This is where we put the discussion about the survey. Right now, this website is not accessible to the public: when we have the content up, we change the status of the website to “public” and it can be viewed without the password.
Former GE CEO Jack Welch elaborates further on his suspicions about the recent unemployment report which put the unemployment rate below the important psychological threshold of 8%.
Economics blogger Megan McArdle lays out the case for the report being valid: why cook the books in such a weak manner so close to the election?
This week in the History of Financial Crises class, we’ve been looking at some early market bubbles and crashes, in particular the Mississippi bubble in France and the crash of the South Sea Company in England in 1720. These two early bubbles in many important ways set the pattern for future bubbles and crashes.
Case in point: the collapse of the stock price of Facebook since its initial public offering last May. Shares are down 45% since their debut, and in all likelihood are heading much lower. How did this happen? The story is both amusing as well as revealing: Bloomberg has a longer article spelling out the details, as well as this good summary.
Now, the obvious difference is that, unlike the Mississippi and South Sea Bubbles, which bankrupted the countries of France and England respectively, this is only impacting shareholders: but, it’s interesting to note the parallels in the role of expectations, rumors, and speculative mania over time.
We used this clip of Harry Potter going with Hagrid into Gringotts for the first time in class Monday to illustrate the point about the differences between a medieval and a modern bank (as part of a larger discussion about the very medieval approach to money the wizards had.
What would cause a run on a bank like Gringotts—how would it be different than the run on the Bailey Building and Loan in It’s a Wonderful Life?
Bank runs provide a dramatic spectacle of one of the most dangerous phenomena in economics: a panic reaction based in the sudden loss of confidence in a financial institution.
Probably the bank run scene that is most famous from American popular culture is this scene from the classic holiday movie It’s A Wonderful Life:
Probably the other most famous scene is from Mary Poppins, when the boy starts a bank run by accident when he won’t deposit his tuppence so he can feed the birds: I would post that one but youtube is failing me.
Deposit insurance was the innovation that was designed to put an end to a bank run. Banks pay money into a government-run pool, which then provides money back to banks if they are unstable to give customers confidence in the bank. There is no need to withdraw your money as its guaranteed. It’s a way to force strong banks to support weaker banks, which in the process helps the strong banks by keeping faith in the whole system. Deposit insurance solves the collective action problem at the root of fractional reserve banking.
The problem that Europe is facing right now is much harder to address: what happens if consumers lose confidence not in the banks, but in the soundness of the financial position of the country and currency itself?
Case in point, Spain:
“The macro situation in Spain is getting worse and worse,” Mr. Vildosola, 38, said last week just hours before boarding a plane to London with his wife and two small children. “There is just too much risk. Spain is going to be next after Greece, and I just don’t want to end up holding devalued pesetas.”
Mr. Vildosola is among many who worry that Spain’s economic tailspin could eventually force the country’s withdrawal from the euro and a return to its former currency, the peseta. That dire outcome is still considered a long shot, even if Spain might eventually require a Greek-style bailout. But there is no doubt that many of those in a position to do so are taking their money — and in some cases themselves — out of Spain.
In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks — an amount equal to 7 percent of the country’s overall economic output — as doubts grew about the durability of Spain’s financial system.
The withdrawals accelerated a trend that began in the middle of last year, and came despite a European commitment to pump up to 100 billion euros into the Spanish banking system. Analysts will be watching to see whether the August data, when available, shows an even faster rate of capital flight.
More disturbing for Spain is that the flight is starting to include members of its educated and entrepreneurial elite who are fed up with the lack of job opportunities in a country where the unemployment rate touches 25 percent.
Consumers reacting to save the value of their money isn’t the root of the problem: the root of the problem is the fear over the soundness of the currency based on the long-term fiscal problems of the Eurozone states.