UW-Madison ECON 102 - The Inside Job (4 pages)

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The Inside Job



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The Inside Job

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The Inside Job Movie


Lecture number:
21
Pages:
4
Type:
Lecture Note
School:
University of Wisconsin, Madison
Course:
Econ 102 - Principles of Macroeconomics
Edition:
1
Documents in this Packet

Unformatted text preview:

Econ 102 1st Edition Lecture 21 Outline of Last Lecture I General Info I The Great Recession II 14 4 Interest Rates and How they Change Investment Output GDP III 14 5 Monetary Policy Challenges for the Fed IV Film Glossary Outline of Current Lecture I The Inside Job Current Lecture I The Inside Job a Using derivatives i 50 trillion unregulated market ii Tried to regulate iii Larry Summers b Securitization Food Chain i the people who make the loan are no longer at risk of the person not paying ii Collateralized Debt Obligations CDO s 1 popular with retirement because of AAA rating best iii Rating Agencies paid to rate c Investment Banks These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute i banker makes more money when giving out supreme loans poor because of the high interest rates ii resulted in the biggest financial bubble in history 1 huge increase in housing prices a 1970 s and 1980 s small increases b effectively doubled in 2006 2007 2 led to hundreds of billions of dollars of profits a wasn t real income money created by the system b basically a global Ponzi Scheme iii Investment Bank Leverage 1 33 1 2 scary hight 3 Credit Default Swaps a unregulated i didn t have to keep specific amounts on reserve b worked like an insurance policy c paid quarterly premium d if goes bad would be paid to make up for loss i HOWEVER allowed many people to insure the same CDO ii House example 1 If 20 people are paying insurance on one house and it burns down the number of people with losses is huge big problem iv Has financial development made the work riskier Rajan 1 greater incentives to take risks that could destroy firms or the entire financial system 2 Make an extra 2 10 million a year by putting your institution at risk when you re not responsible for losses a Most took the bet b Lehman Brothers i CEO Richard Fuld ii 6 jets and a helicopter iii own elevator to bring him to



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