BU UEA Journal (Spring 2013)

Letter from the Editor
Dear Reader, I am happy to state that the Boston University Undergraduate Economics Association (BU UEA) has had another fantastic semester. We have had a few firsts this year from hosting many new student presentations, reaching a milestone of 30,000 views on our website to hosting our very first case competition. We even had a professor debating the usefulness of mathematics in economics! This semester also showcased the talent of our writers as we have had a number of fantastic articles tackling complex questions and ideas. This semester our writers have looked at a wide range of topics ranging from current events to a more theoretical scope. These students have utilized theories from economics, history, finance, international relations and politics to answer these difficult questions and present them in a form that anyone can understand. We have had students debate about the causes of the U.S. housing bubble to a more theoretical discussion on innovation efficiency. BU UEA is happy to showcase these great pieces that have required a lot of time and effort to prepare. We hope you enjoy the articles from the semester of spring 2013.
Daniel Christopher Currie President Boston University Undergraduate Economics Association (BU UEA)
Table of Contents
PREFERENCE FALSIFICATION AND TURKISH REVOLUTIONS ......................................................................................... 4
HAITI AND FOREIGN AID ................................................................................................................................... 14
THE U.S. HOUSING BUBBLE .............................................................................................................................. 18
THE VOLATILITY PLAYBOOK ............................................................................................................................... 36
COIN CURRENCY, THE REEMERGENCE OF AMERICAS METALLIC MONEY .................................................................... 42
HOW INFLATION MATTERS................................................................................................................................ 47
UNDERSTANDING THE PROCESS OF INNOVATION: INNOVATION EFFICIENCY ............................................................... 49
4 | Preference Falsification and Turkish Revolutions
Preference Falsification and Turkish Revolutions

Daniel Currie
The Turkish protests have captured much of the news since it began. What started off as a peaceful protest to stop the demolition of Taksims Gezi Park for a new mall has turned into a widespread movement across 48 cities in Turkey1. Many of the protestors are calling for the end of an authoritarian regime that is impinging upon the basic freedoms that the populace holds in high regard. The protests initially started from 50 environmentalists on the 28th May 2013, to more than a thousand in a couple of days. The mobilization of the protests caught everyone even scholars by surprise2. What is it that constantly makes people surprised about widespread protests? Why do people never seem to predict revolutions? Two theories of revolutions, relative deprivation theory3 and preference falsification4, will be looked in detail in order to explain our inability to predict when a revolution or mass protest will commence.
Uras, Umut. What Inspires the Turkeys Protest Movement. Al Jazeera. 05 June 2013. Web. http://www.aljazeera.com/indepth/features/2013/06/20136513414495277.html 2 Rodrik, Dani. "Turkeys Protests Send a Strong Message, But Will Not Bring Democracy." June 4, 2013. http://rodrik.typepad.com/dani_rodriks_weblog/2013/06/turkeys-protests-send-a-strong-message-but-will-notbring-democracy.html. 3 Davies, James. Toward a Theory of Revolution. California Institute of Technology, 1962. 4 Kuran, Timur. The East European Revolution of 1989: Is it Surprising that We Were Surprised? . working paper., 1991. . Kuran, Timur. Now Out of Never: The Element of Surprise in the East European Revolution of 1989 . Duke University, 1991. .
Firstly, let us go through the events that led to this current predicament in Turkey. It all started with protests by 50 environmentalists against construction of a mall on Gezi Park as it is one of the few parks left in Istanbul. However, the police stormed in and rid the park of the protestors using tear gas and water cannons5. This act of brutality caught the population by surprise and the anger reached a vital point. Soon, what started off with 100 grew into a force of 1000 people6. All different political parties joined in, even the labour unions took two days off to aid the protestors7. A protest against the demolition of the Gezi Park soon led to calls for Erdogan to step down from power and this led to violent clashes between the police and the people. Till now, over 4000 people have been hurt and over 900 arrested; three have died8. The woman in red picture encapsulates what the protest is all about9:
The Women in Red. This infamous picture showcases how a woman is blasted with tear gas.
What remains a shocking tale is how during the first few days of the protest CNN turkey showcased a documentary of penguins while the rest of the world was watching the people challenge government control10. Clearly, with all that has taken place, Prime Minister Erdogan was stunned by the
5 6
Uras, Umut. What Inspires the Turkeys Protest Movement. Al Jazeera. 05 June 2013. Web. Ibid. 7 Turkey protests continue despite apology Al Jazeera. 06 June 2013. Web. http://www.aljazeera.com/news/europe/2013/06/20136551212442132.html 8 Democrat or Sultan The Economist. 08 June 2013. Web. http://www.economist.com/news/leaders/21579004recep-tayyip-erdogan-should-heed-turkeys-street-protesters-not-dismiss-them-democrat-or-sultan 9 Hudson, Alexandra. Turkey Protests: Woman In Red Becomes Symbol for Istanbuls Female Demonstrators Huffington Post. 03 June 2013. Web. http://www.huffingtonpost.com/2013/06/03/woman-in-red-becomesleit_n_3380755.html 10 Rabanea, Zeynep Zileli. Why Turks are good at Protesting Al Jazeera. 13 June 2013. Web. http://www.aljazeera.com/indepth/opinion/2013/06/201361113388747184.html
huge protests because he earlier dismissed them as extremists and vandals11. Erdogan even had to arrange for his trip to North Africa to be cut because this protest was the first major challenge to his rule12. Yet, there is an underlying meaning to all of this protest, let us explore what this is Many of the protestors have argued that their freedoms have been impinged upon. Over time Prime Minister Erdogan has become more autocratic in nature as he has publicly criticized the content of some TV shows, made frequent statements opposing alcohol consumption, and spoken out against public displays of affection.13 There have been many cases of Erdogan limiting freedom of speech in the country as journalists who criticized the government have been arrested 14 while the Turkish Media Group was fined $2.5 billion for being too critical of the Erdogan government15. Clearly, frustration among the people has been brewing over time. One only needs to look at the recent The Economist front page to understand what the Turkish people may think of Erdogan:
Hint: The Turkish people dont seem to think that Erdogan is Democratic enough.
11 12
Ibid. Amanpour, Christiane. Turkey looks for Legitimate Protests CNN. 12 June 2013. Web. http://edition.cnn.com/2013/06/11/world/europe/turkey-amanpour 13 Uras, Umut. What Inspires the Turkeys Protest Movement. Al Jazeera. 05 June 2013. Web. For more information Cook, Steven & Koplow, Michael. How Democratic is Turkey Foreign Policy. 03 June 2013. Web. http://www.foreignpolicy.com/articles/2013/06/02/how_democratic_is_turkey 14 Bilefski, Dan. Changes Against Journalists Dim the Democratic Glow in Turkey The New York Times. 04 January 2013. http://www.nytimes.com/2012/01/05/world/europe/turkeys-glow-dims-as-government-limits-freespeech.html?pagewanted=all&_r=0 15 Arsu, Sebnem & Tavernise, Sabrina. Turkish Media Group is Fined $2.5 billion The New York Times. 09 September 2013. http://www.nytimes.com/2009/09/10/world/europe/10istanbul.html
With all the surprise surrounding the protests let us unearth why it is that some protests can grow so large even turning into full-blown revolutions. Relative Deprivation Theory The main aspect of this theory comes from the paper by James Davies written in 196216. His theory is very interesting and something many people may state to be the reason why many protests and revolutions occur. According to the Oxford dictionary a revolution is a forcible overthrow of the government or social order, in favour of a new system.17 Turkeys mass protests may never be called a revolution, but the theory can be used to explain why these protests grow so big in a short period of time. Davies mentions that once the populace has a taste of the better life and continues to achieve this then they would be afraid of any reversal of fortunes. When people suddenly notice that the growth of prosperity is under threat they will try to their best to remove the impediment to their economic and social success namely a revolution. According to Davies, revolutions are most likely to occur when a prolonged period of objective economic and social development is followed by a short period of sharp reversal. The all-important effect on the minds of people in a particular society is to produce, during the former period, an expectation of continued ability to satisfy needsand during the latter, a mental state of anxiety and frustration when manifest reality breaks away from anticipate reality.18 Davies need satisfaction theory is explained by Figure 1.
Figure 1: Need Satisfaction and Revolution.
16 17
Davies, James. Toward a Theory of Revolution. California Institute of Technology, 1962. Oxford Dictionaries Online. http://oxforddictionaries.com/definition/english/revolution?q=revolution. 18 Davies, James. Toward a Theory of Revolution. California Institute of Technology, 1962. Pg. 6
The J-Curve explains how when an intolerable gap is reached between the peoples actual need satisfaction and their expected need satisfaction, then a revolution will unfold. How can this be applied to Turkey? We have to understand whether the people actually saw their needs being satisfied with economic and social growth. Since Erdogan first became Prime Minister in 2002, Turkey in has achieved great economic growth. The countrys economy has tripled in size in a span of ten years19 and many in Washington were singing Turkeys praises20. The graph below reinforces this fact21.
Figure 2: Turkey GDP (Billions of US Dollars)
GDP per capita has also been rising over the past 10 years as Turkeys people were getting wealthier and benefitting from the economic growth22. As of December 2011, the GDP per capita reached $5700, a near 36% increase from 2000.
Figure 3: Turkey GDP per capita (US Dollars)

19
Cook, Steven & Koplow, Michael. How Democratic is Turkey Foreign Policy. 03 June 2013. Web. http://www.foreignpolicy.com/articles/2013/06/02/how_democratic_is_turkey 20 ibid 21 Trading Economics, "Turkey GDP." http://www.tradingeconomics.com/turkey/gdp. 22 Trading Economics, "Turkey GDP per capita." http://www.tradingeconomics.com/turkey/gdp-per-capita.
Using these measures we can see that the Turkish people were getting wealthier and we assume that the quality of life was improving for the population. According to Davies then there should be a sudden sharp reversal of fortunes that makes the actual need satisfaction diverge intolerably from the expected need satisfaction. Economically, the country seems to be doing very well and has weathered the financial storm of 200823. Then, looking at the graphs above we can state that there wasnt a shift in economic fortunes that could cause anxiety and precipitate a revolution. Additionally, this hypothesis does not stand the test of time because every time there would be a recession in any country there would be a revolution. There must be more than just the declining of wages to cause people to incite mass protest. There have been at least 22 recessions in the US alone and we have yet to see major toppling of governments in other countries as well24. However, many people have stated that an autocratic regime is taking the helm and many are scared that this would stifle personal liberties25. If there is a sharp reversal in personal freedoms and democracy in the country then there could be a increase in mass protest. Yet, even though there is widespread disapproval of a governments measures it does not have to cause a revolution. As I will explain later, people may be disgruntled with a government yet it takes more than just anger to cause widespread protests26. Thus, after analyzing Davies relative deprivation hypothesis we can conclude that it is not just a sharp reversal in economic and social fortunes that cause a revolution. We should look at Timur Kurans preference falsification theory. Preference Falsification Theory Professor Timur Kuran was puzzled by our inability to predict revolutions and he was deeply interested with the dissolution of the Soviet Union27. In order to explain why we will be surprised by the speed of mobilization of mass protests he came up with preference falsification. Kuran starts off by indexing society by i. So, the person that i represents can either support or oppose the government. Each person will have a private and a public preference. The private preference is the persons opinion of the government when he/she is behind closed doors. Public preference is the
23 24
Turkey Profile BBC. 05 June 2013. Web. ECR Research, "A Table of US Recessions." http://www.ecrresearch.com/world-economy/table-us-recessions 25 Westhead, Rick. Turkey Protests: What the Unrest really is about Toronto Star. 11 June 2013. Web. http://www.thestar.com/news/world/2013/06/11/turkish_police_push_into_taksim_square_with_tear_gas_rubb er_bullets.html 26 Kuran, Timur. Now Out of Never: The Element of Surprise in the East European Revolution of 1989. Duke University, 1991. Pg. 21 27 Ibid. 7-8
persons opinion of the government to his friends and the rest of society. When there is a deviation in private and public preferences then the person is said to be exhibiting preference falsification28. The size of public opposition is expressed by S. When S is at 0 then there is unanimous support for the government and when it is at 100 then there is complete opposition towards the government. As Kuran states A revolution, as a mass-supported seizure of political power, may be treated as an enormous jump in S.29 Now, what makes a person join a revolution depends on two factors the internal and external factors. The external factors of joining a revolution depend on the payoffs between punishments and personal rewards and this depends with S. Hence the larger the S the less likely that the person will be punished by the government. The internal payoff will be the psychological cost of preference falsification.30 There comes a point where the suppression of ones desires and autonomy will be too costly to bear. The more the secrets the more costly it becomes for the person to keep hidden. Since a person is indexed by i then xi is the internal payoff for telling the truth and reclaiming your personal autonomy. Or another way to think about it is the cost of constantly lying. So, we have determined that the public preference depends on xi and S. As the opposition size grows or as S grows, the external cost of joining the opposition falls below his *the persons+ internal cost of preference falsification.31 This is a threshold where the person joins the revolution and it is called the revolutionary threshold. The threshold, represented by Ti, can be quantitatively measured from 0 to 100. We can now analyze a threshold sequence: A = {0, 20, 20, 30, 40, 50, 60, 70, 80, 100) There are ten people each representing 10% of the population. So, T1 is now 0. This means that the first person already does not support the government at all while the T10 is at 100 is in full support of the government. Imagine that someone had a horrible incident with the government and then his threshold moves down because he doesnt favour the government anymore. This is what happens to the threshold sequence now: A = {0, 10, 20, 30, 40, 50, 60, 70, 80, 100)
28 29
Ibid. 17 Ibid. 17 30 Ibid. 18 31 Ibid. 18
T2 preference has now moved to 10 from 20. Since T2 is 10 and S is 10, then the person joins the protest. Now, S becomes 20 as the new person joined in32. Since new equilibrium is not sustainable because S = 20, and T3 = 20 then the third person will join in. This makes S=30 and T4 = 30, so he joins in and this builds up from one another until you get 90% of the population joining in the mass protest immediately. This fast and stunning rise in support is called a revolutionary bandwagon33. Utilizing this theory we can see how a revolution can grow at a massive pace in a short period of time. When the protestors were sitting peacefully and protesting the building of the mall we can assume the revolutionary threshold shown below: A = {0, 20, 20, 30, 40, 60, 70, 80, 90, 100) The initial protestors can represent T1 which is at 0. After some time, the protestors were bombarded with tear gas and water cannons and this news spread to people across the country. Some of the others at the revolutionary threshold of T2 = 20, had a strong disapproval of this and the threshold fell to 10. These people joined in as well. As these people joined in the S increased to 20 and T3 joined in. This continued until it reached T6. By now S=50 and the protest stops garnering anymore support. 50% of the population is suddenly protesting and many of the people who joined in were people who had a strong disapproval of the governments methods beforehand. So, they will voice their opinions of how the government was being autocratic long before. But, Turkey is a divided country which is why I have only indicated that 50% of the population have joined in. More than 50% of the voting population chose him and his party at the last election.34 So, a mini bandwagon effect took place but there is still much to happen. In the end, this theory seems to explain why so many people may join even though economic growth takes place. Additionally, Kurans theory also indicates that even though people are displeased with the government (we can assume that to be Ti < 50) it does not mean that there will be a revolution. Something has to develop or spark the revolution for people to join in. As Kuran states that a bandwagon effect may take place but only if someone else foes first35. This is why the relative deprivation theory seems to fail at explaining the fast mobilization of protest. In the end, what Turkey is going may not be considered as a revolution but Erdogan has to be careful because this is sign that once you are elected you do not get power to do as you please. You either respect what the people say or eventually you will be under a lot of pressure and the country may come to a standstill. Erdogan should keep in mind that when a presumably democratic government fails
32 33
Ibid. 19 Ibid. 20 34 Twigg, Krassimira & Williams, Nathan. Turkish Voices back Erdogan against Protest BBC. 13 June 2013. Web. 35 Kuran, Timur. Now Out of Never: The Element of Surprise in the East European Revolution of 1989 . Duke University, 1991. Pg. 22
to respond to dissent or protest, it has become a dictatorship.36 Lets see what the governments future responses will be to the Turkish protests.
Bibliography
Amanpour, Christiane. Turkey looks for Legitimate Protests CNN. 12 June 2013. Web. http://edition.cnn.com/2013/06/11/world/europe/turkey-amanpour Arsu, Sebnem & Tavernise, Sabrina. Turkish Media Group is Fined $2.5 billion The New York Times. 09 September 2013. http://www.nytimes.com/2009/09/10/world/europe/10istanbul.html Bilefski, Dan. Changes Against Journalists Dim the Democratic Glow in Turkey The New York Times. 04 January 2013. http://www.nytimes.com/2012/01/05/world/europe/turkeys-glow-dims-as-government-limits-freespeech.html?pagewanted=all&_r=0 Cook, Steven & Koplow, Michael. How Democratic is Turkey Foreign Policy. 03 June 2013. Web. http://www.foreignpolicy.com/articles/2013/06/02/how_democratic_is_turkey Davies, James. Toward a Theory of Revolution. California Institute of Technology, 1962. Democrat or Sultan The Economist. 08 June 2013. Web. http://www.economist.com/news/leaders/21579004recep-tayyip-erdogan-should-heed-turkeys-street-protesters-not-dismiss-them-democrat-or-sultan Douglass James, Politics without Violence. Christian Century, June 28, 1968. ECR Research, "A Table of US Recessions." http://www.ecrresearch.com/world-economy/table-us-recessions Hudson, Alexandra. Turkey Protests: Woman In Red Becomes Symbol for Istanbuls Female Demonstrators Huffington Post. 03 June 2013. Web. http://www.huffingtonpost.com/2013/06/03/woman-in-red-becomesleit_n_3380755.html Kuran, Timur. Now Out of Never: The Element of Surprise in the East European Revolution of 1989 . Duke University, 1991. Kuran, Timur. The East European Revolution of 1989: Is it Surprising that We Were Surprised? . working paper., 1991. . Oxford Dictionaries Online. http://oxforddictionaries.com/definition/english/revolution?q=revolution. Rabanea, Zeynep Zileli. Why Turks are good at Protesting Al Jazeera. 13 June 2013. Web. http://www.aljazeera.com/indepth/opinion/2013/06/201361113388747184.html Rodrik, Dani. "Turkeys Protests Send a Strong Message, But Will Not Bring Democracy." June 4, 2013. http://rodrik.typepad.com/dani_rodriks_weblog/2013/06/turkeys-protests-send-a-strong-message-but-will-notbring-democracy.html.
36
James Douglass, Politics without Violence. Christian Century, June 28, 1968. P. 836
Turkey protests continue despite apology Al Jazeera. 06 June 2013. Web. http://www.aljazeera.com/news/europe/2013/06/20136551212442132.html Uras, Umut. What Inspires the Turkeys Protest Movement. Al Jazeera. 05 June 2013. Web. http://www.aljazeera.com/indepth/features/2013/06/20136513414495277.html Trading Economics, "Turkey GDP." http://www.tradingeconomics.com/turkey/gdp. Trading Economics, "Turkey GDP per capita." http://www.tradingeconomics.com/turkey/gdp-per-capita. Turkey Profile BBC. 05 June 2013. Web. Twigg, Krassimira & Williams, Nathan. Turkish Voices back Erdogan against Protest BBC. 1 3 June 2013. Web. Westhead, Rick. Turkey Protests: What the Unrest really is about Toronto Star. 11 June 2013. Web. http://www.thestar.com/news/world/2013/06/11/turkish_police_push_into_taksim_square_with_tear_gas_rubb er_bullets.html
14 | Haiti and Foreign Aid
Haiti and Foreign Aid

Justin Bernardo
If there are any arguments against foreign aid, and resultantly arguments for the failures of foreign aid, Haiti is a prime example. The island 600 miles off the coast of Florida has received billions of dollars in foreign assistance, yet continues to be ranked as one of the most impoverished nation-states. This poverty has only been exacerbated by the recent infrastructural troubles that currently plague Haiti. In 2010, Haiti was devastated by an earthquake that saw the displacement of millions of Haitians. Since 2012, a confirmed hundreds of thousands of people remain displaced (although this number is more than likely much higher). Within that span of time, Haiti has received billions of dollars worth of aid (some sources amount aid to be around $12 billion, but the precise amount of aid has an uncertainty value of a couple hundred million). With so much money available, why have the Haitians been unable to see large strides in reconstruction? Where exactly has all this money gone? Firstly, recovery in Haiti is terribly complex. Marc J Cohen states in the Oxfam report that the earthquake disaster left Haiti without a government for five months, severely halting any national effort (or foreign effort) to readily and effectively dispense funds for the dozens of reconstruction projects
already planned or in effect. Of course, a crippled government would halt aid, yet what is more curious about this statement is the fact that aid was targeted towards existing projects. Simply put, aid to Haiti was divided between old and new issues. Unfortunately, the infrastructural damage sustained by Haiti was massive. Aid would be more useful to the recovery of Haiti if assistance was targeted towards infrastructure. This would decrease the amount of debris, which in turn improves the mobility of construction projects. Unfortunately, fixing Haitis woes is not as simple as refocusing the targets of foreign assistance. Haiti is also plagued by a corrupt government, as well as by local crime. This issue impedes Haitian recovery efforts, a position strongly supported in Mao McClellands Aftershock and implied in D. Sontags article Unreconstructed and Mischa Berlinkskis A Farewell to Haiti. According to Mao McClelland, the corruption amongst Haitian officials essentially makes Haitis government ineffective. She supports her positions by measuring the prevalence of rape by both lawless Haitians and police officers. If a government is to allow such crimes against humanity to persist, there must be some degree of corruption in the government. Along these same lines, Mischa Berlinski made note of the blatant difference between the Haitian government and the people they are supposed to represent. It is clearly evident that in Haiti elected officials do a poor job representing their constituency. This sentiment was also implied in Marc Cohens Oxfam report when he stated that the goals of the Haitian reconstruction effort do not include tackling injustice and poverty, a largely institutional issue. This has severely limited any action by institutions both foreign and local to disburse and allocate the resources necessary to remedy the crisis in Haiti. In addition, the institutional framework in which foreign assistance operates adds a wasteful amount of administrative costs. Many people forget that not-for-profit NGOs still have administrative costs that are deducted from donations. Increased administrative costs thus decrease the amount of potential aid able for disbursement. This coupled with logistical and legislative issues brought recovery to a standstill. Understandably, institutions, both local and abroad, questioned how foreign assistance should be implemented. Where do they start? Initially, the reconstruction of Haiti was done with the idea of build back better, a mantra associated with Bill Clinton when he led the Interim Haiti Recovery Commission. Yet this idea was never followed through as disbursed funds went largely to projects existing before the earthquake crisis. Institutions oversaw the disbursement of funds for these existing projects while limiting the role the Haitian government had in appropriating these funds. This limited the funds that could have been used to repair Haitian infrastructure. Haitians were angered by the misallocation of resources, leading many of them to believe that the white people who pledged support and aid have done so without making any lasting efforts or changes. Yet, institutions adopt this structure with much reason. Institutions should be wary of allowing the Haitian government to allocate reconstruction funds for reconstruction projects. As was well documented and expressed in McClellands Aftershock, rampant corruption in the Haitian government is predominantly a result of an elite group that is detached from the peoples they are elected to
represent (an opinion shared with Berlinski). As a result, institutions have delegated reconstruction efforts to locally based foreign groups as a way to avoid any misuse of funds. Unfortunately, this comes with the price of added administrative costs (to pay for staff and supplies), as well as a slowing of the reconstruction process brought about by added legislation (as was evident with the Interim Haiti Recovery Commission). This thus brings into question the strength of the institutional bodies involved in the reconstruction. I believe these institutions are weak and must be strengthened, specifically local Haitian offices, Haitian government, and institutions allocating foreign assistance in Haiti. First of all, the Haitians are a proud, cohesive people. Why is it then that only foreigners hold high positions in these charity groups? What image does this give the Haitian people? Furthermore, the Haitian government is widely criticized for overlooking crimes such as rape and police brutality. If recovery efforts are to proceed and residents are to take more action, then the Haitian people have to have more say in how funds are managed without fear of government reprisal. Both tasks are difficult to accomplish as this essentially means subverting the power of the Haitian president. Thus, strong structural reformation of the Haitian government must be done, accountability must be defined, and the Haitian people must be more pivotal in the allocation of reconstruction funds (i.e., be in positions of powers within the local charities). Following this line of thought, institutions can create better assistance packages. For foreign aid to be more effective, every institution must decrease their administrative costs, improve the delegation of responsibility and unite for one common purpose. Too much money is lost as excess costs of staff and supplies, hindering actual reconstruction efforts. Correcting this issue would be pivotal for increasing the benefits of foreign aid. Step 2 would be to target aid more precisely. More money needs to be spent on shelter than is currently spent. No longer is build back better the goal, rather slum upgrading. Improving upon infrastructure is necessary for emptying the streets of displaced persons from public plazas. It is also one of the primary desires of the Haitian people. Food, health and sanitation are great, but most just want adequate shelter. This homelessness problem must be solved. Current efforts are not enough (an obvious result of weak institutions and mismanagement). To conclude, all the issues with Haitis recovery effort can be summated in 3 words: institutional structural inefficiency. In part of the Haitian government, the political structure is strongly fragmented and corrupt. This reduces accountability of the crimes committed by the government as they simply do not care. Furthermore, the institutional structures of foreign and local charities are inefficient, having high administrative costs and large implementation lag. If these institutions were strengthened, if the Haitian government was held accountable, if all the political injustice and corruption was removed, then Haitian recovery efforts would propagate more readily and exponentially. Yet these internal weaknesses are not easily remedied as the characters of men are not easily changed.
Annotated Bibliography
D. Sontag, Unreconstructed: Rebuilding in Haiti Lags After Billions in Post -Quake Aid, New York Times, December 23, 2012. This article detailed the administrative failures of the Haitian recovery efforts going so far as to label the interim recovery commission as defunct. It also highlighted the many issues of fund disbursement, accountability issues, the political conflicts between the Haitian governments and the foreign donors, and the stagnating results of increased legislations and institutional delegation. Unfortunately, this article did not detail numbers as well as it could, a problem that could easily be remedied by the Oxfam report. Mischa Berlinski, A Farewell to Haiti, New York Review of Books, March 22, 2012. This article is a personal review of Haiti by a person who had lived in the nation for 5 years. As a result it was very opinionated, but the article was useful in characterizing the Haitian people, highlighting the differences between the Haitian government and the citizens they were chosen to represent and the many religious beliefs/fears that hold the country as a whole. As an opinion piece, it was biased, a sentiment that was reflected in Berlinskis own writing in the conclusion. Marc J. Cohen (Oxfam), Haiti-- The Slow Road to Reconstruction Two Years after the Earthquake, Oxfam Briefing Report, 2012 http://oxf.am/oYZ. This is a report detailing the goals of reconstruction and dividing said goals into categories: Shelter, Wash, Livelihoods. The humanitarian challenges were highlighted as well as the policies that were pursued by Oxfam reconstruction efforts. Included in this briefing are the targets that Oxfam did not aim to change which was very useful for an overall analysis of the Haitian crisis. It was a very detailed report. Mac McClelland, Aftershocks: Welcome to Haitis Reconstruction Hell, and F. Emily Lofts, Haitis AWOL Aid, Mother Jones, January 2011 This article dealt more with the political turmoil that ravaged Haiti. Included in this piece are instances of police brutality, rape and the Haitian sentiment for white people. This division between foreigners and the Haitian civilians has a lot to say about the difficulties that face reconstruction effort. Unfortunately, this piece did not relate much to reconstruction efforts, but it did strongly highlight one of the majorly fragmented institutions impeding Haitian recovery efforts, the Haitian government.
18 | The U.S. Housing Bubble
The U.S. Housing Bubble

Fadi Humaid
Abstract In the aftermath of the 2008 financial crisis, a multitude of factors and individuals were blamed for the economic fallout. The media, government officials, and poorly informed taxpayers quickly found their scapegoats. The investment bankers, financial intermediaries, highly paid executives, corporate greed, lax regulation, and laissez-fair economics were the cause of the mismanaged economy it was time to abandon free market principles to save the free market37. Many of these claims may be well intentioned, but they are dangerously misguided. The 2008 financial crisis and the economic collapse that followed were the result of the U.S. housing bubble burst. A bubble materialized by the consequences of excessive credit, poor mortgage underwriting practices, and a system that was encouraged to take disproportionate risk by both the Federal Reserve and federal government policies.
37
George Bush. Dec. 16 , 2008
th
It follows, that the 2008 financial crisis was the result of poorly chosen and misguided systematic government interventions, some of the same tools we desperately cling to stimulate todays fragile world economy.
The U.S. Housing Bubble The U.S. housing bubble traces its origins back to the 1930s, beginning with the New Deals objective of increasing homeownership. Part of the New Deal was the National Housing Act of 1934, designed to make housing and mortgages more affordable through the Federal Housing Administration (today known as the Department of Housing and Urban Development) and Fannie Mae, founded by the government to purchase and securitize mortgages in order to ensure the funding for additional mortgages. With the advent of the New Deal, a plethora of additional government policies and interventions were introduced to drive the political agenda of homeownership. In 1968, Fannie Mae was converted into a government sponsored enterprise a public and private hybrid company that may be privately owned, but with a political mission and with an implicit federal guarantee in case it should fail38. In 1970, the government introduced an additional government sponsored enterprise, Freddie Mac, to buy mortgages from mortgage originators, securitize those mortgages, and sell them as mortgage-backed securities to investors. Through combined efforts, Fannie Mae and Freddie Mac effectively created the secondary market for mortgage backed securities. In 1974 and 1977, Congress passed the Equal Credit Opportunity Act and Community Reinvestment Act, the first acts passed to improve the extension of mortgages to minorities and lowincome families and borrowers. Mortgages of low-income borrowers with a higher probability of default are known as subprime mortgages. Such mortgages tend to pay a risk-premium over more sound mortgages to investors in order to compensate for the additional default risk. The Equal Credit Opportunity Act and Community Reinvestment Act were the first steps towards extending mortgages to borrowers, who would otherwise not receive a mortgage. Government also introduced tax incentives to encourage home ownerships. The Tax Reform Act of 1986 eliminated the tax deduction for interest paid on credit cards, encouraging the use of home equity through refinancing, second mortgages, and home equity lines of credit by consumers39. In addition, the Taxpayer Relief Act of 1997 further provided tax incentives for real estate investors by providing tax reductions on profits gained from the sale of personal residence. In 1977, the Community Reinvestment Act was introduced. The act played an important role in the easing of mortgage underwriting practices by encouraging banks and savings and loan
38 39
Johan, N., 2009. Financial Fiasco. 1st ed. Washington: Cato Institute. p. 26 Rich Dansereau. 2008. Impact of 1986 Tax Reform Act on Homeowners Today . [ONLINE] Available at:http://www.homefinder.com/news/opening-doors/2008/08/05/impact-of-1986-tax-reform-act-onhomeowners-today/. [Accessed 24 April 13].
associations to offer credit to minority groups on lower incomes40. In addition, in 1995, the act encouraged community groups to complain to banks and regulators by allowing community groups that marketed loans to collect a brokers fee41. The Community Reinvestment Act provided activist groups with the political momentum to push banks - kicking and screaming - into more generous lending practices4243. Although the direct effects on mortgage originators from activist groups are questionable, they did provide the political momentum to ease mortgage underwriting practices. In 1999, Fannie Mae eased the credit requirements to encourage banks to extend home mortgages to individuals whose credit is not good enough to qualify for conventional loans44. In 2003, Congress passed the American Dream Down Payment Act to stimulate home ownership by lowering mortgage down payments. Government policies aimed at increasing homeownership were exceptionally effective. By 2004, homeownership peaked at 69.2 percent.45 (Exhibit 1) This increase in homeownership also drove housing prices to increase. As a result, this encouraged further mortgage underwriting. As housing prices continued to rise, lenders and borrowers became convinced that house prices would only continue to increase. Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term. They were provided these loans on the expectation that accumulating home equity would soon allow refinancing into more sustainable mortgages. For a time, rising house prices became a self-fulfilling prophecy, but ultimately, further appreciation could not be sustained and house prices collapsed.46 The increase in homeownership and the price appreciation associated with it effectively became an asset-price bubble. The bulk of the housing bubbles inflation occurred between 2001 and 2005. Prices grew at a 7 to 8 percent annual rate in 1998 and 1999, and in the 9 to 11 percent range from 2000 to 2003. The most rapid price gains were in 2004 and 2005, when the annual rate of house price appreciation was between 15 and 17 percent.47 (Exhibit 2) By late 2005, housing prices started to stagnate as sales decreased and home foreclosures began to increase rapidly. (Exhibit 3) As the supply of housing
40
Text of Housing and Community Development Act of 1977Title Viii (Community Reinvestment)
41
Sandra F. Braunstein, Director, Division of Consumer and Community Affairs. 2008. Federal Reserve. [ONLINE] Available at: http://www.federalreserve.gov/newsevents/testimony/braunstein20080213a.htm. [Accessed 24 April 13]. 42 Stanley Kurtz. 2008. O's Dangerous Pals. [ONLINE] Available at: http://www.nypost.com/p/news/opinion/opedcolumnists/item_cvq7rDCHftKwJyLaecfPQK. [Accessed 24 April 13]. 43 Norberg, Johan, 2009. Financial Fiasco. 1st ed. Washington, D.C.: Cato Institute. p. 26 44 Steven A. Holmes. 1999. Fannie Mae Eases Credit To Aid Mortgage Lending . [ONLINE] Available at: http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html. [Accessed 24 April 13]. 45 United States Census. 2012. Housing Vacancies and Homeownership. [ONLINE] Available at: http://www.census.gov/econ/currentdata/dbsearch?program=HV&startYear=1990&endYear=2013&categories=R ATE&dataType=HOR&geoLevel=US&notAdjusted=1&submit=GET+DATA [Accessed 24 April 13]. 46 Chairman Ben S. Bernanke. 2010. Monetary Policy and the Housing Bubble. [ONLINE] Available at:http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm. [Accessed 24 April 13]. 47 Ibid.
outstripped demand, home prices began plummeting nationwide, an event thought unimaginable before the crisis. The mortgage backed securities market imploded and financial intermediaries began writing down mortgage backed investments. As losses accumulated, insolvency became inevitable. Credit-Driven Bubbles Before investigating the causes of the U.S. housing bubble, it is noteworthy to clarify why this bubble caused such a downturn in the worldwide economy. By definition, an asset-price bubble occurs when an asset is traded at prices that are considerably above the assets intrinsic or fundamental values. At a certain point, market participants become convinced that the assets prices will only continue rising and purchase the asset for such speculative reasons. Consequently, the rising asset prices become a selffulfilling prophecy. Eventually, the asset prices become unsustainable and the bubble bursts causing a sharp correction in the market prices. Not all bubbles are created equally. Asset-price bubbles can be further divided into two sub-categories: bubbles driven by market exuberance and credit-driven bubbles48. The U.S. housing bubble classifies as the latter. A bubble driven solely by market exuberance is driven by overly optimistic expectations of the future performance of a certain asset that drive the assets price beyond its true fundamental value. These bubbles are not associated with a credit boom and therefore do not spill into the rest of the economy by deteriorating the financial intermediaries balance sheets, thus posing much less risk to the financial system and economy at large49. Since the true fundamental value of any asset is exceptionally subjective, identifying asset bubbles driven solely by market exuberance before bursting is problematic. Contrary to bubbles purely driven by overly optimistic expectations, credit-driven bubbles spill into the rest of the economy causing financial and economic fallout. Credit-driven bubbles begin with a credit boom that provides funding used to purchase a particular asset class. As the credit boom expands, so does the purchasing of that particular asset, thereby raising the assets market price. This generates a feedback loop that feeds off itself: The rise in asset values, in turn, encourages further lending for this asset, either because it increases the value of collateral, making it easier to borrow, or because it raises the value of capital at financial institutions, which gives them more capacity to lend. The lending of this asset can then further increase demand for them and hence raise their prices even more.50 This feedback loop feeds upon itself driving asset prices ever higher until the bubble eventually bursts once new demand is priced out. Once burst, credit-driven bubbles enter into a reverse-feedback loop. When asset prices eventually collapse, the loans used to purchase those assets deteriorate, lenders cut back on credit supply, the demand for the asset declines further, and prices drop even further.51 This reverse48
Mishkin, Frederic S., 2013. The Economics of Money, Banking, and Financial Markets . 10th ed. Edinburgh Gate, England: Pearson Education Limited. p 452. 49 Ibid. 50 Ibid. 51 Ibid.
feedback loop causes an erosion of the balance sheets of financial institutions which spills into the rest of the economy causing a decrease in credit supply, deleveraging, and a decline in business activity. The predicament with credit-driven bubbles is in the way these bubbles are inflated by increasing credit and borrowing from financial institutions. By increasing the asset price with borrowed funds and credit, a credit-driven bubble is inherently leveraged. Once burst, credit-driven bubbles cause a tremendous and sharp correction. Since the credit is borrowed from financial intermediaries who collapse under the highly leveraged crash of the bubble, further issues arise. As the losses accumulate, financial intermediaries are driven to insolvency. Due to the financial systems interconnection, the collapse of one financial intermediary leads to losses of another financial intermediary. This form of systematic risk leads to a financial meltdown, a credit freeze, and an economic downturn. This grim scenario began unfolding in 2006 as the U.S. housing bubble began to unwind and wreak havoc on the financial system it was built upon. The U.S. housing bubble is a prime example of a credit-driven bubble. Driven by a credit boom in subprime lending, housing prices rose way above fundamental values, but when housing prices crashed, credit shriveled up and housing prices plummeted.52 Loses associated with mortgage backed securities ultimately eroded the balance sheets of the financial institutions. As the losses accumulated, the financial institutions that were holding these assets were driven to insolvency. When Lehman Brothers filed for bankruptcy, other financial institutions began writing down huge loses and the credit market froze, deteriorating the rest of the economys health. Identifying the Culprits Identifying the U.S. housing bubble as a credit-driven bubble provides us with insights into its possible causes. Any factor that encourages, drives, or inflates credit that ultimately flows into the U.S. real estate sector is a factor contributing to the inflation of the U.S. housing bubble. This analysis leaves us with a number of possible culprits: federal policies aimed at encouraging mortgage lending, expansionary monetary policies, global savings from poor and developing countries flowing into the U.S., easing and negligence in mortgage lending practices, and financial innovation53. We could also put into consideration the countless company-specific misjudgments and malpractices on behalf of financial intermediaries, but to explain industry-wide errors we need to identify price and incentive distortions capable of having industry-wide effects.54 Company-specific misjudgments and malpractices would have resulted in company-specific failures. Such bankruptcies are unable to explain the mammoth cluster of errors which appears swiftly and suddenly at the moment of
52
Mishkin, Frederic S., 2013. The Economics of Money, Banking, and Financial Markets. 10th ed. Edinburgh Gate, England: Pearson Education Limited. P 452. 53 Norberg, Johan, 2009. Financial Fiasco. 1st ed. Washington, D.C.: Cato Institute. 54 White, Lawrence H., 2009. Federal Reserve Policy And The Housing Bubble. Cato - Journal, 1, 115. P 115.
economic crisis55 or why businessman, able to forecast all manner of previous economic changes and developments, proved themselves totally and catastrophically unable to forecast 56 the default of countless subprime mortgage backed securities. Financial Innovation & Negligent Mortgage Underwriting Practices Financial innovation played a key role in driving funds into the U.S. real estate sector. Financial engineering enabled the creation of mortgage-backed securities and collateralized debt obligations. Such securities enabled the breaking down of risk according to investor preference and therefore, increased the available savings driven into the mortgage market. Although financial innovation provided the means to inflate the housing bubble, financial innovation was a tool used in the process and not the cause itself. In essence, financial innovation enabled funds to flow into the real estate sector with greater ease but cannot be identified as the reason why those funds were flowing into the real estate sector to begin with. The deterioration in mortgage underwriting practices were affiliated with the propped-up demand for mortgage backed securities driven by the securities higher interest rates relative to safe assets and federal policies aimed at encouraging mortgage lending. In such regards, lax mortgage underwriting practices are treated as a secondary effect caused by government policies. The Savings Glut Ben Bernanke has pointed out that capital inflows from emerging markets to industrial countries can help explain asset price appreciation and low long-term real interest rates in the countries receiving the funds-the so-called global savings glut hypothesis.57 The savings glut is a well-known phenomenon poor people often save a larger portion of their income than rich people, because the poor need a buffer for bad times and unforeseen expenses.58 This same phenomenon applies to countries. Since the U.S. became the preferred location for investments, poor and developing countries placed their savings in the U.S. market, effectively increasing credit supply and lowering interest rates in the U.S in the same manner Federal Reserve expansionary policy would. The only difference being that the pumping of savings from abroad is a real increase in credit, while the Federal Reserves expansionary policies are inflationary. While Ben Bernanke would like to place the blame on the global savings glut which plays a role in the inflation of the housing bubble that does not explain why the Federal Reserve did not take into account accommodations for the inflow of savings from poor and developing countries. On the contrary,
55
Rothbard, Murray N. , 2009. Economic Depression: Their Cause & Cure. 1st ed. Auburn, Alabama: Ludwig von Mises Institute. P 19. 56 Rothbard, Murray N. , 2009. Economic Depression: Their Cause & Cure. 1st ed. Auburn, Alabama: Ludwig von Mises Institute. P 18. 57 Ben S. Bernanke. 2005. The Global Saving Glut and the U.S. Current Account Deficit . [ONLINE] Available at: http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/default.htm. [Accessed 24 April 13]. 58 Norberg, Johan, 2009. Financial Fiasco. 1st ed. Washington, D.C.: Cato Institute. p 15.
monetary policies amplified the effect of global savings flowing into the U.S. precisely when they were strongest. Government Interventions We are left with two industry-wide factors that could have caused the U.S. housing bubble. First, the easing and expansionary monetary policy advocated by the Federal Reserve after the tech stock bubble; and second, the government and regulatory mandates that encouraged highly-risky mortgage lending. Excessively easy and expansionary monetary policy by the Federal Reserve helped inflate the bubble in housing prices by providing excess liquidity and credit in the economy that flowed into the real estate sector. The Federal Reserves expansionary monetary policy supplied the means for unsustainable housing prices and unsustainable mortgage financing, the dramatic lowering of shortterm interest rates not only fueled growth in the dollar volume of mortgage lending, but had unintended consequences for the type of mortgages written.59 The effects of these monetary policies on housing prices were further intensified by financial innovation that enabled risk to be spread to a number of participants and allowed for very low down payments, such as in the case of adjustable rate mortgages. Easy monetary policies allowed for additional credit to flow into the real estate sector because government policies pushed for ever larger expansion of mortgages to subprime lenders. The growth in regulatory mandates and subsidies that exaggerated the demand for riskier mortgages, importantly the implicit guarantees to Fannie Mae and Freddie Mac that combined with HUDs imposition of affordable housing mandates on Fannie and Freddie to accelerate the creation of a market for securitized subprime mortgages.60 Easy credit policy, combined with encouragements for riskier mortgage provided economy-wide stimulus for inflating the housing bubble. These poorly chosen public policies distorted interest rates and asset prices, diverted loanable funds into the wrong investments, and twisted normally robust financial institutions into unsustainable positions.61 Federal Government Policies Government policy to expand homeownership, especially among income-earners incapable to qualify for standard mortgages, proved to be successful in driving investments into the U.S. real estate sector. The proportion of homeownership had been fairly stable for about 30 years but suddenly it rose from under 64 percent to over 67 percent between 1993 and 2000, and in 2004 it exceeded 69 percent
59 60
White, Lawrence H., 2009. Federal Reserve Policy And The Housing Bubble. Cato - Journal, 1, 115. P 115. White, Lawrence H., 2009. Federal Reserve Policy And The Housing Bubble. Cato - Journal, 1, 115. P 115. 61 Ibid.
for the first time.62 (Exhibit 1) Yet this had the effect of distorting market driven outcomes allowing people who should have not been homeowners to obtain homeownership. Government subsidies made it possible for people to take out big mortgages without having to spend a cent of their own money.63 One such mortgage is the adjustable-rate mortgage product. Such mortgages have an interest rate that is adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets64. During 2003 and 2004, about one-third of mortgage applications were for adjustable-rate mortgage products.65 Such mortgage loan products move interest rate risk from the lender to the borrower effectively making the borrower more likely to default once interest rates rise. These products also made monetary policy have a greater impact on the real estate market. Low policy rates feed through to monthly mortgage payments more directly when the mortgage interest rate is adjustable and tied to short-term rates.66 It was the expansion of such mortgage lending activities that ultimately proved to be the undoing of the entire inflationary government policy and the eventual economic meltdown. Political momentum, activist groups, and government policies played a role in the easing of mortgage underwriting practices that allowed for subprime and adjustable rate mortgages to exist. In 1992, at least 42 percent of all mortgages traded by Fannie and Freddie had to go to households with low and moderate income.67 This target was increased to 50 percent in 1999. Freddie and Fannie exceeded those targets. To do so they provided mortgages to shaky borrowers undocumented income, no down payment, and no credit scores. Those who bought the mortgages from Fannie and Freddie risked nothing because the two government-sponsored enterprises guaranteed them, and Fannie and Freddie themselves also took little risk because the federal government guaranteed their operations.68 Even the Federal Reserve provided an aiding hand in easing lending practices. The Boston Fed wrote a 27-page manual in 1993 aimed to explain what banks should do to avoid discrimination in mortgage lending. The key sentence of that manual instructs that, to attract minority customers, lenders must refrain from unreasonable measures of creditworthiness and instead use procedures that are appropriate to economic culture of urban, lower-income, and nontraditional consumers.69 70 Banks were eager to accept the new easier lending practices; not only could they increase their fees from
62 63
Norberg, Johan, 2009. Financial Fiasco. 1st ed. Washington, D.C.: Cato Institute. p. 24. Norberg, Johan, 2009. Financial Fiasco. 1st ed. Washington, D.C.: Cato Institute. p. 23. 64 Wiedemer, John P, Real Estate Finance, 8th Edition, pp 99105 65 Chairman Ben S. Bernanke. 2010. Monetary Policy and the Housing Bubble. [ONLINE] Available at:http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm. [Accessed 24 April 13]. 66 Ibid. 67 Norberg, Johan, 2009. Financial Fiasco. 1st ed. Washington, D.C.: Cato Institute. p. 29. 68 Ibid. 69 Norberg, Johan, 2009. Financial Fiasco. 1st ed. Washington, D.C.: Cato Institute. p. 31. 70 Federal Reserve Bank of Boston, Closing the Gap: A Guide to Equal Opportunity Lending
selling mortgages to Fannie and Freddie, but they also avoided being sued for discrimination from activist groups. This encouraged and drove banks into making unsound loans. Fannie Mae and Freddie Mac effectively created the secondary market for mortgages. Fannie and Freddie did not themselves lend money to homebuyers, but when a bank had done so, Fannie and Freddie would buy the loan from the bank, so that the bank got its money back and could lend even more to other prospect homebuyers.71 Once sold to Fannie and Freddie, mortgage interest and principal will be guaranteed by Fannie and Freddie. The process of taking securities off the balance sheets of mortgage lenders had a perverse effect on the quality of the mortgages. By keeping them off their balance sheets, mortgage originators were less concerned with the quality of the mortgaged and more incentivized to create mortgages that would be sold to Fannie and Freddie for a fee. Being government-sponsored enterprises provided Freddie and Fannie an implicit government guarantee. Thanks to the federal guarantee, they have been able to lend at lower interest rates than others (almost as low as the rate of the federal government pays on its own debt), and they have used the money that they have borrowed to buy mortgages for which they have been paid at market rates.72 These government interventions distorted the market and moved the market away from equilibrium. The housing sector existed on this scale thanks to a vast network of supporting financial institutions, subject to federal deposit insurance, the secondary mortgage markets provided by quasipublic corporations, and the tax deductibility of mortgage interest. Since 1986, when the tax deductibity of other forms of interest was eliminated, homeownership rates rose thanks to the state, not the market.73 Due to these government policies the housing market expanded beyond the economically efficient level that would have otherwise been set by the free forces of the market: housing prices were higher than they would have otherwise been, mortgage underwriting practices were easier than they would have otherwise been, and subprime mortgages would have been a smaller segment of the market if government did not intervene. Ultimately, mortgage underwriting practices were too lax and the subprime mortgages began to default. As the foreclosures escalated, banks attempted to sell the real estate of the defaulted mortgages to cover their losses. This increased the number of housing vacancies in the market and as the supply of housing swelled well above the demand for housing, prices began to decline. This decline broke the feedback loop of the credit-driven bubble and marked the beginning of the U.S. housing burst. One question arises should the government have aided and driven an ever increasing number into homeownership? Without a doubt the initial developments in these regards seem to be well warranted. Decreasing discrimination in mortgage underwriting practices and providing low-income
71 72
Norberg, Johan, 2009. Financial Fiasco. 1st ed. Washington, D.C.: Cato Institute. p. 26. Ibid. 73 Galbraith, James, 2009. The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too . 1st ed. New York, New York: Free Press.
borrowers the opportunity to own their own home are justifiable, but government officials overstepped by providing a quantitative target that must be accomplished by a certain date. How do government officials economically justify the constantly increasing homeownership targets, especially for lowincome borrowers, set by the HUD for Fannie Mae and Freddie Mac to pursue? Is 56 percent homeownership among low-income borrowers the economically efficient level of homeownership? Government officials are incapable of consistently providing the right answer for very much the same reasons why portfolio managers are incapable of consistently outperforming the financial markets future market outcomes are random. Take for example the job market fluctuations in employment and career opportunities may necessitate relocation. If unemployment in a certain state rises or career opportunities are present in a different location, the labor force is free to relocate to where employment and opportunity exists. In such cases, homeownership is subpar to renting. Homeownership will serve as a barrier to relocation, aggravating the homeowners financial position as he is unable to pay his mortgage because job opportunities do not exist within his or her reach. The same analysis applies to young professionals college graduates who require the flexibility to relocate freely as opportunity arises either professional or personal. In such cases and much more, home ownership through a mortgage is an impediment. Easing Monetary Policies I *Greenspan+ was aware that the loosening of mortgage credit terms for subprime bo rrowers increased financial risk, and that subsidized homeownership initiatives distort market outcomes.74 Yet that did not stop the Federal Reserve pumping liquidity into the market that could eventually flow into the real-estate sector when the housing market was expanding. Precisely that injection of credit flowed into the real estate market and distorted interest, further encouraging investors to place their funds in mortgage backed securities which offered, according to rating agencies, higher risk-adjusted returns. The easing of monetary policy began in 2001 when the U.S. economy suffered a moderate recession between March and November 2001, largely traceable to the ending of the dot-com boom and the resulting sharp decline in stock prices. Geopolitical uncertainties associated with the terrorist attacks of September 11, 2001, and the invasion of Iraq in March 2003, as well as a series of corporate scandals in 2002, further clouded the economic situation in the early part of the decade. 75 In response, the federal funds rate was lowered quickly from 6.5 percent in late 2000 to 1.75 percent in December 2001 and to 1 percent in June 2003. After reaching the then-record low of 1 percent, the target rate
74
Greenspan, Alan, 2008. The Age of Turbulence: Adventures in a New World. 1st ed. New York, New York: Penguin Group. 75 Chairman Ben S. Bernanke. 2010. Monetary Policy and the Housing Bubble. [ONLINE] Available at:http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm. [Accessed 24 April 13].
remained at that level for a year. In June 2004, the FOMC began to raise the target rate, reaching 5.25 percent in June 2006 before pausing76. (Exhibit 4) According to the current Fed chairman Ben Bernanke, monetary responses in 2001 through 2003 were the results of weak and jobless recovery in the latter part of 2003, and reflected concerns about a possible unwelcome decline in inflation and the possible sinking into deflation.77 Although these policies may have been warranted given the geopolitical and economic uncertainty, the Federal Reserve policy conducted aided in the inflation of the housing bubble. The Federal Reserve allowed the monetary base to grow quite rapidly precisely when the housing boom shifted into high gear, and precisely when interest rates collapsed.78 Easing monetary policies had two effects: First, increasing monetary base and liquidity that ultimately flowed into the housing market; and second, distorting interest rates that effectively crowded out an asset class and pushed investors into taking more risky assets in search for returns. Without bank credit expansion, supply and demand tends to be equilibrated through the free price system, and no cumulative booms or busts can then develop. But then government through its central bank stimulates bank credit expansion by expanding central bank liabilities and therefore the cash reserves of all the nations commercial banks. The banks then proceed to expand credit and hence the nations money supply in the form of check deposits. This expansion of bank money drives up the prices of goods and hence causes inflation.79 Since this credit was encouraged to flow into the housing market by federal government policies, the price increases associated with the credit increase were in the real estate sector. Critics of this view point out that the credit injection by the Federal Reserve was insufficient to cause the trillion dollar U.S. housing bubble80, but the credit injection was further amplified by banking sectors fractional-reserve system that has a money multiplier effect. The additional credit delivered to the U.S. banks provided for a tremendous increase in bank mortgage lending. Effectively, this public policy encouraged low mortgage rates, which raised housing prices. (Exhibit 5) The money multiplier effect could easily amplify the actual credit and liquidity increase in the financial sector that ultimately flowed into the real estate sector. Federal Reserve expansionary policies cause something even more sinister. Bank credit expansion, by pouring new loan funds into the business world, artificially lowers the rate of interest of
76 77
Ibid. Ibid. 78 Robert P. Murphy. 2008. Evidence that the Fed Caused the Housing Boom. [ONLINE] Available at:http://mises.org/daily/3252. [Accessed 24 April 13]. 79 Rothbard, Murray N. , 2009. Economic Depression: Their Cause & Cure. 1st ed. Auburn, Alabama: Ludwig von Mises Institute. P 18. 80 J. Bradford Delong. 2008. Liquidity, Default, Risk. [ONLINE] Available at: http://www.catounbound.org/2008/12/08/j-bradford-delong/liquidity-default-risk/. [Accessed 24 April 13].
the economy below its free market level.81 Interest rate falls artificially, caused by the intervention of the central bank, rather than the natural forces of the economy. Businesses react the same way they would have reacted if savings increased naturally, by investing in lengthy and time-consuming projects, which previously looked unprofitable that now seem profitable, because of the fall of interest charge82. This is also true for lengthy mortgages. This artificially spurs economic growth. This economic growth comes about largely as the result of falling rates of time preference, which lead to an increase in the proportion of saving and investment to consumption, and also to a falling rate of interest83. This artificial growth is temporary and the economy inevitably has to re-adjust accordingly. By lowering interest rates in the wake of the tech bubble and the September 11 attacks, the Federal Reserve crowded out investors from safe fixed income assets, such as U.S. Treasuries and encouraged them to invest in assets that, according to credit agencies, provided a higher risk-adjusted return on investments, such as mortgage backed securities. This distortion of interest rates, supported by flawed credit ratings, encouraged investors and institutions to place their capital in riskier assets, believing they provided higher risk-adjusted returns. While relatively higher returns on mortgage backed securities prompted investors to increase the supply of funds, the low interest rates made financing housing very cheap and attractive especially for adjusted rate mortgages, effectively increasing demand as well. By imposing this 1 percent interest rate, the Fed invited everyone and his brother and sister-in-law to go out and get a new mortgage and take on more debt.84 Simultaneously, lowering interest rates enabled financial intermediaries to borrow at lower rates as well. In combination with general surpluses from emerging markets, which the current Federal Reserve Chairmen Ben Bernanke points as the culprit of the U.S. housing bubble, the U.S. financial system had an abundance of cheap credit that was encouraged to flow into the real estate sector. Conclusion We can conclude that the 2008 financial crisis and the U.S. housing bubble that caused it were the result of poorly chosen and misguided systematic government interventions not laissez-fair economics, lax regulation, and definitely not corporate greed. Through these systematic interventions the government distorted otherwise economically efficient outcomes and placed the economy in an unsustainable position.
81
Rothbard, Murray N. , 2009. Economic Depression: Their Cause & Cure. 1st ed. Auburn, Alabama: Ludwig von Mises Institute. P 31. 82 Brian Doherty. 2006. Can We Bank on the Federal Reserve?. [ONLINE] Available at:http://reason.com/archives/2006/11/02/can-we-bank-on-the-federal-res. [Accessed 24 April 13]. 83 Rothbard, Murray N. , 2009. Economic Depression: Their Cause & Cure. 1st ed. Auburn, Alabama: Ludwig von Mises Institute. P 32.
84
Norberg, Johan, 2009. Financial Fiasco. 1st ed. Washington, D.C.: Cato Institute. p. 31.
Some of the same government policies that helped inflate the U.S. housing bubble are the same tools currently used to stimulate the fragile U.S. economy. Current interest rates are at record low levels lower than 2003 levels and the Federal Reserve has undertaken unprecedented actions to stimulate the economy by pumping additional liquidity and credit into the economy. In which sector of the economy this credit is flowing to is undetermined hopefully to all sectors equally. While government intervention during the 2008 financial crisis seemed inevitable, the merits of current policies will be evaluated in the future. Yet given the monetary policys role in the previous asset -price bubble, the question arises are low interest rates and excessive credit fueling the next huge asset bubble? According to the current economic policies, the economy is treated as potentially workable, but always troublesome and recalcitrant patient, with a continual tendency to hive off into greater inflation or unemployment. The function of the government is to be the wise old manager and physician, ever watchful, ever thinking to keep the economic patient in good working order. In any case, here the economic patient is clearly supposed to be the subject and the government as physician the master.85 Yet, the government is not a physician master, the government does not know the economically efficient level that can apply to all individuals, and unsound government policies may lead to unsound economic activities. While improvements in monetary policy in the past decades have had a tremendously positive effect on worldwide economic development, government and central bank officials are not faultless their analysis may be flawed, their data may be inaccurate, and they may miscalculate the necessary policy.
85
Rothbard, Murray N. , 2009. Economic Depression: Their Cause & Cure. 1st ed. Auburn, Alabama: Ludwig von Mises Institute. P 12.
Exhibits
Exhibit 1
Exhibit 2
Exhibit 3
Exhibit 4
Exhibit 5
Bibliography
Ben S. Bernanke. 2005. The Global Saving Glut and the U.S. Current Account Deficit. [ONLINE] Available at: http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/default.htm. [Accessed 24 April 13]. Brian Doherty. 2006. Can We Bank on the Federal Reserve?. [ONLINE] Available at:http://reason.com/archives/2006/11/02/can-we-bank-on-the-federal-res. [Accessed 24 April 13]. Chairman Ben S. Bernanke. 2010. Monetary Policy and the Housing Bubble. [ONLINE] Available at:http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm. [Accessed 24 April 13]. Federal Reserve Bank of Boston, Closing the Gap: A Guide to Equal Opportunity Lending Galbraith, James, 2009. The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too . 1st ed. New York, New York: Free Press. Greenspan, Alan, 2008. The Age of Turbulence: Adventures in a New World . 1st ed. New York, New York: Penguin Group. J. Bradford Delong. 2008. Liquidity, Default, Risk. [ONLINE] Available at: http://www.catounbound.org/2008/12/08/j-bradford-delong/liquidity-default-risk/. [Accessed 24 April 13]. Johan, N., 2009. Financial Fiasco. 1st ed. Washington: Cato Institute. Mishkin, Frederic S., 2013. The Economics of Money, Banking, and Financial Markets. 10th ed. Edinburgh Gate, England: Pearson Education Limited. Rich Dansereau. 2008. Impact of 1986 Tax Reform Act on Homeowners Today . [ONLINE] Available at:http://www.homefinder.com/news/opening-doors/2008/08/05/impact-of-1986-tax-reform-act-onhomeowners-today/. [Accessed 24 April 13]. Robert P. Murphy. 2008. Evidence that the Fed Caused the Housing Boom . [ONLINE] Available at:http://mises.org/daily/3252. [Accessed 24 April 13]. Rothbard, Murray N. , 2009. Economic Depression: Their Cause & Cure. 1st ed. Auburn, Alabama: Ludwig von Mises Institute. Sandra F. Braunstein, Director, Division of Consumer and Community Affairs. 2008. Federal Reserve. [ONLINE] Available at: http://www.federalreserve.gov/newsevents/testimony/braunstein20080213a.htm. [Accessed 24 April 13]. Stanley Kurtz. 2008. O's Dangerous Pals. [ONLINE] Available at: http://www.nypost.com/p/news/opinion/opedcolumnists/item_cvq7rDCHftKwJyLaecfPQK. [Accessed 24 April 13].
Steven A. Holmes. 1999. Fannie Mae Eases Credit To Aid Mortgage Lending . [ONLINE] Available at: http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html. [Accessed 24 April 13]. Text of Housing and Community Development Act of 1977 Title Viii (Community Reinvestment) United States Census. 2012. Housing Vacancies and Homeownership. [ONLINE] Available at: http://www.census.gov/econ/currentdata/dbsearch?program=HV&startYear=1990&endYear=2013&categories=R ATE&dataType=HOR&geoLevel=US&notAdjusted=1&submit=GET+DATA [Accessed 24 April 13]. Wiedemer, John P, Real Estate Finance, 8th Edition, pp 99105 White, Lawrence H., 2009. Federal Reserve Policy And The Housing Bubble. Cato - Journal, 1, 115.
36 | The Volatility Playbook
The Volatility Playbook

Jeevan Parameswaran
The year 2013 promises to be an exciting one indeed. Opinions remain divided as to whether we are truly out of the frying pan or if we are heading back into the fire. What of the giant US deficit? Or the European turmoil? The world economy in general seems to have recovered since the 08 financial crisis and now that the fiscal cliff has been avoided, the talking heads on CNBC are screaming bull market. The reason? Flows of money back to equities as investors seek higher returns, driven by bigger risk appetites (with risk free hovering around a mere 2.7-3% who can blame them?). Looking at 2013 macro events, China may be looking to grow its domestic consumption; the EU still looks to be stuck in a rut and the US may begin deleveraging (more printing, anyone?). Furthermore, with the debt ceiling debate coming up, look for volatility throughout the year as the major economies begin a transition in expectation of an economic upturn. Now, the beauty of volatility is that thanks to derivatives, you can actually treat it as an asset class along the lines of stocks and bonds. While Dodd-Frank may see derivatives as pure evil, I would argue that options and swaps can actually provide an investor various opportunities to add value to his/her portfolio. By trading options and creating synthetic positions, investors can choose to expose or negate their portfolio almost completely from volatility. There are three quick and easy methods to do this with options and stocks (discounting variance swaps) which I will elaborate on below. Volatility in short, is the sum of the log daily stock price return squared:
Where T=number of trading days, and S= stock price The reason options are needed to buy or sell volatility is because of the amplification/ leveraging property options possess relative to its underlying stock. This property comes about as a result of the infamous option greeks, in particular, delta.
The main option greeks are: -Delta= The change in option price resulting from the change in stock price
-Gamma= Change in delta from corresponding change in underlying stock price
-Vega= Volatility sensitivity, i.e. change in option price from a change in implied volatility (assuming all else constant)
-Theta= time decay, i.e. change in option price from change in time period
Strategies: 1) Straddle Scenario: I know a stock is due a big move but I dont know in which direction. This is a common problem for investors, particularly with high growth stocks or firms involved in a regulatory approval process.
The Play: Long straddle
How: Buy at-the-money (strike=stock price) call and put at a 1:1 ratio, strikes equal. Why it works: If the stock moves upward or downward past either break even (the point at which the graph intersects the x-axis) this position becomes profitable because the call is worth more than the put has lost and vice versa. At some point in a continuous upward price movement, the put will become worthless while the call will continue to gain value, which forms the basis of why the long straddle works. Disadvantage: Being a long straddle means going long gamma (delta sensitivity) and vega (volatility sensitivity) but as a result, also short theta (time decay). In other words, the longer you sit on a long straddle position, the more your position loses value. Thus, youd want volatility quick and exit the position ASAP. Scenario: Sideways trending stock, I expect little to no volatility.
The Play: Short straddle
How: Sell ATM put and call at the same strike at a 1:1 ratio, equal strike. Why it works: Selling a call enables the seller the right to a premium. If the stock does not move significantly enough, the seller keeps most of the premium and thus, profits. Disadvantage: Short straddle means short gamma and vega so if the stock moves big, losses can be huge. 2) Strangle Scenarios: Investor wants to invest in non-directional volatility but wants a cheaper, safer alternative to the straddle. The Play: Long strangle if the objective is volatility exposure, short strangle to bet against volatility
How: Buy/Sell OTM call and put at 1:1 ratio but at different strikes Why it works: The strangle works in the same way a straddle does, except there is lower profit/loss potential and a bigger spread between the two strikes hence more movement is required for a long strangle to be profitable. Hence, the strangle functions like a conservative version of the straddle.
3) Delta Hedging(Dynamic) Scenario: Investor believes volatility will decrease in the future, i.e. realized volatility of the option will be lower than current implied volatility. The Play: Sell a call option priced at current IV levels and delta hedge the position (buy equivalent stock required to neutralize delta) (Note: There are many other ways to delta hedge, but the result should always be net delta= 0) Why it works: The Black-Scholes model is built around this very concept: that an option should be priced at the cost of dynamically hedging to expiration under the assumption of constant volatility. By hedging delta, the portfolio is indifferent to price direction but because there is gamma and vega exposure, volatility in itself will affect the portfolios overall value. Profit= Final Option price Initial option price cost of delta hedging (Note: PnL formula does not take into account transaction costs and liquidity) Conclusion: Financial engineering has enabled us to trade volatility as easily as any other asset class on the market, an amazing feat considering its sheer intangibility. Continued financial innovations from derivatives to asset backed securities have opened up a new dimension in the world of financial markets, one which I fully believe can be used to the economic benefit of all investors. However, even with all the financial models and rocket science in the world, one cant help but wonder if the market is driven by anything more than pure guesswork. Bibliography
"Greeks (finance)." Wikipedia. Wikimedia Foundation, 30 Jan. 2013. Web. 31 Jan. 2013.<http://en.wikipedia.org/wiki/Greeks_(finance)> "Diccionario Financiero - Rankia.com." Estrategia Straddle Comprado (long Straddle) -. N.p., n.d. Web. 31 Jan. 2013. <http://www.rankia.com/blog/diccionario-financiero/1142892-estrategia-straddle-comprado-long> "Neutral Strategies." Short Straddle (Sell Straddle) Explained. N.p., n.d. Web. 31 Jan. 2013. <http://www.theoptionsguide.com/short-straddle.aspx> "Neutral Strategies." Option Strangle (Long Strangle) Explained. N.p., n.d. Web. 31 Jan. 2013.<http://www.theoptionsguide.com/long-strangle.aspx> "Neutral Strategies." Short Strangle (Sell Strangle) Explained. N.p., n.d. Web. 31 Jan. 2013<http://www.theoptionsguide.com/short-strangle.aspx>
42 | Coin Currency, the reemergence of Americas metallic money
Coin Currency, the reemergence of Americas metallic money

Spencer Petitti
Coins: the mark of a civilization advanced enough to support some form of a functioning economic system. Dating back over ten thousand years, coins have been used to fulfill the crucial functions required to repay debts and purchase goods and services. In the United States today, paper money has replaced coins as the American citizens currency of choice for large transactions, overshadowed only by the rising tide of electronic cash. With a looming budget deficit in the minds of most citizens, the United States has been actively pursuing stratagem to reduce its expenditure without endangering the social programs most people have come to rely on. Through this, the idea of replacing our dollar bills with dollar coins has come to fruition. The production of coins produces revenue for the government, formally known as seigniorage. In truth, both fiat money and coins produce seigniorage, but fiat seigniorage is slightly different as it is accrued via interest on treasury bonds. Before I further discuss the pros and cons of a dollar coin replacement in the economy, it would be prudent to explain some basic workings of the monetary system in the United States. Fiat money is printed at the Bureau of Engraving and Printing, a subsidiary of the Treasury. This money is purchased by the Federal Reserve for the cost of producing the notes with a credit applied to the Treasurys account (an account held at the Federal Reserve). These notes are primarily used in conjunction with the open-market operation of a Federal Reserve purchase of Treasury securities. When the Federal Reserve obtains these securities from the public (the Federal Reserve is not allowed to
purchase securities directly from the Treasury), a liability swap occurs and the asset side of their balance sheet stays unchanged. These newly transferred securities pay interest to the Federal Reserve who in turn use the money to cover expenses before returning the remaining amount to the Treasury. This remaining amount is an independent source of funding for the Treasury, a form of seigniorage. In contrast with fiat money production, coin-based seigniorage is more directly generated. Coins are produced at the US Mint under the direction of the Treasury. These coins are then sold for face value (rather than cost) to the Federal Reserve who holds the coin assets on its balance sheet, eventually being removed when the coins are sold to banks and circulated into the private sector. The difference between the face value of the coins and the intrinsic value (or cost of production) is revenue generated for the Treasury. Seigniorage is not a new fiscal tool of the government. Beyond the revenue gains accrued, the government has further incentive to pursue seigniorage benefits; an increase in the money supply (which is a requirement for seigniorage revenue) has the added benefit of lowering the real amount of government debt through a dilution of monetary value. The government cites their seigniorage ability as arising from the exercise of the governments sovereign power to create money and the publics desire to hold financial assets in the form of coins and does not involve a transfer of financial assets from the public (United States Mint). Alternatively, in the eyes of some economists, the true incidence of a seigniorage tax lies on the individuals who hold money money that is being diluted in value as the US central bank increases the money supply. Now that the arguments for and against seigniorage have been addressed (within the constraints of this analysis), it would sensible to move on to the core issue at hand: should the United States replace their dollar bills with dollar coins? Fortunately, the Government Accountability Office (GAO) has analyzed the issue seven times since 1990. The general financial benefit has been valued at $4.4 billion over a period of 30 years. The estimate generated by the GAO includes a variety of cost-benefit factors including: 1. Seigniorage. It costs 18.03 cents to produce a $1 coin (United States Mint). This means for every coin produced, the US Treasury generates 81.97 cents in revenue. 2. The Treasurys decision in December 2011 to stop producing $1 coins, as we had roughly 1.4 billion $1 coins in storage within the Federal Reserve at the time. These coins in storage could meet circulation demands for more than 10 years, giving the US Mint time to shift resources to coin production. 3. The Federal Reserves new equipment that checks the quality and authenticity of new dollars produced. This relatively new equipment (2011) increased the expected life of the $1 note to 4.7 years compared to the $1 coins expectation of lasting 30 years. 4. The future public demand for physical currency. If electronic payments are more frequently used in transactions, the demand for cash (coinage or fiat) decreases and, consequently, the net benefit is
decreased. Also, national opinion must be in favor of accepting the $1 coin while being prepared to utilize it in transactions. 5. The replacement rate. It takes approximately 1.5 coins to replace 1 note due to phenomenon of coins being circulated less frequently than fiat currency. Discounted Net Benefit to the Government of Replacing $1 Notes with $1 Coins over 30 Years, by Year
While the GAOs analysis of a $1 coin replacement takes into account a wide variety of issues, it does not touch upon all issues that should be discussed. The issues not on the GAO report (or at least not sufficiently considered) include: 1. Recyclability of coinage. When coins are removed from circulation due to wear and tear they can be reformed into strip metal for the minting of new coins. This is in stark contrast with dollar notes that primarily end up in landfills. 2. Accessibility. Dollar coins are designed to be accessible to the blind and visually impaired through tactile feedback. This is in stark contrast with US dollar bills that do not vary in size. 3. Cost of reinforcing the floors of Federal Reserves bank vaults. The heavier weight of coins would require a reinforcement procedure (this was brought up by the Federal Reserve in their comments on the GAO report), adding to the cost side of the analysis. 86
The GAO responded to both points 3 & 4 affirming the authority of the ir calculations explaining (The) GAO included all costs to the Federal Reserve that the agency provided data on. The Federal Reserve provided no estimate of the additional cost to accommodate heavier coins. GAO used the best data available on coin production costs, which accounts for the cost of raw materials (3)
4. Increasing raw material costs. Again, the Federal Reserve commented on the GAO report stating it does not consider the potential increases in raw material costs for coins (GAO Annual Report, 276).86 5. The menu costs to the private sector. Modifying equipment and adding storage & transport options for the influx of new coins. Transit agencies are ready for this now, but it will take time (and money) for the rest of the private sector to transition. 87 There are a multitude of factors to consider when conducting a cost-benefit analysis of replacing the $1 note with the $1 coin. Many of these variables are hard to pin down quantitatively, as is true in much economic research. Luckily, seigniorage is a relatively easy factor to quantify. However, there are qualitative arguments that could make seigniorage benefits nil, no matter how high the supposed quantitative benefit. Both the Treasury and the Federal Reserve commented on the GAO report claiming seigniorage should not be included in the $1 coin analysis. Louise Roseman, director of the Federal Reserves Division of Reserve Bank Operations and Payment Systems described seigniorage as a revenue transfer from the private sector to the government ($1 Billion That Nobody Wants). This is consistent with the earlier analysis of seigniorage being an indirect tax on individuals. If we take this into consideration and remove seigniorage from the cost-benefit analysis, a strikingly different result is formed. The GAO actually calculated this hypothetical value: If interest savings because of seigniorage were not considered, a net loss of approximately $1.8 billion would accrue during the first 10 years for an average cost of $179 million per year or $2.8 billion net loss over 30 years (GAO Benefits and Considerations, 6). So we are left with this conclusion. If we follow the GAO and their belief that seigniorage cannot be set aside since it is a result of issuing currency (GAO Annual Report, 276), there is a large potential net benefit (assuming the other omitted factors we discussed do not amount to huge sums). On the other hand, if we treat seigniorage as a form of tax for which the incidence falls upon the people holding cash, the net gain in our calculation will be negative.
87
This was addressed in the GAO report to a certain extent, mainly through a qualitative analysis that is not reflected in the GAO estimate. (The GAO) found no quantitative estimates of the cost of replacement to the private sector that could be evaluated or modeled. (GAO Annual Report 276)
Bibliography
Benincasa, Robert, and David Kestenbaum. "$1 Billion That Nobody Wants." NPR. NPR, 28 June 2011. Web. 17 Feb. 2013. <http://www.npr.org/2011/06/28/137394348/-1-billion-that-nobody-wants>. Benincasa, Robert, and David Kestenbaum. "Should We Kill The Dollar Bill?" NPR. NPR, 19 Apr. 2012. Web. 17 Feb. 2013. <http://www.npr.org/blogs/money/2012/04/19/150976150/should-we-kill-the-dollar-bill>. Facts about the Dollar Coin. The Dollar Coin Alliance, n.d. Web. 17 Feb. 2013. <http://www.dollarcoinalliance.org/facts-about-the-dollar-coin/>. Hamilton, James D., and Menzie Chinn. "Econbrowser." Web log post. : Federal Reserve Balance Sheet. Federal Reserve Balance Sheet, 21 Dec. 2008. Web. 12 Feb. 2013. <http://www.econbrowser.com/archives/2008/12/federal_reserve_1.html>. Newmann, Manfred. "Seigniorage in the United States: How Much Does the U.S. Government Make from Money Production?" (n.d.): n. pag. Web. 17 Feb. 2013. <http://research.stlouisfed.org/publications/review/92/03/Seigniorage_Mar_Apr1992.pdf>. Sparshott, Jeff. "U.S. Should Replace Dollar Bills With Coins, GAO Says." Real Time Economics RSS. Wall Street Journal, 27 Nov. 2012. Web. 12 Feb. 2013. Government Accountability Office. 2012 Annual Report: Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance Revenue . N.p., Feb. 2012. Web. 17 Feb. 2013. <http://www.gao.gov/assets/590/588818.pdf>. Government Accountability Office. Benefits and Considerations for Replacing the $1 Note with a $1 Coin . N.p., 29 Nov. 2012. Web. 17 Feb. 2013. <http://www.gao.gov/products/GAO-13-164T>. The United States Mint Coins & Medals." The United States Mint - Coin Denominations. N.p., n.d. Web. 17 Feb. 2013. <http://www.usmint.gov/faqs/circulating_coins/index.cfm?action=faq_circulating_coin>. United States Mint. 2011 Annual Report. N.p.: n.p., n.d. Print.
47 | How Inflation Matters
How Inflation Matters

Luke Rebecchi
This past week Matt Yglesias over at Slate published a piece on what the left gets wrong about the economy. Basically, Yglesias says a society wide doubling of wages will invariably double prices, erasing the nominal gain and any increase in the standard of living. Raising real wages requires making things cheaper, and that happens when Schumpeters (originally Marxs) magical creative destruction is allowed to take place. The Internet may have destroyed print journalism, but the benefits of having the Internet more online content, quick access to information, 4chan, etc. outweigh the costs. By extension, we will all be made better when a similar wave of technological change thats transformed the media starts transforming the health care, education sectors, and transportation sectors. This mode of thinking gained a lot of traction after Daron Acemoglu and James Robinson published their widely popular book Why Nations Fail. In a nutshell, nations fail because entrenched elites find it in their interest to prevent the diffusion of new technology on the grounds that it challenges their power. Economists in the more classical tradition call this phenomenon dynamic inefficiency. Im inclined to agree with the idea that an economy operates best for all when it encourages innovation and technological diffusion. However, as I have pointed out before, how the rewards of new technologies are distributed deserves a ton of attention, lest we become a society where owners of technology (capitalists) reap all the gains while the masses stagnate. Im personally more interested in Yglesias first scenario, where everyones income doubles. Yglesias argues that while Slate doubling his salary would be met with an ear-to-ear grin, if everyones income doubles, then nobodys real income changes. Gross Domestic Product (GDP, aggregate income) increases by 100%, but so does inflation, erasing any gains. The implications of this point are monumental for a society trained to fear inflation. Here, we have 100% inflation, with no serious damage done to the economy. The same number of goods are produced for the same number of people with the same purchasing power. The only difference being each good now costs twice as much in nominal terms. Thats okay though, because you now have twice as much income. Inflation like a lot of other economic issues is at its core a distributional issue. For example, creditors hate inflation because their contractual agreements with debtors usually arent indexed to inflation. Inflation thereby transfers wealth from creditors to debtors. More generally, dollars are a unit of measure for the goods our society produces. Changing the number of dollars that represent those goods either increases or decreases the purchasing power one dollar has, but it doesnt necessarily change how much we can produce/buy. Conversely, if the Fed targets a 5% inflation rate which would be awesome and distributes the newly printed dollars to the wealthiest 2% of earners which would NOT be awesome then that 2% of wealthy households will find themselves benefiting in terms of
48 | How Inflation Matters
purchasing power even after prices rise 5%. Of course, they benefit at the expense of the 98% of the society who now experience a 5% decline in real income. This may come as a surprise, but we dont have to give the newly printed dollars to just wealthy people. We could as easily only give them to people at the bottom of the income range. For those people, inflation would increase their respective real incomes and standard of living. People with large incomes would lose, finding their unchanged number of dollars buying fewer goods. How tragic. Point is which I hope Ive made clear inflation matters only so much as how the new monetary units are distributed.
49 | Understanding the Process of Innovation: Innovation Efficiency
Understanding the Process of Innovation: Innovation Efficiency

Ben Denis Shaffer
The purpose of this article is to discuss the topic of innovation specifically in the context of economics. We can theorize about innovation as an economic process by analyzing its economic causes and consequences. I emphasize economic context because similarly to the process of globalization, innovation is multidimensional and can be applied to, and spoken in the context of, various disciplines. There are many motivations for discussing innovation. Apart from genuine academic interest and the thrill of ever-improving consumer electronics, innovation became the center of discussion within the highest spheres of political and economic leaders. [1][2]. Declining competitiveness of the United States and some European countries relates directly to the decline of levels of innovation. Some assert that declined innovation is the ultimate reason for the slow recovery and unsatisfactory levels of economic growth after the great recession. The importance of this topic is thus clear, as is its relevance that can be derived from the frequency of its occurrence in the press [3][4][5]. In my discussion, I come to three conclusions. First, the process of innovation itself does not contribute to the economy. It merely creates the opportunity to develop and advance technology. Second, in the short run, investment in R&D decreases innovation efficiency. There is an optimal level of investment in R&D in the short run that achieves the highest level of innovation efficiency. Innovation can occur without investments. Defining Innovation: Clearly, defining the term innovation seems to be an appropriate way of beginning the discussion. In my own words, Innovation is a creative process of modifying and implementing existing technology. Perhaps this is not the ultimate definition and further refinement could be desired or required. To elaborate on existing technology, I think all would agree that any new technology is derived from at least one preceding existing technology. Simply said, you cant make something out of nothing. Furthermore, innovation involves creative activity, an act that leads to what we call a creation of unprecedented products, novelties. But not every creative activity is necessarily innovative. Consider painting, for example. Clearly, painting does not fit this definition. Though if one devises a new method of painting, one observes innovation, but in that case the process of painting itself becomes the object of innovation. With regards to innovation, creativity is applied to modifying or implementing with the use of existing technology. Examples illustrate this best. Suppose you have a technology (capacitive touchscreens) that you apply to cellphone products. By using the same technology in a new creative way (installing touchscreens in caf tables to take orders), you economize by saving on wages, facilitate the process of taking orders and possibly attract curious customers. Now suppose you have the same technology, but you improve it (make the touchscreens brighter and more responsive) thus inducing further economization in a multiplier manner. This definition is clearly designed to fit into the discussion of economics. If we were to discuss innovation in terms of design, a definition better fitting for the topic
would be necessary. In the definition of economic innovation, I propose that modification and implementation are emphasized. At a glance, it might appear that innovation benefits the economy by definition. How can creatively improving and implementing existing technology be harmful, one might wonder. One would be wise to wonder because it turns out to not be a one-sided argument. Timothy Sandefur enumerates a number of reasons why one might, or even should, be skeptical of innovation [6]. Most arguments against, however, are of political or social nature (E.g., stable social order, permanency, unforeseen consequences causing disaster) and will not be addressed at length. Very shortly, I would argue that were there no social order, the process of innovation would be greatly hindered and that if disaster were to occur (a case in which a creative modification weakens the preference for a good or is turned into a bad), the invisible hand would play its part and punish the guilty. Of course, there are ethical issues when it comes to new medication, some food products, etc. that should always be addressed; however, for the purpose of the article they are left out, but kept in mind. In this discussion, we are more interested in purely economic resisting forces that oppose innovation. What could be a case in which economic forces counter innovation? Consider the example of updating a software system in an office. On the one hand, there would be better software and, consequently, higher productivity. On the other hand, it can hinder productivity significantly if the learning curve exceeds some limit. Another example could be when irrational behavior occurs once an individual has had an emotional, nostalgic attachment to a particular good, which opposes innovation. For instance, the introduction of the New Coke in 1985 was not well received and the company was forced to return to the classic formula of the famous soft drink [7]. Assuming that an objective customer would consider the two drinks as perfect substitutes, the negative reaction was irrational and the notorious case study of failure in marketing can now also be regarded as a failure of innovation. It is a failure in a sense that even though creative modification had taken place, economic forces manifested by the market reaction negated the effects of such innovation. Likewise, a software update might modify and improve the technological framework of an office, but at the same time, it might hinder productivity due to the need for adaptation time. Efficiency of the innovation process: The creative process of modifying and implementing technology will never end. By nature, we are inclined to improve what we have and create novelty with the purpose of improving life, increasing comfort and facilitating work. Additionally, such creative activity can earn us some dividends. Why then would innovation decrease? In my opinion, it is useful to ask how eager can one be with respect to innovating. It is 4 A.M right now, I want to sleep and not think about how to improve something, unless we are talking about the comfort of my bed! Innovation happens all the time, but sometimes and under some conditions there is more of it and the question is when and under what conditions. I doubt that the declining levels of innovation are because we now need to sleep more and, hence, have less time to innovate. This idea of continuity and periodicity of the process of innovation points to our ability to
conceptualize innovation efficiency. This, in time, gives grounds upon which to theorize about innovation efficiency. Examples of updating software in an office or the introduction of the new Coke are somewhat simplistic, but they point to two ways in which we can judge the efficiency of innovation. In the case of Coke, it is the returns on investment that were allotted towards the project of introducing the novel product. In the case of updating and revamping an office, it is the relative change of productivity. While productivity is essential to consider, the second case can be broken down to the first, in which we observe the cost of updating and revamping and the estimated additional revenues made as the result of change in relative productivity. Now we are left with a way in which efficiency of innovation can be judged by constructing a mathematical model (a very simple one), we can devise a method of analyzing innovation efficiency. I introduce this model later in the discussion. The fact that we often think of innovation as a synthetic investment-driven process motivated this model. While it is true that the amount of investment into development of science or R&D makes a great difference, investment is not the origin of innovation processes. Instead, it is the innovative capacity *8+, the ability to organize knowledge, interact and cooperate in an efficient and creative manner that allows for modification and implementation of novel products and processes. This means that investment and innovation policies serve as essential supporting factors that have the capacity to induce innovation in an economy, but are not sources of innovation. This suggests that in its roots, innovation is an organic process that takes place in society. For this reason some of the most prominent innovation theories today consider innovation to be a mix of evolutionary *9+ and interactive learning *10+ processes that is greatly affected by the institutional and organizational framework of a country or region [11]. This provides for a very interesting possibility of applying models of biological processes for development of models of innovation processes. You can think of innovation as a plant that grows naturally, but grows healthier and quicker given the right amount of water, sun, temperature and soil. Importance of Understanding Innovation: Given that in its essence innovation is an organic process, the big question is where it comes from and why. What triggers innovation? What is the photosynthesis of innovation? Answering these questions is important in my view because innovation policies that the developed countries will be developing and implementing to restore their competitiveness in the now global market economy must be centered around the understanding of innovation as a process, and not simply on the idea that innovation brings competitiveness that increases employment, growth and prosperity. Furthermore, these answers can suggest reasons for why competitiveness and innovation levels declined in the first place. Is it a coincidence that only after the Great Recession and the European Debt Crisis, the question of competitiveness fell into the spotlight? Robert D. Atkinson and Stephen J. Ezell in their book, Innovation Economics: The Race for Global Advantage, they suggest that the decline in innovativeness was the underlining long term cause of the financial crisis [12]. They suggest that the declining innovation redirected investments from wealth-creating innovation to investing in
consumption *13+. Thus the strength, transparency and honesty of financial institutions and systems are not trivial in supporting innovation; this is not surprising. But does this mean that redirecting investment will do the trick and solve problems with unemployment and growth that both the US and EU countries are experiencing today? As was previously said, investment is an inductive force, but not the origin of innovation. The model of innovation efficiency that I propose is designed to look at the role of investments for innovation. I will attempt to show through analyses that increasing investment in R&D decreases innovation efficiency. The model: Innovation efficiency, Returns on investments in R&D. Building and Analyzing the Model: This model will assume that innovation efficiency denoted by is inversely proportional to time and amount of investment into R&D . This is justified by the idea that if you develop a product in less time with less capital, innovation is more efficient then if you developed the same product yet required more finances and time while doing so. In fact, this model assumes that innovation efficiency is inversely proportionate to the product of time and investments in R&D . Thus,
The restriction on time and investments being positive makes physical sense and is necessary for be defined.
to
We must also remember that efficiency of innovation depends on things like the initial amount of disposable technology, quality of entrepreneurship, human capital, institutions and so on. Hence, we also assume that a greater amount of the things listed have a tendency to increase innovation efficiency and, thus, they are accounted for by introducing a positive parameter. This gives,
Also, we are basing our model on the idea that we can judge the efficiency of innovation by evaluating the returns on the investment in R&D. In other words, we can treat as the ratio of change of profits with respect to change in Investment in R&D. Thus,
Or in marginal terms,
So, we have the model in the final form of a differential equation,
We begin our analyses by looking at how
changes with marginal changes of time or investment.
These two margins show that always decreases when time increases and when investments increase. Their graphical representations:
88
Figure 1:
89
Figure 2:
In addition, we know that time and investments are inversely proportionate. We simply keep constant to see their relationship. The following figure represents this relationship:
88 89
Wolfram Mathematica 9, Boston University Wolfram Mathematica 9, Boston University
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Figure 3:
Knowing these three marginal relationships, we know the marginal relationships between all pairs of variables out of the three that we have. This gives us the possibility to graph this model in three dimensions, time taking the x-axis, investments the y-axis and innovation efficiency the zaxis, Figure 4.
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Figure 4: Innovation Efficiency 3D plot.
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Apple.Inc Grapher 2.3 Wolfram Mathematica 9, Boston University
The following views of the graph show two planes, one above another. These two planes are also 3-D representations of the model and show how it changes with different values of the parameter that represents things like entrepreneurship, disposable technology, human capital, institutional environment and so on. A greater valued parameter, we assumed, supports innovation processes, thus a plane with a greater value of is above the other and represents a monotonic, systematic shift in innovation efficiency. This result is important because it shows that a better environment for innovation will produce the same results with less effort in terms of time and capital.
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Figure 5 and 6: Variable Parameter C.
There is another important note about the shifts of the planes of innovation efficiency. Suppose that these two planes represent two firms working on two different innovative projects. The area under these planes is an imaginary quantification of the amount of innovation. A question follows about the aggregated quantity of innovation observed. Is it the sum of the two areas or is this quantity found through some other algebraic operation . I suggest that it can be both. If the products or services that the firms produce do not or will not interfere in the market, this innovation quantity is found by adding the two areas. If, however, they do interfere, then the total quantity of innovation cannot really be determined. Cases where areas under the planes would be added are those in which the products or services are in completely isolated markets where consumers do not forgo an opportunity of consuming the other good that involved innovation in its production. An example would be new ATM machines in Boston and environmentally friendly packaged cheese in Switzerland. Development of new ATMs and a new way of packaging do not interfere with one another.
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Apple.Inc Grapher 2.3
Solving the Differential Equation: Our model is represented by the differential equation
This equation is a separable differential equation and can thus be dealt with analytically. Our goal here is to find a function of Profit (P) that varies with Investments (I). The result is,
The result is a logarithmic function that always increases, but diminishes as given constant (t) and (C). This function shows that more investment yields more profit, yet with each additional unit of investment, fewer and fewer returns per unit of investment are generated. Of course, we know that profit, lets say net profit, depends on operational costs, tax and other goodies that you learn about in accounting classes. They are all combined under the constant (C) so that we can focus on the relationship between profit and investment and think of it in the context of innovation. Also, we assume constant prices as those can change profits as well. Figure 7 and 8 show how the solutions of this model behave given various initial investments and different values of (C).
Figure 7:
Figure 8:
These two figures show solutions to the differential equation. Green lines show solutions with different initial investment. The result here is that with less investment (Green lines that are closer to the origin), innovation is more efficient and more innovation will yield more profit. Perhaps somewhat counterintuitive, more investment yields less profit. This is because more investment results in less efficient innovation and we assumed that innovation yields profit. Greater value of (C) results in more efficient innovation and, thus, yields greater profits as shown in Figure 8. More than anything, these figures show the limitation of the model. In real life, if there is too little financing there is no business. Also, we assume that innovation directly yields profits, which is not true. Instead, more innovation increases potential profits. In addition, profits are increased in ways other than innovation, e.g., improving marketing or production operations. Implication of the Model and Conclusion: This model indeed shows that simply increasing the amount of funds for innovative projects cannot yield results efficiently, which we discovered while solving the differential equation. What matters most are things like institutional environment, quality of entrepreneurship, level of education in the society and the ability to use the available knowledge and technology creatively. These are the sorts of things that foster more efficient innovation. Analogously, you can compare the amount of innovative thinking, modification and implementation of available technology that would come out of a trained entrepreneur or a middle schooler were they given a computer, five workers and $1,000. The idea is to provide the middle schooler with education rather than an additional computer and another $1,000. The main point is that in the short run, increasing investments in R&D will result in less efficient innovation. In the long run, the kid could buy some textbooks and educate himself, thus increasing his ability to innovate, but the probability is, he will just buy candy.
Our model, and common sense, clearly shows that R&D funding is not where innovation comes from. In fact, innovation can occur under the circumstances of scarce disposable capital and technology: this might seem counterintuitive at first, but if we refer back to the definition of innovation, such cases also fit perfectly. On the one hand, this is great; we dont need to do anything for innovation to occur. On the other hand, there is little we can do to directly foster more innovation. We can water the garden and hope that it is the right amount of water and that there will be the right amount of sun but we cannot make the sun shine with more intensity and convince the plants that we are giving them the right amount of water. We already saw that causes of innovation are miscellaneous and that it is manifested though creative modification and implementation of existing technology. But what does innovation do that is so important for firms and competitiveness of economies? In general, innovation makes new technology and operation practices possible. This can give a competitive edge within markets and give an advantage above other firms and economies. It is important to note that innovation grants possibilities that need to be fulfilled in an opportunistic manner. Most important, however, is the possibility of a better quality of life that innovation provides. Many consider Intellectual Property (IP) a good measure of innovation. Patents, copyrights, trademarks and other kinds of IP can, and often do, reflect the possibility of developing novel products and services. IP protection does provide with advantages over competitors. Sadly, holding patents does not contribute to the economy, and for that reason, neither does innovation. Lets end on a high note, however. Innovation is good for the economy because it is good for our life. If it were not, then no innovation would occur and there would not be any demand for innovative activity. However, there are conditions that encourage innovation. Innovation can come from an individual or a large corporation. The likelihood of something revolutionary being invented exists in both cases. Last, in the case for firms and enterprises, innovation efficiency can depend on the amount of investment. Small firms cannot absorb big investment in the short run and, thus, the innovation efficiency may decline if investments are too big. On the other hand, no investment will necessarily lead to innovation. This leads to the thought that there is an optimum level of investment in R&D in the short run. For larger firms, the same is true except larger funds can be absorbed and implemented. This optimum level of innovation can only be raised by rising parameter C of our model.
Bibliography:
[1] World Economic Forum. "Rebuilding Europe's Competitiveness." Weforum.org. N.p., 2013. Web. 10 Mar. 2013. [2] Ulka, Hulya. "R&D, Innovation, and Economic Growth: An Empirical Analysis." Intentional Monetary Fund (2004): n. pag. Http://www.imf.org. Web. 10 Mar. 2013. [3] "The Great Innovation Debate." Http://www.economist.com. N.p., 12 Jan. 2012. Web. [4] Network, CIO. "Danger: America Is Losing Its Edge In Innovation." Forbes. Forbes Magazine, 20 Jan. 2011. Web. 01 Apr. 2013. [5] Businessweek. "Are Patent Problems Stifling U.S. Innovation?" Http://www.businessweek.com. N.p., 8 Apr. 2009. Web. [6] Timothy Sandefur, "Innovation." The Concise Encyclopedia of Economics. 2008. Liberty. 1 April 2013. http://www.econlib.org/library/Enc/Innovation.html [7] Szmmigin, Isabelle, and Gordon Foxall. "Three Forms of Innovation Resistance." Web. Library of Economics and
ScienceDirect.com. N.p., n.d.
[8] Atkinson, Robert D., and Stephen J. Ezell. Innovation Economics the Race for Global Advantage . New Haven: Yale UP, 2012. Print. [9] Edquist, Charles, and Leif Hommen. "Systems of Innovation: Theory and Policy for the Demand Side1." Technology In Society 21 (1999): 63-79. Print. [10] Edquist, Charles, and Leif Hommen. "Systems of Innovation: Theory and Policy for the Demand Side1." Technology In Society 21 (1999): 63-79. Print. [11] Edquist, Charles, and Leif Hommen. "Systems of Innovation: Theory and Policy for the Demand Side1." Technology In Society 21 (1999): 63-79. Print. [12] Atkinson, Robert D., and Stephen J. Ezell. Innovation Economics the Race for Global Advantage . New Haven: Yale UP, 2012. Print
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STUDENT WRITERS
Daniel Currie
Daniel is a senior studying economics and finance. He is the current President of the Boston University Undergraduate Economics Association. Daniel loves to read and play soccer. He was an avid reader of Austrian Economics but recently he has become enamored by Post Keynesianism and hopes to see heterodox economics taught in all universities. His favorite economists are Milton Friedman and F.A. Hayek. He aspires to either become a successful financier, writer, economist (hopefully a Nobel Laureate!) and to eventually join politics.
Fadi Humaid
Fadi is a Boston University alumnus of the Class of 2013. While studying economics and finance at BU, Fadi was involved in a host of extra-curricular activities. He was the 2012-2013 President of the Boston University Undergraduate Economics Association and responsible for the healthcare investments of the Boston University Finance and Investment Club. Fadi now works for Ernst & Young in their Complex Valuation team.
Justin Bernardo
Justin is a resident of Miami, Florida, currently studying political science, economics and mathematics at Boston University. He is currently involved in the Boston University Undergraduate Economics Association as a student writer. He has varied interests in economics, ranging from environmental policy to innovation. He is expected to graduate in 2015.
Jeevan Parameswaran
An avid follower of financial markets, Jeevan hopes to pursue his career in trading or investment banking. He is not a fan of stringent government regulation, but he accepts that Keynesian economics is probably the most relevant school of thought in todays world. Jeevan affirms to be a massive scrooge with a penchant for terse oversimplification. He believes there is no greater joy in life than bacon and eggs in the morning. Jeevans interests include trading, writing, reading, and lifting.
Ben Denis Shaffer

Ben is an Israeli citizen and a Russian resident majoring in economics and mathematics and minoring in philosophy at Boston University. Ben spent his first year of college at Hofstra University studying mathematical business and economics after graduating from an International school in Moscow. At BU, he also plays water polo. Ben does not pertain to any religion, school of thought or movement. Instead Ben affirms to exercise his own thoughts. He hates politics and loves philosophy. His interests are in the subjects of physics, technology, innovation, design & art, business, history, economics and, of course, philosophy.
62 |
Luke Rebecchi
Luke likes to describe himself simply: Im about five things: jazz, coffee, books, basketball, and economics. Occasionally I write, usually not well. The only thing less impressive than my thoughts is my meager readership.
Spencer Petitti
Spencer is a devout believer in liberal institutionalism who happens to be studying both International Relations & Economics at Boston University. He is involved in various jazz groups on campus, primarily through his trumpet playing in the Big Band. His dream is to work for an international governmental organization like the WTO or World Bank and strive towards uniting the economies of the world through global cooperation.
63 |
Boston University Undergraduate Economics Association BUUEA.com uea@bu.edu

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Letter from the Editor

PREFERENCE FALSIFICATION AND TURKISH REVOLUTIONS ......................................................................................... 4

HAITI AND FOREIGN AID ................................................................................................................................... 14

THE U.S. HOUSING BUBBLE .............................................................................................................................. 18

THE VOLATILITY PLAYBOOK ............................................................................................................................... 36

COIN CURRENCY, THE REEMERGENCE OF AMERICAS METALLIC MONEY .................................................................... 42

HOW INFLATION MATTERS................................................................................................................................ 47

UNDERSTANDING THE PROCESS OF INNOVATION: INNOVATION EFFICIENCY ............................................................... 49

4 | Preference Falsification and Turkish Revolutions

Preference Falsification and Turkish Revolutions

5 | Preference Falsification and Turkish Revolutions

6 | Preference Falsification and Turkish Revolutions

7 | Preference Falsification and Turkish Revolutions

Figure 1: Need Satisfaction and Revolution.

8 | Preference Falsification and Turkish Revolutions

Figure 2: Turkey GDP (Billions of US Dollars)

Figure 3: Turkey GDP per capita (US Dollars)

9 | Preference Falsification and Turkish Revolutions

10 | Preference Falsification and Turkish Revolutions

Ibid. 17 Ibid. 17 30 Ibid. 18 31 Ibid. 18

11 | Preference Falsification and Turkish Revolutions

12 | Preference Falsification and Turkish Revolutions

13 | Preference Falsification and Turkish Revolutions

14 | Haiti and Foreign Aid

Haiti and Foreign Aid

15 | Haiti and Foreign Aid

16 | Haiti and Foreign Aid

17 | Haiti and Foreign Aid

18 | The U.S. Housing Bubble

The U.S. Housing Bubble

George Bush. Dec. 16 , 2008

19 | The U.S. Housing Bubble

20 | The U.S. Housing Bubble

21 | The U.S. Housing Bubble

22 | The U.S. Housing Bubble

23 | The U.S. Housing Bubble

24 | The U.S. Housing Bubble

25 | The U.S. Housing Bubble

26 | The U.S. Housing Bubble

27 | The U.S. Housing Bubble

28 | The U.S. Housing Bubble

29 | The U.S. Housing Bubble

30 | The U.S. Housing Bubble

31 | The U.S. Housing Bubble

32 | The U.S. Housing Bubble

33 | The U.S. Housing Bubble

34 | The U.S. Housing Bubble

35 | The U.S. Housing Bubble

36 | The Volatility Playbook

The Volatility Playbook

37 | The Volatility Playbook

-Gamma= Change in delta from corresponding change in underlying stock price

38 | The Volatility Playbook

The Play: Long straddle

39 | The Volatility Playbook

The Play: Short straddle

40 | The Volatility Playbook

41 | The Volatility Playbook

42 | Coin Currency, the reemergence of Americas metallic money