2008 Economic Crisis

Does Fiscal Austerity Reassure Markets? – Paul Krugman Blog – NYTimes.com

Does Fiscal Austerity Reassure Markets? – Paul Krugman Blog – NYTimes.com.

My favorite line from this article is the last one:

But hey, what are you going to believe: what everyone knows, or your own lying eyes?”

Krugman spends all this time basically analyzing whether it’s a good time to move away from deficit spending and more towards some kind of balanced approach to spending.  I have always thought this was one thing that was ignored by all of the critics when the stimulus package and budget were first being rolled out by the Obama administration.

Specifically, that this deficit spending and all of the activities by the Treasury and the Fed had to happen now, but also had to be temporary.  That the monetary base of the Fed would decrease as it wound down and that the Treasury had no desire to be the owner of AIG or GM forever.  But we had to do this for a while, at the least.

After all of that, Krugman then says that those who push for “fiscal austerity” now have “blind eyes.”  Way to go, Paul.

The “let them fall” concept of macroeconomics

Last night, on the Daily Show with Jon Stewart, Peter Schiff was interviewed.  Schiff is an “economic commentator” (as compared to an economist?) and the head of a brokerage firm.  Stewart showed a number of clips of Schiff on CNBC prior to the current economic crisis warning of the dangers of the housing bubble, sub-prime mortgages, and over-leveraged companies and individuals.  These comments were made well in advance of the actual recognition of the situation and there is audio of people actually laughing while he is talking (I got the impression they were other guests of panel shows, not the moderators or CNBC folks themselves, but I cannot be sure).

At any rate, the gist of Schiff’s argument is that

  1. The government should have let companies fail.  No company is too big to fail.
  2. The market will dictate how things will fall out in the end, even if it means massive recession for now.  The market is strong.
  3. This is all because of how messed up things were, so let’s let the bad die out
  4. The government is just making things worse by intervening, and we might have hyperinflation.

In some ways, I find this very dangerous.  In others, thought-provoking.


BBC NEWS | Business | Obama pledges 600,000 summer jobs

BBC NEWS | Business | Obama pledges 600,000 summer jobs.

One thing I know is that there is a lag when it comes to fiscal policy.  The government spends the money, but creation of jobs takes a bit of time as projects are identified, and certainly hiring into those jobs takes time, then income, then willingness to spend, then GDP rise.  

But I wonder how long the lag usually is.  This is something we never studied really in my macroeconomics classes.

I also wonder whether the fear of spending for the sake of spending (which is actually kind of okay when the goal is to SPEND above all else) made selection of “shovel-ready” projects a lot more difficult.  So even if a project was ready to go there was still more scrutiny, so it took longer to get going, so jobs are still falling.

Smart move: Feds refuse to buy troubled assets with TARP – Jun. 8, 2009

Smart move: Feds refuse to buy troubled assets with TARP – Jun. 8, 2009 .

I am usually not one to question Allan Sloan (but who am I to say I do or do not question person X or Y – I’m kinda nobody), but this is kind of a strange argument.

Okay, in our 20/20 hindsight, maybe, just maybe, the Treasury’s switch-a-roo with TARP to invest in bank equity instead of buying off troubled assets wasn’t so terrible.  I still think it’s lousy to have done that, but maybe Sloan has a point that the obstacles of figuring out exactly how to value those troubled assets might have killed the effort in the first place.

But we knew about those obstacles.  And I think the folks running TARP had a pretty good amount of leverage they could wield.  And, finally, Sloan’s use of the problems other, quasi-similar programs have faced as reasons why TARP would have been just have difficult to implement is a weird way around.  Just because another program has had problems doesn’t mean TARP would have had such problems.

And those assets are still sitting on bank balance sheets.  Massive recapitalization is still needed.  Hm.

The stagflation myth – Paul Krugman Blog – NYTimes.com

The stagflation myth – Paul Krugman Blog – NYTimes.com.

The whole thing about stagflation is kind of weird.  The term refers to the economic situation of the 1970’s, where one had high unemployment and inflation.  Usually you don’t have both.

First, there is a misconception about inflation.  It’s not that we print all this money and it’s now worth less.  It’s more that prices go up and a loaf of bread that cost $1.50 yesterday now costs $2.  So the money is worth less but because of prices, not the actual number of bills out there.  In fact, in terms of real money supply, over time the rise in prices brings everything back to a steady state.  

So, usually, as unemployment goes down…i.e. people get jobs and have salaries and start buying things, they tolerate higher prices more and more, and we have inflation.  So you don’t usually have both at the same time.

Economists fall into two general categories when it comes to macroeconomic policies – those that control and influence the overall, national economy.  The first comes from “neoclassical” or “conservative” angles, where government involvement should be small or is useless, and that it’s all about the central bank (The Fed) moving interest rates around to keep everything stable.  In theory, that should work.

The other group follows roughly those ideas put forth by John Maynard Keynes in 19…36, I think.  He basically said that we can affect demand through government spending.  Moving demand moves prices, output, etc, and we can pull ourselves out of recessions and other problems.  Of course, the ideal scenario is a combination of fiscal (gov’t) and monetary (Fed) policies that work together.  

Many conservatives point to stagflation as proof that the Keynesian economists had it all wrong.  However, it’s not that they were wrong, it’s more that since their theories targeted demand and stagflation couldn’t be solved by moving demand around, then Keynesian policies were wrong.  But that’s like saying…just because I can’t make a car go faster with higher octane gas, then high octane gas is useless or “wrong” or something.

MBAs: Public Enemy No. 1? – BusinessWeek

MBAs: Public Enemy No. 1? – BusinessWeek.

This is a really fascinating article.  Essentially, it is about how the training and education of MBA students to examine the bottom line – return on shareholder value – rather than ethics or a higher standard of management over the last few decades has led to a group of leaders that have run companies into the ground, taken too many risks, and put us into our current crisis.  The article does acknowledge that lots of those CEOs’ classmates have not done things to damage our economy to the benefit of shareholders, and lots of CEOs without MBAs have.  But the basic premise is that there is a push back against formally trained individuals because they are taught to look at dollars instead of ethics.  

This is a pretty difficult topic for me.  I’m in an evening MBA program right now, but also work in academia, which is not generally driven by the bottom line and certainly not by the pursuit of profits/return on equity to shareholders.  On the one hand, I am still generally taught that the goal of a CEO is to make money for shareholders.  Those are our clients, we find customers to buy our products, and we try to make money for people who have invested in the company.  Plain and simple.  However, at no point have I ever been taught that this is the only goal for a CEO.  It might be the primary one, but not the only one, and not more important than, say, doing business in an ethical manner or taking risks beyond what one’s organization can hold (such as being leveraged 30 to 1 or offering products that sell now but are missing the point for the future).  

At the same time, even at the Jesuit University at which I attend school, I do not have a single business ethics course as part of my requirements for graduation.  There is one elective that has not been offered in the two years I’ve been here.  

Personally, I think that anyone who is a good CEO, or a good candidate for one even coming out of biz school, should realize that there is a right way to do business, and such practices should be pursued, not ignored.  Even if one bends a rule here and there to make sure the company hits the earnings estimates for the year by delivering a product at 12:01 AM (outside of the quarter that ended at 11:59PM…), that’s a mile away from driving GM into the ground, or creating an idiotic financial monstrosity that was Lehman Brothers.

BBC NEWS | Business | US economic outlook ‘improving’

 BBC NEWS | Business | US economic outlook ‘improving’.

Some interesting bits here.  First, to quote:

“The Fed says it expects the economy will shrink between 1.3% and 2% this year. It had earlier said the economy could contract between 0.5% and 1.3%.”

So that’s…good news?  That we will contract more than what they said earlier?

“It also warned that US unemployment could reach 10%.”

Definitely not good news.  Especially since “real” unemployment, which would include discouraged workers and those who haven’t actively tried to find new jobs for more than 3 months (but of course are still unemployed) is always higher.  And forget about those with jobs that they are forced to take, at lower wages and worse hours, just to make ends meet.

“Participants agreed that the information received since the March meeting provided some tentative evidence that the pace of contraction in real economic activity was starting to diminish,” the minutes showed.

It is critical that this be interpreted correctly.  First, the observation is that the contraction is still going on, but is showing signs of slowing down.  That means we are still in actual recession (with negative GDP growth/GDP shrinkage) much less in an economic malaise (which will last longer than the actual recession, which is technically over after we hit bottom and start the slow climb up).  But the economy is still contracting, just not as badly as before.

Second, what this does mean is that most of the areas that have been battered lately have finished…being battered.  So the loss of construction work, for instance, is finally basically all gone and no longer contributes to negative GDP growth.  Now, that means that people don’t have jobs, but it means that they have already lost their jobs, not that they are still losing them.  

Finally, we must not take this as a sign that we can stop working hard to jump start the economy.  A second major stimulus is probably needed (the ARRA is pretty back-loaded as it is, though at 3% of GDP this year and next it’s not small, either) and we can’t lose sight of that just because our contraction is slowing down.

Bernanke: Stress tests to lead to improved bank supervision – May. 7, 2009

Bernanke: Stress tests to lead to improved bank supervision – May. 7, 2009 .

This is kind of crazy.  The results of the stress tests of banks to determine exactly how much more bailout money each needs came out, as far as I could understand, today, May 7.  Lots of news about the results were posted yesterday, May 6, with fairly consistent estimates (with Bank of America coming in a few billion less than expected (apparently a few billion is good news?), and Wells Fargo and Citi the other two that would need money).

Today, the day on which the results are actually posted, I can’t find any articles other than this one (at first glance, on my google reader lists), that actually talk about them.  And this is Bernanke’s response, not the actual results.