Hudson Econ Blog

More Government Intervention

2009-05-13T08:19:00.000-05:00

According to this Wall Street Journal article, the administration is considering means of controlling compensation by banks to executives. The lead-in says this:

The Obama administration has begun serious talks about how it can change compensation practices across the financial-services industry, including at companies that did not receive federal bailout money, according to people familiar with the matter.

These "evil executives" have been the target of populist ire for some time. And, to be sure, there are real issues with compensation. For example:

The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long-term performance. [Emphasis added]

There is little doubt from years of economic/finance research that when compensation is based on short-term performance, you get short-term behavior. Therefore, compensating more on the basis of long-term performance should lead to more long-term behavior. But, what is the "long-term"? How you compensate a CEO who may have a useful life of 5-6 years on the basis of this "long-term performance"? Is this really the job of the government to determine compensation schemes in the first place?

But the story takes a turn for the worse:

At the same time, House Financial Services Committee Chairman Barney Frank (D., Mass.) is working on legislation that could strengthen the government's ability both to monitor compensation and to curb incentives that threaten a company's viability or pose a systemic risk to the economy.

Yes, this model of forward-thinking, ethical, and public-interest centered behavior is working on legislation that places more power in his hands. This should cause everyone to shutter just a tad.

Economic Decision-Maker-in-Chief

2009-05-04T11:09:00.002-05:00

President Obama, it seems, has decided that he gets to direct how people choose to make their living. According to a Fox News story, Mr. Obama has decided that Wall Street will "play a less dominant role in our economy." More specifically:

Wall Street is not going to play as dominant a role in the economy as regulations reduce "some of the massive leveraging and the massive risk-taking that had become so common," President Barack Obama says.

and:

"That means that more talent, more resources will be going to other sectors of the economy," he said. "I actually think that's healthy. We don't want every single college grad with mathematical aptitude to become a derivatives trader. We want some of them to go into engineering, and we want some of them to be going into computer design."

Well, I tend to agree that corporate profits were at least in part a result of under-regulation in terms of the rules of the game, these quotes show the arrogance of Mr. Obama that he somehow knows what you ought to major in while in school. Through the looking glass....

Setting Us Up

2009-04-22T10:08:00.003-05:00

Mr. Geithner now blames the United States for the current financial crisis, unwittingly (or, maybe not) putting us on the hook as the responsible party to pay the costs. Well, it may be true that Americans excessively borrowed, but that means the world excessively lent. But, this is the typical "guilt talk" that solely blames lenders for "predatory lending practices" and absolves borrowers from the act of taking out a loan they knew they were at high risk of being unable to repay. To be sure, the current economic situation is a bitter pill we will have to swallow, but setting the precedent that we are primarily responsible only gives the world justification to absolve themselves of their own responsiblity. Typical for this administration...

Stirring the desPot

2009-04-20T15:56:00.003-05:00

Yes, this is the President of the United States shaking hands and smiling with Hugo Chavez.

Chavez is a man that has declared the United States an enemy of the world...a terrorist state, etc., etc., etc. It is one thing to politely ignore him, but something altogether different to shake his hand and smile. Imagine how this is being played in the state run media in Venezuela...

Absolutely Insane

2009-04-17T11:44:00.002-05:00

This Wall Street Journal editorial points to the insanity of Barney Frank. It is bad enough that he was a key player in the current financial disaster. But, more importantly, he is plotting the next economic disaster. Mr. Frank is a danger to the Republic.

Rhetorical Inconsistency

2009-04-16T09:54:00.002-05:00

Even Paul Krugman notices that the Obama administration has been completely inconsistent with its economic story...that says a lot.

Say What??

2009-04-13T14:46:00.003-05:00

A testament to the stupidity of some people. Here is the warning label on the back of a fishing lure:

Or what about this one from a hair dryer:
Amazing. This means that not only has someone done these stupid things. They have done them, sued, and won!! So, who is more culpable? The idiot, or the idiot jury that allowed them to win the case?

Economic Gestapo

2009-04-09T13:36:00.002-05:00

Well, one had to wonder how long it would take before the Obama administration would meander off the path to inject its fingers where they did not belong. As with all things in this administration, they moved quickly. This Wall Street Journal editorial points to some serious issues related to regulatory overreach. The opening line says it all:

The Obama administration wants to regulate venture capital firms to prevent systemic risks. Silicon Valley residents are scratching their heads and asking: What risks? The rest of us should ask why Washington is targeting a jewel of the American economy that had nothing to do with the housing bubble.

What's next? Are your credit card purchases going to threaten financial stability and therefore be subject to regulation?

A Little Fun with Larry Summers

2009-04-09T13:33:00.001-05:00

Soros on the Economy

2009-04-07T09:51:00.003-05:00

In two related stories, billionaire George Soros makes some economic prognostications. First, Soros states that the "Dollar's strength a Measure of the Systems 'Sickness'." In the second, Soros claims "The Danger of Collapse has Passed, but the Stock Rally is Unsustainable." I'm going to go out on a limb here an predict Soros is short both the dollar and stocks...

Estate Taxes

2009-04-02T17:38:00.003-05:00

This editorial pokes a little fun at the estate tax. The title "Spend It in Vegas or Die Paying Taxes: A 0% Tax on Carousing, but 55% on Thrift" is quite descriptive and drives home the point. The money quote is:

To counter the fact that economists such as I obsess about the deleterious effects of the estate tax, advocates of the estate tax note with some pride that 98% of Americans will never pay this tax. Let's make it 100%, and I'll get off my soapbox.

Something non-bailout to ponder.

Bailout Humor

2009-03-31T22:00:00.002-05:00

Tobacco Tax

2009-03-31T21:23:00.002-05:00

I suppose that if you make $250,000 or less, you are exempt from this new tax on tobacco...I guess not. So much for the no new taxes for 95% of the population.

Should UAW President Go Too?

2009-03-31T15:46:00.002-05:00

A Fox News story asks "With GM's Wagoner Ousted, Should Union Head Have Met the Same Fate?"

--Yes. He is as much responsible for the excesses and idiotic decisions by the UAW as Wagoner was for the company (GM). They are both culpable, although not completely responsible.

Housing Price Differentials

2009-03-31T15:33:00.004-05:00

The folks at CalculatedRisk blog provide a useful graphic for understanding some of the dynamics of housing prices, bubbles, and the subsequent collapse. Below is the Case-Shiller house price index for three different house price "tiers."

Note that the lowest priced houses witnessed the fastest appreciation, and the fastest subsequent fall. One of the theories underlying this housing market is that the government "forced" banks to make bad loans to people with insufficient income to support the purchase. That should be reflected in demand for lower-priced housing. To the extent that the above reflects excess demand for housing in the lower tier, these data would tend to support that hypothesis. Of course, this is just San Francisco, but it does provide some interesting food for thought.

More GM and Bailouts

2009-03-31T09:46:00.002-05:00

A Wall Street Journal editorial addresses President Obama's plan for auto. Although more skeptical than I at this point (I want to wait and see whether Obama has the guts to pull the trigger on GM), they make some valid points. It is worth a read.

GM and Bailouts

2009-03-30T16:19:00.004-05:00

As reported here, GM's new CEO Fritz Henderson is putting bankruptcy back on the table. Keith Hennessey, President Bush's National Economic Council director, outlines on his blog that they recommended GM get the loans because they were not "ready" for Chapter 11. That makes some sense. President Obama ousted GMs CEO Wagoner today mainly because Wagoner refused to keep bankruptcy as one of GMs future options. Now that GM and Chrysler have had an opportunity to get their act together, President Obama believes they must make tough choices, which could include bankruptcy. Score one for Mr. Obama today. By keeping it on the table, it forces the unions to make tough concessions...concessions, by the way, that have already been made at Ford. Interesting stuff.

South Park on Economic Policy

2009-03-27T11:59:00.002-05:00

Be Afraid...Very Afraid

2009-03-27T07:41:00.002-05:00

While the proposals for broad sweeping powers being granted to the United Nations to "combat global climate change" outlined in this report are likely to never make it out of the gates, they should give everyone pause as to the underlying currents in both U.S. and global political circles that this document could even be floated without being laughed off immediately as dangerous.

More on Geithner and New Rules

2009-03-26T12:08:00.002-05:00

A bit more on Geithner's testimony from CNN. The money-quote:

"Our system failed in basic fundamental ways," Geithner said in written testimony released Thursday morning by the panel, which is chaired by Rep. Barney Frank, D-Mass. "The system proved too unstable and fragile, subject to significant crises every few years, periodic booms in real estate markets and in credit, followed by busts and contraction."

Hogwash! Regulators failed to regulate. Laws (in particular, laws supported by Barney Frank) created perverse incentives. This phraseology is just like President Obama speaking about charitable contributions in the past tense in his speech. In his tone, Mr. Geithner believes he is signing the death certificate on capitalism. More:

Geithner also called for "substantially more conservative capital requirements" for big firms and consistent standards for executive pay.

Perhaps more conservative capital requirements are a good thing. But, the Administration chooses to entangle these with red herrings...like executive pay. So, the government is now going to dictate executive pay to privately held (non-government) firms?? Where does the decision of a Board of Directors about how much to pay a CEO translate into a matter of national security...or even a public good? No, this is populist backlash at its best. But we better be careful. We may get exactly what the mob wants. Guillotines for the "obvious crooks" quickly turns into guillotines for the masses.

"Rules of the Game"

2009-03-26T10:59:00.002-05:00

Secretary Geithner has proposed new rules of the game for financ e. Rules matter. Enforcement probably matters even more. I am not necessarily opposed to the idea. But imagine if the Federal Reserve Board was the arbiter of risk monitoring as CalculatedRisk pointed out this morning.

According to Greenspan in 2005 "we don't perceive that there is a national bubble", just "a little froth", and even in March 2007 Bernanke said "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained".

If the new risk czar is not capable of detecting the systemic risk, what good are they?

Budget Follies and a Socialist Agenda

2009-03-25T13:46:00.004-05:00

President Obama defended his budget plan on national TV and his comments are summarized in a Wall Street Journal article here. This would almost be comical if it were not for the dire impacts of his erroneous logic. Consider the following passage in reference to critiques of the proposal to eliminate tax deductions for charitable contributions.

"I'm assuming that [the deduction] shouldn't be the determining factor as to whether you're giving that hundred dollars to the homeless shelter down the street," he said.

You know what they say about assuming, Mr. President. First, the deduction is not the sole reason for the contribution, to be sure. Those who give generously to charities do so for a myriad of reasons. But, we, as a society, decided long ago that we would provide some incentive for everyone to provide for the less fortunate by giving that generosity some reward of lowering tax liability. Note contributions are not a tax credit, but a deduction, so they are only beneficial at the rate at which the contributor pays taxes.

Perhaps a more disturbing (and admittedly cynical) interpretation of this proposal is that he knows it will reduce charitable contributions leading to a greater need for government intervention in the lives of low-income people. After all, if those nasty, greedy rich people are not going to be naturally generous with their money without tax loopholes, we'll just have to tax it out of them and give it to the needy via a government program.

The evidence is mounting that President Obama is either extremely naive about incentives in which case he was a very poor choice for President. Or, he is outright nefarious with his plans in which case he was a very poor choice for President. I am finding it more and more difficult to find a middle ground.

Update: Martin Feldstein of Harvard had an editorial yesterday in the Washington Post that has a good numerical example of what I am talking about. It is worth a read.

Say What??

2009-03-25T12:21:00.003-05:00

Here are two stories that do not seem to go together. First, the Obama administration continues to push for extended powers to take over troubled non-bank financial institutions. Second, Bank of America has announced that it will begin repaying TARP funds in April. What gives?? I am not quite sure that BofA's announcement means we are out of the woods, but it certainly gives a signal that maybe there is light at the end of the tunnel. Yet, Mr. Geithner wishes to expand his powers. It appears that events are overtaking the administration's movements to further centralize the economy. We can only hope this happens before too much damage has been done.

There were a couple interesting points in the AP article on Geithner that are worth mentioning. First:

In response to a question, Geithner said he had not seen a recent article by the head of China's central bank, Zhou Xiaochuan, in which he called for a new currency to eventually replace the dollar as the world's major reserve currency. But Geithner praised Zhou and said he looked forward to reading the article. Those comments immediately sent the dollar plunging on world currency markets.

Okay, c'mon. I know Mr. Geithner is new to this game, but you would think that a former President of the New York Fed would know that a Treasury Secretary's words act like policy, whether he intends them to or not. But, perhaps more disturbing is the following:

"A strong dollar is in America's interests," he said, returning to the stock phrase that the past five Treasury secretaries have used to signal to markets that the U.S. is not contemplating any changes in its dollar policies.

I am trying to figure out why Mr. Geithner thinks that a "strong dollar policy" and moneterizing the debt is at all consistent...

A True Understanding of AIG

2009-03-25T08:22:00.003-05:00

In this resignation letter printed in the New York Times, one gets a better picture of what has happened at AIG. This also echos my point that the American public and Congress should be ashamed for its mob mentality that has surrounded this unfortunate event.

Kudos to Mr. Specter

2009-03-24T15:16:00.003-05:00

A Wall Street Journal report suggests that Senator Arlen Specter will not back a plan favored by labor unions to circumvent secret ballot elections to unionize. If a majority of a shop's workers want to organize, so be it. But, at least individuals who do not want to unionize should be able to express their opinion through their vote without fear of retribution.

Slippery Slope

2009-03-24T13:37:00.002-05:00

Treasury Secretary Geithner has proposed a need to have more power for the Treasury Department to take over "failing" non-bank institutions. A key phrase is:

Geithner said Congress should grant the government new authority to make loans to a troubled institution, buy its obligations, take over its liabilities or possibly take an ownership stake in it while it regains its footing.

But hasn't the fact that we HAVE taken ownership of AIG the rationale used to suggest that the government has the right to regulate executive pay? Or:

In that capacity, it would gain sweeping powers like the right to sell or transfer assets of non-bank financial institutions that get in trouble. The government would also get the authority to renegotiate contracts, including pacts with employees, and to halt the termination of contracts if necessary.

This sounds suspiciously like the federal government grabbing power. And, yes, this is brought to you by the very people that called the Patriot Act a "massive power grab" as reported in the International Herald Tribune.

"Fuzzy" Math

2009-03-23T13:23:00.001-05:00

Talk about "Fuzzy"math and "Vodoo Economics," apparently the White House and the Congressional Budget Office cannot even get in the same ballpark on the increase in the budget deficits under Obama.

Obama to the Rescue...

2009-03-17T22:18:00.002-05:00

A CNBC story suggests that there are signs of economic recovery in some of the recent economic data. Interestingly, this is before a dime of stimulus money has been spent. But, rest assured that the Obama administration will take credit for whatever recovery that occurs now.

Chinese Exports Fall--Economic Adjustment

2009-03-11T08:48:00.002-05:00

According to the Wall Street Journal, Chinese exports have fallen sharply (26% from a year earlier), which has reduced their trade surplus. This is a result of both the economic slowdown as well as exchange rate adjustments (actually, these are linked, but I don't want to be too wonkish here). At first blush, this appears to be a "good thing," and it is part of a necessary adjustment in our economy. The issue to watch is that the trade surplus has given the Chinese cash, which they have reinvested in U.S. Treasuries. As the trade surplus declines, so does their available cash. As the story points out, however, this decline in purchases has been offset by an increase in the U.S. savings rate to 5% of disposable income (again, for economics wonks, this is obvious). So, we are buying more of our own debt. This trade balance will deserve attention in the near term to see if this trend continues.

John Nash, Climate Change, and "One World Government"

2009-03-10T14:55:00.007-05:00

John Nash, played by Russell Crowe in the movie A Beautiful Mind, was a mathematician awarded the Nobel Prize in Economics. One of his most famous insights was something called a "Nash Equilibrium." Basically, Nash argued that an individual will do what is best for himself given that his "opponent" chooses what is best from them. More generally, I will choose the course of action that is best for me conditional on what you choose.

The classic example of a problem like this is something called a "Prisoner's Dilemma." From the Wikipedia site, here is a description of the problem:

Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one testifies (defects) for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?

Obviously, both suspects would be better off is they each kept their mouth shut (we call this the social optimum). (This is why your momma always separated you and your brother to get to the truth.) But, Nash and others recognized that each had an incentive to rat out the other party. Because I assume that you will do what is in your best interest (rat me out), I act in my own best interest given that assumption (rat you out). So, while the social optimum is to keep quiet, the individual incentives of ratting out are quite powerful.

Roll out climate change (or any common-pool resource problem for that matter). IF climate change is a real man-made issue, and that is very debatable, is has characteristics of a common-pool resource. That is, my actions have an impact on you and vice versa, but we act independently. If neither of us pollute, we will both have positive economic growth with positive health impacts. If one of us pollutes but the other does not, the one that does not will have higher economic growth (hence, the incentive to not adopt pollution controls), while the non-polluter will have lower economic growth. The negative health consequences are affecting both of us. Thus, while we would both be "better off" by not polluting, the incentive is to pollute.

OK, so what does this have to do with "one-world government." Admittedly, that is a bit hyperbolic. But, notice in the original prisoner's dilemma game that there is no in-game communication (no tapping "just keep quiet" in morse code through the prison walls). This means that because we act individually, we will not reach the social optimum without communication. A recent article in the New Yorker Magazine had an interesting quote on this subject.

“We are in an era of creative destruction,” he said. A thin, easygoing man with the look of an Oxford don, Elkington has long been one of the most articulate of those who seek to marry economic prosperity with environmental protection. “What happens when you go into one of these periods is that before you get to the point of reconstruction things have to fall apart. Detroit will fall apart. I think Ford”—a company that Elkington has advised for years—“will fall apart. They have just made too many bets on the wrong things. A bunch of the institutions that we rely on currently will, to some degree, decompose. I believe that much of what we count as democratic politics today will fall apart, because we are simply not going to be able to deal with the scale of change that we are about to face. It will profoundly disable much of the current political class.” [my emphasis added]

Interesting... Basically, this person is arguing that a command-and-control dictatorship, or at least some significant modification to our representative republic (it really irks me when liberals refer to it as a "democracy" because it is NOT) will have to arise because of the prisoner's dilemma problem. Could be, but in-game communication can be accomplished in many ways, which short-circuits the problem. Additionally, economic research suggests that players of the prisoner's dilemma game often choose to "cooperate" as much as 40% of the time even though it runs counter to their individual incentives. Nevertheless, this might explain why the liberal left continue to push the global warming agenda...how else to get you to accept sacrificing self-government unless there is a "crisis too big to solve" as individual nations.

More on Climate Trend

2009-03-10T13:07:00.005-05:00

Using the NASA data charted in a previous post, I have plotted the mean global temperature index and plotted trend lines and a 10-year moving average line.

The yellow line represents a trend created using a 2nd order polynomial (techno-geek talk for a regression with both time and time squared as variables). For convenience, the regression equation and R2 value (a measure of goodness of fit; but only one of many measures) are presented in the bottom right of the graph. Indeed, if I were Al Gore, I would be scared to death of what this means...namely that global temperatures are increasing at an increasing rate. This runaway global warming is enough to scare even the most hearty of constitution.

But a second look at the data reveals a potential problem. The red line represents a 6th order polynomial trend (a 6th order was determined to be optimal on the basis of a number of statistical criteria relating to goodness of fit). The regression equation for this line lies at the top of the graph. Notice that you get a much different interpretation from this model. Namely, global temperatures have peaked and are actually heading down!! The 10-year moving average appears to confirm this trend (note that the 10-year moving average appears to have only declined twice over the entire period when a global cooling stage was not actually beginning).

Does this analysis necessarily mean that global temperatures will continue to decline? Certainly not. But, it should give us serious pause about implementing draconian measures (I am not talking about your everyday recycling and other prudent conservation measures) that could cripple economic growth in a time of global recession.

An Inconvenient Reversal of Trend?

2009-03-10T12:06:00.001-05:00

Al Gore's now infamous movie title may have an interesting twist. The truth may be that trends in global temperatures have reversed. From NASA, here are the most recent facts:

This figure has its own set of issues. But, let's take as given that we are warmer today than in 1950 (the base year for this figure). The black line tracks the annual observations of this index while the red line shows the 5-year mean (presumably to measure the longer term trend in the index). What we see is that we peaked several years ago, and the longer-term trend is now moving downward. This, of course, does not mean that the trend has permanently reversed, but calls into question the notion that temperatures are perpetually increasing. On the contrary, there appears to have been relatively steep increases in this index during the 1990s, but the rate of climb fell of sharply in the late 1990s-early 2000s, and now has actually gone negative (temperatures on the decline).

Lest we focus too much on the global picture at the expense of more specific regions, the figure above breaks the data down by latitude bands. Note that the Northern latitudes have experienced the greatest degree of "warming," which may lend some support to man-made causes (the area with the most industrial activity), but note that all areas are experiences the same reversal of trend.

The above figure shows land and sea temperature changes. Note again that both land and sea are reversing course in temperature. Just an interesting observation is that the sea temperature change appears greater in percentage terms as compared to land and also appears to lead temperature changes on land... That might make an interesting testable hypothesis.

Bottom line...is the trend in global temperatures reversing?? Who knows? Not Al Gore. But, these data will not appear in the mainstream media because it runs counter to the goals and objectives of the liberal left. But more disturbing is how the scientific community has abandoned its principles in this debate.

Some may question why we should care whether the issue of global warming is real or fabricated. The answer is that proposed solutions have costs (see Wall Street Journal editorial or Fox News story that summarizes a complex text produced by the EPA). I suspect, but have no direct evidence, that many of the people most pushing the global warming agenda are heavily invested financially (as well as emotionally) in companies that stand to profit from a move to reduce carbon emissions. I guess we will find out what is going on later....

"There are three types of lies. Lies, damned lies, and statistics."

--Benjamin Disraeli

"Too Big"

2009-03-09T15:12:00.003-05:00

AIG warns of serious consequences if it does not get more bailout money. This is what happens when regulators are asleep at the wheel. Note that on page two of the document:

AIG's business model - a sprawl of $1 trillion of insurance and financial services businesses, whose AAA (credit rating) was used to backstop $2 trillion dollar financial products trading business - has many inherent risks that are correlated with one another. As the global economy has experienced multi-sector failures, AIG's vast business has been weakened by these multi-sector failures. [my emphasis added]

Well, duh. What did you think would happen when you highly levered correlated risks?? This either points to the extreme arrogance of these people in ignoring the potential for systemic risk or the lack of competence in understanding that risk existed in their "vast business." To be sure, risk exists in all businesses and cannot be eliminated. Nor should we expect that firms will never take risks, otherwise they will never innovate or expand. But, businesses should be prudent in understanding their risks and regulators should be cognizant of the risks that are being taken.

Who Pays for Cap-and-Trade?

2009-03-09T12:32:00.004-05:00

The Wall Street Journal editorial on the subject is a rather enlightening example of how costs work their way through the system. Most important is this passage:

Once the government creates a scarce new commodity -- in this case the right to emit carbon -- and then mandates that businesses buy it, the costs would inevitably be passed on to all consumers in the form of higher prices. Stating the obvious, Peter Orszag -- now Mr. Obama's budget director -- told Congress last year that "Those price increases are essential to the success of a cap-and-trade program."

Notice that Mr. Obama's administration quite readily views this as a tax. I wonder if they even view this as a real solution to a "pollution problem" or just a way to generate tax revenue?

We were also pointed to recent comments by Mr. Orszag that he was "sure there will be enough there to finance the things that we have identified" and maybe "additional money" too. In other words, Mr. Obama expects a much larger tax increase than even he is willing to admit.

I guess that means the more revenue side wins... Finally, the editors observe:

Cap and trade, in other words, is a scheme to redistribute income and wealth -- but in a very curious way. It takes from the working class and gives to the affluent; takes from Miami, Ohio, and gives to Miami, Florida; and takes from an industrial America that is already struggling and gives to rich Silicon Valley and Wall Street "green tech" investors who know how to leverage the political class.

Of course, there are arguments for the success of these programs (see another post of mine that outlines these arguments). But, one must be intellectually fair and recognize the potential outcomes of a policy. And, yet again, we will not discuss this for long...only until May of Ms. Pelosi has her way.

More Housing

2009-03-06T20:29:00.004-06:00

USA Today provides an interesting story and graphic on the concentration of mortgage foreclosures and defaults. The graphic below is from the Economix blog from the New York Times, but the USA Today article breaks it down by counties and shows that 35 counties accounted for roughly half of all foreclosures in 2008. Amazing that such a few geographic areas are responsible for such a mess.

Historical Timeline on Housing Crisis

2009-03-06T20:12:00.004-06:00

This link to a Fox News video on You Tube actually comes out of Canada, so it has a little ancillary material at front and back, but it is useful to watch as a means of understanding the obfuscation that is taking place in Congress today about who is really behind some of the key mistakes in the lead up to this crisis.

GM Bankruptcy

2009-03-05T07:20:00.003-06:00

As reported in the Wall Street Journal, GM auditors question the firm's ability to continue to operate. This smacks of political blackmail for more bailout money. I have no doubt that they need additional funds to continue to operate. I just question the need to keep them afloat. Many companies file for Chapter 11 protection and come out of bankruptcy in much better shape. I would predict that GM will go bankrupt. The only question is how much money are we going to put into the company before it happens.

Interesting Question: If the government loans significant money to GM and GM files for Chapter 11 bankruptcy, is GM "protected" from its major creditor...the U.S. taxpayer?

Probability of a 'Depression'

2009-03-04T20:32:00.004-06:00

Robert Barro in a Wall Street Journal editorial provides some evidence to formulate the probability of a mild "depression" as defined as real GDP decline of over 10%. Based on his data, he estimates the probability at around 20%. The probability of a major depression (real GDP decline more than 25%) at around 9%. The last statement he makes deserves repeating here:

I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful. But I think it more likely that the economy will eventually recover despite these policies, rather than because of them.

Unfortunately, I am afraid I agree with him. I hope we are wrong and our recovery is more rapid, but it increasingly seems the structural adjustments the economy is progressing through are deeper than anticipated.

Government Contracting Future???

2009-03-04T09:18:00.003-06:00

An Associated Press story outlines plans by the Obama administration to overhaul government contracting at a savings of $40 billion per year. Sounds good, but details are scant. Here are a few quotes from the story worth mentioning.

Those new rules, officials said, would make it more difficult for contractors to bilk taxpayers and make some half-trillion dollars in federal contracts each year more accessible to independent contractors.

OK. That sounds good. But, what do they mean by "independent contractors?" Or what about:

Obama will say that his administration will stop outsourcing to private contractors many services that should be performed by government employees. He also pledged to open contracts to small businesses and eliminate "unnecessary" no-bid contracts that allow preferred contractors to take assignments even though they might not be the least expensive option.

The first sentence sounds suspiciously like more government expansion. There are certainly jobs that should be performed by government for a variety of reasons, but most of the time it is more costly and inefficient. Equally important is that the first sentence in this quote appears to contradict the previous quote.

The administration official said Obama would not, however, sacrifice national security to save pennies. The official also said the administration plans to increase transparency and accountability provisions in contracts -- a major theme of Obama's young administration. [my emphasis added]

OK. The rest was sounding OK, but the highlighted statement runs counter to our experience so far with this administration. This is just another issue to watch closely in the future.

Mortgage Pig

2009-03-04T08:14:00.001-06:00

The guys at CalculatedRisk have an amusing technical interpretation of the S&P 500:

It helps to find some humor in the current economic environment...

Ugly Picture

2009-03-04T08:00:00.002-06:00

Here is another ugly picture from dshort.com:

The accelerating pace of this is quite scary. But, all markets are new. So we shall see where we go from here.

Opportunity Costs and Budgeting

2009-03-02T13:48:00.002-06:00

The core principle of economics is a concept called opportunity costs. Basically, opportunity cost is the value of an alternative course of action given the choice to do something else. You give up current income to go to college (the opportunity cost) in the hopes of achieving a higher lifetime income. We live in a world of scarce resources, so choosing one use of those resources necessarily means that we are giving up the opportunity to do something else. Every freshman economics student is taught this concept.

Now that the President's budget "blueprint" has been released, we get a glimpse of how he does opportunity cost calculus (or doesn't). Let's start with a media "darling"...agriculture. Farm subsidies have been a favorite political target of developing countries as well as the Wall Street Journal editorial board, among others. First, a little perspective is in order. The total cost of farm subsidies in current dollars over the last 40 years is somewhere in the neighborhood of $140 billion. Compare this to the TARP and"stimulus" packages of the past several months. But, are there opportunity costs associated with farm subsidies? Of course there are costs. The money could have been used elsewhere in the economy. The subsidies have distorted resource use away from the allocation of resources that would have resulted in the absence of government intervention (how much, of course, is a relevant question).

We have to compare this, though, with what we get in return. In the 1940s, as much as 50% of U.S. household disposable income was spent on food. Today, it's less than 10%. This relative decline means we have had more money to spend on DVD players and cars, thereby fueling economic growth. We have arguably maintained or improved the standard of living in rural areas and promoted a sector that is the only industry that has consistently fed the U.S. population uninterrupted through two world wars and countless other conflicts and economic crises.

Platitudes aside, the question is whether the benefits to society outweigh the opportunity and cash costs of the programs? Well, society, since 1933, has consistently said "yes." Now, we find in the President's budget that for some reason that calculus has changed dramatically. Why? Surely it is not cost. He argued for a $600+ billion "reserve fund" for some future undefined nationalized health care system. What is the opportunity cost of that $600 billion? What is the future economic growth drag of a system like that?

I have never been a proponent of farm programs. But, I recognize that there are social, political, and other non-economic reasons for their existence. I also recognize that our trading partners will continue to subsidize their production even if we do not (and do not be fooled; even developing countries are subsidizing their agriculture). In years past, government budget and deficit spending levels were such that we economists were concerned with the social tradeoffs between agricultural and other government spending. But today, I am not sure the opportunity cost arguments implicit in the President's budget are genuine. If we are to spend $600+ billion per year on health care, what's another $15 billion on food?

Currency Manipulation "Message"

2009-02-24T13:21:00.001-06:00

Greg Mankiw has an interesting take on the inconsistency of the message coming from Washington to China about currency and debt. It is worth a read.

Bank 'Nationalization'

2009-02-23T14:15:00.002-06:00

This editorial in the Wall Street Journal points to some semantic differences when people use 'nationalization.' Quite correctly, the author points out that the Federal Deposit Insurance Corporation (FDIC) quite regularly 'nationalizes' failed banks. But this is potentially quite different than what is being proposed by some. The devil is in the details. But, so far, very few details have been forthcoming. By being purposely vague, the Obama administration can hide their agenda is something that resembles common sense. Or, maybe they just do not know what they are doing.

Policy Stability

2009-02-23T07:56:00.002-06:00

Jeffrey Sachs has an interesting piece on the need for policy stability, not stimulus, in the Scientific American.

Stimulus Humor

2009-02-23T07:53:00.002-06:00

A bit of stimulus humor:

What Does "Create or Save" Jobs Really Mean??

2009-02-19T14:59:00.002-06:00

Greg Mankiw has a useful political commentary on President Obama's "creating or saving" jobs with the stimulus bill. I agree with him that this phrasing is politically genius because it is not provable and virtually any outcome can be justified by the statement...ludicrous.

"Green Payments" in Agriculture

2009-02-19T14:06:00.004-06:00

The Southwest Farm Press reported on a discussion by Secretary of Agriculture Vilsack about green payments in agriculture. In a nutshell, Vilsack is discussing the potential that agriculture receive payments for environmental amenities (for example, carbon sequestration) produced on farms. This would, theoretically, be in place of traditional farm income support payments (I say "theoretically" because existing programs rarely disappear when new programs are introduced; but may have to now given the financial mess we are in). Although I have long argued that this was the direction we were headed with farm programs, I do think two questions are relevant before embarking down this road:

Current payments are related to factors such as farm size, crops, etc., that lead to a certain distribution of these payments across the country. Land values, equipment loans, etc., are tied to the existence of those payments. Changing payments to be based on environmental amenities is likely to result in a distribution of payments that is at least somewhat different than the current distribution, which could have impacts on land values, cropping patterns, etc. Do we understand this process well enough? Are we ready to accept the consequences of those changes?
Green payments are presumably not tied to farm revenue, prices, production, or any other historical variable related to the farm. As such, the revenue these payments would provide are not counter-cyclical to farm revenue. Do we care if farm policy does not provide income risk protection?

These are but a couple of questions relevant to the debate that is likely to begin soon.

Some Clear Explanations...

2009-02-19T13:05:00.004-06:00

Thomas Sowell provides a clear, concise, easy-to-read explanation of a, in my opinion, key component of our current market breakdown. Most importantly, Mr. Sowell questions the current media and political mantra that we need MORE government involvement in the market when, at least in the case cited, it was government intervention that led to the calamity in the first place.

"Executive" Pay Caps in Wonderland...

2009-02-18T15:23:00.002-06:00

This Fox News story highlights the absurdity of President Obama's executive pay caps. Here is the "CEO" of a publicly funded/managed entity that is consistently unprofitable, yet there is no discussion of limiting his compensation to $400,000...

Some "Better" Housing News...

2009-02-18T15:18:00.002-06:00

The following graph shows an interesting trend:

The red bars show quarterly new home sales and the blue bars is quarterly housing starts. Note that 2006-most of 2007, starts exceeded purchases, which implies growing inventories. But, during 2008, purchases exceeded starts, which signals a draw down in inventories. This is relative, of course, because both are racing to the bottom right now...but, maybe we will bleed off inventories enough to start to stabilize price.

The FED Provides More Bleak News...

2009-02-18T13:19:00.002-06:00

The Federal Reserve Board released its summary of economic projections. The graph below shows actuals and mean estimates going forward for key economic variables.

Their projections show a return to positive growth in 2010, with a spike in unemployment of around 9%. Let's hope they are not being too optimistic.

More Peanut Business...

2009-02-18T09:50:00.003-06:00

This Wall Street Journal editorial echos some of my earlier comments. The market has punished Peanut Corp. of America by driving it into bankruptcy. But, as I predicted, the reaction to this failure of regulators to do their job will be to create more regulation. Yeah...that makes sense...

Capacity Utilization...

2009-02-18T09:37:00.003-06:00

In support of my discussion on inventories below, the following graph is illustrative.

Industrial capacity is being idled at a quick pace. Although we have not reached levels of the 80s, we are getting there quickly. Note, however, that this is somewhat of a lagging indicator because it bottoms out after a recession has passed...the draw down in inventories occurs prior to the restart of production, which is why I favor watching inventories more than industrial capacity utilization numbers.

Asian Unemployment

2009-02-18T08:27:00.003-06:00

This article discusses the impacts of the current crisis on Asian employment. I discuss this for political rather than economic reasons. Higher unemployment in the US and Europe will be met largely with big stimulus bills including expanded social insurance programs. In much of Asia, however, this will not be possible. Higher unemployment could lead to social unrest if the high unemployment is severe and long-lasting enough. I am not suggesting we are headed for the next global war like some doomsayers...rather, this is worth keeping an eye on for investment and political purposes.

Inventories...

2009-02-18T08:17:00.002-06:00

This Washington Post article is important from a macro sense. Inventories are a good, albeit imperfect, indicator of what is going on. Build-ups in inventory indicate either rapid increases in production or falloff in demand. Well, I think we can eliminate the increases in production right now... So, that leaves us with a falloff in demand. I know...we knew that. I bring it to attention here as a key variable to watch. As inventories get drawn down, it will entice producers to begin producing again. So watching inventories in the near term may tell us something about directions of change in other variables such as employment...

Some more perspective on the 'crisis'

2009-02-17T15:38:00.003-06:00

The stock market is not, I repeat, NOT, the economy. But, activity in the stock market is a useful lens through which to view the economy. The graph below from Doug Short at dshort.com is useful in the regard:

The gray line is the crash of 1929, green the tech crash, red the oil crisis, and blue the current bear market (all but the 1929 data are S&P 500 data; the 1929 is based on the DOW). Note that we are percentage decreases in the market consistent with the tech and oil crashes, but in much shorter time frames. Interestingly, the oil crisis was a "classic V" with a final dip to a bottom and then a recovery. The tech crash has a "double V" pattern with a test of the 50% level twice before recovery. This does not mean much except that we have tested the 50% decline once and are close to that level again. What happens next is anyone's guess...but let's hope it is not cliff diving.

Rush to Wait...

2009-02-17T14:43:00.002-06:00

Thomas Sowell raises an interesting question:

The big story last week was the incredible Congressional rush to pass a bill that was more than a thousand pages long in just two days-- after which it sat on the President's desk for three days while the Obamas were away on a holiday.

There is the same complete inconsistency in the bill itself. Despite the urgency in President Obama's rhetoric, as well as in Congress' haste in passing a bill which few-- if any-- members had time to read, much less consider, most of the actual spending will take place next year, at the earliest.

The Dangers of Protectionist Sentiments...

2009-02-17T13:17:00.003-06:00

The Associated Press reported:

Measures in a $789 billion U.S. stimulus package that favor American goods are a "poison" that will hurt efforts solve the financial crisis, an editorial by China's official news agency said.
Provisions in the U.S. stimulus bill approved Friday favoring American steel, iron and manufactured goods for government projects are protectionist measures that could trigger trade disputes, said the editorial issued late Saturday by the Xinhua News Agency.
"History and economics have told us, facing a global financial crisis, trade protectionism is not a solution, but a poison to the solution," the editorial said.

Protectionism is a problem that can spiral into outright trade wars. Waves of protectionist policies pervaded the world in the lead-up to World War II. We are not there yet, but protectionism is a popular political subject because of the perceived need to "protect our people" in times of economic hardship. Keep your eyes open on this one...

European Exceptionalism and Trade Policy

2009-02-17T11:34:00.003-06:00

Well, it seems that Europe has decided to return to the time honored policy mechanisms of intervention buying (stock accumulation) and export subsidies on dairy products in the face of the on-going economic downturn. Didn't the U.S. recently lose a case in the World Trade Organization involving export subsidies in cotton...hmmm...I wonder if the European Union will be brought to task for the same behavior???

Executive Pay Caps...

2009-02-17T11:18:00.002-06:00

Even law professors understand incentives... More importantly, this article provides a critique of executive pay caps not from a values perspective (capitalism vs. socialism), but from a corporate governance/economic perspective. Interesting read...

Stimulus Scaremongering

2009-02-17T11:16:00.002-06:00

More on the stimulus scaremongering of politicians...

Cattle Industry Needs to Adapt...

2009-02-16T15:39:00.002-06:00

In a recent article, Lowell Catlett of New Mexico State opined (in a rather flamboyant way) that the U.S. cattle industry needs to adapt by considering changing demographics (that is, taste and preferences) trends as well as the consumers in international markets. This article provides some perspective on issues facing this industry from a consumption perspective that will affect future demand.

More Economic Downturn Ruminating

2009-02-16T14:36:00.001-06:00

Here is a article that provides a lucid discussion of the difference between a good old fashioned recession and the deleveraging that our economy is going through right now. For those interested in understanding (at least more realistically) why the stimulus will not likely work (at least in the long term).

Income Elasticity of Demand...High End Autos

2009-02-16T14:12:00.004-06:00

Here is an example of the income (both real and expectations of future) elasticity of demand effects. Note that luxury products such as high end cars take a bigger blow in bad economic times than necessities.

Politics Matters Too...

2009-02-16T10:14:00.003-06:00

For those of you who wonder why: "Well, if you economists are right, why are we in such a mess???" Well, the answer is two part. First, economics, as much as we would like to think differently, is an inexact science. We are generally pretty good at getting directions of change and identifying driving forces...but precise (correct) answers are not usually forthcoming. But, and probably much more importantly, economics is embedded in the broader political world. Consider this article...especially this passage:

Early in the hearing, Mr. Frank urged all lenders not to foreclose on any mortgage borrowers until Treasury Secretary Timothy Geithner unveils a new foreclosure mitigation plan. In fact, foreclosures had already started to decline due to Treasury-created uncertainty. Mr. Frank's admonition will cause a more rapid fall, since Citigroup, Bank of America and J.P. Morgan "volunteered" to a temporary freeze after the hearing.

Don't confuse this with a sign that the housing market is improving. The pols are simply delaying the pain until they decide how much to inflict on taxpayers versus investors. It's true that investors in consumer debt can expect subsidized financing from Mr. Geithner, but it's a flip of the coin whether the new subsidies will outweigh the costs of new foreclosure limits. (My emphasis added)

Here is an illustration of how politics affects economic outcomes by changing the "rules of the game." Ultimately, politicians are not so much concerned about correct courses of action as reelection. This is not to say they are nefarious...just looking out for their own interests. This is an important lesson for both amateur and professional economists. For the amateur, don't forget that economics must operate in a political world. For professional economists...ditto.

More Psychology...It REALLY DOES MATTER...

2009-02-16T09:13:00.002-06:00

More about the psychology of markets...

Treasury Yields Rise...Duh...

2009-02-16T09:09:00.002-06:00

Read and carefully consider the impact of government borrowing. As I stated in a previous post, higher interest rates are a necessary consequence of all of this additional borrowing for "stimulus." Hope you locked in your mortgage rates...

Bank 'Nationalization'

2009-02-16T08:13:00.003-06:00

According to this WSJ report, it is increasingly likely that the U.S. government will need to 'nationalize' some banks. This is a bit unsettling. I am, by no means, an expert on the subject. Greg Mankiw provides an explanation that seems to indicate this is necessary and workable...we shall see where this goes.

Some more perspective on the 'crisis'

2009-02-16T07:57:00.005-06:00

The folks at CalculatedRISK have generated an interesting set of graphs that should be considered. First, take a look at bank closures since the inception of the Federal Deposit Insurance Corporation:

Note the number of failures now compared with the number of failures in the 1980s...perhaps declaring this as "the worst crisis since the Great Depression" is a bit premature. In terms of banking, the 1980s was much worse than the Depression, and we have not even approached the numbers of the depression. But, wait...what about the value of assets:

This figure appears to indicate that we are, in fact, closing down more value (in terms of assets) in the bank. But, most of the value of closings in 2008 is WaMu, which was closed and then sold to JP Morgan at no cost to the government. So, if you take out WaMu, we are still way below what was closed down in the 1980s. There will, no doubt, be more bank closings in the future...but let's keep it in perspective.

Protectionism Again...

2009-02-14T09:28:00.003-06:00

Score one for organized labor in the stimulus bill with the "Buy American" provision. Although this sounds good, it potentially creates the incentive for a downward spiral of protectionist policies.

Again...Psychology Matters

2009-02-13T12:31:00.002-06:00

More sensationalization of the recession.

A Good History Lesson...

2009-02-13T10:56:00.004-06:00

The Economist has a good piece on a view back at Irving Fisher's contribution to understanding depression economics. In particular is the quote:

Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money. The very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate…the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip.

Amazing that he was talking about this in 1933. A previous post talks about inflation fears, which are relevant, but deflation is also a problem. Greg Mankiw, however, believes that we are getting past the deflation portion of the cycle (at least that bond signals suggest an end to deflationary fears). This seems to be borne out in the gold price data in the inflation post. In mid-2008 when deflation fears were at their highest, gold dropped substantially, but has since returned supporting Dr. Mankiw's argument.

Inflation Fears??

2009-02-13T10:38:00.005-06:00

Gold futures continue to climb and hold at historically high levels:

Given that gold is often seen as a signal for inflation, what do you think the market expects to happen?

Update: Bill at CalculatedRISK suggested to me in an email conversation that perhaps inflation fears were a bit premature and that gold was not a good indicator of inflation any more. I suspect he may be right. I think inflation is a real possibility in the not too distant future, but right now it is very muted (if deflation is not actually happening).

Chocolate Lover's Nightmare...

2009-02-13T09:21:00.003-06:00

The report in the WSJ on cocoa prices is instructive for people interested in basic economics. Demand for chocolate products is anticipated to be down due to the recession, yet this graph shows a relatively strong rally in cocoa markets:

What gives?? Supply disruptions due to tree disease issues in West Africa are the culprit. There is always two sides to a market.

Psychology Matters

2009-02-13T08:33:00.001-06:00

This from Peggy Noonan:

Politicians keep saying, "People have to begin to understand we're in bad shape," and "People should realize it's a crisis." I think they know, Sherlock. Do you? Our political leaders are like a doctor who rushes to the scene of a terrible crash, bends over a hemorrhaging woman and says, "This is serious, lady, you can't take it lightly." She looks up at him: "Help me, do something, I'm bleeding out!" The doctor, to the local TV cameras: "I hope she knows she's in trouble."

Yes, Peggy...psychology matters...and so does leadership.

Food Fight....

2009-02-13T08:21:00.004-06:00

Consumer expenditures on food down sharply...

Maybe we will get skinnier as a result of the recession??

If these data are to believed, maybe so.

Interestingly, though, what the top graph shows is food expenditures. In reality, part of what is going on (although I have no direct evidence of the magnitude) is that consumers are eating out less (spending less on each meal). Anecdotal evidence supports my hypothesis, though.

Reading the Stimulus

2009-02-12T21:54:00.002-06:00

A great site for background and critiques of the stimulus bill.

Socialist Slippery Slope

2009-02-12T20:32:00.004-06:00

Nicholas Kristoff, in his usual left-leaning fashion, provides his own set of solutions for the current financial crisis. Everyone is entitled to their opinion, of course. But consider the following passage:

Senator Claire McCaskill, a Democrat of Missouri, had it right in her recent legislative proposal: cap compensation for all employees at companies receiving bailouts at the salary of the American President, which is $400,000 a year.

So, not only are we going to partially nationalize the banks through equity purchases, we are then going to usurp the authority of the Boards of Directors of those banks. If the U.S. Government wants a seat at the table, they can get a seat on the Board. I am quite sure that if we attempt to tell the lower-income beneficiaries of "tax cuts" what color car to purchase, Mr. Kristoff would have a complaint to file...

Second Thoughts...

2009-02-12T20:28:00.000-06:00

Good for Mr. Gregg...

Prospects for the Secretary of Agriculture

2009-02-12T15:26:00.002-06:00

President Obama named Tom Vilsack Secretary of Agriculture, and Jim Harkness of the Institute for Agriculture and Trade Policy had some advice for him. Let's break some of this down:

"The last Iowan to serve as head of the U.S. Department of Agriculture (USDA), Henry Wallace, was by far the greatest Secretary of Agriculture in our nation’s history. Serving under FDR during the Great Depression, Wallace made sweeping reforms that saved farmers from the Dust Bowl and ushered in the most prosperous period in rural America’s history."

Well, we know that the FDR administration did implement many changes that helped curb soil erosion and stabilize rural/farm income...but, this is a bit hyperbolic. To say that "Wallace ushered in the most prosperous period in America's history is too simplistic" for a supposed scientist. But, let's keep reading... Speaking about the Depression:

Over-production had led to a price crash, and the combination of environmentally harmful farming practices and drought had created the Dust Bowl.

True...

The predicament facing Governor Vilsack is really not so different from 1932. The symptoms may seem new: climate change, global food shortages, biofuels, food safety scares. But the central challenges once again are markets run amok and the unsustainable farming practices they promote. (My emphasis added)

Well, the differences between now and 1932 are both minor and quite startling. Yes, high prices have been followed by a market crash. But significant conservation measures are in place and government institutions for income stabilization are present where they were not in 1932. Further, markets CANNOT run amok. People may manipulate, rules may be bent, broken, or ill-defined. But markets cannot "fail." Misinformation such as this is what makes average Americans cynical about market economies and economics in general.

Decades of free market fundamentalism and agribusiness lobbying have gutted Wallace’s programs or twisted them beyond recognition. (My emphasis added)

OK, well one could certainly argue that agribusiness lobbying has perhaps skewed things (that is, they have relative bargaining power; the extent to which that is exploited relative to the farm lobby is questionable but possible), but the nonsense about free market fundamentalism is just populist drivel.

Today, the real winners in the system are a tiny handful of agribusiness companies, who profit from the boom bust cycle and whose anti-competitive control of the market hurts farmers and consumers alike.

Again, market structure considerations are real...albeit difficult to prove. This, so far, is the only bit of real economic logic in the piece.

And instead of a Dust Bowl concentrated in the Great Plains, we have an entire agriculture system that is toxic. It runs from the poisonous chemicals used to grow crops, to the unhealthy foods marketed to our children contributing to the obesity crisis, to the enormous dead zone choking the Gulf of Mexico, to the massive emissions of greenhouse gases from industrial farming.

Man, and I just thought he was going to be logical...

Useful Thought for Today

2009-02-12T15:09:00.001-06:00

"The first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics."--Thomas Sowell

Money Supply, Mortgage Rates, Inflation

2009-02-12T14:57:00.004-06:00

Recent data suggest that the mortgage market is a little skittish...well, it should be. In the cited article, note the following:

"We're going to continue to see volatility in mortgage rates between 5% and 6%. There's a tug of war between the Fed and the Treasury trying to push rates lower, and the volume of government debt issuances that pushes rates higher," McBride said. (my emphasis added)

...well, duh... $1 trillion in new debt, with over $500 billion in the next several months. Somebody PLEASE tell me the Obama administration is anticipating rates having to increase in order to entice investors to Treasuries. Meanwhile...

Does anyone see anything wrong with this picture? The growth in M1 (available money supply) looks like someone lit off a bottle rocket. Can anyone say a closed room with gasoline vapors waiting for a match. In this case, the match is money velocity (the rate at which money turns over in the economy). At this point, no one is spending...but Katie bar the door when they decide to start...I wonder if the Fed can draw down M1 fast enough to avoid double-digit inflation???

GDP Growth

2009-02-12T14:12:00.004-06:00

Yeehaw...The WSJ survey of economists on GDP growth is out. The graph below is quite telling.

Note that the interesting issue is not the mean estimate (the little black bars in the middle), but the variance (the size of the bar from top to bottom). What these data indicate to me is that our expectations are becoming more fuzzy, not more certain, which is probably being reflected in the market volatility seen in the stock market.

Protectionism rears its ugly head...

2009-02-12T12:28:00.003-06:00

According to this story, protectionism is alive and well in Europe...actually, that is not too surprising, but does not bode well for trade in general. The political realities on the ground are likely overtaking ideological stances about trade...after all, the effects from protectionism are often subtle and difficult to cleanly identify. The US flirted with this through its "Buy American" provision of the "stimulus bill." The real fear is that global conflicts are often preceded by economic hardships often exacerbated by protectionist policies.

What Stimulus??

2009-02-12T12:08:00.004-06:00

Daniel Henninger has an interesting op-ed in the Wall Street Journal. Central thesis..."stimulus" = politics...interesting concept. His USA Today/Gallup poll numbers cited seem to suggest that the American public is catching on...although they have not yet figured out "the details."

Chicken Coop Foreclosures?? Time for a Bailout...

2009-02-12T10:23:00.005-06:00

An interesting little story appeared on the front page of the Wall Street Journal today (2/12/09) relating to chicken farmers losing their chicken houses to foreclosures. According to the story, the problems started with the bankruptcy of Pilgrim's Pride who has canceled many contracts with growers in an attempt to cut cost.

These are, of course, real economic hardships. But, it also points to the impacts of something called asset specificity, a theory which suggests that when you are heavily invested in an asset (in this case, a chicken coop) that cannot be effectively used for any other purpose, the owner of that asset is subject to considerable economic risk. Apparently so...

Ethanol vs. Food (Finale)

2009-02-12T09:49:00.005-06:00

Ok, so the real question becomes: "In the absence of high oil prices, what happens to corn price/ethanol?" Well, here ya go:

The corn (orange) and oil (blue) do in fact follow each other quite well as suggested by studies previously cited. But look at the period after November 2008. The divergence is telling. These data suggest that while ethanol is, at the margin, driven by oil, the RFS does place a floor on corn price. If you look back at the stocks-to-use graph in part 1 below, the floor seems to be somewhere in the $3-$4/bushel range. If this is, in fact, a consistent relationship, one can safely say that the RFS is having significant effects on corn price over-and-above the other cited issues. This result would imply that, via feed and food ingredients, the RFS is having an impact on food prices.

Ethanol vs. Food (Part Deux)

2009-02-12T09:18:00.003-06:00

A legitimate question is whether the RFS is actually "binding." See below (again, thanks to John Anderson):

The purple line represents the production of ethanol. As we can see, the RFS created in '02 was not "binding," so Congress thought it would be a good idea to increase it. In '05, it was increased and was much closer to being binding, so Congress thought, "what the heck, let's increase it again." By the '07 - '08 period, it the RFS became binding.

The upshot...early on, the RFS was not binding and ethanol production was highly driven by crude prices and other considerations as suggested by studies in my earlier post. But...

Ethanol vs. Food (Part 1)

2009-02-12T09:00:00.004-06:00

There has been considerable debate whether the Renewable Fuels Standard (RFS) has created as "food vs. fuel" competition. Several studies, including ones by my colleagues at Purdue University and Texas A&M University suggest that the answer is no. They conclude most of the increase in grain price is attributable to a combination of the declining value of the U.S. dollar, increased demand overseas, and increases in the price of oil. Indeed, some of our own work suggests that oil prices and exchange rates lead corn prices. But consider the following:
The graph (and thanks to my friend John Anderson of Mississippi State for "loaning" it to me) shows the relationship between the stocks-to-use ratio and corn price. As the ratio increases, stocks are increasing relative to use, so we expect a decline in price...and that is what we see. But, when you get to the 2006-2008 period, something occurs. Same basic underlying fundamentals (i.e., consistent stocks-to-use), but a huge increase in price. This graph suggests a structural shift in corn prices which are directly tied to the RFS time period...more on this later.

Welfare Reform Redux

2009-02-12T08:31:00.004-06:00

Well, I guess I can say that I am not surprised. According to Mickey Kaus on Slate, a sneaky provision in the "stimulus bill" basically undoes the crowning achievement of the Clinton Administration...welfare reform. Work done by myself as well as many others clearly shows that the welfare reform of the Clinton era did effectively move individuals off welfare rolls. In one fell swoop, the new Democratic majority may have reversed these gains. I am no expert on the wording used in the bill and not a lawyer to judge interpretation. But, if Kaus is right, this one needs to be much more widely publicized.

Useful Thought for Today

2009-02-11T15:19:00.001-06:00

"I hate to hear about "partnerships" between government and business, or between government and other organizations. When there is a partnership between an ant and an elephant, who do you suppose makes the decisions?" -- Thomas Sowell

Peanut Madness

2009-02-11T13:44:00.001-06:00

The article discussing the owner of the peanut company shipping salmonella tainted peanut products brings up an interesting policy dilemma for people to consider:

Do we, as the Director of the testing center suggests, need to increase oversight by the FDA for what he admits is an event that is "unheard of"? At what cost? What is the benefit of such additional oversight relative to the cost? Be careful...if we consider the value (benefit) of a human life saved as "infinite," does this not imply we are willing to expend an infinite amount of money to protect it...

Before I get blasted...the behavior of this executive is morally reprehensible if what is reported is true. He should be placed in jail forthwith. But knee-jerk reactions as those proposed by the testing center Director most often lead to bad policy. In fact, if you read the Wall Street Journal version of the story, which strongly suggests that it is not regulation that is lacking, but lack of regulatory attention span. As with mortgages, banking, and other issues of late, the regulators were asleep at the wheel and unwilling to enforce regulations on the books...

Update:

Another story shows the depths of the stupidity of this company.

Stimulus Schimulus

2009-02-11T13:18:00.001-06:00

It has been an interesting couple of weeks. The largest "spending bill" in the history of the United States has cleared both the House and Senate and apparently made it through conference. But what do we get for our money? Work by cited by Ray Fair on Greg Mankiw's blog seriously questions whether we will get any lasting "stimulus" out of this bill.

The truth is I do not know. What I do know is that much of the bill is not stimulative. I do not question the need for more infrastructure investment. But those are long-term investments. The obvious short-term stimulative activities like reducing the corporate tax rate, capital gains tax rate, and, yes, even some payroll rate reductions seems to have been dismissed as "the rhetoric of failed economic policies" (I actually shudder as I quote Mr. Obama on that).

Two other "political facts" appear to be sinking in to at least some of the electorate. First, spending does not necessarily equal stimulus. Second, tax policy, while not perfect, is more easily reversible than spending programs. Can you imagine the outcry of governors a year from now when the Feds propose suspending Medicaid payments for the states??

Unfortunately, this "grandest of experiments" will have profound impacts on capital markets, interest rates, and inflation. Whew...