EconAir

I've been asked to define some financial terms and comment on the current financial crisis and coming recession. -Financial institution (is it any bank or stock broker?) -Investment bank ( I never understood why Goldman Sachs was considered a kind of bank) -Systemic risk -Counter party risk -Mortgage backed securities vs. mortgages (does a mortgage become a security when it's bunched up with a lot of other mortgages so a person can invest in the whole bunch?) -Hedgefund -Relationship between hedge funds, short selling and credit default swaps. Financial Institution - any company that deals in finance - money, credit, stocks, insurance. It could be a bank, stockbroker, insurance company, hedge fund, credit card company, mutual fund company, etc. Even half of GE is a financial company. Investment bank. In 1934, the U.S. government passed a law dividing banks into commercial banks and investment banks. That law has since been repealed so there is a lot of overlap...

CHANGES IN FINANCIAL MARKETS Financial markets have been revolutionized by innovation and information processing technology. Financial markets and the “real economy” are linked in new, complex ways. There are feedback effects. Much of the American and global financial sectors are unregulated. The recent financial crisis in the mortgage-backed securities market indicates that the usual Fed tools to fix financial problems no longer work. The Fed is improvising new policies. They may become the basis for wider regulation or oversight of capital markets. Since 1973, the year of the Black-Sholes equation to price options and the beginning of the Chicago Board of Options Exchange, the major changes in financial markets have been: • Increased liquidity. Lower cost and shorter time to turn assets into cash. • Securitization. Part of the innovation to make financial assets more liquid. • Variable-rate instruments. Among other effects, this shifts interest rate risk. • Usin...