Freshman Economics Won't Quite Be the Same

http://www.nytimes.com/2009/05/24/business/economy/24view.html

by cwan • 17 years ago

32 11 17 years ago

joshhart• 17 years ago

There were a lot of signs that we were in a housing bubble. Why is it difficult to understand that subprime mortgages + leveraging & rampant house flipping created inflated, unsustainable prices?

bwd2• 17 years ago

Bubbles are inevitable. The United States experienced a huge one less than ten years ago in the equity markets. The bubble isn't the crisis, leverage is the crisis. The real lesson from the events of the last two years is not that you have to keep bubbles from happening because you can't. The real lesson is that you have to protect yourself from the consequences of a bubble by avoiding excessive leverage. The last bubble wasn't so damaging to the financial system because there are strict regulatory limits placed on the amount of leverage that you can use in equity investing.

cwan• 17 years ago

I think leverage made the difference - but at the same time, leverage ratios of European banks are significantly greater than that of US banks. There are others who have also said that it was the bubble in excess capital/credit which made the difference between this one and the tech / real estate bubbles of the past. This excess capital was caused by a number of factors that included the USD as a reserve currency (which is why those like Stiglitz now think that a move away from this is a good thing - though this is happening because of the massive borrowing by the current US Administration) and prolonged low interest rates by the Federal Reserve,

mattmcknight2• 17 years ago

Perhaps leverage limits on home mortgages are in order? It would cause prices to fall, but the coming inflation could balance things out.

There used to be a bit of a leverage limit as anyone paying less than 20% was required to buy PMI. Somehow taking out a 80% loan and a second loan allowed people to work around this, or in some cases the lender was paying the PMI. In any case, one would have thought that the negative effects to the lenders would have been mitigated by PMI, but it seems to not be playing a role in the unraveling...

ZeroGravitas• 17 years ago

Seems like a bit of a fluff piece. I doubt it will change one iota.

Mark Shuttleworth, bizarelly, hits the nail on the head with his blog entry about University generally called "It’s the ability to learn tools, not the tools themselves": http://www.markshuttleworth.com/archives/28

"I hated economics at university because it epitomised the disposability of old knowledge. The problem was that first-year economics was basically a history lesson disguised as a science lesson. We learned one classical set of ways of looking at the world, and how to apply them to assess an economy. This was a bit like learning science circa 1252 and being told that you need to be able to draw up an alchemical recipe for lead-to-gold conversions that could pass for authentic in that era.

Then in second year they said “luckily, the world has since decided that those ideas are utter crap, you can’t really manage an economy using them, but here’s a new set of ideas about economics”. So we set about learning economics circa 1910, and being expected to reproduce the thinking of the Alan Greenspan’s of that era. The same people who orchestrated 1929-1935 and all the economic joy that brought the world. We knew when we were studying it that the knowledge was obsolete. And of course, when I looked into the things we were supposed to study in third year, fourth year and masters economics programs the pattern repeated itself."

I'm assuming he studied economics in South Africa, it's the same in the UK. I'm guessing it applies in the US too.

ericwaller• 17 years ago

It's funny because that's actually what I liked the most about an intro economics class (at an engineering school): that it was more philosophy plus illustrative math than anything like a science.

But I had to laugh at this line:

The textbook answer to recessions is simple...the central bank can cut interest rates.

That really depends on who wrote your textbook

edw519• 17 years ago

I don't care what you do with Freshman Economics as long as you keep it out of the Sciences.

After 6 Economics courses and an MBA, I'd prefer these sentiments: (sorry, I couldn't resist)

"An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today." Laurence J. Peter

"An economist is an individual who can tell you 364 ways to make love to the member of the opposite sex, but never has done so." Quoted in John von Neumann by Norman Macrae

"A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain." Mark Twain

"Earth provides enough to satisfy every man's need, but not every man's greed." Gandhi

"The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics." Thomas Sowell

"What is studied [in modern formal analysis] is a system which lives in the minds of economists but not on earth. I have called the result 'blackboard economics'. The firm and the market appear by name but they lack any substance." Ronald Coase, Nobel Prize Winner in Economics.

"Give me a one-handed economist! All my economists say, "on one hand... on the other." Harry Truman

"Every time history repeats itself the price goes up." No name

"Teach a parrot the terms "supply and demand" and you've got an economist." Thomas Carlyle

Freshman Economics Won't Quite Be the Same

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