Saturday, September 13, 2008

Economics vs. Finance

One of the first points I like to make to my AP Economics classes is the difference between Economics and Finance [Business]. On the very first day of class each year, I explain to my students that they will not learn how to make their first million in this class. From there, I define Economics for them. This week, I had the opportunity to show them using Lehman Brothers as an example.

The government and Fed are, or should be, concerned about the moral hazard principle. However, the financial institutions seem to view the current crisis as a bluff game; that if it came down to it, the government would provide tax dollars to bail them all out. The bluff game is a finance [business] strategy while the moral hazard concern is an economics concept. In most cases these days, it seems like the Wall Street wizards have this game perfected.

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