Notes from Class, May 10th

Jennifer Bonapace Class discussion May 10^th 2011

Start class with Keynes vs Hayek Rap on Youtube.

Video:

Round Two : http://www.youtube.com/watch?v=GTQnarzmTOc

So who won? Keynes even though he got knocked down. There is a lot of argumentation against switching to the Austrian/Hayek view point but what we decided in class is that there is no black and white. Both of them have good points which the video does a good job of portraying. Here are some points I gathered from the video.

Keynes

· Top Down View

· Focuses on Spending

· Increasing Aggregate Demand

· Supports state intervention/ Steers markets

· Supports WW2- In the light that it ended the Great Depression by boosting GDP with war production

· Increased Government Spending

Hayek

· Bottom Up view

· Focuses on real growth. Defined here:

· Focuses on savings to drive investment

· In the boom-bust cycle, the boom is a binge that leads to the bust.

· The capitalist structure has caused bad investment

· Blames low interest rates

· Supports entrepreneurship

· Free Markets- let banks fail. No intervention. No interventions allows for all the prices to be real and not contrived. Value setting by the actual consumers would help everyone out, society in general.

· McKinney explains: There is an IS curve but no LM curve

Please see this Link for Comparison On Theories

Article from CNN mentioned in class. If you find it please post it. It was about If we had allowed banks to fail would it have put the economy in a better position today and in the long run?

· Ch2 p 50 in Slapped by the Invisible Hand By Gorton “No official figures for the size of the repo market,”

There is no data and no one knows how big it is and how far the effects will reach because of this lack of data. Data is disappearing despite the age of information and the internet. Ironic.

· Data- Yes it needs to be collected but isn’t it odd that now when we want to check it out we can’t find any? We cannot find it to analyze it and there seems to be a lot of guesswork into some big markets. Are we even collecting data? Why not? The video (Keynes vs Hayek) mentioned that the rise out of The Great Depression due to World War 2 is only one data point.

McKinney explains econometrics is where we assume a structure for a very sparse data set and then make it fit an equation, whether the line is positive or negatively sloped. This is called an identification problem. In case you want to know more, this website explains the way we would do identification. This would help us figure out the equation of the line.

· Forecasting- We can only count on Uncertainty. You really cannot predict the economy even if you have data because there are so many factors affecting us.

Once the environment changes then we can react but not before. McKinney’s example of the Kalamazoo City Budget and the year 2013 is a “discontinuity” because we know we are bankrupt due to good data keeping but again can’t react if you don’t know how the environment changes.

We can predict the trends but also sometimes there are overlapping trends which make it hard to make accurate predictions for the economy. It really is a lucky guess. Long term forecasting for investments ended up being like a coin toss.

How does not being able to predict things affect public discourse? If you are confident and can exude this confidence and come up with some points then you can get the herd to follow you. People are susceptible to the herding theory. People flock to confident persons. Play on their uncertainties.

No one wants to be wrong, or a doomsayer. Humans don’t like to be pessimistic. Hindsight is 20/20 and we can see things we missed when we were in the midst of the fray. (Which is why recording data is important so we can later analyze it and understand what we did but also making predictions based on trends is hard. Every situation is unique. Sometimes a trend that looks like it might match our situation will not because of the different environments.) But we don’t want to be the only one predicting doom, especially if we end up getting it wrong and jeopardizing our careers and looking like morons. We are afraid to come forward with our predictions in case we are wrong. We only do so after the fact and find out that we are right.

Therefore we need to have contingency plans available but they also might not prove valuable if there is a different given situation.

If Fannie and Freddie were allowed to fail: A quote from this Article I found about predictions explains What would have happened if we hadn’t bailed them out. ? This shows a liquidity freeze which disrupts the whole economy.

“Adams explained that many banks around the world own bonds from the mortgage agencies. If those bonds were suddenly worth far less, the banks would stop giving out loans of any kind. Consumers wouldn't be able to borrow money to buy homes, cars or basic goods. Entrepreneurs wouldn't be able to get financing for their ideas.

"If you can't borrow, you can't run your business," Adams said. "You can't go to school. You can't expand. And, therefore, the economy stops.’”

This is also what JP Morgan Chase Managing Director Don Thompson said would happen if we regulated the derivatives market. Regulations would make it too expensive to manage risk with derivatives and make the liquidity or cash disappear. See this blog post Further discussion of Dodd-Frank And this article:

· Benton Harbor Emergency mentioned briefly. What I found is this, an article going over what has happened there.: http://sfbayview.com/2011/benton-harbor-is-the-new-selma/

Farm Subsidies-What do you think about this? I personally think revoking the subsidies would help the worldwide economy. I think that US subsidies only helps out large corporations like Monsanto which are the players in the agricultural industry now. Not small town people. These people are paid not to farm. And sometimes food is even destroyed because we have so much excess. It also happens to be genetically modified which makes it questionable in other countries as a food source.

But if we revoke the subsidies what would happen to food prices? How much would they fluctuate? Would they fluctuate too much and create too much uncertainty? How much would cost of living increase?

Corn used for production of ethanol for use in cars, E85, caused the price of food to increase. See this article.

Food manufacturers like cereal companies and companies that use high fructose corn syrup would be against this. The subsidies allow them to make a lot of money in what otherwise would eb a competitive market. The subsidy gives them a huge advantage. Especially in places like Africa.

I also think that getting rid of the agricultural subsidy would help the small farmer out by increasing the demand from the local food movement. I think it would support the local food movement. See here for some Pros and Cons

Here is more about the movie that talks about the US agriculture and food industry’s secret. Food Inc- is pretty graphic in some parts. I give you warning that you won’t look at your food the same for a while.