• Crisis Autopsy

    Apr 9 • Economic History, Financial Markets, Regulation • 91 Views

    In an October NY Times op-ed, Calvin Trillin describes a (hypothetical) conversation in a midtown bar about the financial crisis. “The financial system nearly collapsed because smart guys had started working on Wall Street.” By contrast, decades ago, a top student became a federal judge or a professor. Meanwhile, the bottom third went to Wall Street. More recently though, “Smart guys started going to Wall Street.” and invented derivatives and credit default swaps.  ”But who was running the firms they worked for? Our guys! The lower third of the class. Guys who didn’t have the foggiest notion of what a credit default swap was…!” 

    I only remembered Trillin’s column because of yesterday’s Financial Crisis Inquiry Commission (FCIC) testimony from Chuck Prince, former head of Citigroup and Bob Rubin, Citigroup “senior counselor” and former Secretary of the Treasury. 

    Please do read Trillin’s column and then listen to yesterday’s testimony. Your opinion? Also, check this baseline scenario comment on Alan Greenspan’s testimony.

    The Economic Lesson

    The FCIC is being compared to the Pecora Commission. Between 1932 and 1934, the Pecora Commission investigated “stock exchange practices and their effect on American commerce, the national banking system, and the government securities market. They also addressed issues of tax evasion and avoidance.” Their impact is reflected by the content of the Banking Act of 1933 (Glass-Steagall), the Securities Act of 1933, and the Securities Exchange Act of 1934. A St. Louis Fed paper has the documents. 

     

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    It’s All About Extras

    Apr 8 • Businesses, Thinking Economically • 109 Views

    Whenever you consider doing something extra, you are thinking at the margin.

    • When airlines decided to charge travelers for more than one bag, they were thinking at the margin.
    • Still thinking at the margin, they realized they could generate considerable extra revenue by getting paid for extra baggage.
    • Also thinking at the margin, some travelers stopped taking an extra bag.
    • Still though, airlines’ extra (marginal) revenue increased by $1.5.billion.
    • Then, because planes had less extra baggage, extra fuel was no longer necessary.
    • Less fuel meant extra profits and larger profit margins.
    • For baggage handling injuries and bag losses, there were fewer extras.
    • Fewer bags meant extra room for cargo (which is more lucrative for the airlines).
    • However, flight attendants are experiencing extra injuries because passengers are jamming bigger bags into the overhead racks.
    • And finally, airlines have always thought about extras because one extra passenger on a plane typically costs them the price of an extra meal.  

    The Economic Lesson

    Whenever anyone considers the cost and benefit of something extra, that person is thinking at the margin. The margin is an imaginary line that separates the current amount you are doing from the extras you might be contemplating. As you can see, airlines have been doing a lot of thinking at the margin.

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    Frugal Fatigue and Yuan Updates

    Apr 7 • Businesses, Households, International Trade and Finance, Macroeconomic Measurement • 120 Views

    Re a March 21 post about frugal fatigue…

    For a fifth straight month, consumer spending is up, meaning perhaps that we are headed for a “V” recovery?  

    Data from the most recent Bureau of Labor Statistics (BLS) report indicates that internet spending on computer information services is soaring while purchases of newspapers and magazines are plummeting. Predictably, between 1999 and 2008, with the largest decline, the “under-25 population” spent 58% less on newspapers and magazines; those 65 and over spent the most on real print media but still decreased their spending by 22%. The report includes a great graph.

     

    Re a March 27 post about the yuan…

    Economist Don Boudreaux responds to Planet Money’s description of Chinese currency manipulation saying instead that their policy can also have a positive impact on trade by making the value of the yuan more predictable.

    Hoping to settle differences during the next G-20 meeting, Treasury Secretary Geithner will postpone his report to the Congress on Chinese currency policies.

     

    The Economic Lesson

    Characterized as structural change, diminished demand for magazines and newspapers is an example of an industry contracting as demand shifts to new technology.  

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    Handy Quotations

    Apr 6 • Economic Thinkers, Thinking Economically • 120 Views

    On Economics:

    Economics is “the study of mankind in the ordinary business of life.”   Alfred Marshall, 1842-1924 (U.K. economist).

    “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Friedrich von Hayek, 1899-1992 (Austrian-born, U.K. citizen economist).

    “…persons, with big wigs many of them and austere aspect, whom I take to be Professors of the Dismal Science.”  Thomas Carlyle, 1795-1881 (Scot. teacher, writer, satirist), on the (sometimes) dreary character of economics.

    On economists:

    “In the long run we are all dead.”  John Maynard Keynes, 1883-1946 (U.K. economist), referring to economists’ emphasis on the future impact of their ideas. 

    “Give me a one-handed economist. All my economists say, “On the one-hand; on the other.” Harry Truman, 1884-1972 (U.S. president).

    The Economic Lesson

    Economics books say that economics is a social science that explores how we produce and distribute scarce resources (land, labor, capital).

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    Economics and Literature

    Apr 5 • Thinking Economically • 108 Views

    Thinking of how Economics is Everywhere, I am reading The Literary Book of Economics in which economist Michael Watts displays the connection between literature and major economic ideas.  

    Discussing 78 examples, from fiction, nonfiction, and poetry, he includes the connection between Dickens’s Hard Times and negative externalities, Amy Tan’s Joy Luck Club and the efficient market hypothesis, and Jon Krakauer’s Into Thin Air and price elasticity of demand. Similarly, while David Sedaris surely was not thinking about labor markets when he debated whether he needed a job after finding $50, he was indeed thinking economically.

    The Economic Lesson

    Concerning so much more than money, when we slice away all of its complexities, economics is fundamentally about making choices among scarce resources.

     

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