Unintended consequences

0:01- In a lot of ways the study of economics, and, to some degree, finance is really all about scarcity. Scarcity means that not every one or not everything can get everything that they want. And so, you have to figure out, well, who gets it and how much do they get of it?

0:18And so to figure that out, our society has things like prices and we have things like money to figure out who gets what in most cases. So, related to that is this idea of opportunity cost. Let's say that you have $10 and there's two things that you want. You want, let's say a hamburger, but you also want some new socks.

0:41Both of them cost $10. Well, your money is scarce. You have to decide which one you wanna buy, and there is the cost, and then there's the opportunity cost because yes, the cost of either of those is $10, but then there's also an opportunity lost. If I buy the socks, then I have the opportunity cost of not getting the hamburger.

1:03You could also think about that with your time. If you decide to spend the next hour studying, there is an opportunity cost. Well, that that could have been time with your friends or vice versa. And so, you have to think about these things all the time. Now, when you make these types of economic decisions, there are oftentimes well consequences and sometimes unintended consequences.

1:26You could imagine a city, they say, "Okay, we have a few million dollars. We need to figure out where do we put those few million dollars. We could build parks, we could improve the hospital. Maybe there's a lot of traffic, and we could improve the roads." And so, they make that decision.

1:40They take their scarce dollars and they use it to say, build a road, to say, add a few lanes to it. But maybe it has unintended consequences because when the traffic was bad, a lot of folks might have decided to take public transportation or walk. And now that they widen the road more people say, "Oh, great, more road. Let me drive more often."

1:59And so the traffic doesn't improve, or maybe it even gets worse. And then there's other unintended consequences. Maybe there's more street noise, maybe there's more pollution. And this happens all around us all the time. You can think of something like the 2008 financial crisis, and there's a lot of fingers that could be pointed, but a lot of folks think in the run up to it, we had very low interest rates.

2:22And at the same time, you had a lot of banks made it a lot easier for folks to get loans. They released a lot of the conditions that you needed for a loan. You could all of a sudden do it with a low down payment or lower income, or even no income at all. Now, in the short term, a lot of these banks or mortgage companies were saying, "All right, we're making money.

2:42We're making the fees off the loans. People seem to be paying it back." As you can imagine, as it got easier and easier for people to buy houses, housing prices generally went up. People could argue that it was also good socially on some level, because people who traditionally could not afford a house who maybe did not have as high of an income, as high of a credit score or have as much of a down payment, all of a sudden they were able to buy houses.

3:05So, it seems like it was good, but there were unintended consequences, especially long-term, unintended consequences. As soon as things started to weaken a little bit, housing prices stopped going up. A lot of these, and maybe in certain cases, housing prices started going down.

3:20A lot of these folks weren't able to pay their mortgage, and they weren't able to sell their house for even what the loan was, and so they had to return the house to the bank. And so, these people, in many cases, lost their down payment. So, they were hurt. That was an unintended consequence.

3:37And then the banks had to take losses on these loans, and a lot of banks and financial institutions had trouble surviving. Some of them went out of business. And then, that also created a bit of a, what's known as a, well, I could call it a chain reaction event in the financial system as a whole.

3:52So, generally speaking, we all have to make economic decisions because of scarcity. There is an opportunity cost. When we do one thing, we are oftentimes deciding not to do something else. And it has consequences, oftentimes intended, but oftentimes unintended.