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Economics
Hello scared Americans (and other scared people from failing economies),
I thought it would be a good time to play one of my favorite games: WHAT SHOULD I UNDERSTAND ABOUT ECONOMICS THAT MOST PEOPLE DON'T?
It is pretty simple really, I will just lay out some information and if it is new to you then put a checkmark on your scoring cards at home.
Are you ready? Let's begin:
1) Laissez faire economics refers to "free market capitalism". This means that the marketplace is open for business men and women to trade with each other without any hindrances of governmental interference or regulation. The governments role is to simply enforce contracts.
Ok, easy so far?
2) Laissez faire economics has never existed in America.
Ooohhhh. Zinger.
3) The Federal government mints money, directs interest rates, sets the tax rate, and provides exemptions to the tax rate. All of these things severely skew us away from laissez faire capitalism. Not only that, most of these things disproportionally help the wealthy.
You probably could have guessed on that one.
4) Poor people in many states actually pay more in taxes than wealthy people.
5) Laissez faire capitalism presupposes the freedom of movement of labor, which does not exist in America due to immigration policies.
6) Adam Smith, the author of "Wealth of Nations" is the father of the idea of laissez faire economics. He writes that a strong educational system is paramount for capitalism to be successful, because everyone needs an equal opportunity (thus... affordable/free). We are clearly failing in this regard.
7) The United States subsidizes many goods, which means that the government pays to help people produce those goods. What are some things that are subsidized? Milk, corn, wheat, and OIL. To name a few. Many trade agreements and IMF loan agreements in poorer countries forbids the use of subsidies in the poorer nations. This gives us an unfair advantage in other market places.
How are we doing so far? Let's get to current events:
8) What caused the economic meltdown? If you guessed gambling than you are correct. It works like this: The very last law President Clinton passed that made "bucket shops" legal. Bucket shops existed at the turn of the 20th century, and people went to them to make bets on stocks. This caused a stock crash when too many people bet that stocks were going to drop and was made illegal. Now our economy is guaranteed with bucket shops to the tune of trillions of dollars.
9) AIG operated like a large bucket shop. Mortgages were bought buy large companies and put into security packages. Each package was given rating and backed by a company like AIG. If you owned this package, it would be nice for it to be guaranteed in case the value dropped suddenly, wouldn't it? That's what AIG did. Except - you didn't have to own the security to get the insurance. You could place a bet without any stake in the mortgages at all.
10) This gamble/insurance/"weapon of financial destruction" was called a CDS - Credit Default Swap. These are not limited to making bets on mortgage securities, but could also be done on other things as well.
11) Mortgage foreclosures increased primarily for two reasons. First, many loans were given out with terrible terms that people couldn't live up to. Adjustable rate sub-prime loans could see a monthly payment go from $600 to $2000 after 6 months. Second, gas prices severely affected many commuters that found all of their extra income sucked away in their gas tanks.
12) The security rating companies bid against each other to give top ratings to mortgage securities. That's right, they had an economic incentive to give the top rating even if the security didn't deserve it. AAA ratings to everyone!
13) The day that some securities were forced to have their ratings drop from AAA to AA (there have been a lot of foreclosures), a bunch of people wanted to cash in on their bets. Oops, AIG didn't have the money on hand! Guess they'll have to go bankrupt. Oh, that won't work, they're TOO BIG TO FAIL. Guess the government will have to bail them out.
14) With all of these bets, lots of banks couldn't pay up. I guess credit won't be available for a while. Good thing we got a huge bailout bill that was mostly used for banks to buy other banks with. This is great for two reasons - first, none of the money is circulated into the economy so that normal people don't get any access to credit which is needed for things like buying houses. And second, buying failed banks is a good way to avoid paying taxes!
15) Every time a house goes into foreclosure and sells at a discounted price, it undercuts the market. This means that banks are further shooting themselves in the foot every time a foreclosure happens, it hurts the market and makes it difficult for people to sell their homes because they would take a loss.
16) Economic studies have been done that show how well money spent to stimulate the economy works. The best stimulus - food stamps. For every $1 spent, $1.73 is made back. The worst stimulus - permanent tax cuts. For every $1 spent, less than $.50 is made back. See page 6
17) We've lost over 500,000 every month for the past several months. Last month, we lost just under 600,000 jobs.
18) Oh, screw it. I give up for now...
How'd you do? Will the free market save you?
I thought it would be a good time to play one of my favorite games: WHAT SHOULD I UNDERSTAND ABOUT ECONOMICS THAT MOST PEOPLE DON'T?
It is pretty simple really, I will just lay out some information and if it is new to you then put a checkmark on your scoring cards at home.
Are you ready? Let's begin:
1) Laissez faire economics refers to "free market capitalism". This means that the marketplace is open for business men and women to trade with each other without any hindrances of governmental interference or regulation. The governments role is to simply enforce contracts.
Ok, easy so far?
2) Laissez faire economics has never existed in America.
Ooohhhh. Zinger.
3) The Federal government mints money, directs interest rates, sets the tax rate, and provides exemptions to the tax rate. All of these things severely skew us away from laissez faire capitalism. Not only that, most of these things disproportionally help the wealthy.
You probably could have guessed on that one.
4) Poor people in many states actually pay more in taxes than wealthy people.
5) Laissez faire capitalism presupposes the freedom of movement of labor, which does not exist in America due to immigration policies.
6) Adam Smith, the author of "Wealth of Nations" is the father of the idea of laissez faire economics. He writes that a strong educational system is paramount for capitalism to be successful, because everyone needs an equal opportunity (thus... affordable/free). We are clearly failing in this regard.
7) The United States subsidizes many goods, which means that the government pays to help people produce those goods. What are some things that are subsidized? Milk, corn, wheat, and OIL. To name a few. Many trade agreements and IMF loan agreements in poorer countries forbids the use of subsidies in the poorer nations. This gives us an unfair advantage in other market places.
How are we doing so far? Let's get to current events:
8) What caused the economic meltdown? If you guessed gambling than you are correct. It works like this: The very last law President Clinton passed that made "bucket shops" legal. Bucket shops existed at the turn of the 20th century, and people went to them to make bets on stocks. This caused a stock crash when too many people bet that stocks were going to drop and was made illegal. Now our economy is guaranteed with bucket shops to the tune of trillions of dollars.
9) AIG operated like a large bucket shop. Mortgages were bought buy large companies and put into security packages. Each package was given rating and backed by a company like AIG. If you owned this package, it would be nice for it to be guaranteed in case the value dropped suddenly, wouldn't it? That's what AIG did. Except - you didn't have to own the security to get the insurance. You could place a bet without any stake in the mortgages at all.
10) This gamble/insurance/"weapon of financial destruction" was called a CDS - Credit Default Swap. These are not limited to making bets on mortgage securities, but could also be done on other things as well.
11) Mortgage foreclosures increased primarily for two reasons. First, many loans were given out with terrible terms that people couldn't live up to. Adjustable rate sub-prime loans could see a monthly payment go from $600 to $2000 after 6 months. Second, gas prices severely affected many commuters that found all of their extra income sucked away in their gas tanks.
12) The security rating companies bid against each other to give top ratings to mortgage securities. That's right, they had an economic incentive to give the top rating even if the security didn't deserve it. AAA ratings to everyone!
13) The day that some securities were forced to have their ratings drop from AAA to AA (there have been a lot of foreclosures), a bunch of people wanted to cash in on their bets. Oops, AIG didn't have the money on hand! Guess they'll have to go bankrupt. Oh, that won't work, they're TOO BIG TO FAIL. Guess the government will have to bail them out.
14) With all of these bets, lots of banks couldn't pay up. I guess credit won't be available for a while. Good thing we got a huge bailout bill that was mostly used for banks to buy other banks with. This is great for two reasons - first, none of the money is circulated into the economy so that normal people don't get any access to credit which is needed for things like buying houses. And second, buying failed banks is a good way to avoid paying taxes!
15) Every time a house goes into foreclosure and sells at a discounted price, it undercuts the market. This means that banks are further shooting themselves in the foot every time a foreclosure happens, it hurts the market and makes it difficult for people to sell their homes because they would take a loss.
16) Economic studies have been done that show how well money spent to stimulate the economy works. The best stimulus - food stamps. For every $1 spent, $1.73 is made back. The worst stimulus - permanent tax cuts. For every $1 spent, less than $.50 is made back. See page 6
17) We've lost over 500,000 every month for the past several months. Last month, we lost just under 600,000 jobs.
18) Oh, screw it. I give up for now...
How'd you do? Will the free market save you?
posted by Will at 11:28 PM
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