Economists are supposed to be interested in money. (If so why did I become an economist, particularly an academic one?) Well compared to most people I am very interested in money, maybe not so much having it but the actual coins and bills. I am facinated by little factoids like more US currency circulates outside the US than inside. (How do they know, I wonder.) Or a large percentage of $20 bills have trace amounts of cocaine on them from the drug trade.
James Lileks is an writer I like reading. He is always coming up with weird stuff including this site that has pictures of interesting bills. Take a look at some strange money.
Thursday, March 22, 2007
Wednesday, March 14, 2007
SubPrime Lenders
In recent days the stock market has reacted quite negatively to problems "Subprime" lenders have been having. Subprime lenders specialize in home mortgage lending to borrowers with credit problems. The lenders have been raking in the bucks due to heavy fees and high interest rates. The loans are usually sold to someone else so that the lender can keep on making loans.
For a while the game worked. As long as housing prices were rising then if a borrower got in trouble he could sell the house, pay off the loan (and perhaps some penalty fees as well) and even pocket a little cash. However, in many markets, home prices have been stable or even falling. Now if a borrower gets in trouble and can't make payments he is stuck. If the borrower sells the house he takes a loss, especially with all the commissions and fees. These borrowers most likely can't afford a loss, they are not top notch remember, so they hang on to the house until the lender forecloses.
So the lender now has a house that is probably not worth the loan it made which eats into those profits obtained earlier. Well, this is bad for the lender and would explain why the stocks of those lenders are dropping but why stocks in general?
Well, those foreclosed houses must be sold which further depresses housing prices. Falling prices cause a drop in sales. Sellers don't want to sell when they see prices are too low. Buyers are happy to wait for lower prices in the future. Housing sales drag along a lot of other spending as well, new appliances, furniture, carpet, and stuff that people have to have to make the new house complete. Hence, stock traders are worried that these subprime problems will spread into the rest of the economy. Chances are they probably won't but stock traders are entirely focused on the future.
For a while the game worked. As long as housing prices were rising then if a borrower got in trouble he could sell the house, pay off the loan (and perhaps some penalty fees as well) and even pocket a little cash. However, in many markets, home prices have been stable or even falling. Now if a borrower gets in trouble and can't make payments he is stuck. If the borrower sells the house he takes a loss, especially with all the commissions and fees. These borrowers most likely can't afford a loss, they are not top notch remember, so they hang on to the house until the lender forecloses.
So the lender now has a house that is probably not worth the loan it made which eats into those profits obtained earlier. Well, this is bad for the lender and would explain why the stocks of those lenders are dropping but why stocks in general?
Well, those foreclosed houses must be sold which further depresses housing prices. Falling prices cause a drop in sales. Sellers don't want to sell when they see prices are too low. Buyers are happy to wait for lower prices in the future. Housing sales drag along a lot of other spending as well, new appliances, furniture, carpet, and stuff that people have to have to make the new house complete. Hence, stock traders are worried that these subprime problems will spread into the rest of the economy. Chances are they probably won't but stock traders are entirely focused on the future.
Thursday, March 1, 2007
Markets on the Cheap
Sometimes I'm asked how do I get into the stock market? My advice would be to start reading business and financial news and get used to the terminology as well as the ebb and flow of the markets. However, if you want to gain some experience trading with real money on the line (not a lot) check out the Iowa Electronic Markets. There are marekts for the upcoming Presidential election, Federal Reserve Policy, and even a market for bird flu. You can open an account for as little as $5.
Wednesday, February 28, 2007
It's Not Easy Being Green
My favorite magazine has the wonderful title of "The Economist". The website is www.economist.com Actually it is a British news magazine something like Time or Newsweek. (With one exception, unlike Time or Newsweek you are unlikely to read about where is Anna Nicole Smith's body in The Economist.) The reporters for The Economist are anonymous, only when they retire do they get a byline. The Economist now has a blog, Free Exchange which like the magazine has some interesting articles.
Recently there has been controversy over Al Gore's house. It seems that Mr. Gore uses more electricity in a month than the average family in a year, which is a tad inconsistent with reducing global warming. Free exchange weighs in on the controversy pointing out unintended consequences of trying to be "carbon neutral". Here is the post.
Recently there has been controversy over Al Gore's house. It seems that Mr. Gore uses more electricity in a month than the average family in a year, which is a tad inconsistent with reducing global warming. Free exchange weighs in on the controversy pointing out unintended consequences of trying to be "carbon neutral". Here is the post.
Wednesday, February 21, 2007
Economics of Speed Traps
Perhaps you know of places or town that have a reputation of being "speed traps". There is one town in Texas that would save everybody time if the cops would just take VISA on the spot. Well economists are fond of determining if something causes towns to rigidly enforce traffic laws. The following is an except from a paper (HT Tyler Cowen)
Speeding tickets are not only determined by the speed of the offender, but by incentives faced by police officers and their vote maximizing principals. Our model predicts that police officers issue higher fines when drivers have a higher opportunity cost of contesting a ticket, and when drivers do not reside in the community where they are stopped. The model also predicts that local officers are more likely to issue a ticket when legal limits prevent the local government from increasing revenues though other instruments such as property taxes. We find support for the hypotheses. The farther the residence of a driver from the municipality where the ticket could be contested, the higher is the likelihood of a speeding fine, and the larger the amount of the fine. The probability of a fine issued by a local officer is higher in towns when constraints on increasing property taxes are binding, the property tax base is lower, and the town is more dependent on revenues from tourism. For state troopers, who are not employed by the local, but the state government, we do not find evidence that the likelihood traffic fines varies with town characteristics. Finally, personal characteristics, such as gender and race are among the determinants of traffic fines.
That is from Thomas Stratmann and Michael Makowsky, both at George Mason. Here is
the paper.
Speeding tickets are not only determined by the speed of the offender, but by incentives faced by police officers and their vote maximizing principals. Our model predicts that police officers issue higher fines when drivers have a higher opportunity cost of contesting a ticket, and when drivers do not reside in the community where they are stopped. The model also predicts that local officers are more likely to issue a ticket when legal limits prevent the local government from increasing revenues though other instruments such as property taxes. We find support for the hypotheses. The farther the residence of a driver from the municipality where the ticket could be contested, the higher is the likelihood of a speeding fine, and the larger the amount of the fine. The probability of a fine issued by a local officer is higher in towns when constraints on increasing property taxes are binding, the property tax base is lower, and the town is more dependent on revenues from tourism. For state troopers, who are not employed by the local, but the state government, we do not find evidence that the likelihood traffic fines varies with town characteristics. Finally, personal characteristics, such as gender and race are among the determinants of traffic fines.
That is from Thomas Stratmann and Michael Makowsky, both at George Mason. Here is
the paper.
Tuesday, February 13, 2007
Labratories of Democracy
It has been said that states are "Laboratories of Democracy", places were ideas can be tested. If the idea is worthy, other states can copy it or it can be implemented nationally. On the other hand, if the idea is a loser, at least only a relatively few people are harmed.
Well this idea comes from the state of Wisconsin. Put this in the "free lunch" category. It seems the Governor of Wisconsin wants to tax oil companies but not have any of the tax passed on to consumers. Specifically,
The tax would be 2.5% - or currently $1.50 - per barrel of oil meant for sale in Wisconsin.
Usually, a tax of this magnitude would raise gasoline prices 3-4 cents per gallon. Should those nasty oil companies try to raise prices then,
If oil companies passed the tax on to consumers, the firms could be fined for the gains from the price increase or company officials could face the jail time.
My Mother used to say if you are going to criticize something offer at least one suggestion for improvement. So here goes. If the Governor of Wisconsin wants to raise money from oil companies without those companies passing on part of the tax to consumers he should propose a law that says for this time and this time only we will tax you say 10 cents a gallon for every gallon of gasoline you sold last year. Now I won't guarantee that prices will not rise, but it would not be profit maximizing if they do, assuming firms are maximizing profits now. (It is a fixed cost, unrelated to current output.) Of course, when people do this they get sent to prison for robbing convenience stores.
Well this idea comes from the state of Wisconsin. Put this in the "free lunch" category. It seems the Governor of Wisconsin wants to tax oil companies but not have any of the tax passed on to consumers. Specifically,
The tax would be 2.5% - or currently $1.50 - per barrel of oil meant for sale in Wisconsin.
Usually, a tax of this magnitude would raise gasoline prices 3-4 cents per gallon. Should those nasty oil companies try to raise prices then,
If oil companies passed the tax on to consumers, the firms could be fined for the gains from the price increase or company officials could face the jail time.
My Mother used to say if you are going to criticize something offer at least one suggestion for improvement. So here goes. If the Governor of Wisconsin wants to raise money from oil companies without those companies passing on part of the tax to consumers he should propose a law that says for this time and this time only we will tax you say 10 cents a gallon for every gallon of gasoline you sold last year. Now I won't guarantee that prices will not rise, but it would not be profit maximizing if they do, assuming firms are maximizing profits now. (It is a fixed cost, unrelated to current output.) Of course, when people do this they get sent to prison for robbing convenience stores.
Monday, February 12, 2007
A Blogger I Read
One of my favorite bloggers isMarginal Revolution. Take a look around. Here is an article the MR pointed to about trees and incentives.
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