Healthpoint was started by Dr. Allen Hammond, a strong believer in market-based solutions to development issues, as a method by which to provide healthcare to the rural poor in India. Healthpoint focuses on striving to achieve the UN Millennium Development Goals, particularly Goal 4 regarding reducing child mortality. Healthpoint, like many businesses, cites its values as being “Customers come first,” “Culture of respect,” and “Continuous improvement.”

Because sanitary water plays a large role in maintaining good health, Healthpoint provides both sanitary water and consultations with medical professionals. Each Healthpoint unit contains both a water-cleansing facility and a video conferenced medical facility. Villagers visit daily to obtain clean water at a low cost of approximately $1.50 per month. Because of the facilities’ proximity, it draws a large majority of villagers. The medical consultations at a Healthpoint clinic function much like those of a regular clinic; a patient is checked in to a clinic and escorted to a private room. In each room, there is a video conferencing screen which allows for patient-doctor communication. A facilitator in each room mediates conversation between the doctor and patient: translating, retrieving equipment to conduct small tests such as blood pressure, and serving other patient needs. Succeeding the visit with the doctor, the patient visits a pharmacy located within the clinic to obtain medication. If clinical testing is necessary, it is conducted by lab technicians within the clinic. Testing for most diseases costs approximately 20 more cents, and medicine costs the same. The consultation itself costs around 40 cents, a nominal fee.1

For their investment, this company’s returns are substantial. Presently, it has $3 million invested as capital. Going forward, Healthpoint is aspiring to prompt innovators to imitate its successful business model. Currently, it has expanded itself to Latin America and the Philippines to see if a different audience will react similarly to this service. Healthpoint’s partners include Airtel, the Calvert Foundation, and Procter & Gamble, as it spans across for-profit and non-profit sectors for assistance.

Healthpoint’s business model has four central tenets: democratization of healthcare, sustainability (with a focus on economic returns), replicability/scalability, and innovation. First, Healthpoint intends to democratize healthcare by involving the local citizenry in healthcare systems. This interrelates with their sustainability model: Healthpoint actively works to provide jobs for local community members in order to ensure the future sustainability of medical checkpoints. A unit typically provides between 5 and 6 community members with employment. Healthpoint aspires to ensure that their model is replicable and scalable by charging for their services. In this manner, Healthpoint’s customer base determines the appropriate size of the business and the business can appropriately and specifically address their needs. Finally, Healthpoint focuses on innovation and new methods to improve healthcare.2

A group of women gathering in a slum to learn how to jointly apply for a loan.

The Calvert Foundation, one of Healthpoint’s partners, capitalizes on such returns for investment. It specifically takes investments and provides them to poor people attempting to rebuild their business after a catastrophe has prevented them from continuing. Loans the Foundation provides are limited to 10% of the company’s assets. The Calvert Foundation, though, differs from Healthpoint in that it is a non-profit organization. Instead of implementing market-based solutions themselves, they empower other people and organizations, including microfinancing organizations, to do so.2

Healthpoint takes one approach to for-profit social enterprise: providing services. Another very common approach is providing small loans or grants, termed microfinance. A prominent for-profit microfinance institutions is SKS microfinance founded by Vikram Akula in 1998. SKS distributes loans ranging from $46 to $260 to urban and rural poor women in India. It uses a model in which the women guarantee each other’s loans and large loan amounts can only be obtained through the collaboration of multiple women. The loans are collateral free, and there are weekly meetings held in the slum communities or village centers for women who are borrowers. Furthermore, SKS standardizes its loan packages to, according to SKS, better cater to their customers. In the case that customers do not have the financial literacy to make the best use of the loans, SKS provides training to run an income generating enterprise and to manage assets through its Ultra Poor Program.3

This business model is very similar to the business model of many non-profit microlending agencies. However, SKS turns a profit of approximately 1,270 crore rupees from 7307 members. It is the largest microfinance organization in India, operating in 19 states. SKS is so successful that it has even attracted investment from other corporations, including Bajaj Allianz, an insurance company.3

Muhammud Yunus, known as the ‘father of microfinance’ for his work with Grameen Bank in Bangladesh, has expressed doubt towards SKS and similar for-profit microfinance institutions. Yunus critiques that for-profit, public organization like SKS inevitably must focus on their investors rather than the poor they are helping. He states that going public implies to potential investors that there is an opportunity to make money from poor people. Akula counters that for-profit enterprise is the only way in which to raise sufficient funds to finance all those in need and that SKS has not yet lost sight of its ultimate mission.4

Healthpoint and SKS microfinance represent successes in the world of social enterprise. Their work is similar to charitable organizations with similar goals, but they are able to turn a profit while achieving noble goals. Their business models indicate that the key to creating successful for-profit social enterprises is to engage the community by providing them with employment or by ensuring that there is regular contact with community members.

References

1. “Transforming Rural Health Care,” E Health Point, last accessed February 28, 2012, <http://ehealthpoint.com/>.
2. John Ydstie, “Selling Water, Health Care In The Developing World.” National Public Radio, November 22, 2011, accessed February 28, 2012. <http://www.npr.org/2011/11/22/142184691/selling-water-health-care-in-the-developing-world>.
3. “Know SKS,” SKS, last accessed February 28, 2012, <http://www.sksindia.com/prospective_employees.php>.
4. “SKS Microfinance,”Angel Broking, last accessed March , 2012.  <https://docs.google.com/viewer?url=http://indiamicrofinance.com/wp-content/uploads/2010/07/sks-ipo-angel-broking.pdf&pli=1>
5. Image (CC-BY-NC): Todd Gehman, “consulting,” Flickr, September 23, 2009, accessed April 9, 2012. <http://www.flickr.com/photos/pugetive/4065331223/>
6. Image: Dhrooti Vyas.

Dhrooti Vyas is a second-year majoring in political science and possibly biology. She is very interested in social entrepreneurship and international development, particularly new ventures in global health. Follow The Triple Helix Online on Twitter and join us on Facebook.

Mandelbrot’s Story: From World War II France to ‘60s America

Mandelbrot was born in Warsaw in 1924 and privately tutored by an uncle who despised rote learning. His first exposure to algebra and his self-discovery as a mathematician followed his family’s relocation to France in 1936. After being relegated to the countryside at the onset of war in 1944, he was hidden by French resistance members in a Lyon school. For every question the professor asked, Mandelbrot would describe a geometrical approach to yield a fast, simple solution. He passed in this way through a series of elite French universities as well as Caltech.  He returned to Paris for his PhD, then proceeded to the Institute for Advanced Study. It was during these heady years that Mandelbrot developed the fractal, to which we now turn. 1

Fractals: An Introduction to Mandelbrot’s Beautiful Creations

The concepts behind the math Mandelbrot developed during those years and which he applied to fields as varied as economics and thermodynamics are easy to learn, and the results are often visually stunning. Perhaps the most important concept for our purpose in fractal geometry is that of the fractal dimension. Since the time of Euclid, a point in any space has had no dimension. A straight line has had one. A curve has had two and so on. But what about a fractional dimension? The utility of such a concept is that, unlike integer-valued dimensions, it can be used to measure roughness. 1,2

Think about is this way: Measuring a single line requires one ruler, while approximating a curve requires many smaller rulers. A rougher figure, such as the British coastline, requires even more. There is no single answer to the question of how long the coastline is. Unlike the smooth curve, the rough coastline does not provide one best estimate of length. Your answer to the question depends on the scale of the map you are drawing. 1

Mandelbrot’s solution is startlingly simple and very illuminating: for each ‘ruler’ you use, write down the estimate of the length of the coastline you get. Then halve the size of the ruler. Write down the new, increased estimate. And so on.  Observing the results of this exercise reveals a startlingly simple truth: the length we are recording increases at a more or less stable rate! This rate is Mandelbrot’s fractal dimension. 1

Bachelier And Those Who Came After

The most important effect of Mandelbrot’s math was to rework how financial theorists and traders viewed price change and volatility. To understand this effect and how radical it was, we must travel back in time, once again, to Paris. The year is 1900. The French mathematician Louis Bachelier, in his PhD thesis ‘Theorie de la Speculation’ asked the million-dollar question: ’How do bond prices move?’ He made an ingenious observation: the volatile pattern with which heat moved from particle to particle in a physical system was like the volatile pattern of bond price movement. In both systems it was possible to derive a probability distribution that broadly described its behavior.1,2,3

With this in mind, Bachelier tried to calculate the odds of a bond price going up or down. He assumed that there were two viewpoints to consider: after the event had occurred and before the event had occurred. After the price change, it was possible to attribute some form of cause and effect to the price change. But before the event had occurred, traders assumed that the market had already taken account of all relevant information and that demand would equal supply. Unless new information about a bond emerged, there was no reason to assume its price would change. The next change was as likely to be up as down. In essence, prices followed a random walk. Each price fluctuation is independent, driven by a mysterious statistical process that drives markets. Bachelier discovered that if one were to plot the price changes of a bond over a period of a month or a year, the many small price changes would cluster in the middle, while the fewer large price changes would be at the edges: a Gaussian distribution, so ubiquitous in modern statistics that it is known as the ‘normal curve.’ This opened up the standard mathematical toolkit for use in finance. 1,3

Later theorists built up a towering structure based on the assumption that bond prices were like a fair game where the long-run payoff is zero. Eugene Fama of the University of Chicago formulated the efficient markets hypothesis: a stock price always reflects all relevant information that the market has to offer. Many advances were made in deriving pricing mechanisms for risk and assets based on the idea that each price change was independent of the last. Modern finance as we know it emerged. 1

Challenging Bachelier: Mandelbrot’s New View of Volatility

There is a very old and very simple game that mathematicians like to play.  Two brothers, Harry and Tom, bet on the toss of a coin. Each toss is pure luck. Harry wins one Swiss franc on every heads. Tom wins one Swiss franc on every tails. If they play the game long enough, probability theory says that their payoffs will converge to some expected value. In this case, each brother would expect to win half the time. 1,2

But other aspects of the game get more complicated. At any given moment in the game, either Harry or Tom might have accumulated far more winnings than the other. Willey Feller, author of a widely used 1950s college textbook on probability, actually graphed each brother’s winnings over 10,000 coin tosses. Most readers did not pay this graph any attention, but Mandelbrot did: he found that the times at which each brother’s purse emptied out were clustered together. It was an irregular pattern: a few long, up and down cycles, with shorter cycles riding on top of them: it seemed that price changes were not independent of one another, which meant that the efficient markets hypothesis (which assumed a ‘random walk’) was based on a fallacious assumption, as were Black-Scholes’ equations. 1

The French maverick mathematician discerned an important pattern: he found that the irregular, rough pattern in the many pennies game implied a different kind of randomness, a kind of randomness wilder than the politely shaped Gaussian distribution. 1

It was the winter of 1961. When he made this discovery, Mandelbrot was at IBM, studying income distribution patterns between the rich and poor. The Harvard economics department invited him to speak about his work. He walked into the office of his host that day to a surprise. On the chalk-board was a figure with a convex shape that opened to the right. He immediately turned to Professor Hendrik Houthhakker and asked why his diagram was already drawn. Houthhakker was perplexed: ‘These are graphs of cotton prices.’ 1,2

The puzzling similarity in pattern between income distribution and cotton prices got Mandelbrot thinking. Was it pure coincidence that the two were spitting images of one another, or was there a deeper truth in the strange connection between the two pictures? And so it was that Mandelbrot was propelled into investigating the mysteries of finance. 1,2

Different Kinds of Randomness as Different Kinds of Volatility

The difference between a Gaussian distribution and the kind of distribution that the shape of the Feller graph implied for Mandelbrot can be demonstrated aptly with the following parable. Imagine an archer shooting between two horizontal lines drawn in white paint on a wall 100 yards away.  In the first scenario, the archer is blindfolded. Naturally, his arrows are all over the place. The statistician sitting safely behind the archer graphs each of the archer’s shots on a frequency vs. distance from target graph. The pattern is rough and irregular: a Levy distribution. Now imagine scenario two. The same archer minus the blind-fold. He obviously manages many more shots closer to the target, and comparatively fewer shots far away from the target. This time, the statistician’s graph looks far more familiar: a normal curve, a Gaussian bell.1

Mandelbrot compared each distribution from the above scenario to the Feller graph. He found that, over a long period of time such as that represented by 10,000 coin tosses, the distribution corresponded to the Levy distribution, and not the bell curve! 1

The Role of Fractals: Conclusion

Mandelbrot began, in a series of subsequent papers, to measure the roughness of different Levy distributions (as bond prices, of course) using fractals. And so it came to be known, at least in a select circle of the academic world, that the fractal dimension of a Levy distribution is a far more accurate measure of volatility than a Gaussian distribution. 2

While Mandelbrot’s finding may seem innocuous to some, the implications are profound. What is very, very unlikely for a system that follows a Gaussian distribution is far more so for a Levy distribution. This means that recessions, big price changes, and all the other things which modern financial theory posited were ‘six-sigma’ events, events that shouldn’t have happened, are the results of models based on inaccurate assumptions. These models, Mandelbrot’s body of work suggests, have caused us to misperceive risk in a dangerous way. His work is a potential explanation to unusual market volatility: it suggests that our notions of ‘usual’ might be incorrect. There are academics who have taken up the baton from Mandelbrot, who died last October. These scholars work to build fractal descriptions of markets, models that take into account the Levy distribution. It remains to be seen how long it will take Wall Street to begin using these Levy-based models. 1

References:

1. Benoit Mandelbrot and Richard Hudson, ‘The (Mis)behavior of Markets: A Fractal View of Risk, Ruin, and Reward,’ Basic Books, August 2004
2. Benoit Mandelbrot, ‘The Variation of Certain Speculative Prices,’ The Journal of Business, Vol. 36, No. 4, October 1963, pp. 394-419
3. Louis Bachelier (Author), Mark Davis (Translator), and Alison Etheridge (Translator), ‘Louis Bachelier’s Theory of Speculation: The Origins of Modern Finance,’ Princeton University Press, September 2006
4. Benoit Mandelbrot, ‘Fractals and Scaling in Finance: Discontinuity, Concentration, Risk,’ Springer, 1997
5. Image (CC-BY-SA): Ken Teegardin, “Graph with Stacks of Coins,” Flickr, taken March 4, 2011, accessed April 2, 2012, http://www.flickr.com/photos/teegardin/6093690339/.
6. Image (CC-BY-NC-ND): Jack Keene, “Cracked,” Flickr, taken July 5, 2006, accessed April 2, 2012, http://www.flickr.com/photos/whatknot/2804669838/
7. Image (used with permission): Jez Liberty, “Why Trend Following Works: Look at the Distribution,” Au.Tra.Sy blog — Automated Trading System, last modified October 21, 2009, accessed April 2, 2012, http://www.automated-trading-system.com/why-trend-following-works-look-at-the-distribution/

Akshat Goel is a second-year student at the University of Chicago majoring in economics and sociology. Follow The Triple Helix Online on Twitter and join us on Facebook.

Some have blamed economic policy makers on the Hill while others like the Occupy Wall Street protesters have channeled their anger toward large corporate executives. However, a growing number of people point to the educational system, in particular the lack of financial literacy education in the United States. Studies show that people with lower incomes track spending better but are often unaware of other aspects of financial literacy such as basic investing, loans, and credit.

Forty-one percent of U.S. adults gave themselves a C, D, or F on their knowledge of personal finance, a substantial increase from 33% in 2010. In 2011, half of adults who earned less than $35,000 or $35,000 to less than $50,000 had a budget and tracked their spending, compared with just three in ten adults who earn $100,000 or more6. Financial literacy is defined as “the ability to make informed judgments and effective decisions regarding the use and management of money and wealth7.” Currently, only seven states require financial literacy to be a part of the public school curriculum5. Private and public coalitions have made efforts to contribute to the expansion of financial literacy education in the United States, but there is insufficient data about their impact.

A debate continues between professors, policy makers, and business professionals about whether all or any financial literacy education is effective and the potential alternatives to this education. Policy makers also consider what extent the government should have a role in the financial decisions of consumers. Consumer freedom of choice in making decisions must be balanced with the negative externalities that arise from poor financial decisions made by uninformed consumers, which may contribute to a recession. One proposed solution is to insert standard financial options into different markets such as housing or automobile so that financially illiterate consumers do not have to make decisions. Another possible solution is effectively teaching financial literacy in classrooms and the workplace.

Private groups, from large organizations like the National Foundation for Credit Counseling to smaller groups like Mind Your Money, aim to teach financial literacy in schools and the workplace. The non-profit National Foundation for Credit Counseling is the country’s largest financial counseling organization. Mind Your Money is a grassroots campaign based in Brooklyn, NY that provides educational financial workshops for teens and pre-teens in addition to holding forums to engage parents in the process.

Ted Gonder is Co-founder and Executive Director of Moneythink, a non-profit student movement expanding economic opportunity for urban youth through peer-mentorship and financial education.

Moneythink, founded at the University of Chicago in 2009, trains college students to teach high-school students financial literacy and entrepreneurship curricula in communities surrounding urban college campuses. The organization has chapters at universities across the country, including at the University of Florida and Columbia University. Both Mind Your Money and Moneythink Chicago focus their efforts in low-income communities. Moneythink teaches financial goal-setting through peer-to-peer mentorship. They use pop culture and current news examples to teach important financial concepts. Moneythink University of Chicago president Jennifer McPhillips believes that the organization has made an impact in Chicago.

“When we went into the school [Woodlawn Charter], the students would understand the short term benefits of money but not long-term things like interest on loans,” said McPhillips. She believes that high-schoolers’ concern with short-term gratification is at the root of their lack of financial planning.

Fellow Moneythink executive Brittany Agostino noticed, however, that the students she taught had a remarkable intuition and interest in finance. For instance, her students did not understand the differences between local and national banks, but they had a keen interest for stock portfolios and how to invest.

Moneythink, like many other financial literacy initiatives, does not have much quantitative data about their impact, but they are experimenting with different metrics. They are starting to use a pre-test and post-test in every classroom to gauge the effectiveness of their programs. A strong critique of financial education initiatives is that it is hard to measure quantifiable outcomes because student progress must be tracked throughout their adult lives.

Moneythink’s goal-setting strategy is consistent with research featured in a 2008 U.S. News and World Report’s “The Financial Literacy Crisis,” which illustrated the effectiveness of interactive and competitive programs that focus on “big-picture” concepts like goal-setting. The article also mentioned introducing these concepts at a younger age so that children can have a strong understanding of financial goal-setting as they transition into adulthood5. Business professionals such as Thomas F. Cooley, former dean of the NYU Stern School of Business, also agree that education is necessary. “Clearly, the best way to protect consumers is to educate them. As a society we don’t seem to have figured out how to do that,” he said in his article America’s Financial Illiteracy in Forbes Magazine. “It’s time we did1.”

However, Richard Thaler, a professor of behavioral science and economics at Chicago’s Booth School of Business, does not believe that financial literacy education is effective. “It’s naive to think that we could give high school students one financial course and then make them financially literate consumers,” said Thaler in “The Financial Literacy Crisis.” In the book Nudge, he proposes that consumers be automatically enrolled in budgeting and savings plans with their employers. For instance, he recommends that adults be automatically enrolled into retirement plans and supports allowing consumers to sign up for saving money each time they receive a raise5.

Research on the impact of financial literacy education in schools reveals ambiguous results. One study, conducted by Douglas Bernheim, Daniel Garret, and Dean Maki in 2001, tried to determine whether states with mandatory financial education had more financially literate people. They determined that people with mandatory financial education had larger savings rates2. Additionally, the number of people with larger savings rates from these states increased over time2. However, a study done by Shawn Cole and Gauri K. Shastry in 2008 used the same method but tracked the data over a longer time period. They found that the financial education mandates have no impact on behavior7. The contrasting results suggest that the methodology used to assess the impact of financial education can affect the results and make conclusions about its impact ambiguous.

What Money Means Seminar on how financial education can be used to enrich teaching, developed by Personal Finance Education Group and HSBC.

McPhillips acknowledges critiques about financial literacy education but believes that it can be effective if it is done the right way. “A big critique about financial literacy is that it’s hard to teach financial skills in a short period of time. But our approach is activity and action-oriented. It is not about definitions.” For example, some mentors have students keep goal journals to record financial and personal goals that are periodically checked on and discussed with a peer and mentor9.

Financial education programs implemented in the workplace are more definitively effective. For instance, a 2003 study by Bernheim and Garret found that, on average and accounting for different levels of savings, employees from firms with financial literacy education have significantly higher levels of 401(k) contributions and balances­­3. A similar study by Annamaria Lusardi in 2002 indicated that financial education had an especially significant impact at the lower end of the savings distribution5.

Some believe that public policy should be utilized to increase financial literacy among consumers. The government’s Consumer Financial Protection Bureau, founded in 2011, regulates some financial institutions, but their jurisdiction is quickly spreading to large banks and credit unions.4. There are suggestions that the CFPB should focus on financial literacy initiatives for consumers rather than regulate these institutions. They have an Office of Financial Education and have set up a website called MyMoney.gov, that provides information to consumers about managing debt and credit. Additionally, the CFPB could go one step further and provide default options for mortgages and credit consumer plans for financially illiterate consumers who are ill-informed about their financial options1.

It is unclear whether it is best to institute a financial literacy education mandate, provide financial options for the financially illiterate, or strongly encourage consumers to make their own financial plans. Research on the effect of the mandate has generated unclear results that may be influenced by the research methodology. Financial literacy education in schools gives everyone access to some basic knowledge of finance. Studies do exhibit financial literacy education’s impact in the workplace, but not everyone will have equal opportunity to this education. Government initiatives like the CFPB started by regulating financial institutions and gravitated toward promoting financial literacy, making it evident that the government is recognizing financial illiteracy as a pertinent issue in the United States.

References:

1. Cooley, Thomas. “America’s Financial Illiteracy.” [Internet] [Updated 2010] Available from: http://www.forbes.com/2010/01/12/cfpa-financial-illiteracy-credit-cards-opinions-columnists-thomas-f-cooley.html.
2. Bernheim, B. D., Garrett, M. D., and Maki, D. M. “Education and saving: The long-term effects of high school financial curriculum mandates.” 2001 Journal of Public Economics80:435-465.
3. Bernheim, B. D. and Garrett, M. D. “The Effects of Financial Education in the Workplace: Evidence from a Survey of Households.” 2003 Journal of Public Economics87:1487-1519.
4. Bishop, Martin. “The Consumer Financial Protection Bureau’s first six months: A predictor of the new agency’s growth and expansion.” [Internet] [Updated 2012] Available from: http://newsandinsight.thomsonreuters.com/Legal/Insight/2012/01_-_January/The_Consumer_Financial_Protection_Bureau%E2%80%99s_first_six_months__A_predictor_of_the_new_agency%E2%80%99s_growth_and_expansion.
5. Palmer, Kimberly. “The Financial Literacy Crisis.” [Internet] [Updated 2008] Available from: http://money.usnews.com/money/personal-finance/articles/2008/04/02/financial-literacy-101.
6. Harris Interactive Inc. Public Relations Research. “The 2011 Consumer Financial Literacy Survey Final Report.” [Internet] [Updated 2011] Available from: http://www.nfcc.org/newsroom/FinancialLiteracy/files2011/NFCC_2011Financial%20LiteracySurvey_FINALREPORT_033011.pdf.
7. Gale, William, Levine, Ruth. “Financial Literacy: What Works? How Could it be more effective?” [Internet] [Updated 2010] Available from: http://www.brookings.edu/~/media/Files/rc/papers/2010/10_financial_literacy_gale_levine/10_financial_literacy_gale_levine.pdf
8. Lewin, Tamar. “College Graduates’ Debt Burden Grew, Yet Again, in 2010.” [Internet] [Updated 2011] Available from: http://www.nytimes.com/2011/11/03/education/average-student-loan-debt-grew-by-5-percent-in-2010.html.
9. Interview with Ms. Jennifer McPhillips and Ms. Brittany Agostino. Moneythink,  Chicago. January 30, 2012
10. Interview with Mr. Michael Herbst. Morningstar, Chicago. February 1, 2012
11. Image (CC-BY-SA): Dugdale, Dave. “Analyzing Financial Data.” [Internet] [Taken October 20, 2010] Available from: http://www.flickr.com/photos/davedugdale/5099605109/
12. Image (CC-BY): Gonder, Ted. “Abandoning Mediocrity and Seizing Opportunity.” [Internet] [Updated March 15, 2012] Available from: http://www.whitehouse.gov/blog/2012/03/15/abandoning-mediocrity-and-seizing-opportunity
13. Image (CC-BY-NC-ND): HSBC UK Press Office. “Trainee teachers using puppets to teach financial education.” [Internet] [Taken July 1, 2011] Available from: http://www.flickr.com/photos/hsbc_uk_press/5890232927/

Tanya Mookerji is a second-year student at the University of Chicago majoring in economics and public policy. Follow The Triple Helix Online on Twitter and join us on Facebook.

Raising animals strains the environment not only because it contributes generously to greenhouse gas emissions, but because it additionally contaminates water sources and aquatic ecosystems, and requires a staggering amount of resources. The efforts of researchers to render the production process more efficient and the efforts of government to regulate it offer some hope, but a smaller-scale, consumer-based solution with more immediate effects is the reduction of animal product consumption, especially meat. In a world of rising temperatures and scarcity, the rapid enactment of any solution is urgent, especially when one considers the sheer number of farm animals being bred for our eventual enjoyment.

There are over 1.5 billion cows and 1 billion pigs in the world [3]. They excrete an astonishing 80 million metric tons of waste annually [3]. Livestock-related emissions from digestive processes and animal wastes account for 26% of total agricultural greenhouse gas emissions. How? While being transferred to waste lagoons, liquid and solid wastes undergo chemical reactions which release methane [1]. But the major culprits are processes which take place in the digestive tracts of ruminants such as cows, called enteric processes, which result in 70% of agricultural methane emissions [1]. This might seem less incredible upon learning that methane production in cows is roughly equivalent to food intake [1][A].

Hogs are even more detrimental to the environment. An animal unit[B] of beef cow results in 59.1 pounds of waste every day [5]. An animal unit of hogs results in 63.1 pounds of waste on a daily basis [5]. Although this outnumbers hogs, porcine waste contains nutrient levels typically seven times higher than cattle excretions [6]. Nutrients may have a benign connotation, but they can contaminate surrounding waters when they seep out of overflowing or inefficient waste lagoons. The nitrates and phosphorous not only taint drinking water, but create dead zones in aquatic ecosystems when the formation of algal blooms causes oxygen depletion in the water. Manure runoff occurs even after it is removed from the lagoons, because it is used unnecessarily copiously as fertilizer. It is, after all, best from a farmer’s point of view to not risk providing too few nutrients to the soil [6]. Furthermore, this runoff contains microorganisms that are capable of causing illness, such as diarrheal diseases, in humans [1, 3]. Due to the common practice of giving superfluous antibiotics to cattle, hogs, and poultry to ward off sickness, the runoff may also contain bacterial strains resistant to many drugs [1, 3].

Animal byproducts are not the only problem. The resource input necessary to produce them is absurdly high, especially when compared to the amount required for grains and vegetables. With clean water becoming an increasingly precious resource, 2500 gallons are estimated to go into the manufacture of a pound of beef [7]. Other estimates are even more astronomical: a recent Cornell study placed the number around 13 000 [8]. Compare this to the 60 gallons needed for a pound of potatoes, and the mere six for a head of lettuce. Grains are slightly more intensive[C]. Attentive readers might point out that chicken has presented few problems thus far[D]. Here comes the snag: a kilogram of chicken requires 3500 liters of water to produce. That still outstrips the 2000 liters for a kilogram of soybeans [3].

A diet of primarily grains and legumes would require less intensive production and go some way to alleviating world hunger. Why, then, do many of us believe in and live on diet based primarily on meat and other animal products instead? Meat is not technically vital to life, and consuming it infrequently is actually better for our health. Humans are animals, whether we like to admit it or not, and our own bodies produce saturated fat. Its continuous intake can lead to atherosclerosis and other kinds of heart disease. Other natural products of our bodies are beneficial: bodies with normal metabolic function can synthesize all of the necessary proteins from only eight out of the twenty amino acids [9]. All eight of these basic amino acids can be obtained from beans and corn. Yet slicing into a cut of pork or chicken or biting into a beef patty is an event that occurs at least once a day for most people. Perhaps it is due to the prevalent belief that it is natural for us to be meat-eaters. Perhaps it is because ‘meat tastes good’, which is not an objective or rational argument at all. But no matter what the contrary claims are, the truth is that our diets and agribusiness are in need of reform.

Some countries have recognized the urgency of this need and have responded with legislation, the goal of which is to reduce the amount of waste run-off which is greatly detrimental to human health and the environment. The Netherlands has imposed limits on the phosphorous content of manure and the methods of its application [11]. The European Union has enacted legislation enforcing a maximum number of manure-producing animals per hectare of land available for manure-spreading [11]. A non-legislative trend is the methane digestor. These recent inventions separate liquid and solid wastes and generate electricity from methane, but they are costly and most of the electricity powers the dairy farms themselves [12].

There are, of course, other options that could ameliorate this problem: scientists could conduct more research about how to obtain greater amounts of milk, eggs, and meat from individual animals; ground meat manufacturers could begin to partially substitute plant-derived proteins for meat in their products; innovations in genetic engineering might result in organisms that produce less waste [1, 4, 11]. All of these approaches, however, would take time and involve some degree of uncertainty. The most evident solution begins with the consumer at the grocery store and the restaurant, and in a global situation where everyone watches one another enviously, making good choices is almost a responsibility for the privileged.

A worrisome global trend of increasing meat and dairy consumption can be observed in developing countries as per capita income rises. This trend is at least partly in emulation of the industrial world’s practices: countries like us. And it is the personal habits of United States residents which are the most dangerous: as a nation, we consumed 122 kilograms of meat per capita in the year 2000, more than any other nation in the world [11]. That number had not decreased in 2005, despite exceeding the USDA’s highly lenient Food Pyramid guidelines, and it sets a terrible example for other nations [13]. It is clear that our choices concerning food have wide-reaching impact, and currently they are destructive to animals, destructive to ourselves, and destructive to the world we inhabit.

Notes:
[A] To be fair, the cows themselves do not strictly produce the methane; microbes which live in their guts do. Methanogens produce methane by reducing carbon dioxide with hydrogen gathered in the gut. The longer a cow’s food takes to digest, the more methane the digestion process generates. [4] Nowadays, industrial farming completely ignores the natural grazing habits of cows and raises them on soybeans and corn, which digest more slowly [1].

[B] An animal unit is equivalent to one thousand pounds of that organism. One cow usually weighs around 1400 pounds, or 1.4 animal units. A hog typically weighs 200 to 300 pounds, or 0.2-0.3 animal units [5].

[C] Wheat requires 108 gallons of water per bushel, corn 168, rice 229, and soybeans 240 [7]. Nevertheless, 40% of total grain yields worldwide currently are destined to be animal feed, although direct consumption would be more efficient [3].

[D] For comparison, one animal unit (about 125 eight-pound chickens) of chicken means about 15 metric tons of annual waste [10].

References:

1. Paustian K, Antle JM, Sheehan J, Paul EA. Agriculture’s Role in Greenhouse Gas Mitigation. 2006; Prepared for the Pew Center on Global Climate Change[14-76].
2. Mui S, Alson J, Ellies B, Ganss D. A Wedge Analysis of the U. S. Transportation Sector. 2007; EPA 420-R-07-007: 6
3. Masson JM. The Face on Your Plate. Norton, New York. 2009; Ch. 1: 35-36, Ch. 2: 95, Ch. 5: 171.
4. Miller T.L., Wolin M.J., Methanogens in human and animal intestinal tracts. Syst. Appl. Micro- biol. 1986; 7: 223–229.
5. Natural Resources Conservation Services, Agricultural Waste Management Handbook, 1992. Available fromhttp://www.nrcs.usda.gov/technical/ECS/nutrient/animalmanure.html.
6. Wall, Keynen J. Knowing When to Say When to Hog Waste: Do State Lagoon Regulations Adequately Protect Ground Water in Kansas. Kansas Journal of Law and Public Policy. 2001-2002; 11: 113-140.
7. Pimentel D, Pimentel M. Sustainability of Meat-Based and Plant-Based Diets and the Environment. American Journal of Clinical Nutrition. 2003; 78(3): 660s-3S.
8. Goodland R, Pimentel D. Sustainability and Integrity in the Agricultural Sector. Ecological Integrity: Integrating Environment, Conservation, and Health. Washington, DC: Islland Press, 2000.
9. Campbell N, Reece R. Biology. Pearson, Benjamin Cummings, 2004; 7th ed.
10. Kellogg Robert L., et al. Manure Nutrients Relative to the Capacity of Cropland and Pastureland to Assimilate Nutrients: Spatial and Temporal Trends for the United States. USDA Natural Resources Conservation Service and Economic Research Service. December 2000; 2, 49.
11. Smail V. Worldwide transformation of diets, burdens of meat production and opportunities for novel food proteins. Enzyme and Microbial Technology. 2002; 30(3): 305-311.
12. Stokes JR, Rajagopalan RM, Stefanou SE. Investment in a Methane Digestor: An Application of Capital Budgeting and Real Options. Applied Economics Perspectives and Policy. 2008; 30(4): 664-676.
13. Wells HF, Buzby JC. Dietary Assessment of Major Trends in U.S. Food Consumption, 1970 – 2005. Economic Information Bulletin. March 2008; EIB -33: 27.
14. Herbst B. [photograph] 2009. Available at: http://www.flickr.com/photos/briherbst/3963820900/

Niloufar Hafizi is a first-year economics major at the University of Chicago. Please join The Triple Helix Online on Facebook. Follow The Triple Helix Online on Twitter

Eagle Island, a remote safari camp in Botswana

Ecotourism is a growing industry in many developing countries.  As an alternative to mining, hunting or farming, it seems more sustainable.  It preserves the rainforests, the rivers, and the savannas, but what does ecotourism mean for economic development in these countries?  In many countries that formerly relied on colonial plantations for income, ecotourism is an industry that makes a lot of sense.  It preserves natural ecosystems, making it more sustainable than agricultural expansion, and it provides a venue for unskilled laborers to work without the input of capital necessary for industrialization.  It seems like a perfect solution.

In my travels, the people I spoke to often praised their governments’ support of ecotourism and nature preservation. In Botswana, the alternative had been hunting reserves as a supplement to the mining industry. Photographic safari reserves provide a sustainable and more fashionable alternative.  Costa Rica, the poster-child for ecotourism, have made a name for themselves as the adventurous, grittier alternative to Mexico for American tourists. It leads me to wonder what will happen if the success of this product is based on its novelty?

The underlying framework of this argument lies in the theory behind the position of developing nations vis-à-vis globalization.  Developing nations enter the global market at a distinct disadvantage. They lack the capital for heavy industry and large-scale agriculture, mining, and tourism are often funded by foreign multi-nationals.  Tourism creates jobs, but it does not necessarily lead to development. Most jobs in tourism are menial and provide little upward mobility, creating a conundrum.  On one hand, ecotourism creates jobs and provides a growing and sustainable industry relative to farming, hunting, or mining in countries with growing populations and shrinking wild lands.  On the other hand, relying on tourism traps these countries in a cycle of dependency on the countries that provide the tourists. This leaves them vulnerable to the whims of those people and the fluctuations in their markets.  Obviously, recessions in developed countries can wreak havoc on developing countries if they become reliant on something as transient as tourism.

The problem with ecotourism is that while it is sustainable, it is also exclusive. It excludes mining and agricultural expansion and precludes the development of industry by putting high demands on land conservation and pollution control.   I don’t know the answer to this problem, but it seems to be the dilemma of all “latecomers” to the global economy: how to overcome dependency without isolating themselves.  Further, in ecotourism, like many other industries often run remotely by foreign companies, how do you ensure that the country making the product reaps the benefits?  The second question is easier to remedy than the first, but in either case economic diversification remains a difficult issue, especially in developing nations. I just wonder if the move toward ecotourism is sustainable in the economic sense rather than just the environmental sense.

Obviously the counterexample would be a fast-growing, developing economy such as India or China that has taken to heart internationally decided pollution exemptions for industrial expansion in developing countries. While this leads to a larger, more diversified economy, and faster growth, some countries that have followed this model, most notably China, are beginning to see the repercussions of fast economic growth without regard for the environment.  Many of China’s rivers and natural places are hopelessly polluted, and its cities are plagued by thick smog from burning coal, which is the cheapest fossil fuel, to meet the giant populations ever-increasing energy demands. All of this environmental destruction is finally affecting their ability to grow food as well as people’s health.  In contrast to ecotourism, this model does better people’s quality of life much faster, the economy becomes more diversified, and there is more upward mobility. However, it leads to health, food and sustainability problems in the long run.  I am not sure which model is better because you don’t see the China/India model in places with small populations, and you don’t see the ecotourism model in densely populated countries because that would imply that the natural areas were already encroached upon.  I wonder if there is a way to reconcile both economic and environmental interests in developing countries when they seem so far in opposition under most definitions of development.

http://www.jstor.org/stable/20643839

First, the direct correlation that skeptics draw between the swine flu outbreak and Kellogg’s immunity health claims needs to be examined and questioned. In fact, Kellogg states that the company began developing cereals with higher vitamin contents more than a year ago, long before most people even became aware of swine flu. Moreover, cereals with special health labels were in stores last May, months before the start of the flu season.[2] This begs the question of why people are making strong associations between two events that may be entirely unrelated. One possible explanation is that in times of distress, individuals are more prone to cynicism, or “a disposition to disbelieve in the sincerity or goodness of human motives and actions.”[3] With the exaggeration of the severity of swine flu, it is no wonder that many people develop irrational fears and as a result become unnecessarily tense and anxious, inducing paranoia.

In addition to average consumers, health advocates are also wasting their time in criticizing Kellogg’s new cereals and their labels. For instance, Kelly Brownell of Yale University’s Rudd Center for Food Policy and Obesity, explained to Kelly Wallace of CBS News that “It simply defies logic to think that spraying on some vitamins and minerals to a cereal…makes a healthy product.”[4] True, boosting immunity takes much more than increasing vitamin and mineral contents; however, health advocates need to ask if the new cereals are at least as healthy as the old ones. That is to say, aren’t the new high vitamin content cereals still an improvement from the old ones regardless of how much vitamins actually play a role in increasing immunity? Therefore, health advocates who are determined to prove the invalidity of Kellogg’s claim are taking it too literally, not to mention investing too much energy and effort that would be better spent on more important issues.

Perhaps the aspect of the attacks against Kellogg that is most worthy of note is the fact that regardless of how inaccurate Kellogg’s claim is, it is simply a marketing technique that is used by many other companies and cannot be stopped. Even when considering only advertisements for cereals, statistics show that many cereals, including Lucky Charms, Reese’s Puffs, and Cookie Crisp, which are all manufactured by General Mills, average three to four unsupported health claims per box.[5] Even if all such false advertisements are eliminated in the future, parents and health advocates alike have many more battles ahead. According to a study from the Rudd Center for Food Policy and Obesity at Yale University, cereal companies spend more than $156 million per year marketing to children, and the average preschooler sees 642 cereal ads per year on television, almost all for cereals with little nutritional value.[6] Above all else, cereal companies and any other for that matter, are businesses, which cannot help but exaggerate the benefits of products in order to lure consumers and make profits. From a legal perspective, private parties including consumers and competitors can file a complaint for false advertising under the Lanham Act. However, merely proving the advertiser falsely advertised is not sufficient. In fact, the plaintiff must also prove that he “was injured as a result of the deception.”[7] Thus, the law tries to protect not only consumers, but also businesses, making the former’s battle even more difficult. Truthfully, it is idealistic and naïve of anyone to believe that advertising strategies, especially those targeted towards young children, can be changed to be more truthful in the near future. After all, the primary goal for companies is to ensure their own survival. Therefore, rather than attacking Kellogg, it is wiser to realize that we need to put greater trust in our own judgments, which sadly are often undervalued despite their reliability.

References
1 Keri Glassman. 2009. “Kellogg’s Immunity Claims Draw Fire.” The Early Show. http://www.cbsnews.com/stories/2009/11/03/earlyshow/health/main5508662.shtml?tag=contentMain;contentBody
2 Ibid.
3 Daily Mind, The. 2009. “How You Can Defeat Cynicism and Become a Positive Thinker.” The Daily Mind. http://www.thedailymind.com/how-to/how-you-can-defeat-cynicism-and-become-a-positive-thinker/
4 Keri Glassman. 2009. “Kellogg’s Immunity Claims Draw Fire.” The Early Show. http://www.cbsnews.com/stories/2009/11/03/earlyshow/health/main5508662.shtml?tag=contentMain;contentBody
5 Deardoff, Julie. 2009. “Study: Sugary Cereal Ads Target Children.” The Chicago Tribune. http://featuresblogs.chicagotribune.com/features_julieshealthclub/2009/11/sugary-cereal-ads-target-childrenimmunity-claims-from-itsboxes-of-cocoa-krispies-and-rice-krispies-and-the-smart-choice-logo-.html
6 Ibid.
7 Frank D. Edens. 2008. “False Advertising Law & Legal Definition.” US Legal. http://definitions.uslegal.com/f/false-advertising/

Excuse me–did national health just get compared to a stock market index, like the Dow Jones?

Yes, an abstract idea such as happiness is being quantitatively measured. These numbers come from a recently developed project called the Gallup-Healthways Well-Being Index. As the name suggests, the Index is a collaborative venture between Gallup, Inc.–the makers of the ubiquitous Gallup Polls–and Healthways, Inc., a provider of numerous health management programs. Their goal, though ambitious, has good intentions: compile the largest database of health research so that communities, employers, and legislators can create policies that will best improve people’s welfare.[2]

Gallup collects its data by conducting 1000 phone interviews nationwide at the end of each day. Respondents are asked questions relating to six categories: life evaluation, emotional health, physical health, healthy behavior, work environment, and basic access to healthcare.[3] Sample questions may include how the respondent expects life to be five years later or if the respondent felt healthy enough to go about the day. Responses are then sorted by demographic factors to help policy makers form programs tailored to a particular population or region.

Gallup-Healthways acknowledges the flaws in the procedure; the nature of a survey innately suffers from bias in the wording of questions, untruthful responses, and nonresponse. However, the sampling method controls for variables it can, such as using random digit dialing for both landline and cell phones, and conducting the survey in the language of the household.[4] Regardless of the factors affecting data collection, the final result is the same. After analyzing each day’s 1000 interviews, an average point value is calculated for each of the six categories, along with the amount of change from prior measurements. The entire average becomes the Gallup-Healthways Well-Being Index and is published monthly.

Despite its weaknesses, Gallup’s survey is the largest and most developed of its kind. Therefore, the results of the index scores are viable indications of trends in America’s view of its own welfare. Gallup-Healthways could not have chosen a more perfect time to begin a happiness tracking meter, especially in today’s difficult economy.

The United States officially declared a recession in December 2008–the worst since the Great Depression, claim economists.[5]As the number of unemployed Americans and foreclosed homes grows, it is difficult to see any reason for the index to display positive results of happiness and health.

How about that American Dream? Can Horatio Alger even bring up the idea of “rags to riches” in times like these when many are barely getting by?

Gustavo Arellano, an editor for the Los Angeles Times, represents one of the major attitudes regarding the Dream. He claims that his parents, two immigrants who began their quest for the Dream in the 1980s, are better equipped for success than the young adults of the current generation are. They bought a house when mortgage was affordable; they learned a diverse set of practical, vocational skills and thus possessed flexibility in the jobs they could hold. On the other hand, Arellano has a master’s degree under his belt and still struggles to pay rent for his one-bedroom apartment. But he is on the fortunate side. Arellano comments how his peers still live with their parents or friends.[6] At this time, it is difficult finding jobs to put university degrees to practice. Consequently, many students opt to stay in school and continue their education until the economy recovers.

Achieving the ideal Dream is not entirely out of the picture, but the recession has certainly pushed it farther from reach. Finding success in today’s circumstances may require extra time and more sacrifice to either develop more skills or conjure up an appealing, entrepreneurial idea.

Despite additional challenges, multiple poll results still point towards a common sentiment. The majority of respondents continue to believe the Dream can be achieved.[7] According to the Gallup-Healthways Well-Being Index, the scores since May 2009 have been higher than those of the corresponding months in 2008, when the nation’s economy had not yet taken a fall.[8] Another poll conducted by the New York Times and CBS News reported that 44% of respondents believed they had reached the American Dream this year.[9] Surprisingly, this percentage is greater than the 32% who thought they had succeeded four years ago.[10]

How do we explain an increase in reported happiness and well-being during times of trouble?

People are collectively changing their definition of the American Dream and lowering their standards during more meager times.[11] One of the questions in the New York Times and CBS News survey asked what the American Dream meant. No matter how many different types of answers people give, responses can usually be categorized into either financial and occupational security or patriotic values such as freedom and opportunity. Four years ago, 19% of respondents said the Dream was about the tangible rewards of financial security, while 20% chose the intangible ideals. This year, 11% chose money, as opposed to the 27% who valued American ideas.[12]

It is a rational phenomenon. Why hope to achieve something that is quickly disappearing and becoming harder to find? This curious relationship between increased ratings of happiness and tougher economic times highlights a potential blemish in the Gallup-Healthways Well-Being Index. The poll, like any other, completely depends on each respondent’s outlook on her health and happiness. Undoubtedly this is a highly subjective attempt to measure the nation’s overall quality of living.

Therefore, all that the well-being project does is reflect collective changes in attitude among Americans. The direction of change illustrated by index scores plotted over time is not always accurate either, or at least does not conform to what logic would dictate. For instance, the monthly index reports currently indicate that people are increasingly satisfied with their level of health and happiness, even though external conditions, such as the economy, do not support such a trend. It is far more probable and realistic that the true morale of Americans is in a downward spiral, contrary to what Gallup’s data suggest. The Well-Being Index may be publishing information that is excessively skewed with optimism because it is influenced by confounding factors that are subjectively determined. An example of such influences is the change in standards for people to feel content.

Or, perhaps it is true that Americans are gradually learning to remain happy with fewer commodities and luxuries. That would truly be an improvement for our commercialist tendencies.

References
1.    Jim Harter, Dan L. Witters, James E. Pope, and Amy Neftzger. Gallup-Healthways Well-Being Index. Gallup, Inc. and Healthways, Inc. November 1, 2009. http://www.well-beingindex.com (accessed November 17, 2009).
2.    Ibid.
3.    Ibid.
4.    Ibid.
5.    Katharine Q. Seelye. What Happens to the American Dream in a Recession? The New York Times. May 7, 2009. http://www.nytimes.com/2009/05/08/us/08dreampoll.html?_r=1 (accessed November 15, 2009).
6.    Gustavo Arellano. The Arellanos of Anaheim. The Los Angeles Times. March 11, 2009. http://www.latimes.com/news/opinion/la-oe-arellano11-2009mar11,0,417418.story (accessed November 16, 2009).
7.    John Zogby. The American Dream Is Still Strong. Forbes.com LLC. January 29, 2009. http://www.forbes.com/2009/01/28/american-dream-polling-opinions-columnists_0129_john_zogby.html (accessed November 14, 2009).
8.    Harter, Witters, Pope, and Neftzger, Gallup-Healthways Well-Being Index.
9.    The New York Times, CBS News. “American Dream Poll.” The New York Times. May 7, 2009. http://graphics8.nytimes.com/packages/pdf/national/20090507_american_dream_poll.pdf (accessed November 16, 2009).
10.    Seelye, What Happens to the American Dream in a Recession?.
11.    Ibid.
12.    The New York Times and CBS News, “American Dream Poll.”

You just turned 21 and your friends take you on an all-expense paid vacation to Vegas. They release you to the card sharks with a blank check to gamble away whatever your heart may desire. You’re feeling lucky. So how much do you put on the table? A hundred? A thousand, maybe? How about billions?

Hey, if you lose all of it, maybe the government can just bail you out of debt with taxpayer money. After all, they did bail out AIG after they reported a loss of $61 billion – the largest quarterly loss in American corporate history (Taibbi 2009). Do the math – that means that AIG lost $27 million every hour of the last three months of last year, which breaks down to $465,000 a minute, which equates to the average American family’s annual income every six seconds, and about $7,750 every second (Taibbi 2009).

Okay, let’s go back to you now. I guess it is kind of important to know how much your friend has in his bank account right? After all, you can’t write a check for an amount of money that you don’t even have, can you? Even though AIG did that too! They played with about $500 billion that they did not have to begin with, in a completely unregulated derivatives market. AA And let’s not forget that they also spent over ten years methodically plotting to dodge the bullets coming their way via regulators from not only the U.S., but all over the world (Taibbi 2009).

Yes, the economic crisis that we are recovering from was orchestrated. When people talk about this crisis, they are in denial. The majority consensus i s that it is just an unfortunate tragedy that happened to fall upon us; that it is just a once in a generation kind of thing. People wonder who could have possibly predicted such an incident, but someone did see this coming! Her name is Brooksley E. Born (Schmitt 2009).
Ms. Born, the head of the Commodity Futures Trading Commission, in 1998, warned the leaders of the financial world, including, the head of the federal reserve, Alan Greenspan, that government regulation of Wall Street was necessary. Not only did he choose to ignore her, he worked hard to thwart her efforts to regulate this industry (Johnson 2009). That one action has brought the country to where we are today – recovering from the biggest financial debacle since the Great Depression.

Born was a big supporter of restricting the market for financial derivatives. This idea was met with a lot of controversy. Let’s first define what a derivative is – a financial tool whose value is based on other things, such as assets. Credit derivatives are based on loans, bonds, or other forms of credit. The use of credit-default swap derivatives was initially for major corporations to manage their risk across a series of investments; but it is exactly this that ultimately became a key factor in the downfall of the economy. Swap derivatives work like insurance: the insured pays a certain amount (“premium”) in exchange for protection from the insurer in case he/she defaults on a loan (Duffie 2009). The credit-default swap market, valued at about $45 trillion, allowed bank lenders to loan out more when giving out mortgages. Eventually, lenders began lending out more and more, and a problem arose because the swaps were not regulated. Lenders were taking more and more risks that they should not have been taking, and due to lack of regulation, there was no security that the borrowers had the funds to pay back what they were lent. So, when the housing market went downhill, the loans also took a dive, and banks were unable to adhere to the guidelines they had committed to in the derivatives contracts and thus got pulled down as well (Schmitt 2009).

Moral of the story: a little regulation could have gone a long way. Born made several attempts at warning Greenspan and other regulators of the impending crisis. Greenspan even invited her to lunch in his private dining room at the stately headquarters of the Fed in Washington, D.C., but when she got there, the conversation quickly turned controversial. Greenspan acknowledged that he and Born would always have differing opinions on the way that fraud in the economy should be handled – he with a more hands-off policy, and she with a policy of being more involved and monitoring the market. Greenspan made it clear to Born that he did not believe that there is any reason for there to be laws against fraud, while Born believes the exact opposite. Born says that when Greenspan said that to her, “that underscored [her to] how absolutist Alan was in his opposition to any regulation” (Schmitt 2009). Greenspan, along with other regulators, convinced Congress to take measures of passing legislation that made it illegal for Born’s agency to take any action. As a result, she decided to leave the government and return to her private law practice.

There are many theories as to why no one on Wall Street wanted to listen to Born’s warnings. Some people say that it is because she did not hold an important enough role – she was “a little person from one of [those] agencies trying to assertively expand her jurisdiction” (Schmitt 2009). Others found her difficult to work with and did not approve of her personal style – they saw her as counterproductive in the work place and characterized her as being abrasive. Some even dare to admit that they believe sexism may have played a role in this situation as well. Could Alan Greenspan handle the fact that someone in a skirt was telling him what to do? Of course Greenspan strongly refuted such allegations, but no one really knows for sure (Schmitt 2009). But ultimately, the reason does not even matter. The only thing that really matters is that this financial crisis was predicted and could have been prevented. Many people associate the financial crisis solely with money, yet while money is a key factor in the situation, there is something else that is of greater importance. And that is that the crisis was caused by a group of scheming insiders who were more concerned with their own personal profit than the taxpayers (a.k.a involuntary shareholders) who were unwittingly being taken advantage of.

References

Duffie, Darrell. 2009. Derivatives, the Basics. Stanford Magazine.

http://www.stanfordalumni.org/news/magazine/2009/marapr/features/duffie.html.

Greenwald, Glenn. 2009. Larry Summers, Tim Geithner and Wall Street’s ownership of government. Salon. http://www.salon.com/opinion/greenwald/2009/04/04/summers/index.html.

Johnson, Simon. 2009. The Quiet Coup. The Atlantic. http://www.theatlantic.com/doc/200905/imf-advice.

Schmitt, Rick. 2009. Prophet and Loss. Stanford Magazine.

http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html.

Taibbi, Matt. 2009. The Big Takeover. Rolling Stone. http://www.rollingstone.com/politics/story/26793903/the_big_takeover.