Banking

This toon is from Karlwimer at toonpool.com. In his words, "There's a solution for the US (and global) banking crisis, but it's pretty clear no one's figured it out yet. " In Muscatine, 30-year mortgages are rising to just over 7% even after the FED cut its Fed Funds Rate.

Short Selling

Click here.

Robert Schiller on Subprime

Guru economist Robert Schiller has a way of predicting future economic disasters. Here's his latest thoughts.

Income Inequality--Tom Garrett

Here's an audio of an interview with St. Louis Fed economist Tom Garrett. What are social costs of inequality such as health costs and low educational achievement? Is income really distributed or is income earned by the a factor of production?

Consumer Confidence

The Confidence Board released its survey of 5,000 households. The results are here. Consumers represent about 67% of GDP and a decrease in confidence shows that consumers may have formed pessimistic expectations. A drop in consumer spending will shift aggregate demand to the left, decrease income, and increase unemployment. In Muscatine, sudden layoffs at HNI and GPC are signs that the economy is slumping. I think the problems with credit that hit the coastal states first are finding their way inland.

The St. Louis Fed has a nice article in the Regional Economist here. Finally, how much confidence do you put into anecdotal data?

Disappearance of Poverty

The great Rodrigo inked this toon. From the top quintile, the rich are insulated from the poor.

The Financial Crisis by Kevin Nguyen

Probably the best description of how mortgage backed securities ruined the economy is here. The genius is in the simplicity.

Cool Graphs

If you like graphs, many mikeroeconomic concepts are animated here. I especially like the Cobb-Douglas Utility Function. I recently downloaded a trial version of DPlot for Excel to make eye-popping graphs for my classes. I believe that time constraints in teaching are presenting teachers with the opportunity to find better presentation techniques and reinvent how they teach. I'm looking for software that will help students see the immediate relevance of economics. Any help would be appreciated.

Moral Hazard

The Paul Solman video on Moral Hazard is excellent. Look here.

Sinking Economy by Rodrigo

Another great cartoon by Rodrigo. I'm worried about deflation. Can the economy go even lower?

Savings, Debt, and Comedy

A brilliant insight into savings is on this video. Higher interest rates show uncredit worthy applicants. Americans are saving more. Thanks to Jason Welker for this video.

FED Pays Interest On Reserves

A new monetary policy tool is the FED is now paying interest on reserves. Doesn't encourage banks to hold excess reserves?

Investment in Iowa for new capital goods is down according to Aaron Putze, Executive Director of the Coalition to Support Iowa's Farmers. Why might a business choose to invest? When the return is greater than the interest rate. Low interest rates create more profitable investments yet Iowans aren't investing in new agricultural capital. This must mean that farmers are pessimistic about future returns. The farmers I know are shrewd.

Liquidity

This cartoon shows that the were are drowning in liquidity. Cartoon is courtesy of John Bent at www.bentillustration.com There's more at toonpool.com for the cartoon lover.

Wedding Picture

My class congratulating me on my marriage to Kathy...I finally did something right...

Consumption

This graph is intended to show that US citizens are spending more than they make and that Americans over consume. But is that the whole picture? Say that Juan goes to the bank to save his disposable income and finds that interest rates on a passbook is .058. It's hardly worth it for him to save that money especially when inflation is 5.6%. If Juan saves h is money he actually is worse off so he spends it. If he saved his money, he would have less buying power in the future than he would have right now. Americans are just behaving rationally. (Click to enlarge. Graph is from the New York Fed.)

Grinch

The Fed Funds rate stands at 1.5% yet people are holding on to their money and not spending. The Grinch will steal Christmas as consumers and business have lost confidence in the FED's ability to movie the LM curve to generate investment in new homes, capital, or inventory.

Red Bull

The bulls will find energy this week and recapture much of the losses from selling.

Hans Rosling on TED

Brilliant.

Interview--Dr. Benjamin Allen

To hear Dr. Allen's comments click here. I asked Dr. Allen to comment on the relevance of international economics as a high school class. You can also hear a podcast of this interview here and selecting Episode 5.

Bull Market?

The stock market is down as the bears have chased the bulls off the street. The Motley Fool had an interesting question in their investment workbook that I never could answer. The question was, "How do you value a company?" Do you value a company on technicals or fundamentals? Now I am left wondering if any asset has a value other than my confidence in its intrinsic value.

Richard McKenzie on the Credit Crisis

Richard is the author of "Why Popcorn Costs So Much At The Theater" and popular YouTube contributor. My take is that Dr. McKenzie supports a free-market solution and that government intervention will be worse than the crisis. This is what I call the Clockwork Orange Effect. In Stanley Kubrick's movie, the cure had worse consequences than the crime. Dr. McKenzie presents clearly both sides of the argument for government intervention and let's you decide what you think is right. His commentary is poignant.

What's a Credit Default Swap?

A no nonsense explaination is given on Marginal Thoughts, a blog written by Wade Rousse and Cindy Ivanac-Lillig at the Federal Reserve Bank of Chicago.

TED Spread

The TED Spread is a measure of credit risk for interbank lending. It is calculated by taking the difference between 3-month US treasuries and 3-month LIBOR rate--the rate banks typically lend each other. A higher difference indicates that banks perceive each other as credit risks.

On October 16, 2008, the spread was 4.07%, according to Bloomberg.com. The spread has grown from 1.21% on September 11, 2008, to 4.07% yesterday indicating a higher perceived risk. Is it a stretch to say that banks would rather hold on to excess reserves than fund investment? I think the TED Spread is growing evidence that monetary policy is ineffective as the economy is trapped in liquidity. The October 16, 2008, Investors Business Daily reported interest on 30-day T-bills at .058--almost zero. The real rate of return on these bills are negative as inflation, as published in the Economist, was 5.6%. Why would anyone including the government, want to loan money and be repaid with cheaper dollars?

It will be hard to get the economy going again with monetary policy as I believe the US is in a liquidity trap. Time will tell. Meanwhile, the economy will self-correct.

The Bank Always Wins

This cartoon used with permission from Quel at toonpool.com, shows how the banks were able to take money and and have the government bail them out. The banks who made bad loans were able to profit twice as a result. They are sticking their tongue at us.

Domino Effect

The crisis began when the housing prices fell. Now, lenders are scared to lend. There are massive numbers of foreclosures and sheriff's sales. This cartoon is from Nizar and you can view his cartoons at toonpool.com.

School Board Meeting

Dr. Williams presents me with an award. I am humbled.

Free Fall

Actions by the FED should help the markets so why hasn't the parachute opened? The markets and consumers lack confidence. Using the FED funds to add liquidity and boost reserves is like "pushing on a string."

Ingstad on Liquidity in the Market

Scott Ingstad, President and CEO of First National Bank of Muscatine, discusses the FED Funds rate and interbank loans in Iowa. Here's the link, but you'll have to open it then play.

Heat

The value of homes might be less than the value of using the home for heating. A friend tells me that a $320,000 home in California has been on the market selling at $65,000. Watch as the market fairly values these homes. When I was painting, we saw homes selling for $400K that were not worth a 100K.

Liquidity Trap

You will see the money supply expand, but investment won't follow. It's like pushing a string.

Yeild Curve

This link animates the yeild curve from 2000 to now. Does the yeild curve now resemble the yeild curve in 2001?

Comedy Central on the Bailout

This sketch mocks the self-correcting mechanism of the free markets, explains the rationale for the bailout plan, and makes wonder, "What was we thinking." A salute goes to Jason Welker for the link.

FED Actions

The FED increased the money supply recently and markets responded by tanking. In the long-run, we'll see a price increase but no GDP expansion as I believe in monetary neutrality. This winter will see North Americans burning money to stay warm. This cartoon was found at nicholsoncartoon.com.au. You can find cartoons, animations, and more at his website by clicking here.

MV=PQ

To induce banks to increase their loans, the FED recently increased the money supply. This effectively lowered the nominal interest rate and encouraged the interbank loans known as the FED Funds Rate. Increasing the money supply will proportionally increase prices. The average consumer will find prices raising faster than wages. I love this cartoon, but typically, food in income inelastic meaning that income increases as a percentage greater than the demand. Food should remain affordable. This toon courtesy of the great Rodrigo at toonpool.com.

Housing Mess

This cartoon was posted by Rodrigo at toonpool.com. When you buy a home you are chained to it.

Belly Flop

World markets took a dive today as interest rates eased. Lenders are reluctant to make loans to those non-credit worthy or to meet short-term payroll obligations. People see the low interest rates and prefer to hold cash as the opportunity cost is low. I see the economy diving into a liquidity trap.

Not Out of the Woods Yet

Iowa is a great place to live. Seems like we are not hit as hard by economic cycles or the credit crisis. The Christian Science Monitor has a cool map here. Iowa might not have opera houses or a pro football team, but we seem to be insulated against major economic downturns. Our agricultural economy seems to keep on growing. The fall is inspiring too as we head into an indian summer.

Dow Jones Falls in Autumn

The DJIA broke a lot of hearts today. Read about it here.

Podcast

Here's a podcast of me discussing the possibility of a depression. Thanks to Cathy Krammer at Muscatine High School for how to make a podcast in seconds. The website is Gabcast.com. Sign up is free and you instantly publish.

Bailout Recovery Plan

To help the credit markets, the government will spend $700 billion. The interest rate is an expression of how much future consumption one is willing to give up of future consumption. The market might be jumping for joy now, but the debt will eventually come due. More national debt is like a ceiling that constrains future expansion. To view the national debt, click here.

Potter Interview

Here's a podcast of the interview. You'll have to download, then play the podcast until I can figure out how to make this a button. Any comments are welcome.

Flad on KWPC--Voice of Muscatine

Flad on Economy
Written by Charles Potter

One of Muscatine High School's most successful and most popular teachers gives his views of the housing and financial crisis.

Congress has passed and President Bush has signed the seven hundred billion dollar government bailout of the financial industry. But a Muscatine audience heard a nationally known economist predict a little over a month ago that financial woes were on the horizon. Back on August 27th, Doctor Edmond Seifried said the housing market wasn't safe. Seifried is a Business and Economics Professor at Lafayette College in Easton, Pennsylvania. He also said that of the three hundred eastern banks he works with, 299 were in serious trouble.

One of the around 150 audience members that morning during Central State Bank's fourth annual Business Forum Breakfast at Geneva Country Club was Muscatine High School Business and Economics Teacher Mike Fladlien -- popularly known as "Flad." He says people who bought homes expecting values to continue increasing were caught when values fell lower than the amounts mortgaged -- and the resulting defaults left banks in a bad situation. Flad agrees Doctor Seifried hit the nail on the head when he said those eastern banks were in serious trouble.

Many point to the Fair Market Act as the culprit in the current housing and financial crisis. It encouraged lending institutions to make credit available for low income people to own their own homes. Flad remembers Doctor Seifried's assessment -- when the price of gas went up a dollar a gallon, many of those people who depend on their cars to commute to work and who were living paycheck to paycheck could no longer keep up with their house payments.

Some critics of the government bailout say other strategies should have been implemented in solving the financial crisis instead of throwing seven hundred billion dollars of taxpayer money at it. One strategy suggested by radio talk show host Dave Ramsey is suspending the capital gains tax to stimulate people who have money to invest in housing. Flad is intrigued with Ramsey's concept.

Flad says there's money to be made now for people who have the resources to buy stocks at low prices. But for people who shouldn't take on risk, he recommends being conservative.

Doctor Seifried also told his Muscatine audience there's a fifty-fifty chance of a recession. And he talked about the threat of deflation. Flad says if credit markets are tight, and if housing prices continue to fall, deflation could become a problem by making borrowed dollars more difficult to pay back. He says if that happens and interest rates become high, there will be more defaults, people will invest less, the gross national product will decline, and jobs will be lost.

Mike Fladlien is the runner up for this year's Iowa Teacher of the Year award.

Bear Trap

Many investors found themselves trapped with securities that they couldn't sell. Bond prices and interest rates are inversely related. So when selling pressure puts downward pressure on bond prices interest rates rise. On some of the mortgage backed securities, the interest rate was 30%.

Inflation favors the debtor. But when housing prices were falling, debtors had to pay the interest and the debt tax that comes from a loss of purchasing power. This caused mortgage defaults. The resulting credit crunch caught many in a illiquidity trap.

The Art of Possibility

Watch this and learn how to keep your audience on the edge of their seats.

The Mortgage Derivatives

How to package bad loans into a financial derivative is explained here.

The Long Johns on Subprime Market

Where did the $700 billion figure come from, a figure that Paulson
insisted on when members of Congress suggested that perhaps they could
authorize some of the money right away, and then provide more later?

"It's not based on any particular data point," a Treasury spokeswoman
[1]told Forbes.com Tuesday
. "We just wanted to choose a really large number."

Posted by David Bernstein:
Quote of the Year:
http://volokh.com/archives/archive_2008_09_28-2008_10_04.shtml#1222824781