The visible hand in economics

Archive for the ‘US economics’ Category

I have to admit that I am confused. The US wants to pump a bunch of money into the economy in order to get consumers borrowing again – why?

I thought that one of the primary issues was that the US consumer has borrowed too much in the past, supposedly to make up for a “glut in savings”. This had to give way at some point surely.

Of course the Fed and the US Treasury should be looking at loosening credit constraints that have appeared – but are they there. Megan McArdle was able to get hold of a good number of credit cards, and as I noted there seems to be some “throwing of funds” at consumers in LA at least.

Now, businesses over there (and potentially here) are suffering from credit constraints – so why doesn’t the Fed and Treasury work on loosening the constraint on business borrowing, instead of trying to knock down mortgage rates. Businesses that haven’t shut down don’t lay off all their staff!

So the deposit insurance schemes being introduced around the world have the explicit aim of “saving the world economy from Armageddon”.  Even so, when I spent a couple of weeks in the US I got the distinct impression that this scheme will lead to more (even more substantive) issues down the track.

Here is a list of interesting things I heard on Ads (or saw on billboards) in the US:

  1. Now, thanks to the deposit insurance scheme, we don’t have to check your credit (Ad),
  2. The world is America’s ATM (Billboard),
  3. Need a $200,000 loan to start a business – with no credit check? (Ad).

Add to this the already poor nature of savings in the US, and the fact that there is no individual responsibility in the housing market or even in the realm of taxes (every third ad is either about getting a lawyer to lower your taxes or getting a lawyer to push the government to give you extra benefits).

Ultimately, I think the US has some structural issues that need sorting – trying to keep consumers borrowing to maintain short-term growth feels like the government is creating a ponzi game in favour of the initial consumers that were involved.

The paradox of thrift is one of the key lessons taught to macroeconomics students during their first undergraduate year.

Fundamentally it states that if everyone in society decides to save more right now, then it reduces consumption, with reduces economic activity and thereby incomes – and as a result it may actually decrease aggregate savings, and it will definitely reduce economic activity.

It is still widely applied, with recent Nobel prize winner Paul Krugman appealing to it in order to explain why the US needs to jump on in and get consumers spending again.

Of course this does not mean the theory is necessarily right. The paradox of thrift does not have a supply side – as long as prices and quantities can adjust to an economic shock this paradox, and the suggestion of government intervention in the face of it, does not hold water. For government intervention to be a possible solution we need a MARKET FAILURE, a market failure that causes a special macro-economic situation called “demand deficiency”. (Note: This is effectively the difference between Say and Keynes).

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Following today’s terrible house price figures (I don’t have to see them to know they would be bad :P ) I thought it would be appropriate to go back to the comparison of NZ (and Aussie) to the US – at least for housing.

Greg Mankiw links to an article in the Wall Street Journal.  Read this:

When Australians borrow money to buy a house, they know that if they default and the mortgaged property doesn’t cover the debt, they will be responsible for the shortfall. And the lender will chase them for it. It’s a neat way of reminding Australians to borrow responsibly.

In America, where populist post-Depression laws in many states have mandated loans be nonrecourse, the opposite is true. Americans can take out a mortgage more or less as a one-way bet. If you can’t afford the repayments and can’t refinance, you just send the keys back to the bank. Borrowers wipe their hands of liability.

Surely hearing how moronic lending practices are in the US makes us all feel better about the relative outlook for our banking and housing sectors.  Although I bet to spite me that a major Aussie bank has gone bankrupt while I’ve been out of the country ;) (again this was written on Sunday Nov 2)

Greg Mankiw has blogged about young voters abandoning the republican party in the recent Presidnetial election, citing this graph from Andrew Gelman

When discussing why he thinks this happened he cites anecdotal evidence from talking to undergrads at Harvard that

It was largely noneconomic issues. These particular students told me they preferred the lower tax, more limited government, freer trade views of McCain, but they were voting for Obama on the basis of foreign policy and especially social issues like abortion. The choice of a social conservative like Palin as veep really turned them off McCain.

I found this interesting as I generally fall into the same category, my utility function probably places a greater weight on social and foreign policy issues then economic issues. Since there is such a gulf between the democrats and republicans on social issues I generally tend to vote democrat in the US.

On the other hand, (despite what the parties say!) we don’t have anywhere near as much of a politcal divide on social issues in New Zealand so I generally vote based upon economic policies. Which, as you will have seen from our TVHE political quiz results, means I usually vote National.

As an aside, isn’t it random that a “Red State” is a Republican state when red is the socialist colour? According to my good friend wikipedia this just happened by accident and was a result of the the US news stations.

Agnitio:Votes blue in both countries

Complaining about inflation now may seem to be similar to the captain of a boat complaining about pushing the engine too hard when the ship is sinking – but I’m going to do it anyway ;)

Bank in September Fred Mishkin wrote an article for the Wall Street Journal (ht Economists View and Greg Mankiw).  In it he mentions that the concern should not lie with headline annual growth in the consumer price index, but a more generalised and persistent increase in the price level.  Looking at core inflation, nominal wage growth, and the such in the US indicates that they are not truly suffering from an inflation problem.

Heading into the recent crisis this still seemed to be the case.  The October NBNZ Business confidence survey (which I will discuss tomorrow) still had elevated inflationary pressure, and I suspect the labour market data we have seen today and back on Monday (note that I haven’t seen this data when I wrote this) would indicate a strong inflationary undercurrent.

The truth is, even with a drastic slowdown in domestic economic activity, there is the risk that some form of underlying inflation mark-up is occurring during the wage negotations of the firm and the price setting behaviour of other firms.  I think this is evident in changing marketing strategies – with a “fixed price contract” now seen as an amazingly special deal by electricity retailers.  Purging this from the economic environment is difficult and costly – and is the ultimate cost of loose policy over the past six years.  If our recession is deeper than that experienced by the rest of the world, we can probably put it down to a historical failure by our central authorities.

The US may be able to relax about inflation – but we still can’t :(

It’s good to know investment bankers still have a sense of humor. I just these jokes in an email from some friends in finance. From the Wall Street Journal apparently.

Given that a major NZ investment bank has just had a large culling of its staff I guess they need something to lighten the mood around the office!

Enjoy!

Agnitio

Gallows humor. Wall Street might have lost tons of money, but that doesn’t mean traders have lost their ability to laugh. Some faves making the rounds:

– What’s the definition of optimism? An investment banker who irons five shirts on a Sunday evening.

– What is the capital of Iceland? About $3.50

– I tried to get cash from an ATM today, but it said “insufficient funds.” I don’t know if that meant them or me.

– What’s the difference between an investment banker and a large pizza? The pizza can still feed a family of four.

– What does a hedge-fund manager with no fund to manage say? Would you like fries with that sir?

– The credit crunch is getting bad, isn’t it? I mean, I let my brother borrow 10 bucks a couple weeks back. It turns out I’m now America’s fourth-biggest lender.


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