This video is phenomenal. A big part of economics is explaining why countries grow and what policies can be implemented to ensure continued (or renewed) growth.
Monday, December 6, 2010
More on the Fed
Fed critics run risk their attacks will backfire
By Robin Harding in Washington
Published: December 6 2010 00:17 | Last updated: December 6 2010 00:17
Bigamy, grave robbing and passing false cheques are pretty much the only crimes that Ben Bernanke and the Federal Reserve have not been accused of in the past few weeks.
Since the US central bank launched its $600bn round of asset purchases at the start of November, its critics have not hesitated to accuse it of recklessness, incompetence and conspiracy to devalue the dollar, often in vitriolic terms.
Wolfgang Schäuble, the German finance minister, called the Fed “clueless” and accused it of steering “the dollar exchange rate artificially lower”. Republicans in Congress decried a Fed policy that, through some voodoo, they think will not only fail to stimulate the economy but will also create inflation.
Last week’s Fed “data dump” – revealing details of 21,000 transactions with banks during the financial crisis from 2007-2009 – has prompted accusations that the Fed bailed out foreigners or lent against dodgy collateral.
There are legitimate criticisms of the Fed, but many of these attacks could be turned back on the attackers.
Start with the dollar. All else being equal, some fall in the exchange rate is the inevitable consequence of the easing of monetary policy, always and everywhere.
Yet since the start of November the euro has depreciated by about 5 per cent against the dollar, prompted in large part by Germany’s insistence on talking about future mechanisms to restructure eurozone sovereign debt in the middle of a eurozone sovereign debt crisis.
Then there is the political criticism that the Fed’s asset purchases will lead to runaway inflation. Central bank purchases of government bonds can do this – but only in cases when politicians run a persistent fiscal deficit and then force the central bank to finance it.
“The Federal Reserve hasn’t gotten the message. Printing money is no substitute for sound fiscal policy,” said Mike Pence, a leading Republican in the House of Representatives, last month.
Quite right, the Fed might say, now how about that sound fiscal policy? Even as members of Congress attack the Fed, they are moving towards an extension of Bush-era tax cuts on all income levels that will add about $3,700bn to the deficit if continued over the next 10 years.
The official deficit commission run by Erskine Bowles and Alan Simpson came up with a plan that, like it or not, would deal with the deficit. It did not win sufficient bipartisan support. Congress is adding more than its share to long-term inflation risks in the US.
Finally, consider the fallout from the Fed’s data release last week. “After years of stonewalling by the Fed, the American people are finally learning the incredible and jaw-dropping details of the Fed’s multi-trillion-dollar bail-out of Wall Street and corporate America,” said Bernie Sanders, an independent senator from Vermont.
Two of the biggest criticisms are that the Fed lent against the questionable collateral of low-rated debt and that much of its help went to foreign banks. There is no doubt that the Fed took risks.
If Congress had not come through with the $700bn troubled asset relief programme then the results for the central bank would have been unpleasant.
But the point of the Fed’s lending was to provide liquidity to markets that had frozen up. It could not have done this if it had only been willing to lend against Treasury bonds, which were almost the only asset that remained liquid throughout the crisis without Fed help.
Heavy use of Fed facilities by foreign banks reflects the global role of the dollar and the intense demand for US currency during the crisis. Denying liquidity to overseas central banks and to the New York branches of foreign banks would have been a quick way to end that global role. It might also have forced foreigners to default on their obligations to American banks.
At least the Fed’s rescue worked: it was paid back in full, with interest, on all its emergency loans and prevented a devastating financial collapse. Would that Ireland – where bank losses have overwhelmed the government’s finances – could say the same.
Copyright The Financial Times Limited 2010.
By Robin Harding in Washington
Published: December 6 2010 00:17 | Last updated: December 6 2010 00:17
Bigamy, grave robbing and passing false cheques are pretty much the only crimes that Ben Bernanke and the Federal Reserve have not been accused of in the past few weeks.
Since the US central bank launched its $600bn round of asset purchases at the start of November, its critics have not hesitated to accuse it of recklessness, incompetence and conspiracy to devalue the dollar, often in vitriolic terms.
Wolfgang Schäuble, the German finance minister, called the Fed “clueless” and accused it of steering “the dollar exchange rate artificially lower”. Republicans in Congress decried a Fed policy that, through some voodoo, they think will not only fail to stimulate the economy but will also create inflation.
Last week’s Fed “data dump” – revealing details of 21,000 transactions with banks during the financial crisis from 2007-2009 – has prompted accusations that the Fed bailed out foreigners or lent against dodgy collateral.
There are legitimate criticisms of the Fed, but many of these attacks could be turned back on the attackers.
Start with the dollar. All else being equal, some fall in the exchange rate is the inevitable consequence of the easing of monetary policy, always and everywhere.
Yet since the start of November the euro has depreciated by about 5 per cent against the dollar, prompted in large part by Germany’s insistence on talking about future mechanisms to restructure eurozone sovereign debt in the middle of a eurozone sovereign debt crisis.
Then there is the political criticism that the Fed’s asset purchases will lead to runaway inflation. Central bank purchases of government bonds can do this – but only in cases when politicians run a persistent fiscal deficit and then force the central bank to finance it.
“The Federal Reserve hasn’t gotten the message. Printing money is no substitute for sound fiscal policy,” said Mike Pence, a leading Republican in the House of Representatives, last month.
Quite right, the Fed might say, now how about that sound fiscal policy? Even as members of Congress attack the Fed, they are moving towards an extension of Bush-era tax cuts on all income levels that will add about $3,700bn to the deficit if continued over the next 10 years.
The official deficit commission run by Erskine Bowles and Alan Simpson came up with a plan that, like it or not, would deal with the deficit. It did not win sufficient bipartisan support. Congress is adding more than its share to long-term inflation risks in the US.
Finally, consider the fallout from the Fed’s data release last week. “After years of stonewalling by the Fed, the American people are finally learning the incredible and jaw-dropping details of the Fed’s multi-trillion-dollar bail-out of Wall Street and corporate America,” said Bernie Sanders, an independent senator from Vermont.
Two of the biggest criticisms are that the Fed lent against the questionable collateral of low-rated debt and that much of its help went to foreign banks. There is no doubt that the Fed took risks.
If Congress had not come through with the $700bn troubled asset relief programme then the results for the central bank would have been unpleasant.
But the point of the Fed’s lending was to provide liquidity to markets that had frozen up. It could not have done this if it had only been willing to lend against Treasury bonds, which were almost the only asset that remained liquid throughout the crisis without Fed help.
Heavy use of Fed facilities by foreign banks reflects the global role of the dollar and the intense demand for US currency during the crisis. Denying liquidity to overseas central banks and to the New York branches of foreign banks would have been a quick way to end that global role. It might also have forced foreigners to default on their obligations to American banks.
At least the Fed’s rescue worked: it was paid back in full, with interest, on all its emergency loans and prevented a devastating financial collapse. Would that Ireland – where bank losses have overwhelmed the government’s finances – could say the same.
Copyright The Financial Times Limited 2010.
Friday, December 3, 2010
Changes coming for the Fed
Republicans are pressuring the Federal Reserve to shift away from the dual mandate of price and output stability and focus primarily on price stability. They argue as the Fed has focused on creating more jobs it has come at the possibility of higher inflation.
Most of the recent criticism has come after the announcement for a second round of quantitative easing. I am a bit baffled by the recent push for a single mandate of price stability. If the Federal Reserve had a single mandate of price stability, would monetary policy be any different from today. Bernanke, perhaps more than anyone else, understands the risk an economy faces in the event of a debt-deflation spiral. His research has been instrumental in helping policymakers understand the risks associated with a large decline in prices. Following the housing crisis, the U.S. consumer faced record levels of debt. If prices decline, debt increases in real terms. If the economy would have entered a period of 2-3% of deflation, the real interest rate would have increased by 2-3%. Wages would have declined while mortgage, car, and loan payments stayed the same. That is a receipt for a disaster. We would have experienced drastic increases in household and bank defaults.
As much as Republicans want to change the mandate of the Federal Reserve, it would not change how they have conducted policy. Inflation rates are well below their target of 2-3%. Greg Mankiw, a conservative economics has also voiced his opinion on the matter:
Most of the recent criticism has come after the announcement for a second round of quantitative easing. I am a bit baffled by the recent push for a single mandate of price stability. If the Federal Reserve had a single mandate of price stability, would monetary policy be any different from today. Bernanke, perhaps more than anyone else, understands the risk an economy faces in the event of a debt-deflation spiral. His research has been instrumental in helping policymakers understand the risks associated with a large decline in prices. Following the housing crisis, the U.S. consumer faced record levels of debt. If prices decline, debt increases in real terms. If the economy would have entered a period of 2-3% of deflation, the real interest rate would have increased by 2-3%. Wages would have declined while mortgage, car, and loan payments stayed the same. That is a receipt for a disaster. We would have experienced drastic increases in household and bank defaults.
As much as Republicans want to change the mandate of the Federal Reserve, it would not change how they have conducted policy. Inflation rates are well below their target of 2-3%. Greg Mankiw, a conservative economics has also voiced his opinion on the matter:
I am skeptical. If the Fed's mandate were different, monetary policy today might well be the same. That is, with inflation now below its target, the Fed could be pursuing QE2 even if it were operating under the proposed mono mandate. Looking ahead, the Fed believes that inflation too low, even deflation, is a larger risk than inflation too high, so it is engaging in expansionary policy to get inflation back on target.In another post he says:
My view is that QE2 is a modestly good idea. I say it is a "good idea" because, like Ben Bernanke, I am more worried at the moment about Japanese-style deflation and stagnation than I am about excessive inflation. By lowering long-term real interest rates below where they otherwise would be, QE2 should help expand aggregate demand. I include the modifier "modestly" because I don't expect these actions to have a very large effect.I think Congress is looking for someone else to blame instead of focusing on their own problems. Instead of blaming the Federal Reserve for doing something, perhaps they should focus on using fiscal policy to improve the economy. They need to be finding way to increase spending, cut taxes today and reducing the national debt over the next ten years. Going after the Fed tells me they are trying to avoid more pressing issues.
Unemployment Rate Increases
Well this is not good news. The unemployment rate has increased to 9.8% for November. The economy added 39,000 which is below the expected 150,000 jobs that were forecasted. Part of the increase is from discouraged workers reentering the labor force. The labor force increased by 100,000 workers, but the number of unemployed increased by 250,000.
Wednesday, December 1, 2010
Paul Krugman on Structural Unemployment
I tend to disagree is Krugman on structural unemployment. He views the current increase in unemployment as entirely cyclical (in his mind the economy has a natural rate around 5%), while I view the increase in unemployment as increases in structural and cyclical (in my mind the economy has a natural unemployment rate around 6.5-7%). Krugman goes on to say:
As far as I can tell, the only economists who believe that we’re suffering largely from a rise in structural unemployment are those who are ideologically committed to the view that the demand side of the economy doesn’t matter — and so by definition, in their universe, any large rise in unemployment must be structural.Well, I believe the demand side does matter and we have an increase in structural unemployment. The difference between Krugman and myself is where we see potential output, mainly during the housing boom. Krugman's argument implicitly assumes the economy was operating at potential output during the housing boom. I believe the economy was operating slightly above potential during the same time period. In other word, the 5% unemployment in the economy was because cyclical unemployment was negative. If you go back to 2000, you'll see large decreases in the manufacturing employment. This is the exact definition of structural unemployment. These workers do not have the skills needed to find employment in the current economy. During the housing bubble, the construction industry was clearly operating above it's potential) took on the unemployed manufacturing workers. Today employment in the construction industry has returned to pre-bubble levels, and we're left with 8 million unemployed manufacturing workers.
China or India
Jagdish Bhagwati analyzes the growth rates for China and India.
In economic jargon, the supply curve of labor was flat but is now sloping upward, so that rapidly increasing demand for labor resulting from rapid growth is driving up wages. That means that China is beginning to “rejoin the human race” as capital accumulation meets scarcer labor and growth slows.
Is the Housing Market Better?
No, well yes, okay maybe. It depends are you a buyer or a seller. Housing prices declined by 2% during the third quarter, but for most of 2009 and 2010 have remained stable. I expect this is be part of the new normal. Housing prices should increase at the same rate as inflation (1-2% annually). A lot of the price changes will have to do with the interest rates. With low interest rates, I'm surprised prices didn't increase a little, but with a fixed population there is no reason to expect housing prices will increase at a faster rate, unless we end up in another housing bubble.
Tuesday, November 30, 2010
Update on the Debt Commission
Wednesday, November 24, 2010
Some advice
Here is some invaluable advice. You can thank me later.
I hope everyone has a wonderful Thanksgiving! I will see everyone Monday.
I hope everyone has a wonderful Thanksgiving! I will see everyone Monday.
We are recovering, just slowly.
Here's the Fed's updated projections of the economy. Notice unemployment is going to remain above 7% for the next 2-3 years.
Quantitative Easing II
We've talked in class about QE1, the decision for the Federal Reserve to buy long-term debt instruments to lower the yield curve. Here is a nice review of the process.
Politically QE2 has drawn a lot of heat. So is it good, bad or somewhere in between. My views tend to follow those of Greg Mankiw. I see QE2 with some potential upside by lowering interest rates on mortgages, student loans, and government debt and trying to prevent deflation. Remember we want to see inflation rates around 2%, they are still well below 1% as the economy sputters along. The skeptics point to QE2's potential for cause high inflation in the future. Of course these same skeptics were calling for high inflation after QE1 (back in March of 2009). Clearly, they were wrong the first time (evident by the need for QE2) and I suspect will be wrong the second time. QE1 consisted of $1.25 trillion in debt purchases (government bonds and mortgage backed securities) meanwhile the Fed announced QE2 will result in $600 billion (less than half of QE1).
The concern is not high inflation, the Federal Reserve will not let inflation go above 3-4%. The concern is the cost of preventing high inflation. The Federal Reserve has the ability to reign in the money supply (remember banks use the excess cash from the Fed to make loans, as loans increase the money supply increases) and prevent prices for drastically increasing. They can raise interest rate on reserve holdings. Banks are currently earning 0.25% on their reserves, it would be easy for the Fed to offer a higher right and entice banks to keep reserves with the Fed. Second the Fed can buy back the cash through open market sales. Finally, they could raise the reserve requirement. All three choices would be costly, not only will the Fed take a loss on their open market purchases they would have to pay out a large sum in interest payments. This is the least of my concern. So what if they take a $10-50 billion loss (last year they made more than that on the purchases). The bigger concern would be the effect on a struggling economy. A sudden increase in interest rates (from the debt sell off) could send us back into another recession.
The Fed's actions have probably prevented a double dip recession, made borrowing extremely cheap, and saved taxpayers $100+ billion in future interest payments on the debt. A 1-2% reduction in bond yields means cheap financing for the government when they have issued will over $5 trillion in government bonds these last few years. The a sudden reversal in policy will ultimately cause the double dip recession. I don't necessarily see the latter likely to occur. So in my take the benefit outweighs the cost.
Politically QE2 has drawn a lot of heat. So is it good, bad or somewhere in between. My views tend to follow those of Greg Mankiw. I see QE2 with some potential upside by lowering interest rates on mortgages, student loans, and government debt and trying to prevent deflation. Remember we want to see inflation rates around 2%, they are still well below 1% as the economy sputters along. The skeptics point to QE2's potential for cause high inflation in the future. Of course these same skeptics were calling for high inflation after QE1 (back in March of 2009). Clearly, they were wrong the first time (evident by the need for QE2) and I suspect will be wrong the second time. QE1 consisted of $1.25 trillion in debt purchases (government bonds and mortgage backed securities) meanwhile the Fed announced QE2 will result in $600 billion (less than half of QE1).
The concern is not high inflation, the Federal Reserve will not let inflation go above 3-4%. The concern is the cost of preventing high inflation. The Federal Reserve has the ability to reign in the money supply (remember banks use the excess cash from the Fed to make loans, as loans increase the money supply increases) and prevent prices for drastically increasing. They can raise interest rate on reserve holdings. Banks are currently earning 0.25% on their reserves, it would be easy for the Fed to offer a higher right and entice banks to keep reserves with the Fed. Second the Fed can buy back the cash through open market sales. Finally, they could raise the reserve requirement. All three choices would be costly, not only will the Fed take a loss on their open market purchases they would have to pay out a large sum in interest payments. This is the least of my concern. So what if they take a $10-50 billion loss (last year they made more than that on the purchases). The bigger concern would be the effect on a struggling economy. A sudden increase in interest rates (from the debt sell off) could send us back into another recession.
The Fed's actions have probably prevented a double dip recession, made borrowing extremely cheap, and saved taxpayers $100+ billion in future interest payments on the debt. A 1-2% reduction in bond yields means cheap financing for the government when they have issued will over $5 trillion in government bonds these last few years. The a sudden reversal in policy will ultimately cause the double dip recession. I don't necessarily see the latter likely to occur. So in my take the benefit outweighs the cost.
Tuesday, November 23, 2010
Course Update
GRADES:
I have updated the grades on the webpage. There are a couple of items I would like to point out. I've separated your scores into four categories (homework, quizzes, blog, and final exam). You will notice that I have tallied the total points earned for each component. To date you have completed nine homework assignment, seven scores are being counted for a total of 140 points. This means you have 60 points left to earn. You have completed four quizzes, three scores are being counted for a total of 300 points which means you have 100 points left to earn. You can enter in the scores for each component to see how many points you need on homework, the final quiz, blog posts, and the final exam for a particular grade. Remember there are 1000 points in the class. The grade break down is available on the syllabus.
On the second sheet you will notice your raw scores for homework assignments and quizzes and your current percentage in the class (far column). Please make sure these are correct. On the third sheet you will see your blog posts. I have updated the blog scores through today, but when calculating your grade I went through week 12 since a number of people have not posted this week.
HOMEWORK:
There is a homework assignment due Sunday night at midnight. For those that attended class on Monday the assignment should be very straightforward. For the 45 students that did not attend class you will need to read the first part of chapter 13 on aggregate demand. We will briefly review aggregate demand before getting into aggregate supply on Monday after Thanksgiving.
QUIZ:
There is one quiz left. It will be Wednesday, December 8th. As we discussed in class on Monday, the quiz can not lower your grade. You will receive the higher of average of your three highest scores or your score on quiz 5. For example, suppose your average for your highest three quizzes is 85% and you score a 75% on the quiz, your score for quiz 5 will be an 85, but if you score a 90% your score will be a 90.
I have updated the grades on the webpage. There are a couple of items I would like to point out. I've separated your scores into four categories (homework, quizzes, blog, and final exam). You will notice that I have tallied the total points earned for each component. To date you have completed nine homework assignment, seven scores are being counted for a total of 140 points. This means you have 60 points left to earn. You have completed four quizzes, three scores are being counted for a total of 300 points which means you have 100 points left to earn. You can enter in the scores for each component to see how many points you need on homework, the final quiz, blog posts, and the final exam for a particular grade. Remember there are 1000 points in the class. The grade break down is available on the syllabus.
On the second sheet you will notice your raw scores for homework assignments and quizzes and your current percentage in the class (far column). Please make sure these are correct. On the third sheet you will see your blog posts. I have updated the blog scores through today, but when calculating your grade I went through week 12 since a number of people have not posted this week.
HOMEWORK:
There is a homework assignment due Sunday night at midnight. For those that attended class on Monday the assignment should be very straightforward. For the 45 students that did not attend class you will need to read the first part of chapter 13 on aggregate demand. We will briefly review aggregate demand before getting into aggregate supply on Monday after Thanksgiving.
QUIZ:
There is one quiz left. It will be Wednesday, December 8th. As we discussed in class on Monday, the quiz can not lower your grade. You will receive the higher of average of your three highest scores or your score on quiz 5. For example, suppose your average for your highest three quizzes is 85% and you score a 75% on the quiz, your score for quiz 5 will be an 85, but if you score a 90% your score will be a 90.
Tuesday, November 16, 2010
Myths about the Federal Reserve
Greg Ip (a writer for the Economists) explores five common myths associated with the Federal Reserve. This article will help you better understand the structure, role, and policy stance of the Fed.
The five areas he tackles are:
1) Inflation
2) Devaluation of the dollar
3) Monetizing the federal debt
4) Politics
5) Big Ben
The five areas he tackles are:
1) Inflation
2) Devaluation of the dollar
3) Monetizing the federal debt
4) Politics
5) Big Ben
The Yield Curve and Monetary Policy
For those struggling to understand the relationship between the yield curve and monetary policy this article does a really nice job of summarizing everything. This will help answer questions 1 and 2 in chapter 11.
Sunday, November 14, 2010
Your Turn to Fix the Deficit
Think you can solve the government's budget deficit. Give it a try by going here.
Notice the biggest savings comes from increasing medicare and social security age and by removing the tax benefits employers receive by providing employees health care.
Sidebar: Have you ever wondered why employers provide health care? Well they can offer you health care and it comes tax free. Why not give workers the income they have earned and let them decide which health care program best suits their needs. It would save $150 billion over the next 20 years.
Here's my budget fix.
Notice the biggest savings comes from increasing medicare and social security age and by removing the tax benefits employers receive by providing employees health care.
Sidebar: Have you ever wondered why employers provide health care? Well they can offer you health care and it comes tax free. Why not give workers the income they have earned and let them decide which health care program best suits their needs. It would save $150 billion over the next 20 years.
Here's my budget fix.
Wednesday, November 10, 2010
Monday, November 8, 2010
Unattended Consequences
Oil prices are responding to the Federal Reserves recent announcement for further quantitative easing. Oil is a global commodity that is denominated in dollars. As the Federal Reserve continues pumping money into the economy and the dollar depreciates oil producing countries are finding themselves with decline oil revenues. I've always said that the economy will continue in it's recovery (albeit weak) as long as oil prices stay under control. High oil prices place greater burdens on households and weaken an already low consumer confidence. This could spell trouble with the upcoming travel season.
The Debt Paydown
It looks like American's are continuing this push to a new normal. American's have paid off nearly $1 trillion in debt, are taking out fewer credit cards, and mortgage debt is in decline. Now only if the government could do the same (at least in the future have some plan to pay down the debt).
Sunday, November 7, 2010
Double-Dip Recession
Is the economy going into a second recession? The evidence suggests the economy will not reenter into another recession.
The biggest concern is the high levels of long-term unemployment. I don't see this causing another significant slowdown in the short-run. Instead I think the economy is going to adjust to a new level of economic growth. Instead of growing at 3% we'll grow at a 2% average. I view this as more of a structural problem. Households will continue to save, the natural rate of unemployment will increase, but the economy will grow.
The biggest concern is the high levels of long-term unemployment. I don't see this causing another significant slowdown in the short-run. Instead I think the economy is going to adjust to a new level of economic growth. Instead of growing at 3% we'll grow at a 2% average. I view this as more of a structural problem. Households will continue to save, the natural rate of unemployment will increase, but the economy will grow.
What about those tax cuts?
What is going to happen with Bush's tax cuts that are set to expire at the end of the year. Well it looks like compromise may happen.
I'm going to also link to my post back in August about the tax cuts.
I'm going to also link to my post back in August about the tax cuts.
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