Wednesday, August 04, 2004

Econ Camp Field Trip

One of the morning lectures talked about externalities and why it is difficult to hold people accountable for them. It comes down to the simple concept that where there exists ambigious private property rights, there is little incentive for those who produce externalities to deal with them. The second lecture talked about the difference between accounting costs and economic costs (you add the loss of potential income) when talking about entrepreneurship.

The simulation today was a totally enlightening game dealing with cartels and the idea of market power. It's hard to explain in a few sentences, but you'll have to trust me that I thought it was great.

Usually, the afternoon is a three hour session working with the two professors and Smokey. Today, however, we took advantage of the fact that this conference is being held in Chicago. We took a field trip to the Loop and had tours of both the Chicago Board of Trade and the Federal Reserve Bank of Chicago





Amish in the city, a sight we saw as we walked to the CBOT






Boeing's corporate headquarters now here in Chicago






Looking north along Lasalle Street


So the Chicago Board of Trade building is one of the most architecturally celebrated buildings in a town that has more than it's share of notable buildings. It stands at the intersection of Jackson and Lasalle and is noted for its Art Deco style. They continue the Art Deco theme inside the building as well.





The Chicago Board of Trade Building






Hey, if you've forgotten what I look like


Now some of you may be wondering what happens at the Chicago Board of Trade (CBOT) and why is it important. Chicago being the major metropolitan city of the Midwest and it's vast agricultural production is where the majority of the countries agricultural commodites are bought and sold. Remember I said earlier that when there are numerous buyers and sellers, a near perfect market is formed and price discovery (the amount a commodity such as corn) is efficiently determined. What is being traded here at the CBOT are futures contracts and options on major agricultural commodities. This is all done in person and the floor traders have their very strict system of communication with hand signals and nods of the head.





The floor of the CBOT just before the closing bell


Trading of futures and options of agricultural commodities has been done in this manner since the 1800's. In 1975, the CBOT began the trade of futures and options on certain financial instruments, such as Federal Funds, Treasury Bonds, 10 year notes and 2/5 year notes just to name a few. There is a separate trading pit in the same building for the financials. As we watched the trading floor from a perch above the floor, it looked as though sometimes the trading got heated and that brawls were breaking out. But we were told that those dust-ups are all in the name of sealing the deal.

Our second tour of the afternoon was at the Federal Reserve Bank of Chicago.





The Federal Reserve Bank of Chicago


In 1913, Congress passed the federal reserve bill establishing 12 regional banks that would serve as the "bank to the banks". The Federal Reserve Bank of Chicago (region 7) covers Illinois, Indiana, Iowa, Michigan and Wisconsin. The Fed serves many purposes. It stores all currency and distributes it to banks in its region as needed. It processes about one-third of all checks written, although as more people use electronic transfers, this job is becoming less an integral part of the Feds services. The Fed develops, writes and oversees banking rules. But most important, the Fed sets monetary policy, with the goals of a) having stable prices, b) full employment and c) maximum economic growth. This is where Alan Greenspan comes in. He and the 12 board presidents meet 8 times a year as the Federal Open Market Committee to determine interest rates. There was actually little to see at the Fed. We saw a short film and had a very nice extensive question and answer session with a Fed employee.

In the display area there was a video quiz where you were presented with a certain economic newsclip and then you had to predict what Mr. Greenspan would do.





Set the course of the economy


I agreed with Alan three out of three.

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