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    The Banking Pendulum

    Mar 4 • Thinking Economically • 202 Views

    As George Bailey in “It’s a Wonderful Life,” Jimmy Stewart faces a bank run.  On his wedding day, hoping to save his bank, George first gives out the bank’s cash and then his honeymoon money to a long, agitated line of panicked depositors.

    During the bank run, in two sentences, George Bailey summarizes the basics of banking. “You’re thinking of this place all wrong, as if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house … and a hundred others,” George Bailey is referring to a fractional reserve system in which banks keep part (a fraction) of a deposit in reserve and then loan and invest the balance. 

    Through loans and investments, just as the heart pumps nutrients around the body, banks and other financial institutions pump money around the economy. And, just like we need a healthy heart, we need healthy financial institutions for economic growth.  How to maintain healthy financial institutions is a question our Congress has repeatedly had to ask. 

    I keep thinking of a pendulum swinging back and forth between more and less government regulation.  During the 1930s, government regulation increased.  In 1980, regulation diminished somewhat as banks needed more freedom to compete in a changing financial environment.  In 1999, with the repeal of the Glass-Steagall Act, the pendulum continued its swing toward less government.

    Now, where should it go?


    The Economic Life

    Between the Civil War and the First World War, we had banking panics in 1873, 1884, 1890, 1893, 1896, 1907, and 1914.  “It’s a Wonderful Life” looked at the banking panic of the early 1930s. Many banking crises led to reform legislation.  Initially celebrated, the reforms eventually failed. 

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    Tipping Points

    Mar 3 • Thinking Economically • 257 Views

    When tipping, we all have a tipping point.  It might sound reasonable to leave a dollar tip.  But, if a Tall Vanilla Latte costs $3.37, is a thirty percent tip too much?  Yes, says one NY Times blogger. On the other side, Starbucks baristas say that they earn more from tips than hourly pay.  After a California court decided that Starbucks’ shift supervisors could not share the tips pool, an appeals court reversed the decision.

    Another way in which customers are asking themselves, “How much extra?” involves calories.  With New York City the first in 2008, municipalities around the nation are requiring that calorie information be posted.  Has it made a difference?  According to a Stanford Business school study, yes. 

    The Economic Life

    Starbucks’ customers and employees both are wearing their economic lenses. Whenever they consider the cost and benefit of something extra, they are thinking at the margin.  Thinking at the margin is thinking economically.



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    More Health Care Thoughts

    Mar 2 • Thinking Economically • 226 Views

    Looking at yesterday’s Wall Street Journal editorial article on Indiana’s health care approach, I wondered why no one refers to incentive when assessing alternative legislation.

    Indiana offers a Health Savings Account (HSA) option to state employees.  Here is how it works:  In an account overseen by the employee, the state deposits $2750 for health care bills and pays the premium for the account.  Any money not used for health care belongs to the HSA participant.  If the entire account is used for health expenses, then the state will share additional health costs.  Maximum out-of-pocket is $8,000.  Increasingly popular, the HSA had a 70 percent sign-up this year.

    Indiana’s incentives had these results:
    1. People were more likely to use generic drugs.
    2. People visited physicians and emergency rooms 67 percent less frequently than those with traditional health care plans.
    3. Overall, it appeared that while participants sought necessary procedures and doctor visits, they also thought more about cost.
    4. Unused funds averaged $2,000 per employee.
    5. There is no evidence that appropriate health care is being sacrificed.

    Looking at Congressional proposals, I hope that someone will identify the incentives. By recognizing the impact of incentives, we can all decide whether we approve of how new legislation encourages us to act.

    The Economic Life
    At the heart of economics, incentives shape our behavior.  On the demand side of markets, buyers have the incentive to spend less.  On the supply side, producers have the incentive to charge more.  New laws will shape the behavior of buyers and sellers through the incentives they create.

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    Random Health Care Notes

    Mar 1 • Thinking Economically • 367 Views

    Last summer, at a Fourth of July picnic, a 75 year old great-grandmother, told by her doctor not to eat a hot dog because of its high sodium content, said, “I’m going to have a hot dog.  If I’m dead in the morning, I’ll never know.”

    Other random health care notes…
    1. A recent study concluded that Medicare costs are skyrocketing because of outpatient treatment of obesity related diseases.
    2. A typical person in NY state drinks 46 gallons of sugary drinks annually which contain a total of forty pounds of sugar.  Sixty percent of adults and twenty-five percent of children in NY state are obese or overweight.
    3. Starting next September, NY State might levy a tax on sugary drinks.
    4. Pondering national health legislation and perhaps universal coverage, six Congressmen were pictured eating chippers, aka “North Dakota Diet Food” (chocolate-covered potato chips).

    All of this takes me to a dilemma.  If government pays for our health care, should it have the right to tell us what to eat? 

    The Economic Life
    Whenever a nation answers the three basic economic questions–what to produce, how to produce, and who gets income–it is deciding the role for government.  We could imagine a continuum with the free market at one end and a command economy on the other side.  Adding government programs pushes that country closer to the command/government end.  Many economies have a mixture of a free market and government.

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    Notes From Warren Buffett

    Feb 28 • Thinking Economically • 868 Views

    Released yesterday, Warren Buffett’s annual letter to shareholders, as always, included sections that make me smile: 

    Talking about how he uses a consistent standard to assess Berkshire Hathaway’s performance:
    “That keeps us from the temptation of seeing where the arrow of performance lands and then painting the bull’s eye around it.”

    As an introduction to “What We Don’t Do”:
    “Long ago, Charlie laid out his strongest ambition: ‘All I want to know is where I’m going to die, so I’ll never go there.'”

    Discussing ownership of Geico:
    “An old Wall Street joke gets close to our experience:
    Customer: Thanks for putting me in XYZ stock at 5.  I hear it’s up to 18.
    Broker: Yes, and that’s just the beginning.  In fact, the company is doing so well now, that it’s an even better buy at 18 than it was when you made your purchase.
    Customer: Damn, I knew I should have waited.”

    Commenting on incorrect advice he gave to Geico management about issuing a credit card:
    “I subtly indicated that I was older and wiser.
    I was just older.”

    On seeing a silver lining in the housing bubble cloud:
    “Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.”

    After stating his own responsibility for risk control at Berkshire:
    “In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment.  And if he fails at it-with the government thereupon required to step in with funds or guarantees-the financial consequences for him and his board should be severe.”

    And finally, an inspiring conclusion:
    “At 86 and 79, Charlie and I remain lucky beyond our dreams.  We were born in America; had terrific parents who saw that we got good educations;  have enjoyed wonderful families and great health; and came equipped with a ‘business’ gene that allows us to prosper in a manner hugely disproportionate to that experienced by many people who contribute as much or more to our society’s well-being.  Moreover, we have long had jobs that we love, in which we are helped in countless ways by talented and cheerful associates.  Indeed, over the years, our work has become ever more fascinating; no wonder we tap-dance to work.”

    May we all tap dance to work!


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