You Got to Be Kidding Me!

Fundamentals

Posted in Economics by Stacy McMahon on August 24, 2008

Glenn Reynolds links a piece by Tyler Cowen in the NYT and pulls this quote:

“The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings.”

Nothing earth-shattering in the article, but that’s just Cowen’s point – at their root, most big economic problems come down to people inexplicably ignoring basic rules that everyone knows. Does it just get boring after awhile, brown-bagging your lunch and putting a certain amount in savings every month?

My theory is that a lot of people look around and see others who they believe have similar circumstances, but appear to spend a lot more more than they do. They don’t know how this works, but decide that it must work somehow, mainly because they really want a nicer car or a new house. Alternatively, not everyone actually knows the basic rules, and American schools don’t teach them. So it’s entirely possible for financially ignorant parents to raise financially ignorant kids who in turn go through life making ignorant choices and screwing themselves progressively worse. Forget self esteem, make personal banking and investing a mandatory class in 8th grade!

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