Economics – Page 3 – Garrick van Buren

What the Hell Happened?

I’m confident the past couple years will be discussed and dissected by economics students for decades to come.

Here’s just two graphs visualizing the monetary movement that have made my jaw drop:

In both of them, there’s little to no movement for 5 years. Then…WHAM!

It doesn’t really matter what these graphs measuring – the shock is obvious.

jth’s Fed’s borrowing from May 2008:

Kedrosky’s 30-day commerical paper rates:

If this continues to fall, returning to 2006 rates in the next quarter or so, there will be as much discussion on the quickness of the recovery as there will be on the suddenness of shock itself.

Introducing the Minnesota Pineapple Economic Indicator

It’s March in Minneapolis.

The thermometer just broke 40°F and there’s still inches of snow cover. Winter sustenance in the upper Midwest traditionally comes in two forms: canned or hotdish. Not the most uplifting and exciting dishes to get families through long, grueling winters, but economical.

Citrus fruits were a rarity, rare enough for oranges to be included in the treat bags given out after the elementary school Christmas program.

And according to the news media – we’re working through one of the hardest, coldest, financial winters in a nearly a century.

Yet, right now, at the Cub Foods up the street kiwi fruits are 4 for $1, mangos are 10 for $10, and pineapples are 2 for $5.

Admittedly, this isn’t as scientific as the Big Mac Index, but it’s quite remarkable, that a selection of tropical fruit can be grown, transported from South America (or Southeast Asia) to the middle of North America, in the middle of March, in the middle of a global economic winter, and sold for one or two dollars.

For my money it seems a more substantial – and more delicious – economic indicator is in the produce aisle.

16 April 2013 – Related:

“…bananas were first available commercially to American consumers in 1876…and sold for ten cents. In today’s dollars, that would be the equivalent of $3.00 per banana, or 1,150% more expensive than the 24 cents I paid at the local Safeway a few days ago!” – Mark J. Perry

“My Baby’s Only Known Recession”

Mark Zandi, author of the Financial Shock, the best book on how we got into this economic mess is now covering the proposals to get us out.

Quick context setting:

“Every dollar decline in household net worth reduces consumer spending by 5 cents over the next two years. If sustained, the wealth lost over the past year could thus cut $300 billion from consumer spending in 2009 and a like amount in 2010.” – Mark Zandi [pdf]

Ouch.

According to the NBER, I’ve lived through 4 recessions ¹. 54 months (+ 13 and counting) of my life spent from peak-to-trough.

Seems like a fortunate amount of time.

Also fortunate, Zandi continues,

“Assuming gas remains below $2 per gallon through the coming year, Americans will save well more than $100 billion in 2009 compared with fuel costs in 2008.”

“Boosting food stamp payments by $1 increases GDP by $1.73…”

Huh.

Overall, Zandi is for the House stimulus plan – if only to stop the bleeding (something he argues could/should have been done years ago).

“The House stimulus plan would not forestall a sizable decline of 2.3% in real GDP in 2009, but it would ensure that real GDP returns to its previous peak by the end of 2010”

Overall if he’s in, I’m in.

The problem I have is the principle of the thing.

For individuals and businesses that have behaved fiscally responsibly over the long run, any stimulus package unnecessary. In the exact same way it’s a life saver to those that have behave irresponsibly. This is why Detroit’s auto makers want to get in on the TARP funds – why Circuit City² didn’t lobby congress the same way, I don’t know. 😉

Additionally, what if the stimulus works?

Moral Hazard.

Doesn’t saying the overall economy requires government intervention to recover set a bad precedent?

Primarily because Congress is structured to move much, much more slowing than the economy overall. Secondarily, because – unlike healthcare – there are so few comparable economic situations.

Zandi reminds us:

“A long history of public policy mistakes has contributed to the financial and economic crisis.”

Same with the auto makers and Circuit City. Their problems were not sudden or surprising. It just looks so, because declines (like ascents) are cumulative.

May you live in interesting times.

1. My daughter’s only known recession. And based on the business cycles dates, I too was a recession baby. Also, I have a very distinct memory of PBS’s Nightly Business Report playing in my house around and following the 1987 crash.

2. Perhaps you also remember the presently liquidating Circuit City was profiled in the business management book “Good to Great”. Peter Galuszka does.

A popular Democrat becomes President during one of the worst economic downturns

I’m reading The Forgotten Man: A New History of the Great Depression. While parallels with pre-1950s America are always tenuious, here’s a synopsis

A popular Democrat becomes President during one of the worst economic downturns in our nation’s history. He drives through some of the most dramatic legislation ever seen and creating departments compensating farmers to not bring food to market. US economy sputters throughout his term, waiting until the end of a yet to be fought war to recover.

Let’s hope tomorrows inauguration marks the beginning of America 3.0, not New Deal 2.0.

I Think We Got All 4

Remember, a few months ago when crude oil was at it’s highest (Unleaded hit >$4 in my neighborhood) and natural gas was spiking as well?

Considering both are falling (Unleaded is currently $1.85 in my neighborhood), both are sold in US Dollars on the world market, and the US Dollar is trading at it’s highest value in 8 months, I’ve been wondering what’s been so dramatically changing the value of $1 over the course of the year.

While I’m still looking for an answer, I thought this 2 year old blog post was quite prescient.

“…let’s hope Democrats can take the White House in 2008 through good politics and good policy rather than from a crash on Wall Street and a stagnating economy.” – Mark Thoma – University of Oregon, Dept of Econ – on Monday, December 4, 2006

This is the great thing about the proliferation of blogging and good search engines. Separating relevance from timeliness.

Thoma quotes a Robert Reich posts that describes how Hank Paulson’s been playing chicken with the Chinese (via interest rates) for at least 2 years. Smells close, but not quite it.

Financial Shock: The Bad Decisions that Got Us Here

Financial Shock A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis is an amazing read.

Amazing for 2 reasons:

It was published in early 2008 and
is covering – in-depth – the issues the news media is just now picking up on – e.g. the Fed nearly bailed out Bears Stearns a year ago – in 2007 – when 2 of their big hedge funds collapsed.¹

Our financial institutions, like our economy, are complex and global in reach. Zandi does a fantastic job of navigating that complexity and arguing that it wasn’t a single decision, or policy change, that caused the collapse, it was many Really Bad Decisions.

I’ve been dog-ear-ing the pages containing jaw-droppingly bad decisions, easily a third of page have their corners down.

Here’s just 3:

CDOs
ARM
Negative Amortized Mortgages

1. Stearn’s said, ‘No thanks. We’ll handle it internally.’ Add this to the Bad Ideas List.

McCain & Obama Tax Plans: Small Change

Viveka Weiley redrew Washington Post’s chart of Obama’s and McCain’s respective tax plans.

First off, a caveat: Basing a vote on potential personal financial changes is as one-sided as basing a vote on gender, skin pigment, or hair color. It’s one factor and one that I hope to argue it is a wash to vast majority of Americans. For both plans call for significant cuts for the vast majority of Americans – households making less than $603k/yr (99% of Americans). For those remaining 1%, taxes will either go up or down. I’m part of the 99%, and I suspect you are as well¹.

Income (% of Taxpayers)	Plan Difference in $	Plan Difference as % of Income	Favors
< $603k (10)	7,869	1.3	McCain
< $227k (10)	1,591	0.7	McCain
< $161k (10)	410	0.25	McCain
< $111k (10)	281	0.25	Obama
< $ 66k (20)	723	1.1	Obama
< $ 38k (20)	779	2.0	Obama
< $ 19k (20)	548	2.9	Obama

While much attention has been made to how different these plans are at the poles, it surprises me how close the two plans are for the middle 60% of tax payers (<2% delta).

I’m assuming both plans are drafts and would have to pass Congress to be enacted ². If so, then I assume getting them passed through Congress would change the plans – perhaps even making them more similar.

Does this betray how similar their policies are/will be for the majority of Americans?

1. If you’re not, can I has monie? kthxbye.
2. Confirming we shouldn’t be investing too much in the candidates plans:

“The fact is that presidents have no power to raise or lower taxes. They can propose tax measures or veto them but Congress has the ultimate power to raise or lower taxes” – Walter E. Williams

I Bet It’s Self-Fulfilling

Back in May, Barry Ritholtz bet James Pethokoukis that we are in a recession.

From my view and the numbers I’ve seen, the downturn is concentrated in the housing sector. A good thing. Unfortunately, housing is a huge percentage of our overall GDP and it completely collapsed.

Reminds me of early 2001, when the tech sector collapsed and slowed down the economy. Other sectors (even specific areas within the tech sector) were still growing.

We’re fortunate that our economy is so diversified that when one area collapses, other sectors can soften the blow.

Taking me back to the bet between Ritholtz and Pethokoukis. I find the bet quite amusing for two reasons;

How specific the bounds are in defining “winning”. Because anything less specific is the equivalent to “I know it when I see it.”
That the amount of money spent by the “loser”. It could easily approach, if not surpass, the ‘economic stimulus’ tax rebates. An amount designed to get us out of any recession we might be in.

RE: Starbucks Might Be Helping, Not Hurting, Independent Coffee Shops

“‘Anyone who complains about having a Starbucks put in next to you is crazy. You want to welcome the manager, give them flowers. It should be the best news that any local coffeehouse ever had.'” – Martin Diedrich, coffeehouse owner in Orange County, CA.

Competition increases demand and you can succeed by outsourcing your marketing to your competition?

What a wonderful world we live in.

Drive Vague

There’s something appealing about removing complexity – and the costs to maintain that complexity – to more effectively improve the behavior of a complex system.

“The assumption is that drivers are accustomed to owning the road and rarely pay attention to speed limits or caution signs anyway. Removing traffic lights and erasing lane markers, the thinking goes, will cause drivers to get nervous and slow down.”

“‘Generally speaking, what we want is for people to be confused,’ said Willi Ladner, a deputy mayor in Bohmte. ‘When they’re confused, they’ll be more alert and drive more carefully.'” – Craig Whitlock, WashingtonPost.com