Professor Timmy's Rants and Raves

AXIOM #1 Recessions are a Normal Part of the Business Cycle. Booms and Busts are as old as the data available. The business cycle is something that every economy must go through. Although the news media outlets treat a recession as abnormal, to an economist it is as normal as a person exhaling. Because we have had an extremely good run of growth and productivity for the past 20 years, now that we are entering into a recession, there is a temptation to liken it to the depression of the 1930’s. This is a mistake. Things won’t get that bad. AXIOM #2 Banks make money by lending money. Just like a landscaper needs to plant trees and trim shrubs to keep his business going and a baker needs to bake and sell loaves of bread to keep her business going, a banker needs to lend money to keep his business going. Even though there is a “credit crunch” going on now, it can’t go on forever. Eventually, banks have to make loans. The lack of lending we are witnessing now is simply a normal activity of

Every banking crisis we have ever experienced has its roots in the unchecked explosion of credit, this occurs without regard to people's ability to pay off the debt or a reasonable risk assessment. Lately we hear about how the poorly administered loans in the subprime mortgage mess has cripled many credit markets in the United States. Well, I'm not so convinced that these bad loans are the culprit. Maybe they are just a convenient target. After all, the public always wants to find a bad guy to blame. According to the Federal Reserve, only 14% of the total mortgage market is categorized as subprime. So what do the numbers actually tell us? How many defaulted mortgages are there truly? How many more mortgages should we expect to default? It's really some simple accounting. The article written by former hedge fund manager and Wall Street analyst, Tom Brown maps the data out logically. He calculates a loss rate that tells us what % of the mortgages out there will default. He l

The word "economics" is derived from the Greek "oikonomikos", which means skilled in household management. Although the word is very old, the discipline of economics as we understand it today is a relatively recent development. Modern economic thought emerged in the 17th and 18th centuries as the western world began its transformation from an agrarian to an industrial society. One day a professor of this emerging science thought, "Hmmmm. If we complicate this, we might be able to force the local university to teach this in business programs and employ us. Why we might even be able to write a textbook that no one can understand but us." Then Voila, Economics as a study was born. See it's all about job security. Now that wasn't so hard to understand, was it?