there's only so much you can learn from a
book, but a documentary The Inside Job shows us the era of un-fair trade-offs, where people want power and take 'insane' decisions to maximize their profit, not their utility, but their PROFIT . Why do I say that we fall into manipulations of the system? Because our money isn't always used as we think it is. Banks don't work for the people to boost the economy; instead, they can sometimes crash it. | Yesterday, if I was asked why the market crashed in 2008 I would have just stood there, blank, with no clue of even what the market crash was, but today I got to understand that the pursuit of the economy is leaded by the wrong incentives--It's, as I stated in a previous post, a game played wrong. The idea that most called my attention was how conflicts of interest where somewhat ignored in society yet these affect everyone. But which one am I referring to? the demolition of theglass-steagall actlegislation that said that banks had to be regulated by the government and couldn't merge. Despite this set "rules" lobbyists, as always, did everything for the pay and convinced the government they where reliable enough to be independent. |
remember the assumption:
"every one will act according to their desire to be better off."
Lets take an example: HOME BUYERS. In this time period, people started buying homes and as the banks lowered the requirements to give out loans for their own benefit every one was able to buy one EVEN the ones who couldn't pay it back! And the banks knew!! In fact, they didn't care, they just wanted more people to fall into it. Predatory loaners dived with fury for the task and simply tried to get as many people as they wanted, because as they gave out the loan and sold it to the investment bank they where automatically saved from the risk and won a portion of their money that went straight to their pockets. Of course investment banks where not stupid (economists are clever people), they knew this bundle of loans (called CDO's) these loaners where selling where extremely bad investments. But then again: THEY DIDN'T CARE. | Remember the concept of supply and demand? Well, what happened as more people bought homes: consequently the demand incremented and the curve shifted, the prices GREW. As naked economics states, humans tend to believe that a pattern will remain constant even if facts and data state the contrary. The catch is that people supposed the value on houses would continue incrementing, so they kept purchasing these, even if they DIDN'T need one, with money they DIDN'T have because they planned on selling them for a greater value in the future. |
At the end, the inflation of demand in home's had caused them to be over valued , sticking to a high and fake price such that the home buyers couldn't afford to continue paying for the loans to reach that target price. They stepped out, or found themselves in debt. The bubble popped, the money these banks where playing with was not real and people lost it all, prices crumbled. A house that was supposedly $50,000 was actually $20,000 the demand curve was way out of proportions. |
SO, why do
demand curves actually shift?- Population increases, more immigrants
- More jobs, the economy is actually flourishing and people actually have the money to buy
C O L L A P S E. At the end, banks fall into a crisis and who bails them out? The government. With OUR money, the one we spend on taxes.