The US Taxpayer as "Shareholder"

[wiegie]

this is what is worrisome, the unknown. what do these banks really have?

here is the whole article:

 

Friedman's Chicago Tosses Texts as Crisis Generates Confusion

 

By Oliver Staley

 

Oct. 14 (Bloomberg) -- For most Americans, $700 billion is a large amount. Not in University of Chicago professor Casey Mulligan's classroom, where he says the sum, pledged for a bailout of financial institutions, represents only 1.75 percent of an estimated $40 trillion in U.S. and European liabilities.

 

``A small change in market conditions can erase $700 billion,'' Mulligan told 60 sleepy students hunched over steaming cups of coffee in a macroeconomics lecture on Oct. 2. ``It's not out of the question that $700 billion will buy you a couple of months and nothing more.''

 

Economics and business professors across the U.S. say they are tearing up lesson plans to focus on current events. Wall Street's crisis gives students real-world examples of how markets work, and is engaging students in ways that textbook examples can't, said John Caskey, a professor at Swarthmore College.

 

``It's a great teachable moment,'' said Caskey, who is chairman of the economics department at the liberal-arts and engineering school in Pennsylvania. ``When you're talking about the Argentinean financial crisis, you don't have the same level of interest.''

 

At the University of Chicago, where 10 percent of students receive degrees in economics, the most popular major, the crisis is the main topic of conversation, in class and out, said Lance Contento, 21, a senior from Tucson, Arizona.

 

``All around, people are talking about it,'' Contento said. ``We're just so close to being where the ideas are being generated. Especially since a lot of Chicago professors are dissenting opinions from what you hear in Washington.''

 

Challenging Government Action

 

In his Oct. 2 lectures, Mulligan challenged the necessity of government intervention, using PowerPoint to graph supply and demand curves of capital and demonstrate that if U.S. banks fail, other institutions will step in to seek profits as part of the normal flow of business.

 

``It's not a big deal,'' he said. ``In theory.''

 

Anya Hosain, 19, a junior from Randolph, New Jersey, raised her hand to object. If the crisis is caused by a freeze in short-term lending, she asked, ``it seems like this model of supply and demand only works in the long term.''

 

``Supply and demand always works,'' answered Mulligan. ``We use supply and demand to study everything. There may be less adjustment by the market in the short term, but there's also less cost in the short term. What's the big deal if I've got to wait nine months for a new car?''

 

Moral Hazard

 

Mulligan, 39, also used the bailout to introduce the concept of ``moral hazard,'' the danger that people or companies will act differently if insulated from risk.

 

``If you give people a subsidy for having poorly performing assets, you're going to have more poorly performing assets,'' he said.

 

Nationally, almost 24,000 undergraduate degrees were awarded in economics in 2006, a 14 percent increase from 1995, according to the latest available figures from the U.S. Department of Education. In addition, almost 3,000 students got master's degrees in the field, up from 2,533 in 2006, and 930 earned Ph.D.'s, up from 916.

 

``There has been this general sense, over time, that `I need to know more about economics,''' said Victor Matheson, an associate professor at the College of the Holy Cross in Worcester, Massachusetts. ``Everyone has experienced increases in enrollment.''

 

Even in classes devoted to sports economics, current events have overwhelmed discussions of revenue sharing and salary caps, Matheson said.

 

Asking About Derivatives

 

``I have students staying after class every day asking about derivatives and the mortgage market, not about whether the Boston Celtics will repeat,'' Matheson said.

 

Business professors, too, are discussing the cascade of financial events. On Sept. 26 and Oct. 3, forums at the Kellogg School of Management at Northwestern University in Evanston, Illinois, drew overflow crowds of students.

 

The crisis, caused partly by executives' not understanding financial models, adds relevance to the lessons in an introductory business course, said Janice Eberly, a finance professor at Kellogg.

 

``It makes the theory more important because the theory is fundamental to finance and models,'' Eberly said. ``Being intelligent and sophisticated and subtle users of models and theory,'' she said, will make students ``better prepared to deal with change and with complexity.''

 

Game Theory

 

The University of Chicago students and faculty have won 25 Nobel Memorial Prizes in economics. The Nobel laureates include the late Milton Friedman, the late Friedrich Hayek, and Paul Samuelson. That doesn't mean the faculty has a perfect understanding of the crisis, said Philip Reny, chairman of the Chicago economics department.

 

While professors can use events from the news to illustrate concepts, explaining what happened is harder, said Reny, 50, who studies game theory.

 

``Often, when we teach, we teach what we're really sure of, what we really know,'' he said. ``This would be an opportunity to say, `Here's where we're kind of confused. We're in a situation where we don't know the answers and here are some leads and paths we can go down.'''

 

Ultimately, the answers aren't as important as knowing the `right questions to ask, said Robert Lucas, a Chicago macroeconomist who won the Nobel in 1995 for explaining how people's expectations affect their behavior.

 

``I want our students to come away with the idea that knowing economics is having a set of tools,'' Lucas, 71, said. ``You want people to be talking intelligently about important stuff. That's all you can ask from a university.''

For what it's worth, this is exactly what is happening in my classes right now. I am teaching two sections of 400-level "Money and Banking" and each day I just walk into class and say "What questions do you have?" and then for the next 20-30 minutes I just explain (as best that I can) what is going on. It's crazy.