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