Monday, October 13, 2008

My first unregulated derivative market

Slate has posted a set of children’s books that are appropriate to difficult economic times, showing characters living in poverty or privation. The piece’s title—Mom, What’s a Credit Default Swap?—is a funny title, but should really be about an entirely different and missing set of books that can explain economics and finance in comprehensible terms. I suspect a lot of people would appreciate some of those books right now.

We don’t teach consumer finance in the typical high school curriculum. Home economics no longer includes any economics related to the home. But even if we corrected that, financial literacy does not translate into understanding macroeconomics or the financial sector. As we’ve seen, degrees in economics and careers in the financial sector do not translate into understanding macroeconomics or the financial sector. So how do we, the concerned and undereducated public, figure out what would be good public policies going forward?

One key to the appeal of children’s books is that they generally contain lessons. Here are some lessons I’d suggest we can use to guide us going forward, even without understanding the details of what happened:

1. Things go wrong sometimes. Have contingency plans.
2. Transparency helps.
3. Regulation helps.
4. Enormous companies can become societal burdens. Keep companies smaller.
5. Honesty and verification are important. Investigate and punish fraud.
6. Markets of all sorts go up and down, and not always at convenient times.
7. If we have safety nets for our citizens, harder economic times don’t have to be as punishing.
8. When good economic times return, remember that there will always be some people who are not as well off.

Different people would come up with different lessons from this financial crisis, of course. But almost anyone can come up with some lessons if they try. It’s at least as productive as watching the Cat in the Hat Treasury Secretary choose arbitrarily large numbers to play with.

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