Financial economics looks at the allocation of capital, labor, and material over time. We live in in an uncertain environment. It examines how money is traded now to create money in the future. It tries to gauge the amount of money transferred into the future, based on uncertainty and risk. It looks at how decisions by one party can make a decision to affect the money transfer in the future. And lastly, it examines how future knowledge can reduce uncertainty. Their safety ratings and bank checks seemed reasonable, so they thought.
A number of new economics books are focusing on how the calculations may have been off, leading to the current recession. A number of voices were calling out the warnings all along, it seemed, but they were drowned out by others who were overtly confident that the system itself could never fail.
Financial economics focus on the fair values of assets, how much risk is in the asset, which discount rates should be applied, what cash flows will come from a transaction and which events cash flow or assets are dependent upon. As such, it has a combative role with behavioral economic theory. Commodities, stocks, bonds, money market, financial institutions, derivatives, regulations; these are all the language of bank and finance economics.
A, more psychological approach to finance is behavioral economics. They examine how economic decisions by borrowers, consumers and financial institutions affect return on equity, market prices, allocation of resources and values. Market trends, bubbles, socioeconomic trends, market crashes and directional trends, prospect theory; these are all terms used in that discipline, which tends to consider more microeconomics theories. However, on the personal economic front, lowering high prices is attention getting. Buying cheap checks online are a practical way to benefit from online sources that have found a more efficient way to market their product. Saving fifty percent off what financial institutions would charge, cheap personal checks online is a direct add on to anyone’s bottom line.
Finance economics experts have a lot of work to do. Now that they’ve acknowledged the potential devastation that “bubbles” can cause in the market, they must work out how to manage those contingencies and limit the scope of the damage. They must learn how liquid markets can suddenly cease to exist and determine which political actions could keep cash flowing freely and purchasing power strong.
Socialist labor unions and government are at odds with a purer form of capitalism, even though capitalism in its purest form would solve most allocation of resource problems. They must look at how special interest government regulation (or lack thereof) played a part in the current crisis and make wise recommendations for the future. They need to find new models for calculating systemic risk and help bank institutions look at the cause and effect picture in management economics to make more informed decisions.