Friday, October 31, 2008
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.
Thursday, October 30, 2008
Wednesday, October 29, 2008
The St. Louis Fed has a nice article in the Regional Economist here. Finally, how much confidence do you put into anecdotal data?
Tuesday, October 28, 2008
Monday, October 27, 2008
Sunday, October 26, 2008
Saturday, October 25, 2008
Thursday, October 23, 2008
Tuesday, October 21, 2008
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.
Monday, October 20, 2008
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.)
Sunday, October 19, 2008
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.
Saturday, October 18, 2008
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 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.
Friday, October 17, 2008
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.
Wednesday, October 15, 2008
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.
Tuesday, October 14, 2008
Monday, October 13, 2008
Sunday, October 12, 2008
Saturday, October 11, 2008
Friday, October 10, 2008
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.
Thursday, October 09, 2008
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.
Tuesday, October 07, 2008
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.
Monday, October 06, 2008
Sunday, October 05, 2008
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.
Saturday, October 04, 2008
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.
Thursday, October 02, 2008
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.
Wednesday, October 01, 2008
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
told Forbes.com Tuesday
. "We just wanted to choose a really large number."
Posted by David Bernstein:
Quote of the Year: