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A study About Personal Finance

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BA 96 Personal Finance Module 2
Risk Management and Securing Assets
3/2/09 The crisis
Risk vs. uncertainty
Risk: probabilities can be assigned with confidence
Uncertainty: no precise probabilities, flimsy foundation, sudden changes
Income insecurity: rise of uncertainty in American middle class (online)
GDP grew but all the money went to the top 20%
Job insecurity
Health insecurity
25% (?) of GDP is spent on healthcare
Rise of technology people kept alive longer, more healthcare expenses
Retirement insecurity
No more pensions, now 401(k)… and everyone’s are dropping, crap.
(paper is on bspace)
- Compare this to another asset bubble, explain to another business person
- Will have bubble-analysis system
o Investor excitement
o Financial boom
o Market euphoria
o Profit taking
o Panic
- See JK Galbraith’s Great Depression
- 1879 was bigger than great depression silver, railroads, etc
- First one ever: dutch tulips
- Japanese land boom ($1million/sq m!)
o Economy never returned because: banks cant mark assets to true value without going
out of business (insolvent), so assets weren’t marked down for 10 yrs couldn’t loan
money
o No recession, but flatlined for 17 yrs
o Export-driven economy + feudal economy
All little stores and big car exports
Couldn’t compete against Asian tigers
Minsky’s stages
Hedge speculative Ponzi
o People start borrowing because of easy liquidity
o Easy investments, good profits, so more people borrow to invest
o “all capitalist economies get less stable as they go along” (profit instability)
Savings and loan crisis (1980s-90s)
Banking and real estate, surprising
90% of 585 bank failures were in OK and TX (but biggest was in CA)
$800billion, nationalized banks, liquidated shareholders, sold back into a healthy economy later
o Only cost $200billion once banks sold back

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(why housing prices? Why?)
People say don’t invest in real estate – wtf, who says that…
When the dot-com bubble blew, stock speculators were hurt
Citibank and BofA are insolvent right now assets aren’t covering liabilities
Shit.
Victim one: i-banks
o Industry is defunct (Lehman, Merrill, Morgan, Goldman, gone)
o People are even willing to buy American treasury bills! Even with no rate of return!
Wow, that’s bad.
CDS (credit default swap) growth not insured
Balance sheets get weaker and weaker, no insurance, no loans, economy doesn’t grow
If you look at unemployment as unemployed + partially employed + given up, we’re at ~14% (GD hit a
high of 25% with just the normal calculation of UE)
US vehicle sales are in freefall, including foreign-made cars
Honda was doing the best and they just fired their CEO
GM loses $30billion (AIG lost $60billion today)
o Insolvent
Auto-worker unemployment + supply chains + everyone else related to the industry
o Kept alive as a job program, not for the value of cars. Shit again.
Retail sales are worse
Restaurant sales down too
Whole hospitality industry, actually
Bad analysis
GSEs (Fannie and Freddie and collateralized debt obligations)
o They didn’t touch the really toxic stuff, tho
o Goldman, others followed their lead and squeezed them out
Reaganomics borrowing now, stealing from the future
o Over-stimulates the current economy
Dot-com bubble led to people thinking housing was a safe investment… oops
80% of mortgages done by not-banks!
Interest-only loans negatively amortize
People began to extract home equity up to the point where they couldn’t take out any more
Couldn’t make mortgage payments
90% of money borrowed since 2000 is mortgages
o The kind of mortgage matters
10 vs 30 yrs, different interest rates, etc
Buying Cars (see textbook)
What kind to buy?
o Logical: warranty, mileage, service

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BA 96 Personal Finance – Module 2 Risk Management and Securing Assets 3/2/09 The crisis Risk vs. uncertainty Risk: probabilities can be assigned with confidence Uncertainty: no precise probabilities, flimsy foundation, sudden changes Income insecurity: rise of uncertainty in American middle class (online) GDP grew but all the money went to the top 20% Job insecurity Health insecurity 25% (?) of GDP is spent on healthcare Rise of technology  people kept alive longer, more healthcare expenses Retirement insecurity No more pensions, now 401(k)… and everyone’s are dropping, crap. (paper is on bspace) Compare this to another asset bubble, explain to another business person Will have bubble-analysis system Investor excitement Financial boom Market euphoria Profit taking Panic See JK Galbraith’s Great Depression 1879 was bigger than great depression – silver, railroads, etc First one ever: dutch tulips Japanese land boom ($1million/sq m!) Economy never returned because: banks cant mark assets to true value without going out of business (insolvent), so assets weren’t marked down for 10 yrs  couldn’t loan money No recession, but flatlined for 17 yrs Export-driven economy + feudal economy All little stores and big car exports Couldn’t compete against Asian tigers Minsky’s stages Hedge  speculative  Ponzi People start borrowing because of easy liquidity Easy investments, good profits, so more people borrow to invest… “all cap ...
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