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Lecture

PHL 295 - 2008 Financial Crisis

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Department
Philosophy
Course
PHL295H1
Professor
Joseph Heath
Semester
Fall

Description
A recession occurs when there is a variation in the demand versus the supply. Once something becomes intrinsically valuable there tends to be a recession. Money is intrinsically valuable so no one spends it creating a huge supply with no demand for commodities to be purchased with money. Insurance is not a game from trade. Insurance generates a benefit by leveling the peaks in an uncertain process. If there are two hunters who have varied levels of returns they end up with variation in their returns. If they pool and split the returns evenly then there is an offsetting of the bad and good days however sometimes there will be a time when they both have a bad day. The variability of returns is reduced however. The more people you add the smoother and smoother the levels of returns are. Correlation risk is when each interaction within an insurance scheme is correlated to each other. For example if there are suddenly too many hunters and the returns of one hunter effects the returns of another then it stops becoming profitable. It is difficult to acquire long term capital so in order to cope banks turn short term capital into long term capital. By pooling a large amount of short term loans together the peaks in the depositing and withdrawals begins to level out and there is a consistent long termish loan that occurs. Banks are conservative because it is very difficult to make money of loans if they fall through because there is no collateral. If you don't pay for your credit card its hard to get money out, the same is true with large loans such as mortgages. Bank runs cause huge amount of problems. Bank panics also caused problems because if a bank collapsed everyone would run to their bank and take out the money. This would be contagious as there would be a wave of with drawls. The financial crisis was the re-emerging of the same problem over and over. All of the money that is around is divided up into debt and equity. The debt is divided out on conservative terms but equity is muc
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