How did the US financial sector get to this point?

1987 –Jan. 1993 –Feb. 1994 –May 1998 –Sept. 1998 –Dec. 1998 –1999 – Mar. 2000 –May 2000 – 2001-2006 –

Video is posted at http://www.pbs.org/wgbh/pages/frontline/warning/cron/

Financial Sector Reform• Financial reform is complicated

– Eight major components.– Evaluate as overall

if proposal will prevent new financial crisis if proposal will NOT prevent new financial crisis

• Systemic risk ~ interdependence in a market where single failure (or cluster) can cause a cascading series of failures, bringing down entire market.

• Moral hazard ~ an individual or institution does not bear the full consequences and responsibilities of its doings, and therefore has a tendency to act less carefully

Fact on Financial Reform

http://politifact.com/truth-o-meter/article/2010/jul/16/facts-financial-reform/

1. Consumer Financial Protection Bureau2. New mortgage rules3. Size matters4. Liquidation authority5. Audit for the Fed6. Credit card rules7. Volker Rule8. Derivatives9. Hedge funds10. Credit rating agencies11. “Say on pay”Criticisms

Financial Sector Reform

• Summary of proposed banking reform– Copy the heading for the proposed change.– Find information 3-5 facts about what it will do.– Evaluate good/bad of proposed change. Give your

opinion…– Evaluate proposal…back opinion with FACTS

if proposal will prevent new financial crisis if proposal will NOT prevent new financial crisis

Federal Budget & National debt

• Federal budget = – tax revenues - expenditures

• Balanced budget: taxes = expenditures• Budget deficit: taxes < expenditures • Budget surplus: taxes > expenditures• Government spending is independent of

output (RGDP) while taxes rise/fall with changes in RGDP.

FY 2010 budget

http://research.stlouisfed.org/fred2/series/FYFSD?cid=5

Is the Federal Government budget deficit a problem?

YES NO

Would a law or Constitutional Amendment requiring a balanced budget be a good idea?

How does the government eliminate it’s budget deficit?

• Someone has to pay more, propose 1 tax increase. – Why did you select this tax?– How would the tax increase impact people in different

income groups?• Someone has to get less, propose 1 spending

decrease. – Why did you select this expenditure?– How would this spending decrease impact people?

• What would be the impact of your proposal?

National Debt

• Will the national debt cause the U.S. government to go bankrupt?

• Q: How does the government pay for it’s budget deficit?– A: It borrows money (issues bonds, treasury bills)– “Crowding out” means it costs average U.S. citizen &

businesses more to take out a loan.• How does the U.S. debt compare to other

countries?

Budget Deficit = -$1,267 billion

http://crfb.org/stabilizethedebt/