week 3: crises Flashcards

Question

1998 → value of most affected East Asian currencies fell ______ % against the $, and the most serious stock declines were as great as 40-60%.

Answer 1

to widespread bankruptcies and a sharp decline of credit flows. → economic activity in the region collapsed.

Answer 2

***Before*** Well-established corporations are listed on the New York Stock Exchange (NYSE). Young, innovative and promising firms have their shares traded at NASDAQ. The prices of the shares of many companies listed in the latter started growing in the late 1990s. At that time access to the internet was *greatly expanded* and offered new opportunities to companies to do business (**online retailing**). It generated expectations of high future profits ⇒ thus a large demand for the shares of such companies which inflated their share prices.

Answer 3

1,000 -> 5,000

Answer 4

go public; (to enter the stock market by issuing stock and offering it for sale; initial public offerings (IPOs)).

Answer 5

Selling their stock at prices above the initial valuations.

Answer 6

Low inflation, low interest rates, steady growth

Answer 7

- Savings Glut (accumulation of reserves by China, Japan and oil-exporting countries) - Foreign Capital Inflows financing the U.S. Trade Deficit - Credit Boom (excessive lending supported by a loose monetary policy) - U.S. Saving Rate fell from 6% to 1% of Disposable Income - U.S. Debt-to-Disposable Income Ratio rose from 75% to 120% - **Housing Bubble**

Answer 8

1933 | Glass-Steagall Act 1986 | 'Big Bang': Complete deregulation of the UK financial system 1999 | Abolition of the Glass-Steagall Act

Answer 9

In 1933, the Glass-Steagall Act separated commercial banking from investment banking. This meant that banks couldn't do both types of banking at the same time. The reason behind this was to make sure that people who put their money in banks felt safe. Commercial banks take people's deposits and lend them out, so if they also took on risky investments like investment banks do, it could put people's money at risk. By keeping them separate, the government could protect people's deposits.

Answer 10

o Balance Sheet o Income Statement o Cash Flow Statement o Retained Earnings Statement

Answer 11

"Too big to fail" is a concept referring to financial institutions that are deemed so large and interconnected with the broader economy that their failure could have catastrophic consequences for the financial system and the economy as a whole. The notion suggests that because these institutions are so big, their collapse would cause widespread disruptions, leading governments to intervene to prevent their failure. During the global financial crisis of 2007-2008, several banks and financial institutions were considered "too big to fail," and governments around the world provided bailouts and other forms of support to prevent their collapse. This included institutions like AIG, Citigroup, and Bank of America in the United States, among others.

Answer 12

Total assets are less than liabilities - equity. or Negative equity

Answer 13

Leverage ratio: Liabilities/Equity - Apple Computers: <1 - RBS: 18.8 - Barclay’s 61.3 - US Banks: 35 - UK Banks: 41

Answer 14

1. Depositors vs Shareholders Depositors, concerned about the safety of their money. Shareholders, focused on maximizing profits. 2. Upside risk vs Downside risk and moral hazard Upside risk for shareholders and downside risk for depositors. Moral hazard, where bailouts can encourage risky behavior. 3. Management compensation (bonuses) Management compensation, which can incentivize short-term gains over long-term stability. 4. Political risks – TBTF Political risks, particularly with institutions deemed "too big to fail," where governments may bail them out to prevent systemic collapse, despite the potential for moral hazard.

Answer 15

7.76 trillion

Answer 16

**Marshall Plan**: The Marshall Plan was a U.S. initiative to aid Western Europe economically after World War II. Its cost, adjusted for inflation, was around $150 billion. **Louisiana Purchase**: The acquisition of the Louisiana Territory from France in 1803. Adjusted for inflation, its cost was approximately $15 million. This is an incredibly small fraction of the bail-out cost. **1980s Savings and Loan Crisis**: The Savings and Loan Crisis in the 1980s cost taxpayers around $124 billion (adjusted for inflation). While significant, it is still substantially less than the bail-out cost. **Korean War**: The Korean War, fought from 1950 to 1953, cost the U.S. government approximately $67 billion (adjusted for inflation). Again, this is significantly lower than the bail-out cost. **New Deal**: The New Deal, a series of programs and reforms implemented during the Great Depression, cost the U.S. government around $500 billion (adjusted for inflation). While sizable, it is still much smaller than the bail-out cost. **Invasion of Iraq**: The cost of the Iraq War, including both direct and indirect costs, is estimated to be around $2.4 trillion. This is a substantial amount but still less than the bail-out cost. **Vietnam War**: The Vietnam War, which lasted from 1955 to 1975, cost the U.S. government approximately $1 trillion (adjusted for inflation). Again, this is much lower than the bail-out cost. **Total Cost of NASA**: The total cost of NASA from its inception to the present day is estimated to be around $1.2 trillion (adjusted for inflation). While significant, it is still considerably less than the bail-out cost.