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Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts

Wednesday, March 12, 2014

Why Is America So Pessimistic?

 Random Rant.
The S&P 500 has set new all time records.  A simple buy and hold policy has more than quadrupled investment assets over the past 20 years.  It is fairly easy to get ahead, be financially secure, and enjoy a peaceful existence in this country.  Yet polls show a huge dissatisfaction.

Stock Market Surge Bypasses Most Americans, Poll Shows (David Lynch/Bloomberg)

After reading the article, take a gander at the comments.

At the risk of stirring the hornet's nest, I would argue that it isn't that hard to get ahead in this country. Sadly, more and more of those who understand this are trying to get across our borders.  They are willing to take jobs Americans turn their noses up at.  When I started college, I worked in the laundry at NIH in Bethesda.  I gathered the gowns, etc. throughout the hospital and delivered them to the cavernous laundry in the basement.  How many young people would take that job today, given the choice of working or not?  It was a nasty job.  But, for sure, it served a purpose - it kept me motivated in my studies.

But I'm in the weeds.  Back to the "getting ahead" proposition.  Just about anyone willing to work hard with a decent high school education can enroll at the local community college and, within two years, get  a "good job" in the medical field or elsewhere making good money.  Plumbers, construction workers, and automotive technicians make good money.

This, of course, raises one hurdle (that I saw firsthand by teaching 12 years at the community college level); and that is getting a solid background in high school.  I have experience here as well - I substitute taught for a year and a half in the public high schools, an experience I highly recommend. And the high schools are a huge part of the problem.  A goodly portion of the high school population is being cool by playing games and learning little of value for a free market capitalistic system.  In today's vernacular, many graduate with skills that are barely worth the minimum wage--if that.

They enter the local community college needing remedial courses for the material they should have learned in high school.

Some people like to fall back on the "I can't afford college" argument.  Guess what?  I and many others couldn't either.  I took a year off after high school, lived at home, and saved every penny I made for college.  I worked 60 hours a week that year and then entered community college.  After that, I was drafted into the Army and used the G.I. Bill to pay for the university level as well as worked part time. Instead of going the military route, a young person today can take those 2 years to work and save.

The bottom line is this:  most young people can gain the skills necessary to make a meaningful contribution to the economy without going into debt.   News flash:  Making a meaningful/valued contribution is what is required in a free market economy.  I'm not saying the journey is easy, but most would agree it is highly rewarding.  The hardest part for young people today is probably the removing of the headphones, the giving up of surfing the internet, and the limiting of gaming. 

IMHO, the glass is half full--not half empty.

Tuesday, January 22, 2013

Economist Comedian

If you have taken a course in economics, are interested in monetary policy, or have ever wondered if economists have a sense of humor, you'll enjoy this:

Wednesday, September 26, 2012

$ heading up?

Rosebud - Vigilantes
QE3 made a commitment to keep rates low for a longer time and to buy Treasuries and mortgage-backed securities monthly until the unemployment rate drops a meaningful amount.

This is an interesting experiment for market observers.  Low rates typically push the dollar lower as speculative global money, like a roof leak seeking the path of least resistance, snakes away after higher rates elsewhere.  But so far, the dollar has risen since the 9/13 QE3 announcement.

This probably isn't good for stock investors (unless you're a boring dollar-cost averager, building a nest egg for retirement and seeking to buy at low prices!) because there has been an inverse relationship between the dollar and stock prices.  Check out this chart of UUP, a dollar bullish fund:
Source: ETF Trends

CLICK TO ENLARGE  Although this is early in the game, it bears watching.  Market participants of a certain vintage remember the days of the "bond market vigilantes."  Reminiscent of a hanging posse, those were days when the bond market looked at economic conditions and moved interest rates higher despite Fed policy.

This interests me for the simple reason that I've come to believe that there are underlying economic laws that can be violated for only so long.  One of those laws is that controlling prices, as Nixon did and as Bernanke is doing now, builds pressures that eventually cause prices to rise sharply.  In the present context, these pressures could be building on interest rates to result in a sharp spike down the road.  In conjunction with the accident waiting to happen (that regulators and legislators refuse to deal with) known as "high frequency trading," the end result could be ugly.

Monday, September 24, 2012

Reckless Endangerment - Book Review

 Some will rob you with a six-gun, And some with a fountain pen.  Woody Guthrie 

Talent comes in different forms.  Jesse James was good at robbing banks, Angelo Mozilo of Countrywide was expert at ripping off wanna-be homeowners, and James A. Johnson of Fannie Mae was at the top of his game in self-enrichment at the expense of the American taxpayer.  Like the prodigy who sits down at the piano at a young age and gets it, Johnson and Mozilo saw how national politics, policy manipulation, mortgage securitization, and ratings agencies being paid off all fit together.  He saw how Fannie Mae, a Government Sponsored Enterprise duopoly, along with Freddie Mac, could use the political advantage and the excessive profits generated thereby to win political favor to influence Congress, rip off the American taxpayer, and walk away a top 1 percenter.

Roles he and numerous others played in the 2008 housing crisis are the subject of Reckless Endangerment by Gretchen Morgenson, business reporter for The New York Times, and Joshua Rosner, research consultant for Graham Fisher & Company.  And many of those who played key roles are named in this book, which is unusual for this genre - I know because I have made a hobby out of reading books on the 2008 housing crisis.  The end of the book has a list of key players and where they are today--which by itself is a sobering eye opener.

I happened to have picked up the book on a whim.  I was  browsing the new book section in the library and saw it was by Morgenson and, because I enjoy her Times column, decided to give it a flip through. That got me to take it home with the objective of reading the first couple of chapters, and I found that I couldn't put it down.  Admittedly, some readers will find parts a bit tedious.  The book, however, is definitely worth reading if you are interested in the period and learning about the interaction between the financial community, lobbying, and Congress.

The ending, sadly, is depressing as most of these books are, in that it makes it crystal clear that nothing has really been done to prevent similar episodes in the future.  For example, the "too big to fail" issue is still with us, Congress can easily be bought off to garner favors, regulators are totally captured by the industries they regulate, and there is no need to worry about going to jail for blatant lying and manipulating financial documents.

Reading history can be scary because there comes a point where it dawns on you that, in effect, the people driving the bus are blind:  trusting that the people in charge know what they are doing (and, in this case, are doing what is in the best interest of the country) is a huge leap of faith.  Read Reckless Endangerment and you'll know exactly what I mean.

Friday, September 21, 2012

Why Analysts are Scratching Their Heads Over QE 3

QE 3.  Open ended.  Fed has arrows in its quiver.  Buy mortgage securities and Treasuries until employment picks up.  Sounds like a plan!

When the Fed buys securities like mortgage securities and Treasuries, it takes its checkbook and creates money out of thin air.  When banks get the deposit, they can create money out of thin air by lending because of our fractional reserve  monetary system.  As it continues, the money supply increases by a multiple amount.

It's pretty clear that this should be the cure for what ails a very sick economy. Or maybe not.

This chart is the monetary base - currency + reserves- i.e. what is referred to as "high powered money." The monetary base is the raw material from which money is created.

 Uh... a lack of raw material does not seem to be the problem!

Maybe the banks are loaded with excess reserves, but interest rates are too high.  Yeah!  That's got to be it.  Let's look at the yield on the constant maturity 10-year U.S. Treasury note:

Hmm...the yield on the 10-year Treasury note started the century over 6% and now is below 2%!

Maybe the problem isn't rates.  Maybe the problem isn't a liquidity problem at all but, instead, is an on-going solvency problem.  Maybe banks have forgotten how to lend if they can't readily sell the loans to be securitized by Wall Street.

Maybe we have gone to the opposite extreme of moral hazard, where bank execs are overly cautious in their lending as they see that some high fliers (not Franklin Raines or James A. Johnson by the way, in case you're wondering) in the housing bubble actually had their lives ruined by greed.

One thing to be clear on is that the Fed, in our fiat money system, will never run out of arrows. Bernanke can literally walk down the street and write $50,000 checks to every homeowner if he wanted (I hope FOMC members aren't reading this; I'd hate to be the one to give them the idea).

Anyway, some analysts will continue to scratch their heads as they look at the charts and some will even wonder how the Fed (whomever is in charge at that point) will reverse Bernanke's actions.

Wednesday, September 19, 2012

Should They Break Up?

She's German...He's Greek


Friday, August 31, 2012

3 Great Reads

One of the best features of the blogosphere, IMHO, is the wide-ranging topics presented on an ongoing basis.  Here are 3 I especially enjoyed this week:
  • What is the best cash rewards card?  How do they compare?  How much can be saved by choosing intelligently?  Here is a great article, "Best Cash Back Credit Cards, August 2012"  from Free Money Finance, examining these questions that anyone with the analytic bug will enjoy.  Be sure to check out the comments section--it includes valuable observations as well.  This article is worth sending to college students, also, since they are on the verge of dealing with these questions.
  • From Biz of Life comes a Bloomberg video interview of Jim Grant.  If you watched the Republican Convention, you know that Romney has said he will replace Fed Chairman Bernanke.  The Fed Chairman is said to be the second most powerful position in the world.  Some have said that gold bug Jim Grant should have that position.  I fully agree with Grant's position that the Fed has morphed into a central planning group whose actions mirror those of the old Soviet Union in their ineffectiveness and downright harm.
  • I previously covered the poor performance of hedge funds, the bastion of "sophisticated" investors.  In this post, "Couch Potatoes Crush Hedge Funds",  Andrew Hallam, author of the best-selling Millionaire Teacher, goes into greater detail on hedge fund performance and explains how the average investor can do better.
So there it is:  personal finance, economics, investment performance - all in one fell swoop.  Enjoy!

Thursday, July 26, 2012

Sandy Weill and Other Stuff

Yesterday Sandy Weill cleared his conscious and stunned the financial world by saying that he believes we should move back towards Glass-Steagall by separating commercial and investment banking.  This amounts to an admission that the banking supermarket he played a major role in creating was a huge mistake and that it created "too big to fail" behemoths that are harming the economy. Maria Bartiromo went apoplectic as she is wont to do, and politicians were trotted in front of the cameras to proclaim that it was a great idea worth considering.

Unsolicited advice to politicians:  keep your mouths shut.  Every time you open your mouths, you prove that you can't think for yourself.  You show that you are puppets spouting the party line, and you are pushing voters into the camp intending to vote across the board against incumbents.

Wouldn't it be something if Sandy Weill's McNamara moment will get Greenspan to admit that micro-manipulating the price of money via the federal funds rate was a mistake and caused the housing crisis leading to the Great Recession of 2008?  That would get me to go apoplectic.  Greenspan, in the '90s until the end of his tenure, and Bernanke today micro-manipulated this price.  Today it is at zero %, and markets are debating whether the Fed has any means at all to improve the economy.

What tends to be swept under the rug is that the Fed totally botched its mandate of ensuring a stable banking system, completely misunderstood the housing market debacle, and didn't understand the banking sector was in a solvency crisis rather than a liquidity crisis.  Other than that, they did a terrific job.  Banks loaded up on off-balance-sheet toxic debt as the FOMC focused on pontificating on their views of the likely course of the economy.

Speaking of forecasts - this from Ezra Klein in Why not Uncle Ben's Crazy Housing Sale?:

In January 2010, the Fed projected that the economy would grow 4.15% in so12.  By June 2011, it had revised that down to 3.5%.  By April 2012. it was down to 2.65 percent.  And in June, officials lowered expectations once again, saying they expect economic once again, saying they expect economic growth to be a mere 2.15% in 2012. Ouch.
Klein's article is worth reading because it illustrates so well how top analysts and observers fail to understand economic fundamentals.  Here is fundamental number 1, presented in the first week of Econ 101:  manipulating prices distorts resources.  This can be seen in the minimum wage market, rent control market, and even the Nixon price controls.  It is especially true for the price of money via the fed funds rate.

Lowering the fed funds rate to 1% in 2003 led to a moonshot in the housing market.  Resources gushed into housing.  People became mortgage bankers, real estate agents, carpenters, etc.  That's what prices do.  Then the Fed pushed fed funds above 5% - in effect, saying we didn't need all of the resources that had moved into real estate activities.  Think about this.  Today they wonder why it is so hard to get unemployment down.

As you read Klein's article and see that he supports buying mortgages and pushing down the rate on 30-year mortgages (again, affecting the price of money), you'll probably scratch your head.  This is exactly what got us into the present situation.

They say a definition of insanity is doing the same thing over and over and expecting a different result.

How about a different approach:  set a growth rate for M1 or M2 of 3%/year and let the market set interest rates, i.e., set the price of money.  Volcker did this, and it broke the back of spiraling inflationary expectations.

Wednesday, December 21, 2011

Why Are Interest Rates So Low? (Part 6)

In this Khan Academy video, "American - Chinese Debt Loop," Sal explains the effect of China pegging the Yuan, lending the U.S. funds via the buying of Treasury securities, and thereby contributing in a major way to low U.S. interest rates.  U.S. Treasury rates affect other U.S. rates as well, along with global interest rates.  Furthermore, low interest rates push global investors out on the risk spectrum - after all, individual investors, pension funds, insurance companies, et al. aren't satisfied with miniscule rates on the least risky assets being affected by this process.

Understanding the process leads naturally to the questions of how it gets unwound and what happens if and when the Chinese get tired of holding U.S. assets.  Not long ago, Fed Chairman Greenspan wondered why long-term Treasury note yields didn't rise as the Federal Reserve raised rates from the 1% level in the latter part of 2004.  His so-called "conundrum" is partially explained by the process explained here by Sal.

Enjoy the video:

Saturday, December 3, 2011

Heroes Breakfast Speech

 Worth watching and reflecting on. Found on Biz of Life site.

Paul Tudor Jones II- 2011 Heroes Breakfast from Robin Hood on Vimeo.

Wednesday, November 23, 2011

Movie Recommendation

For those who get overdosed on cheer this holiday season, I recommend the DVD Inside Job . It will quickly bring you back to reality.  It proves what most people know - there is no upper bound for greed.  Still, to see how it has played out to bring us to where we are today is sobering.

We have paid a heavy price for assuming that those in charge know what they are doing and that they are operating in the nation's best interest.

Many want the bad actors in the film put in jail--which is easily understandable. The problem is that a lot of bad things can be done without it being criminal.  It is easy to not do one's job in the pursuit of greater riches, which will be seen over and over in the film.  This isn't a crime under the criminal code.  Most viewers will get that.

What is unfathomable is that the leading institutions of the country continue to employ many of these people at the highest level.  The Federal Reserve, Columbia Business School, the various think tanks should be ashamed.

I, for one, am deeply ashamed for the economics profession.  Watch the film and see why.

Monday, October 3, 2011

Wall Street Protests

The problem with the protest on Wall Street is that, like similar episodes, many of the protesters tend to be clueless on what the protest is about.  Leaders of the protests tend to be closet Marxists (Susan Sarandon) who feel left out of an economic system that rewards merit or feel guilty because they have an economically valuable talent (Susan Sarandon) and who never understood why Marx was wrong.

Leaders of the protest seek others who desperately want  to be part of something - anything.  They seek those who have spent their life on the outside and who feel they have been wronged by the economic system.  Easy to find in an economy with persistent unemployment and underemployment.  The mob grows and they chant inane sayings about the economy and wealth - and the ever-present anarchists who thrive on shock value incite the mob.  Shock value and economic understanding don't go hand in hand. Mobs are more about wealth destruction than wealth creation.

Some are frustrated because they have gotten college degrees that they believed were the key to a high paying job and now are saddled with a large student loan and have no job or a low-paying job.  Others bought houses they couldn't afford and have slowly seen their dreams dissipate.  Many had jobs they thought would afford them a productive life that were swept away to other countries.  These are the discontented that the protests will gather up as it spreads.

To be sure, there are economic injustices and policies to protest. Money controls politics to too great an extent.  Our leaders have enacted harmful economic policies.  Economists have led us down the wrong road with the never-ending prescription extolling the virtues of free trade.  The tax system is out of whack.  Wars are fought for economic purposes and their real purpose is obfuscated.  There is plenty to protest.

Part of the problem - which the protestors will never get - is that the country has too many "safety nets."  It is to easy to get part of what is produced without contributing to the productive process.

There also is much to celebrate.  In our system, people are free to choose their own path.  You can pursue wealth - or not.  Your choice.  One thing is for sure.  As long as people can keep a goodly part of what they earn, the best and brightest among us (in the U.S. and around the planet) will work hard to try and figure out what we want.  They will think hard and work hard to produce the music, clothes, computers, and autos we want.  They will work hard to cure our diseases and seek innovative ways to educate us.  As I've said before on this blog, IMHO, we should feel like kings and embrace the opportunities afforded us.

The economy they protest creates the laptops and the cell phones and even the pizza they eat as they protest.  Something to think about as the protest spreads is whether shutting down bridges is the best way to go about getting desired changes.  That is, once the desired changes have been figured out.

Friday, September 9, 2011

Bad Economics

Hire someone who has been out of work for more than 6 months, and Uncle Sam will pay you $4,000 under Obama's Job Act described last night.  You hired 4 chronically unemployed last week?  Too bad - you're screwed.  You left $16,000 on the table.

You applying for a jo,b but you've been out of work for only a week.  There's a good chance someone less qualified will get it.  Sorry, you're screwed.  Employers need to reshuffle applicants into the chronically unemployed and others.  Forge  ranking job applicants by "most qualified"..

Getting ready to hire somebody?  My advice is to wait until Congress passes this act.  Out of work for 5 months? should wait a month because you can probably get a better job.

The good news is there will be job creation.  Bureaucrats will be needed to track the program and to write the rules.  Pundits will get more attention as they try to explain the program and why we're turning into Europe.  After al,l Europe has done a great job.  How long before companies can't fire their worst workers?

People of a certain vintage remember the days when considerable resources were directed towards getting around the ravages of inflation.  Today resources are directed towards gaming the government's macroeconomic policies.  It's too bad.  The free market system is all powerful, but it needs room to work. Setting up perverse incentives spirals the country downward.

One wonders where they are getting the economists who think these things up!

Saturday, September 3, 2011

Obama's Speech

Adam Smith
I, along with many others across the nation last week, introduced students to the marvels of the free market system.  We discussed how, by allowing individuals to act in their own self-interest, unprecedented wealth has been created over the past 250 years in the Western world and how many nations that had chosen a different economic system have seen the folly of their choice and are moving to the capitalistic, free market system.  Along the way, we mentioned Adam Smith and the Wealth of Nations - written prior to the industrial revolution but fully cognizant of the role of self interest and its influence on our founding fathers. We pointed out that the Wealth of Nations with its emphasis on economic freedom, was published in the same year, 1776, as Jefferson's  Declaration of Independence - the foundation of political freedom.

I like to go a step further with my class and think back, to say 1750, and suppose that we were able to get the 25 smartest people in the world in one room.  And suppose we pointed out that the world is on the verge of an industrial revolution - that it will be moving from an industrial society to one of factories, specialization, and unprecedented division of labor.  People will leave farms and move to the cities.  The smartest people would then be asked how best should economic activity be managed.

I think we can imagine that there would be considerable interest and excitement over this clearly very important problem.  I imagine that all sorts of plans would be forthcoming about setting up planning boards, how far plans have to go in the future, how to find the appropriate people for the jobs that need to be filled.  After all, how would the economy be assured that there are enough teachers, doctors, farmers, etc.?  What a great problem!

But the back of the room a hand is up.  "What if we just let the economy organize itself?  What if we just set the ground rules and then let individuals act in their own self interest?"

The response would likely have been incredulous.  How in the world could this possibly work?  For one thing, the brains of the world's smartest people wouldn't be needed.  Throw all the elaborate plans into the trash cans.  This would have been, undoubtedly, taken as an insult by many.

This, of course, is the debate raging today.  Many very smart people cannot fathom that the economy would be better off without their elaborate plans.  As a result, planning has increased to an unprecedented level.  Last night I saw a pundit ask how we (think "the government") can create demand, that is, the willing consumer?  Huh?  They discussed the president potentially proposing an infrastructure bank.  Other stimulus will be proposed in the president's speech on Thursday.

Interestingly, a comment was forcefully made, by the pundit planners, to the effect that our employment problems are the result of uncertainty holding back consumers and businesses.  I held my breath - would they get that their incessant schemes are what creates this uncertainty?  Didn't happen.

I, for one, would like to see the president say that the government is backing away from managing the economy--that it recognizes that prices are out of whack because of ill-advised programs, that the free market system needs room to breathe, and that the process, though painful, will lead to an adjustment that will legitimately create jobs and enable the economy to move forward in the  information age.  He should state unambiguously that artificially manipulating the economy hasn't worked and has run up an enormous bill that will be a drag for decades even under the best of outcomes.

There are a lot of problems in Washington - not just the nuts at the ideological extremes.

Maybe its time to listen to that voice in the back of the room.

Thursday, September 1, 2011

The First Economist

This cartoon made me think of the Fed Chairman and the Treasury Secretary.

CLICK TO ENLARGE From Greg Mankiw's blog (former head of Council of Economic Advisors to the President) and author of the best-selling undergraduate micro and macro economics texts.

Friday, August 19, 2011

What is Stagflation?

Source: Time
Backstory:  Unemployment stubbornly high.  High percentage of unemployed chronically unemployed.  Official numbers underreport extent of unemployment.  Overall Consumer Price Index (CPI) reported at 0.5% - approximately 6% annual rate.

One of my favorite exercises with my macro econ students is to think about how many "inflation" words we can think of, to define them, and to give instances when they occurred.  There is inflation, deflation, disinflation, hyperinflation, and stagflation.  Stagflation is the one DIY investors are hearing more often today.

Stagflation doesn't often raise its ugly head - thankfully.  To understand stagflation, it is useful to understand that macro economic weakness is generally perceived as a problem in inadequate aggregate (total) demand.  In this view, the problem is corrected by increasing aggregate demand using standard monetary policies ( increase the amount of money in the economy, thereby lowering interest rates) or by fiscal policy (lowering taxes and increasing government spending).

There is a bit of a difficulty in this that we are currently facing.  If the Fed supplies excess reserves to the banking system, but the banks don't lend, then we are in a liquidity trap a la the U.S. in the 1930s and Japan in the 1990s.  The banks aren't lending because they need to recapitalize after their bad lending spree of recent years.  Businesses aren't borrowing because demand uncertainty is rising.

As an aside  I know some readers probably flinched at the mention of the typical fiscal and monetary policies because  they are the exact prescription for the mess the global economy finds itself in today. The problem is that, if you lower taxes and increase government spending to combat economic weakness, you commonsensically need to run surpluses, i.e. reverse the policies when the economy is strong.  This is what politicians do not have the stomach for and their economic advisors wimp out and "swallow the whistle," as we say when referees fail to call a blatant foul.

Anyways, with stagflation, the economy experiences weak aggregate demand and inflation pressures. The problem, then, is that the usual policies (which, in truth, are commonly viewed as the proverbial  free lunch) won't work.  Fiscal policy will only exacerbate inflation, and monetary policy that will lower inflation will ramp up unemployment.  This was the situation in the early 1980s.  Then Fed Chairman Volcker (we should have never let him resign!) cracked inflation expectations by letting short-term rates rise to 20%, and the unemployment rate skyrocketed.  In stark terms, stagflation causes the usual macro economic models to break down.  They fail to provide seemingly easy solutions.

After taking Volcker's medicine, the next 20 years produced exceptional economic growth and low inflation.  As a point of history, Volcker was almost tarred and feathered and run out of D.C. before his medicine took hold.

Since the 1980s, the U.S. economy as well as the global economy have become considerably wealthier; and it is probably true that the wealthier an economy becomes, or people for that matter, the more difficult it is to take corrective medicine when necessary.

Stay tuned.

Thursday, August 11, 2011

Put Me on the Super Committee

Source: CNNMoney
Help me out here, but does anyone truly believe that the super committee is going to get this country's finances under control?  For crying out loud, we just went through an exceedingly embarrassing spectacle of many of these same men making asses of themselves as they postured and sound bited and brought the financial markets to its knees.  These are the exact same people who don't want to pay the bills they have voted on.  Some are focused solely on the 2012 elections and will use their membership as a platform to further that agenda.  It is why we are where we are.  They have demonstrated that they put their own personal interests ahead of the country's.

Consider independents who aren't seeking election or reelection or have presidential ambitions.  The super committee is just the same ole same ole.  I nominate myself. 

My recommendations would include having all agencies cut expenditures immediately by 10%.  I would recommend that Congress cut its pay by 20% and revamp its benefits to align with what average Americans get.  Hey Kerry and Hensarling, you with me on this?  I would suggest meeting immediately with all the heads of Departments - especially Department of Education - and ask them to justify their existence.

I would recommend that Social Security COLA adjustments be cut in half.  Furthermore, Medicaid should start at 67.  Eliminate the tax deduction for mortgage interest and student loans, period.  Put a special tax on farmers.  They are subsidized when prices are low; they should pay more when prices are higher.  Better yet, let farmers compete openly.

Increase taxes on the wealthy, especially the Paris Hilton tax loophole.  Increase the tax on dividends and on capital gains - no one who is earning an income should pay higher taxes than those whose earnings come from the work of others - period.

I know these suggestions make sense because they would get everybody in the country pissed at me so they must be on the right track.  And they are just a start.  As an important aside, forget the argument that these cuts would negatively impact the economy - they would, in fact, likely spark a recovery once people recognize that the days of handouts are over.  The economy card has been way over played.

Bottom line:  let everyone truly sacrifice.  The President is right on this, IMHO.

Sunday, August 7, 2011

Former Fed Officials Interviewed

I don't know about others, but when I see these types of interviews, I waffle between cringing and biting at the bit to ask a question. For example, when they say that QE2 was successful because it increased inflation, I want to follow up with the comment that unemployment is still above 9% and consumer confidence is plummeting! How can they say it worked? How can they be rationally talking about more of the same? Are they at all cognizant of the employment picture?
Then they go on and on about Fed forecasts and admit that they have been horrible. Their response "Wall Street forecasts have also been poor." So this is how we make policy? This is the basis of how they jerk around the price of money and create uncertainty in the business sector?
As you watch, ask yourself if they are aware of how bad the employment situation is. Over half of those out of work today have been unemployed for a long time. Furthermore, unemployment benefits are on the verge of being extended for a much longer time. And these former Fed officials talk as if we are in the economic environment of the 1980s.

Source: Wall Street Journal.

Friday, August 5, 2011

The Reich Video

Robert Reich explains the economic situation in 2 minutes:

Here's Robert P. Murphy's 10-minute  response:

I'm off to get aspirin.

Thursday, August 4, 2011

A Nasty Graph

Here is an interesting graph from "Calculated Risk" I found on Jay Hancock's blog.


It vividly illustrates the critical difference between the employment picture emerging from the most recent recession compared to previous recessions.

The question is why the employment recovery has been so overwhelmingly anemic compared to the past and why the economy continues to struggle despite unprecedented policy actions both on the fiscal and monetary side.

The answer to me is clear.  The Federal Reserve caused the most recent recession by pushing interest rates down to 1% in the midst of a fairly robust housing market.  What people fail to grasp is that, by manipulating the federal funds rate, the Federal Open Market Committee (FOMC) is manipulating the most important price in the economy - the price of short-term money.  By driving the rate to 1% in 2003, they lowered sharply the price of housing (again, in a fairly robust housing market).  Then after sucking in fringe buyers with Fed-enabled teaser rates and exotic mortgages, they turned around and pushed rates sharply higher making the new mortgages unaffordable to new homeowners.

The part that people don't get, or better, don't want to see is that all of this has real effects in the labor market.  Instead of seeking an education that reflected the needs of the market, job seekers piled into the construction industry.  They piled into the mortgage broker industry.  They piled into fringe areas supporting these industries.  Great money could be made as a mortgage broker's assistant.  And so it went until the bust.

More recently, we have been in the mode of trying to figure out how to put the unemployed back to work and have slowly come to realize that this doesn't happen overnight.  The policy tools suggested by standard macroeconomic models aren't working.  The unemployed need new skills.  The ability to drive a nail is no longer in demand.

One question that needs examining is why the FOMC, under Greenspan and with the urging of Bernanke, pushed rates to 1% in 2003.  The line given is that they feared deflation lurking in the shadows.  But where is the evidence that deflation was imminent?  Macroeconomic forecasting is widely recognized as maybe just a half step above crystal ball grazing.

There was no deflation, and the disinflation that occurred certainly wasn't because of weakening demand.  It was because of the bust and the aftermath of the corporate governance problems with some lingering effects from 9/11.

At the time, there were accolades constantly showered on Greenspan.  Congress didn't understand his testimony but proclaimed his genius as he manipulated the fed funds rate during his tenure.  Too many accolades, especially in the macroeconomic policy arena, and soon arrogance begins to grow geometrically.  And that, IMHO, led us down the wrong path and to the results shown in the graph.