Summary
This article relates to an event that happened on a single day. Apparently, we can say the stock market crashed because the "Lehman Brothers" bank went bankrupt and the Merill Lynch investment bank sold itself for "pennies." According to "The Dow Jones Industrial", the index lost more than 500 points. A significant drop since the stock market reopened after September.11 attacks. The company AIG had lost 60% of their value, this means that almost $20 billion was lost on Monday. To sum it up, there was a 10.0 earthquake in the financial sector.
Connections
Although it may not be obvious, the connection to our text is scarcity. The resource here that is scarce is credit. The root of the problem was the housing market slump. This in turn caused the credit crunch, meaning people are not willing to lend money to other people. This connects to scarcity because credit is becoming a scarce item. Without credit, a lot of business (Lehman Brothers and Merril Lynch) are not able to function properly. Many business depend on loans, credits, or in other words, spend other peoples money to make money. The article connects to direct costs because people spend their money to invest and make more money, yet these companies failed to provide the reward of "making more money." Since people know this is happening, the opportunity costs for the companies are skyrocketing because they could have done other things such as selling their bank to another bank, saving themselves from bankruptcy. They did not take the best possible alternative that was given to them. This is also an example of how you can expect anything from the economy. They cannot control what people think and do as economics is not a science.
Reflection
If it costs me $1 to borrow $10 from my brother, now it would cost $3 because there is a less supply of credit. It drives up the price and lowers the demand. Because the private sector is doing so bad, the government should step in and help out businesses, especially in this stormy situation. Credit is really difficult to obtain when you also need the trust and confidence of others. The banks mentioned went downhill and couldn't obtain the trust and confidence of the credit suppliers. I wouldn't invest in the companies either. The scarce resource of credit will affect me too because it will turn our economy to a recession due to scarce resources. People will not invest in banks anymore because of how the economy is doing.
Top: A Credit Crunch(er)
