2. Functions Of A Generic
Capital Market
Figure 11.1: The Main Players in a Generic Capital Market
3. Attractions Of The Global Capital Market
Borrowers benefit from:
the additional supply of funds global capital markets provide
the associated lower cost of capital (the price of borrowing
money or the rate of return that borrowers pay investors)
The cost of capital is lower in international markets because
the pool of investors is much larger than in the domestic
capital market
4. Attractions Of The Global Capital Market
Figure 11.3: Risk Reduction
through Portfolio
Diversification
5. Growth Of The Global Capital
Market
Global capital markets have been growing at a rapid pace
In 1990, the stock of cross-border bank loans was just
$3,600 billion
By 2006, the stock of cross border bank loans was $17,875
billion
The international bond market shows a similar pattern with
$3,515 billion in outstanding international bonds in 1997,
and $17, 561 billion in 2006
International equity offerings were $18 billion in 1997 and
$377 billion in 2006
6. Manias and Crashes
Unfortunately, the world economy since the time of the
Holy Roman Empire (800 years ago!!!) has been
plagued by
Manias – periods when everyone believes they can make
money doing something that turns out not to be so great
after all
Example – the dotcom boom of the early 2000s.
Crashes – periods when the economy has huge
problems as the problems of the mania period unravel
Kindelberger, Manias, Panics, and Crashes,
1998
7. Mid 2000s: The world had a
lending & investing mania
Deregulation
Excess savings in developing countries (China, Taiwan)
and Japan
It’s hard to spend money in a fast-growing economy
“Easy money” in the developed countries
U.S. government allowed money supply to grow
8. Banks, most of all in U.S., issued ‘sub-prime’
mortgages
Banks did not want to own them, but packaged pieces
of many mortgages into bonds
Banks said the mortgages underlying the bonds wouldn’t
all default at once
Rating agencies (firms resembling Consumer Reports) agreed
Developing country & Japan investors bought
Eventually the pile got so bad people saw the problems
9.
10. The Crash of 2008
Many banks have so many hard-to-evaluate
investments that no one knows if their assets are
worth more than their liabilities
Would you invest in your bank if your deposits weren’t
government guaranteed?
11. Governments…
Lent huge amounts of money to banks
Took over dying banks
Launched huge stimulus packages (deficit spending)
12. So what do we do?
Do we increase regulation?
If so, how?
What do we do about dying banks?
