Euro Crisis According to Sweden

Given our discussion of Stiglitz's book as well as our discussion of debt from previous books, what are your thoughts on this author's analysis of Sweden's discussion of the Euro crisis? The author interpreted Sweden's overall solution to Europe's problems:  "restructure wobbly debt and write-down dud loans without delay." Further, "excessive prudence is as dangerous as gross recklessness when it comes to correcting imbalances, it was suggested." What do you think Stiglitz would have to say about this? You can read the article here:

http://www.economist.com/blogs/freeexchange/2011/05/swedish_view_euro_crisis?fsrc=scn/tw/te/bl/getonwithit

The End of QE2 and Why QE3 is Inevitable

I thought this was quite interesting. Its a video interview of what might come post QE2 and an arguement for QE3

http://finance.yahoo.com/blogs/daily-ticker/michael-pento-central-bankruptcy-why-qe3-inevitable-105819637.html?sec=topStories&pos=9&asset=&ccode=

Better than nothing

How much growth should we expect before we let ourselves be optimistic?


http://www.economist.com/blogs/freeexchange/2011/05/americas_labour_market

Refraining from labeling China a 'currency manipulator'

I was intrigued by Kerney's post yesterday, so I did a little extra digging. Googleing "labeling currency manipulators" found me a ton of article, all of which said essentially the same thing: that the US (specifically the Treasury Secretary, Tim Geihtner) refrains from labeling China a 'currency manipulator' because it would result in sanctions or trade retaliation. Just thought, I'd share the article.

RMB Pegged to US Dollar

With China's economic bubble, is there a another big slowdown ahead?

China is going to keep appreciating its currency slowly; manufacturing the world's cheap consumer products is key to China's economic growth. Appreciating China's currency will only dampen its own economic growth.

Banking not fixed yet

http://www.economist.com/node/18681970

Do you think that we will ever get to a point when banks are truly 'safe'?

Deficit reductions and inward shifting AD in the UK

Here is a good analysis of why reducing a deficit is not a good economic stimulus plan.  The UK is in trouble because of its deficit reduction/austerity plans.  You reduce deficits when AD is growing not when it is already declining. 

Banks and China Put Global Economy at Risk

Link

"Every year China prints 450 billion yuan for the purpose of buying U.S. dollars, says Morici. "This really drives up commodity prices and in turn strangles growth in the United States and in Europe." Rather than continue to raise interest rates to cool the country's economy, he says all China needs to do is stop its "reckless use of currency policy."

"As for financial institutions, Morici says banks "hold too much sway" with their governments. It is not that markets are not regulated enough, but rather that Wall Street is not regulated properly. Why? Because wealthy bankers are able to "game politicians so effectively"."

Change is afoot

Are the changes being made in this article helpful or hurtful? Not just to the banks, but the the global economy as a whole?



http://www.economist.com/node/18654622

Taxes: What is Fair?

In light of our discussion of a stimulus package and the U.S. tax structure, below is the link to an article from The Economist. In it the author discusses what a fair tax system might look like, or rather not look like. What are your thoughts on some of the insights in the article?


http://www.economist.com/blogs/freeexchange/2011/05/fiscal_policy?fsrc=scn/tw/te/bl/whosaidtaxesarefair

Regulators Charge Two Traders for the 2008 Oil Spike

Link + Video

The Commodity Futures Trading Commission has recently accused two individuals for fixing the oil market back in 2008. And the theory goes that the big banking firms may be behind the action, using the two individuals as scapegoats in the scheme.

Is anyone surprised by this?

Thoughts?

The U.S Fiscal Solution - Follow Canada's Lead

Click here

Here is an article by David Rosenberg one of my favorite authors of morning news letters until he started charging $1000 a year for them. Fortunately, I was able to get a hold of this one which I found extremely interesting. It is quite long so I pasted relevant quotes for all to get the jest of what he is saying.

"As concerns over the mushrooming U.S. deficit and debt levels continue to mount, we are sending today our recent Special Report entitled The U.S. fiscal solution – follow Canada’s lead.Focusing on Canada’s successful 1990s battle to rein in its deficit and debt and bring itself back to a good fiscal place, the report covers how the U.S. in particular could benefit from following Canada’s example as a way to get its balance sheet back in order. As the report highlights, the U.S. will likely have years of painful retrenchment and tax increases, which will be contractionary in nature. The Canadian experience shows that fiscal recklessness can indeed morph into fiscal integrity, assuming that the political will is there."

"Over that time frame in which Canada swung from massive deficits tosurpluses, program spending as a share of GDP contracted from 17.4% to12.1%. That came out to a near-$50 billion haircut. But the revenue-yield —what the government takes in relative to GDP — also rose from 17% to 18.2%for another $10 billion squeeze on the population. A similar move towardsrestraint in the U.S. today would imply $1 trillion of tax and spending shifts, oralmost a percentage point drain out of GDP growth for at least the next halfdecade, if not longer. Canada did it most out of the spending side and as aresult today boasts one of the lowest top marginal corporate income tax ratesin the world."

"Considering that the starting point on the deficit ratios in the U.S. are muchworse, the retrenchment may be a lot tougher — but even a Canadian-style $1trillion restraint over a similar five-year period would clip real GDP growth byroughly one percentage points annually. That is a lot of pain, to be sure, butnot insurmountable given the rewards down the road of reclaiming one’sfiscal flexibility."

"One item worth noting: The problem for the U.S. is that the deficit ratio isabout twice as it was in Canada, and in Canada we had a government with amajority that could take charge without lobby or special interest groupsexerting an influence on the decision-making process."

Thoughts?

Insider Trading

A little ditty about insider trading. Do you think that the current 'crackdown' will make a difference, or will the traders simply find another way to get it done?


http://www.economist.com/blogs/schumpeter/2011/05/after_galleon_verdict

Real versus nominal

Stiglitz is not a monetary economist.  He would point to increases in food and fuel costs as reasons that US economic policy is out of whack (a very technical term, of course).  Bloomberg writes about the real economy here.  This article reminds me of last night's discussion about a good stimulus program.  Jared's group went "monetarist" on us--a school of thought led by Milton Friedman that believed any stimulus had no effect because it was "monetarized" through inflation and not through real changes in the economy.  Bloomberg is pointing to real changes but the cause may be the overactive stimulus.

EU vs Greece

Here is an article from The Economist outlining the issues that Greece is having with the EU, and the possible effects. Is Greece really that important to the EU economy? What effect could this have globally should there be some dramatic effect on the Eurozone?




http://www.economist.com/node/18681980

European Debt Crisis Effects Wall Street

Apparently the link doesnt want to work so here is the URL to the link I was trying to post before. You'll just have to copy and paste it.

http://www.msnbc.msn.com/id/43074531/ns/business-eye_on_the_economy/

Interesting article about how the European debt crisis is affecting wall street.

Its all Goldman's fault........

Here is a nice, scathing article about the role that Goldman, et.al. played in the mortgage/financial crisis. Enjoy.


http://www.huffingtonpost.com/2011/05/23/gretchen-morgenson-reckless-endangerment_n_864841.html

Do Falling Gas Prices Spell Recession?

link

An interesting article I came acrossed today regarding gas prices and the recession.

Rejected: Greek Restructuring

I also ran across this article, which I thought was awfully interesting.

“A Greek debt restructuring is not the appropriate way forward -- it would create a catastrophe” because it would damage the banking system, ECB Executive Board member Juergen Stark said today in Lagonissi, Greece. Fellow board member Lorenzo Bini Smaghi said in Milan that “a solution for reducing debt but not paying for it will not work.”

Looks like Greece is not going to get a free lunch. The thought is that a plan to reduce the debt will "jeopardize all of Europe," but I'm not so sure about this. I think that perhaps if they do not restructure, it will jeopardize all of Europe. Agree? Disagree?

Rising dollar

This article talks about the rising dollar and the implications that the rise will have on the stock market.

"Signs of a Wall Street sell-off are all over the place, but U.S. stocks might well survive another week relatively unscathed if investors keep betting on sectors less vulnerable to an economic downturn."

The article basically illustrates where investors will change strategy with the change in dollar strength. The author suggests that instead of hurting the stock market as a whole, investors will just be shifting sectors. I am no financial analyst, but I see the shift as evidence of a good change. The article predicts that investors will move to "consumer staples". What that says to me, is that the strengthening dollar is good for everyday-consumers. This is where I think that real economic turnaround is going to come. The lower and middle classes are going to start spending more. Again, though, I could be way off on my analysis. Thoughts?

Jamie Dimon breaks it down

Here is an article covering a speech made by Jamie Dimon, JPMorgan CEO, in Denver this past Thursday. He makes some very strong points, from a Wall Street point of view. The article touches on a lot of what we have been discussing in and out of class about the effects of reaching the debt ceiling. As one might expect, he is terrified of a default. But, as a Wall Street banker, is he just looking out for his profits or is he truly concerned that defaulting would have real large consequences?

Housing Market Recovery

link

A recent survey shows that prices within the housing market won't begin appreciating again until 2014. Do you feel this is a reliable study to base this type of prediction on? What are your thoughts on what they are saying about the housing market?

Cracking Down on Insider Trading

link

This was an interesting article regarding the crackdown on insider trading. I am all for trying to put a stop to it, but do you feel its wrong to do so using wiretaps and invading privacy?

Article Regarding the Deficit and the Upcoming Election

link

An interesting article regarding whether the government should wait for the 2012 election before making a decision on the budget deficit. What are your thoughts on the points made in the article?

US Job Market

Here is a illustrative article on the US Job Market. As the article states, the month of April was a bump in the road for unemployment improvement. It goes on to say that we have been seeing slight improvements, but it will take a long time until we fully recover.

What do people think?

Are there steps that the government should be taking to create jobs quicker?

Do we have our priorities mixed up?

Should we show a little more love to "main street"?

Great chart on deficit

So why is the deficit so large?  Tax cuts and wars are the biggest issues over the long run.  In the short run, the financial crisis added on.  (see here)

Political Gridlock

I thought this was an nice article on one of the factors that can have an effect on economic recovery.

What are people's thoughts on government gridlock? Do we think that it's better to have the government at odds with each other, so that the government institute rules that might slow recovery? Or do we think it is better for confidence if investors know what to expect?

My personal opinion is that we're always better off when the government stays out, but that's the libertarian in me, and I know it goes against classic macro economic theory.

Manufacturing Back to America

link

I found this article very hopeful for American jobs. I hope these companies do bring manufacturing back to the U.S. What are your thoughts on this?

Recessions Roll on Retirement

I know this is a little off topic, but I thought it was an interesting article regarding our elderly. Just makes you wonder what our futures entail.

link

A good summary of risks in the global financial world

As I read this, I could see all of our authors explaining various things in the background.  I hope when you read it that you will see how much you have learned about financial crisis:  its causes, remedies, and impacts.  (go here)

Head of the IMF faces sexual assault charges

Since everyone, except Richard, seemed puzzled by this question in Jeopardy, I thought I'd share it on the blog. What do people think? Should a person's personal life have consequences in his or her professional life? Should Dominique Strass-Kahn resign? Check it out.

"The banks were in over their heads. They were lending to people who they knew couldn’t pay them back. Then they aggressively pursued foreclosures to try and get their money back when those folks defaulted. The question is why would you loan money to those people in the first place? And further, when you packaged and sold some of those mortgages did you explain to those investors the risks involved? That’s the heart and soul of what the attorney general is going after."

link

I find it a relief someone is actually investigating and challenging these big banks, but also interesting that some people don't feel these investigations are necessary or are "over the top." What are your thoughts on these investigations?

Don't you just love data?

Who has the money?  Check this out!!!

Bitcoins: a new money

You can see the future of money here.  But given the time and energy it takes to make a bitcoin, I'm not sure that it is a fiat money.  It may be a new form of commodity money. There goes monetary policy.

Drill! Drill! Drill!

Going along with the recent theme around gas prices, here is a CNBC video about drilling offshore. What do we think? Too soon after the Gulf oil spill?

The video dialog is a little back and forth about the safety and the potential drilling area. Kind of annoying towards the end, but I think their points are reflective of our general arguments in class.

Anyway...to drill, or not to drill? That is the question.

http://video.cnbc.com/gallery/?video=1926678667#eyJ2aWQiOiIzMDAwMDIyMzM2IiwiZW5jVmlkIjoiM3Bhd3dWay9zU0w5QWV2MW9DaUhZdz09IiwidlRhYiI6InRyYW5zY3JpcHQiLCJ2UGFnZSI6IiIsImdOYXYiOlsiwqBMYXRlc3QgVmlkZW8iXSwiZ1NlY3QiOiJBTEwiLCJnUGFnZSI6IjEiLCJzeW0iOiIiLCJzZWFyY2giOiIifQ==

More Debt Ceiling Discussion

I found this article saying that we need to increase the debt ceiling, since it will be reached today as Mckinney's post showed. My thoughts on this are, if we fail to pay off our debts and continue to increase our debt ceiling, will we ever pay off our debts? When will this debt procrastination end? What are your thoughts on this?

http://www.bloomberg.com/news/2011-05-15/obama-says-debt-default-may-unravel-global-financial-system.html

Debt ceiling politics

We are getting closer to the debt ceiling.  So what?   A lot of noise signifying nothing or a real contraction in GDP?  Here is a good summary of some of the impacts.  As it gets closer to the end of the quarter, I keep thinking about competency in economic theory or the lack thereof.  Samuel Clemens wrote:  "It is not what we don't know that hurts, it is what we do know that just isn't true."  A lot of people in Washington know a lot of things that just aren't true.

Exxon CEO talks about speculation driving up oil prices

I came across this article and it has a short 6 minute clip that I found interesting because it's the CEO of Exxon and he is talking about how speculation has driven up the oil prices when really it should cost about $60-$70 a barrel if we were basing it solely on economic terms. I just thought I'd share this with the class and see what people's reactions were to this because the rise in oil prices have really hurt American's budget the past month. I believe that the US should start looking for natural gas within the US because I don't have the specific article but I remember reading about how the US isn't using their domestic oil fields as much as they should so this could be an alternative solution. Any thoughts?

Mortgage Bill Favors Private Firms

I read an article in the Wall Street Journal on Thursday that was too good not to post. It discussed new legislation that would "replace mortgage giants Fannie Mae and Freddie Mac with at least five private companies that would issue mortgage-backed securities with explicit federal guarantees." The legislation was proposed jointly by a California Republican and a Michigan Democrat and is seen as a compromise between Republicans favoring a private system and Democrats who don't think the government should "abandon the mortgage market."

As far as the details, the companies would be required to hold more capital than Fannie or Freddie ever did, and will also have size caps on loans. Also, only "the mortgage backed securities that they issue-not the companies themselves-would enjoy federal guarantees." What do you guys think about this legislation? Do you think private is the way to go?

Social Security and Medicare to run short sooner than expected

Here's an interesting article talking about the social security and medicare programs and how they are facing trouble in the future. I thought this went well with what we've talked about in previous classes about major entitlement programs and how we should address them. Here's a little bit which I thought was interesting...

"Social Security will have sufficient resources to pay 100% of promised benefits through 2036. That's one year earlier than last year's forecast because the economic recovery has been slower than expected and seniors are living longer.
After 2036, the program will only be able to pay 77% of promised benefits."

Even though I'm not a big fan of projections that are decades away, I think that we are going to face major problems with these programs in the future if we continue to pay out more than we are taking in. Last year was the first time the program took in less payroll tax revenue than the benefits paid out. What are your thoughts on these major programs and the future of them? What changes are needed in order to make them successful programs?

Financial repression

Gillian Tett has written a piece in the Financial times about "a new and alarming catchphrase.  She says,
"Another week, another wave of dismal fiscal gridlock in Washington. But as US politicians squabble about how to cut the debt, another concept with a catchy name is quietly starting to creep into the policy debate: “financial repression”. A few weeks ago, Carmen Reinhart, a US economist who shot to fame two years ago by co-authoring an influential book on sovereign debt, This Time Is Different, produced a joint paper for the International Monetary Fund on the topic of “financial repression” in the west. And while this phrase is not yet mainstream news, it is starting to generate a buzz among the policy elite in Washington and in some European capitals." 

All I can say is that "there is no such thing as a free lunch" that remains free over time.

"Natural" or "good" growth from last night's discussion

Stiglitz, our last author for this class, has been a tireless critic of GDP statistics and how the act of creating the gross domestic product number leads us to the wrong definition of growth and well-being.  Here is a short piece that he wrote in 2009  (see here)  He says, "Before the crisis, when US growth (using standard GDP measures) seemed so much stronger than that of Europe, many Europeans argued that Europe should adopt US-style capitalism. Of course, anyone who wanted to could have seen American households' growing indebtedness, which would have gone a long way toward correcting the false impression of success given by the GDP statistic.  Recent methodological advances have enabled us to assess better what contributes to citizens' sense of well-being, and to gather the data needed to make such assessments on a regular basis." 

Finland and the EU: what is truth?

Interesting piece here in terms of Finland's relationship to the EU and why Finland refuses to bail out other countries and also in terms of the Wall Street Journal's editing of the piece.  When does editing distort the intent of the author and was this done deliberately in response to economic or political pressure?  A few years ago, such a question might have ideological overtones but little validity in an impartial way.  Today, given the changes in the world of news reporting, truth has become a commodity up for sale to the highest bidder.

What is QE2?

I meant to post this a long time ago but this blog post explains QE2 and what it is.

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.

Foreclosures crush home prices

Here's an article about how the foreclosures in the United States are effecting the median home price, which is down 4.6% from a year earlier. The article states that these foreclosed properties, or "distressed" properties, are usually sold at 20% cheaper than conventional homes so this is dropping the median cost of homes across the United States.

"We're seeing prices dropping faster than they did in 2010," said Pat Newport, an analyst with IHS Global Insight. "That's troubling. Falling home prices precipitated the recession and are slowing the recovery."

At first I didn't think there was any good out of this, but I believe this can be good news for young people in their 20's or 30's that are looking to buy a home. These foreclosed houses are also attractive to investors that want to clean up the place and turn around and sell it.

The people who do suffer is people who have owned their houses for many years and have seen their house depreciate in value significantly in the last five years. It's unfortunate for these home owners and they have to pay the price for these foreclosed homes. I want to know what everyone else thinks about the continued drop in housing prices due to more foreclosures? Is it necessarily good or bad? What do you think will happen to house prices in the US in the future?

Gary Gorton talks about Credit Default Swaps & Financial Crisis

Gary Gorton, Yale University finance professor, talks with Bloomberg's Erik Schatzker and Deirdre Bolton about credit default swaps and the collapse of the financial system.

4 minutes after advertisement

Click Here

Buffett Was Right About the Economy -- Again

This is an article geared toward investing but it talks about the overall economy as well. The message is that manufacturing is growing, fueled by the rebound of domestic car companies and that several commodities futures were dropping somewhat which should further help manufacturing by cutting input costs.

This was a short article but it made me think of a few questions related to my last post "If you have the answers tell me" How will we know we are out of the recession? Is it a composite of statistics like in this article, various sectors growing, GDP etc. Is it just a general consensus with increased consumer confidence? Is it the stock market reaching new peaks?

This just made me consider our measurement systems and how we classify different economic climates.

S&P cuts Greece rating two notches to B

Short news update article about whats going on with Greece.

So the S&P ratings agency has further cut Greece's debt rating down to B which is a junk rating.

"Recent research from the International Monetary Fund shows that every country that has defaulted since 1975 was junk-rated for at least a year beforehand."

yield on benchmark 10-year bonds rising 0.22 percentage points to 15.73%.

The yield on three-year bonds rose 0.4 percentage points to 24.21%.

Compare these rates to U.S treasuries, 10year-3.19% 3year-0.96%

This is a big advantage because the U.S can raise capital so much cheaper and this is what we face eventually without a plan to reduce the debt.

It is interesting to note that Greece is also in an inverted yield curve meaning their short term debt has a higher yield than longer term.

Comments? Would you buy some Greek debt for those juicy returns?

An End in Sight for Farm Subsidies?

Check out this NYT Article: Farm Subsidies Become Target Amid Spending Cuts

"A confluence of factors have lined up against the farm programs. While the rest of the economy remains largely stagnant, commodities prices and farm incomes have remained at a protracted high. The House Agriculture Committee, while still dominated by farm state members, is now peppered with freshmen who view cuts to these programs as an essential part of the broader attack on the federal deficit, the centerpiece of their campaigns."

"Senator Debbie Stabenow, Democrat of Michigan and chairwoman of the Senate Committee on Agriculture, Nutrition and Forestry, told reporters at a state agriculture conference that “making sure that we’re doing our part in being fiscally responsible” would be the biggest challenge in the next farm bill."

"In 2011, taxpayers are projected to pay roughly $16 billion in aid to farmers through various programs, according to figures from the Congressional Budget Office."


What do you think of farm subsidies?
In light of the corporate-dominance of the agriculture industry, why have these subsidies stuck around since the Great Depression, when this subsidy was created to help average-Joe farmer?

If You Have the Answers, Tell Me

This article presents a refreshing bit of honest uncertainty and poses some of the main questions we have been asking in class.

"By its nature, punditry craves attention, which is easier to attract with certainties than with equivocation."

I agree with this statement and it is too bad because those who do make predictions with certainty have profoundly bad track records over time. I know many of us have learned how poorly market forecasters do and so it was nice to see an article not proclaiming to know what inflation will be like in 5 years but just asking good questions. The three Mankiw poses are,

How long will it take for the economy’s wounds to heal?

How long will inflation expectations remain anchored?

How long will the bond market trust the United States?

Think about these questions as well as how it would change our national discussion if economists quit pretending that their predictions are absolute facts.

We Aren't so Unlucky

Gas prices are in red and total taxes* (both excise and consumption levies) are in blue. As you can see, almost every European country surveyed charges more in fuel taxes alone than we pay for a gallon of gasoline.

I posted about gas prices last week, but this article really intrigued me. Check it out and give some of your thoughts. Notice how much in tax the European's charge compared to us.

The World in Gas Prices

This time may be different afterall

An excellent piece in macrobusiness (see here) deconstructs theory and common understanding about our current financial mess.  Here is part of the piece:

[Money] is rules. Rules about value and obligation. Those rules are usually based on legally enforced structures, although that need not be the case. In the case of cross border capital markets, the enforcement is informal because there is no supranational government to impose penalties. Disputes are resolved by a handful of law firms, the main penalty is to be prevented from participating for a period.  Now if money is rules, then what does it mean to “de-regulate financial markets” as was claimed in the 1990s? Can you de-regulate rules? Obviously not. So what happened? The place where rules were set shifted.  Instead of government for the most part making the rules, the traders started making the rules. The logic was, as Alan Greenspan argued, that because everyone was acting in their self interest then nothing could possibly go wrong. Pricing would be accurate, the less formal self organisation of the market would be superior to the formal oversight of governments (what would governments, which are always bad, know?) and everyone would win. Free lunches as far as the eye can see.

We live in transition period where new rules need to be carved out. 

Further discussion of Dodd-Frank

Jared and Chris got to see a pretty cool talk. Here is another article discussing possible pros and cons of the legislation. There are a few sections in the article that were most memorable to me,

"Warren Buffett famously called derivatives financial weapons of mass destruction. That was before they detonated..."

A "freight train" of regulation "could literally spell the end of U.S.-based derivatives markets," Rep. Scott Garrett (R-N.J.)

(He argues this could destroy jobs and I wonder which jobs? and how many?)

Dodd-Frank generally calls for them to be traded in markets like stock exchanges, where the prices would be plain to see and it would be harder for firms in the business of minting derivatives to extract outsize profits.

In addition, Dodd-Frank calls for steps to make sure the parties to those contracts have the financial wherewithal to make good on their commitments - for example, by putting down collateral. But business groups are arguing that such a requirement, known as "posting margin," could force them to tie up capital they could use more productively.

Another argument against the bill was that companies who legitimately use derivatives as a hedge and not speculation would be punished somehow (The article cites MillerCoors). I did not follow this argument completely as we are only talking about regulating derivatives not eliminating them.

Do you think some of these objections have merit or are they just a standard response by parties that have a stake to lose?

Bernanke Speaks on Dodd-Frank

Yesterday, Chris and I saw Ben Bernanke speak in Chicago (we were in the 2nd Row - see picture below). He gave a 45 minute speech on how banking has changed in the last 9 months due to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Check out THIS CBS News article and THIS Bloomberg article for a little information about his speech, and the potential impacts we will begin noticing as a result of this regulatory legislation. I think this legislation will help mitigate many of the potential Wall Street concerns many of us had during Tuesday's debate.

Washington is trying to take the necessary steps to prevent future financial instability, do you think Dodd-Frank is a step in the right direction?

The Link below is to Bernanke's entire speech, but I have added the conclusion if you just want to read that instead, as the speech is rather long.

http://www.federalreserve.gov/newsevents/speech/bernanke20110505a.htm


"The financial crisis demonstrated clearly that supervisory and regulatory practices must consider overall financial stability as well as the safety and soundness of individual firms. The Dodd-Frank Act requires regulators to mitigate the buildup of financial excesses and reduce vulnerabilities, and it created an interagency council to monitor financial markets, to identify emerging threats, and to help formulate policies to contain those risks. For our part, the Federal Reserve has restructured its internal operations to facilitate a macroprudential approach to supervision and regulation and to monitor systemic risks. We are committed to working closely with the oversight council and other agencies to promote financial stability. While a great deal has been accomplished since the act was passed less than a year ago, much work remains to better understand sources of systemic risk, to develop improved monitoring tools, and to evaluate and implement policy instruments to reduce macroprudential risks. These are difficult challenges, but if we are to avoid a repeat of the crisis and its economic consequences, these challenges must be met."

A new economic era??

I've been thinking a lot about structured products recently mostly because of things Chris has said and written about.  If you think about money as a way to create credit and further investment, then the need to link credit expansion to existing investments in a meaningful way seems relatively clear.  The beauty of mortgage-backed securities and commercial debt obligations is that they are ways to aggregate small individual real investments in one area of the world economy into financial products that can then be used as a platform for credit expansion throughout the world.  It seems to me that we have created the tool and now we need to figure out how to use it (ie., what kinds of rules and laws need to govern the creation, sale, and disposal  of such instruments under different kinds of economic conditions).  We have created a globalized real economy and now we have to create structures that support that global economy.