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CNBC had an interesting program on the current financial crisis. They located one investor who noticed that since the late 1990's housing prices have been growing 10 percent every year (that is, each year, the average home price is 1.1 times the average price in the previous year) while income was only increasing by 5 percent each year (that is, each year, the average income was only 1.05 times the average of the previous year).This simple question goes right to the heart of the financial collapse. I would only add that, not only did this particular investor make billions off this observation, but our whole economy lost trillions, because the vast majority of financial decision makers were either unable or unwilling to make this same observation.
Explain why it is "absolutely clear that this situation could not go on forever", in the words of the investor (who made over a billion dollars because of this observation).
(Anyone who needs help with the mathematics of this problem can meet me in the comments.)
our whole economy lost trillions
ReplyDeleteThat's patently false. Our whole economy didn't have those trillions to begin with, and just finally got around to using the uncooked books.
It's true in the sense that our government is now trillions more in debt from bailing out said economy. The "real" economy also lost real money when credit stopped flowing.
ReplyDeleteSo even though the money made by the financial sector was illusory, the crisis they caused lost real as well as illusory money.