Thursday, November 5, 2009

Guest Blogger Thursday - Keon & How to Fix the Economy (Part 1)

DUM-DUH-DUH-DAH . . . better late than never, right??? More than 2 years after the founding of the Scooter and Keon blog, after having been called out by Scooter noting that the blog had Keon Clark but no Keon Weigold…..after Scooter pretended I had written on the blog by posting the synopsis of a conversation we had had discussing our Australian Open favorites...and after Scooter finally gave up and renamed his blog, deleting my name from the title...Keon has finally arrived and written a blog entry. Maybe now that I finally broke down and posted something, maybe I will become the regular contributor that Scooter intended that I should be back at the founding of this blog.

As an additional sidenote before I address the subjects mentioned in my title, as I sit here in Hamilton, NY with a nice mix of snow/rain falling, I have to respond to Amanda’s blog post a few weeks ago and my wife’s Facebook status update of earlier today complaining about the snow. I’m ecstatic that the snow is finally arriving in Upstate New York and that this means the depressing season of Fall is finally going to be gone. There are only two good things about Fall in my opinion. First, the anniversary of my wedding to my amazing wife that was on October 11th (yes honey if you read this I put our anniversary before the sports). Second, the beginning of football and especially hockey season. 

However, the fall weather and its place in nature’s lifecycle both mean it must be the most depressing season. Everything is dying, the trees, although nice with the colors for a time, are soon bare and the weather is cold. My opinion has always been that if the trees are not going to have leaves and it is going to be cold, then please, please let their be snow falling to make everything look pretty. It is my personal opinion that as soon as the leaves on the trees are dying, it might as well be snowing 24/7 until the weather warms up and the green things start growing again in the spring. Now, I’m not requesting blizzards all winter long but I’d like a nice gentle snowfall continuously to make the whole world look beautiful with a layer of fresh snow at all times.

Now onto the main topics of my post. As a 20-something with a bachelor’s degree in both Philosophy and Political Science and a J.D. with a concentration in International Law who has been unable to find a full-time job for the past 4 months as well as having taken 3 college-level economics classes, I declare myself at least as competent as the majority of the journalists currently writing on the subject to address the problems with the current global economy. (Or maybe I’m just desperate for a job so I’m writing this out of a need for self-preservation)

All of us have certainly been affected in some way or another by the global economic crisis of the past year or so, and if not we all at least know someone who has been. Now I’m not claiming to have a magic solution but I do believe I have some insights on what some of the problems are and ways we might be able to come up with a better system.

1. The causes of the crisis. It has become pretty obvious that the current financial crisis originated on Wall Street and in the other global financial exchanges and radiated outward from there. It is also a pretty basic idea in economics that both the stock market and the global economy work on a spiraling basis. That is to say that as they go up, the more they go up and as they go down, the more they go down. The reason for this is that much of the operation of the financial market depends on placing what are essentially bets on the future of the financial market. In other words, a person or company invests in a stock because they believe it will go up. A bank loans money to a business because they believe that the business will succeed and will be able to pay back that loan and the accompanying interest.

In general, the economy will tend to spiral up on this basis because the more money invested or loaned, the more money that can be made and everyone is happy. However, every investment entails risk, and that is where the problem begins. One common way that investors use to hedge their risk is a method of investment called short-selling. In order to keep this from getting too technical, I will simply explain short-selling by saying it is a means for investors to make money by betting that certain stocks will go down. More on this in a bit. The other important consideration of risk is that the better the economy is, the less risk-averse that investors, especially banks, become. And as long as the economy continues to get stronger, no one gets hurt and everyone makes more money.

However, once one big bump in the road happens, in the case of the present crisis it was the sub-prime mortgage crisis and the rapid increase in oil prices last year, then all of the excess risk that was taken on by major financial institutions turns from being profit into gigantic losses which cascade from institution to institution and the financial markets and therefore the economy as a whole begins its downward spiral. Adding to this downward spiral is the practice of short-selling I mentioned earlier, as soon as everyone can be pretty certain that almost all investments are going to be decreasing then short-selling becomes the primary, and perhaps only, way of making a profit. However, because short-selling means investors are betting that prices will decrease, the practice itself causes prices to decrease and the downward spiral increases at an ever-increasing rate.

In addition, the global mass-media reporting on the economy has the effect of amplifying the spiraling effects. In essence, the more the media reports that the economy is getting worse, the less willing people are to invest and spend, and the worse the economy gets. One solution to this problem, which is not so appetizing to those of us who treasure the ideas of free speech and freedom of the press, would be to only allow positive reporting on the economy, which would have the effect of increasing investment and spending and therefore help the economy improve. For example: Stocks surge on jobs data, Cisco forecast. However effective such a policy might be, it is not really feasible.

Part II will be available next week once again in the Guest Blogger spot, so check back then. I'm in the middle of working at my part time job and it's back to work for now.

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