Relations and Modeling of GDP and House price index of USA
Use R coding
You could refer to the example report uploaded.
1. data background
2. process data to be used
3. use models to model the two datasets separately.
Models: AR, MA, ARMA, or seasonal model.
Test and use GARCH models (different kinds)
Could compare different models
Pick models
Test models, use tsdiag, box-test
Predict/forecast
4. regress GDP on House Price Index
test linear relation
test regress
5. conclusion
15.
Too big to fail
Project description
write a paper based on the power point slides? Please only use the information covered in the slides. Thank you
Positive aspects of “Too Big to Fail”.
Even though “Too Big to Fail” is an unnatural problem in the market, it actually does bring several benefits to both the economy and the society. First of all, assistance from the government in forms of subsidies and low interest rates will help to maintain financial stability during the crisis. Although “Too Big to Fail” cannot ensure that big banks will never go into bankruptcy, it is at least a strong insurance. According to Journal of Banking Regulation, as a reaction to the near collapse of the banking system during the Great Depression, the government implemented several regulatory measures such as deposit insurance (Moosa, 2010), which was proved to be effective in maintaining the stability of the financial system in the twentieth century.
In addition, “To big to fail” will reduce the market disruptions and inefficiencies resulting from the bank failure. Large banks will bring higher systematic risk because they have more powers to negatively affect other banks in the market simultaneously. This kind of risk occurs when banks borrow funds from each other to pay off debt. If these big financial institutions fail, the financial market may collapse as well. Furthermore, since there is a perfect correlation between the bank sizes and the risks such that bigger banks have higher risks to harm the economy and other banks in the market. And those big financial institutions have possessed too much capital. If one of those banks went bankruptcy or liquidated, the financial market would also be disrupted. According to the Federal Reserve, “five banks-JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs held more than $8.5 trillion in assets at the end of 2011, equal to 56% of the US economy” (Lynch, 2012). Therefore, the government assistance is crucial in reducing the market disruptions.
Furthermore, from the social perspective, “Too Big to Fail” lowers the possibility of bank failures and therefore enhances the social stability. Since big banks possess a large amount of financial and human capital, its failure might cause many individuals to lose both their savings and jobs. When the individuals’ savings and job securities vanished overnight, the society will suffer from chaos and fears. With “Too Big to Fail,” large banks will not bail out on individuals easily, so it actually helps to avoid mass unemployment in the society.
Even though “Too Big to Fail” has some benefits to the society, its negative aspects seem to be more significant.
Are Big Financial Institutions “Too Big to Fail?”
In the business world, there are always some unequal powers between different businesses. Some powers are competitive advantages that are gained by the business itself, whereas other powers are supported by other parties either to ensure coexistence or to minimize systematic risk. “Too Big to Fail” is such an economic phenomenon that several big financial institutions in the economy are so large and significant that both other banks and the government strive for protecting them from bankruptcy in order to avoid disastrous consequences and collateral damages. It is an important phenomenon which highlights the unfairness in the financial markets. Because of this, financial professionals have paid serious attention to avoid the severe effect it can cause on the global economy, if one of the big financial institutions actually failed in the financial crisis. It is also a significant issue that every individual should be aware of since our savings and investments also bear the risks of the banks’ activities.
Background
In 2008, the U.S. Treasury announced major interventions in the economy that involves using the taxpayer funds to purchase equity positions in the country’s largest banks. The purpose of this action is to prevent major bank failures and stabilize financial markets to combat the economic recession. However, Lynch from Business Week proved that after the financial crisis in 2008, big financial institutions have expanded and accumulated more capital than before. Due to their huge financial structures, the Fed might not necessarily be able to supply adequate funds to save them from their financial issues anymore. From a historical perspective, it is quite understandable why the government tries so hard to ensure stability in the financial market. But, whether their protective acts are “right” has aroused many controversies. “Too Big to Fail,” which refers to unfair competitive advantages that the government offers big financial institutions should be carefully analyzed.
One of the most frequently discussed questions of this issue is whether big financial institutions are really “Too Big to Fail”. Size can bring stability to the banks because it can help to spread and diversify the risk. But it cannot protect banks against systematic risk. Advocates of “too big to fail” may say that there is a perfect correlation between bank sizes and the risks where size reduces the risk. Opponents however argue that no bank or financing institution is “Too Big to Fail” in the market. Even though the advocates and opponents hold quite different views with regard to this issue, they both have strong supports for their sides.