Ask an Economist (Post #1005 and counting)

[Homie]

I am hilariously bad with money and have no natural sense for finance or economics. My first question is, am I right to think that some people simply have a better head for this or do you think it is just a matter of having sufficient interest in the subject and working hard to develop the necessary skills, with a generous sprinkling of experience?

I ask this because my second question depends on whether a money-moron like me can learn how to handle capital. For a financially-******** college student that is just entering sophomore status and whose financial history consists of getting a job and a bank account and living paycheck-to-paycheck, would taking an introductory class in economics be helpful? Are there better options? Are there books you can recommend for someone who just wants to start building a stronger foundation for his future financial security? Like Suze Orman: is she full of crap or helpful?

I get a deer-in-the-headlights look as I try to read much of this thread, and your website, while very interesting so far, is equally baffling to me. I'd appreciate even the most basic advice.

Taking econ courses is not gonna help you manage your money better, that is not really what econ is about. It is about allocating resources in a way that optimizes social welfare, and parameters need to be in place to achieve this.

If you want a better financial situation then make more money and spend less money.

 

[Bill3000]

If you want a better financial situation then make more money and spend less money.

You're a real John D. Rockefeller.

 

[Whomp]

One of the best money managers ever, Peter Lynch, once said "spend at least as much time researching a company as you would choosing a refrigerator".

Do you want to own businesses or loan to businesses? Both have their advantages and disadvantages. This boils down to your temperment which is more important than how smart you are about investing.

I would suggest Peter Lynch's book "One up on Wall Street". His ideas are timeless and more importantly simple.

For now, I'd focus on your education since it will be the best investment you'll ever make since it pays dividends for perpetuity.

 

[Homie]

You're a real John D. Rockefeller.

Hehe, thanks A good Christian, a good entreprenur, and a net contributor to society.

 

[theskald]

Taking econ courses is not gonna help you manage your money better, that is not really what econ is about. It is about allocating resources in a way that optimizes social welfare, and parameters need to be in place to achieve this.

If you want a better financial situation then make more money and spend less money.

I was hoping that taking an Econ 101 course might help me to familiarize myself with the terminology so I could better understand what goes on in the world of finance. It's all Mongolian to me, that is how little I know... And I've got spend less going but the "make more" part is gonna be tough.

One of the best money managers ever, Peter Lynch, once said "spend at least as much time researching a company as you would choosing a refrigerator".

Do you want to own businesses or loan to businesses? Both have their advantages and disadvantages. This boils down to your temperment which is more important than how smart you are about investing.

I would suggest Peter Lynch's book "One up on Wall Street". His ideas are timeless and more importantly simple.

I like simple, that sounds like a good place to start. Thankfully I'm still a full-time student but I figure I should start learning how to be a good capitalist now.

For now, I'd focus on your education since it will be the best investment you'll ever make since it pays dividends for perpetuity.

Please say "education" is the name of a publicly traded company with currently cheap stock.

 

[Mise]

If you want to read a book that's worthwhile I also recommend "The Black Swan" as I started a thread on black swans but received a fair amount of abuse for it at the time.

I think half of the abuse was because it really, really annoyed Europeans.

I won't pretend to have read it, but it seems that, at least some of those, people who have read it (not just on this forum) point to every apparently inexplicable event and say, "omg black swan!!!", or "omg this book PROVES that all economists are wrong!!!"

I'm always wary of books that have that effect: that "enlighten" people, and "see the world as it really is". Authors are out to sell copies, and are (quite naturally) intent on presenting their ideas as fact -- especially in disciplines such as finance, and especially when their "controversial" ideas "defy conventional wisdom". I'm sure he says some true things, and I'm open to the possibility that he's right (again, not having read it myself...), but I'd rather learn about it from someone who wasn't out to prove a point, you know? I just can't trust those people...

 

[Hygro]

I read the Black Swan and I'm still excited to study econ read it, it's a great book

 

[JerichoHill]

What are your opinions on the big bailouts that are being proposed right now? Good idea, bad idea? Best we can do in a bad situation? If you don't think they should happen, is there an alternative that you'd suggest? If you do think that it should go through, what controls would be a good idea to ensure that this doesn't happen again a decade or two down the road?

There will be a bailout of some form, almost has to be, given the cascade of effects we would have from fallout if we didn't. We're look at something like the S&L Crisis. Hopefully the politicos grow a backbone and have this plan: We'll float out the money to oil the machine and we'll take the bad mortgages. In exchange, we'll take equity stakes in your companies, you'll reform the time horizon outlook for your executives, agree to *reforms* yada yada yada. As for the future, PROACTIVE leadership is all that is necessary. None of this bass ackwards reactive stuff.

Is it possible to be poor enough to not be able to afford medication in to get medicaid while at the same time being able to afford timesharing?

It's possible to spend money unwisely.


@@theskald
Economics isn't about financial acumen or good personal finance hygiene. Yes, to be a good economist you need intuition and strong math skills. Basic economics courses get you to think about opportunity costs of other alternatives.

For better personal finance hygiene, become a regular reader of the blog in my signature and blogs in our network. If you join our forums there you'd get to talk to personal finance planners and money minded folks.

We recommend the following books in this thread. They're a good start.

http://www.getrichslowly.org/blog/2...nce-library-25-of-the-best-books-about-money/

 

[theskald]

@@theskald
Economics isn't about financial acumen or good personal finance hygiene. Yes, to be a good economist you need intuition and strong math skills. Basic economics courses get you to think about opportunity costs of other alternatives.

For better personal finance hygiene, become a regular reader of the blog in my signature and blogs in our network. If you join our forums there you'd get to talk to personal finance planners and money minded folks.

We recommend the following books in this thread. They're a good start.

http://www.getrichslowly.org/blog/2...nce-library-25-of-the-best-books-about-money/

Thank you very much for your reply, I'm thankful for the help as I would not describe my math skills as "strong," but it's good to know I can at least learn to be better with my money.

 

[DNK]

A question about "value added". If, say, construction of homes adds $500bn to the economy and the financial retail sector adds $1.5tr to the economy in VA terms, what just happened there?

Is this effectively people putting $500bn worth of construction labor in that then got used for three times as much retail labor/resources? Does this mean the aggregate cost of housing = materials + VA labor + VA retail services? Why is financing and selling the house worth more than building the house?

Edit: I understand VA isn't just the labor cost, but the increase in value created by the labor.

 

[Homie]

I just sat in on a presentation of what is happening with the housing "crisis" and the bailout or lack thereof. What I got out of it was pretty much this:
1. The bust is not as serious as people make it out to be. Yes, it is a downturn but it is nothing compared to the Great Depression, like some people make it out to be.
2. Some people say that deregulation of the banking system is the cause of this mess. What deregulation, said the panel of professors. Not since Bill Clinton partly deregulated the banking sector in 1991 have we seen a deregulation of the banking sector. In fact, we have seen increased regulation. Apparently a lot of the procedures that banks go through before granting a loan were racist and discriminatory against urban minorities (i.e. black people). Such as:
- Credit history checks
- Income in comparison to size of loan
- Savings
(These are by memory, there might be other measures that were deemed discriminatory as well)
These are all important things to check for if you want to hand out a loan. Banks don't hand out loans to be nice, they do it because they expect you to pay them back, with interest, so they can make a profit. So if they don't think you'll pay them back they won't give you a loan. But if the government is tying the banks hands in determining whether someone is a risk or not, the banks will give out bad loans, loans that won't be paid back.

What say ye, econ and finance people?

 

[Homie]

Oh, and point 3:
There should be no bailout. By bailing out you are only postponing this recession for a worse one down the line.

 

[Theige]

Apparently a lot of the procedures that banks go through before granting a loan were racist and discriminatory against urban minorities (i.e. black people). Such as:
- Credit history checks
- Income in comparison to size of loan
- Savings
(These are by memory, there might be other measures that were deemed discriminatory as well)
These are all important things to check for if you want to hand out a loan. Banks don't hand out loans to be nice, they do it because they expect you to pay them back, with interest, so they can make a profit. So if they don't think you'll pay them back they won't give you a loan. But if the government is tying the banks hands in determining whether someone is a risk or not, the banks will give out bad loans, loans that won't be paid back.

What say ye, econ and finance people?

If that is true it completely defies all common sense. I can't imagine anyone with any kind of understanding of banking would call those measures discriminatory.

It seems to me that banks just got greedy. Some far more than others.

 

[Mountain-God]

If that is true it completely defies all common sense. I can't imagine anyone with any kind of understanding of banking would call those measures discriminatory.

It seems to me that banks just got greedy. Some far more than others.

It's discriminatory it's just the right kind of discriminatory.

 

[DNK]

What percentage of the current US deficit gets monetized and what gets bought? How is the deficit playing into the overall inflation picture, and how will the bailout inflate the money supply? Which money supply do you look at when determining "inflation" - M2?

I don't quite understand the full nature of what's going on here:

Sept. 29 (Bloomberg) -- The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

What's the actual effect of this on inflation and how are these two forms of liquidity creation creating money?

 

[Princeps]

1. The bust is not as serious as people make it out to be. Yes, it is a downturn but it is nothing compared to the Great Depression, like some people make it out to be.

If the financial sector -- a heart of sorts for capitalism -- remains mired, I can't see why this crisis doesn't have the potential of getting worse. Although, I agree, it will not reach the proportions of great depression.

Not since Bill Clinton partly deregulated the banking sector in 1991 have we seen a deregulation of the banking sector.

The 1999 Gramm-Leach-Bliley Act, which broke down barriers between banks, securities firms, mortgage lenders and insurance companies, is often cited as an example of such deregulation. That deregulation repealed great depression-era bank regulations with the approval of former president Bill Clinton. Although I suspect whether GLB act was a major cause in any of this crisis: I think the failure to regulate and the lack of appropriate regulation (not deregulation itself) was probably more significant.

In fact, we have seen increased regulation.

Now, as for "increased regulation", I think you're referring to the Community Reinvestment act, which in fact, had a slightly alleviating effect on the housing crisis.

 

[Mise]

2. Some people say that

Strawman strawman strawman strawman strawman strawman strawman strawman strawman strawman strawman strawman strawman strawman.

 

[Homie]

Strawman strawman strawman strawman strawman strawman strawman strawman strawman strawman strawman strawman strawman strawman.

I just looked up strawman in wiki to be sure, and as I suspected my quote is not a strawman at all. How would you come to this conclusion? It was definitively not intended as a strawman and I don't see why anyone would consider it one.

 

[Mise]

I just looked up strawman in wiki to be sure, and as I suspected my quote is not a strawman at all. How would you come to this conclusion? It was definitively not intended as a strawman and I don't see why anyone would consider it one.

I don't know exactly how the lecture went, but as it's above written, it looks like 1) and 2) were used to assert some kind of credibility behind what the lecturers were saying and disparage "some people" who held opposing views. To paraphrase w/ poetic license:

1. It's not as bad as the Great Depression, so fixing it shouldn't cost a lot of money. People who want the bailout say that it's really bad; they are wrong.
2. Some people (i.e. the people who want a bailout) say X. X is clearly wrong. So people who want the bailout are wrong.
3. The bailout won't work. It costs a lot of money, and people who want the bailout were wrong about some things.

2) is a strawman because it argues against one thing, and (apparently) draws a conclusion related to another thing. "Some people say" is a common way of setting up a strawman. It's used in politics a lot...

 

[Murky]

Given the current financial crisis and massive deficit where should the government look to cut spending first?