01 May 2009
Glossary
Bretton Woods
A 1944 conference held at Bretton Woods, New Hampshire, that designed the structure of the international monetary system after World War II and set up the International Monetary Fund (IMF) and the World Bank. It was agreed that the exchange rates of IMF members would be pegged to the dollar, with a maximum variation of 1 percent on either side of the agreed rate.
bubble
An economic bubble can occur when the price of an asset rises far higher than the item is actually worth. The assumption is that the next buyer will pay an even higher price for the asset. Major speculative bubbles have been known to occur from time to time, often with ruinous effects. Sometimes they are triggered by inexplicable phenomena (fads or crazes), or are kindled by the manipulative actions of individuals or corporations.
corporate governance
An internal company system — encompassing policies, processes, and people — that serves the needs of shareholders and other stakeholders by directing and controlling management activities with good business savvy, objectivity, accountability, and integrity. Sound corporate governance relies on external marketplace commitment and legislation, plus a healthy board of directors culture that safeguards policies and processes.
credit debt swap
A credit debt swap is a contract between a protection buyer and a protection seller. The buyer makes a series of payments to the seller and, in exchange, receives a payoff if the bond or loan goes into default (fails to pay). Credit debt swap contracts have been compared with insurance because the buyer pays a premium and, in return, receives a sum of money if one of the specified events occurs.
derivative
A financial contract whose price is derived from underlying assets such as stocks, bonds, commodities, currencies, interest rates, and market indexes. Most derivatives are characterized by high leverage, that is, the investor only pays a small amount of the actual cost of the contract and borrows the rest from the seller or the broker.
dot-com
A company whose operations are Internet-based; its business model would not be possible if the Internet did not exist. While dot-com can refer to present-day companies, it is also used to refer to companies with this business model during the late 1990s.
externality
The side effect of an economic transaction on people who are not involved in it. A classic negative example is the air pollution produced by a power plant.
Fannie Mae
The Federal National Mortgage Association (FMNA), a congressionally chartered corporation that buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. Monthly principal and interest payments are guaranteed by FNMA but not by the U.S. government.
Federal Reserve
The central bank of the United States, which provides the nation with a safe, flexible, and stable monetary and financial system.
Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC), a government-chartered corporation that buys qualified mortgage loans from the financial institutions that originate them, securitizes the loans, and distributes the securities through the dealer community. The securities are not backed by the U.S. government. The market value of these securities prior to maturity is not guaranteed and will fluctuate.
G20
Established in 1999, the Group of Twenty finance ministers and central bank governors from industrialized and developing economies that meet and discuss key issues in the global economy.
International Monetary Fund
An organization set up in 1944 to lower trade barriers between countries and to stabilize currencies by monitoring the foreign exchange systems of member countries and lending money to developing nations.
Lake Wobegon
“The town that time forgot and the decades cannot improve” as described by radio host Garrison Keillor. Over the past 30 years, Keillor has shared with listeners to the weekly A Prairie Home Companion the latest news from the little fictional town where “all the women are strong, all the men are good looking, and all the children are above average.”
liquidity
The ability of an asset to be converted into cash quickly and without any price discount.
macroeconomics
Macroeconomics is the branch of economics that deals with the performance, structure, and behavior of a national economy as a whole, as opposed to the level of subgroups or individuals (which is called microeconomics.) It is useful in helping determine the aggregate effect of certain policies on an economy as a whole.
margin
Margin is the minimum amount of collateral, in either cash or securities, an investor must have in his accounts to trade in certain investment instruments. The margin is also the difference between the market value of an investment instrument and the loan a broker makes to the investor in order to purchase the investment.
securitization
The process of aggregating similar instruments, such as loans or mortgages, into a negotiable security.
subprime
Subprime loans are for persons with blemished or limited credit histories. The loans carry a higher rate of interest than prime loans to compensate for increased credit risk. Subprime lending evolved with the realization of a demand in the marketplace for loans to high-risk borrowers with imperfect credit.
wealth effect
The tendency of consumers to spend more because they believe they are wealthier. Sometimes they actually are richer (by objective measurement, for example, a bonus or a pay raise at work), or when consumers perceive themselves to be "richer" (for example, the assessed value of their home increases, or a stock they own has gone up in price recently).
World Bank
An organization whose focus is on foreign exchange reserves and the balance of trade.
Definitions are adapted from glossaries at http://www.investorwords.com,
http://www.economist.com/research/economics/, http://encyclopedia.thefreedictionary.com,
and other Web sources.
