Read the following two articles and the question prompts. Article 1 The "Shadow Banking System" and the Financial Crisis of 2007-2009 In the past 25 years, two important developments have occurred in the financial system: Banks have begun to resell many of their loans rather than keeping them until they are paid off. Financial firms other than commercial banks have become sources of credit to businesses. Traditionally, when a bank made a residential mortgage loan to a household to buy a home or made a commercial loan to a business, the bank would keep the loan and collect the payments until the loan was paid off. A financial assetsuch as a stock or a bondthat can be bought and sold in a financial market is a security. When a financial asset is first sold, the sale takes place in a primary market. Subsequent sales take place in a secondary market. After 1970, loans began to be securitized. Securitization is the process of transforming loans or other financial assets into securities. The financial system was also transformed in the 1990s and 2000s by the increasing importance of nonbank financial firms, such as investments banks, money market mutual funds, and hedge funds. Investment banks concentrate on providing advice to firms issuing stocks and bonds and considering mergers with other firms. In the 1990s, investment banks began bundling large numbers of their mortgages and reselling them to investors. Mortgage-backed securities became popular because they often paid higher interest rates than similar securities. Money market mutual funds sell shares to investors and use the money to buy short-term securities. Hedge funds raise money from wealthy investors and use sophisticated investment strategies that often involve significant risk. By raising money from individual investors and providing it directly or indirectly to firms and households, investment banks, money market mutual funds, hedge funds, and other financial firmsthe "shadow banking system"were carrying out a function that at one time was almost exclusively the domain of commercial banks. The firms in the shadow banking system differed from commercial banks in two ways: First, the government agencies that regulated the commercial banking system did not regulate these firms. Second, these firms were more highly leveraged than were commercial banks. Beginning in 2007, some firms in the shadow banking system experienced runs. As housing prices began to fall, some borrowers began to default on their mortgages, which caused mortgage-backed securities to lose value. Investment banks and other financial firms that had borrowed short term and invested the funds long term were in trouble. In the fall of 2008, the process of securitization had ground to a halt. The resulting credit crunch significantly worsened the recession that had begun in December 2007. The Fed, in combination with the U.S. Treasury, took action to deal with the financial panic. In the fall of 2008, under the Troubled Asset Relief Program (TARP), the Fed and Treasury began to stabilize the commercial banking system by providing funds to banks in exchange for stock. The Fed modified its discount policy to make it possible to grant loans to financial firms that had not previously been eligible. Sources: Essentials of Economics (Sixth Edition), 2015, p. R. Glenn Hubbard, Anthony Patrick O'Brien Article 2 BITCOIN AND CRYPTOCURRENCIES What is Bitcoin and is it really money? Bitcoins are a digital currency that works without the backing of governments. With Bitcoins, you can transfer money to another party anywhere in the world without using traditional banks and without the possible oversight of any government. Bitcoins are one of several cryptocurrencies that are in existence today. Cryptocurrency refers to the feature of these payment systems that uses modern methods to encode or encrypt transactions, so they cannot be read without special procedures to decode them. Bitcoin "miners" verify and encode transactions between parties using an array of high-powered computers. The technological idea behind Bitcoin is "block-chain" technology, which appears to have many other applications besides cryptocurrencies. Cryptocurrencies have both advantages and disadvantages. One of the main advantages is that the payment system does not depend upon governments, which can be an important fac-tor in many countries with weak legal systems. They also permit transactions to be anonymous, a feature that can be used for both legitimate and illegitimate purposes. A disadvantage is that the value of Bitcoins has varied sharply over time. This makes them a poor store of value and more of a speculative investment. Purchasers of Bitcoins can either make or lose money because of its fluctuations in value. In this dimension, it is not that different than holding gold. Are Bitcoins money? They are a medium of exchange, but do not function as a unit of account or store of value. They and other cryptocurrencies are likely to be part of our monetary environment in the future. Sources: Survey of Economics: Principles, Applications, and Tools, (8th Edition) Arthur O'Sullivan; Steven Sheffrin; Stephen Perez Questions to think about: Securitization seems to be a good idea. It allows households and firms to have more access to loans. It also allows investors to earn a high return from investing in those securities. Yet it is believed that securitization led to a huge amount of loans lent out, which consequently resulted in the financial crisis in 2008 - 2009. Do you support the idea of securitization? How can the government regulate the process of securitization? What do you think about the "Shadow banking system"? Should Fed regulate the nonbank financial firms in the "Shadow banking system"? Trading activities in cryptocurrencies are increasing rapidly. The government is at the preliminary stage of regulating cryptocurrency. Should cryptocurrency be regulated? The public understanding on cryptocurrency is still very limited. Do you think that cryptocurrency can lead to disturbances in the global financial market in the future