[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.56,0:00:03.56,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:14.30,0:00:19.44,Default,,0000,0000,0000,,- [Alex] On September 15, 2008, the\Nworld's financial system was shaken to its
Dialogue: 0,0:00:19.44,0:00:24.78,Default,,0000,0000,0000,,core when the investment bank, Lehman\NBrothers, filed for bankruptcy. The impact
Dialogue: 0,0:00:24.78,0:00:30.08,Default,,0000,0000,0000,,was great not simply because Lehman was\Nbig, but also because it was an important
Dialogue: 0,0:00:30.08,0:00:36.24,Default,,0000,0000,0000,,financial intermediary, an institution\Nthat helps bridge the gap between savers
Dialogue: 0,0:00:36.24,0:00:41.70,Default,,0000,0000,0000,,and borrowers. The failure of Lehman\Nmarked the beginning of a series of events
Dialogue: 0,0:00:41.70,0:00:46.97,Default,,0000,0000,0000,,that signaled the worst economic downturn\Nsince the Great Depression. And while there's
Dialogue: 0,0:00:46.97,0:00:52.06,Default,,0000,0000,0000,,several significant angles to the Great\NRecession, one of them was the decreased
Dialogue: 0,0:00:52.06,0:00:55.29,Default,,0000,0000,0000,,efficacy of financial intermediation.
Dialogue: 0,0:00:55.29,0:00:59.84,Default,,0000,0000,0000,,Now, some later videos are going to go\Nthrough this in more detail. But for now,
Dialogue: 0,0:00:59.84,0:01:03.84,Default,,0000,0000,0000,,we want to start with some basic\Nobservations as to why financial
Dialogue: 0,0:01:03.84,0:01:08.62,Default,,0000,0000,0000,,intermediation is so important. We'll\Nstart with the supply of savings and the
Dialogue: 0,0:01:08.62,0:01:12.98,Default,,0000,0000,0000,,demand to borrow, and the market which\Nbrings them together, the Market for
Dialogue: 0,0:01:20.77,0:01:26.43,Default,,0000,0000,0000,,So why do people borrow and save at all?\NWell, let's imagine a world without
Dialogue: 0,0:01:26.43,0:01:31.58,Default,,0000,0000,0000,,borrowing and saving. Most people's\Nincomes don't stay flat their entire
Dialogue: 0,0:01:31.58,0:01:37.61,Default,,0000,0000,0000,,lives. They change in predictable ways.\NHere's a typical pattern, showing a
Dialogue: 0,0:01:37.61,0:01:42.22,Default,,0000,0000,0000,,person's income over their life, with\Ntheir income on the vertical axis and time
Dialogue: 0,0:01:42.22,0:01:46.82,Default,,0000,0000,0000,,on the horizontal axis. When you're young\Nand still in school, you might make a
Dialogue: 0,0:01:46.82,0:01:52.44,Default,,0000,0000,0000,,little bit of money, waiting tables or\Noccasionally mowing lawns. Your first job
Dialogue: 0,0:01:52.44,0:01:56.25,Default,,0000,0000,0000,,out of school, it's going to pay more, and\Nafter a few years of experience and
Dialogue: 0,0:01:56.25,0:02:01.17,Default,,0000,0000,0000,,hopefully a few raises along the way, you\Nmake more than you ever have. Then, as you
Dialogue: 0,0:02:01.17,0:02:05.63,Default,,0000,0000,0000,,age, you look forward to retirement, when\Nyour income falls. But you're no longer
Dialogue: 0,0:02:05.63,0:02:10.50,Default,,0000,0000,0000,,working and you could really enjoy \Nyour golden years.
Dialogue: 0,0:02:10.50,0:02:13.09,Default,,0000,0000,0000,,- [Estelle from “Seinfeld” TV series] \N“We're moving to Florida!”
Dialogue: 0,0:02:13.09,0:02:19.39,Default,,0000,0000,0000,,- [George] “What? You're moving to Florida?\NAh-hah! That's wonderful! I'm so happy!
Dialogue: 0,0:02:19.39,0:02:23.37,Default,,0000,0000,0000,,For you! I'm so happy for you!”
Dialogue: 0,0:02:23.37,0:02:29.72,Default,,0000,0000,0000,,- [Alex] Now, let's imagine if your consumption\Nfollowed the same path as your income and
Dialogue: 0,0:02:29.72,0:02:35.14,Default,,0000,0000,0000,,you never saved or borrowed. You'd\Nstruggle when young, and you'd be unable
Dialogue: 0,0:02:35.14,0:02:39.93,Default,,0000,0000,0000,,to invest in an education. Then, you'd\Nspend every cent you make during your
Dialogue: 0,0:02:39.93,0:02:45.49,Default,,0000,0000,0000,,prime working years. Well, that sounds\Nlike a lot of fun. But without savings,
Dialogue: 0,0:02:45.49,0:02:50.91,Default,,0000,0000,0000,,your income will drop suddenly when you\Nretire, and so will your consumption.
Dialogue: 0,0:02:50.91,0:02:52.50,Default,,0000,0000,0000,,Your golden years wouldn't be so golden.
Dialogue: 0,0:02:52.50,0:02:53.94,Default,,0000,0000,0000,,- [Doug from “King of Queens” TV series]\N[Kevin] If you're so smart,
Dialogue: 0,0:02:53.94,0:02:55.43,Default,,0000,0000,0000,,why don't you tell them that \Nyou live in my basement?
Dialogue: 0,0:02:55.43,0:02:56.90,Default,,0000,0000,0000,,- [Arthur] Why don't you tell them \Nyou're enormous?
Dialogue: 0,0:02:56.90,0:03:00.57,Default,,0000,0000,0000,,- [Doug] Why don't you tell them that \Nyour total salary last year was $12?
Dialogue: 0,0:03:00.57,0:03:03.73,Default,,0000,0000,0000,,- [Arthur] That was after taxes.
Dialogue: 0,0:03:03.73,0:03:10.99,Default,,0000,0000,0000,,- [Alex] So instead, people tend to follow a life\Ncycle theory of savings. A person can
Dialogue: 0,0:03:10.99,0:03:17.96,Default,,0000,0000,0000,,start out consuming more than she makes,\Nborrowing to fill that gap - and to pay for
Dialogue: 0,0:03:17.96,0:03:23.62,Default,,0000,0000,0000,,things like an education. Then, during her\Nprime working years, she makes more than
Dialogue: 0,0:03:23.62,0:03:30.47,Default,,0000,0000,0000,,she consumes, paying down her debt and\Nsaving the extra income for retirement.
Dialogue: 0,0:03:30.47,0:03:36.60,Default,,0000,0000,0000,,And when retirement comes, she can spend those\Nsavings and enjoy the golden years even
Dialogue: 0,0:03:36.60,0:03:41.86,Default,,0000,0000,0000,,without working. Now of course, many\Npeople deviate from this exact path,
Dialogue: 0,0:03:41.86,0:03:43.69,Default,,0000,0000,0000,,depending on details.
Dialogue: 0,0:03:43.69,0:03:47.31,Default,,0000,0000,0000,,Most people, for example, they consume\Nless in college than they do as
Dialogue: 0,0:03:47.31,0:03:53.86,Default,,0000,0000,0000,,professionals. Ramen noodles are no longer\Na staple of my diet. But generally
Dialogue: 0,0:03:53.86,0:04:02.25,Default,,0000,0000,0000,,speaking, many people follow a pattern of\Nborrowing, saving, and dissaving to smooth
Dialogue: 0,0:04:02.25,0:04:07.10,Default,,0000,0000,0000,,their consumption path over their\Nlifetime. Of course, just like some people
Dialogue: 0,0:04:07.10,0:04:11.72,Default,,0000,0000,0000,,can't wait until after dinner to reach for\Nthat cookie jar, not everyone saves and
Dialogue: 0,0:04:11.72,0:04:16.80,Default,,0000,0000,0000,,spends in the same way. How much you save\Nand borrow depends upon your time
Dialogue: 0,0:04:16.80,0:04:22.25,Default,,0000,0000,0000,,preference. Some people - they're more\Nimpatient than others. We all know someone
Dialogue: 0,0:04:22.25,0:04:27.05,Default,,0000,0000,0000,,who spends everything they've got and\Ndoesn't save enough. On the other hand, if
Dialogue: 0,0:04:27.05,0:04:31.42,Default,,0000,0000,0000,,you're keeping to a budget and not\Nspending too much so that you can go to
Dialogue: 0,0:04:31.42,0:04:38.64,Default,,0000,0000,0000,,college, well that's an example of being patient \Nand waiting for higher consumption later.
Dialogue: 0,0:04:38.64,0:04:42.80,Default,,0000,0000,0000,,We've also learned from behavioral\Neconomics that saving is not just a matter
Dialogue: 0,0:04:42.80,0:04:49.52,Default,,0000,0000,0000,,of weighing costs and benefits. Nudges can\Nmatter. If your employer automatically
Dialogue: 0,0:04:49.52,0:04:55.33,Default,,0000,0000,0000,,enrolls you in a retirement plan, or sets\Na high default contribution rate, you'll
Dialogue: 0,0:04:55.33,0:04:59.87,Default,,0000,0000,0000,,probably end up saving more than if you\Nhave to choose yourself, even if choosing
Dialogue: 0,0:04:59.87,0:05:05.07,Default,,0000,0000,0000,,yourself would only take a few hours of\Nwork once in your lifetime. Another
Dialogue: 0,0:05:05.07,0:05:10.36,Default,,0000,0000,0000,,important reason to borrow is to make big\Ninvestments. Just as students borrow to
Dialogue: 0,0:05:10.36,0:05:16.37,Default,,0000,0000,0000,,invest in education, businesses borrow to\Ninvest in big projects. Entrepreneurs with
Dialogue: 0,0:05:16.37,0:05:21.95,Default,,0000,0000,0000,,great ideas but not much money, they may\Nhave to borrow or sell a stake in their
Dialogue: 0,0:05:21.95,0:05:27.45,Default,,0000,0000,0000,,idea just to get their venture off the\Nground. For example, Howard Schultz built
Dialogue: 0,0:05:27.45,0:05:33.28,Default,,0000,0000,0000,,Starbucks into a global brand by borrowing\Nand raising capital through several
Dialogue: 0,0:05:33.28,0:05:39.69,Default,,0000,0000,0000,,different types of financial intermediaries. \NWe'll talk more about that in upcoming videos.
Dialogue: 0,0:05:39.69,0:05:43.66,Default,,0000,0000,0000,,As with any other good, we're going to use\Nsupply and demand to analyze the market
Dialogue: 0,0:05:43.66,0:05:48.14,Default,,0000,0000,0000,,for saving and borrowing, known as the\NMarket for Loanable Funds. As we've seen,
Dialogue: 0,0:05:48.14,0:05:52.80,Default,,0000,0000,0000,,there are lots of good reasons to save and\Nto borrow. But we have failed to mention
Dialogue: 0,0:05:52.80,0:06:00.65,Default,,0000,0000,0000,,one big factor - price. What's the price of\Nsaving and borrowing? It's the interest
Dialogue: 0,0:06:00.65,0:06:06.66,Default,,0000,0000,0000,,rate. So here's the supply curve showing\Nthe supply of savings. As the interest
Dialogue: 0,0:06:06.66,0:06:12.11,Default,,0000,0000,0000,,rate goes up, the quantity of savings\Nsupplied increases, and here's the demand
Dialogue: 0,0:06:12.11,0:06:18.01,Default,,0000,0000,0000,,curve showing the demand to borrow. Lower\Ninterest rates incentivize borrowing, so
Dialogue: 0,0:06:18.01,0:06:24.50,Default,,0000,0000,0000,,as the interest rate falls, the quantity of\Nborrowing demanded increases. As with any
Dialogue: 0,0:06:24.50,0:06:30.56,Default,,0000,0000,0000,,other supply and demand graph, different\Nfactors will shift the curves. If a lot of
Dialogue: 0,0:06:30.56,0:06:34.93,Default,,0000,0000,0000,,people decide that it'd be a good idea to\Nincrease their savings, for example, then
Dialogue: 0,0:06:34.93,0:06:40.07,Default,,0000,0000,0000,,the supply of savings will shift outward.\NAs you can see, this would cause interest
Dialogue: 0,0:06:40.07,0:06:45.30,Default,,0000,0000,0000,,rates to fall. This is what we saw in\Ncountries like South Korea and China,
Dialogue: 0,0:06:45.30,0:06:48.08,Default,,0000,0000,0000,,as their populations saved more.
Dialogue: 0,0:06:48.08,0:06:54.06,Default,,0000,0000,0000,,On the demand side, if investors, say\Nbecame less optimistic for some reason,
Dialogue: 0,0:06:54.06,0:07:00.82,Default,,0000,0000,0000,,the demand to borrow would shift inward,\Ncausing the interest rate to fall. But if,
Dialogue: 0,0:07:00.82,0:07:05.72,Default,,0000,0000,0000,,say an investment tax credit from the\Ngovernment increased the demand to invest,
Dialogue: 0,0:07:05.72,0:07:09.72,Default,,0000,0000,0000,,then the demand curve will shift in the\Nopposite direction, up and to the right,
Dialogue: 0,0:07:09.72,0:07:12.05,Default,,0000,0000,0000,,pushing interest rates up.
Dialogue: 0,0:07:12.05,0:07:16.79,Default,,0000,0000,0000,,Thinking about the Market for Loanable\NFunds helps us to see the big picture and
Dialogue: 0,0:07:16.79,0:07:21.43,Default,,0000,0000,0000,,understand the raw factors that determine\Ninterest rates and the quantity of
Dialogue: 0,0:07:21.43,0:07:26.39,Default,,0000,0000,0000,,borrowing and lending. But there isn't\Nactually one market called the Market for
Dialogue: 0,0:07:26.39,0:07:32.16,Default,,0000,0000,0000,,Loanable Funds. It's not like the New York\NStock Exchange. Instead, there are many,
Dialogue: 0,0:07:32.16,0:07:37.66,Default,,0000,0000,0000,,many, many markets for different kinds of\Nborrowers and different kinds of lenders.
Dialogue: 0,0:07:37.66,0:07:42.19,Default,,0000,0000,0000,,And there are different types of\Ninstitutions like banks, bond markets, and
Dialogue: 0,0:07:42.19,0:07:47.18,Default,,0000,0000,0000,,stock markets that connect the two sides\Nof the market. We're going to delve more
Dialogue: 0,0:07:47.18,0:07:51.00,Default,,0000,0000,0000,,deeply into the different kinds\Nof financial intermediaries,
Dialogue: 0,0:07:54.53,0:08:00.00,Default,,0000,0000,0000,,- [Narrator] If you want to test yourself,\Nclick "Practice Questions." Or, if you're
Dialogue: 0,0:08:00.00,0:08:04.80,Default,,0000,0000,0000,,ready to move on, you can click \N"Go to the Next Video."
Dialogue: 0,0:08:04.80,0:08:12.00,Default,,0000,0000,0000,,You can also visit MRUniversity.com to see \Nour entire library of videos and resources.