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AGE OF EXPLORATION:
LONG AND SHORT OF FINANCE
Join us in our quest, explore the world of finance.
Visit us on thursdays common time
in Martin 304.
Please come to Visa Turkey Seminar on 21st of January
Thursday Common Time
A very Brief Introduction to Economics
by Melis Roberts
Market economics is about how scarce resources are best allocated to the needs of society. It
is based on the idea that both natural and physical resources are scarce(that means that they
are finite); but that people have unlimited wants and needs. Economics is the science that
shows the best ways to allocate resources to those needs. However, economics is a lot more
than that. It is a way of seeing; a way to understand the world and how it works. It is about
making rational decisions.
Economics is also the science of choices. Scarcity pushes people to make choices, simply
because we can’t have it all. And we sacrifice things while making those choices. These
things sacrificed, meaning the next best options forgone/passed over while we make choices,
are called the opportunity costs. They represent the things we sacrifice in order to obtain
something. Studying economics helps people to develop a habit of analysing the costs and
benefits of their actions and therefore be able to see opportunity costs. In that way it helps
people make healthy choices and develop a rational way of thinking.
One thing to keep in mind about economics is that it is not only about financial choices.
Economics teaches us that each action in life has a cost and benefit. For example staying
afterschool for your club activity means that you cannot be at home and resting. In other
words, the opportunity cost of staying at school is not being at home. However, you made that
decision bearing the cost of not being at home (sleeping, watching cat videos on Youtube) and
the benefit of being at school (enjoying your club activity). The choice you made here by
staying afterschool is also an economic choice as it involved some level of cost and benefit
analysis and opportunity costs.
People usually make the mistake of assuming that economics is about money, and they
confuse it with finance. Money is an aspect of economics, but economics is a much broader
science than finance. Finance is defined as the science that describes the management,
creation and study of money, banking, and credit; while economics is about resources,
society’s choices, countries and politics in general.
I am sure all of UAA’s students can benefit from taking an economics elective, joining the
club, or taking economics in a summer course, especially if they are planning to study a
related subject in college.
From the Editor.
by Elif Koc
Terror is probably the main priority of most countries right now. Emergence of terrorist
organizations such as Al Qaeda, Hamas and especially ISIS invoked fear and unease at
citizens and global leaders. Though most terrorist groups originated in Islamic states such as
Iraq or Syria there is stil controversy about the roots of terrorism, which can be traced in poor
politic and economic conditions.
( Source: Independent UK, 26 December 2015)
It is important to learn how terrorist organizations are financed before focusing on their
impacts on economy as a whole. The richest and most dangerous terrorist organization which
is ISIS, has Arab Gulf Donors and it has a self-sustaining economy. ISIS collects ransoms
before releasing hostages and it controls the oil industry in Syria- Iraq. It produces and
exports oil. That’s why US tries to disrupt the organization’s main source of revenue by
making airstrikes on oil fields the Islamic State controls.
Recent attacks in Paris and Mali brought back the question of terrorism once more and made
us concentrate on its economical impacts. Terrorism, in general damages economic growth
and globalization because it reduces trade flows, investment and ease of travel. It creates a
sense of fear and insatisfaction in people. This can affect economic behavior, in other words
consumer spending. Terror attacks affect tourism and it forces the government to spend more
on security. This high spending may result in higher taxes for citizens, higher borrowing and
cutting spending on other areas such as education or communication expenditures. The recent
and most sensational Paris attack fostered fear all around the world and reminded people that
terrorism is ubiquitous and cruel. The attacks had a huge impact on the buidings and the
infrastructure of the city.
French markets dropped after the attacks and many tourist cancelled their bookings in hotels.
Decrease of tourism revenues of France is highly critical since tourism makes up 7% of the
economy. The prospect of additional attacks in Paris threatens Schengen’s future and it
increases the costs for government ( extra personnel, security measure). According to a
Citigroup analysis Eurozone governments should be careful about the economic aspect of
terrorism since main driver of growth in EU is consumer demand and terrorism has a negative
influence on consumer confidence. Increasing terror attacks urge the governments to take
necessary precautions considering the well- being of their people and terrorism’s economical
effects cannot be neglected.
Facts about Economics
by Elif Koc

Japan’s Abenomics failed or was just unlucky?
( CNN Website, Lessons learned for a better world)
Abenomics is a program of economic stimulus introduced by Japan Prime Minister
Shinzo Abe. It consists of three arrows which are monetary stimulus to defeat
deflation, long term debt reduction and lifting Japan’s growth rate. It aims to
revitalize Japan’s economy after years of stagnation*. Though the intentions seem
realistic and applicable, government debt of Japan is stil 250% of GDP, inflation is
below Central Bank’s 2% target and wage growth ( an important indicator of a
country’s economic condition ) remains flat. It seems that Abenomics is not able to
answer the economical needs of Japan. It is now the second time Japan has fallen back
into recession under Abenomics.
*Stagnation: A prolonged period of little or low growth in economy.
*Recession: A strong decline in the activity across the economy lasting more than a
few months.

It is disappointing to find out that women in the US earn 10, 784 dollars less than
their male counterparts each year according to OECD data. The pay gap between
genders is a prominent issue in economy and it is clear that economy cannot grow
steadily unless it gets support from women in sectors such as business and
engineering. Finance is a sector with minimal number women employees and
number of female senior executives is relatively low. It is important to encourage
women to participate in economic life and share their talents and hard work with
the rest of the world.

Volkswagen Emission Scandal?
( Source: IB Times UK)
German car maker Volkswagen admitted manipulating emission data on its diesel vehicles in
the US and Europe. Volkwagen had commenced a huge marketing campaign promoting the
cars’ low emission results. This will have huge impact on the company’s revenues and
market price. CEO Martin Winterkorn quit after this scandal. Belief in the environmentallyfriendly diesel ceased and demand for diesel cars fell sharply.
An Introduction to Current Account Deficit
by Berk Atlı
What is CAD?
A current account deficit occurs when the value of imports of goods/services/investment
incomes is greater than the value of exports. It is sometimes referred to as a trade deficit.
If there is a current account deficit, it means there is a surplus on the financial / capital
account.
The current account also includes net income, such as interest and dividends, as well as
transfers, such as foreign aid, these components tend to make up a smaller percentage of the
current account than exports and imports. The current account is a calculation of a country’s
foreign transactions, and along with the capital account*, it is a component of a country’s
balance of payment.
Why a Current account deficit is considered harmful to the economy?
1. If a current account deficit is financed through borrowing it is considered unsustainable.
Borrowing is unsustainable in the long term and countries will be burdened with high interest
payments. As an example, Russia was unable to pay its foreign debt back in 1998. Other
developing countries have experienced similar repayment problems. Brazil and African
countries (3rd World debt) with large interest payments have little left over to spend on
investment.
2. A factor behind the Asian crisis of 1997 was that countries had run up large current account
deficits by attracting short term capital flows (hot money or portfolio investments as opposed
to direct foreign investment ) to finance the deficit. But, when confidence fell, these hot
money flows dried up, and inflows turned to outflows or capital flight, leading to a rapid
devaluation and crisis of confidence, leaving a massive wreck behind.
3. If you run a current account deficit, it means that you need to run a surplus on the financial
/ capital account. This means foreigners have an increasing claim on your assets, which they
could desire to be returned at any time. For example, if you run a current account deficit, it
could be financed by foreign multinationals investing in your country or the purchase of
assets.
4. A current account deficit, may imply that you are relying on consumer spending, and thus
becoming uncompetitive. This leads to lower growth in the export sector. This is particularly
a problem for countries in the Eurozone – who cannot devalue their currency to restore
competitiveness.This caused very large current account deficits and was a factor behind the
EU recession of 2008-13.
5. A Balance of payments deficit may cause a loss of confidence in foreign investors. There is
always a risk, that investors will remove their investments causing a big fall in the value of
your currency (devaluation). This can lead to decline in living standards and lower confidence
for investment.
A current account deficit may not be necessarily harmful:
1. Current Account deficit could occur during a period of inward investment (surplus on
financial account). This inward investment can create jobs and investment. E.g. US
ran a current account deficit for a long time as it borrowed to invest in its economy.
This enabled higher growth and so US was able to pay its debts back and countries
had confidence in lending US money.
2. With a floating exchange rate a large current account deficit should cause a devaluation
which will help automatically reduce the level of the deficit.
3. A current account deficit may also indicate a strong economy, which is growing rapidly.
What about China?
by Elif Koc
Most of us are familiar with China and its burgeoning economy in recent years. We hear a lot
about China’s economic objectives, production and policies. There is always a flash news
going on about China in daily newspapers. Bu what is the real reason behind the
unprecedented growth of China, if so, is it likely to proceed in the long run?
China is the second largest economy in the world according to nominal GDP*, the largest
exporter and second largest importer of goods, it was the world’s largest growing economy
until 2015 by average 10% growth over 10 years. China has a very large working force,
consisting of 787. 6 million people and this contributes to the high productivity of Chinese
industries. As a matter of facts, 46.8% of China’s GDP is made up of industry and
manufacturing. China is governed by socialist market economy in other words state owned
capitalism.
Majority of investment in China is carried out by state owned enterprises which are under
control of the local government. A high percentage of banking assets are state owned, most
financial institutions are in control of the government. The shift to socialist market economy
in China was a complicated and long process initiated in 1979 by Mao Zedong. In his
dominion China was trying to recover from the Great Leap* in 1960s and starting new
projects to attract foreign investment. After 1979, China began to invest large amounts on
capital investments, this led to rapid productivity growth. China’s savings surplus ( high rate
of savings ) also made China a large net global lender. Thanks to its huge population and
labour force ( population growth was curbed with one child policy introduced by Chinese
government) Chinese companies were able to maintain relatively low wage rates and they
were able to gain a competitive advantage over other growing economies in Asia.
China may be the closest rival to US but the national currency of China, yuan, was not a
convertible currency until recently IMF put it in SDR basket. People’s Bank of China which
serves as the central bank of China, pegged* yuan’s value to US dolar and yuan was devalued
in order to raise the competitiveness of Chinese exports. This helped to boost exports while
economy was growing at a slow rate. According to Wall Street Journal, to put yuan in the
hands of foreigners China must be a net buyer of goods or allow a net flow of investment.
China’s financial system will also have to be much more integrated into the international
system.
In conclusion, Chinese government should gradually shift to a more market oriented economy
and to a lower but more sustainable growth path as China strives to become the world’s
largest economy.
A graph showing the emergence of China as a global economic power and its future growth
prospects. ( Source: Economics by Saugato Datta)
*GDP: Gross domestic product. Measure of the value of all final goods and services
produced in period of time. ( quarterly or yearly)
*Great Leap: A period between years 1958 and 1960 led by Mao Zedong in order to
transform China economically.
*Pegging a currency: Pegging a central bank’s rate of exchange to another country’s
currency.
Chinese Yuan Receives a Promotion
by Bartu Kutlu
On November 30th 2015, The International Monetary Fund anointed Chinese Yuan as one of
the reserve currencies. Only exceptionally elite 4 more currencies currently have the IMF
designation. Christine Lagarde, IMF’s Managing Director regarded the inclusion as an
“important milestone in a journey that has begun months, if not years ago”
Yes, this is a major step for the growth of the Chinese economy and will foster international
trade yet what other implications will this inclusion have on global markets?
Yuan is now considered to be “freely usable” globally,
meaning many international transactions will be conducted in
yuans. This suggests a possible rise in global demand for the
currency which will likely be followed by an currency
appreciation, in other words, an increase in the value of the
yuan.
Yuan, or in official terms Renminbi which means the people’s
currency in Mandarin, currently has 10.92 percent weighting
in the IMF reserves.
Timothy Adams, president of the Institute of International
Finance claimed that “It’s a big win for Beijing as they look
to bolster their image and to get the respect they think they
deserve,” The IMF designation will indeed raise the
significance of China as a global player in international trade. The inclusion may be regarded
as an attempt to gradually decrease euro’s role in the reserve basket yet speculations are
unlikely to yield dependable predictions. Suffice it to say, dollar will continue to dominate the
world of finance and trade.
Fed Interest Rates
by Elif Koc
When we look at recent economics news, we always see something about FED and its
governor Janet Yellen. FED is the central bank of US and it is responsible for studying and
implementing the monetary policy, which determines the rate of growth and size of money
supply that affects interest rates*. US followed a ZIRP ( Zero Rate Policy) for two decades
mainly because of the small economic growth. ZIRP was used to pay back US public debt and
recapitalize the world’s banking system in the wake of 2008 financial crisis. Its purpose was
to combat deflation and promote economic recovery. Deflation* is a huge problem because
when firms slash prices and wages in order to survive consumers expect stil further price cuts,
they refrain from spending, this worsens the outlook for companies and forces down prices
even more. Because of the deep financial strain 2008 crisis brought on US, ZIRP was used to
stabilize economy and stimulate growth. Benchmark interest rate near zero encouraged
borrowing and bolstered economy.
Today, FED is finally considering to raise interest rates. Why is this so?
As US was finally able to minimize the effects of 2008 financial crisis the emergency level of
economy came to an end, interest rates do not have to be low anymore. When FED considers
a rate hike, it first ensures the stability and liquidity in a country. It is important to ensure that
money supply in the economy is neither too large or too small. If Fed’s governors decide to
decrease the money supply, interest rates will increase which will make spending money and
borrowing more attractive. On the other hand, if moneymakers decide to increase the Money
supply this will decrease interest rates and prevent spending or borrowing. FED also looks at
macroeconomic indicators such as unemployment or inflation rate. Unemployment has halved
since its peak in 2009. Currently, US unemployment rate is near 5% which is very close to
target interest rate. Inflation remains flat, near FED’s target inflation rate of 2%. This rate is
known as core inflation because it excludes certain products that face volatile price
movements ( generally energy and food products whose price change acccording to seasonal
differences).
FED has been considering a rate hike since September but it did not happen until December
2016 because of the worries about slump in Shanghai Composite Index* and uncertainty
about growth prospects about China. FED was reassured after People’s Bank of China (
central bank of China) cut interest rates to boost growth. US economy is now at a healthy
state, it is growing at a higher pace than expected. The first hike was small but interest rates
will gradually increase. As stated in the Wall Street Journal, borrowing costs should return to
normal levels, to keep future inflation from accelerating too much.
( Source: Thomson Reuters Data)
*Deflation: A general decline in prices often caused by the reduction in the supply of credit or
money.
*Shanghai Composite Index: It is a stock market index of all stocks that are traded in
Shanghai Stock Exchange.
Note: Fed raised interest rates on December 16. This article was written earlier.
Volatility in Oil Prices
by Elif Koc
Oil industry is in its deepest bust since 1990s. Earnings of top oil companies are in record low
and this led them to cut investments in exploration and production of oil. More than 200,000
oil workers lost their jobs. Currentlt, brent crude is traded 33 dollars a barrel. The reason of
the fall in oil prices can be explained by basic supply and demand. US production more than
doubled since 2009 thanks to new oil drilling technologies such as hydraulic fracturing or in
other words fracking. According to Forbes, total world demand increased 4% since 2010
while production in US is 38% faster than global demand. US’s massive production led other
oil- producing countries such as Saudi Arabia, Nigeria and Algeria compete for Asian
markets. In addition to this, demand for oil also minimized, Europe and other EU countries
started to use vehicles that are more energy- efficient.
( Source: NY Times article Jan 6, 2016 by Clifford Krauss)
Another reason for the downturn in oil prices is unwillingness of OPEC to intervene in oil
markets to stabilize oversupplied ones. OPEC is an organization found by five petroleum
exporting nations. It aims to ensure stabilization of oil markets and offer regular supply of
petroleum at a steady price. There are currently 13 member states, includin Saudi Arabis, Iran,
Iraq and Libya. OPEC countries have huge reserves to cushion the impact of low prices. This
way slump will cease end the market will tighten. In the past, Saudi Arabia maintained high
oil prices by reducing its own output when market was oversupllied. Now, Saudi Arabia
refuses to reduce production, to force especially Russia and other countries to limit
production. But, this can also cause Saudis a long- term problem, US and other countries may
find new sources of supply resulting in less influence of Saudis in markets.
Ongoing oil supply glut will exacerbate by Iranian oil joining the market. Iran is expected to
be a major exporter again after the Nuclear Deal with US. The Nuclear Deal is an agreement
reached by P5+ 1 ( US, UK, Chinai Russia and Germany) + EU. Iran will reduce its nuclear
facilities in order to lift all nuclear- related economic sanctions. In recompense, it will gain oil
revenue and accumulation of frozen assets.
Most importantly, US dollar continues to increase its value steadily. Stronger dollar is bad for
oil prices, oil will be more expensive for foreign buyers whose currencies are weaker. For
instance, China and other developing economies have high oil consumptions but they are
rather a victim of oil prices. Since foreign Exchange value of US dollar increased, Chinese
yuan became uncompetitive and reduced the benefit for Asian economies
For some economists fall in oil prices is an indicator of bust period in the world economy.
The annual growth in the world economy is already sluggish but oil market is full of booms
and busts, price of oil will normalize eventually
Economic Impact of Tensions with Russia
by Timur Gordon
The economic relations between Russia and Turkey are important for both countries.
Turkey - Russia relations which were strained by the downing of the Russian aircraft by
Turkey on November 24 due to violation of Turkish airspace has further raised the
nervousness in the region.
Putin government which declared a list of economic sanctions against Turkey after the
incident, has also imposed a visa requirement for Turkish citizens. The sanctions so far
declared to include restrictions on imports of some Turkish products into Russia, cancellation
of chartered flights between the two countries, cancellation of work permits of Turkish
citizens in Russia as of beginning of 2016, cancellation of trips organized by Russian tour
operators into Turkish destinations, and also tightening of movements of transportation
vehicles and ships.
Russia is the largest supplier of natural gas for Turkey. It accounts for 55% of our gas
importation. So, Turkey is the second largest customer of Russia. Although no sanction has
been declared to date on this, in case the gas sales are stopped by Russia, this may turn out to
be a very serious problem. Imports from Russia account for roughly 10% of our total imports.
Exports to Russia on the other hand account for only 2.5% of total exports of Turkey.
Although it began to decline after growth in Russian economy slumped in 2015, Turkey hosts
approximately 4.5 million Russian tourists each year. The share of this in total number of
tourists is 11% and with USD 4bn in revenues it corresponds to 12% of our total tourism
revenues. The so-called “luggage trade” with Russial the volume of which was declared to be
around USD 8.6bn in 2014 is expected to decline significantly as a result of sanctions. When
we look at the numbers of the year 2014 in order to forecast the potential impact that may
come through all these channels, we may conclude that the total revenues obtained from
Russia through exports and tourism would amount to USD 9.3bn.
.
In addition to the above, Turkish construction sector has ongoing and substantial
projects in Russia and this sector is expected to suffer from the work permit ban to be
introduced and all such sanctions declared by Russia shall make negative impact on growth
and CDA of Turkey (including maybe on inflation due to natural gas). Some of the major
BIST companies whose revenues mostly come from Russia, in particular, Enka, Anadolu
Efes, Anadolu Cam are expected to be the worst hit by the sanctions.
To sum up, Turkey is an important destination for Russian exports. 6.1% of all Russian
exports (as of September 2015) are made to Turkey. However due to critical importance of
Russial natural gas for us, Turkey is not expected to apply sanctions to Russian exports. Still,
it is not easy to foresee what may follow should the tensions continue . As a aconslusion, it is
beyond dispute that Turkey will be adversely affected given the current scale of relations
with Russia. Although it is not clear the total amount of impact on Turkish economy, analysts’
forecast is that it may be around 0.8% of GDP for 2016.
Supplemental Information
Stocks with substantial exposure are, mainly;
Enka: 14% of total revenues from Russia+12% of the backlog
Anadolu Efes: 25% of NAV is from Ukraine and Russia operations
Anadolu Cam: 36% of total revenues from Ukraine, Russia and Georgia
Others with known exposure to Russia:
Adel, Arçelik, Trakya Cam, Turkcell, Unye Çimento
Nobel Prize Laureate of Economics - Angus Deaton
by Elif Koc
( Source: Princeton Education Website Deaton’s Biography)
Angus Deaton was honoured the Sveriges Riksbank prize in economics in the memory of
Alfred Nobel in 2015. He is a British born economist who has PhD in economics in
Cambridge University. He is currently at Princeton University. The Nobel Prize Committee
awarded him for his analysis on consumption, welfare and inequality. Though there were
other favorites like Anthony Atkinson of London School of Economics and Thomas Piketty
with Capital in the 21st Century, Deaton was the only economist in the area who was
acknowledged by all sides both authoratively and theoretically.
According to the Royal Swedish Academy of Sciences’ website, Deaton had researchs on
two main topics which are demand systems and incomes. Demand system is a set of equation
that shows the amount of consumer demand for different goods and services ( Dalta 62). They
show how the demand of a particular good varies with different factors such as prices and
income. Demand systems in 1960s did not accurately predict demand variation over prices,
they were restrictive. Deaton came up with Almost Ideal Demand System in 1980. This
system boosted research in consumer behavior, it was flexible and it had a huge impact on the
evaluation system of demand. AIDS also shows how households consume goods given their
total expenditure in a period. So the question is how much of their incomes do people
consume in a year? Deaton paradox explains the relationship between consumption and
income.
Many economists today do research on poverty and welfare but they are generally not realistic
and unable to answer the real needs of poor people. For instance, Piketty who created a lot of
sensation with his book Capital, offers to get 2% extra tax from the rich and use it to
ameliorate the conditions of the poor. This is certainly a good intention but given the current
capitalistic system in today’s most developed countries, it cannot be implemented.
Angus Deaton made researchs on poverty line, the relationship between calorie intakeincome and welfare differences across time in different countries. According to an article
written by Tim Worstall in Forbes magazine Deaton worked with World Bank data,
constructed price indices for all countries to measure goods and services, showed how to use
these to make theoretically appropriate comparisons of welfare. To conclude, Deaton made
huge contributions to the understanding of consumer behavior and especially wealth
inequality which is one of the biggest problems in our world.
To access further articles or books of Deaton please visit princetonedu.com.
Business and Leadership
by Elif Koc
A Powerful Woman: Sheryl Sandberg
( Source: Time magazine March 2013)
Sheryl Sandberg is one of the most influential woman in our world. She is the COO ( Chief
Operating Officer) of Facebook. She was ranked 14th in Fortune magazine’s “50 Most
Powerful Women in Business” list. She entered Time 100 which consists of the world’s most
powerful 100 people. She is a very successful business woman and she is considered as the
most influential person in Facebook after the founder and CEO Mark Zuckerberg.
In addition to her inspiring career, she initiated a lot of projects to help women with their
leadership skills and enable them to participate in economic life. She has a book about
necessary attributes of women called ‘Lean In’ which is an international bestseller. According
to an full extent biography of Sandberg composed by The NewYorker, Sheryl possesses the
most critical leadership skills. As the global world changes, the thing that matters most is not
analytical skills or knowledge anymore. Leaders should be able to cooperate, listen and
influence people. Especially the executives of global companies such as Facebook and
Google should be able to motivate their employees and create a comfortable working
environment. Sheryl Sanberg highlights the difference between being bossy and being a
leader when she talks about her career. She emphasizes that leaders praise others for their
success and they take responsibility if they fail. They admit their mistakes and try not to
repeat them again. Leaders lift the spirit of other people, it is important to motivate everyone
to keep the innovative soul of the company awake all the time. Leaders are humble and they
do not try to degragade or humiliate anyone. The most important thing is being a role model
for employees. They are reliable, honest and courageous.
Today’s global company CEOs seem to possess most of these qualities, of course there are
some exceptions such as Jeff Bezos of Amazon who is known to be a perfectionist and an
extremely critical boss along with Donald Trump whom we know very well from the ongoing
GOP race in the US.
Leadership Skills according to Sandberg:

Leadership listens. Bossy says "listen to me."

Leadership hands out praise to others for success. Bossy takes all the credit when things go
well.

Leadership lifts others up. Bossy wants to keep others down, because otherwise someone
might take over the top role.

Leadership prepares for a future when there is a new leader. Bossy wants to ensure there is
never a new leader.

Leadership makes sacrifices for the good of the team. Bossy wants the team to sacrifice for
her.

Leadership is humble. Bossy is prideful.
Book Critic
by Elif Koc
2008 Global Crisis is known to be the worst financial crisis since The Great Depression in
1930s. Several banks like Lehman Brothers collapsed and some were bailed out by the US
government. It’s major cause is considered to be housing bubble and a new financial
instrument called securitization*. 2008 Crisis is a very complex phenemenon to understand
and an informative book is needed to learn more about this crisis. ‘The Storm’ written by
Vince Cable, who was the chief economist for many prominent institutions since 1995 and he
was able to foresee the advent of this financial crisis before many economists.
(Source: Telegraph UK )
According to Cable, the main reason for this huge crisis was excessive risk taking and
greed. Most bankers and economists thought property was a guaranteed way to accumulate
wealth. They were assured that their properties would soon be worth more than their debt.
Many banks tried to raise their deposits, the portion of funds that are used for collateral for the
delivery of a good or security, not from depositors but from mortgage back securities*. Also,
a new and more sophisticated form of borrowing emerged, it was called securitization. Banks
used it to expand their market share rapidly and without much work ( Cable 42). It was easier
to gather all debts in a balloon and sell it to huge companies than trying to attract depositors.
With securitization is such a complex financial instrument that debt becomes skillfully
diffused and it becomes impossible to trace it. Additionally, banks started to give loans to
people with no credit worthiness* or collateral*. These loans were called ‘ninja loans’ and
when this sub- prime lending securitized, it caused even a larger collapse of confidence in
financial market sor mortgage- backed assets. Because of the availability of easy credit, more
and more people entered to the mortgage market, further raising the prices of properties
( Cable 33). A credit crunch or in other words housing bubble was inevitable in these
circumstances. People borrowed excessively, beyond their capacity and they risked having
housing debts greater than the value of their property. Finally, when the housing bubble
finally burst, market in mortgage* securities also collapsed and banks were no longer able to
raise money other than through new deposits. Giving new loans to consumers became very
difficult. The prices in the housing market also fell because of the non- availability of credit.
Huge instititutions such as Fannie Mae and Freddie Mac who were stimulating and
stabilizing mortgage lending nationalized. Lehman Brother and an insurance company called
AIG collapsed. Bear Stearns was took over by JP Morgan Chase, Merrill Lynch was sold to
Bank of America. These companies were highly leveraged* by debt and equity, they had very
little capital in their reserves. Federal government’s intervention in the financial word to
protect the depositors, declined the confidence in private entreprise capitalism in US and
offered the door to more government intervention in financial markets. It was considered
necessary since it was very important to scrutinize banks, their lending capacities and
leverage requirements. Cable, associates 2008 Crisis also with rapid growth in China, a high
account surplus used to purchase US government bonds and the fluctuation of oil prices.
In sum, Vince Cable’s The Storm is one of most intriguing and detailed books to learn
more about different aspects of 2008 credit crunch. Cable offers a thorough analysis of the
financial world in 2000s and which measures can be taken to prevent further crisis from
happening.
* Securitization: The process through which an issuer creates an financial instrument
by combining other financial assets then marketing different tiers of the repackaged
instruments to investors.
* Security: Financial instruments that represents an ownership position in a publicly
traded ownership (bond) or relationship to a bond.
* Credit Worthiness: An assessment of the likelihood that a borrower would default on
his or her debt obligations.
* Collateral: Property or other assets a borrower offers to a lender to secure loans.
* Mortgage: A debt intrument secured by the collateral of sepcified real estate
property, that the borrower is obliged to pay back in predetermined set of payments.
* Leverage: The amount of debt used to finance a firm’s assets.
WORKS CITED
Krauss, Clifford. "Oil Prices." New York Times 6 Jan. 2016. NY Times. Web. 10 Jan.
2016.
"2 Career Goals You Need." Time 15 Dec. 2015: 15. Print.
Espinoza, Javier. "Fight Against Extremism." Daily Telegraph 27 Oct. 2015. Web. 4
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