[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,
Dialogue: 0,0:00:19.44,0:00:21.78,Default,,0000,0000,0000,,the world's financial system\Nwas shaken to its core
Dialogue: 0,0:00:21.78,0:00:24.78,Default,,0000,0000,0000,,when the investment bank,\NLehman Brothers,
Dialogue: 0,0:00:24.78,0:00:27.08,Default,,0000,0000,0000,,filed for bankruptcy.
Dialogue: 0,0:00:27.08,0:00:30.08,Default,,0000,0000,0000,,The impact was great not simply\Nbecause Lehman was big,
Dialogue: 0,0:00:30.08,0:00:36.24,Default,,0000,0000,0000,,but also because it was\Nan important financial intermediary,
Dialogue: 0,0:00:36.24,0:00:37.24,Default,,0000,0000,0000,,an institution that\Nhelps bridge the gap
Dialogue: 0,0:00:37.24,0:00:38.70,Default,,0000,0000,0000,,between savers and borrowers.
Dialogue: 0,0:00:38.70,0:00:41.70,Default,,0000,0000,0000,,The failure of Lehman marked\Nthe beginning of a series of events
Dialogue: 0,0:00:41.70,0:00:46.97,Default,,0000,0000,0000,,that signaled\Nthe worst economic downturn
Dialogue: 0,0:00:46.97,0:00:49.06,Default,,0000,0000,0000,,since the Great Depression.
Dialogue: 0,0:00:49.06,0:00:50.06,Default,,0000,0000,0000,,And while there's several\Nsignificant angles
Dialogue: 0,0:00:50.06,0:00:52.06,Default,,0000,0000,0000,,to the Great Recession,
Dialogue: 0,0:00:52.06,0:00:53.06,Default,,0000,0000,0000,,one of them was\Nthe decreased efficacy
Dialogue: 0,0:00:53.06,0:00:55.29,Default,,0000,0000,0000,,of financial intermediation.
Dialogue: 0,0:00:55.29,0:00:56.84,Default,,0000,0000,0000,,Now, some later videos\Nare going to go through this
Dialogue: 0,0:00:56.84,0:00:59.84,Default,,0000,0000,0000,,in more detail.
Dialogue: 0,0:00:59.84,0:01:03.84,Default,,0000,0000,0000,,But for now, we want to start\Nwith some basic observations
Dialogue: 0,0:01:03.84,0:01:08.62,Default,,0000,0000,0000,,as to why financial intermediation\Nis so important.
Dialogue: 0,0:01:08.62,0:01:12.98,Default,,0000,0000,0000,,We'll start\Nwith the supply of savings
Dialogue: 0,0:01:16.02,0:01:17.77,Default,,0000,0000,0000,,and the demand to borrow,
Dialogue: 0,0:01:17.77,0:01:18.77,Default,,0000,0000,0000,,and the market\Nwhich brings them together,
Dialogue: 0,0:01:18.77,0:01:20.77,Default,,0000,0000,0000,,the Market for
Dialogue: 0,0:01:20.77,0:01:26.43,Default,,0000,0000,0000,,So why do people borrow\Nand save at all?
Dialogue: 0,0:01:26.43,0:01:31.58,Default,,0000,0000,0000,,Well, let's imagine a world\Nwithout borrowing and saving.
Dialogue: 0,0:01:31.58,0:01:37.61,Default,,0000,0000,0000,,Most people's incomes\Ndon't stay flat their entire lives.
Dialogue: 0,0:01:37.61,0:01:39.22,Default,,0000,0000,0000,,They change in predictable ways.
Dialogue: 0,0:01:39.22,0:01:40.22,Default,,0000,0000,0000,,Here's a typical pattern,
Dialogue: 0,0:01:40.22,0:01:41.22,Default,,0000,0000,0000,,showing a person's income\Nover their life,
Dialogue: 0,0:01:41.22,0:01:42.22,Default,,0000,0000,0000,,with their income\Non the vertical axis
Dialogue: 0,0:01:42.22,0:01:46.82,Default,,0000,0000,0000,,and time on the horizontal axis.
Dialogue: 0,0:01:46.82,0:01:49.44,Default,,0000,0000,0000,,When you're young\Nand still in school,
Dialogue: 0,0:01:49.44,0:01:50.44,Default,,0000,0000,0000,,you might make\Na little bit of money,
Dialogue: 0,0:01:50.44,0:01:52.44,Default,,0000,0000,0000,,waiting tables\Nor occasionally mowing lawns.
Dialogue: 0,0:01:52.44,0:01:56.25,Default,,0000,0000,0000,,Your first job out of school,\Nit's going to pay more,
Dialogue: 0,0:01:56.25,0:01:58.17,Default,,0000,0000,0000,,and after a few years\Nof experience
Dialogue: 0,0:01:58.17,0:01:59.17,Default,,0000,0000,0000,,and hopefully\Na few raises along the way,
Dialogue: 0,0:01:59.17,0:02:01.17,Default,,0000,0000,0000,,you make more than you ever have.
Dialogue: 0,0:02:01.17,0:02:05.63,Default,,0000,0000,0000,,Then, as you age,\Nyou look forward to retirement,
Dialogue: 0,0:02:05.63,0:02:07.50,Default,,0000,0000,0000,,when your income falls.
Dialogue: 0,0:02:07.50,0:02:08.50,Default,,0000,0000,0000,,But you're no longer working
Dialogue: 0,0:02:08.50,0:02:10.50,Default,,0000,0000,0000,,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: 0,0:02:13.09,0:02:16.39,Default,,0000,0000,0000,,[George] “What?\NYou're moving to Florida?
Dialogue: 0,0:02:16.39,0:02:19.39,Default,,0000,0000,0000,,Ah-hah! That's wonderful!\NI'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: 0,0:02:23.37,0:02:26.72,Default,,0000,0000,0000,,[Alex] Now, let's imagine
Dialogue: 0,0:02:26.72,0:02:29.72,Default,,0000,0000,0000,,if your consumption followed\Nthe same path as your income
Dialogue: 0,0:02:29.72,0:02:35.14,Default,,0000,0000,0000,,and you never saved or borrowed.
Dialogue: 0,0:02:35.14,0:02:36.93,Default,,0000,0000,0000,,You'd struggle when young,
Dialogue: 0,0:02:36.93,0:02:39.93,Default,,0000,0000,0000,,and you'd be unable\Nto invest in an education.
Dialogue: 0,0:02:39.93,0:02:42.49,Default,,0000,0000,0000,,Then, you'd spend\Nevery cent you make
Dialogue: 0,0:02:42.49,0:02:45.49,Default,,0000,0000,0000,,during your prime working years.
Dialogue: 0,0:02:45.49,0:02:47.91,Default,,0000,0000,0000,,Well, that sounds\Nlike a lot of fun.
Dialogue: 0,0:02:47.91,0:02:48.91,Default,,0000,0000,0000,,But without savings,\Nyour income will drop suddenly
Dialogue: 0,0:02:48.91,0:02:50.91,Default,,0000,0000,0000,,when you retire,\Nand so will your consumption.
Dialogue: 0,0:02:50.91,0:02:52.50,Default,,0000,0000,0000,,Your golden years\Nwouldn't be so golden.
Dialogue: 0,0:02:52.50,0:02:53.48,Default,,0000,0000,0000,,[Doug from “King of Queens” TV series]
Dialogue: 0,0:02:53.48,0:02:54.45,Default,,0000,0000,0000,,[Kevin] If you're so smart,
Dialogue: 0,0:02:54.45,0:02:55.43,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: 0,0:02:56.90,0:02:57.90,Default,,0000,0000,0000,,[Doug] Why don't you tell them
Dialogue: 0,0:02:57.90,0:03:00.57,Default,,0000,0000,0000,,that your total salary\Nlast year was $12?
Dialogue: 0,0:03:00.57,0:03:03.73,Default,,0000,0000,0000,,[Arthur] That was after taxes.
Dialogue: 0,0:03:03.73,0:03:07.99,Default,,0000,0000,0000,,[Alex] So instead,\Npeople tend to follow
Dialogue: 0,0:03:07.99,0:03:10.99,Default,,0000,0000,0000,,a life cycle theory of savings.
Dialogue: 0,0:03:10.99,0:03:17.96,Default,,0000,0000,0000,,A person can start out consuming\Nmore than she makes,
Dialogue: 0,0:03:17.96,0:03:20.62,Default,,0000,0000,0000,,borrowing to fill that gap --
Dialogue: 0,0:03:20.62,0:03:21.62,Default,,0000,0000,0000,,and to pay for things\Nlike an education.
Dialogue: 0,0:03:21.62,0:03:23.62,Default,,0000,0000,0000,,Then, during\Nher prime working years,
Dialogue: 0,0:03:23.62,0:03:27.47,Default,,0000,0000,0000,,she makes more than she consumes,\Npaying down her debt
Dialogue: 0,0:03:27.47,0:03:30.47,Default,,0000,0000,0000,,and saving the extra income\Nfor retirement.
Dialogue: 0,0:03:30.47,0:03:36.60,Default,,0000,0000,0000,,And when retirement comes,\Nshe can spend those savings
Dialogue: 0,0:03:36.60,0:03:38.86,Default,,0000,0000,0000,,and enjoy the golden years\Neven without working.
Dialogue: 0,0:03:38.86,0:03:41.86,Default,,0000,0000,0000,,Now of course, many people\Ndeviate 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,\Nthey consume less in college
Dialogue: 0,0:03:47.31,0:03:50.86,Default,,0000,0000,0000,,than they do as professionals.
Dialogue: 0,0:03:50.86,0:03:53.86,Default,,0000,0000,0000,,Ramen noodles are no longer\Na staple of my diet.
Dialogue: 0,0:03:53.86,0:04:02.25,Default,,0000,0000,0000,,But generally speaking,\Nmany people follow a pattern
Dialogue: 0,0:04:02.25,0:04:04.10,Default,,0000,0000,0000,,of borrowing, saving,\Nand dissaving
Dialogue: 0,0:04:04.10,0:04:05.10,Default,,0000,0000,0000,,to smooth their consumption path\Nover their lifetime.
Dialogue: 0,0:04:05.10,0:04:07.10,Default,,0000,0000,0000,,Of course, just like some people\Ncan't wait until after dinner
Dialogue: 0,0:04:07.10,0:04:11.72,Default,,0000,0000,0000,,to reach for that cookie jar,
Dialogue: 0,0:04:11.72,0:04:16.80,Default,,0000,0000,0000,,not everyone saves and spends\Nin the same way.
Dialogue: 0,0:04:16.80,0:04:19.25,Default,,0000,0000,0000,,How much you save and borrow\Ndepends upon your time preference.
Dialogue: 0,0:04:19.25,0:04:20.25,Default,,0000,0000,0000,,Some people -- they're more\Nimpatient than others.
Dialogue: 0,0:04:20.25,0:04:22.25,Default,,0000,0000,0000,,We all know someone\Nwho spends everything they've got
Dialogue: 0,0:04:22.25,0:04:27.05,Default,,0000,0000,0000,,and doesn't save enough.
Dialogue: 0,0:04:27.05,0:04:28.42,Default,,0000,0000,0000,,On the other hand,\Nif you're keeping to a budget
Dialogue: 0,0:04:28.42,0:04:31.42,Default,,0000,0000,0000,,and not spending too much\Nso that you can go to college,
Dialogue: 0,0:04:31.42,0:04:35.64,Default,,0000,0000,0000,,well that's an example\Nof being patient
Dialogue: 0,0:04:35.64,0:04:38.64,Default,,0000,0000,0000,,and waiting\Nfor higher consumption later.
Dialogue: 0,0:04:38.64,0:04:42.80,Default,,0000,0000,0000,,We've also learned\Nfrom behavioral economics
Dialogue: 0,0:04:42.80,0:04:49.52,Default,,0000,0000,0000,,that saving is not just a matter\Nof weighing costs and benefits.
Dialogue: 0,0:04:49.52,0:04:52.33,Default,,0000,0000,0000,,Nudges can matter.
Dialogue: 0,0:04:52.33,0:04:55.33,Default,,0000,0000,0000,,If your employer automatically\Nenrolls you in a retirement plan,
Dialogue: 0,0:04:55.33,0:04:56.87,Default,,0000,0000,0000,,or sets a high\Ndefault contribution rate,
Dialogue: 0,0:04:56.87,0:04:57.87,Default,,0000,0000,0000,,you'll probably end up saving more
Dialogue: 0,0:04:57.87,0:04:59.87,Default,,0000,0000,0000,,than if you have to choose yourself,
Dialogue: 0,0:04:59.87,0:05:02.07,Default,,0000,0000,0000,,even if choosing yourself\Nwould only take a few hours of work
Dialogue: 0,0:05:02.07,0:05:05.07,Default,,0000,0000,0000,,once in your lifetime.
Dialogue: 0,0:05:05.07,0:05:10.36,Default,,0000,0000,0000,,Another important reason to borrow\Nis to make big investments.
Dialogue: 0,0:05:10.36,0:05:13.37,Default,,0000,0000,0000,,Just as students borrow\Nto invest in education,
Dialogue: 0,0:05:13.37,0:05:16.37,Default,,0000,0000,0000,,businesses borrow\Nto invest in big projects.
Dialogue: 0,0:05:16.37,0:05:18.95,Default,,0000,0000,0000,,Entrepreneurs with great ideas\Nbut not much money,
Dialogue: 0,0:05:18.95,0:05:21.95,Default,,0000,0000,0000,,they may have to borrow\Nor sell a stake in their idea
Dialogue: 0,0:05:21.95,0:05:27.45,Default,,0000,0000,0000,,just to get their venture\Noff the ground.
Dialogue: 0,0:05:27.45,0:05:30.28,Default,,0000,0000,0000,,For example, Howard Schultz\Nbuilt Starbucks into a global brand
Dialogue: 0,0:05:30.28,0:05:33.28,Default,,0000,0000,0000,,by borrowing and raising capital
Dialogue: 0,0:05:33.28,0:05:36.69,Default,,0000,0000,0000,,through several different types\Nof financial intermediaries.
Dialogue: 0,0:05:36.69,0:05:39.69,Default,,0000,0000,0000,,We'll talk more about that\Nin upcoming videos.
Dialogue: 0,0:05:39.69,0:05:40.69,Default,,0000,0000,0000,,As with any other good,
Dialogue: 0,0:05:40.69,0:05:43.66,Default,,0000,0000,0000,,we're going to use\Nsupply and demand
Dialogue: 0,0:05:43.66,0:05:45.14,Default,,0000,0000,0000,,to analyze the market\Nfor saving and borrowing,
Dialogue: 0,0:05:45.14,0:05:48.14,Default,,0000,0000,0000,,known as the Market\Nfor Loanable Funds.
Dialogue: 0,0:05:48.14,0:05:49.80,Default,,0000,0000,0000,,As we've seen, there are\Nlots of good reasons
Dialogue: 0,0:05:49.80,0:05:52.80,Default,,0000,0000,0000,,to save and to borrow.
Dialogue: 0,0:05:52.80,0:05:57.65,Default,,0000,0000,0000,,But we have failed to mention\None big factor -- price.
Dialogue: 0,0:05:57.65,0:06:00.65,Default,,0000,0000,0000,,What's the price\Nof saving and borrowing?
Dialogue: 0,0:06:00.65,0:06:03.66,Default,,0000,0000,0000,,It's the interest rate.
Dialogue: 0,0:06:03.66,0:06:06.66,Default,,0000,0000,0000,,So here's the supply curve\Nshowing the supply of savings.
Dialogue: 0,0:06:06.66,0:06:09.11,Default,,0000,0000,0000,,As the interest rate goes up,
Dialogue: 0,0:06:09.11,0:06:12.11,Default,,0000,0000,0000,,the quantity\Nof savings supplied increases,
Dialogue: 0,0:06:12.11,0:06:18.01,Default,,0000,0000,0000,,and here's the demand curve\Nshowing the demand to borrow.
Dialogue: 0,0:06:18.01,0:06:21.50,Default,,0000,0000,0000,,Lower interest rates\Nincentivize borrowing,
Dialogue: 0,0:06:21.50,0:06:22.50,Default,,0000,0000,0000,,so as the interest rate falls,
Dialogue: 0,0:06:22.50,0:06:24.50,Default,,0000,0000,0000,,the quantity\Nof borrowing demanded increases.
Dialogue: 0,0:06:24.50,0:06:27.56,Default,,0000,0000,0000,,As with any other\Nsupply and demand graph,
Dialogue: 0,0:06:27.56,0:06:30.56,Default,,0000,0000,0000,,different factors\Nwill shift the curves.
Dialogue: 0,0:06:30.56,0:06:31.93,Default,,0000,0000,0000,,If a lot of people decide\Nthat it'd be a good idea
Dialogue: 0,0:06:31.93,0:06:34.93,Default,,0000,0000,0000,,to increase their savings,\Nfor example,
Dialogue: 0,0:06:34.93,0:06:40.07,Default,,0000,0000,0000,,then the supply of savings\Nwill shift outward.
Dialogue: 0,0:06:40.07,0:06:45.30,Default,,0000,0000,0000,,As you can see, this would\Ncause interest rates to fall.
Dialogue: 0,0:06:45.30,0:06:46.30,Default,,0000,0000,0000,,This is what we saw in countries\Nlike South Korea and China,
Dialogue: 0,0:06:46.30,0:06:48.08,Default,,0000,0000,0000,,as their populations saved more.
Dialogue: 0,0:06:48.08,0:06:51.06,Default,,0000,0000,0000,,On the demand side,\Nif investors, say
Dialogue: 0,0:06:51.06,0:06:54.06,Default,,0000,0000,0000,,became less optimistic\Nfor some reason,
Dialogue: 0,0:06:54.06,0:06:57.82,Default,,0000,0000,0000,,the demand to borrow\Nwould shift inward,
Dialogue: 0,0:06:57.82,0:07:00.82,Default,,0000,0000,0000,,causing the interest rate to fall.
Dialogue: 0,0:07:00.82,0:07:02.72,Default,,0000,0000,0000,,But if, say an investment tax credit\Nfrom the government
Dialogue: 0,0:07:02.72,0:07:05.72,Default,,0000,0000,0000,,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\Nin the opposite direction,
Dialogue: 0,0:07:09.72,0:07:12.05,Default,,0000,0000,0000,,up and to the right,\Npushing interest rates up.
Dialogue: 0,0:07:12.05,0:07:16.79,Default,,0000,0000,0000,,Thinking about the Market\Nfor Loanable Funds helps us
Dialogue: 0,0:07:16.79,0:07:21.43,Default,,0000,0000,0000,,to see the big picture\Nand understand the raw factors
Dialogue: 0,0:07:21.43,0:07:23.39,Default,,0000,0000,0000,,that determine interest rates
Dialogue: 0,0:07:23.39,0:07:24.39,Default,,0000,0000,0000,,and the quantity\Nof borrowing and lending.
Dialogue: 0,0:07:24.39,0:07:26.98,Default,,0000,0000,0000,,But there isn't actually\None market
Dialogue: 0,0:07:26.98,0:07:29.57,Default,,0000,0000,0000,,called the Market\Nfor Loanable Funds.
Dialogue: 0,0:07:29.57,0:07:32.16,Default,,0000,0000,0000,,It's not like the New York\NStock Exchange.
Dialogue: 0,0:07:32.16,0:07:34.66,Default,,0000,0000,0000,,Instead, there are many,\Nmany, many markets
Dialogue: 0,0:07:34.66,0:07:37.66,Default,,0000,0000,0000,,for different kinds of borrowers\Nand different kinds of lenders.
Dialogue: 0,0:07:37.66,0:07:42.19,Default,,0000,0000,0000,,And there are different types\Nof institutions like banks,
Dialogue: 0,0:07:42.19,0:07:44.18,Default,,0000,0000,0000,,bond markets, and stock markets
Dialogue: 0,0:07:44.18,0:07:47.18,Default,,0000,0000,0000,,that connect\Nthe two sides of the market.
Dialogue: 0,0:07:47.18,0:07:51.00,Default,,0000,0000,0000,,We're going to delve more deeply
Dialogue: 0,0:07:51.53,0:07:54.53,Default,,0000,0000,0000,,into the different kinds\Nof financial intermediaries,
Dialogue: 0,0:07:54.53,0:07:57.00,Default,,0000,0000,0000,,[Narrator] If you want\Nto test yourself,
Dialogue: 0,0:07:57.00,0:08:00.00,Default,,0000,0000,0000,,click "Practice Questions."
Dialogue: 0,0:08:00.00,0:08:01.80,Default,,0000,0000,0000,,Or, if you're ready to move on,
Dialogue: 0,0:08:01.80,0:08:04.80,Default,,0000,0000,0000,,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
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,to see our entire library\Nof videos and resources.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,♪ [music] ♪