the precipice: a simple economics lesson part one

precipice- a situation of great peril

Over the last six months, I have been asked on multiple occassions to explain to people what is going on in the economy. At last, I've decided to give it a shot. This post is probably going to be long and for most of you, boring. However, I feel that if you have any interest in your future in a capitalistic economy, you should at least read a little bit of it. So here goes....

I believe that it is wise to say that problems occuring in recessions stem from problems occuring in past recessions. Economics is defined as the science of attempting to maximize your utility from a limited amount of goods. Naturally, the fact that we have a limited amount of goods brings about the problem of how to best allocate these resources. The simple introduction to our current crisis stems from the last recession that occured at the beginning of the 21st century. That recession was fueled by the overheating of the market due to the introduction of names such as Apple, Microsoft, and IBM to every household in America. For almost five years traders ran these companies' stock prices up to absurd levels. Upon realizing this, a huge technology driven sell off began. That, coupled with the destruction that 9/11 caused our economy, launched the country into a recession. The Fed chairman at the time, Alan Greenspan, decided that the best way to get the economy going again was to lower the federal funds rate(interest rates is misleading, because the fed funds rate is one of many important interest rates). The reason he decided to do that is because there is a very observable correlation between the federal funds rate and investing/saving. When the federal funds rate drops, people tend to save less because they are getting lower returns on their money than they would have beforehand. Therefore, any person acting rationally will move their money from savings to investments because of the decreasing returns from savings. The lowering of the federal funds rate is the easiest way the Federal Reserve can influence the macro, or entire, economy. Greenspan felt that the economy was in such poor shape that he lowered the rates 17 times straight! You might ask why once or twice was enough and there are two basic answers to this. First, the obvious answer is that he has to lower them in small enough percentages that he doesn't bring shock to the market. Imagine what would happen if you were earning 7% on your savings account one day and you wake up the next to be told that it is only earning 1% now. Not only would you be incredibly pissed, but you would be very afraid that the banking system may not survive. The second reason is that it takes time for the economy to respond to the stimulus. Imagine that you get strep throat and require medicine to get rid of it. Although the medicine begins working almost instantly, it takes time for you to see any results from it. The same holds true for interest rates. It is generally believed that it takes about six months for us to see the effects of a single rate cut. However, when we do see them, the results are generally incredibly positive. About a year and a half after 9/11, the American economy began to climb out of the recession thanks in part to those cuts. You have to remember though, these rate cuts began to have very unforseen consequences. For one, mortgage brokers were willing to give anyone with any sort of income a loan to get a house that the brokers knew they would not be able to afford in the future. Why did the brokers do this? It's simple really: they got a commission every time someone signed on the dotted line. The general belief is that most of the dealers knew that what they were doing was wrong, yet they continued to do so. It's one thing to take a stand when you know that what you are doing could legitimately make a difference. However, when you're talking about a couple extra hundred thousand that would have been lost(had these dealers acted prudently), you really aren't talking about that much. With the easy availability of these mortgages, the price of homes skyrocked in a short period of time. In late 2005 all the rage was up and businesses and individuals alike realized that they had been gravely fooled. The Federal Reserve had begun to raise interest rates again, translating into increased payments per month for an individual home owner. As people realized they could not afford the payments, default rates began to rise almost overnight. As businesses realized that these people weren't going to pay, they quickly tried to pawn off these obligations on others. The most common technique was to package these mortgages together and try to sell them to investment banks in the US or to foreigners.

This ends our lesson for today, namely because my head is pounding and the Rays look like they're trying to be the third team to lose to the Sox despite being one game from ending the series. I'll continue the lesson with my next post, but until then, enjoy.


mh

Guest Spot: Lemonade Here!!!

Don't turn that blog readers, this is a guest spot Hartman has given myself, Bradburn, to do in order to try and get back into that mood for blogging. I decided to retire my old blog and start a new one over the summer. Unfortunately I stopped writing because of the same reason I stopped my first one, life was too repetitive to blog about. So I am hoping with a couple of different column ideas it will really help me get back into the flow of things. This is one of those column ideas that I have called, Lemonade Here!!!

Lemonade Here!!! is my thoughts on mainly Pittsburgh sports, but can be on the sports world outside of Pittsburgh. This originally was an idea for a new blog, but with school I would not have the time to consistently update it as much as I would like to for a sports blog. The name of this column comes from the legendary vendor at the Pirates, Panthers, Penguins, and Steelers games, the Lemonade guy, who is often known as the Cotton Candy guy and as recently as the Pitt-Iowa game the Ice Tea guy. Let the fun begin, Lemonade Here!!!

Pens open season in Sweden

The Penguins opened the 2008-2009 NHL season in Sweden in the NHL's attempt for European expansion. And really what better way to do it then to send the NHL cover boy, Sidney Crosby, over to Sweden. While the Pens may have split the series with the Senators 1-1, it is hard not to think of these games as preseason games still.

The reason I say this is because both games were neutral ice, both games fell in awkward times due to timezone differences, and in reality it was just a team building excerise much like when the Pens have made visits to West Point in the past couple of years.

Sure the Power Play looked terrible, but really is that not to be expected when you lose two of the Pens top PP performers in Gonchar and Whitney, and they are forced to plug in Letang and the unproven Goligoski? I do have to admit though, it was pretty amazing to see five offensemen on the ice during the 5-3 in Game 1 with Crosby and Geno playing thing point. Given time I honestly believe this PP will click and give the Pens more depth when it comes time for playoffs.

Lets face it the Pens always seem to start slow, and I do realize that it is only two games into the season, but this team in much better to start the season this year then the team that started the team last year.

Pitt stuns USF to re-enter Top 25.

Last Thursday, the Pittsburgh Pangthers stunned the South Florida Bulls in what seems to be a weekly tradition in ESPN's Thursday Night Football with the unranked team defeating the ranked team.

It is nice to see Pitt back into the Top 25, but should they have ever left in the first place? In a way the loss to Bowling Green still stings when we could be highly ranked, but in a way, that loss could have been what helped the Panthers win this game and all their other games this year. You have to remember the Panthers are still relatively young, and are finally playing to Wannstache's style of a ground and pound, physical, eat the clock, NFL style of football.

In a wide open Big East this team can truly do some damage and now has the momentum to keep making a run. You figure they start 2-0 now in conference play, with one of the main challenges done with USF. We can only hope Panther fans, that this year will be different then other years under the Stache that our Panthers return to a game in late December/early January and go bowling. And with a weakened Big East, it looks very possible.

Wouldn't it be nice?

I was talking to Hartman the other day after the Pitt victory and the two of us talked about this hypothetical situation, in which will probably not come to fruition. The situation being Pitt goes onto win the Big East, and Penn State goes onto win the Big Ten, with 1 loss. When it comes time for BCS bowl selection, we see a rebirth of an old rivalry that died years ago in Pitt-Penn State.

I say wouldn't it be nice, not because I don't have faith in Pitt winning the Big East, or how Penn State is playing; winning the Big Ten, but let's face folks, the BCS Bowl Selection Commitee would rather go with their usual Big Ten-Pac Ten battle in the Rose Bowl tradition. But in this case what is wrong with renewing an old tradition in the Pitt-Penn State tradition. Think of the hype that could go into this game, the two teams haven't played 2000 and a lot has changed since then. Personally, I would love to see Joe Pa's face when he learns he has to play Pitt and how the grumpy S.O.B would complain, and there would be nothing he could do about it. But that is neither here nor there.

The chances of us seeing the game are pretty slim, but oh wouldn't it be nice? Keep your fingers crossed Penn State and Pitt fans, and maybe, just maybe we can see a return of the Pennsylvania Classic in a BCS bowl game.

I would like to thank Matt, for giving me the oppurtunity to write this column in his blog and I hope you all enjoyed a preview of the Lemonade Here!!! column. If you liked what you read here or would like to see where I am going from here, visit my blog at http://crusher524.wordpress.com/

Thanks,

Bradburn

days gone by

"No alarms and no surprises."
October 6, 10:51 AM
State College, PA

Despite the fact that I had heard my alarm buzzing almost two and a half hours ago, I decided to ignore it, as is the case on most Mondays and Fridays. I have Introduction to C++ on those days which the university insisted that I take despite the fact that I had proven more than adequate knowledge on several pre-programming tests. However, those were taken three years ago, a time frame which Penn State considers too long ago for me to remember the specifics of it. I've responded by only going to class on quiz or test days due to the fact that I have worked so far ahead in the class that it isn't even worth going to. Therefore, I have been able to successfully expand my days that I don't need an alarm to four from two. Cha-ching.


"You see that guy over there. That's my econometrics professor. Nice guy and all, but if a pin drops he'll hear it and wait at least thirty seconds before restarting class."
October 6, 1:06 P.M.
Driving on Curtin Road

I'm waiting in class now for what seems like ever. Tick, tick, tick. The ruffling of newspapers has the Dutch professor in a silent uproar. I can only imagine what was going on in his head as someone tried to enter my row and accidentally uttered the words "Excuse me" too loudly. He stared at the young man for what seemed like an eternity before looking up and continuing. Econometrics is a nice course and all but it'll probably be something I'll never use, despite being the most important course an Economics major takes. You see, after my freshman year I was in such a rush to get out of Education that I went to the first thing that appealed to me. Economics seemed like a good choice because it was enough to keep me interested and hard enough to the average student to make me feel like somewhat of a badass when I told people my major. Problem is, I really didn't know what the fuck I was getting myself into. Economics is more of a technical discipline in the sense that economists do the boring statistical and graphical work while the finance people sell the product we recommend and make ten to fifteen times what we do. Thankfully(or maybe not so), I've always wanted to be on the financial end of things. I look up and it's almost 2:15. I have successfully daydreamed my way through another class.


"The most fascinating question about our own minds just might be if we can really be sure of anything."
October 6, 2:42 P.M.
Hosler Building

Finally, a class I can pay attention in: Philosophy. As a young daydreamer(way back in my high school days) I often thought about majoring in Philosophy, yet I was led to the conclusion that if I did I would just think about things all day. Considering this is what I usually did all day(I was much less social then than I am now) I decided that I wanted something more people related. Back to today though. For whatever reason, today's lecture seemed to resonate with me a lot more so than usual. Most of the time, I'll listen to my professor for a solid minute and a half and then zone out for five minutes. That's pretty much the way the first month and a half of lectures had gone in that class. However, today was different. Dr. Fisher stepped out of in front of the safe haven of his computer and instantly seemed less like a blabbering fool and more like an average man. No longer did he appear like an arcane philosopher, but rather a human that was trying to get us all to understand that the problems faced in philosophy are intense and sometimes scary, but that they are necessary for us to consider as humans. He fielded questions and even allowed us to give our own opinions on the mind body problem. All in all, a lecture that I could actually relate to.


"Let's go down to the weight room before I punch someone."
October 6, 7:30 P.M.
State College Park

It's funny how girls can bring out the best and the worst in us. In one sense, when you finally meet a girl you like it seems like there's some kind of obstacle in the way to get what you both want. So often we lie in that odd place that neither one wants to risk losing the friendship by venturing into the dating phase, yet both still have this weird attraction to each other. And often times teetering on that fine line leads us to overthink and occasionally overreact to situations.


"I guess he's just trying to find himself. I think we all are really."
October 6, 9:15 P.M.
State College Park

College is one of the rare times in our lives that we can actually learn more about ourselves from other people than we can from just being alone. It's a place that takes acne ridden youngsters and produces freshly minted adults. I can honestly say that I learned about ten times more outside of the classroom last year than I did in it. And believe me, I feel that I made great strides last year in understanding what I wanted to do with the rest of my life. Still though, I think that I made even greater strides in finding out what kind of person I wanted to be and how I could get there. It's just the getting there part that can be aggrevating.


"It's not until late at night that I really start to think about the way that things could have been."
October 7, 1:38 A.M.
State College, PA

As those parting words left a friend's mouth(or IM box), I began to reflect on the way that things could have gone for me in the past. The question that I always get back to is whether things happen as part of a greater plan or if we're able to make that plan ourselves. As I look back, I realize that a lot of things that happened to me weren't fair, but they were necessary. Throughout broken promises and broken hearts I've learned about the dark, dark side of human nature. On the other hand, through strengthened friendships and difficult times I've learned that the Great Balancing Act goes both ways. We just need to hope we're on the right end of the beam that day.