Naked Economics by Wheelan, Charles (spanish books to read .txt) 📕

the public by issuing bonds. These transactions may be as simple as a new car loan or as complex as a multibillion-dollar bailout by the International Monetary Fund. The bottom line never changes: Individuals, firms, and governments need capital to do things today that they could not otherwise afford; the financial markets provide it to them—at a price.

Modern economies cannot survive without credit. Indeed, the international development community has begun to realize that making credit available to entrepreneurs in the developing world, even loans as small as $50 or $100, can be a powerful tool for fighting poverty. Opportunity International is one such “microcredit” lender. In 2000, the organization made nearly 325,000 low-collateral or non-collateral loans in twenty-four developing countries. The average loan size was a seemingly paltry $195. Esther Gelabuzi, a widow in Uganda with six children, represents a typical story. She is a professional midwife, and she used a tiny loan by Western standards to set up a clinic (still without electricity). She has since delivered some fourteen hundred babies, charging patients from $6 to $14 each. Opportunity International claims to have created some 430,000 jobs. As impressive, the repayment rate on the micro-loans is 96 percent.

Storing, protecting, and making profitable use of excess capital. The sultan of Brunei earned billions of dollars in oil revenues in the 1970s. Suppose he had stuffed that cash under his mattress and left it there. He would have had several problems. First, it is very difficult to sleep with billions of dollars stuffed under the mattress. Second, with billions of dollars stuffed under the mattress, the dirty linens would not be the only thing that disappeared every morning. Nimble fingers, not to mention sophisticated criminals, would find their way to the stash. Third, and most important, the most ruthless and efficient thief would be inflation. If the sultan of Brunei stuffed $1 billion under his mattress in 1970, it would be worth only $180 million today.

Thus, the sultan’s first concern would be protecting his wealth, both from theft and from inflation, each of which diminishes his purchasing power in its own way. His second concern would be putting his excess capital to some productive use. The world is full of prospective borrowers, all of whom are willing to pay for the privilege. When economists slap fancy equations on the chalkboard, the symbol for the interest rate is r, not i. Why? Because the interest rate is considered to be the rental rate—r—on capital. And that is the most intuitive way to think about what is going on. Individuals, companies, and institutions with surplus capital are renting it to others who can make more productive use of it. The Harvard University endowment is roughly $25 billion. This is the Ivy League equivalent of rainy-day money; stuffing it under the mattresses of students and faculty would be both impractical and a waste of a tremendous resource. Instead, Harvard employs nearly two hundred professionals to manage this hoard in a way that generates a healthy return for the university while providing capital to the rest of the world.1 Harvard buys stocks and bonds, invests in venture capital funds, and otherwise puts $25 billion in the hands of people and institutions around the globe who can do productive things with it. From 1995 to 2005, the endowment earned an average 16 percent annual return, which is a lot more productive for the university than leaving the cash lying around campus. (Harvard also managed to lose 30 percent of its endowment during the financial crisis, so we’ll come back to the Harvard endowment when we talk about “risk and reward.”)2

Financial markets do more than take capital from the rich and lend it to everyone else. They enable each of us to smooth consumption over our lifetimes, which is a fancy way of saying that we don’t have to spend income at the same time we earn it. Shakespeare may have admonished us to be neither borrowers nor lenders; the fact is that most of us will be both at some point. If we lived in an agrarian society, we would have to eat our crops reasonably soon after the harvest or find some way to store them. Financial markets are a more sophisticated way of managing the harvest. We can spend income now that we have not yet earned—as by borrowing for college or a home—or we can earn income now and spend it later, as by saving for retirement. The important point is that earning income has been divorced from spending it, allowing us much more flexibility in life.

Insuring against risk. Life is a risky proposition. We risk death just getting into the bathtub, not to mention commuting to work or bungee jumping with friends. Let us consider some of the ways you might face financial ruin: natural disaster, illness or disability, fraud or theft. One of our primary impulses as human beings is to minimize these risks. Financial markets help us to do that. The most obvious examples are health, life, and auto insurance. As we noted in Chapter 4, insurance companies charge more for your policy than they expect to pay out to you, on average. But “average” is a really important term here. You are not worried about average outcomes; you are worried about the worst things that could possibly happen to you. A bad draw—the tree that falls in an electrical storm and crushes your home—could be devastating. Thus, most of us are willing to pay a predictable amount—even one that is more than we expect to get back—in order to protect ourselves against the unpredictable.

Almost anything can be insured. Are you worried about pirates? You should be, if you ship goods through the South China Sea or the Malacca Strait. As The Economist explains, “Pirates still prey on ships and sailors. And far from being jolly sorts with wooden legs and eye patches, today’s pirates are nasty fellows with rocket-propelled grenades and speedboats.” There were 266 acts of piracy (or