Finance Economics And The Economic Crisis
- Posted by admin on September 25th, 2009 filed in Business and Management
Finance economics looks at the allocation of resources over time; in an uncertain environment. It examines how money is traded now to create money in the future. It tries to gauge the amount of money transferred into the future, based on risks and uncertainties. It looks at how one party of the transaction can make a decision to affect the future outcome of the money transfer. And lastly, it examines how certain knowledge of the future can reduce uncertainty. A number of new economics books are focusing on how the calculations may have been off, leading to the current recession. A number of voices were calling out the warnings all along, it seemed, but they were drowned out by others who were overtly confident that the system itself could never fail.
Nobel prize winning economist Myron Scholes argues that it’s not the models of financial economics that failed us here, but rather, the improper practices of Wall Street and the legislators who allowed them to run too far. Financial firms plugged in data reflecting “a view of the world that was far more benign than it was reasonable to take, emphasizing recent inputs over more historic numbers,” explained Scholes. He said a lot of the models were dead-on and most derivatives and securities performed exactly as predicted, but a few of the exceptions proved disastrous. Since 1998, Scholes had been warning his colleagues about the risk that liquid markets could dry up suddenly and without warning and that individual decisions made in the financial sector could have a great impact on the larger economy as a whole.
One of the criticisms of finance economics and macro economics theories is that it never considers how the inner-workings of financial institutions can impact the larger economy. “That’s the view of microeconomics theorists,” they scoff. In turn, micro-economists are looking at how financial institution decisions affect consumer spending and behavior, rather than scaling up. In 2000, Franklin Allen, president of the American Finance Association, asked the question, “Do financial institutions matter?” He quickly added that most people would be surprised to learn “that institutions play little role in financial theory.” At the time, his assumptions may have been correct, but today the banking system and financial economics are inextricably linked. Even questions as small as “How much should bankers be paid” can affect the loans available to consumers, which in turn affects consumer spending, which in turn can inflate or deflate the American economy.
Beth Kaminski is the co-author of Curing Your Anxiety And Panic Attacks which detailed treating panic disorder as well as tips on the various medications for panic disorder available at anxietydisordercure.com.
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