A quick aside: via professor Bernstein at Volokh Conspiracy comes this delightful quote, regarding the reason for the specific $700,000,000,000 figure in the bailout bill:
"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."
Sigh.
Now back to your regularly scheduled program.
You know about electric and magnetic fields. You experience them in daily life: electric fields push current through all the electrical devices you encounter in your day, as well as sticking lint to your clothes and shocking you when you touch a doorknob in your socks. You don't see magnetic fields directly as often, but if you have any magnets around you're well aware of them. They also are commonly used within the little wall transformers that turn wall current into something your electronics can use, and they allow electric motors in your appliances to run.
In introductory physics classes, you learn that in fact those electric and magnetic fields are not completely different phenomena. They're interrelated in a very specific way. Changing electric fields produce magnetic fields, and changing magnetic fields produce electric fields. Arrange things just right, and you can get them to produce each other and go shooting off into the distance. Sounds creepy, but it's nothing more unusual than light. Light itself is just electric and magnetic fields inducing each other.
Go on further in physics and you'll discover that electric and magnetic fields are even more promiscuously intertwined than you might have previously suspected. In special relativity we know that what reference frame we're in makes a difference to what we observe. Lengths, time intervals, and similar variables aren't the same in every reference frame. A meter stick at rest in your lab is going to look shorter (indeed, it will be shorter) to someone zooming by your lab in a spaceship going half the speed of light.
What about electric and magnetic fields? Are they different in different reference frames? Heck yes they are. An electric field in one frame will look like a combination of electric and magnetic fields in another. Magnetic fields do the same thing; they're a combination of magnetic and electric fields in another frame. In general it's a little complicated to keep track of exactly how they change in each frame and which direction they end up pointing, but it can be done without too much difficulty if you're careful. In a way, electric and magnetic fields are the same thing looked at in different frames.
Despite the fact that so many things are different in different reference frames, some things stay the same. Charge, for instance, or the spacetime interval. These sorts of things are called Lorentz invariants.
Two of them have to do with electromagnetic fields. The following quantities are Lorentz invariant, so they are the same in each inertial reference frame. I'll write each one in two ways: once in the cool relativistic formalism and once in terms of the actual fields.
(I'm using relativistic units where c = 1.) Now we have two quantities that don't change. These quantities have several important implications. To pick an example at random, the second invariant implies that if the electric and magnetic fields are perpendicular in one frame, they're perpendicular in every frame.
And that's the kind of things we learn in grad school. Neat stuff. Well, mostly - the exam is next Monday...
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The thing on banking pretty much says it all. Banking is a "confidence game" in that people have to be confident that the bank can give them their money when they ask for it. However, banks loan for long time (mortgages) and if everyone asks for their money at the same time, banks can only provide cash by selling some of those long time assets. If those assets have gone down in price, either by rising interest rates or just because people don't want to own them, then the bank will lose money when they sell the assets. The result is that a run on the bank causes bankruptcy.
The cure for this is pretty simple. Raise the FDIC guarantee to something much larger than $100,000. The $100K figure dates to the 1950s and needs to be updated. The commerical banker I talked to today said $1 million would be enough, I say $100 million would be a good number.
The truth is that the larger depositors always get taken care of during bank runs anyway, so why not make it law.
This is what Ireland did that caused all that money to flood into their banks the past few days.
Yeah, I'm kind of surprised. I thought this was one of my more interesting recent posts. Oh well. I guess maybe Lorentz invariance is an acquired taste.
You ever read Asimov's Foundation Trilogy? There's a scientist who comes up with a sort of statistical mechanics for sociology on the galactic scale. One of the fundamental requirements for the theory to operate is that the population can't be aware of its predictions. Confidence in banks is probably like that. The more people think there's a crisis (and there really is one, sadly) the worse the crisis gets. Unfortunately the feedback loop works the wrong way, and rational behavior by a depositor or investor to protect his assets will tend to wreck things in the aggregate.
It's a pickle for sure. I don't envy the next President whoever he is.
@Carl: The $100k limit only dates from the early 1980s. I remember, as a grade school kid going to the local savings and loan to open my first savings account, signs saying that deposits were insured to $40k. There may be good reasons for raising the limits now (as there were when they were raised in the early 1980s), but there is also a moral hazard risk, like the one which came to pass with many savings and loans in the 1980s.
Something has to happen or I read me might have a BANK FREEZE. I cant imagine how that would help anything though. I read that at http://www.gotoguy.com/?p=367