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Showing posts with the label financial crisis

What is a debt default? The debt ceiling?

The above video gives a very good description of the debt ceiling. But some might put more emphasis on the current scale of US debt - which has edged up towards $17 trillion at an alarming rate - see debt clock here .  What brought the debt ceiling back into political play has been growing consensus that the debt is now unsustainable in the long term. What Democrats and Republicans battle over is what to do about this. It is universally agreed debt default (see below) could have a potentially catastrophic impact on the world economy. This prospect will eventually lead to some sort of deal but the two parties will fight bitterly until the last moment. What is a debt default? A failure to meet a legally agreed payment. This usually means that the agreement - for example a mortgage - is no longer valid and the lender can take steps to recover the value of the loan Why would a US debt default be a disaster? Usually the national currency falls in value and this helps to make the

What is a 'hair cut' in the financial world?

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A 'haircut' is a loss in the value of an investment or security: see  here  for an example. 

What is a 'run' on a bank?

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A run on a bank is when a large number of customers withdraw their funds simultaneously. If a run on a bank gains momentum it can quickly 'fail' or go out of business, as  happened with Lehman Brothers in 2008. This is what George (James Stewart) is trying to prevent in the famous scene (above) from 'It's a Wonderful Life'. With institutions that are 'too big too fail' a government or international financial organisation may rescue the bank by either taking it over or injecting huge amounts of cash. This is the role the EU is currently playing in Cyprus. Unfortunately the proposed solution, which involved seizing ten per cent of depositor cash has created a crisis of confidence that threatens the banks, the role of Cyprus in the EU and ultimately the EU project itself. How do you stop a bank run? With great difficulty. The traditional remedies are: a) delay -  ....the bank is going to open again next week ... the key requirement is to 'buy tim

What is the 'fiscal cliff'?

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Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.   Mr Micawber in Charles Dickens David Copperfield (1850) The ' fiscal cliff ' is the phrase used by Federal Reserve Chairman Ben Bernanke to describe the situation US economy will face in January 2013 if political agreement is not reached in Washington. At that time a series of tax rises (the expiration of the 'Bush tax cuts') and spending cuts (part of a previous agreement) will take effect. As things stand the Democrats - including the freshly re-elected President - are refusing to cut expenditure on programs like Medicare. They insist on tax rises for 'the super rich' or 'millionaires and billionaires' as it expressed in electoral rhetoric. Both sides are hemmed in by the 'debt ceiling' - a legal limit to the amount that can be borrowed - and the a previous agr

What is a run on a bank? What does James Stewart teach us in It's a Wonderful Life???

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A run on a bank is when a large number of customers withdraw their funds simultaneously. If a run on a bank gains momentum it can quickly 'fail' or go out of business, as  happened with Lehman Brothers in 2008. This is what George (James Stewart) is trying to prevent in the famous scene (above) from 'It's a Wonderful Life'. With institutions that are 'too big too fail' (see The Royal Bank of Scotland) a government or international financial organisation may rescue the bank by either taking it over or injecting huge amounts of cash. This can prove ruinously expensive (see the current situation with the Spanish banks). How do you stop a bank run? With great difficulty. The traditional remedies are: a) delay -  ....the bank is going to open again next week ... the key requirement is to 'buy time' to organise refinancing. This means slowing down the rate at which customers can withdraw their funds. At the end of the scene above George agrees to r