Thursday, October 19, 2006

An Economist wins the Nobel Peace Prize

If you haven't heard, the Nobel Peace price has gone to an economist this year. Muhammad Yunus is an economist who developed micro credit. This bloomberg article provides a good background into exactly what microcredit actually is.

Essentially the problem Muhammad solved was the following. If you want to go to the bank and take out loan--for a new business, home, or whatever--the bank needs to be confident that you will pay them back the money they lent plus the interest rate they charge you. You and I can put up collateral in order to acquire the loan. So, for instance, if you buy a home your home is the collateral on the loan. If you don't pay, the bank gets your home. In poor countries this is not possible because people either don't have anything to offer as collateral or the property rights are so poor the ownership of the collateral is essentially meaningless. How to solve such a conundrum? Risk pooling, which you can read about in the article.

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