Econ-Chapter 8 Flashcards
The true suppliers of loanable funds are
consumers and businesses that save, banks are intermediaries
interest rate
savers are paid for delaying consumption until the future, by borrowers, who wish to consume or invest more in the present and will later pay for that privilege-the price they pay is this
direct finance
a borrower deals directly with the lender
-selling of bonds
maturity
the date that the payment will be made to the lender
face value
the value paid at maturity
zero coupon bond
seller makes no interest payments
coupon rate
making interest payments twice a year until maturity, would have this quoted on it
indirect finance
when individuals and businesses use middlemen, such as banks, for borrowing and lending, they are engaging in this
financial intermediaries such as banks:
- spread the risk of non-payment
- develop comparative advantages in credit
- divide denominations of loans
- match time preferences
high interest rates
the greater rewards encourage more saving-larger quantity of loanable funds is supplied
the higher cost of consumption and investment discourages borrowing-a lower quantity of loanable funds is demanded
borrowers prefer what kind of interest rates
lower rates, and lenders would prefer higher
usury law
which puts a price ceiling on interest rates, it would cause a shortage in the market if the ceiling was below the equilibrium interest rate
us loans interest rate is
2.25% and mortgage is 4%
indirect crowding out
when an increase in government spending is financed through borrowing, private spending decreases due to the rising interest rates
direct crowding out
when government spends, private markets spend less because their ability to spend is taxed away
financial trades may create value because of differing abilities
one partner is motivation and sells a good, and the other partner is less motivated and buys the good. one partner finances while the other manages.
leveraged buyout
where a firm borrows in order to purchase another firm then immediately sells the firm in whole or in parts
finance moves money around , but it does so to more resources around from..
less valued uses to higher valued uses, resulting in an increase in the wealth of a nation and nearly always creating employment
insolvent
a firm whose value is negative-owes more than it owns
iliquid
a solvent firm may be forced to declare bankruptcy, because of this, cannot pay its immediate obligations
absolute priority rule
which the creditors are ranked with regard to how long ago the company became indebted to them, then every penny is paid to the senior debt, before any less senior debt is paid.
Fannie Mae (Federal National Mortgage Association) and Freddie Mac (competeror)
was created to restart lending on housing after the crisis of housing prices from the great depression
The system of Fannie Mae and Freddie Mac
- Mortgage loans to poor people
- bank sells loan to freddie or fannie
- poor people make payments to them
- FM sell investors a share of the payments
- the money to buy more mortgages with is returned to them
Community Reinvestment Act
became a law, which instructed banks to make loans to poor people, who could not get home loans before because the could not pay
noncomforming loans
HUD directed the FMs to purchase loans that banks made to risky borrowers who could not meet the old standards.
-this passed the risk of making loans to poor people to the FM
What was the result of the housing industry being over built?
- frannie and freddie failed and could not pay bondholders
- AIG failed as well
- state had to pay off debt to the bondholders
TARP ( Trouble Asset Relief Program)
$700 billion was given to pay off bad mortgage back bonds. BUT Paulson took the money and gave it to banks. Banks were forced to accept the money
Congress proposed remedy for the financial crises, the Dodd-Frank bill of 2010
created new government regulatory agencies
created new regulations
directed regulators to write additional regulations
The Dodd-Frank bill does NOT
restrict the FMs in any way
The Dodd-Frank Bill DOES
- Establish the Financial Stability Oversight Council
- Instituted Bailout Insurance
- Created the Consumer Financial Protection Bureau to Regulate consumer credit
Systemic Risks
risks to the entire financial system
Aftermath of the 2008 Crisis
brought together the value destruction that accompanies government insuring of loans and austrian businesses cycle theory on how fed money creation inflates bubbles. The bubble bursted
economic growth
a healthy economy’s increased production of goods and services is atleast around 3% per year
the 2008 crisis was triggered by
contraction of money supply, bad housing policies, monetary expansion to fight the recession
