The Economic Way of Thinking

My Explanation Of The Bubble

I have a piece forthcoming in the Review of Austrian Economics, available at their "Online First" link.  I challenge Hyman Minsky's theory of crises, and try to show how Austrian business cycle theory captures the notion of financial instability and macroeconomic breakdown.

You need to have a personal or institutional subscription (NMU does) to access my paper.

Castles in the Sand

Here's a before and after picture of Dubai:

That picture is from a set of "12 unrecognizable before and after views of cities" put out by the site Oobject (HT: Freakonomics blog).

Here's a chart of the Dubai Financial Market Index for 2009:

 

Also, give this Bloomberg link a try.  Use the 3 month and 5 year options to get a better sense of the Dubai crisis. 

Finally, here's the Economist magazine discussing Dubai and markets where new bubbles may be appearing. 

The House That Uncle Sam Built

Steve Horwitz and Pete Boettke have a new and highly readable pamphlet on the causes of the housing bubble and our Great Recession, published by the Foundation for Economic Education.  Highly recommended.

Into the Belly of the Beast

 

This morning I will be joining four Mercer University Free Marketeers for a conference at the Atlanta Fed.  The last time I went inside of a Federal Reserve bank, I was their age and went on a tour of the Chicago Fed and the Chicago Board of Trade with NMU's Economics Student Association. 

The best part of my previous trip to the Fed was that we pulled up to the Fed's doors in a limo hearse.  I kid you not.  

Check this post again later this weekend for pictures.  (I doubt there'll be any hearses this time around, but you never know...).

Is The Fed Independent?

No.  See Don Boudreaux's Open Letter to Ben Bernanke.

Laws And Economics

It turns out Dave's a great dubber.  Many years ago, he wrote an essay titled "Praxeology" for the Elgar Companion to Austrian Economics.  In the essay he introduced readers to something he called "the Caldwell Question," which I'm pretty sure is a term he created.  (The Caldwell Question, according to Dave, asks people interested in methodology to consider the following: "How does one choose between rival systems of thought that also claim to be deduced from absolutely true axioms?"). 

In a recent blog discussion, Dave attempts to create another new term, which he calls "the Horwitz Rule."  According to the comment section, The Horwitz Rule would "allow the Fed to adjust the money supply whenever money demand changes so as to maintain monetary equilibrium."

What do you all think of Horwitz's Rule vis-a-vis Friedman's Rule?   

One Year Ago Today

There have been a lot of "on this date" stories and television programs discussing different events related to the financial crisis from one year ago.  On this date one year ago, Pete Boettke and I published this op-ed in the Atlanta Journal Constitution.  Here's the New Yorker cartoon mentioned in the piece. 

I know I haven't wavered from what I said then, and it's clear from posts like this one that Pete hasn't either. 

What Caused The Great Depression?

Here's Art Laffer's answer in a WSJ op-ed from earlier this week.  The piece is quite good overall, and it encourages policymakers to exercise caution in the wake of our current crisis. 

Investment, Not Consumer Spending, Leads To Growth

That affects the bottom line of businesses relying on customers who could more easily get credit in better times. For example, retailer Target Corp., where about one-third of overall sales are made on credit cards, said tightening credit standards on its proprietary cards may have contributed as much as half a percentage point to its sales declines in the second quarter at stores open more than a year.

Nonrevolving credit, such as loans for autos, vacations and education, declined at an 11.7% annual rate. Economists expected a far smaller decline, given the increase in auto sales from the federal "cash for clunkers" program. The program, which ramped up in late July, gave consumers a government rebate if they traded in certain vehicles for more fuel-efficient models.

Tighter credit played a part in this realm, too, as 33% of banks in the Fed's loan officer survey reported tighter terms and conditions for approving consumer loans other than credit cards. None of the banks said they loosened credit standards.

Now wait a minute.  We want to see more consumer debt?  What about the billions upon billions of consumer defaults on their mortgages?  We are now concerned about a tightening of credit standards?  Sounds awful.  Read more of this morning's Wall Street Journal piece here.

The problem in this reasoning is clear.  It's the old Keynesian notion that "C," in the familiar C+I+G equation, can pick up the economy.  (Oh, and let's not forget, of course, the "G" element.)

Business investment drives the economy, not consumer spending.  Investment generates jobs, new jobs generate higher levels of income.  Higher income provides more opportunities for consumption spending and saving, which leads to further rounds of investment.

But let's not move too fast here.  If the new investment is spurred by artificially lower interest rates, it cannot be sustained. 

What do you think the government can do to move the economy back toward long run economic growth?

ADDENDUM:  Or, is it more saving that we need?

One Way to Keep the Dollar's Value High

At EWOT we worry about things like the declining purchasing power of the US dollar, and we even entertain radical approaches to end the debasement of currency. 

That must be part of the reason why I got a good laugh the other night when Bill Maher said in response to this news story that, "If it weren't for cocaine on dollar bills, the American dollar wouldn't have any value at all." 

How We Got Into This Mess

Here's a nice lecture by our friend Steve Horwitz on the causes of the current recession.

Place Your Bets

A couple weeks ago, the possibility of Larry Summers becoming the next Fed chairman came up in a post.  In the comments, someone asked if there's a betting market on this possibility.  Sure enough, Intrade has one on Bernanke being reappointed Fed chairman; you can keep an eye on it here.

Low Stress Banking at BB&T

News that BB&T Corporation is the only major financial institution in North Carolina not to need extra capital comes as no big surprise to me.  Here's the story about their "stress test" results.   

Here's BB&T's chairman of the board, John Allison, explaining the financial crisis.  Here's Mr. Allison's letter to Congress from back in September.

Detroit Cheers Alternative Money

David Jenks, a loyal EWOT reader, sent me this link:

http://www.huffingtonpost.com/2009/04/06/communities-print-own-cur_n_183497.html

He raises the question of just how this currency will be monitored.  For example, how will counterfeiters be discouraged?  Also, what will constrain the potential incentive of the official issuers to resist temptation to inflate the money supply?

What are your answers?

The Fed Doesn't Have To Print Money To Increase The Money Supply

It's a metaphor.  The Fed typically increases the nation's money supply through open market operations.  That is, by buying billions of dollars worth of Treasury Bonds from brokers outside the Fed itself.  The Fed gets pieces of paper called bonds (bonds are not money, but debt contracts) and banks get credits for pieces of paper called Federal Reserve Notes (fiat money).  The Fed doesn't have to print money at all to increase the money supply.

The fractional reserve system does the rest.

Here's a nice article that helps clear things up a bit.