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Econ Week 13

by: D S

Econ Week 13 FIN 501

Financial Economics
Tatyana Deryugina

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Financial Economics
Tatyana Deryugina
Class Notes
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This 3 page Class Notes was uploaded by D S on Wednesday December 9, 2015. The Class Notes belongs to FIN 501 at University of Illinois at Urbana-Champaign taught by Tatyana Deryugina in Summer 2015. Since its upload, it has received 16 views. For similar materials see Financial Economics in Finance at University of Illinois at Urbana-Champaign.


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Date Created: 12/09/15
Financial Economics Week 13 Professor Tatyana Derugvina University of Illinois Urbana Champaign December 9 2015 1 Response to the Great Recession Why can t the fed take care of everything We had QE17 2 and continued Paul Kuggerman curve zero lower bond cannot have negative nominal interest rates too negative class notes on Miles Kimball problem with negative interest rate is that people won t put money into the bank cash always had a zero nominal interest rate7 the way to charge the fed can charge banks for depositing cash but will shave off money on the electronic to 96 merchants will take on the same responsibilities Thus if everyone is getting charged for using cash then it pushes people to just use credit more and thus people won t hoard cash as much gift cards cash value starts to decreases bank charges 5 merchants charge 5 as well class notes on tart 11 TARP Troubled Asset Relief Program 700 billion Bear Stearns also helped but this was because they were under the troubled assets7 and they had to show insolvency AIG massive bank and on the brink of collapse and yet TARP got bailed out Lehman wasn t bailed out because they took on excessive exposure AIG was speci cally targeted or capitalized on AIG was an insurer problem with credit crunch from Lehman and linked to a whole bunch of other companies AIG got bailed out because of the effects from Lehman issues picking lesser of two evils by helping AIG even though causing moral hazard tough regulation and the Treasury made quite a bit of money from AIG with TARP US Auto Industry was collateral damage with credit crunch so US gov decided to help them as well US loss about 10 billion dollars on this What were the concerns about TARP moral hazard if we bail out all these big things Did the program work stabilized and there was not a great recession however it caused a lot of stigma against them since there was a lack of transparency unknown moral hazard that will affect the long run short run it worked 12 ARRA American Recovery nd Reinvestment act of 2009 800 billion dollars amount of funds given to state governments for Medicaid 1361 moral propensity to consumeMPC to spend and poor has a higher value than rich somewhat controversial that had many people supply side economists who were against ARRA suggested that we should lower taxes and reduce government interference instead Talked about what economists used to determine if TARP actually worked Looked primarily at employment to determine if it worked pre 200000 per job per year where 125000 during the rst year of ARRA look at how productive each person in the US is June 2009 US has had an increasing GDP and thus we ve been out of the economy however the job market has still been weak Why would you expect larger increases in jobs basically we ve been lowing some strict steady curve to compensate slide 9 brings out perhaps there were other reasons that we were not growing as much as we d like to slide 10 Moral hazard in nancial markets basically wall street believes that they are safe because of lehman brothers issue Wall Street reform prevent these failures from happening 13 Dodd Frank Wall Street Reform Consumer Protection Act enacted in 2010 and had a huge number of changes Financial Stability Oversight Council Alan Blinder the regulators weren t looking at the banks themselves because no one was looking at it high level Bureau of Consumer Financial Protection mortgages and car loans they wanted to put a limit on how much you could charge however now there is more transparency on housing mortgages systematically important need to have liquidation plans or living wills tell the regulator on how you would be dismantled added more stringent capital requirements no banks should not be too big to fail issue with Lehman Bros people couldn t gure out how to get money out of Lehman and this hurts all the people who had there assets frozen Volcker Rule banks cannot engage in proprietary trading for their own pro t note this still doesn t break up the big banks and so really there is still open issue 14 Bank Stress Tests banks need to show they had enough capital on margin call issues they have enough capital to continue lending even under extremely adverse economic conditions detailed scenarios are provided by the Fed asymmetric information issue regulators are always informational disadvantage since they don t underwrite loans or structure derivatives the just try to check up on it potentially you need the experts coming up with these strategies 15 Rating agency reform issue previously were that analysts were paid and had a con ict of interest exists 6 ngers of blame Alan Blinder previously there was a monopoly power over securities ratings and thus dif cult to break into that market 2 Europe EUrope fell back into recession from Q4 2011 through Q1 of 2013 due to this government debt issue 21 European sovereign Debt Crisis Ireland is one example idea was that people didn t think people ould run so much debt and was unable to tell them no Greece Portugal Ireland and Cyprus primarily austerity measures Bailouts coordinate with IMF EC and ECB Troika EFSM created 2010 Greece so many problems mostly described in the slides swimming pool tax 2 swimming pools tax wise but there are signi cantly more which goes to show that people don t actually pay any taxes while this goes against Keynesian economics ie governments should spend more not less during the recessions however you need to have some surplus to pay off the debt if there are no strings on the loans then Greece just keep paying them more credit Political Changes Syriza party anti austerity won majority of the Greek parliaments and yet they were ghting against austerity IMF has declared that the debt is unsustainable and thus Greece needs major debt otherwise it will Default moreso 22 Legislation quite a bit of this money when into decreasing T not just in G but 15 trillion dollars


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