Eurozone: If Greece goes ... - FT.com

Nice summary of the events in Greece:

http://www.ft.com/intl/cms/s/0/175fcc8c-9b7f-11e1-8b36-00144feabdc0.html#axzz1uqoPJp5x

The Once and Future Dollar - Barry Eichengreen - The American Interest Magazine

Let's start reading some interesting articles on foreign exchange.

http://www.the-american-interest.com/article.cfm?piece=1228

House Advantage - Product Design - Banks That Bundled Bad Debt Also Bet Against It - NYTimes.com

http://www.nytimes.com/2009/12/24/business/24trading.html?pagewanted=all

That exam was hard

My top 5 responses to a student that complains my exam was too hard:

1. You're in college it's suppose to be hard.

2. Clearly you have not taken calculus. Now that is hard.

3. I really do enjoy making your life miserable.

4. Wait until you take the final, you'll think this exam was easy.

5. Really? Did you study?

Whatever Happened to the Free Market

Oil prices are determined in the global market. The Economists does a nice job summarizing the recent spike in oil prices. Many supply and demand factors will help determine the price of a barrel of oil. The demand side largely is influenced by US drivers, the rise of Chinese and Indian economies, and oil speculators purchasing futures contracts in hopes of driving prices higher. On the supply side comes down to OPEC and right now the concerns over a war with Iran. The POTUS has no influence on oil prices, but somewhere along the lines Republicans believe gasoline should be $2.50 per gallon. If you believe in the free market, you will quickly realize gasoline will never be $2.50/gallon. Of course the Republicans did not blame George W. Bush when gasoline prices reached $5/gallon in the summer of 2008. So what can we take from this, Republicans believe in the free market, that is until it is inconvenient to do so.

In the Long Run...

This article is a perfect example why journalist should not inject their opinion on an economic debate. In the long run it is all macroeconomics, not micro. We care about the efficient allocation of resources to increase living standards, minimize unemployment, and alleviate poverty. If we didn't have macroeconomic goals then we wouldn't care about microeconomics.

http://www.forbes.com/sites/timworstall/2012/03/16/in-the-long-run-its-all-microeconomics/?feed=rss_home

The Villain

Bernanke has found himself in the crosshairs of a debate between the left and the right over whether he is doing too much or too little to stimulate the economy. All this, while the debt troubles in Europe have threatened to compound America's problems and snuff out the recovery before it takes hold.

http://m.theatlantic.com/magazine/archive/2012/04/the-villain/8901/?single_page=true

Why the IS/LM model is still useful

Still the go to model for understanding the usefulness of policy.

"But economists who knew basic macroeconomic theory – specifically, the IS-LM model, which was John Hicks's interpretation of John Maynard Keynes, and at least used to be in the toolkit of every practicing macroeconomist – had a very different take. By late 2008 the United States and other advanced nations were up against the zero lower bound; that is, central banks had cut rates as far as they could, yet their economies remained deeply depressed. And under those conditions it was straightforward to see that deficit spending would not, in fact, raise rates, as long as the spending wasn't enough to bring the economy back near full employment. It wasn't that economists had a lot of experience with such situations (although Japan had been in a similar position since the mid-1990s). It was, rather, that economists had special tools, in the form of models, that allowed them to make useful analyses and predictions even in conditions very far from normal experience.

"And those who knew IS-LM and used it – those who understood what a liquidity trap means – got it right, while those with lots of real-world experience were wrong. Morgan Stanley eventually apologized to its investors, as rates not only stayed low but dropped; so, later, did Gross. As I speak, deficits remain near historic highs – and interest rates remain near historic lows.

http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the-crisis/?pagewanted=all

Looking for a 'super' low unemployment rate? - Economy

8% is the magic number. If the unemployment rate is below 8% by November Obama will be reelected. 

http://economy.money.cnn.com/2012/03/06/looking-for-a-super-low-unemployment-rate/

Federal Reserve under attack ... again - Economy

Ironic, I was just having the conversation today in regards to Ron Paul. I said if anything those against the Fed should focus on the dual mandate and eliminate the goal of output stability. The reality, inflation is under control, the Fed has announced a firm inflation target, is publishing their forecasts, and has opened to the media. I don't see a single mandate of inflation targeting changing the current position of the Fed.

http://economy.money.cnn.com/2012/03/06/federal-reserve-under-attack-again/

CBO | Comparing the Compensation of Federal and Private-Sector Employees

Why it pays to have a federal job, well as long as you don't have a PhD.

http://cbo.gov/publication/42921

American manufacturers importing workers

Why we need better skills training programs in high schools:

http://cnnmoney.mobi/primary/wk_article?articleId=urn:newsml:CNNMoney.com:20120305:manufacturing-workers:1&category=cnnm_jobs&pagesize=10

Monetary Policy and the Yield Curve

Here is a nice link that talks about the relationship between the yield curve and monetary policy.

What did the Fed learn?

A recent speech by Bernanke talks about the need to focus on financial stability.

Conflict of Interest - Global Settlements

Here are the details surrounding the separation of research and investment banking:

• To ensure that stock recommendations are not tainted by efforts to obtain investment banking fees, research analysts will be insulated from investment banking pressure. The firms will be required to sever the links between research and investment banking, including prohibiting analysts from receiving compensation for investment banking activities, and prohibiting analysts' involvement in investment banking "pitches" and "roadshows." Among the more important reforms:
   
  • The firms will physically separate their research and investment banking departments to prevent the flow of information between the two groups.
     
  • The firms' senior management will determine the research department's budget without input from investment banking and without regard to specific revenues derived from investment banking.
     
  • Research analysts' compensation may not be based, directly or indirectly, on investment banking revenues or input from investment banking personnel, and investment bankers will have no role in evaluating analysts' job performance.
     
  • Research management will make all company-specific decisions to terminate coverage, and investment bankers will have no role in company-specific coverage decisions.
     
  • Research analysts will be prohibited from participating in efforts to solicit investment banking business, including pitches and roadshows. During the offering period for an investment banking transaction, research analysts may not participate in roadshows or other efforts to market the transaction.
     
  • The firms will create and enforce firewalls restricting interaction between investment banking and research except in specifically designated circumstances.
     
• To ensure that individual investors get access to objective investment advice, the firms will be obligated to furnish independent research. For a five-year period, each of the firms will be required to contract with no fewer than three independent research firms that will make available independent research to the firm's customers. An independent consultant for each firm will have final authority to procure independent research.
   
• To enable investors to evaluate and compare the performance of analysts, research analysts' historical ratings will be disclosed. Each firm will make its analysts' historical ratings and price target forecasts publicly available.

Quantitative Easing

I'm putting a presentation together on monetary policy and am going to policy relevant articles here.

From the Economist following the announcement of QE2

Morgan Stanley

One of the last remaining investment banks (Bear Stearns, Lehman Brothers, Wachovia, and Merrill Lynch all gone). Is Morgan Stanley next?

Moral Hazard and the Crisis

I will be using this post as a running entry with articles relating moral hazard to the financial crisis.

Here is a post by Paul Volcker in the WSJ.

A great post in Seeking Alpha.

Here is a nice explanation of the role of moral hazard during the failure of LTCM and 9/11.

An article from The New Yorker.

Adverse selection and the financial crisis (think of this as credit rationing by banks). The Bank of Canada has a nice review.

The Use of Unconventional Policies

Here is a letter from the SF Federal Reserve

The Role of Bank Capital

This is going to be a running post on articles talking about the need for bank capital.

I will also be posting articles under the arguments for and against a strict bank capital requirement. Like any policy we need to understand the costs and benefits of added bank capital. The costs are reduced lending, the benefits are a reduced likelihood of a financial crisis. Here are the results from the Basel panel.

Here is recent article from the WSJ talking about recent moves toward more bank capital. Of course Citi Bank does not like the requirements.

Here is the first article from The Economist. This article talks about increased bank capital during the onset of the financial crisis.  How much capital is enough?

The Basel Accord has been an attempt to standardize bank capital requirements across countries. Here is an article talking about Basel III.

A panel discusses the effects of bank capital requirements on economic growth. The pros are simple, more capital reduces the likelihood of a bank become insolvent due to large loan write downs. The costs are simple, the more capital reduces the return on equity for bank owners.

I'm in favor of strict capital requirements for all bank-like institutions. I believe the financial system in a large way acts as a public good. Because of the problems posed by banks failing to fully account for the costs of risky behavior (yes, largely created by the types of regulations we currently have) large banks do not recognize the costs to society. I view capital requirements as an easy but highly effectively way of minimizing regulations while allowing banks to serve society (i.e. channeling funds from borrowers to savers). I like these requirements mainly because banks still have a choice for the types of assets they want to hold. If banks want to undertake in subprime lending they can, but it needs to be supported by added capital. Will this slow down growth, probably in the short run, but in the long run it will lead to fewer financial crises. Given the recent number of crisis that could have been avoid if banks were holding adequately capital, I view the long run benefits as a necessary.