Finance in a Nutshell

Finance in a Nutshell

Finance started as a sub-discipline of economics, and although it has since evolved into a university major in its own right, the two still share many concepts. The main fields of finance, the science of lending and borrowing money, as well as investing available funds with the ultimate intention of increasing investors’ wealth, are corporate finance (corporations), public finance (governments) and personal finance (individuals). Academic finance has been revolutionized with technological advancements and inventions.

Finance is very quantitative in nature; even more so are financial mathematics, a challenging but afterwards very financially rewarding, endeavor. Regardless, mathematics and statistics could be thought of as the pillars of finance.

The theory of probability, outlined in any introductory statistics textbook, is at the heart of many financial theories. For example, the ideas of risk spreading and risk pooling are responsible for the lucrative industry of insurance. Nonetheless, the picture has once been very different. Paradoxically, when people needed it most, in the 1800s, when average life expectancy was early 40s, the overall majority was reluctant to accept the premises of life insurance. One reason was that salesmen tried to explain probability, and it seemed to potential customers that they were asked to place a bet, the outcome of which would benefit them if there were death. Naturally, deemed grim and blasphemous, the concept was rejected.

In the US, insurance is regulated at the state level, not at the federal. Matters are rendered somewhat less complicated for insurance companies by the National Association of Insurance Commissioners (NAIC), which acts almost as a parliamentary agency in setting regulations for the insuring firms. Since 1999, with the financial modernization introduced by the Gramm-Leach-Bliley Act, banks gained the right to act as insurers.

Avenue of the Americas and 57th street. Photo by Elena

A potential problem is the selection bias. Financial data, uninterrupted for long periods of time, is only available for a few countries (US, UK). Other states’ data are either missing (Russia’s stock market gradually disappeared after 1917, China’s in 1949, with their respective Communist Revolutions) or interrupted by World Wars I and II. Some speculate that maybe the US success in the matter should be attributed to its stock market being the first and remaining unencumbered, while providing shaky grounds for generalization to the world at large or even to America’s own future.

An interesting aspect is the way the financial community is portrayed in the popular media, with financiers notorious for being the “bad guys”. To illustrate, in the Wall Street movie, Gordon Gekko, portrayed by Michael Douglas, gives the unforgettable speech in which he immortalizes the phrase “Greed is good!” Whether the 2010 sequel, Wall Street: Money Never Sleeps, with the addition of Shia LeBeouf to the initial cast, restores faith in financiers’ humanity depends on one’s interpretation.

Fitting Suits

Fitting Suits

By Ben Bova

All of you are too young to remember the America of the early twenty-first cetury, a democracy of the lawyers, by the lawyers, for the lawyers. It was impossible to sneeze in the privacy of your own home without someone suing you as a health menace. Inevitably the lawyers would also sue the home builders for failure to make the structure virus-proof. And the corporations that manufactured your air-conditioning system, wallpaper, carpeting, and facial tissues. To say nothing of the people who sold you your pet dog, cat, and/or goldfish.

It got so bad that eventually a public servant resigned her sinecure because of a lawsuit. A social worker employed by a moderate-sized midwestern city was slapped with a personal liability suit for alleged failure to do her job properly. She had advised an unemployed teenaged mother to try to find a job to support herself, since her welfare benefits were running out. Instead, the teenager went to a lawyer and sued the social worker for failure to find her more money.

Rather than face a lawsui that would have ruined her financially, whether she lost or won, the social worker resigned her position, left the state, and took up a new career. She entered law school. The teenager lived for years off the genereous verdict awarded her by a jury of equally unemployed men and women.

This was the America in which Carter C. Carter lived. We have much to thank him for.

Fitting Suits. Photo de Elena

He was, of course, totally unaware that he would change the course of history. He had no interest even in the juridical malaise of his time. All he wanted to do was to avoid dying.

Carter C. Carter had an inoperable case of cancer. “The Big C,”, it was called in those days. Se he turned to another “C,” cryonics, as a way to avoid permanent death. When declared clinically dead by a complaisant doctor (a close friend since childhood), Carter C. Carter had himslef immersed in a canister of liquid nitrogen to await the happy day when medical science could revive him, cure him, and set him out in society once more, healthily alive.

He left his life savings, a meager $100,000 (it was wroth more in those days) in a trust fund to provide for his maintenance while frozen. It would also provide a nest egg once he was awakened. He was banking heavily on compound interest.

His insurance company, however, refused to pay off on his policy, on the grounds that Carter was not finally dead. Mrs. Carter, whose sole inheritance from her husband was his $500,000 life insurance policym promptly sued the insurance company. The insurance company’s lawyers, in turn, sued the Carter estate on the grounds that he was trying to cheat, not death, but the insurance company.

After several years of legan maneuvering the suit came to court. It was decided in favor of the insurance company. Mrs. Carter promptly sued the jugde and each individual member of the jury for personal liability on the grounds that they had “willfully and deliberately denied her her legal rights.” And cased her intense pain and suffering while doing so.

East River Greenway

East River Greenway

The East River Greenway (also called the East River Esplanade) is a 9.44 miles long foreshoreway for walking or cycling on the east side of the island of Manhattan on the East River. The Greenway is separated from motor traffic. Many sections also separate pedestrians from cyclists. The path is parallel to the Franklin D. Roosevelt East River Drive (FDR drive) for a majority of its length. Parts of the greenway were built at different times. Most of the greenway was built in the 1930 to 1950s.

All the pictures have been taken by Elena, but the weather was not helping.

Hudson River on the west, with a connection to the Erie Canal.The East River waterfront in Lower Manhattan was known for heavy maritime activity, with over 40 piers in operation by the later 1950s.

The rise of truck traffic and the transfer of port activity to the Port Newark-Elizabeth Marine Terminal drastically reduced maritime traffic on the river after the middle 20th century. With many piers now defunct, ambitious plans have been made to reclaim and reuse the pier space.

The north-south arterial highway, the FDR Drive, was moved to an elevated location to allow convenient access to the piers.

In the 1970s, the Water Street Access Plan was drafted to extend the confines of the traditional Financial District eastward and create a new business corridor along Water Street, south of Fulton Street. Noting the success of the World Financial Center, the East Side Landing plan was created in the 1980s to add commercial and office buildings along the waterfront, again south of Fulton Street, similar to Battery Park City.

Benches were also added along the partially restored waterfront.

Peking. Furthermore, the Fulton Fish Market formerly located around South Street and Fulton Street, was pressured to relocate in 2005 to Hunts Point in the Bronx due to plans for the redevelopment of the Manhattan waterfront.

The pedestrian and bike path was first established in the late 1990s between Montgomery Street in the Lower East Side and Broad Street in the Financial District.

In 1982, there was a plan to expand the Seaport Museum of New York and attract tourist activity. Parts of the district were devoted to retail, including the main building of the Fulton Fish Market. A modern shopping mall was then built on Pier 17 and was opened in September 11, 1985.

The pedestrian path/bikeway has been well received by community members. Drawbacks exist however.

The pedestrian path and bikeway are not segregated from each other; there is one lane in each direction which is shared by pedestrians and bikers.

The path curves around FDR Drive viaduct pillars.

Brooklyn Bridge over the Greenway.

Can You Afford to Buy a Home?

Can You Afford to Buy a Home?

More Americans Can Own a Home of Their Own

Forty acres and a mule were the American entitlement in the nineteenth century. In the twentieth century, it’s a home of one’s own. But can you afford one in the 21st century? As home prices soared in the 1970s and 1980s, fewer and fewer Americans could afford to purchase a home. At the end of the 20th century 64 percent of U.S. households owned their homes, down from 66 percent in 1980.

Young adults trying to scrape together enough for their first down payment had a hard time. Only 39 percent of households headed by people under the age of 35 owned their residences in 1999, down from 41 percent in 1982. The drop-off in home ownership was sharper among households headed by people aged 35 to 39. Home ownership fell to 63 percent from 68 percent in 1982. The housing affordability crunch affected older people as well.

Things seem to be taking a turn for the better in the 1990s. Lower interest rates mean smaller monthly mortgage payments for all buyers, and the purchasing power of home buyers reached its highest point in two decades in February 1994, according to the National Association of Realtors Housing Affordability Index, which measures affordability factors. But the index for first-time purchasers wasn’t as rosy. A typical first-time buyer still fell short of qualifying for a conventional mortgage on a $90,900 starter home. But someone earning $24,098 – the median income for prime first time buyers, could afford a home costing $83,500.

Roxborough street, Rosedale. Photo by Elena

How much of a house you can afford – or, indeed, whether you can afford one at all – depends a lot on where you live. Each year, Lomas Mortgage USA ranks 50 states by the percentage of household income that goes to monthly payments on a conventionally financed purchase. The most affordable states, according to Lomas’s 1994 survey: Wyoming, where on average only 14.5 percent of household income goes to pay the mortgage; Nebraska (15.5 percent), and Idaho (15.6 percent). At the other end of the scale is California (26.6 percent), Hawai’i (26.7 percent), and Virginia (23.6 percent). Generally, you’ll spend more of your household income meeting the mortgage if you live on the East Coast, less in the Western and Sothern states.

Housing in a big city can be just as affordable as a place in the boonies – if you pick your city carefully. The most affordable metro markets, according to the Lomas survey, are Tampa (14.3 percent of household income should be enough to cover monthly mortgage payments, taxes, and insurance), Houston (16.4 percent), and St. Louis.

The least affordable included Los Angeles (26.6 percent), San Francisco (26 percent) and, of course, New York (24.1 percent). Housing costs in some of the country’s boom towns are, well – booming. Expect to pay around a quarter of your household income to cover the mortgage in Salt Lake City and around Paget Sound, the area that surrounds Seatle.

Whatever the median household income (which the Lomas survey factors into its considerations), some cities are just plain expensive. The priciest market in the country in 1994, as it has been for some time now, was Honolulu, Hawai’i, where the median price increases in the top markets have been leveling off in recent years. In Honolulu , for example, the median price dropped almost 1 percent in 1994. The biggest bargain in 1994 was in Cedar Falls, Iowa. The median price was $55,000. But you better hurry – the median price jumped almost 5 percent last year.

More house, smaller payments

As price increases have moderated, mortgage rates dropped, and median family income increased, housing has become more affordable for many Americans. The National Association of Realtors composite Housing Affordability index measures affordability for all home buyers. When the index measures 100, a family earning the medium income has exactly the amount needed to purchase a median-priced resale home, using conventional financing and a 20 percent down payment. Thus in 1994, the composite index shows that half the families in the nation had at least 134,3 percent of the income needed to qualify for the purchase of a home with a median price of $109,400. The typical family could afford a home costing $147,000.

(Text written in 1994).

The Economics of Higher Education

The Economics of Higher Education

Bartik & Erickcek (2007) recount that in the case of medicine, higher education contributes to economic development by paying graduates higher than average wages and thus, the new income can be spent raising the locality’s consumption and overall economy’s health. The higher education industry itself, however, pays below average wages.

According to Bloom et al. (2006), even tertiary education contributes to economic development. The authors concentrated on Sub-Saharan Africa. Traditionally, it has been believed that only elementary and high school learning mattered for business progress. Higher education in that part of the world is among the world’s lowest, with enrolment ratio in 2005 constituting only five percent; consequently, outbound research is also scarce.

Sculley (1989) was among the first to reinstate the point that information technologies have shifted capital from raw materials and physical force to knowledge. Surely, in a meritocracy where information and knowledge are highly valued, higher education reigns supreme. In the past, say in the Middle Ages, few could afford a formal education. People who were literate were most likely clergymen or aristocrats. In today’s world, high school and university diplomas are prerequisites for many jobs.

Sociology, the social science studying societies, cultures, living arrangements, mores, norms and rules, maintains that there are manifest and latent functions. The manifest function is the one the object was intended to fulfil. The latent function is either a covert motive or an unintended consequence. For example, while the manifest function of high school is to educate, it is believed that the latent function is to find a life mate. Many North Americans, Australians and Europeans admit being married to their high school sweetheart. Surely, most people’s friends are those they made during that time. Along these lines, a latent function often ascribed to higher education is keeping young people off the job market. Similarly, elementary school is said to be a babysitting facility.

The need for higher education is visible. Photo by Elena

For those still convinced that education enlightens and serves a higher purpose, in addition to almost guaranteeing a better income and meaningful employment, there are centres specifically designed to help students prepare for, and take, exams such as the internationally standard GMAT (business grad school), GRE (arts and sciences, MA, MSc, PhD), and LSAT (law school).

The Ivy League includes some of the best universities in the entire world (Harvard, Yale, Princeton, Brown, Columbia, Cornell, Dartmouth, Pennsylvania). Some other top U.S. choices are Massachusetts Institute of Technology (MIT), Stanford, University of Chicago and University of California, Berkeley. English elite university circle Red brick (Birmingham, Manchester, Liverpool, Leeds, Sheffield, Bristol) is another prestigious conglomeration. However, Britain’s best are Cambridge, Oxford, London School of Economics (LSE) and University College London (UCL). Rumour has it, that to get into one of those unattainable schools, one has to start early, take on an as rigorous as possible course load, show mastery of the material with stellar grades, and participate in relevant extracurricular activities. Of course, there is also the question of how to pay for tuition. Financial help is available at most educational institutions in the forms of scholarships, bursaries, loans and grants, for those who fit the conditions.

The BCom, BEng, BPharm and so on are professional degrees. Other degrees such as a BA in anthropology or sociology are more theoretical in nature. Whether it is easier to find work with a liberal arts or an applied science degree is debatable, but some majors are clearly more marketable than others. Best to choose wisely!

References:

    Bartik, T. J. & Erickcek, G. (2007). Higher education, the health care industry, and metropolitan regional economic development: What can “Eds & Meds” do for the economic fortunes of a metro area’s residents? Upjohn Institute Staff Working Paper No. 08-140, p. 1-98.

    Bloom, D., Canning, D. & Chan, K. (2006). Higher education and economic development in Africa. Human Development Sector: Africa Region.

    Sculley, J. (1989). The relationship between business and higher education: A perspective on the 21st century. Communications of the ACM, 32 (9): 1-6.