Crises Midterm Review

Fundamental Value

The perceived value of a security or business based on its fundamentals or characteristics.

Speculation

The act of buying or selling assets with the goal of making a profit from price fluctuations.

Bubble

When the price of an asset or security is much higher than its actual value.

Tulipmania

A period when tulips were introduced and bought in large quantities, causing prices to rise sharply before crashing.

The Mississippi Company

One of the first examples of an economic bubble created by John Law to develop French territories.

The South Seas Company

A joint-stock company formed in 1711 to consolidate Britain's national debt, resulting in a financial bubble.

Poyais

A fictional Central American country created by fraudster Gregor MacGregor to defraud investors.

Bond face value

How much a bond will be worth on its maturity date.

Bond coupon

The interest payment made to a bondholder by the bond issuer.

Bond maturity

The date on which the bond issuer pays back everything owed to bondholders.

Sovereign debt

Debt owed by a government to foreign (external) and domestic (internal) lenders.

Fixed exchange rate

A system where a country's currency value is set at a specific rate against another currency.

Floating exchange rate

A currency value based on supply and demand for other currencies.

Currency maintenance

The process of managing a country's currency to maintain its value and economic stability.

Bitcoin fundamentals

A decentralized digital currency operating on a blockchain with fixed monetary policy and no central authority.

Decentralized Finance

A financial ecosystem built on blockchains, offering financial services without banks.

Traditional finance

The existing regulated financial system that includes banks and investment firms.

Northern Rock

A British bank that collapsed in 2007 due to over-reliance on wholesale funding.

Wholesale lending

Lending between large institutions rather than individual consumers.

Repurchase agreement (repos)

A short-term borrowing arrangement where securities are sold and bought back later at a higher price.

Deposit insurance

A government guarantee that protects depositors’ money if a bank fails.

FDIC

A U.S. government agency that insures bank deposits and regulates banks.

Inflation

General rise in prices over time that reduces purchasing power.

Deflation

General decline in prices that increases purchasing power.

Federal funds rate

The interest rate banks charge each other for overnight loans, set by the Federal Reserve.

Bank run

A mass withdrawal of deposits by customers who lose confidence in a bank’s solvency.

Cost of credit intermediation

Total costs involved when financial institutions channel funds from savers to borrowers.

Money multiplier

The idea that each dollar deposited in a bank leads to more money creation through lending.

Debt deflation hypothesis

Describes how excessive debt can lead to asset sales, falling prices, and economic contraction.

Monetarist (Schwarz-Friedman)

A school of thought arguing that money supply is the main driver of economic activity.

Durable goods

Goods that last a long time and are sensitive to economic cycles.

Leverage

The use of borrowed money to increase investment size, magnifying gains and losses.

Buying stock on the margin

Borrowing money from a broker to buy stocks, risking margin calls on price drops.

Short-selling stocks or currency

Betting an asset will decline in value by borrowing and selling it to buy back later at a lower price.

Silicon Valley Bank Run (2023)

A bank run triggered by losses on long-term bonds, leading to a major bank collapse.

European Sovereign Debt Crisis

Crisis where Eurozone countries struggled to repay government debt after the Global Financial Crisis.

Asian Financial Crisis

A financial crisis in Asia triggered by fixed exchange rates failing and capital flight.

Great Depression

Characterized by mass unemployment, bank failures, severe deflation, and a collapse in global trade.

Romer

Emphasizes monetary expansion as the factor that ended the Great Depression.

Bernanke

Focuses on financial sector dysfunction as a cause of the Great Depression.

Debt-Deflation (Fisher)

Falling prices raised real debt burdens, causing defaults and shrinking demand during the Great Depression.

Monetarist (Schwarz-Friedman)

Blamed the Fed for allowing the money supply to collapse after the banking crisis.

SVB Uninsured Deposits

90%+ of deposits were uninsured, causing panic withdrawals during the bank run.

Asset with Interest Rate Risk

SVB held long-term bonds that reduced in value as interest rates rose.

Minsky instability hypothesis

Describes Ponzi, hedge, and speculative finance's role in financial instability.

Austrian Business Cycle Theory

Argues that cheap credit causes malinvestment and Minsky's views on financial fragility.

Bitcoin as a currency

Serves as a digital medium of exchange and store of value, though with volatility.