[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.25,0:00:03.85,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:14.35,0:00:16.66,Default,,0000,0000,0000,,[Alex] On September 15, 2008,
Dialogue: 0,0:00:16.66,0:00:20.32,Default,,0000,0000,0000,,the world's financial system\Nwas shaken to its core
Dialogue: 0,0:00:20.32,0:00:22.17,Default,,0000,0000,0000,,when the investment bank,\NLehman Brothers,
Dialogue: 0,0:00:22.17,0:00:24.12,Default,,0000,0000,0000,,filed for bankruptcy.
Dialogue: 0,0:00:24.12,0:00:27.54,Default,,0000,0000,0000,,The impact was great not simply\Nbecause Lehman was big,
Dialogue: 0,0:00:27.54,0:00:31.82,Default,,0000,0000,0000,,but also because it was\Nan important financial intermediary,
Dialogue: 0,0:00:31.82,0:00:34.68,Default,,0000,0000,0000,,an institution that\Nhelps bridge the gap
Dialogue: 0,0:00:34.68,0:00:37.79,Default,,0000,0000,0000,,between savers and borrowers.
Dialogue: 0,0:00:37.79,0:00:41.49,Default,,0000,0000,0000,,The failure of Lehman marked\Nthe beginning of a series of events
Dialogue: 0,0:00:41.49,0:00:44.06,Default,,0000,0000,0000,,that signaled\Nthe worst economic downturn
Dialogue: 0,0:00:44.06,0:00:46.52,Default,,0000,0000,0000,,since the Great Depression.
Dialogue: 0,0:00:46.52,0:00:48.31,Default,,0000,0000,0000,,And while there's several\Nsignificant angles
Dialogue: 0,0:00:48.31,0:00:49.74,Default,,0000,0000,0000,,to the Great Recession,
Dialogue: 0,0:00:49.74,0:00:52.73,Default,,0000,0000,0000,,one of them was\Nthe decreased efficacy
Dialogue: 0,0:00:52.73,0:00:55.18,Default,,0000,0000,0000,,of financial intermediation.
Dialogue: 0,0:00:55.18,0:00:57.03,Default,,0000,0000,0000,,Now, some later videos\Nare going to go through this
Dialogue: 0,0:00:57.03,0:00:58.49,Default,,0000,0000,0000,,in more detail.
Dialogue: 0,0:00:58.49,0:01:02.32,Default,,0000,0000,0000,,But for now, we want to start\Nwith some basic observations
Dialogue: 0,0:01:02.32,0:01:06.43,Default,,0000,0000,0000,,as to why financial intermediation\Nis so important.
Dialogue: 0,0:01:06.43,0:01:08.36,Default,,0000,0000,0000,,We'll start\Nwith the supply of savings
Dialogue: 0,0:01:08.36,0:01:09.90,Default,,0000,0000,0000,,and the demand to borrow,
Dialogue: 0,0:01:09.90,0:01:12.46,Default,,0000,0000,0000,,and the market\Nwhich brings them together,
Dialogue: 0,0:01:12.46,0:01:14.22,Default,,0000,0000,0000,,the Market for Loanable Funds.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,So why do people borrow\Nand save at all?
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Well, let's imagine a world\Nwithout borrowing and saving.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Most people's incomes\Ndon't stay flat their entire lives.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,They change in predictable ways.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Here's a typical pattern,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,showing a person's income\Nover their life,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,with their income\Non the vertical axis
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and time on the horizontal axis.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,When you're young\Nand still in school,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,you might make\Na little bit of money,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,waiting tables\Nor occasionally mowing lawns.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Your first job out of school,\Nit's going to pay more,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and after a few years\Nof experience
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and hopefully\Na few raises along the way,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,you make more than you ever have.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Then, as you age,\Nyou look forward to retirement,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,when your income falls.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,But you're no longer working
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and you could really enjoy \Nyour golden years.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,[Estelle from “Seinfeld” TV series] \N“We're moving to Florida!”
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,[George] “What?\NYou're moving to Florida?
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Ah-hah! That's wonderful!\NI'm so happy!
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,For you! I'm so happy for you!”
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,[Alex] Now, let's imagine
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,if your consumption followed\Nthe same path as your income
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and you never saved or borrowed.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,You'd struggle when young,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and you'd be unable\Nto invest in an education.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Then, you'd spend\Nevery cent you make
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,during your prime working years.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Well, that sounds\Nlike a lot of fun.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,But without savings,\Nyour income will drop suddenly
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,when you retire,\Nand so will your consumption.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Your golden years\Nwouldn't be so golden.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,[Doug from “King of Queens” TV series]
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,[Kevin] If you're so smart,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,why don't you tell them that \Nyou live in my basement?
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,[Arthur] Why don't you tell them \Nyou're enormous?
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,[Doug] Why don't you tell them
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,that your total salary\Nlast year was $12?
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,[Arthur] That was after taxes.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,[Alex] So instead,\Npeople tend to follow
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,a life cycle theory of savings.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,A person can start out consuming\Nmore than she makes,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,borrowing to fill that gap --
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and to pay for things\Nlike an education.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Then, during\Nher prime working years,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,she makes more than she consumes,\Npaying down her debt
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and saving the extra income\Nfor retirement.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And when retirement comes,\Nshe can spend those savings
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and enjoy the golden years\Neven without working.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Now of course, many people\Ndeviate from this exact path,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,depending on details.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Most people, for example,\Nthey consume less in college
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,than they do as professionals.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Ramen noodles are no longer\Na staple of my diet.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,But generally speaking,\Nmany people follow a pattern
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,of borrowing, saving,\Nand dissaving
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,to smooth their consumption path\Nover their lifetime.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Of course, just like some people\Ncan't wait until after dinner
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,to reach for that cookie jar,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,not everyone saves and spends\Nin the same way.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,How much you save and borrow\Ndepends upon your time preference.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Some people -- they're more\Nimpatient than others.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,We all know someone\Nwho spends everything they've got
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and doesn't save enough.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,On the other hand,\Nif you're keeping to a budget
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and not spending too much\Nso that you can go to college,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,well that's an example\Nof being patient
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and waiting\Nfor higher consumption later.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,We've also learned\Nfrom behavioral economics
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,that saving is not just a matter\Nof weighing costs and benefits.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Nudges can matter.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,If your employer automatically\Nenrolls you in a retirement plan,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,or sets a high\Ndefault contribution rate,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,you'll probably end up saving more
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,than if you have to choose yourself,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,even if choosing yourself\Nwould only take a few hours of work
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,once in your lifetime.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Another important reason to borrow\Nis to make big investments.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Just as students borrow\Nto invest in education,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,businesses borrow\Nto invest in big projects.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Entrepreneurs with great ideas\Nbut not much money,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,they may have to borrow\Nor sell a stake in their idea
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,just to get their venture\Noff the ground.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,For example, Howard Schultz\Nbuilt Starbucks into a global brand
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,by borrowing and raising capital
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,through several different types\Nof financial intermediaries.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,We'll talk more about that\Nin upcoming videos.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,As with any other good,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,we're going to use\Nsupply and demand
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,to analyze the market\Nfor saving and borrowing,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,known as the Market\Nfor Loanable Funds.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,As we've seen, there are\Nlots of good reasons
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,to save and to borrow.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,But we have failed to mention\None big factor -- price.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,What's the price\Nof saving and borrowing?
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,It's the interest rate.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,So here's the supply curve\Nshowing the supply of savings.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,As the interest rate goes up,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,the quantity\Nof savings supplied increases,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and here's the demand curve\Nshowing the demand to borrow.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Lower interest rates\Nincentivize borrowing,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,so as the interest rate falls,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,the quantity\Nof borrowing demanded increases.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,As with any other\Nsupply and demand graph,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,different factors\Nwill shift the curves.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,If a lot of people decide\Nthat it'd be a good idea
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,to increase their savings,\Nfor example,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,then the supply of savings\Nwill shift outward.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,As you can see, this would\Ncause interest rates to fall.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,This is what we saw in countries\Nlike South Korea and China,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,as their populations saved more.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,On the demand side,\Nif investors, say
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,became less optimistic\Nfor some reason,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,the demand to borrow\Nwould shift inward,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,causing the interest rate to fall.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,But if, say an investment tax credit\Nfrom the government
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,increased the demand to invest,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,then the demand curve will shift\Nin the opposite direction,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,up and to the right,\Npushing interest rates up.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Thinking about the Market\Nfor Loanable Funds helps us
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,to see the big picture\Nand understand the raw factors
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,that determine interest rates
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and the quantity\Nof borrowing and lending.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,But there isn't actually\None market
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,called the Market\Nfor Loanable Funds.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,It's not like the New York\NStock Exchange.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Instead, there are many,\Nmany, many markets
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,for different kinds of borrowers\Nand different kinds of lenders.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And there are different types\Nof institutions like banks,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,bond markets, and stock markets
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,that connect\Nthe two sides of the market.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,We're going to delve more deeply
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,into the different kinds\Nof financial intermediaries,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,[Narrator] If you want\Nto test yourself,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,click "Practice Questions."
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Or, if you're ready to move on,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,you can click \N"Go to the Next Video."
Dialogue: 0,9:59:59.99,9:59:59.99,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] ♪