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Classroom vs. real world

The scramble for American Eagles and other bullion coins continues on the market. Supplies just don’t keep up with the insatiable demand from buyers who believe they are a hedge against the financial crisis afflicting the country.

Perhaps the interesting thing revealed by the news media in the last few hours is the level of skepticism expressed by average Americans about the crisis. Calls to Washington, D.C., congressional offices seem to be running against the bailout proposal of the Treasury secretary and the chairman of the Federal Reserve.

Is this an example of the “What, me worry?” attitude of Mad Magazine’s Alfred E. Neuman? Is it disbelief that a crisis exists? Or is in disbelief that the bailout will do any good?

All of the above?

When I was taught economics in college 35 years ago, the professors often mentioned how much more economically sophisticated we were today as compared to the time of the Great Depression when the Federal Reserve and the Treasury did not act to prevent the 1929 stock market crash from becoming the Depression it became with unemployment at a quarter of the work force in 1933 and a home foreclosure level that is used as a yardstick of horror in the present day.

Are we witnessing the fact that we are not any more sophisticated than we were in 1929 and further action to try to prevent the serial collapses of banks will not be taken?

Bullion coin buyers seem to be saying that with their money.

What would my professors say now?

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One Response to Classroom vs. real world

  1. Scott in DC says:

    One of the issues that we are seeing is that the current crisis is based on the transactions of commercial paper. Commercial paper are securities created out of the promise of money to be gained from collecting mortgages. When the promise to pay goes away because of foreclosure or default, the shares become worthless. When enough of the shares become worthless, the commercial paper risk goes up and becomes worthless.

    Your economics professor from 35 years ago should have taught you the concept of TANSTAAFL: There Ain’t No Such Thing As A Free Lunch. It is never free. Someone has to pay. That’s the problem with creating this commercial paper. While it looks like a free lunch, someone has to pay for it in the end. Credit looks like a free lunch until margin call.

    Your economics professor would say that we did not learn enough from the credit crisis that started the Great Depression. They would have pointed to the derivatives mistakes of the early 90s or the manipulation of savings and loan securities in the late 1980s and said we did not learn from our mistakes.

    Your economics professor would look at the people running for gold, silver, and other tangible assets reminding how lessons were not learned, credit isn’t a free lunch, and that the taxpayers are once again asked to bail out those who do not deserve it in order to prevent the rest of us from crashing under the house of cards they built.

    I hope someone learns from this and that whatever the government does, the mortgage backed securities are unraveled where the securities are backed by the real estate and not paper. Then change the rules that prevents real estate to be turned into paper for it to be diluted through the system for a fast buck.

    For now, it’s margin call and the taxpayers are left holding this bag.

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