Because he also gets it.
I hoped for a new "New Deal." And he delivers.
Saturday, November 22, 2008
Friday, November 21, 2008
Can't Wait Until Monday
It's amazing what a little confidence and reduced uncertainty can do.
"Msnbc.com's Al Olson reports that immediately after NBC News' report on Tim Geithner likely to be named Treasury Secretary, stocks rebounded sharply. The Dow Jones Industrial Average was trading in negative territory -- down about 38 points -- before the news. Moments after, the Dow zoomed more than 300 points." (MSNBC source)
I support the pick overall.
Geithner seems to get that traditional Fed policy will not solve this crisis:
"What we were observing in U.S. and global financial markets was similar to the classic pattern in financial crises. Asset price declines—triggered by concern about the outlook for economic performance—led to a reduction in the willingness to bear risk and to margin calls. Borrowers needed to sell assets to meet the calls; some highly leveraged firms were unable to meet their obligations and their counterparties responded by liquidating the collateral they held. This put downward pressure on asset prices and increased price volatility. Dealers raised margins further to compensate for heightened volatility and reduced liquidity. This, in turn, put more pressure on other leveraged investors. A self-reinforcing downward spiral of higher haircuts forced sales, lower prices, higher volatility and still lower prices.
This dynamic poses a number of risks to the functioning of the financial system. It reduces the effectiveness of monetary policy, as the widening in spreads and risk premia worked to offset part of the reduction in the fed funds rate. Contagion spreads, transmitting waves of distress to other markets, from subprime to prime mortgages and even to agency mortgage-backed securities, to commercial mortgage-backed securities and to corporate bonds and loans. In the current situation, effects were felt in the municipal and student loan markets."
-Senate Banking Committee Remarks, T. Geithner
"Msnbc.com's Al Olson reports that immediately after NBC News' report on Tim Geithner likely to be named Treasury Secretary, stocks rebounded sharply. The Dow Jones Industrial Average was trading in negative territory -- down about 38 points -- before the news. Moments after, the Dow zoomed more than 300 points." (MSNBC source)
I support the pick overall.
Geithner seems to get that traditional Fed policy will not solve this crisis:
"What we were observing in U.S. and global financial markets was similar to the classic pattern in financial crises. Asset price declines—triggered by concern about the outlook for economic performance—led to a reduction in the willingness to bear risk and to margin calls. Borrowers needed to sell assets to meet the calls; some highly leveraged firms were unable to meet their obligations and their counterparties responded by liquidating the collateral they held. This put downward pressure on asset prices and increased price volatility. Dealers raised margins further to compensate for heightened volatility and reduced liquidity. This, in turn, put more pressure on other leveraged investors. A self-reinforcing downward spiral of higher haircuts forced sales, lower prices, higher volatility and still lower prices.
This dynamic poses a number of risks to the functioning of the financial system. It reduces the effectiveness of monetary policy, as the widening in spreads and risk premia worked to offset part of the reduction in the fed funds rate. Contagion spreads, transmitting waves of distress to other markets, from subprime to prime mortgages and even to agency mortgage-backed securities, to commercial mortgage-backed securities and to corporate bonds and loans. In the current situation, effects were felt in the municipal and student loan markets."
-Senate Banking Committee Remarks, T. Geithner
Thursday, November 20, 2008
Mainstream economists just don't GET it
Mankiw is finally pointing out that the Fed pumping money into the economy isn't working. Duh. Been there, discussed that.
The sad thing is, he still doesn't get WHY. As is typical of his more classical perspective, he is focusing on inflation expectations being the culprit. It's not the big problem. It is true that with little wiggle room in nominal rates, and with prices falling and expected to fall further, that real rates should rise - which is problematic for the Fed (ie. there is a nominal liquidity trap, which people have been noting for months now will be a problem).
But that's just one small part of the problem. The BIG problem is the overall market uncertainty and consumer confidence drop. Banks, business, people are hoarding their money, reducing credit usage etc and pulling funds from their 401K's and stock market etc. All this means money demand is rocketing up - raising interest rates. And it's not just general market uncertainty, but also INFLATION uncertainty. Yes, deflation is likely in the short-run, but keep in mind that just a few months ago we were all concerned about stagflation. To the extent that is a longer-term concern, inflation uncertainty is higher now. This contributes to hoarding or lack of lending and borrowing --- people are taking a wait-and-see approach.
So, the Fed can announce a price target all they want, but the Fed only has so much control. They can't control inflation uncertainty due to supply-side effects, nor can they control general market uncertainty in times where aggregate demand is free-falling. Further, to the degree that the Fed can't control the money supply in times of crisis (ie. money is endogenous and led by demand for funds), this further limits the Fed's ability to effect the market. I am therefore skeptical that even an announced price target would have much of an effect given the current malaise.
As a matter of fact, Mankiw's very prescription would likely cause inflation uncertainty to skyrocket as X number of people would find the Fed action credible, Y number would not, and Z number would see the current economic crisis making it moot! That could mean an even bigger credit crunch!
Focus needs to be on 2 areas:
1. Quicker use of that $700 billion to buy equity in banks etc to get interbank funds flowing and to try to reduce uncertainty (which is the main culprit).
2. Government spending stimulus of a large-order - a new New Deal.
....Abandon Fed Funds targeting - it's not effective and actually can be doing more harm than good because if interest rates on riskier savings is unaffected by the Fed such that those rates keep rising due to uncertainty, but the Fed keeps trying to push it's interest rate on T-bills down further, all that does is INCREASE demand for hoarding.
I think monetary theory will be completely revamped after this crisis is over with, because I am becoming more and more convinced that the traditional idea that decreasing Fed Funds rate can stimulate the economy is outdated in times like these --- in normal times yes, but not now.
The sad thing is, he still doesn't get WHY. As is typical of his more classical perspective, he is focusing on inflation expectations being the culprit. It's not the big problem. It is true that with little wiggle room in nominal rates, and with prices falling and expected to fall further, that real rates should rise - which is problematic for the Fed (ie. there is a nominal liquidity trap, which people have been noting for months now will be a problem).
But that's just one small part of the problem. The BIG problem is the overall market uncertainty and consumer confidence drop. Banks, business, people are hoarding their money, reducing credit usage etc and pulling funds from their 401K's and stock market etc. All this means money demand is rocketing up - raising interest rates. And it's not just general market uncertainty, but also INFLATION uncertainty. Yes, deflation is likely in the short-run, but keep in mind that just a few months ago we were all concerned about stagflation. To the extent that is a longer-term concern, inflation uncertainty is higher now. This contributes to hoarding or lack of lending and borrowing --- people are taking a wait-and-see approach.
So, the Fed can announce a price target all they want, but the Fed only has so much control. They can't control inflation uncertainty due to supply-side effects, nor can they control general market uncertainty in times where aggregate demand is free-falling. Further, to the degree that the Fed can't control the money supply in times of crisis (ie. money is endogenous and led by demand for funds), this further limits the Fed's ability to effect the market. I am therefore skeptical that even an announced price target would have much of an effect given the current malaise.
As a matter of fact, Mankiw's very prescription would likely cause inflation uncertainty to skyrocket as X number of people would find the Fed action credible, Y number would not, and Z number would see the current economic crisis making it moot! That could mean an even bigger credit crunch!
Focus needs to be on 2 areas:
1. Quicker use of that $700 billion to buy equity in banks etc to get interbank funds flowing and to try to reduce uncertainty (which is the main culprit).
2. Government spending stimulus of a large-order - a new New Deal.
....Abandon Fed Funds targeting - it's not effective and actually can be doing more harm than good because if interest rates on riskier savings is unaffected by the Fed such that those rates keep rising due to uncertainty, but the Fed keeps trying to push it's interest rate on T-bills down further, all that does is INCREASE demand for hoarding.
I think monetary theory will be completely revamped after this crisis is over with, because I am becoming more and more convinced that the traditional idea that decreasing Fed Funds rate can stimulate the economy is outdated in times like these --- in normal times yes, but not now.
Wednesday, November 19, 2008
Wow
President of Chrysler:
"[As a condition of loan] We fully welcome the government as stakeholder, including as an equity holder [part owner]."
Wow I live in an interesting and scary time. I still don't get it though. If the problem is still largely liquidity and consumer's not buying autos in large part due to lack of financing, why don't we just take $25 billion or $50 billion and provide tax rebates to purchasers of automobiles with relatively high MPG. That helps consumers, helps the environment, helps automakers (from Japan or the USA or wherever).... It is true the effect on stimulating demand, dollar-per-dollar, would be less than government spending or a loan provided directly to US automakers, but it would still be substantial, and frankly seems a little easier pill to swallow.
"[As a condition of loan] We fully welcome the government as stakeholder, including as an equity holder [part owner]."
Wow I live in an interesting and scary time. I still don't get it though. If the problem is still largely liquidity and consumer's not buying autos in large part due to lack of financing, why don't we just take $25 billion or $50 billion and provide tax rebates to purchasers of automobiles with relatively high MPG. That helps consumers, helps the environment, helps automakers (from Japan or the USA or wherever).... It is true the effect on stimulating demand, dollar-per-dollar, would be less than government spending or a loan provided directly to US automakers, but it would still be substantial, and frankly seems a little easier pill to swallow.
Tuesday, November 18, 2008
Show Me the Money
"A second stimulus package should 'emphasize investment in infrastructure,' such as roads, bridges and other construction, as well as alternative energy projects"
I couldn't agree more. I'd extend that 'infrastructure' to retooling existing non-green infrastructure into green infrastructure such as providing:
1. direct financial assistance to State's with business plans for mass transit. This would help 2 issues: some State's financial problems and their need for revamped transportation options
2. government subsidization/investment in alternative fuel stations and productive capacity along the lines of Obama's energy plan to support a plethora of alternative energies
That along with general spending on regular infrastructure is a good second stimulus I would support.
I would note that this should NOT be the only spending regarding Obama's overall environmental strategy. The long-run strategy should include research and oversight and strategizing on exactly what kinds of green initiatives make the most sense for the US to pursue. It's always best to have a plan first, then start putting money where it matters.
I couldn't agree more. I'd extend that 'infrastructure' to retooling existing non-green infrastructure into green infrastructure such as providing:
1. direct financial assistance to State's with business plans for mass transit. This would help 2 issues: some State's financial problems and their need for revamped transportation options
2. government subsidization/investment in alternative fuel stations and productive capacity along the lines of Obama's energy plan to support a plethora of alternative energies
That along with general spending on regular infrastructure is a good second stimulus I would support.
I would note that this should NOT be the only spending regarding Obama's overall environmental strategy. The long-run strategy should include research and oversight and strategizing on exactly what kinds of green initiatives make the most sense for the US to pursue. It's always best to have a plan first, then start putting money where it matters.
UAW admission of self-defeat
I am watching the House Finance Services Committee, and just now the UAW President, speaking on behalf of the Detroit bailout, said something to the effect of:
"I made a promise to our union workers that they wouldn't have to pay for their health care.... it was the hardest decision I've had to make to change that to help out auto companies."
http://www.washingtonpost.com/wp-dyn/content/article/2005/10/20/AR2005102002078.html
Hmmm. I wonder why Detroit is having such a hard time....
I'm all for more socialized healthcare, but only if it's done correctly. GM etc. are not government agencies - they are far more subject to negative turn in the economy and don't have access to a printing press. So by putting the entire cost of retiree health care etc. on their backs was never smart for automakers or UAW employees in the long-run. Union power got out of control in many parts of the Midwest thanks to UAW. Changes came too late. And now automakers, the UAW, and employees are paying the price in part because automakers refused to follow Honda, Toyota etc. and not let the Union walk all over them.
"I made a promise to our union workers that they wouldn't have to pay for their health care.... it was the hardest decision I've had to make to change that to help out auto companies."
http://www.washingtonpost.com/wp-dyn/content/article/2005/10/20/AR2005102002078.html
Hmmm. I wonder why Detroit is having such a hard time....
I'm all for more socialized healthcare, but only if it's done correctly. GM etc. are not government agencies - they are far more subject to negative turn in the economy and don't have access to a printing press. So by putting the entire cost of retiree health care etc. on their backs was never smart for automakers or UAW employees in the long-run. Union power got out of control in many parts of the Midwest thanks to UAW. Changes came too late. And now automakers, the UAW, and employees are paying the price in part because automakers refused to follow Honda, Toyota etc. and not let the Union walk all over them.
Monday, November 17, 2008
Words From a Strange Source
Prof. Richard Posner, who typically take a pretty laissez-faire attitude toward policy questions du jour (though perhaps less so than his co-blogger Gary Becker) had this to say on their most recent posts regarding the potential auto bailout:
"The major problems with allowing the automakers to be forced into bankruptcy within the next few months are three, all arising from the depression that the nation appears to be rapidly sinking into."
The bolding is my own, but to hear someone like Posner all but say that he thinks we are heading for a depression, and that we need to bail out the auto industry, is a bit striking. I do think he's in the minority on that point.
"The major problems with allowing the automakers to be forced into bankruptcy within the next few months are three, all arising from the depression that the nation appears to be rapidly sinking into."
The bolding is my own, but to hear someone like Posner all but say that he thinks we are heading for a depression, and that we need to bail out the auto industry, is a bit striking. I do think he's in the minority on that point.
Friday, November 14, 2008
OOPS, Intrade forgot about Nebraska's split electoral vote
Tonight, Obama won 1 extra electoral vote, from Nebraska, which other than Maine, is the only state to split its electoral votes. So, intrade was off slightly in terms of total final electoral tally.
As an aside, does it not seem somehow....unpatriotic that we extend State's rights to NATIONAL elections? Why should Nebraska be able to decide to split its electoral votes, while others choose not to. We need serious federal overhaul of our electoral system. I would start by, you know, getting rid of it.
As an aside, does it not seem somehow....unpatriotic that we extend State's rights to NATIONAL elections? Why should Nebraska be able to decide to split its electoral votes, while others choose not to. We need serious federal overhaul of our electoral system. I would start by, you know, getting rid of it.
Thursday, November 13, 2008
Mixed Messages
Our government's reaction, especially as of late, to the credit crisis leaves much to be desired. It reminds me of John McCain's failed presidential campaign: a whole lot of tactic, but no clear strategy. First we were going to just buy up bad debt, then we were going to take equity ownership of banks to inject cash, now we are ditching the bad debt buy-up and we are talking about bailing out GM and Chrysler, and now we are talking about government-backed restructuring of mortgages....
From a heterodox econ perspective, this surely doesn't help ease market volatility and uncertainty. Consumers value direction - and fear breeds off of confusion, and our government is not providing direction, but they are definitely adding confusion.
We need to pick a strategy and stick to it at this point, or risk an even worse outcome.
Further, as an aside, I do not support the bailing out of GM and Chrysler. Stabilizing the financial markets was one thing, but once you start bailing out specific manufacturing sectors, where does the slippery slope flatten out? Detroit screwed up in terms of having bad business plans for decades, and letting Union power tilt the balance too far from cost-effectiveness. We owe Detroit no further favors from what we've given them for years. One can make an argument that Chrysler for example is 'too big to fail' especially in light of the supply chain and the negative ripple effect that could ensue. I don't buy that. I envision Toyota, Nissan, Honda etc. picking up the slack with a limited time lag. I think it's worth the risk to let some in Detroit fail. It's not like bankrupt companies just disappear, their assets will still exist to be bought out, or restructured under new or even the same (potentially) ownership, etc.
From a heterodox econ perspective, this surely doesn't help ease market volatility and uncertainty. Consumers value direction - and fear breeds off of confusion, and our government is not providing direction, but they are definitely adding confusion.
We need to pick a strategy and stick to it at this point, or risk an even worse outcome.
Further, as an aside, I do not support the bailing out of GM and Chrysler. Stabilizing the financial markets was one thing, but once you start bailing out specific manufacturing sectors, where does the slippery slope flatten out? Detroit screwed up in terms of having bad business plans for decades, and letting Union power tilt the balance too far from cost-effectiveness. We owe Detroit no further favors from what we've given them for years. One can make an argument that Chrysler for example is 'too big to fail' especially in light of the supply chain and the negative ripple effect that could ensue. I don't buy that. I envision Toyota, Nissan, Honda etc. picking up the slack with a limited time lag. I think it's worth the risk to let some in Detroit fail. It's not like bankrupt companies just disappear, their assets will still exist to be bought out, or restructured under new or even the same (potentially) ownership, etc.
Friday, November 7, 2008
An Update on Zimbabwe Hyperinflation
As Hyperinflation gets more and more out of control in that country as the two opposing political factions can't (won't in the case of Mugabe) move forward with a governing agreement, the deviation of estimates regarding exactly what that country's inflation rate is has, well, inflated:
Is it 231,000,000%
or could it be 2,790,000,000,000,000,000%
The reports are 3 weeks apart. 3 weeks is a lifetime regarding hyperinflation.
Of course, this is an example of statistical vs. economic significance. Regardless of the actual statistic, the economic situation likely wouldn't be much different: it's in the crapper in any case.
Is it 231,000,000%
or could it be 2,790,000,000,000,000,000%
The reports are 3 weeks apart. 3 weeks is a lifetime regarding hyperinflation.
Of course, this is an example of statistical vs. economic significance. Regardless of the actual statistic, the economic situation likely wouldn't be much different: it's in the crapper in any case.
Wednesday, November 5, 2008
Prediction markets Predict Perfectly
It appears that when North Carolina and Missouri are finally officially called, McCain will have won Missouri, and Obama North Carolina. This will mean the final electoral tally will by 364 for Obama and 174 for McCain, if I'm not mistaken.
This will mean further that intrade.com will have exactly predicted - for days prior - the outcome of the US election. On caveat: intrade.com predicted Obama would win Missouri and McCain would win Indiana - it appears likely the opposite has occurred. But they both have 11 electoral votes so the net effect is intrade.com predicted perfectly.
"On the eve of the 2008 U.S. presidential election, Barack Obama and John McCain are making final arguments to voters in key swing states. Intrade's presidential markets show Obama extending his advantage even as polls show a slight tightening."
Barack Obama (364 Votes) (top)
John McCain (174 Votes) (bottom)
Florida (27)
80%
22%
Pennsylvania (21)
89%
11%
Ohio (20)
83%
20%
Georgia (15)
21%
75%
North Carolina (15)
70%
37%
Virginia (13)
86%
14%
Missouri (11)
51%
45%
Indiana (11)
41%
64%
Nevada (5)
82%
15%
New Mexico (5)
92%
11%
North Dakota (3)
29%
73%
Montana (3)
29%
79%
This will mean further that intrade.com will have exactly predicted - for days prior - the outcome of the US election. On caveat: intrade.com predicted Obama would win Missouri and McCain would win Indiana - it appears likely the opposite has occurred. But they both have 11 electoral votes so the net effect is intrade.com predicted perfectly.
"On the eve of the 2008 U.S. presidential election, Barack Obama and John McCain are making final arguments to voters in key swing states. Intrade's presidential markets show Obama extending his advantage even as polls show a slight tightening."
Barack Obama (364 Votes) (top)
John McCain (174 Votes) (bottom)
Florida (27)
80%
22%
Pennsylvania (21)
89%
11%
Ohio (20)
83%
20%
Georgia (15)
21%
75%
North Carolina (15)
70%
37%
Virginia (13)
86%
14%
Missouri (11)
51%
45%
Indiana (11)
41%
64%
Nevada (5)
82%
15%
New Mexico (5)
92%
11%
North Dakota (3)
29%
73%
Montana (3)
29%
79%
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