-­‐interest  links  the  individual  to  wider  community  interests 'Self-­‐Interest' Women  should  have  more  concern  for  children § Voice  putting  men's  individualism  in  check § Idea  that  even  though  women  were  excluded  form  public  involvement,   they  still  had  a  public  role Women  were  excluded  from  politics  during  this  era  but  not  totally   excluded  from  public  discourse More  concerned  with  welfare  of  entire  community  and  not  just   their  own  narrow  interest § Sexist  idea  during  a  sexist  time § Women  are  naturally  more  nurturing  in  their  attitude  than  men Women  were  concerned  with  welfare  of  all  children § Men  concerned  for  welfare  of  all  wives  and  children  of  the   community § Both  men  and  women  were  responsible  for  the  interest  of  community  in   general Women  +  Civic  Morality Checks  on  Individualism: Religion 1. Charity § Putting  a  limit  on  individual  self-­‐interest Community  aid § Won't  have  more  than  one  church  in  a  village  or  town § Not  segregated  by  class Caring  about  community  at  large You  would  see  the  poor  people  and  all  kinds  of  people  coming   together  which  fostered  sense  of  obligation  towards  poor  and   children  of  community § Churches  tended  not  to  be  segregated,  community  based focus  of  religion  in  early  American  republic  was  to  get  people  engaged  in  their   civic  obligations Politics 2. Voting  because  good  for  country  and  good  for  everybody  which  means  it   was  good  for  an  individual acting  for  the  good  of  all Economics 3. Got  you  interested  in  how  they  were  doing   § Fostered  sense  of  community  between  people § Economic  deals  tended  to  be  long  term  relationship   Most  Americans  were  subsistence  farmers § Site  of  where  you  worked  was  done  at  home § Gender  roles  were  not  defined most  economic  activities  were  face  to  face  activities ○ Idea  that  in  pre  modern  times,  majority  of  people  were  working  on  family   owned  farm ○ Work  place  is  home,  home  is  workplace
○ No  clear  cut  gender  roles
○ No  such  thing  as  men  vs.  women's  work
Domestic  Mode  of  Production 1870s More  private  views § People  weren't  concerned  with  public  reform 'Gilded  Age' No  longer  concerned  with  social  reform § Concern  shifted  from  trying  to  better  the  community  and  now   focused  on  their  own  family  and  lives  and  friends § 1870-­‐1890:  middle  class  retreated  from  public  engagement Middle  Class  Retreats  from  Public  Engagement Concern  shifted  from  trying  to  better  the  community  and  now  focused  on   their  own  family  and  lives  and  friends Focus  on  family America  became  exceedingly  polarized Between  rich  and  poor Diseases  increased § Poverty  increased § Without  unions  and  such,  the  poor  had  very  unhealthy  standards  of  living Polarization  of  Rich/Poor Explain  why  government  was  reluctant  to  help  out  the  poor § Genetically  inferior § Idea  was  that  helping  the  poor  would  spread  bad  genes  and   instead  we  should  let  them  die Goal  of  charity  was  to  help  elevate  the  middle  class Even  people  who  wanted  to  give  to  charities  were  encouraged  to   give  to  libraries  and  museums,  not  to  help  the  poor § Social  Darwinism  became  prominent  feature  of  American  political  life Each  economic  group  became  segregated  between  one  another Middle  class  along  with  every  other  class  became  a  distinct  segment Social  Darwinism,  Segregation  of  Society ○ Religion  started  to  focus  on  personal  vice  rather  than  community   betterment Religion  was  used  to  encourage  political  activism Focus  was  on  Law  and  Order Morality  became  an  individual  and  family  issue,  not  so  much  a  civic   concern Religion  focus  on  Personal  Vice  (not  civic  morality) Rich  and  poor  were  concerned  simply  with  their  own  pleasure Middle  class  thought  they  were  moral  unlike  the  rich  and  poor  people Middle  Class  see  themselves  as  only  moral  groups Money  spent  on  family  or  household  were  seen  as  good No  longer  seen  as  representative  of  virtue Role  of  women  changed Children  were  forced  to  work  as  a  way  of  supplementing  family   income Women  were  accused  of  neglecting  children 1880s:  rich  and  poor  were  bad Consumerism  +  the  family 1980s Reagan  Year Poor  were  seen  as  bad  but  rich  were  seen  as  good If  poor  would  shape  up  and  create  stable  households  we  would  not  have  a   problem  with  poverty  or  drugs Poor  could  not  adopt  middle  class  family  lifestyle  because  they  were  poor Poor  women  were  forced  to  work  outside  of  household  leaving  children  at   home  by  themselves Women  were  accused  of  neglecting  children 2nd  Gilded  Age 1980s:  public  domain  became  exclusively  the  domain  of  restrained  self-­‐ interest All  social  issues  now  are  framed  from  individual  choice Inappropriate  for  politician  to  be  doing "politicians  are  public  figures  not  your  drinking  buddy" "I  feel  your  pain" What  were  looking  for  is  somebody  to  do  public  good Politicians  or  public  figures  have  to  talk  to  us  as  if  they  are  our  friends Checks  on  individual  self-­‐ interest  have  become  eroded Focus  on  individual  doesn't  allow  us  to  see  structural  problems Private  morality  of  the  family  ends  up  feeding  individualism  itself Public  domain  no  longer  a  check  on  individualism Checks  on  individual  self-­‐ interest  have  become  eroded Focus  on  individual  doesn't  allow  us  to  see  structural  problems Private  morality  of  the  family  ends  up  feeding  individualism  itself Gender  Roles  +  America  today ○ Article  by  Thomas  Friedman    came  from  that  book World  is  flat More  things  started  to  be  controlled  by  the  government As  technology  of  war  got  more  advanced,  many  more  sectors  of  economy   were  pulled  into  military  complex Becomes  possible  to  break  up  a  job  and  farm  it  out  to  wherever  in   the  world  it  is  cheapest  to  do  that  specific  part  of  the  job Computers  an  internet  made  anyone  around  the  world  able  to  work  with   each  other Interconnection  of  world  (computers)  means  Production  is  Global America  was  willing  to  side  with  dictators   Called  the  United  Fruit  Company   Led  to  civil  war  there  that  lasted  decades § Government  of  Guatemala  were  labeled  as  communist  so  we   orchestrated  a  cue  that  put  a  right  wing  dictatorship  in  power Americans  sold  a  ton  of  military  equipment  to  government  of   Guatemala The  majority  of  the  land,  example  Guatemala,  was  owned  by  one   American  company Iran's  oil  fields  were  controlled  by  American  and  British  companies Iran  hates  us  because  we  intervene  in  their  country America  actively  supported  dependent  economies   Before  large  companies  had  to  employ  many  people  form  their   country  but  today  the  largest  American  company  do  not  employ   many  people  directly  because  all  of  the  manufacturing  are  done   abroad Now  we  have  very  efficient  companies  but  do  no  generate  a  lot  of   jobs  in  America Companies  do  not  produce  a  ton  of  jobs  in  own  country Western  markets Developing  countries  experienced  economic  boom Companies  not  loyal  to  Country   Fairly  beneficial  to  global  economy § Globalization  had  it's  problems  but  it  seemed  to  be  a  good  things Rationality  of  Globalization ○ Idea  that  call  centers  will  teach  their  employees  to  sound  American 'Accent  Neutralization  Classes' ○ Led  to  era  of  globalization 1917  USSR  communist  revolution/  got  rid  of  czar Communism:  everything  is  regulated  by  central  government,  not  supply   and  demand Repressive  towards  people Most  nations  throughout  world  fell  somewhere  between  U.S  and  U.S.S.R.   views World  switch  over  to  mainly  capitalism   § 1989:  collapse  of  U.S.S.R:  they  couldn't  keep  with  the  needs  of  people Collapse  of  U.S.S.R  in  1991 New  independent  organizations  like  the  W.T.O  were  set  up  as   independent  judges  of  the  fairness  of  government  and  policies  when  it   came  to  trade W.T.O:  World  Trade  Organization No  longer  block  a  company  from  entering  your  country  just  to  protect   your  country's  economy W.T.O Agriculture  was  exempt  from  free  market  openness When  global  economy  opened  up,  developing  countries  were  flooded   with  Western  goods Only  thing  they  had  to  trade  were  agricultural  products § Newly  independent  countries  had  nothing  to  sell  because  of   the  exception § During  colonial  era,  many  developing  colonies  were  forced  into  cash   crop  farming One  exception  to  free  trade  colonies:  agricultural  sector Agriculture  excluded  from  global  free  trade ○ The  shift  of  where  things  are  made  so  essentially  people  lost  jobs Disruption  of  Globalization ○ Idea  that  the  manufacturing  jobs  that  are  created  these  days  tend  not  to   employ  many  people New  manufacturing  +  jobs ○ Represented  an  alternate  model  to  capitalism U.S  would  give  to  dictatorship  countries  as  long  as  they  supported  the  U.S They  didn't  want  people  to  revolt  to  communism  so  they  gave  weapons  to   the  dictator Cold  War:  U.S  vs.  U.S.S.R More  efficient  =  cheaper  it  is  to  produce  a  good Efficient  means  that  rationality  will  generate  more  wealth § Economic  theory  is  all  about  economic  rationality:  more  rational=   more  efficient Goal  of  economics:  maximize  profit,  minimize  cost  of  production Made  not  be  good  for  everybody  in  short  run  but  in  the  long   run  is  beneficial  to  everybody § Trade  generates  more  profit   Ideally  everybody  should  benefit  but  more  than  likely  a  sector   of  the  country  could  keep  it  al  for  themselves § Trade  might  increase  overall  wealth  of  country  but  it  is  up  to  each   individual  country  to  decide  where  extra  wealth  is  distributed Win-­‐win  situation  for  both  countries Free  trade  is  important  because… U.S.  stood  for  democracy  +  free  trade Totalitarian-­‐ left  leaning  dictatorships  were  not  good We  made  a  distinction  between  authoritarian  and  totalitarian   governments   ○ Distinction  between  left  and  right
○ Authoritarian  =  good
Authoritarian  vs.  Totalitarian Middle  of  WWI  (1917),  Russia  had  a  communist  revolution,  got  rid   of  their  king  (czar) Saw  free  market  capitalism  as  one  of  the  great  evils  of  the   world § Marx  felt  capitalism  was  unequal § He  said  it  promotes  inequality   § Gets  rid  of  any  institutions  that  interfere  with  free   market  exchanges He  said  capitalism  promotes  alienation § Capitalism  is  all  about  rational  economic  exchanges § Derives  from  theories  of  Karl  Marx "Communist  block" Centralize  directed  economic  control Regulated  by  centralized  director  of  some  sort  (in  other  words,   government) Instead  of  market  forces  determining  economic  factors,  now  it  was   being  directed  by  the  central  government Russia,  a  communist  country,  tried  to  set  up  and  alternate  model  to   capitalism Communism  +  Centrally  directed  economy Invisible  hand  gone Costs  and  profits  determined  by  the  government,  not  supply  and  demand No  market  correction  for  things "centralized  planning" Every  aspect  of  the  economy  was  all  under  the  control  of  a  government Problems  with  gov.  control  of  economy First  time  in  human  history Different  from  older  cities § Massive § No  electricity No  sewage No  access  to  clean  water Rapidly  growing  cities  have  overwhelmed  many  countries § Lead  to  creation  of  mega-­‐cities Today,  majority  of  the  world  live  in  cities Globalization  +  Urbanization Ex.  Apple Cannot  generate  jobs  like  other  companies  used  to  do Even  though  they  are  American  companies  and  successful  did  not   generate  middle  class  jobs Some  companies  have  been  exceedingly  successful Everything  has  become  global Wages  are  as  low  as  they  have  ever  been  even  though  we  are  the  most   efficient  we  have  ever  been Corrupt  officials § Money  not  going  where  it  was  supposed  to  be  going § All  of  these  projects  had  very  little  affect  in  reducing  global  poverty Made  UN  goal  without  all  of  the  projects § With  globalization,  poverty  has  been  cut  in  half   Bi-­‐product  of  globalization § Goal  that  seemed  so  distance  actually  happened Countries  that  most  embraced  globalization  experienced  the  most   dramatic  decreases  in  poverty   Years  ago,  UN  set  up  a  goal  to  reduce  global  poverty  in  half ○ Net  affect  of  globalization  is  decrease  in  poverty Globalization  +  Poverty Great  shock  to  most Started  as  financial  meltdown  in  America Problems  in  America  quickly  became  global  problems § Quickly  spread  to  other  parts  of  the  world  because  the  world  was   interconnected Global  recession  started  in  2008 Recession  of  2008 Free  markets  have  been  characterized  by  boom  and  bust   cycles § Markets  have  gone  up  and  down  since  the  beginning  of  capitalism New  Economic  Model-­‐ supposed  to  put  an  end  to  business  cycles ○ Deregulate  the  markets  because  the  markets  could  take  care  of   themselves The  'New  Economy'  +  Free  trade Economic  downturn § When  bubble  in  market,  market  itself  will  pop  the  bubble   New  economic  model  was  supposed  to  ensure  that  markets  would  not  do   market  corrections  and  their  would  not  be  a  downturn  in  the  market Deregulation  of  businesses  would  mean  markets  would  be  better  at   managing  risks Markets  would  be  better  at  correcting  themselves  before  bubbles  were   formed Argued  that  the  less  government  interference  the  better Government  involvement  should  be  minimal  in  the  market  because   it  was  assumed  that  markets  were  self-­‐correcting Approach  to  economic  policies  was  that  government  should  be  as  free  of   economic  involvement  as  they  possibly  could  be East  Asia  Crisis  of  1997:  could  not  pay  back  loans  they  had  from   Western  banks 1980s:  Policies  of  Ronald  Reagan-­‐ government  should  not  interfere  with   market R.Reagan,  A.  Green  Span  +  the  self-­‐correcting  market People  were  paying  large  sums  of  money  for  flower § First  bubble  in  1600s:  Great  Tulip  Bubble Market  bubble:  one  sector  of  economy  will  forever  increase  in  value .com  bubble:  when  computers  first  came  on  to  market,  a  lot  of  tech   companies  opened  up  and  each  thought  they  would  always  make  money   because  computers  were  here  to  stay   Market  'bubble' Depends  on  us  buying  stuff Without  Americans  regularly  buying  stuff,  the  entire  global   economy  would  collapse We  have  to  consumer  stuff  at  and  ever  increasing  rate  for  model  to   sustain  itself Buy  more  stuff  every  year  for  global  economy  to  keep  coming  along Entire  global  economy  is  dependent  on  American  consumerism American  Consumerism  +  Globalization Contradiction § Can't  afford  to  buy  what  is  needed  to  be  bought § Bulk  of  stuff  consumed  in  America  is  consumed  by  middle  and  lower   class  people The  income  for  middle  and  lower  class  Americans  has  been  stagnate  for   decades Stagnant  wages  of  American  Middle/lower  class You  wouldn't  have  to  pay  as  much  money  for  the   money  that  you  borrowed Federal  reserve  (so  not  really  government)  lowered  the   interest  rate  to  encourage  borrowing § Government  deregulated  institutions  that  lend  money  so  that   there  is  less  oversight  to  who  was  lending  out  the  money § Government  had  to  step  in   Solution:  let  middle  and  lower  class  borrow  money  to  fuel  global   consumption Borrowing  +  the  Middle  Class Everybody  assumed  that  home  prices  would  continue  to  go  up   because  they  have  been  for  decades It  got  so  bad  that  a  simple  two  bedroom  house  could  go  for  as   much  as  a  million  dollars § HOUSING  BUBBLE Some  people  didn't  care  because  they  figured  no  matter  what   they  paid  for  a  house,  they  knew  the  value  would  go  up  the   next  year  and  they  could  get  back  their  money § It  didn't  matter  if  people  borrowed  a  lot  of  money  for  their  house   because  value  would  go  up  and  they  would  be  able  to  pay  back   their  own Regulators  and  banks  thought  this  was  a  good  idea When  one  sector  collapses,  the  entire  economy  did A  lot  of  people  lost  their  houses § When  price  of  houses  fell,  people  could  no  longer  make  borrow   money  against  the  equity  of  their  home  so  could  no  longer  pay  their   mortgages Banks  now  did  not  know  how  much  money  they  actually  had Housing  bubble  crashed  and  it  affected  the  entire  American  economy  not   just  housing  economy Housing  bubble,  along  with  lower  interest  rates,  fuel  American   consumerism American  Housing  market  +  the  bubble Global  credit  crisis:  nobody  was  willing  to  take  the  chance  to  lend   money  to  anybody  else Banks  very  quickly  realized  they  could  not  trust  other  banks  either   because  other  banks  were  doing  the  same  thing Global  Credit  Crisis  +  importance  of  banks Did  not  stimulate  the  economy § People  just  saved  their  money  instead  of  using  it  to  buy  goods § Tax  cut  didn't  help They  let  Leeman  Brothers  fail  because  they  just  assumed  market   would  correct  itself 2007:  Bush  administration  responded  by  giving  a  tax  cut  to  people   (everybody) They  already  have  what  they  need  so  will  just  save  that  extra  money   instead  of  spend  it The  poor  are  more  likely  to  need  stuff Tax  cuts  to  the  wealthy  has  a  minimal  multiplier  effect Tax  cuts  +  the  economy Banks  focused  on  securitization  of  mortgages Banks  facilitate  transactions  &  manage  risk  and  make  loans Securitization  of  mortgages You  can  go  here  to  take  out  money  whenever  you  feel § Commercial  bank  is  the  bank  you  think  of  when  you  think  of  a  bank Handle  stocks  and  bonds,  etc § You're  giving  money  to  a  financial  advisor  who  will  then  invest   it  into  something  you  tell  them  to  and  you  could  potentially   lose  that  money § Investment  banks:  things  that  manage  people's  portfolios Supposed  to  keep  these  banks  separate   Glass-­‐ Stegall  Act  1933:  split  commercial  banks  from  investment  banks If  gambles  did  not  pay  off  than  the  bank  did  not  have  enough   money  to  pay  back  depositors § 1990:  repealed  so  they  could  now  do  both  at  any  bank If  these  banks  collapsed,  they  would  hurt  the  entire  economy Government  has  no  choice  but  to  make  sure  that  these  banks  don't   collapse If  banks  fail,  we  have  to  bail  them  out § Traditionally,  government  has  insured  commercial  banks  but  now  that   they  do  both  they  insure  all  banks Glass-­‐Stegall  Act.  (commercial  vs.  investment  banks) Aggregate  demand:  people  willing  to  buy  stuff Aggregate  demand ○ Idea  that  the  interest  rate  of  bonds  went  down  to  1%  and  foreign   investors  thought  it  was  too  low  so  they  invested  in  the  housing  market   instead Foreign  investment  in  American  housing  sector Banks  quit  trusting/loaning  money  to  each  other Because  banks  didn't  know  their  own  finances,  they  figured  other  banks   didn't  either Banks  didn't  lend  to  each  other Gov.  bail  out  of  banks He  did  a  government  stimulus Government  was  willing  to  start  spending  money  to  simulate  the   economy Increase  in  demand  helped Obama  administration  took  a  different  approach  than  Bush States  in  America  were  doing  austerity What  states  were  doing  was  out  of  sink  with  what  federal   government  was  doing Stimulus  Obama  was  able  to  get  from  Congress  wasn't  large  enough   Obama  stimulus  wasn't  big  enough  to  pull  economy  out  of  depression Obama  +  stimulus  spending Obama  administration  used  tax  payer  money  to  bail   Government  felt  they  had  to  bail  out  banks  and  insurance  companies  that   insured  investment  banks Bankers  have  always  argued  that  they  are  better  at  managing  risk  than   the  government  is   Revolving  door  between  financial  sector  and  government  bureaucrats Government  bail  out  of  investment  banks/  insurance  co. Banks  weren't  restructured  so  heir  shareholders  didn't  lose  any  money Banks  said  if  they  were  going  to  regulate  them,  it  would  tamper  the   system Obama  administration  went  to  federal  reserve  to  get  money  to  bail  out The  whole  point  to  saving  banks  was  to  make  sure  they  would  lend  money Global  aggregate  demand  was  very  weak   Banks  not  re-­‐structured/  not  forced  to  cut  wages/  pay  more  taxes Ensures  money  can  be  paid  back  to  people  (tax  payer  money) Bank  pays  the  corporation Gives  depositors  confidence  in  financial  sector Even  with  federal  government,  if  all  banks  failed  at  once,  they   wouldn't  have  enough  money Government  set  of  Federal  Deposit  Insurance  Corporation  (FDIC)1933 The  F.D.I.C. By  2009:  economy  was  rising  a  little  but  still  very  weak   2009  +  end  of  recession ○ Bailed  out  the  banks People  lose  confidence  in  the  economy  and  tend  to  become  less   willing  to  spend  money A  crisis  is  created  when  people  spend  money  on  the  wrong  stuff Economic  crisis:  consistent  feature  of  capitalism  from  the  beginning Multipliers:  for  every  government  dollar  that  is  spent,  it  should  promote   spending  of  3,4,  or  5  dollars  in  the  economy Econ.  Crisis  and  the  gov. States  were  cutting  back  on  spending  while  government  was  increasing  it States  cut  spending Decrease  in  regulation § 1999:  Glass  -­‐Stegall  Act,  that  stated  commercial  and   investment  banks  had  to  be  separate,  was  repealed § Government  still  had  to  pay  but  increasingly  government  had  no  say   in  what  the  banks  were  doing Banks  lobbied  to  have  less  regulation  from  the  government Now,  government  also  had  to  ensure  investment  banks Commercial  banks  could  also  be  investment  banks  because  of   deregulation Deregulation  of  the  1980s Banks  had  new  revenue  streams Could  put  fee  on  mortgages,  transactions,  even  some  charge  a  fee   for  going  to  the  teller Fees 1. So  if  something  happened  the  banks  would  not  care Bank  is  no  longer  holding  your  mortgages § Banks  would  bundle  mortgages  together  and  sell  it  to  anyone  who   wanted  to  invest  in  those  mortgages Bank  has  no  incentive  to  make  sure  you  were  a  good  credit   risk § The  investor  of  the  mortgage  is  on  the  hook § No  longer  held  the  mortgage  so  they  did  not  care  if  you  could  pay   your  mortgage "liar  loans":  banks  would  encourage  you  to  tell  them  you  were  good   for  your  money   Securitization 2. Instead  of  80/20 Banks  were  willing  to  give  you  100%  of  the  value  of  the  house 100%  mortgage  loans:  during  housing  bubble 3. Liars  loans,  100%  mortgages  etc.  (bank  'innovations') • When  interest  rates  got  low  on  bonds,  foreign  investors  went  to  invest  in   housing Everybody  assumed  housing  prices  would  not  go  down Dramatic  collapse  in  price  of  housing  in  America Fed  +  foreign  investment  in  American  housing This  caused  the  credit  rating  agencies  to  rate  the  banks  well  no   matter  what  because  that  mean  they  would  be  paid  well Credit  rating  agencies  rated  banks  credits  but  banks  were  the  ones  who   paid  these  agencies Credit  rating  agencies  +  banks A  lot  of  unemployment  because  businesses  couldn't  pay  employees People  couldn't  buy  a  lot  of  stuff  and  economy  was  in  a  downturn Banks  refused  to  loan  money  because  they  didn't  trust  anyone  but  big   businesses Credit  freeze  +  the  Recovery If  you  lend  money  to  larger  corporations,  you  can  get  a  bigger  return Banks  focus  on  big  business Could  put  fee  on  mortgages,  transactions,  even  some  charge  a  fee   for  going  to  the  teller Fees Banks  +  fees Glass-­‐ Steagall  Act-­‐ separated  investment  banks  from  commercial   banks Every  bank  now  is  an  investment  bank Investment  banks  are  not  covered  by  government  insurance  but   once  we  got  rid  of  separation  they  had  to   "Too  big  to  fail"   1999:  Congress  repealed  Glass-­‐ Steagall  Act  and  replaced  by  Gramm-­‐ Leach-­‐ Bliley  Act Banks  too  big  to  fail/  restructure Short-­‐term  benefits  by  artificially  inflating  the  price  of  their   company  stock Not  just  CEOs CEO  has  every  incentive  to  think  in  terms  of  short-­‐term Distorted  incentives  (C.E.O's  think  in  terms  of  short  term) CEO  are  corrupt They  didn't  care  about  how  well  the  stock  was  doing  because  they  got   paid  either  way Corporate  boards  decide  CEO  salary  but  CEO  picks  the  corporate  board C.E.O.  pay  debt  by  corporate  boards/  appointed  by  C.E.O. A  kind  of  insurance § Derivative:  essentially  betting  that  the  cost  of  a  commodity  will   either  go  up  or  down  at  a  future  date No  logical  connection  or  relationship  to  bank  or  corporation   in  order  to  take  out  a  derivative  on  that  product A  derivative  can  be  taken  out  by  anybody All  of  these  major  banks  were  heavily  involved  in  derivatives Derivatives Late  payments Transactions Credit  card  companies  have  all  sorts  of  hidden  fees Banks  fine  businesses  to  accept  credit  cards Study  Guide  for  Exam  #2 Thursday,  November   3,  2016 12:42  PM
background image Enlightenment  thinkers  focused  on  public  domain What’s  good  for  society  is  good  for  me  as  an  individual § Self-­‐interest  married  to  the  public  good Enlightenment  and  Public  vs.  Private  domains Enlightened  self-­‐interest-­‐ realize  welfare  is  tied  to  welfare  of  society  you   find  yourself  in Self-­‐interest  isn't  same  thing  as  selfishness Individual  should  realize  their  interest  overlap  with  the  interest  of   society  at  large Self-­‐interest  links  the  individual  to  wider  community  interests 'Self-­‐Interest' Women  should  have  more  concern  for  children § Voice  putting  men's  individualism  in  check § Idea  that  even  though  women  were  excluded  form  public  involvement,   they  still  had  a  public  role Women  were  excluded  from  politics  during  this  era  but  not  totally   excluded  from  public  discourse More  concerned  with  welfare  of  entire  community  and  not  just   their  own  narrow  interest § Sexist  idea  during  a  sexist  time § Women  are  naturally  more  nurturing  in  their  attitude  than  men Women  were  concerned  with  welfare  of  all  children § Men  concerned  for  welfare  of  all  wives  and  children  of  the   community § Both  men  and  women  were  responsible  for  the  interest  of  community  in   general Women  +  Civic  Morality Checks  on  Individualism: Religion 1. Charity § Putting  a  limit  on  individual  self-­‐interest Community  aid § Won't  have  more  than  one  church  in  a  village  or  town § Not  segregated  by  class Caring  about  community  at  large You  would  see  the  poor  people  and  all  kinds  of  people  coming   together  which  fostered  sense  of  obligation  towards  poor  and   children  of  community § Churches  tended  not  to  be  segregated,  community  based focus  of  religion  in  early  American  republic  was  to  get  people  engaged  in  their   civic  obligations Politics 2. Voting  because  good  for  country  and  good  for  everybody  which  means  it   was  good  for  an  individual acting  for  the  good  of  all Economics 3. Got  you  interested  in  how  they  were  doing   § Fostered  sense  of  community  between  people § Economic  deals  tended  to  be  long  term  relationship   Most  Americans  were  subsistence  farmers § Site  of  where  you  worked  was  done  at  home § Gender  roles  were  not  defined most  economic  activities  were  face  to  face  activities ○ Idea  that  in  pre  modern  times,  majority  of  people  were  working  on  family   owned  farm ○ Work  place  is  home,  home  is  workplace
○ No  clear  cut  gender  roles
○ No  such  thing  as  men  vs.  women's  work
Domestic  Mode  of  Production 1870s More  private  views § People  weren't  concerned  with  public  reform 'Gilded  Age' No  longer  concerned  with  social  reform § Concern  shifted  from  trying  to  better  the  community  and  now   focused  on  their  own  family  and  lives  and  friends § 1870-­‐1890:  middle  class  retreated  from  public  engagement Middle  Class  Retreats  from  Public  Engagement Concern  shifted  from  trying  to  better  the  community  and  now  focused  on   their  own  family  and  lives  and  friends Focus  on  family America  became  exceedingly  polarized Between  rich  and  poor Diseases  increased § Poverty  increased § Without  unions  and  such,  the  poor  had  very  unhealthy  standards  of  living Polarization  of  Rich/Poor Explain  why  government  was  reluctant  to  help  out  the  poor § Genetically  inferior § Idea  was  that  helping  the  poor  would  spread  bad  genes  and   instead  we  should  let  them  die Goal  of  charity  was  to  help  elevate  the  middle  class Even  people  who  wanted  to  give  to  charities  were  encouraged  to   give  to  libraries  and  museums,  not  to  help  the  poor § Social  Darwinism  became  prominent  feature  of  American  political  life Each  economic  group  became  segregated  between  one  another Middle  class  along  with  every  other  class  became  a  distinct  segment Social  Darwinism,  Segregation  of  Society ○ Religion  started  to  focus  on  personal  vice  rather  than  community   betterment Religion  was  used  to  encourage  political  activism Focus  was  on  Law  and  Order Morality  became  an  individual  and  family  issue,  not  so  much  a  civic   concern Religion  focus  on  Personal  Vice  (not  civic  morality) Rich  and  poor  were  concerned  simply  with  their  own  pleasure Middle  class  thought  they  were  moral  unlike  the  rich  and  poor  people Middle  Class  see  themselves  as  only  moral  groups Money  spent  on  family  or  household  were  seen  as  good No  longer  seen  as  representative  of  virtue Role  of  women  changed Children  were  forced  to  work  as  a  way  of  supplementing  family   income Women  were  accused  of  neglecting  children 1880s:  rich  and  poor  were  bad Consumerism  +  the  family 1980s Reagan  Year Poor  were  seen  as  bad  but  rich  were  seen  as  good If  poor  would  shape  up  and  create  stable  households  we  would  not  have  a   problem  with  poverty  or  drugs Poor  could  not  adopt  middle  class  family  lifestyle  because  they  were  poor Poor  women  were  forced  to  work  outside  of  household  leaving  children  at   home  by  themselves Women  were  accused  of  neglecting  children 2nd  Gilded  Age 1980s:  public  domain  became  exclusively  the  domain  of  restrained  self-­‐ interest All  social  issues  now  are  framed  from  individual  choice Inappropriate  for  politician  to  be  doing "politicians  are  public  figures  not  your  drinking  buddy" "I  feel  your  pain" What  were  looking  for  is  somebody  to  do  public  good Politicians  or  public  figures  have  to  talk  to  us  as  if  they  are  our  friends Checks  on  individual  self-­‐ interest  have  become  eroded Focus  on  individual  doesn't  allow  us  to  see  structural  problems Private  morality  of  the  family  ends  up  feeding  individualism  itself Public  domain  no  longer  a  check  on  individualism Checks  on  individual  self-­‐ interest  have  become  eroded Focus  on  individual  doesn't  allow  us  to  see  structural  problems Private  morality  of  the  family  ends  up  feeding  individualism  itself Gender  Roles  +  America  today ○ Article  by  Thomas  Friedman    came  from  that  book World  is  flat More  things  started  to  be  controlled  by  the  government As  technology  of  war  got  more  advanced,  many  more  sectors  of  economy   were  pulled  into  military  complex Becomes  possible  to  break  up  a  job  and  farm  it  out  to  wherever  in   the  world  it  is  cheapest  to  do  that  specific  part  of  the  job Computers  an  internet  made  anyone  around  the  world  able  to  work  with   each  other Interconnection  of  world  (computers)  means  Production  is  Global America  was  willing  to  side  with  dictators   Called  the  United  Fruit  Company   Led  to  civil  war  there  that  lasted  decades § Government  of  Guatemala  were  labeled  as  communist  so  we   orchestrated  a  cue  that  put  a  right  wing  dictatorship  in  power Americans  sold  a  ton  of  military  equipment  to  government  of   Guatemala The  majority  of  the  land,  example  Guatemala,  was  owned  by  one   American  company Iran's  oil  fields  were  controlled  by  American  and  British  companies Iran  hates  us  because  we  intervene  in  their  country America  actively  supported  dependent  economies   Before  large  companies  had  to  employ  many  people  form  their   country  but  today  the  largest  American  company  do  not  employ   many  people  directly  because  all  of  the  manufacturing  are  done   abroad Now  we  have  very  efficient  companies  but  do  no  generate  a  lot  of   jobs  in  America Companies  do  not  produce  a  ton  of  jobs  in  own  country Western  markets Developing  countries  experienced  economic  boom Companies  not  loyal  to  Country   Fairly  beneficial  to  global  economy § Globalization  had  it's  problems  but  it  seemed  to  be  a  good  things Rationality  of  Globalization ○ Idea  that  call  centers  will  teach  their  employees  to  sound  American 'Accent  Neutralization  Classes' ○ Led  to  era  of  globalization 1917  USSR  communist  revolution/  got  rid  of  czar Communism:  everything  is  regulated  by  central  government,  not  supply   and  demand Repressive  towards  people Most  nations  throughout  world  fell  somewhere  between  U.S  and  U.S.S.R.   views World  switch  over  to  mainly  capitalism   § 1989:  collapse  of  U.S.S.R:  they  couldn't  keep  with  the  needs  of  people Collapse  of  U.S.S.R  in  1991 New  independent  organizations  like  the  W.T.O  were  set  up  as   independent  judges  of  the  fairness  of  government  and  policies  when  it   came  to  trade W.T.O:  World  Trade  Organization No  longer  block  a  company  from  entering  your  country  just  to  protect   your  country's  economy W.T.O Agriculture  was  exempt  from  free  market  openness When  global  economy  opened  up,  developing  countries  were  flooded   with  Western  goods Only  thing  they  had  to  trade  were  agricultural  products § Newly  independent  countries  had  nothing  to  sell  because  of   the  exception § During  colonial  era,  many  developing  colonies  were  forced  into  cash   crop  farming One  exception  to  free  trade  colonies:  agricultural  sector Agriculture  excluded  from  global  free  trade ○ The  shift  of  where  things  are  made  so  essentially  people  lost  jobs Disruption  of  Globalization ○ Idea  that  the  manufacturing  jobs  that  are  created  these  days  tend  not  to   employ  many  people New  manufacturing  +  jobs ○ Represented  an  alternate  model  to  capitalism U.S  would  give  to  dictatorship  countries  as  long  as  they  supported  the  U.S They  didn't  want  people  to  revolt  to  communism  so  they  gave  weapons  to   the  dictator Cold  War:  U.S  vs.  U.S.S.R More  efficient  =  cheaper  it  is  to  produce  a  good Efficient  means  that  rationality  will  generate  more  wealth § Economic  theory  is  all  about  economic  rationality:  more  rational=   more  efficient Goal  of  economics:  maximize  profit,  minimize  cost  of  production Made  not  be  good  for  everybody  in  short  run  but  in  the  long   run  is  beneficial  to  everybody § Trade  generates  more  profit   Ideally  everybody  should  benefit  but  more  than  likely  a  sector   of  the  country  could  keep  it  al  for  themselves § Trade  might  increase  overall  wealth  of  country  but  it  is  up  to  each   individual  country  to  decide  where  extra  wealth  is  distributed Win-­‐win  situation  for  both  countries Free  trade  is  important  because… U.S.  stood  for  democracy  +  free  trade Totalitarian-­‐ left  leaning  dictatorships  were  not  good We  made  a  distinction  between  authoritarian  and  totalitarian   governments   ○ Distinction  between  left  and  right
○ Authoritarian  =  good
Authoritarian  vs.  Totalitarian Middle  of  WWI  (1917),  Russia  had  a  communist  revolution,  got  rid   of  their  king  (czar) Saw  free  market  capitalism  as  one  of  the  great  evils  of  the   world § Marx  felt  capitalism  was  unequal § He  said  it  promotes  inequality   § Gets  rid  of  any  institutions  that  interfere  with  free   market  exchanges He  said  capitalism  promotes  alienation § Capitalism  is  all  about  rational  economic  exchanges § Derives  from  theories  of  Karl  Marx "Communist  block" Centralize  directed  economic  control Regulated  by  centralized  director  of  some  sort  (in  other  words,   government) Instead  of  market  forces  determining  economic  factors,  now  it  was   being  directed  by  the  central  government Russia,  a  communist  country,  tried  to  set  up  and  alternate  model  to   capitalism Communism  +  Centrally  directed  economy Invisible  hand  gone Costs  and  profits  determined  by  the  government,  not  supply  and  demand No  market  correction  for  things "centralized  planning" Every  aspect  of  the  economy  was  all  under  the  control  of  a  government Problems  with  gov.  control  of  economy First  time  in  human  history Different  from  older  cities § Massive § No  electricity No  sewage No  access  to  clean  water Rapidly  growing  cities  have  overwhelmed  many  countries § Lead  to  creation  of  mega-­‐cities Today,  majority  of  the  world  live  in  cities Globalization  +  Urbanization Ex.  Apple Cannot  generate  jobs  like  other  companies  used  to  do Even  though  they  are  American  companies  and  successful  did  not   generate  middle  class  jobs Some  companies  have  been  exceedingly  successful Everything  has  become  global Wages  are  as  low  as  they  have  ever  been  even  though  we  are  the  most   efficient  we  have  ever  been Corrupt  officials § Money  not  going  where  it  was  supposed  to  be  going § All  of  these  projects  had  very  little  affect  in  reducing  global  poverty Made  UN  goal  without  all  of  the  projects § With  globalization,  poverty  has  been  cut  in  half   Bi-­‐product  of  globalization § Goal  that  seemed  so  distance  actually  happened Countries  that  most  embraced  globalization  experienced  the  most   dramatic  decreases  in  poverty   Years  ago,  UN  set  up  a  goal  to  reduce  global  poverty  in  half ○ Net  affect  of  globalization  is  decrease  in  poverty Globalization  +  Poverty Great  shock  to  most Started  as  financial  meltdown  in  America Problems  in  America  quickly  became  global  problems § Quickly  spread  to  other  parts  of  the  world  because  the  world  was   interconnected Global  recession  started  in  2008 Recession  of  2008 Free  markets  have  been  characterized  by  boom  and  bust   cycles § Markets  have  gone  up  and  down  since  the  beginning  of  capitalism New  Economic  Model-­‐ supposed  to  put  an  end  to  business  cycles ○ Deregulate  the  markets  because  the  markets  could  take  care  of   themselves The  'New  Economy'  +  Free  trade Economic  downturn § When  bubble  in  market,  market  itself  will  pop  the  bubble   New  economic  model  was  supposed  to  ensure  that  markets  would  not  do   market  corrections  and  their  would  not  be  a  downturn  in  the  market Deregulation  of  businesses  would  mean  markets  would  be  better  at   managing  risks Markets  would  be  better  at  correcting  themselves  before  bubbles  were   formed Argued  that  the  less  government  interference  the  better Government  involvement  should  be  minimal  in  the  market  because   it  was  assumed  that  markets  were  self-­‐correcting Approach  to  economic  policies  was  that  government  should  be  as  free  of   economic  involvement  as  they  possibly  could  be East  Asia  Crisis  of  1997:  could  not  pay  back  loans  they  had  from   Western  banks 1980s:  Policies  of  Ronald  Reagan-­‐ government  should  not  interfere  with   market R.Reagan,  A.  Green  Span  +  the  self-­‐correcting  market People  were  paying  large  sums  of  money  for  flower § First  bubble  in  1600s:  Great  Tulip  Bubble Market  bubble:  one  sector  of  economy  will  forever  increase  in  value .com  bubble:  when  computers  first  came  on  to  market,  a  lot  of  tech   companies  opened  up  and  each  thought  they  would  always  make  money   because  computers  were  here  to  stay   Market  'bubble' Depends  on  us  buying  stuff Without  Americans  regularly  buying  stuff,  the  entire  global   economy  would  collapse We  have  to  consumer  stuff  at  and  ever  increasing  rate  for  model  to   sustain  itself Buy  more  stuff  every  year  for  global  economy  to  keep  coming  along Entire  global  economy  is  dependent  on  American  consumerism American  Consumerism  +  Globalization Contradiction § Can't  afford  to  buy  what  is  needed  to  be  bought § Bulk  of  stuff  consumed  in  America  is  consumed  by  middle  and  lower   class  people The  income  for  middle  and  lower  class  Americans  has  been  stagnate  for   decades Stagnant  wages  of  American  Middle/lower  class You  wouldn't  have  to  pay  as  much  money  for  the   money  that  you  borrowed Federal  reserve  (so  not  really  government)  lowered  the   interest  rate  to  encourage  borrowing § Government  deregulated  institutions  that  lend  money  so  that   there  is  less  oversight  to  who  was  lending  out  the  money § Government  had  to  step  in   Solution:  let  middle  and  lower  class  borrow  money  to  fuel  global   consumption Borrowing  +  the  Middle  Class Everybody  assumed  that  home  prices  would  continue  to  go  up   because  they  have  been  for  decades It  got  so  bad  that  a  simple  two  bedroom  house  could  go  for  as   much  as  a  million  dollars § HOUSING  BUBBLE Some  people  didn't  care  because  they  figured  no  matter  what   they  paid  for  a  house,  they  knew  the  value  would  go  up  the   next  year  and  they  could  get  back  their  money § It  didn't  matter  if  people  borrowed  a  lot  of  money  for  their  house   because  value  would  go  up  and  they  would  be  able  to  pay  back   their  own Regulators  and  banks  thought  this  was  a  good  idea When  one  sector  collapses,  the  entire  economy  did A  lot  of  people  lost  their  houses § When  price  of  houses  fell,  people  could  no  longer  make  borrow   money  against  the  equity  of  their  home  so  could  no  longer  pay  their   mortgages Banks  now  did  not  know  how  much  money  they  actually  had Housing  bubble  crashed  and  it  affected  the  entire  American  economy  not   just  housing  economy Housing  bubble,  along  with  lower  interest  rates,  fuel  American   consumerism American  Housing  market  +  the  bubble Global  credit  crisis:  nobody  was  willing  to  take  the  chance  to  lend   money  to  anybody  else Banks  very  quickly  realized  they  could  not  trust  other  banks  either   because  other  banks  were  doing  the  same  thing Global  Credit  Crisis  +  importance  of  banks Did  not  stimulate  the  economy § People  just  saved  their  money  instead  of  using  it  to  buy  goods § Tax  cut  didn't  help They  let  Leeman  Brothers  fail  because  they  just  assumed  market   would  correct  itself 2007:  Bush  administration  responded  by  giving  a  tax  cut  to  people   (everybody) They  already  have  what  they  need  so  will  just  save  that  extra  money   instead  of  spend  it The  poor  are  more  likely  to  need  stuff Tax  cuts  to  the  wealthy  has  a  minimal  multiplier  effect Tax  cuts  +  the  economy Banks  focused  on  securitization  of  mortgages Banks  facilitate  transactions  &  manage  risk  and  make  loans Securitization  of  mortgages You  can  go  here  to  take  out  money  whenever  you  feel § Commercial  bank  is  the  bank  you  think  of  when  you  think  of  a  bank Handle  stocks  and  bonds,  etc § You're  giving  money  to  a  financial  advisor  who  will  then  invest   it  into  something  you  tell  them  to  and  you  could  potentially   lose  that  money § Investment  banks:  things  that  manage  people's  portfolios Supposed  to  keep  these  banks  separate   Glass-­‐ Stegall  Act  1933:  split  commercial  banks  from  investment  banks If  gambles  did  not  pay  off  than  the  bank  did  not  have  enough   money  to  pay  back  depositors § 1990:  repealed  so  they  could  now  do  both  at  any  bank If  these  banks  collapsed,  they  would  hurt  the  entire  economy Government  has  no  choice  but  to  make  sure  that  these  banks  don't   collapse If  banks  fail,  we  have  to  bail  them  out § Traditionally,  government  has  insured  commercial  banks  but  now  that   they  do  both  they  insure  all  banks Glass-­‐Stegall  Act.  (commercial  vs.  investment  banks) Aggregate  demand:  people  willing  to  buy  stuff Aggregate  demand ○ Idea  that  the  interest  rate  of  bonds  went  down  to  1%  and  foreign   investors  thought  it  was  too  low  so  they  invested  in  the  housing  market   instead Foreign  investment  in  American  housing  sector Banks  quit  trusting/loaning  money  to  each  other Because  banks  didn't  know  their  own  finances,  they  figured  other  banks   didn't  either Banks  didn't  lend  to  each  other Gov.  bail  out  of  banks He  did  a  government  stimulus Government  was  willing  to  start  spending  money  to  simulate  the   economy Increase  in  demand  helped Obama  administration  took  a  different  approach  than  Bush States  in  America  were  doing  austerity What  states  were  doing  was  out  of  sink  with  what  federal   government  was  doing Stimulus  Obama  was  able  to  get  from  Congress  wasn't  large  enough   Obama  stimulus  wasn't  big  enough  to  pull  economy  out  of  depression Obama  +  stimulus  spending Obama  administration  used  tax  payer  money  to  bail   Government  felt  they  had  to  bail  out  banks  and  insurance  companies  that   insured  investment  banks Bankers  have  always  argued  that  they  are  better  at  managing  risk  than   the  government  is   Revolving  door  between  financial  sector  and  government  bureaucrats Government  bail  out  of  investment  banks/  insurance  co. Banks  weren't  restructured  so  heir  shareholders  didn't  lose  any  money Banks  said  if  they  were  going  to  regulate  them,  it  would  tamper  the   system Obama  administration  went  to  federal  reserve  to  get  money  to  bail  out The  whole  point  to  saving  banks  was  to  make  sure  they  would  lend  money Global  aggregate  demand  was  very  weak   Banks  not  re-­‐structured/  not  forced  to  cut  wages/  pay  more  taxes Ensures  money  can  be  paid  back  to  people  (tax  payer  money) Bank  pays  the  corporation Gives  depositors  confidence  in  financial  sector Even  with  federal  government,  if  all  banks  failed  at  once,  they   wouldn't  have  enough  money Government  set  of  Federal  Deposit  Insurance  Corporation  (FDIC)1933 The  F.D.I.C. By  2009:  economy  was  rising  a  little  but  still  very  weak   2009  +  end  of  recession ○ Bailed  out  the  banks People  lose  confidence  in  the  economy  and  tend  to  become  less   willing  to  spend  money A  crisis  is  created  when  people  spend  money  on  the  wrong  stuff Economic  crisis:  consistent  feature  of  capitalism  from  the  beginning Multipliers:  for  every  government  dollar  that  is  spent,  it  should  promote   spending  of  3,4,  or  5  dollars  in  the  economy Econ.  Crisis  and  the  gov. States  were  cutting  back  on  spending  while  government  was  increasing  it States  cut  spending Decrease  in  regulation § 1999:  Glass  -­‐Stegall  Act,  that  stated  commercial  and   investment  banks  had  to  be  separate,  was  repealed § Government  still  had  to  pay  but  increasingly  government  had  no  say   in  what  the  banks  were  doing Banks  lobbied  to  have  less  regulation  from  the  government Now,  government  also  had  to  ensure  investment  banks Commercial  banks  could  also  be  investment  banks  because  of   deregulation Deregulation  of  the  1980s Banks  had  new  revenue  streams Could  put  fee  on  mortgages,  transactions,  even  some  charge  a  fee   for  going  to  the  teller Fees 1. So  if  something  happened  the  banks  would  not  care Bank  is  no  longer  holding  your  mortgages § Banks  would  bundle  mortgages  together  and  sell  it  to  anyone  who   wanted  to  invest  in  those  mortgages Bank  has  no  incentive  to  make  sure  you  were  a  good  credit   risk § The  investor  of  the  mortgage  is  on  the  hook § No  longer  held  the  mortgage  so  they  did  not  care  if  you  could  pay   your  mortgage "liar  loans":  banks  would  encourage  you  to  tell  them  you  were  good   for  your  money   Securitization 2. Instead  of  80/20 Banks  were  willing  to  give  you  100%  of  the  value  of  the  house 100%  mortgage  loans:  during  housing  bubble 3. Liars  loans,  100%  mortgages  etc.  (bank  'innovations') • When  interest  rates  got  low  on  bonds,  foreign  investors  went  to  invest  in   housing Everybody  assumed  housing  prices  would  not  go  down Dramatic  collapse  in  price  of  housing  in  America Fed  +  foreign  investment  in  American  housing This  caused  the  credit  rating  agencies  to  rate  the  banks  well  no   matter  what  because  that  mean  they  would  be  paid  well Credit  rating  agencies  rated  banks  credits  but  banks  were  the  ones  who   paid  these  agencies Credit  rating  agencies  +  banks A  lot  of  unemployment  because  businesses  couldn't  pay  employees People  couldn't  buy  a  lot  of  stuff  and  economy  was  in  a  downturn Banks  refused  to  loan  money  because  they  didn't  trust  anyone  but  big   businesses Credit  freeze  +  the  Recovery If  you  lend  money  to  larger  corporations,  you  can  get  a  bigger  return Banks  focus  on  big  business Could  put  fee  on  mortgages,  transactions,  even  some  charge  a  fee   for  going  to  the  teller Fees Banks  +  fees Glass-­‐ Steagall  Act-­‐ separated  investment  banks  from  commercial   banks Every  bank  now  is  an  investment  bank Investment  banks  are  not  covered  by  government  insurance  but   once  we  got  rid  of  separation  they  had  to   "Too  big  to  fail"   1999:  Congress  repealed  Glass-­‐ Steagall  Act  and  replaced  by  Gramm-­‐ Leach-­‐ Bliley  Act Banks  too  big  to  fail/  restructure Short-­‐term  benefits  by  artificially  inflating  the  price  of  their   company  stock Not  just  CEOs CEO  has  every  incentive  to  think  in  terms  of  short-­‐term Distorted  incentives  (C.E.O's  think  in  terms  of  short  term) CEO  are  corrupt They  didn't  care  about  how  well  the  stock  was  doing  because  they  got   paid  either  way Corporate  boards  decide  CEO  salary  but  CEO  picks  the  corporate  board C.E.O.  pay  debt  by  corporate  boards/  appointed  by  C.E.O. A  kind  of  insurance § Derivative:  essentially  betting  that  the  cost  of  a  commodity  will   either  go  up  or  down  at  a  future  date No  logical  connection  or  relationship  to  bank  or  corporation   in  order  to  take  out  a  derivative  on  that  product A  derivative  can  be  taken  out  by  anybody All  of  these  major  banks  were  heavily  involved  in  derivatives Derivatives Late  payments Transactions Credit  card  companies  have  all  sorts  of  hidden  fees Banks  fine  businesses  to  accept  credit  cards Study  Guide  for  Exam  #2 Thursday,  November   3,  2016 12:42  PM
background image Enlightenment  thinkers  focused  on  public  domain What’s  good  for  society  is  good  for  me  as  an  individual § Self-­‐interest  married  to  the  public  good Enlightenment  and  Public  vs.  Private  domains Enlightened  self-­‐interest-­‐ realize  welfare  is  tied  to  welfare  of  society  you   find  yourself  in Self-­‐interest  isn't  same  thing  as  selfishness Individual  should  realize  their  interest  overlap  with  the  interest  of   society  at  large Self-­‐interest  links  the  individual  to  wider  community  interests 'Self-­‐Interest' Women  should  have  more  concern  for  children § Voice  putting  men's  individualism  in  check § Idea  that  even  though  women  were  excluded  form  public  involvement,   they  still  had  a  public  role Women  were  excluded  from  politics  during  this  era  but  not  totally   excluded  from  public  discourse More  concerned  with  welfare  of  entire  community  and  not  just   their  own  narrow  interest § Sexist  idea  during  a  sexist  time § Women  are  naturally  more  nurturing  in  their  attitude  than  men Women  were  concerned  with  welfare  of  all  children § Men  concerned  for  welfare  of  all  wives  and  children  of  the   community § Both  men  and  women  were  responsible  for  the  interest  of  community  in   general Women  +  Civic  Morality Checks  on  Individualism: Religion 1. Charity § Putting  a  limit  on  individual  self-­‐interest Community  aid § Won't  have  more  than  one  church  in  a  village  or  town § Not  segregated  by  class Caring  about  community  at  large You  would  see  the  poor  people  and  all  kinds  of  people  coming   together  which  fostered  sense  of  obligation  towards  poor  and   children  of  community § Churches  tended  not  to  be  segregated,  community  based focus  of  religion  in  early  American  republic  was  to  get  people  engaged  in  their   civic  obligations Politics 2. Voting  because  good  for  country  and  good  for  everybody  which  means  it   was  good  for  an  individual acting  for  the  good  of  all Economics 3. Got  you  interested  in  how  they  were  doing   § Fostered  sense  of  community  between  people § Economic  deals  tended  to  be  long  term  relationship   Most  Americans  were  subsistence  farmers § Site  of  where  you  worked  was  done  at  home § Gender  roles  were  not  defined most  economic  activities  were  face  to  face  activities ○ Idea  that  in  pre  modern  times,  majority  of  people  were  working  on  family   owned  farm ○ Work  place  is  home,  home  is  workplace
○ No  clear  cut  gender  roles
○ No  such  thing  as  men  vs.  women's  work
Domestic  Mode  of  Production 1870s More  private  views § People  weren't  concerned  with  public  reform 'Gilded  Age' No  longer  concerned  with  social  reform § Concern  shifted  from  trying  to  better  the  community  and  now   focused  on  their  own  family  and  lives  and  friends § 1870-­‐1890:  middle  class  retreated  from  public  engagement Middle  Class  Retreats  from  Public  Engagement Concern  shifted  from  trying  to  better  the  community  and  now  focused  on   their  own  family  and  lives  and  friends Focus  on  family America  became  exceedingly  polarized Between  rich  and  poor Diseases  increased § Poverty  increased § Without  unions  and  such,  the  poor  had  very  unhealthy  standards  of  living Polarization  of  Rich/Poor Explain  why  government  was  reluctant  to  help  out  the  poor § Genetically  inferior § Idea  was  that  helping  the  poor  would  spread  bad  genes  and   instead  we  should  let  them  die Goal  of  charity  was  to  help  elevate  the  middle  class Even  people  who  wanted  to  give  to  charities  were  encouraged  to   give  to  libraries  and  museums,  not  to  help  the  poor § Social  Darwinism  became  prominent  feature  of  American  political  life Each  economic  group  became  segregated  between  one  another Middle  class  along  with  every  other  class  became  a  distinct  segment Social  Darwinism,  Segregation  of  Society ○ Religion  started  to  focus  on  personal  vice  rather  than  community   betterment Religion  was  used  to  encourage  political  activism Focus  was  on  Law  and  Order Morality  became  an  individual  and  family  issue,  not  so  much  a  civic   concern Religion  focus  on  Personal  Vice  (not  civic  morality) Rich  and  poor  were  concerned  simply  with  their  own  pleasure Middle  class  thought  they  were  moral  unlike  the  rich  and  poor  people Middle  Class  see  themselves  as  only  moral  groups Money  spent  on  family  or  household  were  seen  as  good No  longer  seen  as  representative  of  virtue Role  of  women  changed Children  were  forced  to  work  as  a  way  of  supplementing  family   income Women  were  accused  of  neglecting  children 1880s:  rich  and  poor  were  bad Consumerism  +  the  family 1980s Reagan  Year Poor  were  seen  as  bad  but  rich  were  seen  as  good If  poor  would  shape  up  and  create  stable  households  we  would  not  have  a   problem  with  poverty  or  drugs Poor  could  not  adopt  middle  class  family  lifestyle  because  they  were  poor Poor  women  were  forced  to  work  outside  of  household  leaving  children  at   home  by  themselves Women  were  accused  of  neglecting  children 2nd  Gilded  Age 1980s:  public  domain  became  exclusively  the  domain  of  restrained  self-­‐ interest All  social  issues  now  are  framed  from  individual  choice Inappropriate  for  politician  to  be  doing "politicians  are  public  figures  not  your  drinking  buddy" "I  feel  your  pain" What  were  looking  for  is  somebody  to  do  public  good Politicians  or  public  figures  have  to  talk  to  us  as  if  they  are  our  friends Checks  on  individual  self-­‐ interest  have  become  eroded Focus  on  individual  doesn't  allow  us  to  see  structural  problems Private  morality  of  the  family  ends  up  feeding  individualism  itself Public  domain  no  longer  a  check  on  individualism Checks  on  individual  self-­‐ interest  have  become  eroded Focus  on  individual  doesn't  allow  us  to  see  structural  problems Private  morality  of  the  family  ends  up  feeding  individualism  itself Gender  Roles  +  America  today ○ Article  by  Thomas  Friedman    came  from  that  book World  is  flat More  things  started  to  be  controlled  by  the  government As  technology  of  war  got  more  advanced,  many  more  sectors  of  economy   were  pulled  into  military  complex Becomes  possible  to  break  up  a  job  and  farm  it  out  to  wherever  in   the  world  it  is  cheapest  to  do  that  specific  part  of  the  job Computers  an  internet  made  anyone  around  the  world  able  to  work  with   each  other Interconnection  of  world  (computers)  means  Production  is  Global America  was  willing  to  side  with  dictators   Called  the  United  Fruit  Company   Led  to  civil  war  there  that  lasted  decades § Government  of  Guatemala  were  labeled  as  communist  so  we   orchestrated  a  cue  that  put  a  right  wing  dictatorship  in  power Americans  sold  a  ton  of  military  equipment  to  government  of   Guatemala The  majority  of  the  land,  example  Guatemala,  was  owned  by  one   American  company Iran's  oil  fields  were  controlled  by  American  and  British  companies Iran  hates  us  because  we  intervene  in  their  country America  actively  supported  dependent  economies   Before  large  companies  had  to  employ  many  people  form  their   country  but  today  the  largest  American  company  do  not  employ   many  people  directly  because  all  of  the  manufacturing  are  done   abroad Now  we  have  very  efficient  companies  but  do  no  generate  a  lot  of   jobs  in  America Companies  do  not  produce  a  ton  of  jobs  in  own  country Western  markets Developing  countries  experienced  economic  boom Companies  not  loyal  to  Country   Fairly  beneficial  to  global  economy § Globalization  had  it's  problems  but  it  seemed  to  be  a  good  things Rationality  of  Globalization ○ Idea  that  call  centers  will  teach  their  employees  to  sound  American 'Accent  Neutralization  Classes' ○ Led  to  era  of  globalization 1917  USSR  communist  revolution/  got  rid  of  czar Communism:  everything  is  regulated  by  central  government,  not  supply   and  demand Repressive  towards  people Most  nations  throughout  world  fell  somewhere  between  U.S  and  U.S.S.R.   views World  switch  over  to  mainly  capitalism   § 1989:  collapse  of  U.S.S.R:  they  couldn't  keep  with  the  needs  of  people Collapse  of  U.S.S.R  in  1991 New  independent  organizations  like  the  W.T.O  were  set  up  as   independent  judges  of  the  fairness  of  government  and  policies  when  it   came  to  trade W.T.O:  World  Trade  Organization No  longer  block  a  company  from  entering  your  country  just  to  protect   your  country's  economy W.T.O Agriculture  was  exempt  from  free  market  openness When  global  economy  opened  up,  developing  countries  were  flooded   with  Western  goods Only  thing  they  had  to  trade  were  agricultural  products § Newly  independent  countries  had  nothing  to  sell  because  of   the  exception § During  colonial  era,  many  developing  colonies  were  forced  into  cash   crop  farming One  exception  to  free  trade  colonies:  agricultural  sector Agriculture  excluded  from  global  free  trade ○ The  shift  of  where  things  are  made  so  essentially  people  lost  jobs Disruption  of  Globalization ○ Idea  that  the  manufacturing  jobs  that  are  created  these  days  tend  not  to   employ  many  people New  manufacturing  +  jobs ○ Represented  an  alternate  model  to  capitalism U.S  would  give  to  dictatorship  countries  as  long  as  they  supported  the  U.S They  didn't  want  people  to  revolt  to  communism  so  they  gave  weapons  to   the  dictator Cold  War:  U.S  vs.  U.S.S.R More  efficient  =  cheaper  it  is  to  produce  a  good Efficient  means  that  rationality  will  generate  more  wealth § Economic  theory  is  all  about  economic  rationality:  more  rational=   more  efficient Goal  of  economics:  maximize  profit,  minimize  cost  of  production Made  not  be  good  for  everybody  in  short  run  but  in  the  long   run  is  beneficial  to  everybody § Trade  generates  more  profit   Ideally  everybody  should  benefit  but  more  than  likely  a  sector   of  the  country  could  keep  it  al  for  themselves § Trade  might  increase  overall  wealth  of  country  but  it  is  up  to  each   individual  country  to  decide  where  extra  wealth  is  distributed Win-­‐win  situation  for  both  countries Free  trade  is  important  because… U.S.  stood  for  democracy  +  free  trade Totalitarian-­‐ left  leaning  dictatorships  were  not  good We  made  a  distinction  between  authoritarian  and  totalitarian   governments   ○ Distinction  between  left  and  right
○ Authoritarian  =  good
Authoritarian  vs.  Totalitarian Middle  of  WWI  (1917),  Russia  had  a  communist  revolution,  got  rid   of  their  king  (czar) Saw  free  market  capitalism  as  one  of  the  great  evils  of  the   world § Marx  felt  capitalism  was  unequal § He  said  it  promotes  inequality   § Gets  rid  of  any  institutions  that  interfere  with  free   market  exchanges He  said  capitalism  promotes  alienation § Capitalism  is  all  about  rational  economic  exchanges § Derives  from  theories  of  Karl  Marx "Communist  block" Centralize  directed  economic  control Regulated  by  centralized  director  of  some  sort  (in  other  words,   government) Instead  of  market  forces  determining  economic  factors,  now  it  was   being  directed  by  the  central  government Russia,  a  communist  country,  tried  to  set  up  and  alternate  model  to   capitalism Communism  +  Centrally  directed  economy Invisible  hand  gone Costs  and  profits  determined  by  the  government,  not  supply  and  demand No  market  correction  for  things "centralized  planning" Every  aspect  of  the  economy  was  all  under  the  control  of  a  government Problems  with  gov.  control  of  economy First  time  in  human  history Different  from  older  cities § Massive § No  electricity No  sewage No  access  to  clean  water Rapidly  growing  cities  have  overwhelmed  many  countries § Lead  to  creation  of  mega-­‐cities Today,  majority  of  the  world  live  in  cities Globalization  +  Urbanization Ex.  Apple Cannot  generate  jobs  like  other  companies  used  to  do Even  though  they  are  American  companies  and  successful  did  not   generate  middle  class  jobs Some  companies  have  been  exceedingly  successful Everything  has  become  global Wages  are  as  low  as  they  have  ever  been  even  though  we  are  the  most   efficient  we  have  ever  been Corrupt  officials § Money  not  going  where  it  was  supposed  to  be  going § All  of  these  projects  had  very  little  affect  in  reducing  global  poverty Made  UN  goal  without  all  of  the  projects § With  globalization,  poverty  has  been  cut  in  half   Bi-­‐product  of  globalization § Goal  that  seemed  so  distance  actually  happened Countries  that  most  embraced  globalization  experienced  the  most   dramatic  decreases  in  poverty   Years  ago,  UN  set  up  a  goal  to  reduce  global  poverty  in  half ○ Net  affect  of  globalization  is  decrease  in  poverty Globalization  +  Poverty Great  shock  to  most Started  as  financial  meltdown  in  America Problems  in  America  quickly  became  global  problems § Quickly  spread  to  other  parts  of  the  world  because  the  world  was   interconnected Global  recession  started  in  2008 Recession  of  2008 Free  markets  have  been  characterized  by  boom  and  bust   cycles § Markets  have  gone  up  and  down  since  the  beginning  of  capitalism New  Economic  Model-­‐ supposed  to  put  an  end  to  business  cycles ○ Deregulate  the  markets  because  the  markets  could  take  care  of   themselves The  'New  Economy'  +  Free  trade Economic  downturn § When  bubble  in  market,  market  itself  will  pop  the  bubble   New  economic  model  was  supposed  to  ensure  that  markets  would  not  do   market  corrections  and  their  would  not  be  a  downturn  in  the  market Deregulation  of  businesses  would  mean  markets  would  be  better  at   managing  risks Markets  would  be  better  at  correcting  themselves  before  bubbles  were   formed Argued  that  the  less  government  interference  the  better Government  involvement  should  be  minimal  in  the  market  because   it  was  assumed  that  markets  were  self-­‐correcting Approach  to  economic  policies  was  that  government  should  be  as  free  of   economic  involvement  as  they  possibly  could  be East  Asia  Crisis  of  1997:  could  not  pay  back  loans  they  had  from   Western  banks 1980s:  Policies  of  Ronald  Reagan-­‐ government  should  not  interfere  with   market R.Reagan,  A.  Green  Span  +  the  self-­‐correcting  market People  were  paying  large  sums  of  money  for  flower § First  bubble  in  1600s:  Great  Tulip  Bubble Market  bubble:  one  sector  of  economy  will  forever  increase  in  value .com  bubble:  when  computers  first  came  on  to  market,  a  lot  of  tech   companies  opened  up  and  each  thought  they  would  always  make  money   because  computers  were  here  to  stay   Market  'bubble' Depends  on  us  buying  stuff Without  Americans  regularly  buying  stuff,  the  entire  global   economy  would  collapse We  have  to  consumer  stuff  at  and  ever  increasing  rate  for  model  to   sustain  itself Buy  more  stuff  every  year  for  global  economy  to  keep  coming  along Entire  global  economy  is  dependent  on  American  consumerism American  Consumerism  +  Globalization Contradiction § Can't  afford  to  buy  what  is  needed  to  be  bought § Bulk  of  stuff  consumed  in  America  is  consumed  by  middle  and  lower   class  people The  income  for  middle  and  lower  class  Americans  has  been  stagnate  for   decades Stagnant  wages  of  American  Middle/lower  class You  wouldn't  have  to  pay  as  much  money  for  the   money  that  you  borrowed Federal  reserve  (so  not  really  government)  lowered  the   interest  rate  to  encourage  borrowing § Government  deregulated  institutions  that  lend  money  so  that   there  is  less  oversight  to  who  was  lending  out  the  money § Government  had  to  step  in   Solution:  let  middle  and  lower  class  borrow  money  to  fuel  global   consumption Borrowing  +  the  Middle  Class Everybody  assumed  that  home  prices  would  continue  to  go  up   because  they  have  been  for  decades It  got  so  bad  that  a  simple  two  bedroom  house  could  go  for  as   much  as  a  million  dollars § HOUSING  BUBBLE Some  people  didn't  care  because  they  figured  no  matter  what   they  paid  for  a  house,  they  knew  the  value  would  go  up  the   next  year  and  they  could  get  back  their  money § It  didn't  matter  if  people  borrowed  a  lot  of  money  for  their  house   because  value  would  go  up  and  they  would  be  able  to  pay  back   their  own Regulators  and  banks  thought  this  was  a  good  idea When  one  sector  collapses,  the  entire  economy  did A  lot  of  people  lost  their  houses § When  price  of  houses  fell,  people  could  no  longer  make  borrow   money  against  the  equity  of  their  home  so  could  no  longer  pay  their   mortgages Banks  now  did  not  know  how  much  money  they  actually  had Housing  bubble  crashed  and  it  affected  the  entire  American  economy  not   just  housing  economy Housing  bubble,  along  with  lower  interest  rates,  fuel  American   consumerism American  Housing  market  +  the  bubble Global  credit  crisis:  nobody  was  willing  to  take  the  chance  to  lend   money  to  anybody  else Banks  very  quickly  realized  they  could  not  trust  other  banks  either   because  other  banks  were  doing  the  same  thing Global  Credit  Crisis  +  importance  of  banks Did  not  stimulate  the  economy § People  just  saved  their  money  instead  of  using  it  to  buy  goods § Tax  cut  didn't  help They  let  Leeman  Brothers  fail  because  they  just  assumed  market   would  correct  itself 2007:  Bush  administration  responded  by  giving  a  tax  cut  to  people   (everybody) They  already  have  what  they  need  so  will  just  save  that  extra  money   instead  of  spend  it The  poor  are  more  likely  to  need  stuff Tax  cuts  to  the  wealthy  has  a  minimal  multiplier  effect Tax  cuts  +  the  economy Banks  focused  on  securitization  of  mortgages Banks  facilitate  transactions  &  manage  risk  and  make  loans Securitization  of  mortgages You  can  go  here  to  take  out  money  whenever  you  feel § Commercial  bank  is  the  bank  you  think  of  when  you  think  of  a  bank Handle  stocks  and  bonds,  etc § You're  giving  money  to  a  financial  advisor  who  will  then  invest   it  into  something  you  tell  them  to  and  you  could  potentially   lose  that  money § Investment  banks:  things  that  manage  people's  portfolios Supposed  to  keep  these  banks  separate   Glass-­‐ Stegall  Act  1933:  split  commercial  banks  from  investment  banks If  gambles  did  not  pay  off  than  the  bank  did  not  have  enough   money  to  pay  back  depositors § 1990:  repealed  so  they  could  now  do  both  at  any  bank If  these  banks  collapsed,  they  would  hurt  the  entire  economy Government  has  no  choice  but  to  make  sure  that  these  banks  don't   collapse If  banks  fail,  we  have  to  bail  them  out § Traditionally,  government  has  insured  commercial  banks  but  now  that   they  do  both  they  insure  all  banks Glass-­‐Stegall  Act.  (commercial  vs.  investment  banks) Aggregate  demand:  people  willing  to  buy  stuff Aggregate  demand ○ Idea  that  the  interest  rate  of  bonds  went  down  to  1%  and  foreign   investors  thought  it  was  too  low  so  they  invested  in  the  housing  market   instead Foreign  investment  in  American  housing  sector Banks  quit  trusting/loaning  money  to  each  other Because  banks  didn't  know  their  own  finances,  they  figured  other  banks   didn't  either Banks  didn't  lend  to  each  other Gov.  bail  out  of  banks He  did  a  government  stimulus Government  was  willing  to  start  spending  money  to  simulate  the   economy Increase  in  demand  helped Obama  administration  took  a  different  approach  than  Bush States  in  America  were  doing  austerity What  states  were  doing  was  out  of  sink  with  what  federal   government  was  doing Stimulus  Obama  was  able  to  get  from  Congress  wasn't  large  enough   Obama  stimulus  wasn't  big  enough  to  pull  economy  out  of  depression Obama  +  stimulus  spending Obama  administration  used  tax  payer  money  to  bail   Government  felt  they  had  to  bail  out  banks  and  insurance  companies  that   insured  investment  banks Bankers  have  always  argued  that  they  are  better  at  managing  risk  than   the  government  is   Revolving  door  between  financial  sector  and  government  bureaucrats Government  bail  out  of  investment  banks/  insurance  co. Banks  weren't  restructured  so  heir  shareholders  didn't  lose  any  money Banks  said  if  they  were  going  to  regulate  them,  it  would  tamper  the   system Obama  administration  went  to  federal  reserve  to  get  money  to  bail  out The  whole  point  to  saving  banks  was  to  make  sure  they  would  lend  money Global  aggregate  demand  was  very  weak   Banks  not  re-­‐structured/  not  forced  to  cut  wages/  pay  more  taxes Ensures  money  can  be  paid  back  to  people  (tax  payer  money) Bank  pays  the  corporation Gives  depositors  confidence  in  financial  sector Even  with  federal  government,  if  all  banks  failed  at  once,  they   wouldn't  have  enough  money Government  set  of  Federal  Deposit  Insurance  Corporation  (FDIC)1933 The  F.D.I.C. By  2009:  economy  was  rising  a  little  but  still  very  weak   2009  +  end  of  recession ○ Bailed  out  the  banks People  lose  confidence  in  the  economy  and  tend  to  become  less   willing  to  spend  money A  crisis  is  created  when  people  spend  money  on  the  wrong  stuff Economic  crisis:  consistent  feature  of  capitalism  from  the  beginning Multipliers:  for  every  government  dollar  that  is  spent,  it  should  promote   spending  of  3,4,  or  5  dollars  in  the  economy Econ.  Crisis  and  the  gov. States  were  cutting  back  on  spending  while  government  was  increasing  it States  cut  spending Decrease  in  regulation § 1999:  Glass  -­‐Stegall  Act,  that  stated  commercial  and   investment  banks  had  to  be  separate,  was  repealed § Government  still  had  to  pay  but  increasingly  government  had  no  say   in  what  the  banks  were  doing Banks  lobbied  to  have  less  regulation  from  the  government Now,  government  also  had  to  ensure  investment  banks Commercial  banks  could  also  be  investment  banks  because  of   deregulation Deregulation  of  the  1980s Banks  had  new  revenue  streams Could  put  fee  on  mortgages,  transactions,  even  some  charge  a  fee   for  going  to  the  teller Fees 1. So  if  something  happened  the  banks  would  not  care Bank  is  no  longer  holding  your  mortgages § Banks  would  bundle  mortgages  together  and  sell  it  to  anyone  who   wanted  to  invest  in  those  mortgages Bank  has  no  incentive  to  make  sure  you  were  a  good  credit   risk § The  investor  of  the  mortgage  is  on  the  hook § No  longer  held  the  mortgage  so  they  did  not  care  if  you  could  pay   your  mortgage "liar  loans":  banks  would  encourage  you  to  tell  them  you  were  good   for  your  money   Securitization 2. Instead  of  80/20 Banks  were  willing  to  give  you  100%  of  the  value  of  the  house 100%  mortgage  loans:  during  housing  bubble 3. Liars  loans,  100%  mortgages  etc.  (bank  'innovations') • When  interest  rates  got  low  on  bonds,  foreign  investors  went  to  invest  in   housing Everybody  assumed  housing  prices  would  not  go  down Dramatic  collapse  in  price  of  housing  in  America Fed  +  foreign  investment  in  American  housing This  caused  the  credit  rating  agencies  to  rate  the  banks  well  no   matter  what  because  that  mean  they  would  be  paid  well Credit  rating  agencies  rated  banks  credits  but  banks  were  the  ones  who   paid  these  agencies Credit  rating  agencies  +  banks A  lot  of  unemployment  because  businesses  couldn't  pay  employees People  couldn't  buy  a  lot  of  stuff  and  economy  was  in  a  downturn Banks  refused  to  loan  money  because  they  didn't  trust  anyone  but  big   businesses Credit  freeze  +  the  Recovery If  you  lend  money  to  larger  corporations,  you  can  get  a  bigger  return Banks  focus  on  big  business Could  put  fee  on  mortgages,  transactions,  even  some  charge  a  fee   for  going  to  the  teller Fees Banks  +  fees Glass-­‐ Steagall  Act-­‐ separated  investment  banks  from  commercial   banks Every  bank  now  is  an  investment  bank Investment  banks  are  not  covered  by  government  insurance  but   once  we  got  rid  of  separation  they  had  to   "Too  big  to  fail"   1999:  Congress  repealed  Glass-­‐ Steagall  Act  and  replaced  by  Gramm-­‐ Leach-­‐ Bliley  Act Banks  too  big  to  fail/  restructure Short-­‐term  benefits  by  artificially  inflating  the  price  of  their   company  stock Not  just  CEOs CEO  has  every  incentive  to  think  in  terms  of  short-­‐term Distorted  incentives  (C.E.O's  think  in  terms  of  short  term) CEO  are  corrupt They  didn't  care  about  how  well  the  stock  was  doing  because  they  got   paid  either  way Corporate  boards  decide  CEO  salary  but  CEO  picks  the  corporate  board C.E.O.  pay  debt  by  corporate  boards/  appointed  by  C.E.O. A  kind  of  insurance § Derivative:  essentially  betting  that  the  cost  of  a  commodity  will   either  go  up  or  down  at  a  future  date No  logical  connection  or  relationship  to  bank  or  corporation   in  order  to  take  out  a  derivative  on  that  product A  derivative  can  be  taken  out  by  anybody All  of  these  major  banks  were  heavily  involved  in  derivatives Derivatives Late  payments Transactions Credit  card  companies  have  all  sorts  of  hidden  fees Banks  fine  businesses  to  accept  credit  cards Study  Guide  for  Exam  #2 Thursday,  November   3,  2016 12:42  PM

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School: Michigan State University
Department: Integrative Studies Social Sci
Course: Global Diversity/Interdepend
Professor: Y. Sinha
Term: Fall 2016
Tags: ISS315 and Studyguide
Name: ISS Study Guide for Exam 2
Description: This is a detailed study guide for the midterm exam on Tuesday, November 8th after talking to the Professor during office hours.
Uploaded: 11/05/2016
15 Pages 64 Views 51 Unlocks
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