Category Finance
Random Thoughts
Sometimes my brain can't concentrate on any one topic long enough to write a serious post. Or maybe I just don't know enough to give a good answer to some question I want to answer. So here is a random collection of thoughts:
House price risk is negative covariance with your PV desired rents
If you buy a house, the risk is minus the covariance between the price of the house and the present value of the rents of the house you would desire to live in. I disagree with Felix Salmon. Strangely, Felix seems to have misplaced the significance of an idea he had earlier: we are born […]
Car insurance, home ownership, and efficient markets
I don't insure my car. Well, I have liability insurance, but I don't insure the car itself. So if I drive it into a ditch, or it gets stolen, I have to pay to repair or replace it, out of my own pocket. Why did I take this decision? I could have estimated the probability […]
Why do (bad) banks (really) matter?
I'm going to put forward two perspectives on why bad banks might be important in understanding the recession: an orthodox perspective; and a heterodox perspective.
Reflections on teaching very basic finance to first year economics students
Today I taught basic finance to my first year economics class. We don't have time to cover all the micro chapters, so have to skip some. In the past we skipped the finance chapter. This year we decided to include the basic finance chapter, and skipped consumer choice (indifference curves and budget constraints) instead. That […]
Money, banks, loans, reserves, capital, and loan officers
Anyone who has taken ECON1000 has probably seen the simple model of how banks create money in a fractional-reserve banking system, and how an increase in reserves creates a multiple expansion of loans and the money supply. An alternative approach, cogently argued in comments here by JKH, says that it is bank capital, not reserves, […]
What’s the optimum net worth of a charitable organisation/university?
Last night I was chatting with someone who works for a think-tank. I work for Carleton University. We both work for charities. Like households, firms, and governments, charities have income and expenses, and a net worth. Consumer choice theory tells us, at least in principle, how much people should save, and what the optimum net […]
That’s not shadow banking, that’s the stock and bond markets
Paul Krugman has a flow chart showing flows of savings from ultimate lenders to ultimate borrowers. One arrow goes via the banks. Paul labels it "traditional banking"; that's fine. People deposit their savings in banks, and the banks lend those savings to other people or firms. But a second arrow goes directly from "the public" […]
Does CMHC have big enough reserves?
This post is more of a bleg; because I'm sure someone reading this knows more about the answer than I do. An insurance company doesn't need reserves if it is insuring a large number of short term uncorrelated risks. The Law of Large Numbers ensures that its annual claims will equal its annual premiums, if […]
A “proof” of Say’s Law; and why money is weird
For a whole economy, does planned expenditure on newly-produced goods necessarily equal planned income from the sale of newly-produced goods? That's what I mean by "Say's Law" in this context. Say's Law is wrong, and the fact that it is wrong is really important for macroeconomics. But it's not obvious why Say's Law is wrong. […]
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