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Money, Banking,
and Business
Lecture 21
Financial Innovation
Chapter 10
Questions?
Chapter 11
Financial Instability
Schemes
Buy for $8 million
Appraisal $10 million
Sell 1,000 shares at
$10,000
Promise 7% return
Vacancy loss
$103 billion Bankrupt
House Loans
$100,000 Down Rate Payment
$20,000 20% 8.0% $670
$1,000 1% 4% $600
House Loans
House values change
Payments don’t
House Loans
Everybody had
mortgage loans in
their portfolios
Risk
Cannot be eliminated
Can only be shared
differently
Moral Hazard
Keep the profits
Shift the losses
Bailouts
Too big to fail
$327.9 billion
House Loans
$700 billion
$5 Trillion
Hyman Minsky
Stability leads to
instability.
The more stable
things become and
the longer things are
stable, the more
unstable they will be
when the crisis hits
Minsky Theory
Hedge
Speculative
Ponzi

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