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asset bubble

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by

Luong Mai

on 4 October 2012

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Transcript of asset bubble

ASSET BUBBLES Expantionary monetary policy, freezing loans with adjustable interest rates. Housing prices reduced dramatically in the big cities, to solve the situation, the Fed has pumped more than $ 41 billion in low-interest bank loans. At the same time President Bush to allow banks to freeze mortgage loans with adjustable interest rates on the market for 5 years.
Existing home sales continue to decline in 2008, the value of real estate-related securities price down significantly. In early January 2009, the Fed bought $ 600 billion of securities are secured by collateral. This is a further step in the campaign credit easing tension stems from the collapse of the housing market in the US Solutions THEORETICAL BACKGROUND GROUP 6

1. Dang Thanh Huyen
2. Luong Thi Quynh Mai
3. NguyenThi Thanh Nga
4. Nguyen Hai Yen
5. Tran Manh Hung An asset bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values". It could also be described as a trade in products or assets with inflated values. Definition Causes Excessive monetary liquidity potentially occurs while fractional reserve banks are implementing expansionary monetary policy
Interest rates are going down->investors tend leverage their capital by borrowing from banks and invest the leveraged capital in financial assets such as equities and real estate
Once the bubble bursts the central bank will be forced to execute a contractionary monetary policy
central bank raises interest rates - > investors tend to become risk averse and thus avoid leveraged capital because the costs of borrowing may become too expensive
Liquidity Excessive monetary liquidity potentially occurs while fractional reserve banks are implementing expansionary monetary policy
Interest rates are going down->investors tend leverage their capital by borrowing from banks and invest the leveraged capital in financial assets such as equities and real estate
Once the bubble bursts the central bank will be forced to execute a contractionary monetary policy
central bank raises interest rates - > investors tend to become risk averse and thus avoid leveraged capital because the costs of borrowing may become too expensive Liquidity Social psychology factors Greater fool theory behavior of a perennially optimistic market participants (the fools) who buy overvalued assets in anticipation of selling it to other speculators (the greater fools) at a much higher price projecting historical data into the future on the same basis; if prices have risen at a certain rate in the past, they will continue to rise at that rate forever
Overbidding on certain assets will at some point result in uneconomic rates of return for investors; only then the asset price deflation will begin Extrapolation investors tend to buy or sell in the direction of the market trend Herding the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk
An investor must balance the possibility of making a return on their investment with the risk of making a loss - the risk-return relationship
occur when this relationship is interfered with, often via government policy Moral hazard Disadvantages Consequences cause misallocation of resources into non-optimal uses
the crash which usually follows an economic bubble can destroy a large amount of wealth and cause continuing economic unstability
their impact on spending habits. Market participants with overvalued assets tend to spend more because they "feel" richer
the bubble inevitably bursts, those who hold on to these overvalued assets usually experience a feeling of reduced wealth and tend to cut discretionary spending at the same time, hindering economic growth or, worse, exacerbating the economic slowdown Advantages extensive standard-of-living increases for large segments of the population
Without the Internet bubble we might have missed companies like AOL, which connected virtually every American household to the Web
Not all bubbles are transformational, but those that are enhance our quality of life and pave the way for future innovation

The Housing Bubble in the United States Case analysis Causes Subprime Mortage Irrational Exuberance Low short-term interest rates The development of subprime mortgage as well as the lax leding standards of US banks led to the exposion of housing market and then the dramatical increase of housing prices.
Because of the low short-term interest rate, individuals were taking on subprime mortgages, with the expectations that the price of their home would continue to rise and that they would be able to refinance their home before the higher interest rates were to go into effect the low short-term interest rates encouraged the use of adjustable rate mortgages (ARMs).
low short-term interest rates contributed to the housing bubble was by encouraging leveraging (investing with borrowed money). All the participants who contributed to the housing bubble acted on the assumption that home prices would continue to rise. Negative effects Possitive effects (cc) photo by medhead on Flickr Side effects When the bubble bursts, the feedback loop goes into reverse
Prices decline and individuals find not only that their wealth has declined but that in many cases their mortgage indebtedness exceeds the value of their houses
Loans then go sour and consumers reduce their spending
verly exposed financial institutions begin a deleveraging process
The attendant tightening of credit weakens economic activity further, and the outcome of the negative feedback loop is a severe recession
Credit boom bubbles are the ones that pose the greatest danger to real economic activity Bubbles and Economic Activity From 2001 to 2006, nonfarm payroll employment in residential construction increased by 29.1 percent, considerably faster than the 12.7-percent growth in the construction sector as a whole.
from 2006 to 2009, nonfarm payroll employment in residential construction declined by 36.6 percent, while employment in the entire construction sector decreased by 21.5 percent
From 2001 to 2006, employment in cement and concrete product manufacturing and in construction machinery manufacturing grew by 5.1 percent and 9.0 percent, respectively. Employment in the real estate credit industry and the mortgage and nonmortgage loan brokers industry ballooned by 52.0 percent and 119.5 percent, respectively.
From 2006 to 2009, employment in mortgage and nonmortgage loan brokers and in real estate credit decreased by 54.5 percent and 44.0 percent, respectively. Wood product manufacturing (35 percent) and cement and concrete product manufacturing (24.4 percent) also experienced losses in employment. The impact of the U.S. housing bubble and bust on employment, 2001–09 has created a revolution in the U.S. banking system
A series of mergers and acquisitions took place between the large banking groups
current financial crisis is a favorable opportunity for many financial firms acquired competitors who are "distress" with cheap price
Not only did this action help the company to wipe out their enemies, but they also dominate all branches and market share U.S. banking system The market went down, giving small companies a great opportunity to recruit senior staff who were fired from the top financial companies
There was still many companies unrelated to the mortgage market
They have the resources to recruit talented leaders that they did not have the ability to sign on Small companies on Wall Street The decline of the labor market on Wall Street brought many advantages for developing countries, where labor costs were lower than New York, London and Hong Kong
about 40% of the study Wall Street may be conducted abroad Wall Street distress
a golden opportunity for developing countries banks pumped a large a mount of money worth hundreds of billions US dollar into the market to increase liquidity in the world financial system
agreed to increase the deposit guarantee level to double, about 3 or even agreed to stand guarantee 100% for deposits in banks in the region
The European governments closer together to deal with a common problem and to build a new international economic and financial system Europe also gained benefit
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