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Macroeconomic Notes April 4th, 6th, and 8th for Professor Kaplan of CU Boulder

by: Robin Silk

Macroeconomic Notes April 4th, 6th, and 8th for Professor Kaplan of CU Boulder Econ 2020

Marketplace > University of Colorado at Boulder > Economcs > Econ 2020 > Macroeconomic Notes April 4th 6th and 8th for Professor Kaplan of CU Boulder
Robin Silk

GPA 3.871

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About this Document

Professor Kaplan of CU's Macroeconomics class. In this week we discuss mortgage backed securities, the housing crisis, the trend of median household incomes in the US, financial deregulation, and ...
Principles of Macroeconomics
Jay Kaplan
Class Notes
Kaplan, Macro, Econ, macroecon, Macroeconomics, Boulder, CU, Professor, MBS, financial, deregulation, housing crisis, mortgage backed securities, ACT, Todd
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This 4 page Class Notes was uploaded by Robin Silk on Thursday April 14, 2016. The Class Notes belongs to Econ 2020 at University of Colorado at Boulder taught by Jay Kaplan in Spring 2016. Since its upload, it has received 16 views. For similar materials see Principles of Macroeconomics in Economcs at University of Colorado at Boulder.


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Date Created: 04/14/16
April 4th    The US Economy is doing well, as shown by the next two points.    1. Unemployment and Job Growth  a. March jobs report shows +215,000 jobs  b. March unemployment rate was 5%  i. This is up .5% from February  ii. This can be explained by an increase in the labor force participation rate  c. Unemployment rate = # Unemployed / Labor Force    2. ISM Manufacturing Index  a. February ­ 49.5  b. March ­ 51.8  i. >50, industry is contracting  ii. <50, industry is expanding      3. Mortgage Backed Securities Continued  a. Credit Default Swaps  i. Insurance policies purchased on CDO’s, MBS’s, etc.  1. Good idea for high risk investments  ii. These have nuances though  1. You do not have to own an asset to purchase a CDS on it  2. You can buy multiple CDS’s for a single asset  3. The value of a CDS rises as the market value of the underlying  asset falls                                  April 6th ​ ousing Crisis      1. Trust in the markets  a. Rational behavior ­ minimizing risk firstly and maximizing profit secondly  i. Banks & financial institutions don’t always behave rationally  ii. During the crisis, B & FIs tried to maximize profit and maximized risk    2. Housing bubble  a. In the last century the average value of housing increased across the country by  less than 1% annually  i. Shiller Housing Price Index  1. Jan 1990 ­ 1999: Annually increased 2.47% on average  2. Jan 2000 ­ 2006: Annually increased 11.93% on average  3. Jan 2000 Index: 100.59  4. Jan 2006 Index: 203.75  5. Jan 2012 Index: 136.59  ii. Median Household Income  1. 2000: $57,724  2. 2003: $55,579  3. 2006: $56,598  4. 2010: $53,507  a. Income is falling; it follows that the average American  would lose purchasing power, and as such spending would  fall too  iii. Real GDP  1. Real GDP Growth  a. 2000 4.14%  b. 2001 1.08%  c. 2002 1.81%  d. 2003 2.54%  e. 2004 3.47%  f. 2005 3.07%  g. 2006 2.66%  h. 2007 ­3.07%  i. Great growth, and then biggest fall since the great  depression                iv. Assessment for the mid 2000s  1. Incomes are falling  2. Consumption is rising  3. GDP is growing  a. This is because  i. Savings are low, borrowing is high  ii. People are tapping into home appreciation  (refinanced mortgages)  v. Refinanced Mortgages  1. 2000: $250k  2. 2004: $400k  a. The house appreciates, so you take out a $400k loan to  pay off the initial $250k loan, leaving you with $150k  disposable income  b. This can be done over and over as houses continue to  appreciate in value  3. 2008  a. Decreasing housing prices and decreasing incomes, which  leads to decreasing consumption, and ultimately recession        Friday April 8th      3. Financial Deregulation  a. Gramm Leach Bliley Act (1999)  i. This allows the combination of banking, I­banking, insurance, and other  financial institutions  1. Banking: FDIC backs any account up to $250k; low risk and low  return  2. They transferred to I­Banking because it allowed for higher risk as  well as higher return. This was done because the banks thought  they were too big to fail    b. Commodity Futures Modernization Act (2000)  i. This act led to a deregulation of financial derivatives  1. MBS, CDO, CDS  2. AIG has insurance policies in auto, health, life, home, but they are  all slow growth (2­3%). They have reserves to be backed up  a. After this act is instated, AIG started to sell CDSs. CDSs  have no reserves; they are not backed up  b. When the housing market crashes and the CDSs need to  be reimbursed, they can’t because they aren’t backed. The  reserves for the other stuff could be used to pay it back,  but they would go broke and go out of business  c. The US govt takes over AIG, comes up to $187b to bail out  AIG, the financial system, and the economy. Multiple  institutions and banks    ii. Value of Outstanding CDOs and CDSs  1. CDOs: 2001: $275b  2007: $4.7t   2. CDSs: 2001: $920b 2007: $67t    c. Dodd Frank Reform  i. Identify financial firms: banks, I­banks, insurance etc. that pose a threat to  the economy should they fail  1. Must have higher levels of capital (equity + debt) to protect against  failure and to require a govt bailout  ii. Institutions don’t like this rule  1. As shares rise outstanding stock will dilute the value of existing  shares, lowering market price, and lowering yield per share  2. As debt rises, interest expenses and payments rise, which lowers  profits  d. Key Points  i. Taking advantage of deregulation, the MBS, CDO, and CDS markets  helped create tremendous wealth for Wall Street  ii. The housing bubble supplemented stagnant incomes as middle class  Americans 


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