We are stuck in a downward spiral. The iterative process of declining housing prices has pulled us into a vicious cycle that only expansionist policy can remove us from. The S&P Case Shiller Home Price reports that housing prices dropped 16.6% from a year ago. Prices are approximately back to where they were in 2004. This shocking statistic shows just how bad this crisis is and that it will have to get worse before it gets better. Declining housing prices were the source of this economic collapse, and they are going to decline even more because of it. As consumer confidence continues to decline, foreclosures increase, and unemployment rises, housing prices are going to continue to plummet. Because of the liquidity crisis, it is nearly impossible to even get a loan to buy a house. As cyclical unemployment increases, people are going to be less and less likely to buy. As the demand for houses decreases, the prices for houses are going to continue to decrease, which will increase foreclosures and add to the already dire liquidity crisis. The $700,000,000,000 bail out will have to move quickly to stop this cycle before it repeats itself.

The Feds new $800,000,000,000 plan to help consumer debt is targeting this problem.

The Panic of 1837

The Democrats during the 1830s were generally a part of the “hard money” faction, which only trusted coin currency. Basically, they were stupid. I guess Andrew Jackson really was the President of the Common Man, for he knew about as much about economics as the Common Man. Jackson and the rest of the Hard-money supporters tried to move their country backward. Jackson wanted to remove fiat money and transfer back to commodity money. The fiat currency was reliable and a sign of an advanced economy. Gold and silver currency was impractical and a logistical nightmare. He was extremely hesitant of the banking system, but he had no reason to be. Without the central regulator of the United States Bank, the smaller state banks had no one to answer to. Though there was an economic boom between 1835 and 1837, the devastating collapse in 1837 would not have occurred or probably would not have been as bad if the central Bank of the United States was regulating the irresponsible overspending by the states by regulating the state banks. The state banks had a liquidity crisis and had to get loans to even transfer money to the state governments. The Panic of 1837 was not only Andrew Jackson’s fault, but also the fault of Martin Van Buren. Van Buren shared Jackson’s fear of fiat currency and therefore catalyzed the economic collapse with his specie circular. This order required that all payment for public lands were either paid in gold and silver or backed by these precious metals. People obviously did not have huge stores of gold in their backyard and could no longer buy the public lands that had generated the economic boom. Their reaction to the crisis was not much better. Van Buren attempted to implement a new financial system that simply got shut down in Congress. Stupid.

Though the causes were different, the Panic of 1837 is very similar to the economic crisis today. The lack of faith in the banking system is driving our country into a downward spiral. This event also shows that the introduction of fiat or representative currency created some hesitation. The dollar is only as valuable as society agrees it is. When a nation doubts its own currency, chaos ensues. The reaction to the crisis is very similar as well. Van Buren faced Congressional opposition which ultimately led to his inefficiency. This same obstacle slowed down the passage of the bail out plan. Though it ultimately passed, the Senate halted the process. This simply shows how much history repeats itself and it is shocking that we have not learned much since 1837.

Evaluation

I really enjoyed Genius Economics this quarter. Though the current economic crisis is terrible, I am glad that I took this course at the same time. I liked actually understanding the news and being able to decode the facts from the hype. I regained interest for the news and the economic world and felt like I had a deep comprehension of the situation. I could watch the news with and educated eye and I didn't feel like what they were saying was going over my head.

I really liked this class. I really enjoyed just hanging out and talking about economics and the real issues that impact today's world rather than just in theory. AP Economics was fun and a really good class, but I found a new passion for the subject in these few weeks because it was relevant to today's world which was really exciting. I really changed my perspective and the concepts we had been learning came to life. I was not really sure before, but now I really feel like I will continue pursuing economics and might even major in it in college.

I like the laid back feel of this class. It feels more like a discussion rather than a class but I still get a lot out of it. I feel like I am learning a lot even though I am not taking notes and listening to lectures like a normal class setting. I would like to keep this relaxed energy alive in the next quarter. This class is a refreshing break from the monotony of lectures and constant assessments. I feel like this class focuses on learning for learning's sake rather than for a grade and that's what I like the most about it.

I talked to Jeanne and Katie... and some other people I can't really remember...

Housing Component of the Financial Crisis

The origin of this financial crisis lies in the housing market.  For the past 15-20 years, the housing market has been increasing.  Since people expected the housing market could increase indefinitely, people would take out loans that were beyond their means to actually pay and only pay interest.  They would wait until their house went up in value and then either sell it or refinance (take out another loan) to pay off the initial loan.  However, when the housing market started turning downward and prices decreased, these people could not sell their houses at a higher price and therefore couldn't afford to pay off their loans.  These subprime loans (or loans given to people with a high risk of defaulting) that were widespread in the years leading up to this crisis, especially because of institutions like Frannie Mae and Freddie Mac which made it easier for the public to obtain loans.  When people began to default (refuse to or declare that you are unable to pay) on their loans, banks were not getting the cash (liquidity) that they rely on to perform regular business.  This directly led to the liquidity crisis we are experiencing today.

Correction

I'm sorry

$700,000,000,000

Media~Government Relief Plan

I was watching the Daily Show and they were discussing the crash of the financial markets.  The beginning of this clip is kind of irrelevant, but halfway through they show a montage of actual news clips.  Though Bush calls the recent events "adjustments", the media calls it an "apocalypse".   With these two trusted resources telling the public two different things, it only creates more turmoil.  People are already confused and now they have no idea what to think.  This is only going to create even more chaos.  Plus, most of the articles I have read are written in such technical terms so that the majority of the population who have no idea what they are talking about.  If there is nothing written in the popular vernacular, the American people cannot differentiate the propaganda from what is actually happening.  Experts keep making vague metaphors about blood and hurricanes rather than actually explaining what is going on.  

On the front page on Yahoo! there is a story about "Black Wednesday".  The article discusses the "panic" and how the economy is going "haywire".  Ok, if one of the most widely seen websites starts calling it Black Wednesday, what do you think people are going to do?  The people are not the only ones freaking out.  The federal government is planning a huge intervention (the biggest since the '30s).  Treasury Secretary Henry Paulson planned the "Balance Sheet Relief", which proposed that the government assimilate the bank's bad assets.  This plan comes with a heavy pricetag, over $700,000,000.  Is this really necessary?  Should taxpayers really bear the burden of the mistakes of businessmen?  Nevertheless, action is necessary.  Banks are really in a bind: the federal funds rate is two percentage points over the normal interest rates.  They are in debt and do not have the ability to lend anymore.  Without action, everyone will be affected.  These large banks are so closely intwined with the American economy.  If they collapse, the American economy will collapse.  If this plan is effective, banks will have the ability to loan again and mortages will become more abundant.  People will be able to buy houses and real estate prices will increase, which is essentially the root of the problem.  Though the initial cost of the plan is titanic, the marginal social cost of not doing anything is even more substantial.

Because I am not an expert and I am just interpreting many of the analyses I have read, I could be completely inaccurate.  Most of the articles are very negative about the current economy and very optimistic about the federal plan.  I have to wonder if all of this media attention is just propaganda to gain public support for the new government plan.

http://finance.yahoo.com/banking-budgeting/article/105807/Shock-Forced-Paulson's-Hand

http://www.nytimes.com/2008/09/21/business/21econ.html?pagewanted=2&hp

Murderball

The one economic concept I have always had a hard time with is the concept of sunk costs.  I understand that once decisions are made and that once things happen you cannot go back in time and change them, but it seems to contradict human nature to completely forget your mistakes.  I know when I mess up, I become preoccupied with my mistake and then I cannot objectively make new decisions because I am so fixated on my past choice. 

In the movie Murderball, a documentary about a paraplegic rugby team, I recognized how the people epitomized this acceptance of the past in order to move forward and succeed.  Though they have the biggest reason to regret and to complain about their history because it had such a huge impact on their daily lives, they seemed to accept what had happened to them and tried to move on.  A few of them rightfully whined about their situation, but they did not let it stop them from making their next move.  The paraplegic players had suffered so much trauma and tragedy, yet they risked even more physical injury to play the game.  I don’t understand how someone could simply let their experiences go and forget about the past, and then decide to put their lives in danger again.  My first reaction to the incredibly physical and violent game was “Why risk even more injury?”  But just like in economic practice, it was in their best interest not to dwell on their regrets and problems and to think about their next choices.

What I gleaned from the film was that whining and complaining does not get you anything: it is impossible to turn back the clock.  You have to, despite human tendency to kick yourself, let go of the past in order to move into the future.  Sunk costs are irrelevant and should be disregarded.  However, emotion makes this statement easier said than done.