60 Second Economist

The causes of the crisis remain ambiguous, with many theories and assumptions offered by economists and governments around the globe. While a significant amount of literature has been published regarding the attributing factors of the 2008 financial crisis, this article attempts to simplify them into a few basic points:

1. The collapse of the Icelandic Banking System

2. Speculative asset demand a.k.a. The UK’s Bank Run

The Icelandic Banking crisis has been cited as the flashpoint for the recession hitting Europe; the three biggest Icelandic banks collapsed in the wake of substantial difficulties in refinancing short-term debts. This led to detrimental effects to the UK’s economy, where over GBP 840m had been invested in Icelandic banks by local and federal authorities.

Speculative Demand is defined as the demand for financial assets which is not otherwise affected by actual transactions. For example, if, say… a well-known news provider reported on a bank applying for a liquidity loan from the Central Bank of England because it was unable to repay short-term loans attributed from the massive reduction in demand for securitisation of sub-prime mortgages, it sends a clear message out to the bank’s customers, who then decide that it would be most prudent to withdraw their savings from said bank with great urgency. More customers, privy to the withdrawal habits of their fellow account-holders, decide to jump on the withdrawal bandwagon to safeguard their savings.

This is precisely what occurred in the case of Northern Rock, with the BBC’s Robert Peston reporting on the bank’s predicament, leading to the bank’s run and its subsequent nationalisation. The bursting of the US’s subprime mortgaging bubble was a key player in this sordid affair of imprudent choices; look out for this in the next few posts.

Guest Post by Clement Chew

In southern and eastern England we’ve had exceptionally two dry years since records began. With no way of knowing what mother nature will bring us, Thames Water, along with others have introduced “temporary use bans”. To you and me that means hosepipe bans.

So after this, The 60 Second Economist is left with a dilemma.

Do I water my garden or break the law?

In recent days we’ve seen huge amounts of rainfall so lots of people have been moaning about this so called “drought”. However remember you don’t cure a water shortage with some April showers neither do you get a water shortage from a dry week. We take averages over an entire year.

There’s a flaw with the water ban; it targets how the water is transported not its consumption.  It basically says you can flush your toilet 2000 times but risk getting a fine for using a hosepipe to wash your car. But then no fine for using buckets and buckets of water to clean your car.

There are even loopholes* within the law:

• You can power wash your patio if healthy & safety concerns you.
• Fountains may flow if they lead to a pond containing goldfish.

You get the idea how we can make the law work around our own needs & desires.

From an economics point of view rationing is a crude solution, instead we should incentivise the use of less water-CentreForum, a think-tank, also thinks the same.

Lets have a basic rate for the first X litres anyone uses. From there onwards increase the rate for every extra Y amount. Commercial water users would then pay more for using more and domestic users can still do basic things like wash and bathe.

Of course this may mean installing metres in every household-which can be costly but in the long run it should pay off.

*Loopholes pointed out by The Economist (Print Edition)

What the 60 Second Economist is referring to is your economic Vote.

Believe it or not the economic vote has influence on politics and the economy.

Each £1 (or penny) spent is an economic vote.

Every time you spend some amount of money at your local supermarket you are essentially giving your vote to that company to stay in business over its competitors.

However, many “economic voters” become disenfranchised – resources go to where demand and profit is highest. What we mean here is that the poorest may not have much voting power in this kind of democracy.

Yesterday, someone (we’ll call him Bob) asked me if I had a commenting feature on this blog. Unfortunately as great as Tumblr may be, they dont have a commenting system.

Looking at this from a purely economic perspective, I was the supplier of content and Bob was the consumer. It seemed that Bob was over demanding…hence we were not operating at the equilibrium of the demand and supply curves.

I have managed to tweak the system to allow commenting on posts for readers.

The personal cost to me of making this happen was about half an hour of my time spent trying to fiddle with code. I could have spent that half hour doing something else. (A decision had to be made so a matter of opportunity cost) However I decided that the marginal social benefit was much more greater than my marginal private cost.

Lets take a look at what the potential benefits could be:

• Bob is happy that I’ve fulfilled his request
• Bob is an engaged reader of my content & may even share this with his friends
• The commenting feature encourages conversation and creates a real “buzz”.
• I gain more visitors and readers
• My blog stands out from the other Tumblrs

So clearly the beenfits outweight the costs.

Maybe this would be a great time to express my gratitude.

Thank You Bob

A bit more about the new features (this is the techy stuff NOT economics, I wouldn’t really bother reading it)

1. Realtime comment system - Comments become more like live discussions with realtime posting and updating.

2. Notification and reply system - The notification system lets you know when you’ve received a response. Best of all, you can continue the conversation straight from the email.

3. Inline media embedding - Full integration with media services such as Youtube, Flickr, and more. Attach media such as photos and videos right within the comments.

4. Social integration - Full integration with Facebook, Twitter, and more. Login, comment, and share using social services you already use and love.

….just click at the bottom of the posts where it says ” ← Click to leave a comment” and away you go.

LOOK THERE ↓