THE FIRST STUDENT TO POST A COMMENT WHICH CORRECTLY LINKS EACH QUOTE TO AN ASPECT OF THE CREDIT CRUNCH WILL GET A PRIZE!!!!!!!!!!!!
1) "If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has."
2) "The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again."
3) "If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well tried principals of laissez-faire to dig the notes up again ...... there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. "
1) "If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has."
ReplyDeleteAnswer: Excess borrowing without the ability to pay back
2) "The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again."
Answer: Keynes is criticizing the belief that inflation would acceptably control itself without government intervention. The lack of government intervention in the economy and financial sector was one of the reasons for the current credit crunch crisis.
3) "If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well tried principals of laissez-faire to dig the notes up again ...... there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. "
Answer: The heart of the Keynesian philosophy is that what drives the economy is demand for goods. Economic recessions are predominantly the result of insufficient demand. In the Keynesian framework an increase in demand not only lifts overall output but that output increases by a multiple of the initial increase in demand. Within this framework something can be created out of nothing.
- Tang
Yes, that's all true, but what I want is an explanation of real-life aspects of the current crisis which can be linked to the comments Keynes made.
ReplyDeleteLike you did with the second quotation but for all of them.
ReplyDeleteI have some thoughts about first quote. There is a charge for owing to a bank, obviously. If you owe relatively small amount of money, bank can force you to pay it back with some interests. But if the amount is very high, you cannot pay it back, so you default on this debt and interests on it. In this case, the bank cannot do anything with you but get some assets from which really worth far less than the amount you owed to it. Therefore, the bank has lack of money, it has problems. It just simply said, but there are problems with bad debts for banks.
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ReplyDelete1) "If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has."
ReplyDeleteAnswer: Excess borrowing without the ability to pay back. This was what happened that resulted in the sub-prime mortgage and credit crunch crisis. Many of these people who were borrowing money from the bank were unemployed, do not have a good credit history etc. but banks still loan them the money assuming that property prices would rise and they would be able to pay back but that was not the case. As a result, many banks suffered huge amount of bad debts which led to the current crisis.
2) "The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again."
Answer: Keynes is criticizing the belief that inflation would acceptably control itself without government intervention. The lack of government intervention in the economy and financial sector was one of the reasons for the current credit crunch crisis.
3) "If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well tried principals of laissez-faire to dig the notes up again ...... there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. "
Answer: The heart of the Keynesian philosophy is that what drives the economy is demand for goods. Economic recessions are predominantly the result of insufficient demand. In the Keynesian framework an increase in demand not only lifts overall output but that output increases by a multiple of the initial increase in demand. Within this framework something can be created out of nothing. The demand for goods was demonstrated by the rush in loans for house mortgages earlier which led to the current crisis. The current global economic recession is a result of insufficient demand as banks are now over-cautious on loans and credit which then affect firms and businesses which require loans to finance their day to day running. One way of increasing demand as well as lifting overall output is through government stimulus package, essentially giving money to consumers to spend more, boosting the economy. Another way has been to been increase public spending on public projects such as infrastructure (e.g. railways, telecommunication systems, development of properties etc.) Through the various initiatives such as government stimulus packages which put more money into the hands of the public and public spending on public projects which helps to create more jobs and keep people employed, it would inject more cashflow into the economy, thus improving and reviving the economy. When these happens, it increase the general public sentiment of an improving economy and as a result, it would prompt more people to get back to spending and investing their money. This is an example of increases by a multiple of the initial increase in demand.
Sanzhar, I agree with your comments but we can take it one step further. The bank has the problem if lots of people owe it money, but it all the banks have this problem, it then becomes the problem of the whole economy.
ReplyDeleteWell done Hsin Qin, you will receive your prize next week.
ReplyDeleteThis means the competition is now closed (not that many people seemed to be interested in it!)