Tuesday, May 04, 2010

Principal and Interest Rates

Instapundit linked to two economic articles today that could serve as examples of what my math students learn.

From the first, this quotation about how certain pensions and programs have "fudged the books":
So public-sector pensions have the principal, but they get the interest rate wrong. The Social Security and Medicare Trust Funds, by contrast, have the right interest rate but don’t have any principal.
That's a great example of something my students can understand after Math 20 (and especially after Math 25), but which might have been Greek to them before.

From the second, about why the recovery of many banks does not necessarily mean a recovery to healthy banking:
But what about all those record bank profits? Isn’t that a sign that bank lending is back? Not at all, says Whalen: It’s just an indicator that even our most brain-dead banks can make money when the Federal Reserve holds their cost of goods — short-term interest rates — at essentially zero. "The zero interest rate policy is a massive transfer of wealth from savers to banks," says Whalen. In a financial rondeau that would make even Lloyd Blankfein blush, banks borrow taxpayers' deposits at close to zero percent rates and essentially lend it back to them at higher rates, through Treasury purchases. The banks keep the profits. Nice work if you can get it, but not exactly the "God’s work" of allocating capital to ensure economic growth.
This one is slightly trickier, but students who have taken Math 25 should still be able to understand it.

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