2015-08-21
546
Read the text and speak about the ways securities affect the economy
Securities help the economy by making it easier for those with money to find those who need investment capital. By making trading easy and available to many investors, securities make markets more efficient. For example, the stock market makes it easy for investors to see which companies are doing well, and which ones are not. Money can swiftly go to those companies that are growing, thus rewarding performance and providing an incentive for further growth.
On the flip side, securities also create wider, more destructive swings in the business cycle. Since securities are so easy to buy, individual investors can purchase them impulsively, without being fully informed or diversified. When stock prices fall, they can lose their entire life savings. This happened on Black Thursday, which led to the Great Depression of 1929.
Derivatives can make this volatility even worse. Originally, investors thought derivatives made the financial markets less risky, because they allowed them to hedge their investments. If they bought stocks, they just purchased options to protect them if the stocks' prices fell. CDOs allowed banks to make more loans, because they received money from investors who bought the CDO and took on the risk. Unfortunately, all these new products created too much liquidity. This ultimately created an asset bubble in housing, credit card and auto debt, creating too much demand and a false sense of security and prosperity. CDOs allowed banks to loosen their lending standards, further encouraging default.
What made things even worse was that these derivatives were so complex that investors bought them without really understanding them. When the loans defaulted, panic ensued when banks realized they couldn't figure out what the derivatives' prices should be. This made them impossible to resell on the secondary market. Overnight, the market for them disappeared. Banks refused to lend to each other because they were afraid of receiving potentially worthless CDOs in return. As a result, the Federal Reserve had to step up and buy the CDOs to keep global financial markets from collapsing.
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Vocabulary notes:
collateralized debt obligation (CDO) - облигация, обеспеченная долговыми обязательствами (обобщающее понятие для различных типов облигаций, обеспеченных пулом долговых обязательств, принадлежащих эмитенту, напр., пулом облигаций, выданных кредитов или ипотек и т. д.)
Overview of the text: Read the text and analyze it using logical connectors.
