Why does the economy grow? When we look at the natural world we see cycles of growth and decline. Gardens sprout in the spring, bear fruit in the summer, and die back in the fall. Populations of rabbits and deer grow until they're everywhere and then collapse. Rivers go into flood, then slow to a trickle. Only with economies do we see steady, long-term growth. A generation ago cars only went 100 thousand miles or so, and you had to wait for weeks to [...]
It's been a mild hurricane season so far. Will it stay that way? At this time of year people watch a storm center in the Caribbean to see how tropical storms develop. In the same way, observers can watch storm centers in the global economy to see if financial problems might be headed our way. For the past several years we've kept an eye on Southern Europe, but recently South and Southeast Asia has become a new global storm center. The Indian Rupee is [...]
So what caused the financial crisis? Now that we understand the four types of causation, we can apply them to what happened in 2008. Because if we understand how it all happened, we can apply these lessons to today. The efficient cause of the crisis was the sub-prime mortgage market. That's what blew up in 2007 and wiped out trillions in capital. The material cause was what made up that capital--the monetary system that underlies our financial system. It's why some people want to [...]
In order to understand what caused the Financial Crisis, we need first to understand what it means to cause something. Classically, causation can be classified four ways. We looked at material and efficient causes yesterday. Today we will examine formal and final causes. The formal cause of a table is the plan for a table--a horizontal plane supported by several legs. Think of it as the blueprint, or ideal structure. The formal cause of a chemical reaction would be periodic table and electro-chemical potential [...]
What caused the Financial Crisis of 2008? On the face of it, that's a simple question. But it really depends what you mean by "cause." This isn't a word game. Classically, we can look at causation in one of four ways: material cause, efficient cause, formal cause, and final cause. We've largely forgotten Aristotle's notion of the four types of causation, but that doesn't make them any less practical. If we don't want something to repeat itself, we'd better understand what brought it about [...]
Is college worth it? That's a reasonable question, and it's what's behind the Administration's recent effort to reign in college costs. The value of getting a college education has been an article of faith for so long (buttressed by study-after-study about lifetime earnings and unemployment) that questioning the value of a college education is like questioning the value of happiness. But it's important: college costs have eclipsed home prices for many as the single biggest expense of their adult lives. And it's unclear what [...]
What if they held an election and nobody noticed? That's the situation in Germany right now. Their federal elections will be held in a month, but German voters don't seem to care. In spite of scandals involving defense procurement or plagiarism by her ministers, Angela Merkel remains well-liked. It is widely seen that this election will have a significant impact on the future of the Euro, but the German public just isn't that engaged. Recent polls indicate that less than a third of voters [...]
Is bond insurance coming back? One of the more prominent casualties of the financial crisis the bond insurance industry. Before 2007--for a modest fee--issuers could have a third party evaluate their credit and underwrite their bonds. By virtue of low default and high recovery rates among the insured, insurers' capital could transform otherwise marginal credits into AAA bonds. 70% of munis are held by individuals, so it seemed like a perfect business. Investors would buy the bonds; the insurers would do the analysis. But [...]
Why is economic growth so hard to predict? When you look at an economics textbook, it looks so clear: supply and demand each have their functions, and the two lines meet somewhere on a price/quantity graph. Economists call this the equilibrium condition. It's like physics--an object at rest tends to remain at rest, right? Only it doesn't. Prices and quantities are always changing, and nothing seems to be at rest. In classical physics, cause and effect are clear: you have a past, a present, [...]
Are markets just random? It's easy to think so. One day they're up 100 points, then they're down 200, then up 400. What comes next? The market appears to move to its own inaudible beat, uncertain as to time, place, and level. When the economy is good is often a bad time to invest, and when the economy is bad appears to be a good time to invest. What to do? All living systems--biological, sociological, economic--are immersed in a sea of randomness. The most [...]