Why Do We Fail to Learn From Past Mistakes? Speculative bubbles form for psychological and economic reasons - Psychological reasons
- faith or “blind optimism”
- herd behaviour
- Economic reasons
How Exactly Are All These Possibilities of Bank-Based and Non-Bank-Based Finance Linked to the Macroeconomy? Finance is crucial to realize investment plans of firms - no savings have to be collected prior to the investment undertaking
- banks can create deposit money by extending loans with “the stroke of a pen”
- investment plans depend on banks and non-banks willingness and ability to provide funds to firms and households
Aggregate Expenditure
Credit Volume
Less financialized economy
More financialized economy
- A larger amount of credit disbursed tends to lead to more aggregate demand: Money is usually borrowed by households and firms to finance spending on consumer goods, residential properties or new equipment.
- However, the more finalized an economy, the more of the credit goes into non-productive activities without an impact on aggregate demand. For a financialized economy, therefore, the Credit-AE-curve is further to the left.
- Some invest in foreign assets because of good performance of – for example – a Japanese car company
- Others invest abroad to speculate on changes in the exchange rate
- Trading financial assets across borders means that one country borrows and another country acquires claims
What to Take Home (I) - Hyperinflation comes from running the printing press
- Deflation is a fall in aggregate price levels
- Money is a store of value, a medium of exchange, and a unit of account
- Economists differentiate between commodity money and fiat money
- Commercial banks make profits through collecting deposits and investing in a portfolio of loans as well as miscellaneous securities
- Deposit money is created when banks make loans
What to Take Home (II) - Nonbank financial institutions are not subject to banking regulation
- Economies became financialized
- Irrational speculative real estate or asset price rises are called bubbles
- Finance is crucial to realize investment plans of firms
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