For years and years after 2008, I’ve regaled many a classroom with a story that began like this:
“Let’s say you’re all relatively poor folks in, say, Florida, and imagine that I’m your local bank.” The dramatis personae would then be expanded: another professor from that college would represent Wall Street banks, while the canteen owner would represent global investors. The academic coordinator would become the rating agencies. And so on and so forth.
But also, through this little tragedy whose charactes we were becoming familiar with, we would start to learn what these characters were up to in the years leading up to (and including) 2008. So along with the list of characters, we would also familiarize ourselves with what CDO’s were, and what swaps were, and what a tranche was, and what collateralization means – or more accurately, what some people thought it meant – and so on and so forth. And at the end of the class, we would have all been entertained, but we would also have learnt a high-level explanation of what led to the events of October 2008, and its aftermath.
It’s quite a story, and if you haven’t heard it before, I hope I get to tell it to you sometime.
But there’s two reasons I bring this up, and here’s the first. When you are learning something hard and intricate and difficult in economics (or other, related fields), try and entertain yourself by building a story around whatever it is that you’re learning. I taught myself Microeconomic Analysis (by Hal Varian) by building stories around each chapter. And if you’ve ever tried to read that book, you will know how difficult a task I had set for myself.
But in a way, that baptism by fire was entirely worth it, for while I have (thank god) forgotten much of that textbook, the truly worthwhile lesson was learning how to make anything more interesting. Turn the lesson into a story!
I have used this lesson to both understand and teach Europe’s sovereign debt crisis. I have used this lesson to teach people what optimum currency areas are all about. I explain to folks how the government might attempt to reduce the price of onions, and used that lesson to explain to people why controlling the price of the rupee vis-a-vis the dollar isn’t really possible. And so on and so forth – but all of these episodes have one underlying lesson: make the topic you’re studying more interesting by turning it into a story.
For the more abstruse parts of economic theory (some might be tempted to ask “as opposed to what?”), it is an invaluable skill.
And here’s the second:
Here’s my high-level explanation of the FTX crash.
https://marginalrevolution.com/marginalrevolution/2022/11/the-ftx-debacle-eli5.html
Imagine that I own a house and I create a million coins representing the value of the house. I give half of the coins to my wife. I then sell one of my coins to my wife for $10. Now the house has a nominal value of $10 million dollars and my wife and I each have assets worth $5 million. Of course, no one is likely to buy my house for $10 million or lend me money based on my coin wealth but suppose I now get my friend Tyler to buy a coin for $15. Tyler says why would I want to buy your s!@# coin! To encourage Tyler to buy I give him a side-deal that is not very public. Say an extra 5% of our textbook royalties. Tyler buys the coin for $15. Now the coins have gone up in value by 50%. My wife and I each have $7.5 million. Other people may want to get in while they can—Tyler bought in! Are you in? I’m in!
Now if it’s not obvious, I am SBF in the analogy, and my wife is Alameda run by his sometimes girlfriend Caroline Ellison. Who is Tyler?—the seeming outsider who gets a kind of under-the-table deal to pump SBF’s coins? One possibility, is Sequoia a venture capitalist firm who invested in FTX, SBF’s house, while at the same time FTX invested in Sequoia. Weird right? Tyler in this example is also a bunch of firms that Alameda invested in but which were then required to keep their funds at FTX. Many other possibilities exist.
I don’t understand the economics of the crypto world, at all. I’ve read my fair share of stuff about it, but I still don’t know how it works. I certainly don’t know enough to be able to explain it to others, and that’s the whole point, no? So the idea that I could explain a scam in the crypto world is a whole other challenge.
But that’s why this post was so enjoyable – because I got to learn what the scam was about. More, I got to learn about it using my own favorite method of learning: by reading a “story”. And stories with “ouch!” sentences are even better!
Ok, final analogy. Suppose to help me run my house I invite over a bunch of friends and we do a lot of drugs and hook up together and suppose that none of us really knows anything about accounting or financial controls.
https://marginalrevolution.com/marginalrevolution/2022/11/the-ftx-debacle-eli5.html
But the bottomline is this: learn the art of building up a story. There’s no better way to learn economics!