Capitalism: Quiz #4

Chapter 15, 18, and 19

1500

 The Dawn of Capitalism (with property rights, social organization, & worker conflicts too)

Purchasing Power Parity (PPP)

Translates foreign currency to make comparable value estimates

Virtuous Cycle

Ahead & able to maintain to grow (provides bare necessities to continue/advance)

Viscous Cycle

Difficulty getting ahead or getting started (often lacks basic necessities to succeed)

Prompts Low Productivity: diseases & famine often associated

Economies of Scale

Virtuous Cycle; can make bigger by already invested in basic necessities (cheapens)

Capacity Utilization: saves resources/investments; can produce big supplies cheaply

(Needs a big market with an array of competition or becomes monopolistic)

Technology Transfer

Requires initial investment funding to yield the “next best method or product” 

Workers, methods, resource sold for research/development/use

EX: Vaccines, Medicines, Phones, Factory Equipment, Generalized Technology (AI)

Intellectual Property Rights

Copyrights, Patents, Trademarks, Trade Secrets to Protect Successful Methods/Ideas

Credits original creator’s ideas, protects profits; WTO gives 20 years no competition

(Can prompt virtuous cycle if profits are secure/protected for 20 years) 

BRICS

Brazil, Russia, India, China & South Africa’s “developer” economic alliance

Asian Tiger

Economic force (quick growth) BUT not in the BRICS or a developed nation

South Korea, Malaysia, Vietnam, Taiwan → NOT China or Japan

Transnational Corporation (TNC)

Headquartered in a developed country but outsources

EX: Nestle, Behr, Boeing are headquartered in EU/US but no work

(Known as homeless organization for less subjectivity to regulation)

World Trade Organization (WTO)

Made in 1995 to assist developing nations navigate fair trade

Polices government entities & TNC’s in global trade / guides trade rules

Only international government entity available to address globalization

International Monetary Fund (IMF)

Developed nations give money to help developing nations seeking assistance 

Primarily funds loans for development initiatives & infrastructure projects 

Made at end of WW2 to rebuild the war-stricken economies

United Nations (UN)

International union with minor role on international affairs (negotiation forum)

Made at end of WW2 as method for negotiation mediation

World Health Organization (WHO)

Sponsored by the UN to identify, address & stop disease spread (globally)

Disease is a primary reason for low productivity preventing development

6% of the world lives in famine & around 20% of world lives in disease

Andean Pact

A South American “trade bloc” operating between 1969 and 1993 (pre-WTO)

North American Free Trade Agreement (NAFTA)

A trade agreement for North America (US, Canada, Mexico) that seeks to eliminate trade barriers by reducing tariffs, creating a common marketplace, and increasing investments

European Union (EU)

An economic union between 28 European countries sharing currency/borders

Seeks to eliminate trade (& movement) barriers while strengthening currency

Non-governmental organization (NGO)

Non-governmental organization; volunteers/citizens organize to provide aid 

Often non-political & non-profit; researches & assists nations

(Any profits are reinvested in the mission)

Keys to Developing a Country

1. Stability & Peace

2. Development Funds

3. Infrastructure

4. Well-Functioning Government Structures

5. Skills / Education

6. Health Control

7. Government Control

Infrastructure

The physical and organizational structures needed for the operation of a society, including transportation, communication systems, and utilities. Essential for economic development and quality of life. Encompasses the essential facilities and systems that support a society's economy, such as roads, bridges, and sewers. It plays a crucial role in enabling trade, improving access to services, and fostering overall development.

Big Issue of Capitalism

Cumulative Race/Chase that Never Ends (No Security)

Social Darwinism

Competition prompts the best environment for economic growth; survival of the fittest

Per Capita

Money made per person

Income

Money received on a regular / timely basis

Average / Mean

Add all & divided by the # added

Quintile (5th)

Stats in 5 pts (20% intervals)

Decile (10th)

States in 10 pts (10% intervals)

Technology Gaps

Circumstances needing a “new method”

Requires research & development

(EX: COVID Shots) 

Infrastructure

Basics to function - road, sewers, electric, water, food

Fosters economic development by accessibility & trade

(Many nations lack adequate infrastructure for disasters)

Health Control

No major public health crisis or outbreak with casualties

(One crisis can kill an economy - Ebola, Covid, Plague)

Methods of Government Control

Tariffs, Technological Regulation, Investment Limits (Foreign)

Less common in the US; more common in China’s economy

Well-functioning gov is key (even if unlikable) to foster growth

TNC’s

Major enabler of development by investing companies in developer nations

Homeless organizations - less subject to international or “home” nation laws

Taxes & governmental involvement determine where investments occur

(EX: strong police government & low wage standards)

Tax Havens

Incentivizes (foreign) investment with lower taxes & regulations

Transfer Pricing

Get to pick the prices (& determine the profits)

Immigration

Plays a factor on economic development (good & bad)

Waves / influx can cause high demand & lower supplies

Generally supports or fills most market-worker gaps

The Great Depression & the 2008 Global Financial Crisis

2 Major Recessions (recessions are fairly common cleansers)

Great Depression

(Lasted from the 1920s to 1930s)

War sparked investor panic which caused the stock market crash during a time of gold standard complications, Smoot Hawley tariffs and federal reserve contractions.

Prompted less work, lower income, default, & depressed conditions

Damage of WW2 (on others) & strategic alliances helped recover (look better)

2008 Crisis Origins

1930s, post WW2 changes, deregulation, housing bubble burst

(Before WW2, the US didn’t globalize the economy; smaller trade / export rates)

(After WW2, US globalized to become an international leaders - 2008 hit the world)

True

Recessions are common in the US as “cleansers” - according to Schumpeter

True

The US has had at least 7 major recessions

2008 Precursors

Reagan & Bush banking deregulation; Dot Com recession; 9/11 panics; extra funds to banks

Housing Bubble Burst is the Direct Cause (ranging from 2007 - 2009 with 2015 ending)

Glass Steagall Act

FDR passed to create FDIC & separate Wall Street from Main Street banks

FDIC

Made by the Glass Steagall Act

Insures deposits and the 1st agency able to regulate banks

2008

Glass Steagall Act: separates Wall Street from Main Street Banks (repealed in 1999)

Deregulation: began during Reagan & Bush administration (ex: 1999); slowly loosened the federal banking standards & allowed Wall Street to de-regulate / reunite certain practices

Greed: banks realized middle class held 2/3 of US wealth in home values and sought a way to make profits —> began to predatorily target the middle class

Residential Mortgage Lending Era: Main Street banks began to target the middle class with predatorily written home loans/mortgages to purposely tie those individuals into contracts capable of gradual refinancing by the bank for higher interest / profit. Gradually, Main Street found it as a quick profit scheme and began to write too many loans to unqualified borrowers, causing inability to pay, refinancing at higher interest rates (making even harder to repay), default, and occasionally ending in bankruptcy or foreclosure. Accordingly, the Main Street banks adopted methods with the banks’ best interest at thought. Many banks gave Liar’s Loans that allowed lending to an individual without extensive background checks, often resulting in an inability to pay. Similarly, Ninja Loans allowed borrowers with no income and no assets, despite unlikeness of repayment. Seeking to prevent a bank run upon taking too many bad loans, Main Street banks began to take loans with Wall Street to afford the loans being given. The government eventually began to support the procedure via financing securitization in which the government sponsored funding and organizations to hold loans with disadvantaged borrowers. Accordingly, the government created credit agencies to rate the riskiness of lending, which were eventually abused by the Main Street banks to persuade Wall Street banks into purchasing the terms of the loan (with some seeking those likely to foreclose or those with higher interest rates for profit).

2008 Recovery

Led by Obama via the TARP program (2008) - known as the Bank Bailout

Began to take an effect in 2015: higher employment, increased income, higher GDP

TARP

Bank Bailout led by Obama (funding approved by Congress)

Government sought to buy out the bad loans / bonds but couldn’t find the original owners

Used funds to assist any “major & active bank” - became a banking stimulus to recuperate losses

(Didn't really address or trickle down to help the civilians until late 2015)

Dodd Frank Law

Government can regulate any industry capable of national / systemic harm

Liar’s Loans

Loans given to borrowers without extensive investigation; can lie about income (likely default)

Ninja loans

No income and no assets; no plan for any payback (likely default)

Adjustable Rate Mortgage

Teaser to get the borrower to sign into a contract (offers low interest rate) and promotes the promise that the home value will increase, but when refinanced, increased interest rates from 2% to 13% causing an inability to afford the mortgage/loan OR being stuck in a contractual payment worth an artificially inflated value

Underwater

Stuck in a contract worth more than it’s value

(Contractually tied into a loan worth more than the home’s value with no ability to escape)

Flippers

Sought to buy foreclosed homes at low value (fix up a little bit) and sell for an inflated price (ultimately causing the housing market to artificially increase value)

Mortgage Backed Securities

An investment that represents a claim of cash flow (subsidy for mortgage loans) by bundling mortgages together and selling shares of the pool to the investor. Can be issued by the US government, government sponsored enterprises, or private institutions (EX: GSE’s include Fannie Mae, Freddie Mac, and Ginny Mae - considered as the highest credit value).

Government Sponsored Enterprises

Government entities to assist the distribution of home loans/mortgages (EX: Fannie Mae, Freddie Mac, and Ginny Mae - considered as the highest credit value).

Prime Loans

Refers to a classification for loan terms (preferable & less risky so lower interest rates)

Subprime Loans

Refers to a classification of loan terms (less preferable terms, years longer, higher interest rate; deemed a risky borrower)

True

Around 40 panics/recessions have occurred since the Panic of 1819

True

Most artisan manufacturing was water powered; located near waters by the 1860s

True

Credit Contractions cause Recessions

True

Industrialization took hold in Europe by the 1500s but the United States waited until closer to the 1800s

True

3/4th of Incorporated Inequality in World is Concentrated in a Few Nations

False

A country becoming capitalism guarantees development

True

Technology gaps and power gaps are consequences from virtuous and vicious cycles

True

Nations starting development earlier had an advantage over latecomers

True

Distinguishing characteristics of a nation’s economy include the rules and institutions relating to or restricting economic activities

True

Major productivity increases can arise from learning and using new technologies

False

Investment by TNC always fosters development with positive effects in practice

True

In the United States, the richest 5% of households is roughly 75x the average income of Bangladesh

8 steps to develop a national economy

1. Stability & Peace

2. Financing

3. Well Functioning Government

4. Skills

5. Education

6. Infrastructure

7. No Public Health Crisis

8. Access to Foreign Markets

Infrastructure

Consists of roads, railways, airports, harbor facilities, bridges, tunnels, water, sewage, public utilities, electricity grids, & communication networks such as telephones and internet. (Fosters economic development through accessibility and trade).

True

The total value of goods and services demanded need not equal the total value produced in a year —> total demand can exceed or fall short of the supply.

True

When demands equals supply, there will generally be some unemployment

Employment Patterns

When demand exceeds supply, firms will hire more workers.

When demand falls short of supply, firms will lay off workers.

When demand equals supply, firms will not alter the size of their workforces.

Levels of Employment

A governments demand for goods and services (with policies regulating interest rates) determine _____.

Mortgage Lenders, Issuers of Securities called Derivitives (like MBS and Adjustable Rate Mortgages) & Credit Rating Agencies

The 3 groups benefitting from the 2008 incentive structures in the Housing Bubble

MBS, Adjustable Mortgage Rates

Example of derivative

Regulation

Prolonged depressions in the 1920s - 1930s, finally led to ____ of the financial sector

Provoke new regulations able to shorten the length & severity of the next potential recession

Deep crisis’ tend to reoccur to _______.

Financial fragility hypothesis

Deregulation causes complacency, increasingly risky firm behavior, and increasing debt (fostering another recession - vicious cycle)

Social Safety Net

The extent and recovery of a recession are determinable by the _______.

ARM

Adjustable Rate Mortgage - teaser rate subject to refinancing

MBSs

Mortgage Backed Securities: supported funds for loans (often issued by

Derivative

A contract - a type of security - derived from some underlying entity or entities (MBS, Collateralized Debt Obligations)

Moral Hazard

An instance in which a person or firm that is insured acts with greater recklessness (EX: too big to fail)

14 trillion

Amount spent on bank bailouts

10

Since the mid-19th century, the US economy has not gone more than __ years without a recession.

Over investment and underconsumption

Non-financial causes of crisis

Government lobbying

Firms can increase profits without investing through _____.

Tax policy/enforcement, regulatory regimes, & government contracting

The corporate influence is growing in

Revolving Door

Hiring government personnel who formerly regulated them or administered contracts

Bid rigging

Illegal collusion among bidders to predetermine the outcome of a bidding process for a contract