21 May 2011

The difference between BSE and DSGE

Q. What is the difference between BSE1 and DSGE2?

A. Both are diseases of the brain. The first affects cattle, the second affects economists.

1. Bovine Spongiform Encephalopathy
2. Dynamic Stochastic General Equilibrium

Category: Economics

20 May 2011

Larry Summers is surprised

From 2001 to 2006 the Fed kept the Federal Funds Rate low and fueled a speculative housing bubble, raising the rate too late and then too slowly. After the inevitable crash the Fed again lowered the rate and, for an extended period, has kept it close to zero, where it still is. Now Larry Summers is surprised that the low interest rate regime has given rise to more bubbles. His surprise surprises me. I wonder what he expected.

The following is from a Bloomberg report on Summers's statements at a conference in Shanghai.

Former U.S. Treasury Secretary Lawrence Summers said there's a rising concern that technology stocks are in a bubble as investors shake off their apprehension from the 2007-2009 American mortgage and credit collapse.

"Who could have imagined that the concern with respect to any American financial asset, just two years after the crisis, would be a bubble?" Summers, who is now a professor at Harvard University, said at a conference today in Shanghai. "Yet that concern is increasingly raised with respect to American technology, with respect to certain other American assets. That is a reflection of the resumption of confidence."

"Today there are very substantial risks, to be sure, but the economy is growing, unemployment is falling and financial conditions are normalized," said Summers, who was director of the White House National Economic Council in the Obama administration from 2009 to 2010.

Summers said the "central irony" of a financial crisis is that it's caused by too much confidence, borrowing and lending, and is resolved by more confidence, borrowing and spending. He was Treasury chief from 1999 to 2001 under President Bill Clinton, a term that coincided with the collapse of technology shares. The Nasdaq Composite Index (CCMP) slid 39 percent in 2000.

The trouble when you are rushing from conference to conference is that you have no time to think. Else, Summers might have pondered over Walter Bagehot's advice to lenders of last resort: "Lend freely at a high rate, on good collateral."

Why might he have said "at a high rate"?

Category: Economics

14 May 2011

John Maynard Keynes and the dog that did not bark

From Franklin National Bank in 1974 to Citigroup, AIG, Morgan Stanley and others in 2008, the rescue of banks and financial institutions has played a key role in preventing recessions from developing into full-blown Great Depressions.

Curiously, however, nowhere in The General Theory does John Maynard Keynes, analyst par excellence of recessions, even mention the importance of bank rescues. It is not that the "father of macro-economics" was so busy expounding questions of theory that he did not have time for mere practical matters. He did attempt to analyse the cause of the Great Depression. And this is what he had to say:

Read the whole article

Category: Economics

11 May 2011

How much longer until a crash?

My graph for Corrected Money Supply shows that it went up in March 2011 after a small rise in February and a dip in January.

Mc for March 2011 stands at $ 1236.7 billion, not far below the peak of $ 1268.7 billion in December 2005.

The GDP (seasonally adjusted annual rate) on 1 January 2006 was $ 13,183.5 billion and that on 1 January 2011 was $ 15,006.4 billion. So perhaps we have a little more to go until a crash.

Category: Economics

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