Class Note for ECON 311 at UMass(1)
Class Note for ECON 311 at UMass(1)
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Date Created: 02/06/15
Econ 311 If Money amp Banking quot 39 Adam S Hersh MF 12303PM Machmer W23 httppeopleumasseduahershecon31 1 htm What is happening in US economy now Potential GDP 050 Sep 03 GDP on 003 25 Nov 08 Copyngnt 2007 Peavson Addwsoeres ey AH Hgnts vesevved J SI quothf mi 1 Caquot JHna LI 398 39WSJ 124435 393 Johnson Somema I 12 What is happening in US economy now Employment Situation Sept to Nov 13 million jobs Net Jab Gains The Recession Hts Hard 0 mcmuo 1 2JIIEIEID m SUU UUU gmmm 5DIIEIIII EIZEIJIIJEIIII 39 Inst J JFHAHJJASON Hun l Copyn What is happening in US economy now Unemployment Rate 2008 Q2 53 September 61 October 65 November 67 December released Friday Copyngnt 2007 Pearson Addrsoanesrey AH Hgnts reserved 14 Why Housing Collapse NAHB Housing Market Index Recesslan NAHB Index HousingMarketlndex 0 a a 55 33 a 9P 9 9 55 9 9quot 9quot aquot PF 9quot SP 55 939 5 9 9quot 9quot 9 quot 9 9 9 9 23 quotc 19 9 9 9 9 24 9 P 9 9 9 9 9 it 9 h uilwwwcalculakadriskblagmam Why Generalized financia nch egg debt cru 31quot fo 2 L F ninli Petunia 0 32 F7 r71 1 1 i 39r i y 4 a v a V5 t u w e 539 99939369 9amp93 3 Tsvaie y a s rig 7 A 4 Vase3 3 39 9 lt3 5amp9 Copyngm 2007 Peavson Addwsoeres ey AH ngms vesevved 2 15 5 2 d Pcvwnlam Poinla 2 i3 1 M35430 Rum nad 5 Econ 311 Money amp Banking This course studies the importance of finance in the process of capital accumulatIon Course Goals l Build a foundation of financial literacy intuition and core competency ll Understand the importance of PpWER in financial relations from historical institutIonal and polltIcal economy perspectives lll Understand the current US economic crisis and efforts to address it Copyright 2007 Pearson Addisoanesiey All rights reserved 17 Econ 311 Money amp Banking We will achieve these goals by Learning key terminolog and financial quotmechanicsquot eg algorithmic manipulation practicing with sources of key financial data Developing theories of market determination of interest rates asset prices and foreign exchange rates and theories of monetary governance Exploring the relationshi between coordination failures in financial markets and dif erent finanicial structures institutional configurations Mapping contemporary postBretton Woods US financial history with an eye to the path of institutionl changes financral crises and key stylized empirical facts Copyright 2007 Pearson Addisoanesiey All rights reserved 18 Grading My Philosophy on Grading 1 Tests suck 2 We have better things to do with our time 19 Grading 1 Problem sets 3 40 Critical readingsClass presentations 2530 Final examination TBD 2025 Pop Quiz 1 5 Subjective class participation 5 Copyright 2007 Pearson Addisoanesley All rights reserved 1 10 Readings 1 A Mishkin Fred 2007 The Economics of Money Banking and Financial Markets 8 7 Ed 1 B What I think about the Mishkin book 39 Good statement of neoclassical theory 39 Good on mechanics foundational knowledge 39 Weird organization weird pedagogy Copyright 2007 Pearson Addisoanesley All rights reserved 111 Readings 2 I would be negligent not to expose you to more and you would be more bored Historical and institutional approach too Tentative Schedule See website Questions Copyught 2007 Peaison Addisoanesiey Aii tights ieseived 112 My Expectations of Students 1 You commit to doing this work 2 I expect you to work hard 3 Corollary If I think you are putting in a good work effort you can know you will get a good grade 4 You are responsible for information discussed in lectures Copyright 2007 Pearson Addisoanesiey AH rights reserved 113 Intro to Money and Finance Mishkin chs 13sort of What is money What is finance A Brief history of global finance Questions to keep in mind for the course Copyngnt 2007 Peavson Addisoanesiey AH ngnts vesevved 114 Microfoundations vs Macrofoundations A very simple causal model lnstitutions Society lndividuals households Copyvlght 2007 Peavson Addlsoanesley All vlghts vesevved 115 Power Private Property amp Money Primitive Accumulation Origins of the nationstate Legalism 3 Private Property Rights Right of Residual Control Right of Residual Claim Right of Alienation Monopoly on force gt monopoly on money 2007 Peat disoanesiey Aii tights reserved 116 Power and Finance 39mc M2 urba nay 7 ma A gtIi 1 u Ability to collect taxes ability to finance In own currency means abllity to raise armies gt means copygglioiixsmismmg tsgegmain 59 new quot13995 117 What is money Standard Economics Definition Unit of Account Means of Payment Store of Value Money is a social relationship Copyngnt 2007 Peavson Addisoanesiey Aii thts vesevved 1 18 Where does money come from Barter economy and Transactions Costs Commodity money historically specie salt many many others Fiat Money currency Classical Gold Standard PostGold Standard money as asset International money where is power behind int39l money Private money Copyright 2007 Pearson Addisoanesley All rights reserved 1 19 What are Financial Markets 1 39 1 Social means of exchanging property rights as defined above 39 2 Means of reaIocating resources from savers to investors also reallocates risk 39 What does it mean to exchange 39 Formal finance contract ultimately enforced and arbitrated by threat of state power 39 Informal endogenously enforced thru social means or by private power Copyright 2007 Pearson Addisoanesley All rights reserved 120 What are Financial Markets 2 39 Such exchange is characterized by coordination failures gt misallocation and crises 39 Moral Hazard and Adverse Selection 39 PrincipleAgent Problem 39 Social institutions arise to mitigate these market failures 39 institutions determine distribution of power who bears risk and reaps reward Copyright 2007 Pearson Addisoanesley All rights reserved 121 A Bjiei istory of Capitalist Fina NE Ai VWgRE gt 39 ELBMMLOSIDCWC Maoriciggx Dam ImPEANoCoNA LA Rva M VP IODIQGAMISIWDJ 13 mm t7g rmuva lvm K 335 5c m 3 2 Iquot 555 xva nownS c39S39l39i P KIrEIIo x a u L 13th Century Venetian citystate consolidates regional salt trade develops private banking houses sends Marco Polo on expedition to China Copynght 2007 Peavson Addisoanesiey AH ngms vesevved 122 13th Cntury Venetiah citystate onsolidate regional salt traderelying heavily on slavery Copynght 2007 Peavson Addwsoeres ey AH thts vesevved 123 regional salt traderelying heavily on slavery and forcible conquest of trade Copynght 2007 Peavson Addwsoeres ey AH thts vesevved 124 Tangent K39ism requires means of social control A Brief History of Capitalist Finance V Y antleran weaken Mas vagri Camera derD9itJn dii che Compngnie binncn Middelburgh Bekcnnen milks chcu ghcacmrdeerl u hcbbm endebydcnOucfangsdcrvootfchws Q QLV yaignie nziangizci ztewe vandancrfnmgn 01 am 3 Jug4 dc qmmqvanWNSyMM bah 44 s i qukevoorfchreven lbmmcva VAmeme 39b mmnlnwr manage ens 1W6quot 14747 enhoudjntjaerghere ennwyag vqor r X 7711 cite den 1 dc def damaim Ont mgers wcdemmmc beimcn re bcmlen over ndmnacrdacc dcicso d gt p e lithAdnm mmm wwwmg 791 Mi iiwtem gum ELSA 3an 45 oo gr x57 39 39 16012 Dutch East India Company founded 1st company to issue stock diversify risk and benefit from limited liability Copyiight 2007 Peaison Addisoanesiey Aii tights ieseived 126 A Brief History of Capitalist Finance i j Copyright 2007 Pearson 39 397 Addisoanesley All rights reserved 1637 Dutch Tulip Mania World39s first speculative financial crisis 1 27 A Br39ef History of Capitalist Finance E degsrgz eoffoiggfude a 65 Equator D 1000 mueesoo NORTH AMERICA 17 1 9th Centuries Age of Empires N Atlantic Triangle Trade flourishes fuels demand for financial and industrial development Copyright 2007 Pearson Addisoanesley All rights reserved 128 A Brief Histeryvof Capitalist Finance 17 3919th Centuries cont Silver trade with the East Asia opened for trading Copyright 2007 Pearson Addisoanesiey Aii rights reserved 129 A Brief History of Capitalist Finance Alexander Hamilton 39 enacts Federal plan to repay Revolutionary War debt exercises power to determine financial rules authority to tax Copyvlgnt 2007 Pearson Addisoanesley All tights reserved 130 Financial Crises Many and 1 Internationalization of Finance 1 Hours GMT 174 2 18 15 17 9 6 3 T 1 1111I IT IIIirtv FOREIGN EXCHANGE mm mm W27 egg 7 Ck i HONL KONG I aney David 1990 The Condition of PostModernity 32 Copyngnt 2007 Peavson Addisoanesiey AH ngms vesevved Internationalization of Finance 2 Hours GMT 24 21 HS 15 i2 9 6 3 0 Tinn39tx1ril Xr39TIYII INTEHNATICNAL SECUHiTlFS TOKYO p m TOKYO am N 139 v39 DH K 39 a 7 v 7 1 ON DON F I 30 WVOI L 5 39 1 none mm a m out KONG p m U a i I i a I 39 o mnme m svomv a m 1 Haney David 1990 The Condition of PostModernity Copyngnt 2007 Peavson Addisoanesiey AH ngms vesevved 133 Internationalizegjgjphgl of Finance 3 24 21 IE 15 12 9 B I If I I I T I I I 1 I I I I T I T r I I 39I I I FUTURES k ilNrJIF IIG I VANCOUVER I U p h I w mm 1 m HDNG KONG a m o H 0 7 MUN 7 REAL a SYDN Y pm SYDNEYmI TORONTO CHICAGD Haney David 1990 The Condition of PostModernity CopyIIght 2007 Peavson AddIsoanesIey AII IIghts Iesevved 134 Developing Intuition How to tell a Financial Story Who Who is saving investing bearing risks and costs reaping rewards What What are their economic objectives How How do they interact what is the nature of their social relationship Where Where do they interact 2007 Pearson Addisoanesiey AH rights reserved 135 r law BorrowerSpenders 1Bu ness nns 2Govennnent 3HousehoMs 4 Foreigners F I G URE 1 Flows of Funds Through the Financial System Copyright 2007 Pearson AddisonWesley All rights reserved 136 What39s missing from Mishkin s 1 story People relationships 39 Institutions Power Confliot resolution Copyright 2007 Pearson Addisoanesiey Aii rights Who and What Individuals maximize utility st budget constraint given income Y choose how much to save sY slt1 and how much to consume 1sY Why save different a income streams b wealth endowments c risk preference Firms maximize profits also firm survival owners vs managers vs workers Copyright 2007 Pearson Addisoanesley All rights reserved 138 Questions to think about How are the financial and real economies related How should they be What is the importance of income or wealth or power distribution for financial systems How do they effect economic outcomes What are the key social relationships underpinning finance How are the social interactions structured How do can different financial institutions shape theses things How are the associated with financial stability Copyright 2007 Pearson Addisoanesley All rights reserved 139 Tomorrow Definitions gt skim 2nd12 Ch 3 Ch 4 Copyvight 2007 Peavson Addisoanesiey AH thts vesevved 140 Econ 311 Money amp Banking Adam S Hersh MF 12303PM Machmer W23 Copynght 2007 Peavson Addwsoeres ey AH thts vesevved 141
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