Lesson time 14:25 min
Learn about the market patterns and unregulated financial activities that led to our worst financial crisis since the Great Depression, and how to prepare yourself for the uncertain economic future.
There was a period not that long ago, when people were very complacent about things like financial crises. There's an infamous address to the American Economic Association saying the problem of the business cycle has been solved-- that was in 2003. Well, actually, no. It turns out recession crises still happen. And we haven't found it that easy to deal with them. When did they begin? No one really knows, but there was, in fact, a recognizably modern banking crisis in Scotland, in the 1770s. Scotland had led the way in the introduction of paper money, which was, at that time, issued by private banks, which had gold and silver in reserve. But it could go bad. You could have bank runs. You could have a crisis of confidence. And left to themselves, banks can create risks that can then spread out and disrupt the economy as a whole. [MUSIC PLAYING] Banking is a very clever institutional thing that, like many clever institutional arrangements, is extremely useful. But sometimes goes really wrong. The trick about banking is that the bank takes your money. And from your point of view, your money is sitting at the bank and I can withdraw it whenever I want. But the bank doesn't actually keep your money there. They put it to work. They lend it out. They make it available so it can be used to build businesses. Or finance other people's purchases of homes. And that's good. You want wealth to be put to work, but how can they do that? Because since I'm free to take my money out of the bank, how can they guarantee that when the money isn't actually there? And the answer is there's a lot of customers. And on any given day, only some people will be withdrawing money. But suppose I have reason to suspect that my bank has actually lost a lot of money? Suppose I have a reason to think that they've made a lot of bum loans. Then I might want to pull my money out while it's still there. So will everybody else. And if everybody tries to take their money at the same time, well, the bank doesn't have the money. And if they try and raise it by selling their loans to somebody else, it's going to be fire sale. They're going to be trying to sell it at speed and they're go lose a lot of money. Which means that if people believe that a bank is going to fail, that can be a self-fulfilling prophecy-- that's a bank run. Everybody is trying withdraw their money at the same time. That actually dries the bank out of business, even if it was fundamentally sound. [MUSIC PLAYING] The Great Depression was, pretty much-- it started as a recession, which was bad. It turned into the Great Depression because of a wave of bank runs. As each bank failed, that made people nervous about the next bank. And so over the course of 1930, 1931-- huge numbers of banks failed. There was panic. People wanted to put cash under their mattresses. The banks that survived pulled back from lending and just accumulated big reserves of cash, just in case. And that is re...
For Nobel Prize-winner Paul Krugman, economics is not a set of answers—it’s a way of understanding the world. In his economics MasterClass, Paul teaches you the principles that shape political and social issues, including access to health care, the tax debate, globalization, and political polarization. Heighten your ability to read between the lines and decipher the underlying economics at play.
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Nobel Prize-winning economist Paul Krugman teaches you the economic theories that drive history, policy, and help explain the world around you.Explore the Class
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