Chinese farmers slaughtered their chickens for people have realized how widely melamine is used as a supplement in feeding their chickens. This market failure of providing safe food supply is a good example why effective government oversight is needed for the market to operate. Markets cannot provide good solutions from time to time. According to my father, the Chinese Communist Party started the nationalization process after they found that the military supply provided by Shanghai capitalists were of perverse quality that the dirty raw materials led to the death of wounded soldiers in the battle fields in Korea.
It is possible that market can work if trusted quality check can be purchased. However, when the Republicans simply propagate the idea that market works like magic and people simply believe that idea, there may be no demand for quality checking service and then the markets fail. This Republican belief is like Melamine for food as to the market economy. The second Bush administration also abolished many needed services provided by the government for preventing market failure (Midnight Regulations on the Diane Rehm Show). To some extend, the lack of a well-functioning government will lead to the lack of a well-functioning market.
Friday, October 31, 2008
The last spokesmen
Obama: Collin Powell and Bill Clinton.
McCain: Joe the Plumber and Reverend Wright.
Why the Democrats and Republicans (mavericks) are so different? Does the Naval Academy ever teach anything about positive thinking?
McCain: Joe the Plumber and Reverend Wright.
Why the Democrats and Republicans (mavericks) are so different? Does the Naval Academy ever teach anything about positive thinking?
Wednesday, October 29, 2008
Time to let the Detroit 3 go
I don't see any reason to keep the Detroit 3. They don't care about drivers, why should drivers care about them? The U.S. economy will be better off without them. The pension holders of the Detroit 3 should have demand the management to formulate a long-term plan for the survivorship of their employers. They should learn more about consumer education than consumer indulging and they should stop self-indulging. The quality of this post matches the quality of their cars.
Reviving the housing market, the supply side
I have given my take on the demand side policies.
Mankiw noted some supply side plans:
Mankiw noted some supply side plans:
- the shared appreciation mortgage, or SAM, in which the homeowners who get a mortgage relief will have to forfeit the future appreciation on their house.
- Zingales's Plan B, which is essentially an equity-for-debt swap.
Friday, October 24, 2008
Reviving the housing market
Since the existing mortgage is hard to renegotiate due to complicated structure of the financial product, I suggest the government design policies to encourage new home buyers to jump in and buy. Possible choices are:
1. low fixed rate mortgage on the purchase of nearly foreclosed homes;
2. tax incentives on first time home buyers;
3. give mortgage insurance as promised in the bailout plan.
In this way, the demand side can help to boost the housing market price and people who should not have get a subprime loan and investors who should not have hold so much subprime loans will not benefit from tax payers' money.
Even though the recent home sales went up but the prices are lower, which can drag the housing market into an even lower level. With help from the demand side, the housing market may be stabilized as soon as possible.
1. low fixed rate mortgage on the purchase of nearly foreclosed homes;
2. tax incentives on first time home buyers;
3. give mortgage insurance as promised in the bailout plan.
In this way, the demand side can help to boost the housing market price and people who should not have get a subprime loan and investors who should not have hold so much subprime loans will not benefit from tax payers' money.
Even though the recent home sales went up but the prices are lower, which can drag the housing market into an even lower level. With help from the demand side, the housing market may be stabilized as soon as possible.
Wednesday, October 22, 2008
21 ECONOMIC MODELS EXPLAINED WITH COWS
funny stuff on the web: Economic Models/Financial Markets explained with Cows
SOCIALISM
SOCIALISM
You have 2 cows.
You give one to your neighbour.
COMMUNISM
You have 2 cows.
The State takes both and gives you some milk.
FASCISM
You have 2 cows.
The State takes both and sells you some milk.
NAZISM
You have 2 cows.
The State takes both and shoots you.
BUREAUCRATISM
You have 2 cows.
The State takes both, shoots one, milks the other, and then throws the milk away…
TRADITIONAL CAPITALISM
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.
SURREALISM
You have two giraffes.
The government requires you to take harmonica lessons.
AN AMERICAN CORPORATION
You have two cows.
You sell one, and force the other to produce the milk of four cows.
Later, you hire a consultant to analyse why the cow has dropped dead.
ENRON VENTURE CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release. The public then buys your bull.
A FRENCH CORPORATION
You have two cows.
You go on strike, organise a riot, and block the roads, because you want three cows.
A JAPANESE CORPORATION
You have two cows.
You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk. You then create a clever cow cartoon image called ‘Cowkimon’ and market it worldwide.
A GERMAN CORPORATION
You have two cows.
You re-engineer them so they live for 100 years, eat once a month, and milk themselves.
AN ITALIAN CORPORATION
You have two cows, but you don’t know where they are.
You decide to have lunch.
A RUSSIAN CORPORATION
You have two cows.
You count them and learn you have five cows.
You count them again and learn you have 42 cows.
You count them again and learn you have 2 cows.
You stop counting cows and open another bottle of vodka.
A SWISS CORPORATION
You have 5000 cows. None of them belong to you.
You charge the owners for storing them.
A CHINESE CORPORATION
You have two cows.
You have 300 people milking them.
You claim that you have full employment, and high bovine productivity.
You arrest the newsman who reported the real situation.
AN INDIAN CORPORATION
You have two cows.
You worship them.
A BRITISH CORPORATION
You have two cows.
Both are mad.
AN IRAQI CORPORATION
Everyone thinks you have lots of cows.
You tell them that you have none.
No-one believes you, so they bomb the shit out of you and invade your country.
You still have no cows, but at least now you are part of a Democracy…
AN AUSTRALIAN CORPORATION
You have two cows.
Business seems pretty good.
You close the office and go for a few beers to celebrate.
A NEW ZEALAND CORPORATION
You have two cows.
The one on the left looks very attractive…
Financial Market Cow Models Commentary by Mark Gilbert Feb. 9 (Bloomberg)
If Hedge Funds Kept Cows, Your Milk Would Go Sour: Mark Gilbert
Similar thinking can be applied to financial markets. Here, then, is the world of money recast in bovine terms.
Leveraged Buyouts
You have two cows. You come home from the fields one day to find Henry Kravis chatting to your spouse at the dining-room table. Two days later, you have no spouse, no farm, and no table. Two guys the size of sumo wrestlers have saddled up the cows and are riding them around the farmyard.
Currency Market
You have two cows. China has 1 trillion cows. Guess who sets the price of milk?
Bond Market
You have two cows. One is Brazilian, one is Australian. They yield 25 quarts of milk per day. That's half as much as three years ago, when you traded your less-lactiferous German and U.S. cows for them. You are thinking of swapping for a pair of Namibian cows. They only have three legs but, hey, they produce 26 quarts per day.
Derivatives
You have two cows. You repackage five of them into a Collateralized Lactating Obligation, pay for a AAA credit rating, slice the CLO into 10 pieces and sell it to investors, skimming the cream from the milk for yourself. Three of the cows fall ill, and the credit rating plummets. You get to keep the cream.
You have two cows. A guy in an open-necked shirt drives up in his Bentley and offers to take care of them for you in return for a year's supply of steak and 50 percent of their milk. They won't be allowed to leave his compound for two years.
Six months later, you have half a cow, producing sour milk. ``You have to be willing to lose rump today to get rib-eye tomorrow,'' the hedge-fund guy mumbles through a mouthful of sirloin and champagne.
Economics
Assume two cows.
Carbon-Emissions Trading
You have two cows. They produce 1.2 tons of methane gas per day. After a hefty donation to the re-election campaign of your local representative, the government gives you enough emission permits for six cows. You sell three permits, buy another cow, and apply for a European Commission grant to build a methane-gas power station.
You have one old, tired cow. A recent heart transplant may have come too late to save the beast.
You have no cows. You slap advertisements on everyone else's cows. The milk floods in. You use the proceeds to reinvent the cow.
Nobody wants your cows. You design the cutest little milk bottle. Now, everybody wants your cows.
You have 26,467 cows. They are strapped into the milking machines 24/7. Some of them have more hay than they could ever hope to eat. Others aspire to one day having more hay than they could ever hope to eat. The cows with the most hay end up with big government jobs.
Pension-Fund Management
You have two cows. How boring is that? You pay a month's supply of milk to a consultant, who advises you to sell one cow and buy two aardvarks instead. The aardvarks die. The consultant charges you four months of your (now reduced) milk supply and advises you to sell half of your remaining cow and buy a wombat. The wombat dies. The consultant charges eight months of milk for a copy of his new report, ``Two-Cow Strategies for Alleviating the Impending Pensions Crisis.''
Russian Energy
You have two cows. Comrade, those cows are an environmental hazard. We suggest you hand one of them over to us.
Credit-Default Swaps
You have two cows. You buy insurance against them dying, and tuck the contracts into the middle of that tottering pile of documentation on your desk. One dark night, Henry Kravis sneaks off with your cows. By the time you track down the paperwork, your now worthless contracts have expired.
Interest-Rate Swaps
You have two cows. You pledge one of them to me as collateral in a swap for some of my pigs. I pledge the cow to my neighbor as collateral in a swap for some of his sheep. He pledges the cow to his cousin as collateral in a swap for some of his cousin's goats. Better pray the livestock market doesn't crash and we have to try and round up that cow.
Commodities
You have lots of stocks and bonds, but no cows. Are you crazy? Cows are the hot new market. Here, buy this exchange- traded cow futures contract. It can't lose. It gained 40 percent in the past six months.
You have two cows. You wear a cap you made out of tin foil so that the tiny black helicopters can't read your thoughts. You spend your days blogging about how the government's decision to abandon the cattle standard in 1933 was part of a global conspiracy by the world's central banks to destroy the value of your herd.
(Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this article: &cls;Mark Gilbert&cle; in London at magilbert@bloomberg.net
Sunday, October 19, 2008
Anna Schwartz missing the aborted new world
It is hard to figure out what Greg Mankiw think about what Ms. Schwartz has said in "An Interview with Anna", but it is easy to see what Brad DeLong thinks about it. It sounds like that Ms. Schwartz wants the market economy to work and she would like to see the garbage cleaned out in the system and a newly established economic order. For that to happen, the economy will have to work into the long run, in which we are all dead, said by Keynes and recalled by Paul Krugman recently. I also have to say that Ms. Schwartz may be too harsh on Bernanke, since we basically gave Ben some knives/axes for dealing with a nuclear bomb and even he didn't hesitate to make his own tools, we still don't know whether he will achieve the ultimate success. After all, Friedman and Schwarts only told us what monetary policy did not work in dealing with a depression but nobody has outlined a set of policies that are guaranteed to work in preventing a imploding economy falling into a recession/depression.
The basic point is still that the American people should trust neither market economy or the government, and the economy need oversight, the government need check and balance, and the national need to do some serious long-term planning, before it turns its focus back on to the celebrities. For that to happen, we probably need a reform in the regulation of the media industry first to encourage competition and free speech.
As the turn of the administrative branch approaches closer, a really important thing to do is to send both candidates' choice of secretary of the Treasury to Washington to start their on-the-job training now. The crisis is not over yet.
The basic point is still that the American people should trust neither market economy or the government, and the economy need oversight, the government need check and balance, and the national need to do some serious long-term planning, before it turns its focus back on to the celebrities. For that to happen, we probably need a reform in the regulation of the media industry first to encourage competition and free speech.
As the turn of the administrative branch approaches closer, a really important thing to do is to send both candidates' choice of secretary of the Treasury to Washington to start their on-the-job training now. The crisis is not over yet.
Friday, October 17, 2008
Thursday, October 16, 2008
Is not Greg lovely?
Mankiw throws out another short post: Two Bull Markets on the uptrend momentum of Obama's way to the Whitehouse. If it is not for him, my blog roll will only be filled with right wing economists such as Paul Krugman and Brad Delong. It is hard to see the emotion of Jim Hamilton though.
Does the size matter (for government)?
The first time "Smaller government is better" I encounter this statement was when it appeared as an exam question on the 1994 Chinese University Entrance Exam on Politics. The answer given by the official Chinese educators is quite sleek and they said that the size is not an appropriate measure to judge the effectiveness of the government. The government should be good at what it should function well.
The fact is that both market failure and government failure both exist in the economy. For health care, private market may fail to provide effective solutions under asymmetric information and the associated monopoly power, especially, if one using the fairness criteria to evaluate the health care system of the society. The problem with the current health care system of the US is that even though the government heavily regulate the health care industry, it has been lobbied against the consumers it supposed to protect. Bill Cusack gives a longer argument supporting the regulation in the market place in general.
A health care system with direct government involvement, may not be a full solution but it may be still useful and I do believe if we set up a good incentive structure for the clerks of the government, the benefit from a health care system with heavy government involvement can provide better service to the society than private market alone.
The solution of the problem is how to make sure that the government work well, which deserve a lot of research and study. The inefficiency of the current government activities should not be the reason to completely neglect the possible roles that can be played by the government. The basic dilemma here is that we can trust neither market or government alone, and the moment we start to trust either is the moment the trusted one starts working against us. The fact that market works or government works is not a reason to loose the leash on them.
The fact is that both market failure and government failure both exist in the economy. For health care, private market may fail to provide effective solutions under asymmetric information and the associated monopoly power, especially, if one using the fairness criteria to evaluate the health care system of the society. The problem with the current health care system of the US is that even though the government heavily regulate the health care industry, it has been lobbied against the consumers it supposed to protect. Bill Cusack gives a longer argument supporting the regulation in the market place in general.
A health care system with direct government involvement, may not be a full solution but it may be still useful and I do believe if we set up a good incentive structure for the clerks of the government, the benefit from a health care system with heavy government involvement can provide better service to the society than private market alone.
The solution of the problem is how to make sure that the government work well, which deserve a lot of research and study. The inefficiency of the current government activities should not be the reason to completely neglect the possible roles that can be played by the government. The basic dilemma here is that we can trust neither market or government alone, and the moment we start to trust either is the moment the trusted one starts working against us. The fact that market works or government works is not a reason to loose the leash on them.
Wednesday, October 15, 2008
More direct intervention may be needed
Paulson still has a hard time to force the banks to lend to each other.
I have to repeat myself here: there should be a mandate for the banks to conduct their business as usual during an apparent turmoil time.
On the other hand, what the Fed is doing these days is to keep an out-of-body circulation of the money in the financial system when they buy the CPs at a higher-than-the-market price. I don't know how much they need to do this but eventually, they need to sterilize the liquidity they injected when the credit market revived.
I have to repeat myself here: there should be a mandate for the banks to conduct their business as usual during an apparent turmoil time.
On the other hand, what the Fed is doing these days is to keep an out-of-body circulation of the money in the financial system when they buy the CPs at a higher-than-the-market price. I don't know how much they need to do this but eventually, they need to sterilize the liquidity they injected when the credit market revived.
Tuesday, October 14, 2008
The Regulation Cycle
Mankiw thinks that the good returns in the stock market during democrat presidencies are simply a sequence of random event.
A theory of regulation cycles in this paper by can provide some explanation to this phenomenon. Basically, when the economy booms, people trust the market more and would accept deregulation, which encourage financial fraud and followed by a burst of the bubbles drags the economy into a recession. During the earlier part of this cycle, market is working then republican/conservative arguments win. After that, problems in the market accumulate and eventually, market returns fall as the bubble bursts. People then wake up in the aftermath of the bubble and demand more regulation of the financial market, which lead democrats to the White house and congress, who may overburden the economy with regulation however, the economy recovers and grows with new boom and the next round of deregulation and bubble are brewing.
A theory of regulation cycles in this paper by can provide some explanation to this phenomenon. Basically, when the economy booms, people trust the market more and would accept deregulation, which encourage financial fraud and followed by a burst of the bubbles drags the economy into a recession. During the earlier part of this cycle, market is working then republican/conservative arguments win. After that, problems in the market accumulate and eventually, market returns fall as the bubble bursts. People then wake up in the aftermath of the bubble and demand more regulation of the financial market, which lead democrats to the White house and congress, who may overburden the economy with regulation however, the economy recovers and grows with new boom and the next round of deregulation and bubble are brewing.
Mankiw on the Right and Left
How do the right and left differ?
Mankiw thinks that the good returns in the stock market during democrat presidencies are simply a sequence of random event.
A theory of regulation cycles in this paper by can provide some explanation to this phenomenon. Basically, when the economy booms, people trust the market more and would accept deregulation, which encouragew financial fraud and followed by a burst of the bubbles that drags the economy into a recession. During the early part of this cycle, market is working and republican/conservative arguments win but eventually, market returns fall as the bubble bursts. People then wake up in the aftermath of the bubble and demand more regulation of the financial market, which lead democrats to the White house and congress, who may overburden the economy with regulation however, the economy recovers and grows with new boom and the next round of deregulation and bubble brewing.
Mankiw thinks that the good returns in the stock market during democrat presidencies are simply a sequence of random event.
A theory of regulation cycles in this paper by can provide some explanation to this phenomenon. Basically, when the economy booms, people trust the market more and would accept deregulation, which encouragew financial fraud and followed by a burst of the bubbles that drags the economy into a recession. During the early part of this cycle, market is working and republican/conservative arguments win but eventually, market returns fall as the bubble bursts. People then wake up in the aftermath of the bubble and demand more regulation of the financial market, which lead democrats to the White house and congress, who may overburden the economy with regulation however, the economy recovers and grows with new boom and the next round of deregulation and bubble brewing.
Monday, October 13, 2008
Dark Matter and BEA accounting
Ricardo Hausmann and Federico Sturzenegger have written several pieces (2, 3)on the dark matter in international investments for the US, which support the current account deficit of the US. Dark matters are technology know-how, liquidity service, and unaccounted insurance in the US economy and they provide extra return on the US assets held abroad.
Ellen R. McGrattan and Edward C. Prescott provides a theoretical model to explain the effect of dark matters in terms of technology capital (Know-how, brand names and R&D etc.) but these authors argue that there is no need of real differentials in technology capital, wherever the US openess to FDI matters to the accounting return differentials for timing of in-wards/out-wards FDI through the accumulated stock differentials of plant-specific intangible capital investment. This timing difference alone can explain 60% of the BEA accounting return differential. The McGrattan-Prescott model thus basically partially eliminated the advantage embeded in the US economy argued by Hausmann and Sturzenegger, and therefore dampen their optimism on the sustainability of the US current account, which is a kind of crucial for the current world wide financial crisis.
Ellen R. McGrattan and Edward C. Prescott provides a theoretical model to explain the effect of dark matters in terms of technology capital (Know-how, brand names and R&D etc.) but these authors argue that there is no need of real differentials in technology capital, wherever the US openess to FDI matters to the accounting return differentials for timing of in-wards/out-wards FDI through the accumulated stock differentials of plant-specific intangible capital investment. This timing difference alone can explain 60% of the BEA accounting return differential. The McGrattan-Prescott model thus basically partially eliminated the advantage embeded in the US economy argued by Hausmann and Sturzenegger, and therefore dampen their optimism on the sustainability of the US current account, which is a kind of crucial for the current world wide financial crisis.
Ben Bernanke v.s. Alan Greenspan
Now that most people blame Greenspan for the prolonged expansionary monetary policy, Ben Bernanke may also just be blamed for all the turmoils in the financial market in these days and some time I even wonder whether there will be a new Fed Chair soon.
Years later after this crisis and may be much sooner, however, most of us may have to realize the central banking innovations made by Ben since later last year, which Hamilton has paid great attention to since then, may have saved the whole world economy from the edge of abyss. Hamilton's recent work on this issue has been picked up by bond traders as a must read.
So, 5 years from now, Greenspan may be deemed as a man who has extended his luck into an excess thus made a big mess afterward, but Bernanke may be remembered as a man who bravely led a battle against his and our crisis with all his intellectual power possible. Bernanke matched the destruction of unchecked financial innovations with at least similar amount of central banking innovations in a very short period of time. I hope the result of this battle is his triumph.
Years later after this crisis and may be much sooner, however, most of us may have to realize the central banking innovations made by Ben since later last year, which Hamilton has paid great attention to since then, may have saved the whole world economy from the edge of abyss. Hamilton's recent work on this issue has been picked up by bond traders as a must read.
So, 5 years from now, Greenspan may be deemed as a man who has extended his luck into an excess thus made a big mess afterward, but Bernanke may be remembered as a man who bravely led a battle against his and our crisis with all his intellectual power possible. Bernanke matched the destruction of unchecked financial innovations with at least similar amount of central banking innovations in a very short period of time. I hope the result of this battle is his triumph.
Friday, October 10, 2008
The Financial Tsunami may be on its way.
The final straw that can crash the current financial system is the investor's confidence on US Treasury, but it seems the traders are already doubt that.
May be it is time to contemplate how to rebuild the system from now on. Just maybe.
May be it is time to contemplate how to rebuild the system from now on. Just maybe.
Thursday, October 9, 2008
The aborted new world
Ok, five years of gains lost in Dow today.
Oct. 9, 2008 DJIA Picture
DJIA Early 2003-Oct. 2008
World leaders are scrambling to put an emergency rescue plan together, if they are responsible in any sense. If this crisis is eventually over and the world is finally saved, however, we won't be able to see a new world rebuilt on the ruins of today's financial/economical/political systems. In that world, maybe we can completely shake-off the bad characteristics of today's socio-economic system. If the rescue actions are successful this time, I believe the world is just an old one with may patches and there is still no long-run solution in sight since the disaster is not large enough to coordinate world leaders to work together and create such a plan. I just swing between liberal and conservative views these days.
In some sense, the Great Depression helped to form today's world and it run finely after WWII until, well recently, at least for the Western World.
Should we let the world fall apart and rebuild a new one or we would rather try to find a easy way to solve the current crisis and wait the next crisis to come around 5-10 years.
Oct. 9, 2008 DJIA Picture
DJIA Early 2003-Oct. 2008In some sense, the Great Depression helped to form today's world and it run finely after WWII until, well recently, at least for the Western World.
Should we let the world fall apart and rebuild a new one or we would rather try to find a easy way to solve the current crisis and wait the next crisis to come around 5-10 years.
How to punish the Wall Street CEOs?
Dig a manhole on the squares before Fannie Mae and Freddie Mac. Put them into the manhole and cover the top with grills. People can spit into the grills when they walk by.
Should we worry about inflation
People on the Diane Rehm show (Sebastian Mallaby) said that he would like to see Chinese currency to appreciate, which I believe will put some inflationary pressure into the US economy and the current rescue plan can be certainly viewed as inflationary.
Is inflation really bad for now? Probably not, since when inflation come, as long as it is not rolling up into double digits, the real interest rate can fall below zero to support an expansionary monetary policy. But, maintaining a healthy inflation level is very hard since people can index the price to inflation and as a result, the inflation can run out of control, how about some price control then? Wow, market is getting killed little by little.
Is inflation really bad for now? Probably not, since when inflation come, as long as it is not rolling up into double digits, the real interest rate can fall below zero to support an expansionary monetary policy. But, maintaining a healthy inflation level is very hard since people can index the price to inflation and as a result, the inflation can run out of control, how about some price control then? Wow, market is getting killed little by little.
Temporary Nationalization of Banking System is on the Table
Here, Krugman thinks Hank Paulson is on board now on this rescue method.
I have suggested similar strategies two weeks ago. We only know that tight monetary policy will help to kill the economy for sure, learned from the great depression. But to prevent this falling economy from drop-dead, a heavy dose is not a bad choice since we don't actually know what rescue plan can work. On the other hand, may be the true market solution is simply left the banking system to die as it deserve. The problem is that we cannot ensure ourselves from not taking on so much risk again once the current system is revived.
I have suggested similar strategies two weeks ago. We only know that tight monetary policy will help to kill the economy for sure, learned from the great depression. But to prevent this falling economy from drop-dead, a heavy dose is not a bad choice since we don't actually know what rescue plan can work. On the other hand, may be the true market solution is simply left the banking system to die as it deserve. The problem is that we cannot ensure ourselves from not taking on so much risk again once the current system is revived.
The Congressional Responsibility Act
I think it is time for the US congress to take some responsibility in the real sense. The following may help to keep them in the track for the benefits of American people.
1. The amount they can use from the political donation they receive is tied to their approval ratings. The lobbyists can send money to Washington but the money should be first received as a fiscal revenue for American people.
2. Deduct the percentage of interest payment on US debt as a fraction of the federal fiscal revenue from their salary.
3. The pork brought home by the senators/congressmen-women should not exceed 120% of the federal revenue from that state.
1. The amount they can use from the political donation they receive is tied to their approval ratings. The lobbyists can send money to Washington but the money should be first received as a fiscal revenue for American people.
2. Deduct the percentage of interest payment on US debt as a fraction of the federal fiscal revenue from their salary.
3. The pork brought home by the senators/congressmen-women should not exceed 120% of the federal revenue from that state.
Wednesday, October 8, 2008
The Basic problems
1. The implosion of credit/liquidity market lead to a loss of confidence among investors and consumers. It is hard for all the central banks to re-inflate the enormous credit market back to its original size, even though the central bankers are quite innovative, poor Ben. The question is whether the market economy can rebuilt after some payment chains have been broken and a fast deleveraging. I understand the rebuild need time and it won't be easy but I don't think the rebuilding process will be disastrous.
2. The wealth effect of the declining stock market and the loss of consumer confidence may actually kick the economy into a recession or deeper into a recession.
2. The wealth effect of the declining stock market and the loss of consumer confidence may actually kick the economy into a recession or deeper into a recession.
A strange world
The Chinese Communist Party conclave is speculated to have some effect on the global financial crisis. What just happened in the Western world's mind? The fate of Capitalism now at least partially depends on the CCP's decision. About 20 years ago, the biggest fear of CCP is that the western world will gradually change China into a capitalist society and it seems now that the western world may be a little bit too successful.
On the other hand, what the US political leaders worried about when they criticize the over-sized trade deficit with China is that someday China will reclaim this debt back. However, one policy the US politicians pressed to ease the trade deficit - the appreciation of Chinese currency RMB (yuan) - actually triggered this process of repayment, which is in the form that the US politicians fear most, very fast repayment, caused by the speculations on RMB appreciation. See this paper I cited before. An easier solution of this trade/money imbalance is to find some way for the US to repay its debt to China gradually, however, the proponent of this approach is simply absent in the past and now. The basic problem is that both sides are skeptical about the other side's intention. The US simply do not feel comfortable be nice with the Chinese government and the Chinese people, who learned from a lot of Japanese yen appreication--Japanese economy stagnantation problem, also do not feel comfortable to do more business with the US, which actually put some pressure on the Chinese government in dealing with US requests. Plus, problems like Taiwan and Tibet keep plague the relationship between the two countries, which make the co-operation between the two even more difficult.
On the other hand, what the US political leaders worried about when they criticize the over-sized trade deficit with China is that someday China will reclaim this debt back. However, one policy the US politicians pressed to ease the trade deficit - the appreciation of Chinese currency RMB (yuan) - actually triggered this process of repayment, which is in the form that the US politicians fear most, very fast repayment, caused by the speculations on RMB appreciation. See this paper I cited before. An easier solution of this trade/money imbalance is to find some way for the US to repay its debt to China gradually, however, the proponent of this approach is simply absent in the past and now. The basic problem is that both sides are skeptical about the other side's intention. The US simply do not feel comfortable be nice with the Chinese government and the Chinese people, who learned from a lot of Japanese yen appreication--Japanese economy stagnantation problem, also do not feel comfortable to do more business with the US, which actually put some pressure on the Chinese government in dealing with US requests. Plus, problems like Taiwan and Tibet keep plague the relationship between the two countries, which make the co-operation between the two even more difficult.
Monday, October 6, 2008
US arm deal with Taiwan
GW Bush has approved a 6.5 billion arm deal with Taiwan. I have several competing theories about this deal.
1. US willingly sell the arm package to Taiwan to rise revenue in order to deal with the financial crisis and boost its economy. China certainly do not like it.
2. Considering the GW Bush has delayed the deal before, this may be a nice gesture to CCP even though the CCP has to protest against the deal on the surface. There has been doubt about whether the 2nd Bush administration will let the deal proceed and that has lead to speculations on the U.S. concerns over closer relationship between Mainland China and Taiwan which may make the arm deal actually benefits CCP's defense power. If this concern has some real elements, then GW Bush is using the military goods to persuade the cooperation of China in dealing with the current financial crisis.
3. GW Bush administration is using this deal as a blackmail to force CCP to cooperate with US in dealing with the financial crisis.
Anyway, to finance the 850 billion dollar rescue plan, US need foreign investors to purchase its treasury bonds and with 1.7 trillion USD reserves, China is one of the biggest possible buyers.
1. US willingly sell the arm package to Taiwan to rise revenue in order to deal with the financial crisis and boost its economy. China certainly do not like it.
2. Considering the GW Bush has delayed the deal before, this may be a nice gesture to CCP even though the CCP has to protest against the deal on the surface. There has been doubt about whether the 2nd Bush administration will let the deal proceed and that has lead to speculations on the U.S. concerns over closer relationship between Mainland China and Taiwan which may make the arm deal actually benefits CCP's defense power. If this concern has some real elements, then GW Bush is using the military goods to persuade the cooperation of China in dealing with the current financial crisis.
3. GW Bush administration is using this deal as a blackmail to force CCP to cooperate with US in dealing with the financial crisis.
Anyway, to finance the 850 billion dollar rescue plan, US need foreign investors to purchase its treasury bonds and with 1.7 trillion USD reserves, China is one of the biggest possible buyers.
Health Care Destruction
Krugman's argument against McCain's health care plan.
It is quite interesting to see that Economists nowadays distrust markets. The reasons? I talked about them before.
It is quite interesting to see that Economists nowadays distrust markets. The reasons? I talked about them before.
Sunday, October 5, 2008
this one is good
No, No, No!
Fannie Mae said it will set aside the loan of a woman who shot herself as sheriff's deputies tried to evict her from her foreclosed home....
"We're going to forgive whatever outstanding balance she had on the loan and give her the house," Faith said. "Given the circumstances, we think it's appropriate."
In other words, the taxpayers are now subsidizing self-injury.
from: Marginal Revolution
Nonsense political joke
Daughter: Daddy, why there is a big bear on the quarter?
Dad: Because there are a lot of grizzly bears in Alaska, honey.
Daughter: Can I buy a bear in a bear market?
Dad: Honey, a bear market means the stock prices in the stock market are falling, they don't trade bears in the stock market.
Daughter: Can the Governor of Alaska bring us a real bear market?
Dad: I guess not, but may be she can put lip stick on a bear.
Daughter: Will that makes the bear a pig?
Dad: No, it is still a bear.
Dad: Because there are a lot of grizzly bears in Alaska, honey.
Daughter: Can I buy a bear in a bear market?
Dad: Honey, a bear market means the stock prices in the stock market are falling, they don't trade bears in the stock market.
Daughter: Can the Governor of Alaska bring us a real bear market?
Dad: I guess not, but may be she can put lip stick on a bear.
Daughter: Will that makes the bear a pig?
Dad: No, it is still a bear.
Where will the inflation go?
If everything goes as planned in the rescue plan (bailout plan), the inflation will go to the housing market where the price is collapsing.
Friday, October 3, 2008
consumer surplus from Mankiw and Wendy's
Double Stack and Consumer Surplus
Mankiw suggests that this intelligent Wendy's ad illustrates well the economic concept of consumer surplus. I concur, and would add that it also illustrates concepts such as the costs of time and decision making.
Mankiw suggests that this intelligent Wendy's ad illustrates well the economic concept of consumer surplus. I concur, and would add that it also illustrates concepts such as the costs of time and decision making.
Wednesday, October 1, 2008
What will happen after the crisis
Will the news all go back to Paris, Britney, Michael, Hanna, Lindsay and OJ?
The Road to Obesity
Warrants are called sweetener when issued together with bonds and in the Rescue plan, Uncle Sam will get some warrants from the banks.
The sweeteners below are added to the Rescue plan so as to win some house republican votes.
1. temporarily raising the limit on federal deposit insurance to $250,000 from $100,000.
2. various tax breaks
3. a "Mental Health Parity" provision
With a deal so sweet, is Uncle Sam on the road to Obesity?
The sweeteners below are added to the Rescue plan so as to win some house republican votes.
1. temporarily raising the limit on federal deposit insurance to $250,000 from $100,000.
2. various tax breaks
3. a "Mental Health Parity" provision
With a deal so sweet, is Uncle Sam on the road to Obesity?
Government's role in the Economy
Adam Smith has been added to the current economists who are discussing the current financial crisis. Yes, it is him who founded Economics and argued that the seeking of individual benefits will led by the "invisible hand" to achieve maximum social welfare. But remember the "invisible hand" theory is based on perfectly competitive market and arm-length transactions with perfect information and the price is determined by the market. In the US economy today, these conditions for the invisible hand to work simply do not meet. So the government need to come in to maintain the justice in transactions (which function is ruined by the lobbyists who twist the laws towards big corporations but not the small customers through legislation) and come to rescue when the market tends to collapse (The Paulson plan is not a good plan and that's why economists are against it but the rescuing functions of the government have to be carried out). There is one more thing the Fed can do: lowering the reserve requirement but how can they reverse that back once they lowered it is a problem.
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