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ISS Lecture 9 Notes

by: Samantha Shea

ISS Lecture 9 Notes ISS 315

Samantha Shea

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About this Document

These notes cover what was talked about in class on Tuesday, October 18th.
Global Diversity/Interdepend
Y. Sinha
Class Notes
ISS315, Lecture Notes
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This 5 page Class Notes was uploaded by Samantha Shea on Tuesday October 18, 2016. The Class Notes belongs to ISS 315 at Michigan State University taught by Y. Sinha in Fall 2016. Since its upload, it has received 2 views. For similar materials see Global Diversity/Interdepend in Integrative Studies Social Sci at Michigan State University.


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Date Created: 10/18/16
Lecture  9 Tuesday,  October  18,  201612:41  PM • market  crash  happened • Global  recession  started  in  2008 ○ Great  shock  to  most ○ Started  as  financial  meltdown  in  America ○ Quickly  spread  to  other  parts  of  the  world  because  the  world  was   interconnected Problems  in  America  quickly  became  global  problems § • New  Economic  Model -­‐supposed  to  put  an  end  to  business  cycles ○ Markets  have  gone  up  and  down  since  the  beginning  of  capitalism § Free  markets  have  been  characterized  by  boom  and  bust  cycles ○ When  bubble  in  market,  market  itself  will  pop  the  bubble   § Economic  downturn § Market  bubble:  one  sector  of  economy  will  forever  increase  in  value □ First  bubble  in  1600s:  Great  Tulip  Bubble ® People  were  paying  large  sums  of  money  for  flower § .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   ○ 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 • Approach  to  economic  policies  was  that  government  should  be  as  free  of   economic  involvement  as  they  possibly  could  be ○ Government  involvement  should  be  minimal  in  the  market  because  it  was   assumed  that  markets  were -­‐correcting • 1980s:  Policies  of  Ronald  Reagan -­‐ government  should  not  interfere  with  market ○ East  Asia  Crisis  of  1997:  could  not  pay  back  loans  they  had  from  Western   banks • Austerity  measures :  cutting  back  on  government  spending ○ You  get  political  volatility • 1980s:  Policies  of  Ronald  Reagan -­‐ government  should  not  interfere  with  market ○ East  Asia  Crisis  of  1997:  could  not  pay  back  loans  they  had  from  Western   banks • Austerity  measures :  cutting  back  on  government  spending ○ You  get  political  volatility ○ People  got  pissed  off ○ Caused  years  of  economic  uncertainty  in  East  Asia ○ Caused  a  great  deal  of  political  uncertainty • When  our  banks  were  not  able  to  pay  back  debts,  we  did  not  use  austerity   measures • Double  standard:  one  set  of  rules  for  west  and  others  for  other  countries ○ Problem  is  global  economy • Argument  by  banks  and  promoters  of  New  Economic  Model  was  that  the  crisis   experienced  was    a  bubble ○ People  saw  the  bubble  coming • Entire  global  economy  is  dependent  on  American  consumerism 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 ○ Aggregate  demand -­‐people  don't  want  to  buy  stuff • The  income  for  middle  and  lower  class  Americans  has  been  stagnate  for   decades ○ Bulk  of  stuff  consumed  in  America  is  consumed  by  middle  and  lower  class   people § Contradiction § Can't  afford  to  buy  what  is  needed  to  be  bought • Solution:  let  middle  and  lower  class  borrow  money  to  fuel  global  consumption ○ Government  had  to  step  in   § Federal  reserve  (so  not  really  government)  lowered  the  interest  rate   to  encourage  borrowing □ You  wouldn't  have  to  pay  as  much  money  for  the  money  that   you  borrowed § Government  deregulated  institutions  that  lend  money  so  that  there   is  less  oversight  to  who  was  lending  out  the  money • Regulators  and  banks  thought  this  was  a  good  idea Everybody  assumed  that  home  prices  would  continue  to  go  up  because   ○ they  have  been  for  decades ○ 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 § It  got  so  bad  that  a  simple  two  bedroom  house  could  go  for  as  much   as  a  million  dollars ○ Everybody  assumed  that  home  prices  would  continue  to  go  up  because   they  have  been  for  decades ○ 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 § It  got  so  bad  that  a  simple  two  bedroom  house  could  go  for  as  much   as  a  million  dollars § 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 □ HOUSING  BUBBLE • Housing  bubble  crashed  and  it  affected  the  entire  American  economy  not  just   housing  economy When  one  sector  collapses,  the  entire  economy  did ○ ○ 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 § A  lot  of  people  lost  their  houses ○ Banks  now  did  not  know  how  much  money  they  actually  had • Banks  very  quickly  realized  they  could  not  trust  other  banks  either  because   other  banks  were  doing  the  same  thing ○ Global  credit  crisis:  nobody  was  willing  to  take  the  chance  to  lend  money   to  anybody  else • Housing  bubble,  along  with  lower  interest  rates,  fuel  American  consumerism • Banks  facilitate  transactions  &  manage  risk  and  make  loans Banks  focused  on  securitization  of  mortgages ○ • When  the  crisis  hit,  first  thing  the  banks  did  was  blame  lack  of  government   oversight  for  the  crisis ○ On  other  hand,  prior  to  crisis  banks  lobbied  to  try  and  get  rid  of   government  regulations ○ Bank  executives  were  the  only  people  who  didn't  lose  money  during  the   crisis • In  economy  we  have  today,  majority  of  people  making  financial  decisions  are   doing  It  on  behalf  of  other  people ○ Agency  is  lost ○ Agency  is  also  a  problem  with  the  way  corporations  are  structured They  are  run  by  a  CEO  that  may  not  even  have  any  interest  in   § company  they  are  running □ When  companies  stock  is  high,  value  of  CEO  portfolio  goes  up □ Instead  of  paying  CEO  money,  it  is  in  terms  of  stock  options ® CEO  has  incentive  of  raising  stock   ◊ Make  company  look  better  on  paper  than  it   actually  is § CEO  thinks  in  terms  of  short  term  profit  and  not  in  terms  of   bettering  the  company  long  term □ Has  every  incentive  to  lie  to  others ® CEO  has  incentive  of  raising  stock   ◊ Make  company  look  better  on  paper  than  it   actually  is § CEO  thinks  in  terms  of  short  term  profit  and  not  in  terms  of   bettering  the  company  long  term □ Has  every  incentive  to  lie  to  others • A  credit  agency:  assess  value  of  any  given  investment,  bank,  company,  etc   ○ is  paid  by  companies  that  are  being  assessed   ○ Assessment  agency  has  every  incentive  to  give  them  a  good  rating   because  if  not  the  company  will  fire  them  and  hire  someone  who  will  give   them  a  good  rating • Externality-­‐ when  something  you  had  nothing  to  do  with  still  effects  you • Global  system  is  so  interconnected   • Glass-­‐ Stegall  Act  1933:  split  commercial  banks  from  investment  banks ○ Commercial  bank  is  the  bank  you  think  of  when  you  think  of  a  bank § You  can  go  here  to  take  out  money  whenever  you  feel ○ Investment  banks:  things  that  manage  people's  portfolios § 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 ○ Supposed  to  keep  these  banks  separate   ○ 1990:  repealed  so  they  could  now  do  both  at  any  bank § If  gambles  did  not  pay  off  than  the  bank  did  not  have  enough   money  to  pay  back  depositors ○ If  these  banks  collapsed,  they  would  hurt  the  entire  economy ○ Government  has  no  choice  but  to  make  sure  that  these  banks  don't   collapse ○ Traditionally,  government  has  insured  commercial  banks  but  now  that   they  do  both  they  insure  all  banks § If  banks  fail,  we  have  to  bail  them  out • We  have  seen  income  inequality  starting  way  back  in  the  80s • Review  of  lecture ○ People  who  fuel  demand  do  not  have  money  to  spend ○ Solution:  housing  bubble ○ Once  equity  went  away  global  aggregate  demand  went  weak  affecting   global  economy ○ At  the  same  time,  foreign  countries  are  taking  money  and  putting  in   reserve  funds     reserve  funds    


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