Dollars and Jens

GDP

2012-01-28T11:01:00.001-05:00

The change in real private inventories added 1.94 percentage points to the fourth-quarter change in real GDP after subtracting 1.35 percentage points from the third-quarter change. Private businesses increased inventories $56.0 billion in the fourth quarter, following a decrease of $2.0 billion in the third quarter and an increase of $39.1 billion in the second.

The release.

	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10	III 10	IV 10	I 11	II 11	III 11	IV 11
Gross domestic product	-1.8	1.3	-3.7	-8.9	-6.7	-.7	1.7	3.8	3.9	3.8	2.5	2.3	.4	1.3	1.8	2.8
Services	.67	-.20	-.78	-.49	-1.07	-.76	-.04	.21	.47	1.18	.75	.61	.36	.87	.90	.10
Nondurable goods	-.53	.35	-.89	-.92	-.15	-.23	.31	.48	.75	.30	.47	.67	.25	.04	-.09	.27
Durable goods	-.84	-.23	-1.01	-2.12	.19	-.29	1.39	-.36	.70	.56	.63	1.20	.85	-.42	.42	1.07
Change in private inventories	-.66	-.14	-.73	-1.54	-2.66	-.58	.21	3.93	3.10	.79	.86	-1.79	.32	-.28	-1.35	1.94
Fixed investment	-1.36	-.80	-1.91	-4.05	-5.09	-2.26	.13	-.42	.15	2.12	.28	.88	.15	1.07	1.52	.41
Net exports of goods and services	.38	2.00	.79	-.12	2.44	2.21	-.59	.15	-.97	-1.94	-.68	1.37	-.34	.24	.43	-.11
Government spending	.58	.34	.85	.35	-.33	1.21	.28	-.18	-.26	.77	.20	-.58	-1.23	-.18	-.02	-.93

FOMC statement

2012-01-25T13:15:00.000-05:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~November~~ December suggests that the economy has been expanding moderately, notwithstanding some ~~apparent~~ slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment ~~appears to be increasing less rapidly~~ has slowed, and the housing sector remains depressed. Inflation has ~~moderated since earlier in the year~~ been subdued in recent months, and longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee ~~continues to expect a moderate pace of~~ expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that ~~inflation will settle,~~ over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate~~. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations~~.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee ~~decided today~~ expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
~~The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools~~ to promote a stronger economic recovery in a context of price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; ~~Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser~~ Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was ~~Charles L. Evans, who supported additional policy accommodation at this time~~ Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate.
Possibly moved phrases:
 to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through 

Income Inequality and Empirical Economics

2011-12-30T15:04:00.003-05:00

I found this podcast less interesting for the findings presented (recent increases in income inequality are overstated) than for the issues addressed.

In particular, attempting to measure purchasing power by looking at before-tax reported income and dividing by the CPI is far from perfect. They also discuss the fact that looking at all demographic subsamples of households could have rising incomes while overall household incomes go down if the poorer subsamples grow in size. Of course, the average incomes of the subsamples aren't necessarily more important numbers than the average income of the total population, depending on precisely what question you're getting at, but it's tempting and wrong to infer from the aggregate number that some of the subsamples must have the same sign. An issue that wasn't addressed in this podcast that I've seen raised elsewhere is that rich people and poor people buy different things; measuring real income for a subset of the population by using a basket of goods for the whole population (or a different population) has problems beyond the ones raised in the podcast.

More generally, empirical proxies usually correspond somewhat with the theoretical concepts they are meant to represent, but they almost never do so perfectly. In this case CPI is specifically designed to measure inflation, and it does, but imperfectly. It irks me when a paper says, "we're going to use firm size as a proxy for liquidity" - they aren't usually quite that stupid, but I'm making up an example - and then refers to "liquidity" through the experimental portion of the paper when the author means "market cap".

If you want an introduction to the sort of thinking you have to do to do empirical social science research, that podcast would be a good place to start.

FOMC

2011-12-13T22:25:00.001-05:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year~~ November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. ~~Nonetheless, recent~~ While indicators point to ~~continuing weakness~~ some improvement in overall labor market conditions, ~~and~~ the unemployment rate remains elevated. Household spending has ~~increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak,~~ continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation ~~appears to have~~ has moderated since earlier in the year ~~as prices of energy and some commodities have declined from their peaks. Longer-term~~ , and longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. ~~Moreover, there are~~ Strains in global financial markets continue to pose significant downside risks to the economic outlook~~, including strains in global financial markets~~. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate ~~as the effects of past energy and other commodity price increases dissipate further~~. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.
Possibly moved phrases:

 in global financial markets

FOMC

2011-11-02T12:37:00.001-04:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~August~~ September indicates that economic growth ~~remains slow~~ strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. ~~Recent~~ Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has ~~been increasing at only a modest~~ increased at a somewhat faster pace in recent months ~~despite some recovery in sales of motor vehicles as supply-chain disruptions eased~~. ~~Investment~~ Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed~~. However, business investment in equipment and software continues to expand~~. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect ~~some pickup in the~~ a moderate pace of ~~recovery~~ economic growth over coming quarters ~~but~~ and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction

.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee ~~discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It~~ will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools ~~as appropriate~~ to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; ~~Charles L. Evans~~ Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action ~~were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support~~ was Charles L. Evans, who supported additional policy accommodation at this time.
Possibly moved phrases:
 principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities
to promote a stronger economic recovery in a context of price stability
 of rolling over maturing Treasury securities at auction
 investment in equipment and software 

GDP

2011-10-27T08:41:00.001-04:00

	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10	III 10	IV 10	I 11	II 11	III 11
Gross domestic product	1.7	-1.8	1.3	-3.7	-8.9	-6.7	-.7	1.7	3.8	3.9	3.8	2.5	2.3	.4	1.3	2.5
Services	.58	.67	-.20	-.78	-.49	-1.07	-.76	-.04	.21	.47	1.18	.75	.61	.36	.87	1.38
Nondurable goods	.06	-.53	.35	-.89	-.92	-.15	-.23	.31	.48	.75	.30	.47	.67	.25	.04	.04
Durable goods	.19	-.84	-.23	-1.01	-2.12	.19	-.29	1.39	-.36	.70	.56	.63	1.20	.85	-.42	.31
Change in private inventories	-.77	-.66	-.14	-.73	-1.54	-2.66	-.58	.21	3.93	3.10	.79	.86	-1.79	.32	-.28	-1.08
Fixed investment	-.81	-1.36	-.80	-1.91	-4.05	-5.09	-2.26	.13	-.42	.15	2.12	.28	.88	.15	1.07	1.60
Net exports of goods and services	2.22	.38	2.00	.79	-.12	2.44	2.21	-.59	.15	-.97	-1.94	-.68	1.37	-.34	.24	.22
Government spending	.23	.58	.34	.85	.35	-.33	1.21	.28	-.18	-.26	.77	.20	-.58	-1.23	-.18	.00

GDP

2011-09-29T14:48:00.002-04:00

Upgrades in estimates of service consumption and the trade deficit made the second quarter look less bad than it did a month ago.

	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10	III 10	IV 10	I 11	II 11
Gross domestic product	3.0	1.7	-1.8	1.3	-3.7	-8.9	-6.7	-.7	1.7	3.8	3.9	3.8	2.5	2.3	.4	1.3
Services	.52	.58	.67	-.20	-.78	-.49	-1.07	-.76	-.04	.21	.47	1.18	.75	.61	.36	.87
Nondurable goods	.29	.06	-.53	.35	-.89	-.92	-.15	-.23	.31	.48	.75	.30	.47	.67	.25	.04
Durable goods	.43	.19	-.84	-.23	-1.01	-2.12	.19	-.29	1.39	-.36	.70	.56	.63	1.20	.85	-.42
Change in private inventories	-.28	-.77	-.66	-.14	-.73	-1.54	-2.66	-.58	.21	3.93	3.10	.79	.86	-1.79	.32	-.28
Fixed investment	-.22	-.81	-1.36	-.80	-1.91	-4.05	-5.09	-2.26	.13	-.42	.15	2.12	.28	.88	.15	1.07
Net exports of goods and services	1.55	2.22	.38	2.00	.79	-.12	2.44	2.21	-.59	.15	-.97	-1.94	-.68	1.37	-.34	.24
Government spending	.67	.23	.58	.34	.85	.35	-.33	1.21	.28	-.18	-.26	.77	.20	-.58	-1.23	-.18

A classic result from auction theory

2011-09-23T00:13:00.004-04:00

This isn't the least bit timely, except that it was covered in one of my classes recently.

The King of Elbonia wants to build a new moat. The Elbonian Construction Group can do the job for $1 million, but the Construction Group of Elbonia has a new technique that brings their costs down. Unfortunately, nobody outside of CGE is quite sure how much, and the insiders can't quite be trusted to be honest about this information; the King's Counselors, though, are well known to believe that CGE could build it for somewhere between $800,000 to $1 million, with any dollar figure in between equally likely; the quality would be the same. Since Elbonia is located in Auction Theorist's World, all agents are known to keep their agreements, to be risk-neutral, to have no costs associated with putting together a bid, and not to anticipate any gain or loss after this deal as a consequence of it; for example, CGE does not worry that giving up information on their costs now will reduce their chance to exploit its privacy in the future. (None of these features of ATW are necessary for the qualitative effect being illustrated, though they will make it bigger, and much easier to calculate.)

The usual thing to do in a situation like this is to put it out for bid, in which case CGE would simply bid $999,999; everyone already knows that CGE is the low-cost producer. As an expected price optimizer, however, the King instead proposes the following: CGE will be hired to build the moat for $900,000, if it wishes to do it for that price; otherwise, ECG will be paid $1,000,000. If CGE can do it for $950,000, of course, the King is spending an extra $50,000 to have ECG do it; why would he do that? Well, with his proposal, there's a 50% chance that he'll save $99,999; the other 50% of the time he only loses $1 based on what CGE would actually bid, so that, overall, he saves an expected value of $50,000 (in round numbers) doing it his way. And, by doing it his way, he keeps CGE honest; there's no reliable way to get CGE to announce its costs while offering to pay no more than that. If he offered CGE two different rates, depending on its costs, CGE would have no reason not to claim to need the higher price. If he raises the price above $900,000, he's losing more, in expectation, than he's gaining.

Suppose neither company's costs are known exactly; then it gets more complicated. If ECG's price is somewhere between $1 million and $1,200,000, again uniformly distributed, the optimal plan turns out to be to ask both firms their price and hire ECG if its price is less than $100,000 more than CGE's price; CGE will be paid $925,000 if it's willing to do the job for less than $900,000, but would have no reason to admit to having lower costs than that; the $25,000 is necessary to keep the company from padding its costs. If ECG comes in right at $1,000,000 (and is hired), ECG will be paid $1,025,000—the $25,000 is, again, to keep it from inflating its costs. The essential point is that, even though ECG is known to be the higher-cost bidder, by committing to hire ECG if its price is close enough to CGE's, CGE can be made to compete with it—to the King's profit, at least in expectation.

As one final note, this is related to placing a reserve price on an auction to sell something you really don't want, anyway. In some sense, the King (in the original story) is selling the right to be paid $1,000,000 to build him a moat, and is asking CGE to bid for it; as far as he knows, it may be worth up to $200,000 to CGE, and he's insisting that CGE pay at least $100,000. If there were more than one potential bidder in the same position as CGE, each with its own cost, they would have to bid against each other, as well as the "reservation price"; with only one bidder, there's no reason to divulge anything but a willingness (or not) to pay the $100,000 for the contract.

FOMC

2011-09-21T14:28:00.000-04:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~June~~ August indicates that economic growth ~~so far this year has been considerably slower than the Committee had expected~~ remains slow. ~~Indicators suggest a deterioration~~ Recent indicators point to continuing weakness in overall labor market conditions ~~in recent months~~, and the unemployment rate ~~has moved up~~ remains elevated. Household spending has ~~flattened out, investment~~ been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up Inflation appears to have moderated since earlier in the year~~, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated~~ as prices of energy and some commodities have declined from their ~~earlier peaks~~ peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. ~~The Committee now expects a somewhat slower~~ The Committee continues to expect some pickup in the pace of recovery over coming quarters ~~than it did at the time of the previous meeting and~~ but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook ~~have increased~~ , including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To ~~promote the ongoing~~ support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with ~~its~~ the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent ~~. The Committee~~ and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ ~~these~~ its tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who ~~would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period~~ did not support additional policy accommodation at this time.
Possibly moved phrases:

The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. 
 will maintain its existing policy of 

Not Statistically Significant Does Not Mean Zero

2011-09-12T20:57:00.004-04:00

I know I've seen this mistake in an accounting paper or two, but I haven't seen it a lot.

In theory, a comparison of two experimental effects requires a statistical test on their difference. In practice, this comparison is often based on an incorrect procedure involving two separate tests in which researchers conclude that effects differ when one effect is significant (P < 0.05) but the other is not (P > 0.05). We reviewed 513 behavioral, systems and cognitive neuroscience articles in five top-ranking journals (Science, Nature, Nature Neuroscience, Neuron and The Journal of Neuroscience) and found that 78 used the correct procedure and 79 used the incorrect procedure. An additional analysis suggests that incorrect analyses of interactions are even more common in cellular and molecular neuroscience. We discuss scenarios in which the erroneous procedure is particularly beguiling.

I suppose real scientists don't have to understand statistics as well as we do because they can do controlled experiments, so the statistics they need is a lot simpler.

mark-to-market accounting

2011-09-06T09:15:00.002-04:00

Josef Ackermann just gave a terrifying speech about the fragility of the Euro banking sector right now.

At a conference in Frankfurt he said, "It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels."

This isn't the first place I've read that. You'll remember that there was some discussion of whether mark-to-market was a mistake three years ago on this side of the Atlantic, or at least whether some debt-like assets should be allowed to stay on the books at a higher value than their market value if there was good reason to believe that the market value was lower for temporary liquidity reasons rather than risk-of-default reasons.

I think there was a stronger argument for supposing that the mortgage-backed securities at issue three years ago were going to pay off eventually - not necessarily in full, but by more than their then-market values indicated - than there is today that the sovereign debt is not really risky. But that's just my visceral judgment.

gdp

2011-08-30T14:26:00.001-04:00

	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10	III 10	IV 10	I 11	II 11
Gross domestic product	3.0	1.7	-1.8	1.3	-3.7	-8.9	-6.7	-.7	1.7	3.8	3.9	3.8	2.5	2.3	.4	1.0
Services	.52	.58	.67	-.20	-.78	-.49	-1.07	-.76	-.04	.21	.47	1.18	.75	.61	.36	.64
Nondurable goods	.29	.06	-.53	.35	-.89	-.92	-.15	-.23	.31	.48	.75	.30	.47	.67	.25	.07
Durable goods	.43	.19	-.84	-.23	-1.01	-2.12	.19	-.29	1.39	-.36	.70	.56	.63	1.20	.85	-.40
Change in private inventories	-.28	-.77	-.66	-.14	-.73	-1.54	-2.66	-.58	.21	3.93	3.10	.79	.86	-1.79	.32	-.23
Fixed investment	-.22	-.81	-1.36	-.80	-1.91	-4.05	-5.09	-2.26	.13	-.42	.15	2.12	.28	.88	.15	1.01
Net exports of goods and services	1.55	2.22	.38	2.00	.79	-.12	2.44	2.21	-.59	.15	-.97	-1.94	-.68	1.37	-.34	.09
Government spending	.67	.23	.58	.34	.85	.35	-.33	1.21	.28	-.18	-.26	.77	.20	-.58	-1.23	-.18

FOMC

2011-08-09T22:46:00.001-04:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~April~~ June indicates that ~~the economic recovery is continuing at a moderate pace, though somewhat more slowly~~ economic growth so far this year has been considerably slower than the Committee had expected. ~~Also, recent~~ Indicators suggest a deterioration in overall labor market ~~indicators have been weaker than anticipated~~ conditions in recent months, and the unemployment rate has moved up. ~~The slower pace of the recovery reflects in part factors that are likely to be temporary~~ Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has Inflation picked up ~~in recent months~~ earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the ~~recent~~ supply chain disruptions. ~~However, longer-term~~ More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. ~~The unemployment rate remains elevated; however, the Committee expects the~~ The Committee now expects a somewhat slower pace of recovery ~~to pick up~~ over coming quarters ~~and~~ than it did at the time of the previous meeting and anticipates that the unemployment rate ~~to resume its gradual decline~~ will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. ~~Inflation has moved up recently, but the Committee~~ Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will ~~subside to~~ settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee ~~continues to anticipate~~ currently anticipates conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate ~~for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and~~ at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee ~~will monitor~~ discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook ~~and financial developments and will act as needed to best foster maximum employment and price stability~~ in light of incoming information and is prepared to employ these tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; ~~Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser;~~ Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.
Possibly moved phrases:

, investment in nonresidential structures is still weak, and the housing sector 
 business investment in equipment and software 
for an extended period.

US Debt CDSs

2011-08-08T17:26:00.001-04:00

Credit default swaps on American debt were up about 2% for the day, around half of their peak in early 2009.

Sovereign Debt Ratings

2011-08-05T21:57:00.002-04:00

From the WSJ:

A cornerstone of the global financial system was shaken Friday when officials at ratings firm Standard & Poor's said U.S. Treasury debt no longer deserved to be considered among the safest investments in the world.

S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn't do enough to address the gloomy long-term picture for America's finances. It downgraded U.S. debt to AA+, a score that ranks below Liechtenstein and on par with Belgium and New Zealand.

Really? Belgium is still AA+? I find that pretty surprising. I wonder how stale that rating is.

Wait, what was the headline? Oh, yeah - Belgium isn't the only first-world country with mounting debt and no predictable government.

S&P said "the downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics." It also blamed the weakened "effectiveness, stability, and predictability" of U.S. policy making and political institutions at a time when challenges are mounting.

I hear CDSs on US debt have already been going up, and in light of what S&P mentioned, AA or AA+ seems reasonable to me. Which, mind you, is not exactly junk status, or even particularly close, but does acknowledge that the conventional "risk-free" asset is not actually free of risk. It will be interesting to see how (and if) the market reacts to this.

Also, if anyone in Congress or near the top of the executive branch calls for an investigation of S&P and their methods, I'd like to preemptively call for his or her resignation. I know they pull that crap in Italy, but the civilized world doesn't behave that way, and I'd be more concerned about the future of my country if we went down that road than I am concerned about the ratings downgrade or even the issues that precipitated it.

gdp

2011-07-29T10:50:00.004-04:00

Drop-off in durable goods. Consumption growth has slowed this year, though in the last quarter that seems to have come from imports, which grew more slowly as well. Exports helped in the second quarter.

	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10	III 10	IV 10	I 11	II 11
Gross domestic product	-8.9	-6.7	-.7	1.7	3.8	3.9	3.8	2.5	2.3	.4	1.3
Services	-.49	-1.07	-.76	-.04	.21	.47	1.18	.75	.61	.36	.40
Nondurable goods	-.92	-.15	-.23	.31	.48	.75	.30	.47	.67	.25	.02
Durable goods	-2.12	.19	-.29	1.39	-.36	.70	.56	.63	1.20	.85	-.35
Change in private inventories	-1.54	-2.66	-.58	.21	3.93	3.10	.79	.86	-1.79	.32	.18
Fixed investment	-4.05	-5.09	-2.26	.13	-.42	.15	2.12	.28	.88	.15	.69
Net exports of goods and services	-.12	2.44	2.21	-.59	.15	-.97	-1.94	-.68	1.37	-.34	.58
Government spending	.35	-.33	1.21	.28	-.18	-.26	.77	.20	-.58	-1.23	-.23

employment-population ratio

2011-07-10T17:04:00.004-04:00

I put a bit more stock in the household survey than the payroll survey because I think the intensive quantities are probably more accurately measured there, and that they are the more important numbers. The unemployment rate itself, as has been well covered, is susceptible to changes in the participation rate; hence the employment-population rate, which Mankiw notes isn't showing much recovery:

Over longer periods of time, the participation rate may be driven by demographic shifts, but short-run changes probably primarily indicate people entering or leaving the workforce because work looks easier or harder to get. Here's a longer-run chart of this statistic since the beginning of 1988, with longer-run trends filtered out:
It got close to 65% in 2000, but plummeted through 60% in early 2009, and, while it has stabilized for a year and a half, it hasn't done much improving.

What interests me about this in part is that, while employment is famously a lagging indicator of economic activity, upticks in the unemployment rate have also historically been pretty clear reliable indicators of recessions when other data are often ambiguous. In the past few months the unemployment rate has ticked back up from its recent lows, creating concern that we're in for another recession, but the arguments for employment as a recession indicator focus on data from the end of periods of robust growth; while I could perhaps usefully go back further with this chart, it's worth noting that 2003 and 2004 looked worse from this standpoint (in terms of direction) than recent data do; it may be that an economy that is already doing pretty poorly is unlikely to get new adverse momentum from relatively small changes in employment.

Update: Going back to 1970, to include arguably two "double-dip" recessions at the beginning of the window.

The eurozone vs. optimal currency areas

2011-06-23T18:12:00.004-04:00

Labor mobility can, to some extent, substitute for the fiscal transfers to which he refers, but Europe doesn't have that to nearly the degree the US does, either.

FOMC

2011-06-22T12:40:00.005-04:00

Note that a lot of phrases were moved around, but were in both April's statement and today's. Follow the link if you just want to read today's statement.
At 2:15 Eastern Time (1:15 Central), Bernanke will be giving a press conference that can be watched live at http://www.ustream.tv/federalreserve.

Update: So far, the most interesting thing (I think) he's said is that QE2 was triggered by employment weakness combined with deflationary concerns, implying that QE3 would require a substantial threat of deflation. Update: He says US banks aren't terribly exposed, at least directly, to Greek debt. Also, large banks should be asked to hold more capital than smaller banks, partly to reduce the probability of their failure, but also to "level the playing field" by balancing the funding advantage enjoyed by firms that are expected to be bailed out.

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~March~~ April indicates that the economic recovery is ~~proceeding~~ continuing at a moderate pace ~~and overall conditions in the~~ , though somewhat more slowly than the Committee had expected. Also, recent labor market ~~are improving gradually~~ indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. ~~Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March.~~ Inflation has picked up in recent months, ~~but~~ mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable ~~and measures of underlying inflation are still subdued~~.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated ~~, and measures of underlying inflation continue to be somewhat low, relative to~~ ; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent~~, over the longer run,~~ with its dual mandate. ~~Increases in the prices of~~ Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other ~~commodities have pushed up inflation in recent months~~ commodity price increases dissipate. ~~The Committee expects these effects to be transitory, but it will~~ However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. ~~The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.~~
To promote ~~a stronger pace of~~ the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability. The Committee will maintain keep the target range for the federal funds rate at 0 to 1/4 percent ~~and~~ . The Committee continues to anticipate that economic conditions , — including low rates of resource utilization ~~, subdued inflation trends, and stable inflation expectations,~~ and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee will ~~continue to~~ monitor the economic outlook and financial developments and will ~~employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate~~ act as needed to best foster maximum employment and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
Possibly moved phrases:
.  The Committee will regularly review the size and composition of its securities holdings 
 purchases of $600 billion of longer-term Treasury securities by the end of 
 its existing policy of reinvesting principal payments from its securities holdings
 as needed to best foster maximum employment and price stability
and is prepared to adjust those holdings

second guess of Q1 GDP

2011-05-26T09:38:00.002-04:00

The headline number is the same as last month, but actual consumption seems a bit weaker than was initially estimated, with a bit more of production ending up in inventories.

	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10	III 10	IV 10	I 11r
Gross domestic product	-.7	.6	-4.0	-6.8	-4.9	-.7	1.6	5.0	3.7	1.7	2.6	3.1	1.8
Services	.88	.00	-.59	.30	-.75	-.79	-.21	.27	.03	.75	.74	.70	.69
Nondurable goods	-.50	.31	-.91	-.78	.06	-.11	.27	.49	.67	.31	.39	.65	.17
Durable goods	-.92	-.23	-.95	-1.79	.35	-.21	1.35	-.07	.62	.49	.54	1.45	.66
Change in private inventories	-.49	-.48	-.12	-2.31	-1.09	-1.03	1.10	2.83	2.64	.82	1.61	-3.42	1.19
Fixed investment	-.98	-.69	-1.83	-4.01	-5.71	-1.26	.12	-.12	.39	2.06	.18	.80	.26
Net exports of goods and services	.84	1.04	-.63	1.50	2.88	1.47	-1.37	1.90	-.31	-3.50	-1.70	3.27	-.06
Government spending	.44	.65	1.04	.31	-.61	1.24	.33	-.28	-.32	.80	.79	-.34	-1.07

Berkshire Hathaway Meeting

2011-04-30T13:21:00.001-04:00

Both Buffett and Munger say most investors are better off in an index fund than trying to pick stocks. Munger says that Berkshire would be good as a second investment.

Buffett chimes in: “Charlie’s big on lowering expectations."

Munger shoots back: “Absolutely. That’s how I got married.”

The Berkshire Hathaway meeting is being liveblogged by the WSJ.

gdp

2011-04-28T13:29:00.002-04:00

	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10	III 10	IV 10	I 11
Gross domestic product	-.7	.6	-4.0	-6.8	-4.9	-.7	1.6	5.0	3.7	1.7	2.6	3.1	1.8
Services	.88	.00	-.59	.30	-.75	-.79	-.21	.27	.03	.75	.74	.70	.80
Nondurable goods	-.50	.31	-.91	-.78	.06	-.11	.27	.49	.67	.31	.39	.65	.34
Durable goods	-.92	-.23	-.95	-1.79	.35	-.21	1.35	-.07	.62	.49	.54	1.45	.78
Change in private inventories	-.49	-.48	-.12	-2.31	-1.09	-1.03	1.10	2.83	2.64	.82	1.61	-3.42	.93
Fixed investment	-.98	-.69	-1.83	-4.01	-5.71	-1.26	.12	-.12	.39	2.06	.18	.80	.09
Net exports of goods and services	.84	1.04	-.63	1.50	2.88	1.47	-1.37	1.90	-.31	-3.50	-1.70	3.27	-.08
Government spending	.44	.65	1.04	.31	-.61	1.24	.33	-.28	-.32	.80	.79	-.34	-1.09

Not a good report, but the hope is that the drop-off is temporary, driven by weather in January and February; there is some initial indication that the economy picked up again in March. (If that's true, it may even show up in revisions to today's release, as sometimes not all of the last month's data make it to the advanced report.)

FOMC

2011-04-27T14:06:00.000-04:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~January suggests~~ March indicates that the economic recovery is ~~on a firmer footing,~~ proceeding at a moderate pace and overall conditions in the labor market ~~appear to be~~ are improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since ~~the~~ last summer, and concerns about global supplies of crude oil have contributed to a ~~sharp run-up~~ further increase in oil prices ~~in recent weeks~~ since the Committee met in March. ~~Nonetheless,~~ Inflation has picked up in recent months, but longer-term inflation expectations have remained stable, and measures of underlying inflation ~~have been~~ are still subdued.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. ~~Currently, the~~ The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. ~~The recent increases~~ Increases in the prices of energy and other commodities ~~are currently putting upward pressure on inflation~~ have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and ~~intends to purchase~~ will complete purchases of $600 billion of longer-term Treasury securities by the end of the ~~second quarter of 2011.~~ current quarter. The Committee will regularly review the ~~pace~~ size and composition of its securities ~~purchases and the overall size of the asset-purchase program~~ holdings in light of incoming information and ~~will adjust the program~~ is prepared to adjust those holdings as needed to best foster maximum employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Today, for the first time, Bernanke is holding a press conference in connection with the FOMC meeting; that will begin at 2:15 Eastern Time.

gdp

2011-03-25T11:35:00.001-04:00

Both "investment" categories were revised up. 2011Q1 is starting to look weaker than hoped; we'll get the first official estimate on that at the end of next month (I believe on the day of the royal wedding, for what that's worth).

	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10	III 10	IV 10
Gross domestic product	2.9	-.7	.6	-4.0	-6.8	-4.9	-.7	1.6	5.0	3.7	1.7	2.6	3.1
Services	.71	.88	.00	-.59	.30	-.75	-.79	-.21	.27	.03	.75	.74	.70
Nondurable goods	.07	-.50	.31	-.91	-.78	.06	-.11	.27	.49	.67	.31	.39	.65
Durable goods	.20	-.92	-.23	-.95	-1.79	.35	-.21	1.35	-.07	.62	.49	.54	1.45
Change in private inventories	-.77	-.49	-.48	-.12	-2.31	-1.09	-1.03	1.10	2.83	2.64	.82	1.61	-3.42
Fixed investment	-.76	-.98	-.69	-1.83	-4.01	-5.71	-1.26	.12	-.12	.39	2.06	.18	.80
Net exports of goods and services	3.21	.84	1.04	-.63	1.50	2.88	1.47	-1.37	1.90	-.31	-3.50	-1.70	3.27
Government spending	.24	.44	.65	1.04	.31	-.61	1.24	.33	-.28	-.32	.80	.79	-.34

FOMC

2011-03-15T17:42:00.000-04:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~December confirms~~ January suggests that the economic recovery is ~~continuing, though at a rate that has been insufficient to bring about a significant improvement in~~ on a firmer footing, and overall conditions in the labor market ~~conditions~~ appear to be improving gradually. ~~Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on~~ Household spending and business investment in equipment and software ~~is rising, while~~ continue to expand. However, investment in nonresidential structures is still weak ~~. Employers remain reluctant to add to payrolls. The~~ , and the housing sector continues to be depressed. ~~Although commodity~~ Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been ~~trending downward~~ subdued.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is remains elevated, and measures of underlying inflation ~~are~~ continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. ~~Although the Committee anticipates~~ The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability~~, progress toward its objectives has been disappointingly slow~~.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; ~~Kevin M. Warsh;~~ and Janet L. Yellen.

Markets are Efficient if and Only if P = NP

2011-03-03T21:51:00.002-05:00

The paper by that title is here (you may need an SSRN account to download it - I'm not sure). I haven't read more than the abstract, but it looks fun.

gdp

2011-02-25T11:14:00.002-05:00

Revised down by .4 percentage points from last month, but half of that change was government expenditures; private demand still looks reasonably healthy, if not perhaps quite as robust as one would hope for a bona fide recovery. No big revisions, really.

	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10	III 10	IV 10
Gross domestic product	2.9	-.7	.6	-4.0	-6.8	-4.9	-.7	1.6	5.0	3.7	1.7	2.6	2.8
Services	.71	.88	.00	-.59	.30	-.75	-.79	-.21	.27	.03	.75	.74	.68
Nondurable goods	.07	-.50	.31	-.91	-.78	.06	-.11	.27	.49	.67	.31	.39	.76
Durable goods	.20	-.92	-.23	-.95	-1.79	.35	-.21	1.35	-.07	.62	.49	.54	1.44
Change in private inventories	-.77	-.49	-.48	-.12	-2.31	-1.09	-1.03	1.10	2.83	2.64	.82	1.61	-3.70
Fixed investment	-.76	-.98	-.69	-1.83	-4.01	-5.71	-1.26	.12	-.12	.39	2.06	.18	.57
Net exports of goods and services	3.21	.84	1.04	-.63	1.50	2.88	1.47	-1.37	1.90	-.31	-3.50	-1.70	3.35
Government spending	.24	.44	.65	1.04	.31	-.61	1.24	.33	-.28	-.32	.80	.79	-.31

gdp

2011-01-28T09:56:00.003-05:00

I had started to worry that too much of recent GDP gains were driven by inventory accumulation. In the fourth quarter, it appears there was basically no inventory accumulation, while imports fell and exports rose. Note that government expenditure is also a subtraction here; this is really the best 3.2% growth I've ever seen.

	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10	III 10	IV 10
Gross domestic product	2.9	-.7	.6	-4.0	-6.8	-4.9	-.7	1.6	5.0	3.7	1.7	2.6	3.2
Services	.71	.88	.00	-.59	.30	-.75	-.79	-.21	.27	.03	.75	.74	.78
Nondurable goods	.07	-.50	.31	-.91	-.78	.06	-.11	.27	.49	.67	.31	.39	.78
Durable goods	.20	-.92	-.23	-.95	-1.79	.35	-.21	1.35	-.07	.62	.49	.54	1.48
Change in private inventories	-.77	-.49	-.48	-.12	-2.31	-1.09	-1.03	1.10	2.83	2.64	.82	1.61	-3.70
Fixed investment	-.76	-.98	-.69	-1.83	-4.01	-5.71	-1.26	.12	-.12	.39	2.06	.18	.50
Net exports of goods and services	3.21	.84	1.04	-.63	1.50	2.88	1.47	-1.37	1.90	-.31	-3.50	-1.70	3.44
Government spending	.24	.44	.65	1.04	.31	-.61	1.24	.33	-.28	-.32	.80	.79	-.11

Update: Now that I look at it, both inventory accumulation and net exports have been strongly pro-cyclical lately; if I back out half of each, the last five quarters have growth rates (in reverse chronological order) of 3.3, 2.6, 3.0, 2.5, and 2.6, a smoother series than the headline numbers. The inventory accumulation and net exports have also been negatively correlated. I wonder how much of the inventory fluctuations have been in tradeable goods sectors, and have been seeing inventories absorb the fluctuations in foreign trade. Of course, this can get into data-mining pretty quickly; it's not as though I have that many degrees of freedom to look at.

fed statement

2011-01-26T14:21:00.001-05:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~November~~ December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring ~~down unemployment~~ about a significant improvement in labor market conditions. ~~Household spending is increasing at a moderate pace~~ Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, ~~though less rapidly than earlier in the year,~~ while investment in nonresidential structures ~~continues to be~~ is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. ~~Longer-term~~ Although commodity prices have risen, longer-term inflation expectations have remained stable, ~~but~~ and measures of underlying inflation have ~~continued to trend~~ been trending downward.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. ~~The Committee will maintain~~ In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings ~~. In addition, the Committee~~ and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of ~~2011, a pace of about $75 billion per month.~~ 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; ~~James Bullard;~~ Elizabeth A. Duke; ~~Sandra Pianalto~~ Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin~~; Eric S. Rosengren~~; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
Voting against the policy was Thomas M. Hoenig. In light of the improving economy, Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

No dissents.

basic international monetary theory

2011-01-19T21:56:00.003-05:00

Ronald McKinnon has an op-ed in the Wall Street Journal in which he states that

In 2010, consumer price indexes shot up more than 5% in major emerging markets such as China, Brazil and Indonesia, while the consumer price index in the U.S. itself rose only 1.2%.

China at least also is at a stronger growth point in its business cycle. It makes sense, then, that they should be running tighter monetary policy than the United States.

McKinnon's op-ed, though, has the curious title — which, if standard practice was followed, was not chosen by him, but by an editor — "The Latest American Export: Inflation". Which would make it a case of a country exporting something of which it is suffering from a shortage.

The first paragraph of the op-ed — which, if standard practice was followed, was chosen by him — seems of this spirit:

What do the years 1971, 2003 and 2010 have in common? In each year, low U.S. interest rates and the expectation of dollar depreciation led to massive "hot" money outflows from the U.S. and world-wide inflation. And in all three cases, foreign central banks intervened heavily to buy dollars to prevent their currencies from appreciating.

If "foreign central banks intervened heavily to buy dollars", thereby creating inflation, who's to blame? If the US economy is weak and shows no signs of inflation, and foreign countries have excessive inflation, in what universe is it appropriate policy for them to "prevent their currencies from appreciating" against the dollar? If someone's worried that the relative currency move will exacerbate China's trade deficit or the United States trade surplus, I imagine we could think of arguments to allay that concern as well.

Over the last few years, I haven't gone in as much for complaining about China's currency policy as seems to be popular in some circles; it does create international stability to some extent, but I don't feel it's bad enough to be worth much political capital — the primary victims, as with most of the Chinese government's policies, are the Chinese. At the same time, it's doubly ludicrous for anyone to complain about the US following appropriate monetary policy on the grounds that it creates problems for currency manipulation. If you insist on pegging your currency to ours, you are ipso facto imposing our monetary policy on your own currency. If your economic circumstances call for different policies, either impose our policy, or impose a different one — but if you impose ours, it's not our fault.

correlation, causation, and "gains" to education

2011-01-17T11:45:00.005-05:00

Arnold Kling, on big structural shifts in the economy:

We are seeing fewer jobs where there is the external discipline of the time clock and the assembly line. The human robot that was once needed to lift and pound in a factory continues to be replaced by non-human robots.

Instead, we are seeing more jobs where internal discipline is required. I suspect that this explains some of the wage differential that shows up for college graduates. Graduating high school shows that you can submit to external discipline. Graduating college shows that you can operate under internal discipline.

There has been some theorizing — almost entirely by people with PhD's — that education, especially in college, doesn't produce more productive workers, but merely filters for them. Usually I've seen this presented in terms of "signaling"; employers prefer to hire the people who have been filtered, even though those same employees would be just as valuable if they hadn't gone to college. (If this is true, then you can think of college as a four-year job entrance exam.) What Kling suggests here is very closely related, but slightly different; he is referring not to the ability of these people to get hired by someone, but to the higher marginal productivity that employers are seeking in the first place.

More specifically, though, Kling is referring to a particular trait to which he argues the economic return has been increasing. This is new to me; the arguments I've seen before have tended not to address the growing spread in wages, while people arguing for a more fundamental benefit to education have tended to argue that those skills acquired in college are more valuable in an increasingly technological workplace. It seems just as reasonable — and perhaps more so — to suggest that the latent characteristics for which college filters might have that property as well.

pensions

2011-01-13T11:23:00.000-05:00

For a number of reasons, workers' best protection against employer abuses is the ability to threaten to leave. Perhaps this is part of the reason large employers and labor unions introduced defined-benefit retirement packages; it provides a large pecuniary barrier to employees' leaving, and thus empowers the unions and the employers at the workers' expense. The pension benefit that accrues to young workers is very, very small; if an employee leaves the employer, even after 15 years, he gets very little value from the retirement plan; on the other hand, the employee deciding between leaving after 24 years and leaving at 25 years may find that his benefits accrue quite rapidly in that extra year, and will want to stick around. Almost the only value to the 15 year employee is that, if he sticks around a few more years, he will be able to earn these large non-wage benefits as well.

Defined-benefit plans don't have to be that way; in practice, though, they almost always are (where "almost" is me being overly cautious, and not an indicator that I have any reason to believe that there is an exception). I just came across a nice graph for the teacher pension in Missouri. In this case, a teacher in his 23rd year (or thereabouts) gets $200,000 in pension value in one year.

As Joel Klein pointed out in an op-ed in the WSJ, this means a lot of money is being spent that is not going to new teachers, making it harder to recruit the best new teachers. This is on top of the teacher mobility issue, and there is evidence of substantial gains made from moving teachers from one place to another; while there appear to be good and bad schools, and good and bad teachers, it also appears that teachers will generally match up better with some schools than others, such that switching a teacher at one school with a teacher at another school can improve both teachers' results.

While much of the recent antagonism toward defined-benefit plans for state employees has been focussed on the uncertainty that this creates for state budgets or the ability it gives to politicians to hide implicit debts, it should also be noted that many problems are caused by the way in which benefits accrue, which, even if they might sometimes serve the narrow interests of the state-as-employer, are detrimental to the state's economy and polity.

Market Inefficiency

2011-01-12T23:44:00.001-05:00

Even proponents of the efficient market hypothesis don't generally claim that all prices are perfectly right; they usually limit themselves to the assertion that wrong prices are expensive to predict. This story would seem to violate the stronger theory:

Who says you can't make money on Twitter? Rapper 50 Cent just raked in millions.

The rapper had plenty to say over the weekend about a penny stock named H&H Imports (HNHI), a tiny operation out of Florida. Why? Because 50 Cent invested $750,000 in shares and warrants in the company last fall. Some of those shares can be cashed in only as the stock rises to 15 cents, 25 cents and, yes, 50 cents.

What better way to pump up the stock than to promote it to your 3.8 million Twitter followers? That's what the rapper did -- and the stock rose 240% to close at 39 cents Monday.

Not the usual way of extracting money from one's fans.

GDP

2010-12-31T02:41:00.002-05:00

I was busy last week, and missed the update of the BEA's measure of third quarter GDP. A slight weakening of final sales was offset by an upward revision to inventory accumulation.

	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10	III 10
Gross domestic product	2.3	2.9	-.7	.6	-4.0	-6.8	-4.9	-.7	1.6	5.0	3.7	1.7	2.6
Services	.62	.71	.88	.00	-.59	.30	-.75	-.79	-.21	.27	.03	.75	.74
Nondurable goods	.27	.07	-.50	.31	-.91	-.78	.06	-.11	.27	.49	.67	.31	.39
Durable goods	.31	.20	-.92	-.23	-.95	-1.79	.35	-.21	1.35	-.07	.62	.49	.54
Change in private inventories	-.28	-.77	-.49	-.48	-.12	-2.31	-1.09	-1.03	1.10	2.83	2.64	.82	1.61
Fixed investment	-.18	-.76	-.98	-.69	-1.83	-4.01	-5.71	-1.26	.12	-.12	.39	2.06	.18
Net exports of goods and services	.87	3.21	.84	1.04	-.63	1.50	2.88	1.47	-1.37	1.90	-.31	-3.50	-1.70
Government spending	.66	.24	.44	.65	1.04	.31	-.61	1.24	.33	-.28	-.32	.80	.79

FOMC statement -- even less change than expected

2010-12-14T14:21:00.000-05:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~September~~ November confirms that the ~~pace of recovery in output and employment continues to be slow~~ economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing ~~gradually~~ at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. ~~Housing starts continue~~ The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have ~~trended lower in recent quarters~~ continued to trend downward.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to ~~expand~~ continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase ~~a further~~ $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
Voting against the policy was Thomas M. Hoenig. ~~Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits.~~ In light of the improving economy, Mr. Hoenig ~~also~~ was concerned that ~~this~~ a continued high level of monetary accommodation ~~increased~~ would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

The Doomsday Trade

2010-12-04T22:06:00.003-05:00

The idea of hedging against catastrophe, otherwise known as tail risk, has become the latest rage among hedge funds, according to money managers and traders.

It's a tail-risk bubble!

Okay, probably not, but it's a fun theory. The story is via Instapundit.

GDP

2010-11-24T18:50:00.002-05:00

An upward revision to the initial estimate of GDP growth in the third quarter, with about half of it coming from revisions to net exports.

	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10	III 10
Gross domestic product	2.3	2.9	-.7	.6	-4.0	-6.8	-4.9	-.7	1.6	5.0	3.7	1.7	2.5
Services	.62	.71	.88	.00	-.59	.30	-.75	-.79	-.21	.27	.03	.75	1.16
Nondurable goods	.27	.07	-.50	.31	-.91	-.78	.06	-.11	.27	.49	.67	.31	.28
Durable goods	.31	.20	-.92	-.23	-.95	-1.79	.35	-.21	1.35	-.07	.62	.49	.53
Change in private inventories	-.28	-.77	-.49	-.48	-.12	-2.31	-1.09	-1.03	1.10	2.83	2.64	.82	1.30
Fixed investment	-.18	-.76	-.98	-.69	-1.83	-4.01	-5.71	-1.26	.12	-.12	.39	2.06	.20
Net exports of goods and services	.87	3.21	.84	1.04	-.63	1.50	2.88	1.47	-1.37	1.90	-.31	-3.50	-1.76
Government spending	.66	.24	.44	.65	1.04	.31	-.61	1.24	.33	-.28	-.32	.80	.81

minority rights

2010-11-23T12:15:00.002-05:00

Anglo-Irish Bank bondholders voted to approve a deal that said, essentially, "anyone who votes in favor of this proposition gets 20% of face value, and anyone who doesn't gets 1/100000 of face value". This strikes me as the sort of thing that may be legal in most of Europe and illegal in the US; US securities law in general is more protective of minority securityholders than is European securities law in general, where 51% of shareholders can largely tell the other 49% to get bent.

Fed statement, translated

2010-11-04T17:46:00.003-04:00

NPR has a pretty reasonable sentence-by-sentence translation here. Less precise in some places, as you would expect, but the basic ideas are right.

Fed statement

2010-11-03T14:29:00.000-04:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~August indicates~~ September confirms that the pace of recovery in output and employment ~~has slowed in recent months~~ continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts ~~are at a depressed level~~ continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters. ~~Bank lending has continued to contract, but at a reduced rate in recent months. The~~
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, ~~although the~~ progress toward its objectives has been disappointingly slow.
To promote a stronger pace of economic recovery ~~is likely to be modest in the near term.~~
~~Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run,~~ and to help ensure that inflation, over time, is at levels consistent with its mandate ~~to promote~~ , the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. ~~The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.~~
The Committee will continue to monitor the economic outlook and financial developments and ~~is prepared to provide additional accommodation if needed~~ will employ its policy tools as necessary to support the economic recovery and to ~~return~~ help ensure that inflation, over time, to is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; ~~and~~ Kevin M. Warsh; and Janet L. Yellen.
Voting against the policy was Thomas M. Hoenig~~, who judged that the economy continues to recover at a moderate pace~~. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth. In addition, given economic and financial conditions, Mr. Hoenig ~~did not believe that continuing to reinvest principal payments from its securities holdings was required to support the Committee's policy objectives~~ believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.
Possibly moved phrases:
 will maintain its existing policy of reinvesting principal payments from its securities holdings. 

3Q GDP

2010-10-29T10:20:00.002-04:00

The BEA release. "Residential fixed investment" (homebuilding), which added .55 to the Q2 figure, subtracted .8 from the Q3 figure; most other kind of investment were also growing more slowly, but not to the same degree. Imports continued to increase, but not at the very high rate at which they were increasing in Q2.

	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10	III 10
Gross domestic product	2.3	2.9	-.7	.6	-4.0	-6.8	-4.9	-.7	1.6	5.0	3.7	1.7	2.0
Services	.62	.71	.88	.00	-.59	.30	-.75	-.79	-.21	.27	.03	.75	1.15
Nondurable goods	.27	.07	-.50	.31	-.91	-.78	.06	-.11	.27	.49	.67	.31	.20
Durable goods	.31	.20	-.92	-.23	-.95	-1.79	.35	-.21	1.35	-.07	.62	.49	.44
Change in private inventories	-.28	-.77	-.49	-.48	-.12	-2.31	-1.09	-1.03	1.10	2.83	2.64	.82	1.44
Fixed investment	-.18	-.76	-.98	-.69	-1.83	-4.01	-5.71	-1.26	.12	-.12	.39	2.06	.10
Net exports of goods and services	.87	3.21	.84	1.04	-.63	1.50	2.88	1.47	-1.37	1.90	-.31	-3.50	-2.01
Government spending	.66	.24	.44	.65	1.04	.31	-.61	1.24	.33	-.28	-.32	.80	.68

Quantitative Easing and Price Level Targeting

2010-10-12T10:12:00.005-04:00

Michael Woodford, one of the leading monetary economists, suggests that Quantitative Easing per se would do relatively little good;

There is, however, another option: for the Fed to clarify its “exit strategy” from its current, unconventional monetary stance. This would mean making clear that the Fed has no plans to tighten policy through increases in the federal funds rate, even if inflation temporarily exceeds the rate regarded as consistent with the Fed’s mandate. In short, the Fed should allow a one-time-only inflation increase, with a plan to control it once the target level of prices has been reached.

Indeed, I think the good that would come from quantitative easing would work through similar channels.

Individual microeconomic actors are affected pretty much exclusively by prices. Insofar as they're rational, they respond to prices and expectations of future prices. If the Fed floods the system with money but is perfectly clear (and credible) that it's going to withdraw the money if it actually causes future prices to rise, then it should have no effect on the behavior of economic agents and thus no effect on the economy. Price-level targeting — or NGDP targeting — is more time-consistent, and therefore more credible, than inflation targeting, and strikes me as the best monetary response we're likely to come up with to the current economic weakness.

inflation

2010-10-01T13:00:00.003-04:00

The Dallas fed released its trimmed-mean PCE inflation measure for August this morning; it was around 1.5% on an annual basis, the highest number since last September. The four-month moving average ticks up to about 0.96% annual inflation, where the 6 is naturally for entertainment purposes only.

GDP

2010-10-01T12:40:00.001-04:00

2nd quarter GDP was revised again yesterday. This was the third release of this data, so there weren't any major changes.

	II 07	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10
Gross domestic product	3.2	2.3	2.9	-.7	.6	-4.0	-6.8	-4.9	-.7	1.6	5.0	3.7	1.7
Services	.74	.62	.71	.88	.00	-.59	.30	-.75	-.79	-.21	.27	.03	.75
Nondurable goods	-.03	.27	.07	-.50	.31	-.91	-.78	.06	-.11	.27	.49	.67	.31
Durable goods	.38	.31	.20	-.92	-.23	-.95	-1.79	.35	-.21	1.35	-.07	.62	.49
Change in private inventories	.90	-.28	-.77	-.49	-.48	-.12	-2.31	-1.09	-1.03	1.10	2.83	2.64	.82
Fixed investment	.62	-.18	-.76	-.98	-.69	-1.83	-4.01	-5.71	-1.26	.12	-.12	.39	2.06
Net exports of goods and services	.01	.87	3.21	.84	1.04	-.63	1.50	2.88	1.47	-1.37	1.90	-.31	-3.50
Government spending	.64	.66	.24	.44	.65	1.04	.31	-.61	1.24	.33	-.28	-.32	.80

FOMC statement

2010-09-21T15:00:00.001-04:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~June~~ August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising ~~; however,~~ , though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak ~~and employers~~ . Employers remain reluctant to add to payrolls. Housing starts ~~remain~~ are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. ~~Nonetheless, the~~ The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be ~~more~~ modest in the near term ~~than had been anticipated~~.
Measures of underlying inflation ~~have trended lower in recent quarters and, with~~ are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be remain subdued for some time before rising to levels the Committee considers consistent with its mandate.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of for the federal funds rate for an extended period.
~~To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by~~ The Committee also will maintain its existing policy of reinvesting principal payments from ~~agency debt and agency mortgage-backed securities in longer-term Treasury securities~~ its securities holdings.
The Committee will continue to monitor the economic outlook and financial developments and ~~will employ its policy tools as necessary to promote~~ is prepared to provide additional accommodation if needed to support the economic recovery and ~~price stability~~ to return inflation, over time, to levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; ~~Donald L. Kohn;~~ Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.
Voting against the policy was Thomas M. Hoenig, who ~~judges~~ judged that the economy ~~is recovering modestly, as projected~~ continues to recover at a moderate pace. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and ~~limits the Committee's ability to adjust policy when needed~~ will lead to future imbalances that undermine stable long-run growth. In addition, given economic and financial conditions, Mr. Hoenig did not believe that ~~keeping constant the size of the Federal Reserve's holdings of longer-term securities at their current level~~ continuing to reinvest principal payments from its securities holdings was required to support ~~a return to~~ the Committee's policy objectives.

wage disparity by sex by city

2010-09-01T06:59:00.003-04:00

One occasionally hears a statistic that women make 3/4 to 4/5 as much money as men do, but for a long time it's been the case that single, childless women make an amount that is statistically indistinguishable from single, childless men in the same jobs. (This, of course, is based on averages. Individual variation is pervasive.) As of 2008, in large metropolitan areas, women on average appear to have been outearning men, though it isn't clear to me whether they took account of which jobs people were working in.

Bernanke at Jackson Hole

2010-08-27T20:10:00.002-04:00

Bernanke's speech this morning. He says the economy sucks, but the fed's on the case. Market indicators of inflation expectations rose, stocks were up, bonds tanked.

GDP

2010-08-27T18:01:00.003-04:00

Inventory accumulation and the trade balance were substantially downgraded from the first estimate; spending on services and nondurables was revised upward slightly, but the headline number is down quite a bit.

	II 07	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10
Gross domestic product	3.2	2.3	2.9	-.7	.6	-4.0	-6.8	-4.9	-.7	1.6	5.0	3.7	1.6
Services	.74	.62	.71	.88	.00	-.59	.30	-.75	-.79	-.21	.27	.03	.56
Nondurable goods	-.03	.27	.07	-.50	.31	-.91	-.78	.06	-.11	.27	.49	.67	.33
Durable goods	.38	.31	.20	-.92	-.23	-.95	-1.79	.35	-.21	1.35	-.07	.62	.49
Change in private inventories	.90	-.28	-.77	-.49	-.48	-.12	-2.31	-1.09	-1.03	1.10	2.83	2.64	.63
Fixed investment	.62	-.18	-.76	-.98	-.69	-1.83	-4.01	-5.71	-1.26	.12	-.12	.39	2.12
Net exports of goods and services	.01	.87	3.21	.84	1.04	-.63	1.50	2.88	1.47	-1.37	1.90	-.31	-3.37
Government spending	.64	.66	.24	.44	.65	1.04	.31	-.61	1.24	.33	-.28	-.32	.86

CDO cross-holdings

2010-08-27T17:41:00.002-04:00

ProPublica found 85 instances during 2006 and 2007 in which two CDOs bought pieces of each other’s unsold inventory. These trades, which involved $107 billion worth of CDOs, underscore the extent to which the market lacked real buyers.

ProPublica, þ Felix Salmon, who says $107 billion was 20% of the market for CDOs. I can imagine this being done for legitimate reasons, but that's not one's natural first bet. It reminds me a bit of the late eighties stock bubble in Japan, in which corporate profits (and the stock market) continued to rise for two years after operating profits peaked, just because of the extensive cross-holding of each other's shares by publicly traded companies. That latter example is more reminiscent than the newer one of an even older incident involving a fellow named Charles Ponzi.

Home Sales

2010-08-24T12:39:00.002-04:00

Existing home sales were expected to be lower in July, after the expiration of the home-buying tax credit, but were even lower than expected.

Those charts could be considered misleading - Indiviglio refers to "[t]hat tiny bar to the far right" in one chart, and the bar wouldn't be quite so tiny if the chart started at 0 - but they do show recent home sales at a glance and raise the question: how much of the demand moved forward by the credit was moved from July and how much of the hangover is left to be seen?

Link via Megan McArdle, who mentions anecdotal evidence that buyers overreacted to the credit.

Fed Statement

2010-08-10T14:15:00.003-04:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~April suggests that the economic recovery is proceeding and that the labor market is improving gradually~~ June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software ~~has risen significantly~~ is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. ~~Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.~~ Bank lending has continued to contract ~~in recent months~~. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be ~~moderate for a time~~ more modest in the near term than had been anticipated.
~~Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With~~ Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.
Voting against the policy ~~action~~ was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee's flexibility to begin raising rates modestly and limits the Committee's ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve's holdings of longer-term securities at their current level was required to support a return to the Committee's policy objectives.

inflation

2010-08-04T20:56:00.003-04:00

For a third consecutive month, falling energy prices were the prime culprit in producing a negative headline PCE inflation rate—abetted this time around by declines in the price index for food. That string of consecutive negative headline rates looks to be snapped, however, when data for July come out. Meanwhile, the 12-month inflation rate for core PCE ticked down a notch, from 1.5 percent in May to 1.4 percent in June. The 12-month trimmed mean PCE inflation rate held steady at 1 percent.

From the Dallas Fed. Overall PCE inflation was a -1.7% annual rate last month, but is still positive over the last year; the core measures are a bit higher, with the trimmed-mean fairly steady in the 0.7-0.8% range recently.

GDP

2010-07-30T11:28:00.002-04:00

In the second quarter Americans spent more money, but mostly overseas; imports took a clean 4 percentage points off the annualized GDP number. Housing investment picked up a bit, but it was nonresidential fixed investment that provided the biggest boost to demand. Inventory accumulation continued to accelerate, though not as quickly as before.

	II 07	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10	II 10
Gross domestic product	3.2	2.3	2.9	-.7	.6	-4.0	-6.8	-4.9	-.7	1.6	5.0	3.7	2.4
Services	.74	.62	.71	.88	.00	-.59	.30	-.75	-.79	-.21	.27	.03	.36
Nondurable goods	-.03	.27	.07	-.50	.31	-.91	-.78	.06	-.11	.27	.49	.67	.25
Durable goods	.38	.31	.20	-.92	-.23	-.95	-1.79	.35	-.21	1.35	-.07	.62	.53
Change in private inventories	.90	-.28	-.77	-.49	-.48	-.12	-2.31	-1.09	-1.03	1.10	2.83	2.64	1.05
Fixed investment	.62	-.18	-.76	-.98	-.69	-1.83	-4.01	-5.71	-1.26	.12	-.12	.39	2.09
Net exports of goods and services	.01	.87	3.21	.84	1.04	-.63	1.50	2.88	1.47	-1.37	1.90	-.31	-2.78
Government spending	.64	.66	.24	.44	.65	1.04	.31	-.61	1.24	.33	-.28	-.32	.88

Monetary Policy and Inflation in India

2010-07-27T13:47:00.003-04:00

The Reserve Bank of India (RBI) on Tuesday... raised the repo rate—at which it lends to commercial banks—by 25 basis points (bps) to 5.75%. The reverse repo rate—or the rate at which banks park excess cash with RBI—has been raised by 50 bps to 4.50%.
...
Inflation continues to be the main concern for the central bank. In fact, it has raised the inflation projection for March 2011 to 6% from 5.5%.

If "inflation continues to be [your] main concern", I would think you shouldn't be targeting negative real interest rates.

Incidentally, last summer (when I was in India) the monsoon largely failed, causing severe shortages of domestically produced food. I have seen elsewhere that the government is hoping that food prices will come down for their own reasons after this year's harvest. That should be baked into an "inflation projection for March 2011", though.

What will the economy do?

2010-07-02T10:10:00.005-04:00

Reasons for optimism		Reasons for pessimism

Steady rise in income, including from employment compensation Some drop in the unemployment rate		Continued high weekly unemployment claims Continued drop in the number of jobs / people employed Expiration of government stimulus (Premature?) contraction of the Fed balance sheet Sovereign credit issues in Europe Production has caught up with final sales; recent inventory investment likely to run out

I expect to continue to edit this over the course of the first week of July. Suggestions for addenda are welcome.

Employment report

2010-07-02T10:01:00.002-04:00

The household survey shows a big drop in the participation rate, with both the number of employed people and the number of unemployed people in the labor force dropping by about 300,000 people. (The payroll survey showed a smaller decrease in the number of jobs, with an increase in the number of private sector jobs; note that a lot of census jobs disappeared between May 12 and June 12.)

This is all seasonally adjusted, incidentally. I would imagine if the unemployment rate (which dropped to 9.5%) works its way down below 9% that the participation rate will start working its way back up. I wonder to what extent the drop in participation rate is connected to the long-term unemployed losing their unemployment benefits; it's certainly easier to keep looking (without success) for a job when you're getting paid to do so. (It's possible, contra what I said earlier, that the people dropping out of the work force are disproportionately not the sort who would be at the top of any employers' lists for new hiring; if they know that, they might stay out of the labor market until the rate drifts closer to 7% or 6%.)

inflation

2010-06-28T11:41:00.002-04:00

The Dallas Fed's trimmed-mean PCE inflation:

NIPA is out today — that's where Dallas gets its raw data — and shows nominal labor compensation rising at more or less a steady 5% annual rate for the last few months, so you can convince yourself that the economy is improving if you want, though there are other data that can give you an excuse for pessimism. That's why people love economists.

GDP

2010-06-25T12:32:00.003-04:00

	I 07	II 07	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10
Gross domestic product	1.2	3.2	3.6	2.1	-.7	1.5	-2.7	-5.4	-6.4	-.7	2.2	5.6	2.7
Services	1.61	.76	.60	.15	.85	.17	-.60	.26	-.13	.09	.37	.49	.69
Nondurable goods	.48	-.13	.33	.27	-.49	.35	-.94	-.78	.29	-.29	.23	.63	.60
Durable goods	.45	.18	.42	.44	-.75	-.46	-.95	-1.64	.28	-.41	1.36	.03	.83
Change in private inventories	-.61	.32	.19	-.63	-.21	-1.25	.26	-.64	-2.36	-1.42	.69	3.79	1.88
Fixed investment	-.43	.59	-.04	-.66	-.99	-.41	-1.30	-3.28	-6.62	-1.68	-.15	.61	-.06
Net exports of goods and services	-.29	.66	1.36	2.24	.36	2.35	-.10	.45	2.64	1.65	-.81	.27	-.82
Government spending	.00	.82	.75	.31	.51	.71	.95	.24	-.52	1.33	.55	-.26	-.39

Fed statement

2010-06-23T14:18:00.003-04:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~March~~ April suggests that ~~economic activity has continued to strengthen~~ the economic recovery is proceeding and that the labor market is ~~beginning to improve~~ improving gradually. ~~Growth in household spending has picked up recently~~ Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures ~~is declining~~ continues to be weak and employers remain reluctant to add to payrolls. Housing starts ~~have edged up but~~ remain at a depressed level. ~~While bank lending continues to contract, financial market conditions remain~~ Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. ~~Although the pace of economic recovery is likely to be moderate for a time~~ Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.
Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to ~~longer run~~ longer-run macroeconomic and financial stability, while limiting the Committee's flexibility to begin raising rates modestly.
Possibly moved phrases:
 the pace of economic recovery is likely to be moderate for a time

GDP as a welfare proxy

2010-06-15T10:28:00.002-04:00

The oil spill is predicted to slightly increase GDP. Note that pretty much all the costs listed are real costs, and the benefits listed are compensating for excluded costs.

employment situation

2010-06-04T12:33:00.005-04:00

	March	April	May	Δ
Civilian labor force	153,910	154,715	154,393	-322
Participation rate	64.9	65.2	65.0	-0.2
Employed	138,905	139,455	139,420	-35
Employment-population ratio	58.6	58.8	58.7	-0.1
Unemployed	15,005	15,260	14,973	-287
Unemployment rate	9.7	9.9	9.7	-0.2

These are from the household survey; the payroll survey shows an increase of 431,000 nonfarm jobs, of which 390,000 are government jobs, many of them for the census.

Three Can Keep A Secret if Two of Them Are Dead

2010-05-27T11:17:00.002-04:00

Federal authorities alleged Wednesday that a Walt Disney Co. executive assistant and her boyfriend engaged in a ham-handed plot to sell Wall Street traders inside information, first offered in a chirpy missive sent to dozens of investment companies.

"Hi, I have access to Disney's (DIS) quarterly earnings report before its release on 05/03/10," the March 5 letter began. "I am willing to share this information for a fee that we can determine later."

The alleged plan went awry. Instead of taking the bait, "multiple hedge funds reported the illicit scheme," the Securities and Exchange Commission said in a press release.

I'm not sure what is the correct way to try to profit from insider information, but putting your illegal plan in writing and mailing it to dozens of strangers is not it.

The story is from today's Wall Street Journal.

Causes of the Great Depression

2010-05-19T11:41:00.002-04:00

If you're looking to fill 68 minutes, you could do worse than this video of Scott Sumner talking about the causes of the Great Depression. The audio could be better quality.

fool me twice, Euro edition

2010-05-14T18:16:00.003-04:00

The European Commission on Wednesday recommended that Estonia be allowed to adopt the euro next year despite a critical report from the European Central Bank.

The divergent views evoked a similar split a decade ago over Greece’s readiness to join the euro zone, which is now struggling with a sovereign debt crisis set off by Greece.

Wouldn't an exchange-rate--fixing mechanism with support from both sides seem a more prudent approximation about now? (In fact, looking at an exchange-rate chart, it looks to me like there might be a peg right now. 48 euros to 751 kroons or so?)

Europe asunder

2010-05-14T15:16:00.002-04:00

Euro plumbs new lows, European stock markets tank, sovereign spreads gap out:

RTRS-GREEK FIVE-YEAR CREDIT DEFAULT SWAP AT 611 BPS VS 528.7 BPS AT NEW YORK CLOSE ON THURSDAY – CMA DATAVISION

RTRS-PORTUGUESE CREDIT DEFAULT SWAP AT 247 BPS VS 201 BPS AT NEW YORK CLOSE THURSDAY – CMA DATAVISION

RTRS-SPANISH CREDIT DEFAULT SWAP AT 180 BPS VS 155.1 BPS AT NEW YORK CLOSE THURSDAY – CMA DATAVISION

RTRS-FRENCH CREDIT DEFAULT SWAP AT 71.5 BPS VS 64.9 BPS AT NEW YORK CLOSE THURSDAY – CMA DATAVISION

The "End of the World" tag is premature, but I'm warming it back up, on the assumption that it is, in fact, merely premature.

2009 state tax revenues

2010-05-13T14:54:00.003-04:00

Tax revenues fell in 45 of the 50 states from 2008 to 2009.

Overall state tax revenues increased in the other five states:

Wyoming: 13.9%
North Dakota: 4.3%
Oregon: 1.9%
Iowa: 1.3%
South Dakota: 0.9%

I don't know to what extent some states raised rates to prevent revenue drops or others cut them to ease the recession.

big trading houses and liquidity

2010-05-12T12:23:00.003-04:00

The New York Times reports that

Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase & Company produced the equivalent of four perfect games during the first quarter. Each one finished the period without losing money for even one day.

Even before reading much deeper, I had suspected this:

Risk management experts said the four banks, as well as other Wall Street players, reaped big rewards without necessarily placing big bets that stocks or bonds would go up or down. Instead, they mostly played matchmaker, profiting from the difference between the prices at which clients were willing to buy and sell. Banks said that customer order flows were particularly strong during the period.

Since the beginning of 2009, these companies have moved away from big market bets toward simply providing liquidity to clients on comparatively simple products. A lot of players left the market or scaled back their presence, either because they failed or because they can't bring as much capital to the table, because of losses, prudent deleveraging, or some combination of the two. It may be a while before enough competition returns to the sell-side to bring this down in a serious way; in the meantime, the juicy profits should remain there, gradually drawing it back in.

Econometric Errors in Factor Models

2010-05-01T10:16:00.004-04:00

A lot of my favorite papers demonstrate common econometric errors by using the econometric techniques to derive results from random data. There's a new example in this month's issue of the Journal of Financial Economics:

It has become standard practice in the cross-sectional asset pricing literature to evaluate models based on how well they explain average returns on size-B/M portfolios, something many models seem to do remarkably well. In this paper, we review and critique the empirical methods used in the literature. We argue that asset pricing tests are often highly misleading, in the sense that apparently strong explanatory power (high cross-sectional R²s and small pricing errors) can provide quite weak support for a model. We offer a number of suggestions for improving empirical tests and evidence that several proposed models do not work as well as originally advertised.

An important law of applied econometrics, especially in a setting in which the correlation structure is poorly understood, is that no matter how many corrections you include in your standard error calculations, your calculated standard errors will be too low.

For the record, Lewellen got his PhD from the program I'm in at the University of Rochester while Shanken was a professor here.

GDP

2010-04-30T09:16:00.004-04:00

The GDP report. Final sales are still weak; an actual increase in inventories for the first time in years increased the headline number.

	I 07	II 07	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09	I 10
Gross domestic product	1.2	3.2	3.6	2.1	-.7	1.5	-2.7	-5.4	-6.4	-.7	2.2	5.6	3.2
Services	1.61	.76	.60	.15	.85	.17	-.60	.26	-.13	.09	.37	.49	1.15
Nondurable goods	.48	-.13	.33	.27	-.49	.35	-.94	-.78	.29	-.29	.23	.63	.61
Durable goods	.45	.18	.42	.44	-.75	-.46	-.95	-1.64	.28	-.41	1.36	.03	.79
Change in private inventories	-.61	.32	.19	-.63	-.21	-1.25	.26	-.64	-2.36	-1.42	.69	3.79	1.57
Fixed investment	-.43	.59	-.04	-.66	-.99	-.41	-1.30	-3.28	-6.62	-1.68	-.15	.61	.10
Net exports of goods and services	-.29	.66	1.36	2.24	.36	2.35	-.10	.45	2.64	1.65	-.81	.27	-.61
Government spending	.00	.82	.75	.31	.51	.71	.95	.24	-.52	1.33	.55	-.26	-.37

Update: I'm still looking for commentary on the net exports statistic. Note that domestic consumption is fairly strong for the latest quarter; the net export number comprises an increase in exports, but an even bigger increase in imports.

Fed Statement

2010-04-28T14:16:00.002-04:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~January~~ March suggests that economic activity has continued to strengthen and that the labor market is ~~stabilizing~~ beginning to improve. ~~Household spending is expanding at a moderate rate~~ Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly ~~. However~~ ; however, investment in nonresidential structures is declining~~, housing starts have been flat at a depressed level,~~ and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
In light of improved functioning of financial markets, the Federal Reserve has ~~been closing~~ closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities ~~and~~ ; it closed on March 31 for loans backed by all other types of collateral.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to ~~the buildup of financial~~ a build-up of future imbalances and increase risks to ~~longer-run~~ longer run macroeconomic and financial stability, while limiting the Committee's flexibility to begin raising rates modestly.
Possibly moved phrases:
 at a depressed level
 starts have 

economic statistics

2010-04-20T17:53:00.002-04:00

“The main thing a low savings rate predicts is that more savings will be discovered by statisticians,” Nakamura said.

Economic forecasting is notoriously unreliable in certain ways, but economists can't even tell the present with the kind of precision available to, say, weather forecasters.

non-recourse mortgage default

2010-04-19T16:11:00.000-04:00

My feelings on the morality of non-recourse mortgage default have changed a bit over the past year or two, and I want to babble a bit about my current feelings.

I want to start with an affirmation of the belief that a moral code restrained only by what can be written into formal law is not going to work. If you go through law school and brainstorm for cracks in the system to figure out where you can tiptoe around the edges of laws on extortion, fraud, and harassment, you may be legally in the clear, but you're still an asshole. On the other hand, particularly where the law is clear and deliberate, it's a reasonable starting point as to the social consensus on appropriate behavior. Further, because housing is likely to be a large part of an average homeowner's net wealth — indeed, in a typical case the homeowner's net worth is less than the market value of the home — tail risk is likely to be particularly odious to the homeowner, and I can imagine that many well-informed people in good faith would be willing to buy a house if they can only lose everything they put into it, and that many well-informed banks acting in good faith would find these to be reasonable terms on which to offer a mortgage. Certainly if the contract is explicitly non-recourse, then, but even if it is only implicitly non-recourse because of the state in which the contract is written, I think it's reasonable for an underwater homeowner to exercise the implicit put option on the house. (For small lenders — say seller-financed mortgages — that are unsophisticated, and reasonably so, and likely not to have realized they were writing a put, I feel a bit differently, especially if the buyer was unaware of the option until things went south.)

I also think that if you're looking at bankruptcy and/or starving your children, and you think the bank won't bother coming after you, that it's fairly reasonable. You should start by approaching the bank about a formally-sanctioned short-sale, but banks are overwhelmed these days; if you're facing a situation in which you really can't meet all the obligations you've incurred, bankruptcy law is supposed to settle which ones take priority, but for the most part I don't think it's terrible if you make some changes in that outcome, especially in response to transaction costs. I think secured lending for cars and houses should be treated in bankruptcy the same way as other secured lending, and my opinion as to what the law should look like probably colors my opinion of the ethics of actions related to that. In these situations, though — where you're illegally breaching your contract because you expect nobody to bother dealing with you — I'm not going to morally clear you unless you're acting in good faith in various ways; don't buy a new SUV the next month, or a big-screen TV for that matter, or keep such items if you can liquidate them for a reasonable value. This is for a legitimate bankruptcy-type situation, and it becomes sketchier the less effort is put into pursuing formal channels.

The final case is that in which a borrower can reasonably keep making payments and keep food on the table, but is unwilling to downgrade (say) the quality of that food, or the amenities of the lifestyle, and decides to skip out because he expects not to be worth the trouble to pursue. I hope that person chokes to death on his steak.

signaling, herding, and the law of demand

2010-04-19T12:09:00.003-04:00

When Victoria Perkovich sees a high toll on the illuminated Interstate 95 Express signs, she steers into the toll lanes.

``I think the traffic must be pretty bad,'' says Perkovich, a college student and frequent commuter. ``I'd rather pay $4 than spend two hours sitting in traffic.''

Her behavior helps explain the traffic growth on the I-95 Express Lanes -- and a classic misunderstanding of commuter psychology.

Traffic engineers assumed high tolls would deter drivers from using express lanes. Wrong.

Many drivers, like Perkovich, assume high tolls mean the toll-free lanes are clogged. Could be true, but the tolls rise mainly due to the number of drivers willing to pay a toll.

Hat tip to Jodi Beggs, who provides some commentary:

Could this work as an efficient congestion pricing system? Yes, if people were doing their own homework regarding traffic conditions and using that information to determine whether the toll was worth it. ... Does it work? No, since rather than checking the traffic reports, people are using the price itself as a signal of the traffic level. So what seems to be happening is something like the following: A few dudes who are really in a hurry choose the pay lane, just to be on the safe side. This raises the toll, and then other drivers see the toll increase and think “wait, what do these other guys know that I don’t?” and also choose the toll lane. This further increases the toll rate, ....

If the signal proves unreliable, this isn't an equilibrium; equilibrium can take a while to develop, but should eventually do so in a situation like this. Listening to radio traffic reports may currently be fairly profitable in Miami.

City Bank put into receivership

2010-04-16T23:48:00.002-04:00

City Bank failure.
Not that one, nor that one...yet.
Not that one either.

Calculated Risk regularly does Haikus for bank failures.

renting vs. owning

2010-04-15T20:56:00.002-04:00

A calculator telling whether owning or renting is cheaper. That they don't ask how far short of your standard deduction your other itemizable deductions fall indicates they're guessing at that; I hope their guess isn't "0".

If I were ambitious and a bit more technically savvy, I would produce something like this for the web that would generate 2-D diagrams with critical lines on them, such that you could look at a graph of break-even rent vs. price appreciation and the like. Actually, I think I have an excel spreadsheet online somewhere; if you have excel on your computer and want to try playing around with this, it's not as fully functional as the other calculator, but it might have its own charms. (Or not. I'm not on a computer with excel at the moment.)

causes of the financial crisis

2010-04-07T20:40:00.002-04:00

Mr. Greenspan sought to lay blame for the crisis on international economic forces that were pouring money into the U.S. real-estate market, as well as on domestic political pressures to boost homeownership.

He singled out the congressionally chartered mortgage companies, Fannie Mae and Freddie Mac, which were major consumers of subprime mortgages. Republicans on the commission, particularly former Bush administration adviser Keith Hennessey, echoed that concern.

Mr. Greenspan suggested that Fed critics have lost sight of the political atmosphere that prevailed at the time. "I mean, I sat through meeting after meeting in which the pressures on the Federal Reserve—and on, I might add, all of the other regulatory agencies—to enhance lending were remarkable."

Better regulation by a dictator would have been conceivable. It's possible that, in a political democracy, the regulation we had was rather closer to as good as it was going to get.

Donald Trump and China

2010-04-07T12:58:00.002-04:00

I hope the Chinese recognize that many of us aren't dumb SOBs; we're just less likely to get on television than those who are.

tomorrow's labor report

2010-04-01T21:08:00.002-04:00

The Bureau of Labor Statistics releases its March employment data tomorrow morning at 8:30; an hour later, staff will have a live Q&A on the web. You can submit your question ahead of time, and, while I hope they answer some questions that won't be possible to formulate until 8:30 tomorrow, if you have one formulated now, that might be the way to go.

municipal default

2010-04-01T11:42:00.003-04:00

It is reasonably likely that Harrisburg, PA, will miss a debt payment due today. Meanwhile, Jefferson County, Alabama, (which includes Birmingham) is trying to renegotiate a debt on which it is in default.

gdp

2010-03-26T08:34:00.002-04:00

The "final" revision of Q4 GDP. The investment numbers were revised down a little bit.

	IV 06	I 07	II 07	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09
Gross domestic product	3.0	1.2	3.2	3.6	2.1	-.7	1.5	-2.7	-5.4	-6.4	-.7	2.2	5.6
Services	1.40	1.61	.76	.60	.15	.85	.17	-.60	.26	-.13	.09	.37	.49
Nondurable goods	.93	.48	-.13	.33	.27	-.49	.35	-.94	-.78	.29	-.29	.23	.63
Durable goods	.46	.45	.18	.42	.44	-.75	-.46	-.95	-1.64	.28	-.41	1.36	.03
Change in private inventories	-1.08	-.61	.32	.19	-.63	-.21	-1.25	.26	-.64	-2.36	-1.42	.69	3.79
Fixed investment	-.91	-.43	.59	-.04	-.66	-.99	-.41	-1.30	-3.28	-6.62	-1.68	-.15	.61
Net exports of goods and services	1.94	-.29	.66	1.36	2.24	.36	2.35	-.10	.45	2.64	1.65	-.81	.27
Government spending	.21	.00	.82	.75	.31	.51	.71	.95	.24	-.52	1.33	.55	-.26

Incentives from unemployment benefits

2010-03-17T11:29:00.001-04:00

Fraction of unemployed people who start working, relative to when they exhaust their unemployment benefits:Krugman is quoted here as suggesting that incentives to find jobs simply don't matter in a recession because there aren't jobs; this seems like a particularly bad case of failing to recognize the heterogeneity of an economy, which is particularly important for things of this sort. A lot of people are losing jobs, and a lot of people are starting jobs; the balance for the last year or two has been slightly toward the former, but there have been a lot of job offers being made and accepted, even in 2009. Further, I don't think anybody imagines that this is primarily a case of people watching TV until two weeks before they're offered a job and then finding a job as soon as they care to look for one; if you're offered a job that would pay 20% less than what you made at your last job and would be less interesting or prestigious, you're more likely to take it if you have two weeks of unemployment compensation left than if you have 20.

This brings me to the point that, this notwithstanding, it doesn't necessarily mean that unemployment insurance is a bad thing. To some extent, letting people look around for the right job, rather than simply the first one that's offered, will benefit the economy in the longer run. This will be less true, though, when people overestimate what they're likely to be able to find, as is frequently the case in recessions; a lot of computer programmers in 2001 thought they were worth a lot more than they were, and the same is probably true of construction workers and investment bankers right now.

Finally, note that this is a bounded rationality argument. Ideally, people would be funding this search time from their own savings, which would be put aside with the possibility of unemployment in mind; they would weigh the value of continued search against taking a job sooner. For unemployment insurance to improve efficiency by enabling people to remain unemployed longer, it has to be playing a role in which people are more or less desperate for a job when they don't have the checks coming in and are much less concerned when they do. If someone with savings and a clear assessment about the value of taking a given job at a given time turns down a job that he would have accepted if he weren't getting unemployment checks, then that's pure loss.

Fed statement

2010-03-16T14:16:00.000-04:00

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~December~~ January suggests that economic activity has continued to strengthen and that the ~~deterioration in the~~ labor market is ~~abating~~ stabilizing. Household spending is expanding at a moderate rate but remains constrained by ~~a weak labor market~~ high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software ~~appears to be picking up, but investment in structures is still contracting~~ has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls~~. Firms have brought inventory stocks into better alignment with sales~~. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack continuing to restrain cost pressures and ~~with~~ longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve ~~is in the process of~~ has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt ~~. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these~~ ; those purchases are nearing completion, and the remaining transactions will be executed by the end of ~~the first quarter~~ this month. The Committee will continue to ~~evaluate its purchases of securities in light of the evolving~~ monitor the economic outlook and ~~conditions in financial markets~~ financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced has been closing the special liquidity facilities that it created to support markets during the crisis. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit wil be offered at the final auction on March 8. The anticipated expiration dates for The only remaining such program, the Term Asset-Backed Securities Loan Facility ~~remain set at~~ , is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral~~. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth~~.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that ~~economic and financial conditions had changed sufficiently that~~ continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

Agency Bounds on Firm Rationality

2010-03-15T23:52:00.001-04:00

The events to be described here took place about six months ago, but it came up in conversation over the weekend, and I thought I'd share it here.

A very good friend of a very good friend bought a house. It was a short sale with two lien-holders — this had been an 80/20 deal — which you can imagine is administratively complex; the total debt was on the order of $350,000 — I don't remember the exact figure — and he and the seller had agreed to a price of $253,000. The primary lien-holder had signed off on an agreement allowing the second lien-holder to receive $11,500, while the second lien-holder had agreed to accept 5% of the sale price. 5% of $253,000 is $12,650, so they were a bit stuck.

The climax came when the buyer was in an office with his real-estate agent, on a speaker-phone conference call with lower-level employees of both lenders, neither with the real authority to renegotiate either agreement. In lieu of being able to negotiate, they began yelling at each other for a protracted period of time, over which it occurred to them that there was nothing in the agreements stipulating a minimum dollar value that either bank would accept. Accordingly, they lowered the sale price to $230,000, of which 5% would be $11,500, and the buyer walked away $23,000 richer.

Most of the time for most purposes, firms, especially large firms, tend to behave more "rationally" than individuals; commercial mortgage prepayments, for example, are much more sensitive to interest rates than you're average conforming home loan. There are certain important quirks of firm behavior, though, stemming from the fact that they are not really unitary actors, but collections of agents with varying knowledge and authority, and sometimes that results in firms acting clearly against their own interests.

Update: Felix Salmon suggests this may be rational behavior in a repeated-game, or (perhaps relatedly) an aversion to outcomes perceived as unfair in some sense. An interesting suggestion, but I think if the lenders' representatives had had the authority to change the deal to split the other $23,000 among themselves, they probably would have; this is a story of individuals doing what's easiest for them rather than their employer, partly due to constraints created (on some level) by the employer.

productivity, growth, employment, and Okun gaps

2010-03-15T23:46:00.000-04:00

On some level, I think it is common sense that the path to wealth is to have people able to produce things as efficiently as possible. At least in the long run, I think a full and detailed understanding gives the same result. Most people seem to be stuck on a middle kind of understanding in which it seems as though inefficiency is good, and I think that's partly due to a fixation on the business cycle; if you have a three year time horizon and we're going into a recession, there may well be things you could give people to do that are better than unemployment, even if they aren't efficient, but in the long run it probably means they will be doing the wrong kinds of things, or doing them poorly.

A lot of the neoclassical assumptions about smoothly functioning and adapting markets hold fairly well in the long run, and if they held in the short run as well, I think this would be more intuitive to people: if you have a fixed number of people doing things, to a large extent the tradeoffs you make (on a societal level) involve whether those people are providing health care or building computers, and the fact that someone who works as a doctor can't then be an electrical engineer during that time as well. The most reasonable time not to think this way is during a recession — you don't, on some level, have a fixed number of people doing things; if you can turn an unemployed person into a doctor, you don't have to give up any computers. You'd have to have a pretty gloomy outlook, though, to think that the tradeoff doesn't exist in the long run, that the number of useful jobs will be essentially independent of the number of people in the labor market over long periods of time. (In fact, if you want to predict how many jobs the economy will create in the next year or two, you might get your best estimate from an economic model, but if you want to predict how many jobs the economy will create in the next two decades, I'd steer you to a demographic model. How many more people will want to be in the work force in 20 years than there are now? That's about how many jobs will be created.)

So here's the upshot: for most government programs — e.g. road building — the benefit is the obvious output -- more or better roads. "Jobs created" are the single biggest cost. If the road isn't worth that cost, you shouldn't build the road. It's not completely insane on a short-term basis during a recession to think that labor is less of a cost than it usually is, particularly if the people being hired are likely to be those who are currently unemployed and who are particularly likely not otherwise to become employed in the near future. It's entirely wrong, though, on a longer term. (This is the single biggest reason I roll my eyes when I hear about "green jobs". The environment is worth something, and it's worth paying for a better environment, but long-term employment in making the environment better is a cost, not a benefit, and needs to be recognized as such; "we take people out of other production and improve the environment" isn't win-win.) Even if politicians understand this, though, I never expect to hear them betray it, especially (again) during a recession.

Berkshire Hathaway

2010-02-27T13:18:00.001-05:00

The annual letter is up. So is the annual report, but that tends to be of somewhat less general interest.

GDP

2010-02-26T11:14:00.002-05:00

GDP was revised up slightly, largely due to non-residential investment, especially in inventories. (Growth in final sales was revised down to 1.9% at an annualized rate from 2.3%.)

	IV 06	I 07	II 07	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09
Gross domestic product	3.0	1.2	3.2	3.6	2.1	-.7	1.5	-2.7	-5.4	-6.4	-.7	2.2	5.9
Services	1.40	1.61	.76	.60	.15	.85	.17	-.60	.26	-.13	.09	.37	.57
Nondurable goods	.93	.48	-.13	.33	.27	-.49	.35	-.94	-.78	.29	-.29	.23	.64
Durable goods	.46	.45	.18	.42	.44	-.75	-.46	-.95	-1.64	.28	-.41	1.36	.02
Change in private inventories	-1.08	-.61	.32	.19	-.63	-.21	-1.25	.26	-.64	-2.36	-1.42	.69	3.88
Fixed investment	-.91	-.43	.59	-.04	-.66	-.99	-.41	-1.30	-3.28	-6.62	-1.68	-.15	.75
Net exports of goods and services	1.94	-.29	.66	1.36	2.24	.36	2.35	-.10	.45	2.64	1.65	-.81	.30
Government spending	.21	.00	.82	.75	.31	.51	.71	.95	.24	-.52	1.33	.55	-.23

inflation

2010-02-19T15:23:00.003-05:00

It's been a little while since I posted the trimmed-mean PCE inflation rate, so this is provided for my benefit as much as anyone else's:

It's low. The four-month moving average dipped below 1% in December, to 0.94%.

Discount rate hike

2010-02-18T17:48:00.001-05:00

The Fed has raised the discount rate to 75bp. This is probably more symbolic than anything right now.

fudging reports

2010-02-15T11:29:00.002-05:00

The number 4 occurs less frequently than chance would dictate in the tenths of a cent digit for quarterly earnings.

... companies that later restate quarterly earnings or become charged with accounting violations report far fewer 0.4 cent results on average [than] other firms.

þ Knowledge Problem.

Economic Report of the President

2010-02-12T01:50:00.001-05:00

The Economic Report of the President is out.

Toyota and Japan

2010-02-11T13:10:00.002-05:00

A couple of days ago, the Wall Street Journal ran an interesting story asserting that Toyota's poor crisis-management was rooted in Japanese culture.

Inventory cycles

2010-02-10T15:57:00.002-05:00

Source (pdf). Note that, in the current cycle, all 7 quarters he shows have seen the level of final sales as higher than GDP, and that much of the recent GDP growth has been a reduction in the gap (as production has partly caught up with final sales), not an actual increase in inventories. This guy is making the assertion that the demand for inventories could lead to a significant boost to the economy going forward, as it did after the 1982 recession. (cf. my dicta in the last GDP report.)

employment situation

2010-02-05T13:40:00.003-05:00

The unemployment rate for January, based on the household survey, has been reported at 9.7%, down from 10% last month, with the participation rate somewhat higher, and an implication of 540,000 more employed people, though the payroll number, based on the employer survey, showed a statistically insignificant change in the number of jobs. The employer survey is popular with economists because of its smaller statistical error bars, but there are a couple of reasons I prefer the household survey (and none of them is because it's more optimistic).

Each set of numbers is, as indicated, based on a survey; it's not possible to go around finding out exactly who is employed by whom and tallying up all the numbers precisely. A certain number of known employers are surveyed, and a certain number of random individuals are surveyed. To get aggregate numbers of jobs created and so on, assumptions have to be made as to how many people there are, how many new businesses were created, how many businesses went out of business, and so on. It is particularly near turning points in the business cycle when the estimates used in the employer survey seem to be at their worst; they tend to be based on factors from the previous year or two, and thus the payroll survey usually looks bad for a while after jobs are being created (as the BLS underestimates the number of new businesses starting up) and looks good for a while after jobs are being lost. If what we're interested in is new news, instead of old news, this is a big flaw. Further, the biggest assumption that goes into the interpretation of the household survey is the change in U.S. population; if the population is presumed to be bigger than it is, it will appear that there are more employed people than there are, but it will also appear that there are more unemployed people than there are. This biggest assumption exactly cancels itself out in the calculation of the unemployment rate. Further, the unemployment rate, being scaled to the size of the economy, is a better indication of labor market slack; if the number of jobs is growing at the same rate as the population and labor force are growing, labor market conditions aren't changing.

The reasons for preferring the payroll survey do suggest that an unexpected 0.3% drop in the unemployment rate should be taken with a grain of salt, but — here I get all econometric — there is a positive serial autocorrelation between changes in the unemployment rate from month to month, which is to say that reported drops tend to be followed by reported drops and reported rises are followed by reported rises. A simple atheoretic ARIMA fit to the last 10 years of data predicts a reading of 9.7% again next month, with a slow decline after that, but the margin of error is comparable to the rate of decline; if I use a symmetric 50% confidence interval, the top of the interval stays at 9.8% well into the fall, though the optimistic end drops below 9% in the seventh month (the August rate, released in September).

GDP

2010-01-29T14:21:00.003-05:00

GDP was even stronger than expected, though, as expected, a lot of it was driven by inventory adjustments. Insofar as one is worried about final demand, this might be cause for concern, but note that inventories were still shrinking in Q4, just not nearly as quickly as in Q3. (The growth in GDP might not be sustainable, but the new level is more in line with recent levels of final sales; if final demand keeps up as it did last quarter, there's no particular reason we would have to "give back" much of the inventory boost.)

Fixed investment finally turned positive as well; "nonresidential structures" are still decreasing, but housing is (slightly) positive, and chattel investment was significantly up. (No, nobody calls it that. Just me.)

The slight drop in durable goods is, remember, affected by the expiration of cash-for-clunkers; if that were backed out, presumably durable goods purchases would be up as well.

	IV 06	I 07	II 07	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09	IV 09
Gross domestic product	3.0	1.2	3.2	3.6	2.1	-.7	1.5	-2.7	-5.4	-6.4	-.7	2.2	5.7
Services	1.40	1.61	.76	.60	.15	.85	.17	-.60	.26	-.13	.09	.37	.83
Nondurable goods	.93	.48	-.13	.33	.27	-.49	.35	-.94	-.78	.29	-.29	.23	.67
Durable goods	.46	.45	.18	.42	.44	-.75	-.46	-.95	-1.64	.28	-.41	1.36	-.06
Change in private inventories	-1.08	-.61	.32	.19	-.63	-.21	-1.25	.26	-.64	-2.36	-1.42	.69	3.39
Fixed investment	-.91	-.43	.59	-.04	-.66	-.99	-.41	-1.30	-3.28	-6.62	-1.68	-.15	.43
Net exports of goods and services	1.94	-.29	.66	1.36	2.24	.36	2.35	-.10	.45	2.64	1.65	-.81	.50
Government spending	.21	.00	.82	.75	.31	.51	.71	.95	.24	-.52	1.33	.55	-.02

Bernanke reconfirmed

2010-01-28T17:50:00.001-05:00

Bernanke received 70 votes, and will get a second term.

FOMC statement

2010-01-27T14:20:00.004-05:00

Note that this is the meeting at which the set of regional reserve bank presidents who vote on the committee changed, and one of the new ones dissented. Most of the other changes are changes in tense; what was previously beginning to happen is now happening, in the estimation of the committee.

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in ~~November~~ December suggests that economic activity has continued to ~~pick up~~ strengthen and that the deterioration in the labor market is abating. ~~The housing sector has shown some signs of improvement over recent months. Household spending appears to be~~ Household spending is expanding at a moderate rate ~~, though it~~ but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. ~~Businesses are still cutting back on fixed investment, though at a slower pace, and~~ Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls ~~; they continue to make progress in bringing~~ . Firms have brought inventory stocks into better alignment with sales. ~~Financial~~ While bank lending continues to contract, financial market conditions ~~have become more~~ remain supportive of economic growth. Although ~~economic activity~~ the pace of economic recovery is likely to ~~remain weak~~ be moderate for a time, the Committee anticipates ~~that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and~~ a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack ~~likely to continue to dampen~~ continuing to restrain cost pressures and with longer-term inflation expectations stable, ~~the Committee expects that inflation will remain~~ inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter ~~of 2010.~~ . The Committee will continue to evaluate ~~the timing and overall amounts of~~ its purchases of securities in light of the evolving economic outlook and conditions in financial markets.
In light of ~~ongoing improvements in the~~ improved functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve's special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve's announcement of June 25, 2009. These facilities include Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. ~~The Federal Reserve will also be working with its central bank counterparties to close its~~ In addition, the temporary liquidity swap arrangements by between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve ~~expects that amounts provided under the~~ is in the process of winding down its Term Auction Facility ~~will continue to be scaled back in early 2010.~~ : $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit wil be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30~~, 2010,~~ for loans backed by new-issue commercial mortgage-backed securities and March 31~~, 2010,~~ for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke~~; Charles L. Evans~~; Donald L. Kohn; ~~Jeffrey M. Lacker; Dennis P. Lockhart~~ Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh~~; and Janet L. Yellen~~. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

Berkshire stock split

2010-01-22T11:14:00.002-05:00

You can now buy into Berkshire Hathaway for about $70 plus commissions. The class B shares, each of which used to have economic rights equal to 1/30 of a class A share, split 50:1.

too-big-to-fail resolution

2010-01-15T11:07:00.002-05:00

There has been some recent move toward creating a bankruptcy chapter better constructed to handle financial institutions; Luigi Zingales was talking about such things in October of 2008 (search for "Bebchuk" — note that his proposal makes legacy counterparties senior to bondholders, who are nominally pari passu), but there now seems to finally be an interest in this in Congress. One idea I've been batting around in my head for perhaps a year now, at least as a tool to help with these things, is the creation of a new kind of credit that the government could issue, which I call TTL cash; I know I've shared it with my brother, but I don't think I've mentioned it here.

The idea is that when a highly-connected company (AIG) gets into trouble, the government lets it go bankrupt, but any creditor who is thereby impaired is given $1 in TTL cash for every dollar the creditor lost to the bankruptcy. The TTL cash is essentially nontransferable (and thus useless) except in bankruptcy, where, in the idea's simplest form, the government redeems it for actual money. The government has not bailed out AIG, or its creditors, but it has bailed out the creditors of AIG's creditors, insofar as they are impaired by AIG's failure; the chain reaction that regulators are eager to avoid is arrested.

The slightly more general case would allow different levels of TTL cash, each of which is redeemed for the next one down; the government could decide instead to bail out the creditors of the creditors of the creditors by issuing level 2 TTL cash, redeemable in bankruptcy for level 1 TTL cash, redeemable in bankruptcy for the real thing. "TTL" stands for "time-to-live", a term used in IP, the internet protocol; each time a router forwards an IP packet to another router it decrements a TTL counter, so that if some routing error causes the packet to wander off in the wrong direction or go around in circles, it eventually gets dropped rather than continuing to be passed around.

This is, of course, still a bailout, but on a practical level the moral hazard issues are much reduced from a standard bailout; everyone is responsible for assessing the credit quality of their debtors, at least to a significant extent. One of the major practical strengths of a decentralized economy vis-à-vis a centralized one is that it recognizes the information-handling limits of agents and asks them largely to make decisions based only on local information. If you lend entities money, or even just enter into contracts with them, you have to know something about their financial condition and their other dealings that affect it; if you have to know everything about their business, including everything about their potential creditors; capping this two levels down under certain circumstances seems to me a reasonable moral hazard price to pay for the benefits of a distributed system.

to-big-to-fail tax

2010-01-15T10:43:00.003-05:00

Mankiw on the new proposed bank tax:

President Obama has proposed a special tax levied on large financial institutions. In general, I am skeptical of narrow-based taxes, as they feed a particularly nasty kind of politics, where the majority gangs up on a minority. And I am turned off by the populist rhetoric coming from the administration, which suggests the issue pits Wall Street fat cats against ordinary Americans. Nonetheless, on the economic merits, there may be a case for the bank tax.

The case being, more or less, that it offsets failure-insurance that is otherwise being provided for free — or, certainly, being perceived to be provided for free, which has the same effect on investors — by the American taxpayer.

Mankiw notes that, in actual political practice, any new tax law

certainly won't be perfect. But it is possible that it will be better than doing nothing at all, watching the finance industry expand excessively, and waiting for the next financial crisis and taxpayer bailout.

What Obama has proposed I believe fits this description, insofar as I've heard any details that exist; Congress seems to have developed a habit of taking decent or defensible ideas from Obama and making them disasters, though, so while it's not obvious to me how they can impair this idea that badly, I'm not going to say they can't pull it off.

GDP

2009-12-22T11:56:00.002-05:00

3Q GDP has been revised down 1.3 points since two months ago. It's not one big thing; half of it is from "investment", with some of that from inventory adjustment and some of it from fixed investment. Every category except government spending has been revised in the same direction, though, and it adds up.

	III 06	IV 06	I 07	II 07	III 07	IV 07	I 08	II 08	III 08	IV 08	I 09	II 09	III 09
Gross domestic product	.1	3.0	1.2	3.2	3.6	2.1	-.7	1.5	-2.7	-5.4	-6.4	-.7	2.2
Services	.92	1.40	1.61	.76	.60	.15	.85	.17	-.60	.26	-.13	.09	.37
Nondurable goods	.40	.93	.48	-.13	.33	.27	-.49	.35	-.94	-.78	.29	-.29	.23
Durable goods	.37	.46	.45	.18	.42	.44	-.75	-.46	-.95	-1.64	.28	-.41	1.36
Change in private inventories	-.13	-1.08	-.61	.32	.19	-.63	-.21	-1.25	.26	-.64	-2.36	-1.42	.69
Fixed investment	-.86	-.91	-.43	.59	-.04	-.66	-.99	-.41	-1.30	-3.28	-6.62	-1.68	-.15
Net exports of goods and services	-.71	1.94	-.29	.66	1.36	2.24	.36	2.35	-.10	.45	2.64	1.65	-.81
Government spending	.11	.21	.00	.82	.75	.31	.51	.71	.95	.24	-.52	1.33	.55