Monthly Archives: January 2008

The Minsky Moment

John Cassidy explains:

There are basically five stages in Minsky’s model of the credit cycle: displacement, boom, euphoria, profit taking, and panic. A displacement occurs when investors get excited about something—an invention, such as the Internet, or a war, or an abrupt change of economic policy. The current cycle began in 2003, with the Fed chief Alan Greenspan’s decision to reduce short-term interest rates to one per cent, and an unexpected influx of foreign money, particularly Chinese money, into U.S. Treasury bonds. With the cost of borrowing—mortgage rates, in particular—at historic lows, a speculative real-estate boom quickly developed that was much bigger, in terms of over-all valuation, than the previous bubble in technology stocks.

As a boom leads to euphoria, Minsky said, banks and other commercial lenders extend credit to ever more dubious borrowers, often creating new financial instruments to do the job. During the nineteen-eighties, junk bonds played that role. More recently, it was the securitization of mortgages, which enabled banks to provide home loans without worrying if they would ever be repaid. (Investors who bought the newfangled securities would be left to deal with any defaults.) Then, at the top of the market (in this case, mid-2006), some smart traders start to cash in their profits.

Admittedly, Minsky’s theory fits the story.

Remembering History

Michael Kitchen writes

With that in mind, Herbert Hoover — only nine months into his presidency — assembled leaders from the public and private sectors to create an economic-stimulus package. Among the measures, Time magazine reported at the time, was a promise from Congress to offer bipartisan support for a tax-cut package. The proposal called for $160 million in tax relief — only about $22 billion if adjusted against the gross domestic product at the time, and therefore much smaller than the plan under consideration here in 2008. Read Time’s original coverage of the plan.  

Economic Growth

Phil Miller on the often unseen wonders of economic growth in our daily lives.

The “Solution” is the Problem!

Steve Horwitz echoes my thoughts (expressed in a post yesterday):

…excessive supplies of credit enabled mortgage lenders to give out high loan-to-value mortgages right and left, leading to delinquencies and foreclosures, supposedly leading to a weakening economy and a falling stock market, which the Fed is now attempting to “cure” by cutting rates by 75 basis points, which will inject even more funds into the economy.

Ridiculing the Fed

In response to Ben Bernanke’s comments that inflation expectations are “reasonably well anchored” Larry White responds:

Translation: Even though the Fed’s preferred measure of inflation, the Personal Consumption Expenditure deflator, is currently running at 2.2% year-over-year, above the Fed’s “comfort zone” (in which 2% inflation = price stability), TRUST US, the inflation rate will come down in 2008 even though we will be accelerating money growth with a big Fed Funds target rate cut at our next meeting, the opposite of pursuing an anti-inflation policy.

The Fed is proceeding down a dangerous path. We are experiencing quite a dichotomy with inflation above the Fed’s comfort zone and the economy experiencing a great deal of friction in the housing and credit markets (which are slowing spreading outward). Loose Fed policy encouraged this mess and now the Fed is seeking to remedy the problem with more liquidity. Yeesh!

Thoughts on the Manufacturing

Russ Roberts writes:

In America, showing up to work to work on an assembly line is no longer the road to the middle class. That’s because most people have found ways to be more productive and make more money using their brains. Most people go to college. True, if you don’t go to college, or worse, if you drop out of high school, it’s hard to make a good living. But we don’t want to fix that by creating jobs for people (or artificially high salaries) for people who have little education. We want to fix the education system and encourage more people to stay in school so they can have a good living.

Indeed.

Oops!

I have previously discussed Ms. Kaptur’s views on trade here.

HT: Three Sources