Central to the distrust and hate that we see on Prime Time Television, in documentaries, and even on bumper stickers is a misunderstanding of the primary goal of finance. This goal is risk management. The most important part of the finance sector is to hedge against risk. We want to spread it out over as many people as possible so that when economics shocks and the ups and downs of the business cycle so occur, everyone shares the financial burden that this may cause and therefore everyone suffers less because it is spread out over many many people.
So, when a person benefits while everyone else is losing on their investments we shouldn't hate him for it. He has managed his risk more efficiently than others. Imagine two men working at two different firms, one man loses his pension, and the other one does just fine with his. We wouldn't assume that the man who's pension came through was clearly evil.
Diversification is an aspect of risk management.
There are assets which pay out when the business cycle is up, and assets that pay out when there is a recession. This is because financially minded people hedge against the business cycle. This relates to the "toxic assets" because many people think that financiers "bet" on the failure of these assets. They did not bet that people would not pay their loans back.
When the FED bought as many of the subprime assets as they could to get them out of the market the FED actually ended up making money. What does this mean? This means that FED spent
$1.25 trillion to buy agency Mortgage Backed Securities to get them out of the market and they made hundreds of billions of dollars in profit, which will turn into losses once the interest rates go up. The goal of quantitative easing (QE) is to keep the FED posting profits until the economy can handle the losses. The idea is that a stronger economy will make the interest rates go up which would cause those losses. This would mean that QE has been successful and hopefully this is how it happens. You can look at a graph of projections in the below article.
http://www.economist.com/news/finance-and-economics/21570753-what-happens-when-fed-starts-losing-money-other-side-qe
Is it now toxic to loan to people with bad credit? So many in this nation have bad credit, that we cannot overlook their desires to buy homes. They were just hedging against risk. Portfolios generally, almost always, have something like this that makes sure they don't just get a good payoff when the business cycle is peaking, but also some stuff to make sure that they also have income when there is a recession. That is when you really need money right? So your financial advisor, or broker had better be doing this for you.
So, when a person benefits while everyone else is losing on their investments we shouldn't hate him for it. He has managed his risk more efficiently than others. Imagine two men working at two different firms, one man loses his pension, and the other one does just fine with his. We wouldn't assume that the man who's pension came through was clearly evil.
Diversification is an aspect of risk management.
There are assets which pay out when the business cycle is up, and assets that pay out when there is a recession. This is because financially minded people hedge against the business cycle. This relates to the "toxic assets" because many people think that financiers "bet" on the failure of these assets. They did not bet that people would not pay their loans back.
When the FED bought as many of the subprime assets as they could to get them out of the market the FED actually ended up making money. What does this mean? This means that FED spent
$1.25 trillion to buy agency Mortgage Backed Securities to get them out of the market and they made hundreds of billions of dollars in profit, which will turn into losses once the interest rates go up. The goal of quantitative easing (QE) is to keep the FED posting profits until the economy can handle the losses. The idea is that a stronger economy will make the interest rates go up which would cause those losses. This would mean that QE has been successful and hopefully this is how it happens. You can look at a graph of projections in the below article.
http://www.economist.com/news/finance-and-economics/21570753-what-happens-when-fed-starts-losing-money-other-side-qe
Is it now toxic to loan to people with bad credit? So many in this nation have bad credit, that we cannot overlook their desires to buy homes. They were just hedging against risk. Portfolios generally, almost always, have something like this that makes sure they don't just get a good payoff when the business cycle is peaking, but also some stuff to make sure that they also have income when there is a recession. That is when you really need money right? So your financial advisor, or broker had better be doing this for you.
Sometimes people hate finance simply because making money is considered evil. Why? Is it because of the growing income inequality in our nation? Probably. When the public does not understand an issue they tend to look for someone to blame because when faced with such painful poverty, how can someone in good faith take the salaries and profit bonuses that banks and wall street often pay out.
That is not a rhetorical question. The answer is because graduates from Business School borrow on average $69,637 (at a second-tier MBA program) and borrow on average $117,200 to get an education from Wharton. That's right this is average debt upon graduation, not the cost to attend.
http://poetsandquants.com/2013/03/19/mba-debt-burden-rises-again/
So, with a growing income inequality what are we to do?
I know this is silly, but I feel that referencing Atlas Shrugged is pertinent. I was watching the film adaptation. I think this part was lost on me when I was fourteen reading the novel, but it really highlights the current issue. Hank Rearden is having the little party to celebrate his new lighter metal he invented. He is approached by Philip who works for a non-profit and agrees to give him a check for $100,000.00. Philip then asks if it can be cash because Rearden is not a popular figure in the public eye and he wants Rearden to anonymously donate.
This is a magic moment for me because it indicates how important big business and the finance sector is to the world and the love hate relationships that develop. We need your money, but we hate ourselves for needing it.
How about this myth: businesses make money by exploiting workers?
There is much too much to be said on this topic, but as a student of economics the most important issue to me is efficiency. When a firm does well through the process of profit maximizing through cost minimizing and also by innovating, they can get to a point of being the most profitable firm in an industry. For those who don't study econ: Profit= (quantity sold *unit Price) - (cost of producing a unit * quantity produced)
So by reducing the cost, they can obviously increase the profits and this means that the firm is making more of a profit because they have increased their efficiency. Maybe they have a newer technology of how to produce, or a way to better utilize every unit of their inputs. No firm should ever be punished for that, because then they would stop trying to be innovate and minimize costs and therefore be wasteful and it would lead to productive inefficiency.
There is so much more to be said about such a huge topic, but that's it for now.
That is not a rhetorical question. The answer is because graduates from Business School borrow on average $69,637 (at a second-tier MBA program) and borrow on average $117,200 to get an education from Wharton. That's right this is average debt upon graduation, not the cost to attend.
http://poetsandquants.com/2013/03/19/mba-debt-burden-rises-again/
So, with a growing income inequality what are we to do?
I know this is silly, but I feel that referencing Atlas Shrugged is pertinent. I was watching the film adaptation. I think this part was lost on me when I was fourteen reading the novel, but it really highlights the current issue. Hank Rearden is having the little party to celebrate his new lighter metal he invented. He is approached by Philip who works for a non-profit and agrees to give him a check for $100,000.00. Philip then asks if it can be cash because Rearden is not a popular figure in the public eye and he wants Rearden to anonymously donate.
This is a magic moment for me because it indicates how important big business and the finance sector is to the world and the love hate relationships that develop. We need your money, but we hate ourselves for needing it.
How about this myth: businesses make money by exploiting workers?
There is much too much to be said on this topic, but as a student of economics the most important issue to me is efficiency. When a firm does well through the process of profit maximizing through cost minimizing and also by innovating, they can get to a point of being the most profitable firm in an industry. For those who don't study econ: Profit= (quantity sold *unit Price) - (cost of producing a unit * quantity produced)
So by reducing the cost, they can obviously increase the profits and this means that the firm is making more of a profit because they have increased their efficiency. Maybe they have a newer technology of how to produce, or a way to better utilize every unit of their inputs. No firm should ever be punished for that, because then they would stop trying to be innovate and minimize costs and therefore be wasteful and it would lead to productive inefficiency.
There is so much more to be said about such a huge topic, but that's it for now.