Economic Data

So today is the dreaded "Cyber Monday." Apparently online retailers realize that employees will take advantage of on-the clock work hours on Monday to do some of their Christmas shopping. This is apparently a huge event... I would say that American's probably spend $32 trillion per hour on Cyber Monday.

But one might ask where the BBFiles got their data from because $32 trillion is almost 3 years of our annual income. Well the BBFiles just did what some economists do which is to make it up! We have no evidence for this dollar amount, but on the front page of MSN today there was an article bragging about how online sales have this Cyber Monday have increased by 20% over last year. What? First of all the day is not even over. The article has been posted since 3:30 PM MST. Also, large retail numbers like this are usually posted once a quarter then adjusted two quarters later. This is because it is extremely difficult to measure numbers like this, so we wonder how the author of the mentioned article could possible even have a rounded out guess, especially one as precise as 20%, before Cyber Monday is even over. People like this give economics a bad name.

A New Era?

One of the differences between America and the rest of the world is our financial system. Whenever a large firm, small or large country or any individual wants a loan, an American financial institution is usually in on the deal in some way or another. These same institutions have fostered unprecedented international growth that has resulted in hundreds of million of people finding their way out of poverty.

Yet a few years of uncomfortable economic conditions automatically gets elected officials (supported by their constiutuents) into a frenzy. They begin calling for drastic changes based upon what has happened over the last few years, instead of what has worked over the last fifty to sixty years! Obama, Frank and especially Dodd need to back off their reform proposals.

The Fed's Independance

Fourteen months ago the financial crisis paralyzed more than just the economy: it also paralyzed Congress. In a heroic act of stupidity, Congressmen embarked upon the usual he-said, she-said blame game refusing to take any action to help the economy. A single entity stepped into the vacuum that Congress left in its wake: the Federal Reserve. Congress did not know how to do with the crisis and almost made things worse by not passing the TARP legislation. The Federal Reserve acted efficiently and aggressively to right the tipping ship and has reaped solid results so far.

What kind of response do they get from the very Congressmen that were scared into a cave last September? Dodd, Frank and Obama have each proposed legislation that would strip the Federal Reserve of some of their power! Easily worse than the others is Dodds plan which seems to implicitly blame the entire crisis on the Federal Reserve. Dodd proposes taking away all of Fed's regulatory power, handing these powers over to an organization that is brand new and will look something like the SEC or FDIC. These organizations do not have the culture or history needed to properly regulate the financial system. In reality, all that needs to take place is an updating of the Fed's duties.

Free Markets: A Lesson From Dubai

As many of you have already heard, the Dubai government is in a tough financial situation. Dubai has spent a decade and hundreds of billions of dollars trying to become the financial hub of the middle east (like New York is the financial hub of America and London is of Europe). To do this, Dubai has gone massively into debt to entities like its neighbor Abu Dhabi (Abu Dhabi has one of the largest oil reserves in the world), banks, investment firms and bond dealers. Dubai has very little oil, but has used the sale of the oil it has and the debt the government has gone into to build such awesome investments like artificial islands shaped like pretty palm trees, hundreds of skyscrapers, thousands of luxury condos and five lane highways with no speed limits.

Now, the country is very close to defaulting on all of its loans. The country is in debt about $100 billion (not a lot for America, but a staggering amount for state about the size of Colorado). Unfortunetly, almost all of the development in the last ten years has been directed by the government. Because the government did not wait for demand to determine what and how to build things, they have artificial islands that no one goes to, five lane highways that have no cars on them, skyscrapers with 50% vacancy rates and an enormous housing bubble. Even if Dubai does not default on their loans (Abu Dhabi will probably figure out a way to bail them out in one way or another), who cares? Dubai is still stuck with expensive investments that are going no where. Governments can't create a financial sector, there are complex processes that go on in New York that have taken a hundred of years to build!

Countries need to learn that you can't jump to the result you want; at best governments can set up streamlining entities that assist private companies in their quest for competitiveness. When a company fails, another company jumps in and takes over where the other company left off, but fix the mistakes the previous company made! Let demand and price dictate investment, not a round table committee that has government pockets.

A Response to Krugman

While Krugman has won the Nobel Prize, James Hamilton is a personal friend of Ben Bernanke... who do you think should be listened to? Read this post and compare it to Krugman's posts and you can decide!

http://www.econbrowser.com/archives/2009/11/yes_the_future.html

BBFiles Gaining Popularity

Apparently the BBFiles is becoming more and more influential. What else could explain the recent increase in US debt debate over the last week or so? The BBFiles has been saying that there is no threat of a total default by the USA for months. Paul Krugman must have tuned into the BBFiles, here is what he has to say:

http://krugman.blogs.nytimes.com/

The Housing Slump

As one of Bernanke's good friends points out today, the housing slump was not as geographically symmetrical as people probably think. James Hamilton's blog reads here: http://www.econbrowser.com/archives/2009/11/factors_in_loca.html

Bernanke's Play

Chairman Bernanke has been criticized for using policies that are sure to induce high inflation rates. However, as this article alludes to, Bernanke has been using monetary policy to right a tipping ship and has done so skillfully. As time progresses the genius of Bernanke reveals itself more and more.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ag8UzTSPtALE&pos=4

The Future of America's Banks

In 1998 the largest American bank was only the 25th largest bank in the world. In 1999, the Glass-Steagel Act was abolished which effectively reduced the legal constraints that had been implemented against large banks during the Great Depression. Since GS was abolished, commercial and investment banks have been allowed to merge together into super-banks. Bear Stearns, Goldman Sachs, Morgan Stanley, and Washington Mutual are good examples of this class of super-banks. These super-banks have been (probably rightfully so) for the current financial crisis. When these banks failed, they were classified as "Too Big To Fail" (TBTF) and were not allowed to file for bankruptcy. In reality, their size was not as important as how interconnected they were to other institutions. If one institution failed, the whole house could come barreling down. Lehman Brothers is the classic example of why a TBTF insititution should not be allowed to fail.

The TBTF policy has been criticized since the recession began. Therefore, policymakers have begun making policy change recommendations. These have included going back to the Glass-Steagel days, breaking up all banks that are 'large', or doing nothing at all. The last several weeks have revealed which direction policymakers are probably heading. First, there will probably be constraints against large banks. Regulators could charge very high insurance fees for the largest banks that could make it so no bank could become large. Or, banks that exceed a certain size may undergo excessive amounts of regulation and monitoring. These calls against large banks have been made primarily in Congress and are gaining popularity. There is a chance that America will not have a large bank for an entire generation.

There is another train of thought that is a little more market friendly. Thomas Hoenig of the KC Federal Reserve recommends that a regulator be given the authority to step in and takeover large failing financial institutions. The instiution's management would be fired and the stakeholders wiped out, but the rest of the institution would be held in tact. This would give the management team the incentive to take limited risk, but also the incentive to maximize profit and revenue. The only constraint would be the insurance the large firms would have to pay for siezures, and this would probably welcomed by the financial system because each firm would have more confidence in the other firms they are interacting with! Hoenigs plan most closely resembles Barney Frank's proposed bill.

Economics and Politics

There are three important bills currently going through Congress that have the potential to change America's economic landscape. The first and most dangerous bill is Ron Paul's attempt to insert Congress into monetary decisions! In its current state the Federal Reserve can change the money supply at a moments notice with no political intervention. Paul proposes creating a new Congressional committee that will have the ability to examine all monetary decisions, effectively placing Congress on the FOMC's doorstep. This is a very dangerous idea. Monetary theory is very complex and Congressmen do not have the expertise to improve upon the current process. For example, in front of the Esteemed Chairman himself Paul said that the definition of inflation was an increase in the money supply!! Furthermore, Congressmen have different incentives than members of the Federal Reserve. If you know you have to be re-elected in two years or six years you will change the money supply with every ebb and flow of the market! Paul is being moved to the top of the Bernanke Arch-Nemesis List for this stupid legislation.

The next two bills are related. Barney Frank presented a bill to the House and Chris Dodd a bill to the Senate that will change how the Federal Reserve supervises banks. These are competing bills and the final legislation will be somewhere in between each of them. The BBFiles supports the Frank bill. Both bills strips the Federal Reserve of its Consumer Protection agency and creates a new CPA that will probably be led by Elizabeth Warren. Next, and more importantly, the Frank bill gives the Federal Reserve more tools to supervise the financial system. It does this by allowing the Federal Reserve Board of Governors to take-over ANY systemically important institution EVEN IF IT IS NOT NECESSARILY A BANK! (Think AIG and FannieMae). This is obviously controversial and there should be efficient constraints that restrict the Fed from becoming uber-aggressive. But, the current system is wholly inefficient and should be changed ASAP. The takeover process would be almost identical to what the FDIC does when it takes over a bank! This process will be funded by large financial institutions that will have to pay a fee as they get larger. There are many repercussions that could occur from this bill but they will not be discussed here.

The Dodd plan is quite drastic. It strips the Federal Reserve of all bank supervision authority and creates a new agency that will be in charge of regulating all financial institutions. The BBFiles is not inheritently against this, but there are several reasons we believe this is not a good plan. First, it assumes that the new agency will be able to supervise the financial system. Agencies such as the SEC, FDIC, CFTC and FHA were not more or less effective than the Federal Reserve. Next, it is important to understand that there are several things that make the Federal Reserve as efficient as it is, and the biggest factor is the relationship it has maintained with every important financial system in the world! Bernanke can go to any European regulator, Chinese bank, South American bank or Wall St CEO and gain an audience that will seriously consider what he has to say. There is no way an agency that is politically created and ran could do this! The Federal Reserve agrees that regulation reform is needed, but it has said this for years. Dodd's plan is too drastic and should be withdrawn from the Senate.

The Apex of the Vortex

The BBFiles often brags about how awesome economics is. We believe that economics is the apex of the vortex of intellectual thought because it incorporates everything from math to business to science, politics, marketing, sociology, philosophy, history, accounting, relationships, experimentation, statistics, weather, development, investment, vacation, religion and many other things that are important and interesting. To be an economist is to be a true Renaissance man! Here is another example of how useful economics can be outside of the money world:

http://www.bloomberg.com/apps/news?pid=20601079&sid=a7jg9R368WdQ

Trade Gap Numbers

The latest trade gaps numbers were released today. The trade gap widened by $39 billion. This was more than expected but probably reflected rising crude oil prices and imported vehicles from Cash for Clunkers. Because we are importing $39 billion more, money is switched from US dollars into the foriegn currency (kinda) and the dollar should depreciate some. The current drop in the dollar probably does not have much to do with the trade gap though. When compared to the carry trade, which is counted in hundreds of billions, the current trade gap numbers seem trivial! Keep in mind that the dollar is still higher than the when the recession began.

Money Flows

In order, the three largest purchasers of US debt (US Tbonds) are Japan, China, and American financial institutions. Each purchaser has a different reason for buying the bonds, but the fact remains that there is high demand for American debt and therefore the interest rates will stay low for some time.

However, as Kenneth Rogoff (former head of the IMF and current Harvard professor) points out, America's ability to show these entities that it will be willing to pay back the debt is very important. As the BBFiles has pointed out several times, America can afford to be many times more in debt than it is right now. The question is how efficient is the new debt that we are accruing?

When Bush went into debt $500 Billion a year unemployment plummeted to 4.5%! Investment and growth was high and the interest rates we paid on these loans were very low. Obama has a different problem though. With Bush's tax cuts about to expire in the middle of next year, Obama almost necessarily has to let them expire just to show the rest of the world that we are willing (they know we are able) to pay back the debt with out having the value of their investment plummet!!

So, while Conservatives are criticizing Obama next year for increasing government control, loyal BBFile readers will know that it has more to do with America's debt confidence than it does politics!

On the Minimum Wage

One of the fantastic jobs that economists are blessed with is analyzing the unintended consequences that could occur if a certain policy is implemented. There are many consequences of implementing a minimum wage. This blog discusses one consequence that doesn't seem to be discussed very often; probably because it is not politically motivated.

While most economists focus on the increase in unemployment when minimum wages increase, this blog focuses on a potential positive consequence of minimum wages. Assume that you are a company that would like to hire an unskilled worker for $5 per hour. Unfortunetly, the minimum wage is $8 per hour. According to many Libertarian economists, the employer is losing $3 per hour, unemployment rises, and the employer can transfer some of the costs of hiring the employee onto the employee (uniform costs, working holidays, using the increased job competitiveness to make him work harder). However, the BBFiles points out that reality is quite different than theories and charts. In reality, no employer would pay a $5/hour employee $8/hour. The employer will have the natural incentive of training the employee to provide $8/hour of service!

Therefore, minimum wages could provide companies an incentive to train employees, which gives the untrained worker the ability to be worth more as an employee than if there was no unemployment!!!