The Western also sells package liquor!

this Recession: cause and cure

The severity and depth of this recession wasn't caused by the financial crisis, or the housing market.

The housing bubble started bursting in 2006, banks somewhat later, but real GDP rose almost continuously thru middle of 2008. It's after that demand started sharply falling across a wide sprectrum of industries.


As economist Scott Sumner wrote: "The prevailing view was that the financial system was the fundamental problem and falling demand was a symptom. I never understood this argument, as modern macro [economic] theory says falling AD [aggregate demand] is a symptom of monetary policy that isn’t expansive enough. Now perhaps things are getting bad enough that people are beginning to understand that it does no good to bail water out of a boat if it is coming in even faster through a hole in the hull."


Sure enough, monetary economists that monitor the Federal Reserve were getting alarmed in 2008 at the contraction of the money supply that was taking place.

Looks to me like the Fed was belately responding to criticism that their "easy credit" policy (targeting nominal GDP at 5% instead of 3% or so--NGDP is GDP plus inflation) was fueling the housing boom, and they responded like they have alot in the past--slammed on the brakes too late and too fast. This caused big drop in AG and slammed the housing and banking sectors, already in crisis, in a big way.


The Fed was also trying out some new and untested ways of using monetary policy to affect the credit markets at this time too. James Hamilton, a very mainstream macroeconomist, wrote about this in his popular blog.


I'm not saying the problems in housing and banking aren't relevant. In hindsight, politicians of both parties fixing and pushing entities so unqualified buyers could obtain mortgages was dumb (but that doesn't explain why the smartest guys from ivy league schools running the biggest investment firms thought it was brilliant to pour hundreds of billion dollars into these mortgages). Large problems in sectors like that can cause GDP and price changes, though historically not big ones. But they can't affect the NGDP--that's entirely the creation of the Fed.

That nominal GDP and nominal prices falling to the negative levels by 2008 wasn't anything a rational mortgage investor would have predicted in 2006. Plus, even if rapidly expanding the money now it does't help boost a rise in real GDP soon--the rising nominal prices will at least help the balance sheet of the banks in a big way, instead of killing them.


So yes, I think this recession, or mild depression, is mostly (tho not all) the result of bumbling Federal Reserve policies: tight money caused the NGDP to plumment, stabbing the housing and finance sectors at almost the worst possible time. The Federal Reserve has done this before. Even Ben Bernanke, a renowned academic scholar on the Fed, acknowledges that the Federal Reserve caused the Great Depression.


As I've said before, we won't know for years the full story of this crisis and it's causes. But examining the evidence across a wide range of opinions, I think this explanation is the one that will hold. Though it is a very, very minority opinion! Even so, some economists might not agree that tight money is what turned this housing/finance caused slowdown, or mild recession, into a depression--but many of those economists do see the need for monetary stimulus. The monetary economist Scott Sumner (from whom I've stolen alot for my post here!) argues for unconventional monetary stimulus to be used in a big way now. Even liberal economist Paul Krugman has recently called for it (tho he still puts old-fashioned Keynesian fiscal stimulus first on this list)

The Federal Reserve has increased the monetary base by gobs in recent months, but looking at inflation and it's long term expectations (that is, the CPI and TIPS- 10 yr TIPS today is at implied 1.40% inflation, up 40 bps recent weeks) increases in MB ain't moving things much. Plus, some other usual routes for them to increase money supply are closed due to 0% interest rate. Hence the call for unconventional monetary stimulus. For those folks worried about hyperinflation, Weimar or even Zimbabwe style, Sumner had a good post on that.

It's only after this monetary stimulus, and wringing all the resulting AG increase we can get from it, that bank's balance sheets will improve, that banks can get lots of folks to loan funds to--and we can do some effective fixes in the banking and housing sectors.

My restaurant pictures at Urban Spoon

Urban Spoon is a popular website for people to research where to eat out, and the site is growing rapidly because of a nice and fun app of it you can download to your iphone or itouch.

Urban spoon does the best job I've seen aggregating restaurant reviews from newspapers, bloggers, patrons and putting it all on a clean easy-to-navigate page.

I've been posting some of my pictures of favorite eateries, such as Hank's Hamburgers, a burger joint in North Tulsa, Uncle Thurm's Southern & Soul restaurant in Tacoma, and Taqueria Arandas here in Austin, Texas.

Pictured above is Hank's Hamburgers ultimate cheeseburger -- the "Big Okie"

This Week's Quote

We shall not grow wiser before we learn that much that we have done was very foolish.
-- F. A. Hayek

Hayek has explored much foolishness, especially when it applies to people who believe they can make "simple" changes in essential complex systems (such as the economy, the environment, or human society) and foolishly think this change will not have secondary and tertiary effects. Many of those effects are unpredictable, and can turn out harmful or defeat the original intentions. In political science they speak of "law of unintended consequences."

This necessary "epistemological modesty" has been practiced by few great thinkers, like Edmund Burke or James Madison. It is indeed a very humbling and difficult approach, to assert that world is too complex for us to know well; our ignorance and frequent foolish mistakes should be the most important design feature of any "solution".

Law professor Richard Epstein in Chicago spoke of the "best and the brightest" from our best universities that go to Washington DC to "fix" things:

[they] are very smart, but the problem is these high-I.Q. guys always think they can square the circle; they always believe they can beat the system with a cleverer system, and they always fail.

watch or download music videos at DivShare

I've backed up some of the videos I've put on my mp3 player, and some videos I've uploaded to YouTube, at Divshare.

You can watch them at the site, such as Neil Young performing "The Needle and The Damage Done" (from a 1971 Johnny Cash Show) and by clicking the "download" button to the right--you can save them to your own computer in ipod-ready AVI files.

Here is Homero Francesch performing the first movement of Mozart's Piano Concerto No 26 , the "Coronation". I also put up Jimi Hendrix's "Hey Joe " from Woodstock. Many others on there, and I will be adding more most every day. So explore the different files!

Blues file
http://www.divshare.com/folder/506814-5ee

Rock and Roll videos
http://www.divshare.com/folder/503116-0aa

Country video files
http://www.divshare.com/folder/515230-ad8

Pop Music video files
http://www.divshare.com/folder/503194-2ff

Jazz video files
http://www.divshare.com/folder/510411-349

Classical Music video files
http://www.divshare.com/folder/503210-135

Video: Hedge Funds and the Global Economic Meltdown

"Short selling hedge funds lit the spark that led to the global economic meltdown. Now they want to help craft the laws Congress will pass to fix our broken regulatory system. That's insane. "

Some freinds posted this video and I commented on it:

Right off the bat you can detect the slant and inaccurracies when video wonders how run on Bears stock could happen with them holding plenty of liquidity. Easy. Lack of confidence. That's how runs happen, especially on banks.

Looks to me that the tremendous short selling was due to insiders knowing collapse was around the corner. No evidence is presented to show how it couldn't have been that.

Also, I don't think Lehman's collapse was any trigger by itself. Credit markets were stable for a week afterwards (looking at the TED spread and Libor rates) then Treasury announced it's rescue deal--and it wasn't recieved too well by congress or markets. Officials further talking it up made it all worse and the they appeared directionless with saving some firms and letting others fail.

Then more bad news on economy and Freddie and Frannie going into recievership. Money started leaving markets, flying to saftey. In Sept. two commercial paper money market funds broke the buck, and it's right after that everyone freaked out and market plunged.

besides, short selling couldn't have caused the Fed to keep interest rates at 1% all these years, nor could SS cause all those ivy-league investors running those big funds to pour billions into these mortage bundles, nor SS cause rating agencies to put AAA on everything that came into their in-box, or cause federal and state regulatory agencies to sit on thier butts all day and do nothing, and so on...

I said before, who knows full story behind this crisis? Only now are studies being done and papers written. It will be at least a year before any consensus develops among analysts. The 1987 crash was much simpler event and up to 2 years later experts were still debating it's causes Now it's fully understood by all and taught at every finance school...

Bernard Shaw's politics and "The Apple Cart"

Today I started uploading several bits from a 1975 BBC production of Shaw's 1929 political play "The Apple Cart" to one of my YouTube channels. A play I had never heard of. Spotted the DVD at the library. But it has some good parts, and a very fine appearance by Helen Mirren playing the dishy mistress to the king, Orinthia.

I never paid much attention to Shaw's politics as I'm very unsympathetic toward his Fabian Socialism. However, turns out we have some similar views on democracy, goverment work, and the voting public. And he expresses it much better!

To (Shavian) wit:

"...choose between Cabinet government and monarchical government: an issue on which I frankly say that I should be very sorry to win, as I cannot carry on without the support of a body of ministers whose existence gives the English people a sensation of self-government.

But not one of them will touch this drudgery of government, this public work that never ends because we cannot finish one job without creating ten fresh ones. We get no thanks for it because ninety-nine hundredths of it is unknown to the people, and the remaining hundredth is resented by them as an invasion of their liberty or an increase in their taxation.

Politics, once the centre of attraction for ability, public spirit, and ambition, has now become the refuge of a few fanciers of public speaking and party intrigue who find all the other avenues to distinction closed to them either by their lack of practical ability, their comparative poverty and lack of education, or, let me hasten to add, their hatred of oppression and injustice, and their contempt for the chicaneries and false pretences of commercialized professionalism.

Our work is no longer even respected. It is looked down on by our men of genius as dirty work. What great actor would exchange his stage? what great barrister his court? what great preacher his pulpit? for the squalor of the political arena in which we have to struggle with foolish factions in parliament and with ignorant voters in the constituencies?"

and from an interview (a 1929 piece in "The Observer"):

"Do you seriously think that democracy may drift into the state of things shown in the play?"

"It has already drifted into it."

"Is not the tendency in this country towards a bigger percentage of voting and a more enlightened use of the franchise?"

"The tendency to disuse the franchise is so strong that in some countries it is a punishable offence not to vote. People vote in times of great social strain for which the government is blamed. The newly enfranchised (the women, for instance) vote whilst the novelty lasts. But in a condition of general satisfaction, or of general disgust at the failure of political parties to make good their promises, people will not vote. In the old vestries, for which anybody could vote, a little ring of men used to meet and elect one another without the interference of a single general elector. Shareholders' meetings are very much the same. Do you ever vote?"