Financial economics is a field of economics that deals with the deployment and allocation of resources, in an uncertain environment, across time as well as spatially and blends the study of finance with the methodology of economicsSearch
Subprime Mortgage Crisis – and the Homes Destroyed
To understand what this crisis was, we first have to understand what subprime lending was in the first place. Subprime lending was lending, i.e. giving loans to those people who generally have difficulty keeping up with the repayment schedule. The proponents of this type of lending believe that this practice gives credit to those who would otherwise be devoid from the credit market.
Over the years the bank gave loans to these people with the facility of adjustable mortgage rate (ARM) which many opted for. The ARM itself became a trap for the people as it gave initial lower interest rates where, in the beginning, the average interest rate was lowered for the first few years (by more than half the interest rate in some cases). However, what transpired was when the period of lower interest rate ended, the total payment suddenly spiked (in some case by more than 75%).
The Recent Recession
There was the Great Depression of the 1930’s and there is the current century’s Great Recession, a recession that sent shattering ripples through the economies of the world. The center point of this quake was the US banking system.
It all began in the December of 2007 when the US banking system was hit by a liquidity shortfall which in turn, started a chain reaction that engulfed big financial institutions like Meryl Lynch, resulted in the bailout package and set the global stock markets to a downward spiral.
What triggered this financial meltdown was the collapse of the US housing bubble. The bubble had peaked in 2006 when the banks began to give out more and more subprime loans to people along with the facility of adjustable rate mortgages (ARM).
Inflation and Deflation and their effects
Known to be amongst the most important variables of economics, inflation and deflation are those factors that can impact everything from interest rates to how contracts are negotiated. Changes in these variables can spin into action a lot of other changes in the economy and hence they are closely monitored as indicators of the situation of a specific economy.
Inflation
Inflation is the increase in the price of goods and services that represent the economy as a whole. It is also defined as the upward movement in the average level of prices. Since inflation deals with the general rise in prices, it is in fact intrinsically linked to money. When there is a general rise in the price level, fewer good can be bought using a unit of currency. Hence, inflation also shows ‘erosion’ in the purchasing power of money i.e. it decreases the value of money. Inflation is counted as an annual rate.
Taxes and Taxation
Every one of us pays taxes and they in turn affect our lives. We have all kinds of taxes, federal, state, local and what not and we have to pay them, unless we want the IRS knocking down our door or worse, being incarcerated for evasion of taxes. Every politician promises us that these will be simplified but in the end, they just end up adding more to the tax code. The thing has been edited approximately 14,000 times in the last 20 years with the addition of 3 million new words. All this and ironically, since the independence, there has been an ongoing debate on what role the tax should play in our lives and what the proper tax code should be. The debates however seem to be going nowhere since currently we are dealing with the country’s most complicated tax code ever. The king among these complexities is – the Federal Income Tax.
Law and Economics
Law and Economics or the economic analysis of the law, tries to answer the two basic questions relating to laws. First, as to how the relevant factors are affected by the legal rules and second, if the effect of these are socially desirable and economically efficient. The positive theory states that common legal rules are efficient whereas the normative theory states that they should (or needs to be) be efficient. Here, efficient bear the meaning – maximization of social willingness to pay. Law and Economics encompasses the fields of law as well as the political economy.
The subject of economic analysis of law relates to the economic application of methods to legal issues. Also, since the field refers to both the legal as well as political systems, few issues of law and economics also find their way in constitutional economics, political science and political economy. Most of the work carried out in this field is in the neoclassical tradition.
Interest Rates
In economics, the term ‘interest rates’ has a few definitions which are competing. However, according to the Economics glossary, interest rate is the yearly price charged by a lender to a borrower in order for the borrower to obtain a loan. This is usually expressed as a percentage of the total amount loaned.
One might hear of all the different interest rates in the media around them. So the question that arises is, ‘How to differentiate between them?’ The very first thing one needs to understand is that there are not just a few but various (dozens or hundreds) of interest rates that vary according to their application. These rates can vary depending on the loan’s duration or the credibility and hence the involved risk factor of the borrower.
Primarily we have two interest rates, namely nominal interest rate and real interest rate.
Letter of Credit
Mostly issued by financial institutions, a letter of credit (LC) is a standard document which is primarily used in the trade finances to provide irrevocable payment undertakings. In simple terms, it is a letter from a bank that guarantees that the payment from a buyer to the seller will be for the correct amount and on time. If for any reason, the buyer defaults on the payment, the bank that issued the letter of credit will have to pay the full or remaining amount to the seller.
The are various factors that affect international trade such as the distance between the two parties, differences in the laws of the countries of involved parties and most importantly the possible hurdles of knowing each other personally. Hence, to ensure that the payment will be received, letter of credit is mostly used in international transactions.