Class Note for ECON 311 at UMass(8)
Class Note for ECON 311 at UMass(8)
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Date Created: 02/06/15
ity 39n v rug r 4 Minsky Financial Instability Hypothesis Copyngnt 2007 Peavson Addisoanesiey Aii tights vesevyed 71 Power I 39 What is power If A is capable of affecting B39s actions in ways that advance A s interests While B lacks this capacity wr t A Bowes and Gintis Kinds of power Physical hard power and proxies Soft power Sticky power Market power etyttititmttgpea L not the other way Power ll Power in Free Mrkt Exchange Market vs nonmarket interactions Premarket power Legal institutions and property rights Separation of worker from means of prod39n Racism sexism etc First mover takeitorleaveit offer Mechanisms sanction discipline threat monitor enforce rents Examples L and credit mrkts and PA Copyright 2007 Pearson Addisoanesley All rights reserved 73 Go over homework Copyngm 2007 Feavson Addwsoeres ey AH ngms vesevved 74 M1 VS CPIU 701 quot CPIU s 00 5 00 4 00 a 00 2 00 1 00 0 00 4 00 72 00 73 00 9 6 9K 5 9 65 asx lt0 0 09K 9 99 Copyngm 2007 Peavson Addwsoeres ey AH ngms vesevved 7M2 CPLU 2 50 2 00 50 moia 050 x VV WM WMWWVW 705014 400 450 400 HHMHHHH HHHHHHHHHH HHHHHHHHHHHHHHHHMHHHHHHHHHHHH Q Q N N 9 9 5 V 0 0 Q Q 4 4 w 6 w w w w 8 8 8 w w a a Q a 9 a a e 9 a a 9 Q Wealth How the other 01 live Wealth Global Distribution DISTRIBUTION OF GLOBAL WEALTH Wealth per capila 2000 3 Over 50000 l10000 49999 2000 9999 Under 2000 5 3 l ig UHU 39iItli Copyiight 2007 Peaison Addison Wesley All lights ieseived 78 Wealth Forbes 1062 billionaires Top cities ascending r Warren Eull zil Unried Slales 77 I52 I 5 I 5 S I5 arias Slim Hem amp ramny Mexlcn as an n Mu mbai5 LA5 Hong lili iirm 21 SW 3 i2 ukash Ambaul India 50 43 u ltOrg5 dor5 quotAmIAmbanr Indla as 42 lngvar Kamprzd ampfamlly Swe en En 31 n NYC5 KP Smyh India 75 mn ZED 270 255 ZED Dleg Darlpaska Ruasra Karl Albrecht Germany US 460 China 45 39 Unried Slams 250 235 ED D9 1439 Lawrence Ellison United Slates Russia Gelman 1 17 Liliana Bellancaun France Al 88 79 74 9mm Amanll France 99 15 5 53 Al 95 BS 42 18quot Alexerivlnrdashor Russia 19 Prince Alwaleed Em Tam Alsaud Saudi Arabia 51 2039 Mrkharl Frmman Russia A3 Copyngnt 2007 PealsonAddlsoanesley All rrgms reserved impHlouuamuemorapresscom Marketreinforcing welfare system 39 Most welfare provided through tax subsidies 39 Tax benefits subsidize those already winners in the market 39 Housing benefit 39 Health care insurance 39 Retirement savings Copyright 2007 Pearson Addisoanesiey All rights reserved 710 SWA Lawrence Mishel Jared Bernstein Sylvia Allegretto The STATE of WORKING AMERICA 2006 2007 ENHHIMIE PDlICV INSTI39IIJTE Wealth is vital component of a family39s standard of living Wealth accumulation statistically pretty difficult Wealth distribution in the US is extremely skewed and getting more so Wealth distribution also has race ethnicity and gender characteristics lt12 HHs own stock biggest asset for most home Indebtedness bankruptcy high Copyright 2007 Pearson Addisoanesley All rights reserved 711 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 712 Episodes of Speculative Manias Kindleberger pp 5051 Copynght 2007 Peavson Addwsoeres ey AH thts vesevved 713 Kindleberger39s Crisis Model l 1 Displacement exogenous shock end of war new technology etc that changes expectations of future profitability 2 BoomExpansion banks and others endogenously create money chasing after new opportunities aided by financial innovation 3 Positive feedback also selffulfilling prophecy bubble inflates 4 Euphoria overconfidenceoverestimate of profit potential expansion potential draws in outsiders Copyright 2007 Pearson Addisoanesley All rights reserved 714 Kindleberger39s Crisis Model ll j 5 Distress a insiders bail b broader community starts to realize the end is near can39t meet liabilities may not be able to exit market 6 Revulsion stampede to exit the market for safe money prices drop bankruptcy counterparty risk 7 Resolution 39 Prices go so low as to bring people back into the mrkt 39 Trading stopped price floors Lender of last resort provides liquidity try to calm panic Copyright 2007 Pearson Addisoanesley All rights reserved 715 US Business Cycles wwwnberorg Peak Trough Peak Trough December1854 IV January 1920I July 1921 III June 1857Il December1858 IV May 1923ll July 1924 III October 1860Ill April 1865l June 1869Il October 1873Ill March 1882I March 1887Il July 1890lll January 1893I December 1895IV June 1899Ill September 1 902IV May 1907ll January 1910I January 1913I August 1918Ill June 1861 III December 1867 I December 1870 IV March 1879 I May 1885 ll April 1888 I May 1891 ll June 1894 ll June 1897 ll December 1900 IV August 1904 III June 1908 ll January 1912 IV December 1914 IV March 1919 I Copyright 2007 Pearson Addisoanesley All rights reserved October 1926Ill August 1929Ill May 1937ll February 1945I November 1948IV July 1953ll August 1957Ill April 1960ll December 1969IV November 1973IV January 1980I July 1981lll July 1990lll March 2001 I December 2007 IV November 1927 IV March 1933 I June 1938 ll October 1945 IV October 1949 IV May 1954 ll April 1958 ll February 1961 I November 1970 IV March 1975 I July 1980 III November 1982 IV March 1991 I November2001 IV 71 6 GDP in the longrun US GDP 19292007 GDP Gitot W000 M2000 00000 E 153000 9 a c 8 6000 N s 93 Tu m cc 04000 2000 0 wH W HH H W W HH ngx 4QQQQNgtlt4Q Q 4 g g w w w Source Me and BEA Log scale US GDP 19292007 GDP fl GJOI M00000 1quot 0000 C 9 E M000 V o f o f O momd N 99 TU D we 039 st HHHHH HH HHHHHHH HH HHHHHHH HHHHHHHHHHHH b x o a x lt Source Me and BEA 5 I a M v t 1quot 4 a J 39 Vx V Q 2 A JOBILESS MEN KEEP GOING MinskyS It The Great Dep restsiiwga 2 6 m s HIGHE39 LSTAHDARD 9911i c r Minsky Why a new model Keynes vs Bastard Keynesianism a K 39ist economy with sophisticated financial institutions is capable of a number of modes of behavior and the mode that actually rules at any time depends upon institutional relations the structure of financial linkages ows of debt and income streams and the history of the economy theory is historically and institutionally contingent need to model theorize K assets and money as it is endogenously created by banks to finance production and investment need to incorporate obvious instability in model a normal function of K39ist economy Copynght 2007 Pearson Addlsoanesley AH thts reserved 723 Minsky Why a new model Keynes vs Bastard Keynesianism a K 39ist economy with sophisticated financial institutions is capable of a number of modes of behavior and the mode that actually rules at any time depends upon institutional relations the structure of financial linkages ows of debt and income streams and the history of the economy theory is historically and institutionally contingent need to model theorize K assets and money as it is endogenously created by banks to finance production and investment need to incorporate obvious instability in model a normal function of K39ist economy Copynght 2007 Pearson Addlsoanesley AH thts reserved 723 Minsky The model I price of current assets f current est of future profit ows current subjective liquidity preference depends on subjective expectations about uncertain future AD and uncertainty determine current investment what determines AD Expectations of demand for I goods Legacy of financial residue Time inconsistency Markup pricing market power in equilibrium Copynght 2007 Peavson Addisoanesley AH thts vesevved 724 Minsky The model II Econ Activity generates cash ows Debts future cash out ow commitments finance present K purchases present K yields future cash in ow Wall Stfinanciersrentiers exchange present cash ow for promised future cash ow incl 139 and principal Cash ows maymay not validate debt and price of K asset cash ows to individual asset function of AD Leverage cash in ows expected cash out ow commitments Hedge speculative Ponzi Cash ows securitized leveraged for other investments e g mortgage backed securities Copynght 2007 Peavson Addisoanesley AH thts ve 725 Minsky The model III Expectations affect new commitments ST and LT interest rates ST and LT profitability Acceptable safe level of leverage Business cycle expansion gt increasing leverage Overconfidence gt too much leverage spec and Ponzi Financial fragility Collapse cooked spaghetti oopyngm 2007 Peavson Addisoanesley AH ngms vesevved 726 Minsky Conclusion Comparison Kindleberger exogenous shock Minsky cyclical expansion begets collapse Financial instability is endemic to K39ism no one policy fix Copynght 2007 Peavson Addisoanesley All ngms vesevved 727
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