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The Global Capital
Market
Hill, Chapter 11
Functions Of A Generic
Capital Market
Figure 11.1: The Main Players in a Generic Capital Market
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
Attractions Of The Global Capital Market
Figure 11.3: Risk Reduction
through Portfolio
Diversification
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
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
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
 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
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?
Governments…
 Lent huge amounts of money to banks
 Took over dying banks
 Launched huge stimulus packages (deficit spending)
So what do we do?
 Do we increase regulation?
 If so, how?
 What do we do about dying banks?

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Chapter 11GlobalCapitalRW .ppt

  • 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?