Mbb21
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The document discusses financial innovation and instability, including schemes to sell overvalued real estate, the risks of mortgage loans when house values change, and how everyone holding mortgage loans in their portfolios led to risk being shared widely. It notes that risk can't be eliminated but only shared differently, and issues like moral hazard when profits are kept but losses are shifted to bailouts. Specific numbers mentioned include $103 billion in bankruptcies, $327.9 billion and $700 billion in house loans, and $5 trillion in something. The document also discusses Hyman Minsky's theory that stability leads to instability over time.
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Mbb21
- 2. Money, Banking, and Business Lecture 21 Financial Innovation Chapter 10
- 3. Questions?
- 5. Schemes Buy for $8 million Appraisal $10 million Sell 1,000 shares at $10,000 Promise 7% return Vacancy loss $103 billion Bankrupt
- 6. House Loans $100,000 Down Rate Payment $20,000 20% 8.0% $670 $1,000 1% 4% $600
- 7. House Loans House values change Payments don’t
- 8. House Loans Everybody had mortgage loans in their portfolios
- 9. Risk Cannot be eliminated Can only be shared differently
- 11. Moral Hazard Keep the profits Shift the losses Bailouts Too big to fail
- 12. $327.9 billion
- 14. $5 Trillion
- 15. Hyman Minsky Stability leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits