I Don't Understand Economics

[JtB]

Seems to me that much of the current economic downturn was caused by irresponsible lending and people borrowing beyond their means. Why then are governments trying to solve the current crisis by encouraging even more lending? I was brought up to 'save and buy' rather than 'borrow and buy' and it seems to me that we wouldn't be in such a mess today if we weren't such a credit driven society. Sure, governments want to stimulate the economy by making more credit available so that people can start spending again, but I can't help feeling that encouraging people to live even further beyond their means will only serve to make the problem worse in the long term. Shouldn't governments be taking substantive steps to encourage saving rather than reducing the bank base rates which sure hurts savers? As the thread title says, I don't understand economics.

 

[another_dave_b]

I think the actions of the UK government are being driven more by short term political calculation, rather than the long term economic good of the country. Plus ca change.

 

[alecstilleyedye]

the economy won't recover if everyone starts saving, it's known as "the paradox of thrift". whilst frugality and saving are of themselves seen as laudible, if people aren't spending, then the amount of money in the economy lessens, and businesses go under, increasing unemployment etc etc.

 

[ChrisKH]

Don't confuse the study of economics with real economics which in reality no one has a clue how to manage. Otherwise we wouldn't be in this sh position as economists would be telling the government what to do to put things right. Well they are, it's just that economists are like politicians; they all take a different view on what will work.

 

[another_dave_b]

the economy won't recover if everyone starts saving, it's known as "the paradox of thrift". whilst frugality and saving are of themselves seen as laudible, if people aren't spending, then the amount of money in the economy lessens, and businesses go under, increasing unemployment etc etc.

But if saving doesn't increase, banks will never be able to increase their reserves, which as I understand it, they need to.

 

[simoncc]

Nobody understands economics including those who claim to.

 

[Quoth]

But if saving doesn't increase, banks will never be able to increase their reserves, which as I understand it, they need to.

You're absolutely correct. After the wild years of untamed lending, the banks have swung in the complete opposite direction and they're holding onto whatever cash comes their way. But no credit means no house sales, no car sales and no investment money for businesses. People lose their jobs as a result.

All this means that the recession gets worse, leading to more bad debts, driving the banks to restrict credit even more. And round and round we go...

It's a classic no-win situation. A Catch-22. A vicious circle!

The thing is, banks are now doing their jobs properly - they're weighing up the risks and lending prudently. Why would they give someone a 95% mortgage when they know houses will likely be worth 30% less by 2010?

Edited for clarity

 

[gavintc]

My daughter has recently finished her MA in Economics, so I asked her a similar question. It seems that UK economics are based on a spend system not a save system. We need to keep spending to keep the system alive. She compared it with Canada - a save system. They have developed their system where people put money away for the long term. Apparently changing from a spend to a save regime is good, but will be painful. Not surprisingly Canada is surviving the current recession better than we are.

 

[yello]

I have never neither understood economics nor wanted to.

It reminds me of a drunken argument I had many many years ago, as a sincere young thing, with someone doing an economics degree. I shan't bore you with details but he used the phrase 'but you don't understand' quite a bit. But he didn't understand that I didn't have to understand the theory to judge the results.

 

[beanzontoast]

[python] What has economics done for us? [/python]

People who need and want to save are being penalised for doing so with poor interest rates.

At a time when the average person hasn't 'spare' money to spend, economists are saying it's imperative that we spend for the sake of the economy. Spend what? The 2.5% VAT cut hasn't made me feel richer, and won't encourage me to buy anything I wouldn't have bought before.

Listening to reports on tv, seems to me that ecomomics has become reactive rather than proactive nowadays. They're fighting fires.

 

[cheadle hulme]

People who need and want to save are being penalised for doing so with poor interest rates.

People who wish to save can do so. If central bank is willing to lend at zero cost, why would a bank pay interest to savers?

The price paid to savers has dropped because the demand for their assets has dropped.

The demand/supply/price equation is one of the few economic theories that bears scrutiny.

 

[asterix]

Saving is a bit like critical mass. Once you have enough saved, banks want to know you and investment gets easy. Reaching that point is the problem.

 

[beanzontoast]

People who wish to save can do so. If central bank is willing to lend at zero cost, why would a bank pay interest to savers?

The price paid to savers has dropped because the demand for their assets has dropped.

The demand/supply/price equation is one of the few economic theories that bears scrutiny.

True - which may partly explain the rise in the sale of home safes. What's the point of saving with an institution, letting them use your money and make profits for themselves by doing so, if you're getting little or nothing back in return?

 

[Cycling Naturalist]

Anatole Kaletsky, the Times Economics Editor (you can take all the stuff about having a mind the size of a planet as read) was urging the government to introduce a tax on bank deposits. Needless to say, he'd failed to realise that this would simply cause a run on the banks as everyone tried to get all their money out.

 

[cheadle hulme]

True - which may partly explain the rise in the sale of home safes. What's the point of saving with an institution, letting them use your money and make profits for themselves by doing so, if you're getting little or nothing back in return?

There isn't one. Part of the theory being that investors seeking positive returns will invest in business instead.

Some naive investors are also coming back to the BTL market .

I'd be too worried about a fire to trust keeping cash in the house. Kruggerands buried in the garden for me.

<<goes off to change log in name>>