Sunday, November 30, 2008

Advent Conspiracy



http://www.adventconspiracy.org/

Powerful video, and I agree with the idea. My wife and I are working on how we want to do Christmas, especially now that we have a son. We're coming up with some ideas.

Note: Someone from a church in NY contacted me about the $450 billion figure, asking if it's correct. It's misleading. $450 billion is roughly the retail & food sales in the U.S. during the month of December (2007, it was actually $429 billion). Americans spend $350-400 billion in a given month anyway. How much of that is spent at Christmas that wouldn't be spent otherwise? My rough estimate is about $51 billion. That would be the difference between the seasonally adjusted retail sales and the raw figure.
(*update*: The numbers they use come from the National Retail Federation's website in 2006.
"NRF defines 'holiday retail sales; as retail industry sales which occur in the months of November and December. Retail industry sales include most traditional retail categories including discounters, department stores, grocery stores, and specialty stores, and exclude sales at automotive dealers, gas stations, and restaurants."
The NRF is estimating that $41 billion was spent this past weekend.)

While Christians using misleading statistics to advance their causes is a pet peeve of mine, my own estimate of $51 billion is still a hefty sum compared to the estimated $10 billion needed to provide clean water to all of Africa.

Tuesday, November 25, 2008

Just plain cool

So, just outside Lexington, KY there is a castle. It's a famous landmark there, set among the rolling hills and nearby horse farms. It was built by an eccentric rich guy for his wife; they later divorced. A few years ago, the inside (house part) of the castle burned to the ground.

Recently, a developer bought it and turned it into a 16-room hotel. Construction just finished. Here is a picture slideshow of the inside, it looks amazing. $1,000 a night.

http://www.heraldleaderphoto.com/2008/11/24/castlepost-media-tour/

Monday, November 24, 2008

Betting the House

$7.76 trillion. Think about that number. Let's write it out:

$7,760,000,000,000.

Roughly half of U.S. GDP last year.

$7.76 trillion is what the government has put on the table so far in this financial crisis in the form of loans, guarantees, capital injections, etc. The latest being the Citigroup bailout.

The government will now pick up the tab in the form of equity injection if Citigroup's assets lose enough value. Citigroup is only one of the largest bank holding companies in the world.

They're betting the house on this one. Who's they? Basically: Paulson, Bernanke, and now Sheila Bair. (HT: Rebecca Wilder).

I've been spending a bit of time on Estonia's economic websites the past few days, wondering if/how I can hasten our move there. Did you know that most Estonians sing in local choirs? My wife will really love that.

Thursday, November 20, 2008

Bad days...

Well, Americans are finally starting to figure out that we're in a really bad recession. Deflation, which only a few were predicting a while back (remember?), is now a bandwagon pick.

Some of the economics/finance-related blogs I follow read like this tonight:
On the bond market's swings, Across the Curve:
"I have done this for nearly 30 years. I have never witnessed this before."

On "deeply troubling" news that all the Fed actions have not succeeded in bringing down long-term real interest rates, Mankiw says:
"What is the Fed to do (other than pray)?"

Brad Setser on the overall picture:
"There is now little doubt this is the worst financial crisis since the Great Depression."

I'm thankful I have next week off.

Wednesday, November 19, 2008

Collusion

We've been talking about oligopolies and collusive agreements in Micro. How an individual firm in a cartel always has an incentive to cheat and, almost always, finds that incentive difficult to resist. For example, say some producers (like OPEC) get together and agree to reduce output and fix a high price to increase their revenues. After the agreement is reached, each producer faces a highly elastic demand curve for his product. If he reduces price just a little bit, he can win customers from the other producers and make even more revenue. The other firms, learning of his cheating, will have to follow suit and competition will ensue.
The outcome is a Nash Equilibrium, and I've talked about this subject before-- specifically why companies threaten to match prices of their competitors. Back to the OPEC example, if you're Argentina, you know Russia has the same incentive to cheat that you do, so you expect him to cheat and so you do the same to beat him to it.

So, I posed my classes the following challenge:
If NO ONE shows up for Thursday's exam, then they will all get a 90%. But, if any one student shows up, then they will be awarded a grade based on their exam performance and anyone not showing up will get a ZERO.

(I'm pretty confident of the outcome--that all will come. Although, a 90% provided a very high incentive to maintain the collusive agreement as few students are likely to get an A. Had I set the bar to 85%, I'd be more confident right now).

On Tuesday, they behaved like a perfect cartel. Plotting, imploring, begging, bribing, threatening to punish (which will lead to a great opportunity to integrate faith into the lesson). Sounds like there might be a couple of holdouts in the morning section, but the afternoon (which is smaller) reached their collusive agreement rather quickly. My department chair expressed some concern since she was copied on some of the mass emails of negotiating students. We'll see.

*Update 1*- It's 9:40am and no one from the class has yet shown. Looks like they have succeeded in their quest. We'll see if anyone gets curious to know if anyone is cheating.
They formulated a plan to all meet in the Student Union at 9:30 and take attendance there. If anyone didn't show, they'd know someone was taking the exam. I half expected some of the holdouts just to not go to the Student Union but not come to class, either. That would create panic among the group as they run across campus to take the exam.


*Update 2*- Both the 9:30 and 2:00 classes succeeded in their collusion. The 2:00 class even sent an unknown spy to make sure I was the only one in the classroom. All nervously dropped by my office later in the day to see if they had succeeded. They spent most of the day in a paranoid state. Many of them learned the lesson of the difficulties of collusion, even if it didn't work out quite as I had intended.

A very surreal moment...

Last night I was in the lounge on campus watching Kentucky get embarrassed by UNC. Then, Dick Vitale started going on and on about how tiny Division II Southwest Baptist University upset Utah in Salt Lake City. "Where is Southwest Baptist? I had to look it up! It's in Bolivar, Missouri baby!" he screamed, mispronouncing "Bolivar."

It was one of the most surreal moments in my life. I'm sitting on Southwest Baptist's campus, listening to them be praised by Dick Vitale, while my home team is getting stomped at the same time.

God has a sense of humor that can't be described or fathomed.

Tuesday, November 18, 2008

It's a basketball school

The big story on campus this week is that our basketball team, a decent D-II team, upset Utah, a decent D-I team with an NBA prospect, in Utah. Our team had narrowly lost to a good Southern Illinois team the previous weekend.

Dick Vitale picked our coach as Coach of the Week.

The first home game is tonight, everyone is going. Except me. I'll be watching UNC-UK.

What everyone is reading

This Dick Cavett article has been #1 on the NY Times' daily "most emailed" article list since last week. I don't think I've ever seen a column do that well for so long, especially not a Dick Cavett one. It's about Sarah Palin, and it is a classic. Mostly because I wish she'd go away (and I suspect 74% of Americans now agree with me). Here's an excerpt:

What on earth are our underpaid teachers, laboring in the vineyards of education, supposed to tell students about the following sentence, committed by the serial syntax-killer from Wasilla High and gleaned by my colleague Maureen Dowd for preservation for those who ask, “How was it she talked?”

My concern has been the atrocities there in Darfur and the relevance to me with that issue as we spoke about Africa and some of the countries there that were kind of the people succumbing to the dictators and the corruption of some collapsed governments on the continent, the relevance was Alaska’s investment in Darfur with some of our permanent fund dollars.

And, she concluded, “never, ever did I talk about, well, gee, is it a country or a continent, I just don’t know about this issue.”

It’s admittedly a rare gift to produce a paragraph in which whole clumps of words could be removed without noticeably affecting the sense, if any.

Sunday, November 16, 2008

Wow. Just wow.

This 10 minute video is well worth your watching. What "experts" (like Ben Stein!?) were predicting on FoxNews a year ago. Notice how they ridicule Peter Schiff for predicting a housing bubble bust, stock market crash, financial crisis and more. Notice the praise for Lehman Brothers and Washington Mutual.



It would be really funny if it weren't so tragic. Dow 16,000, for example. Never get your news or financial advice from any cable TV channel. HT: Alea.

Dominance!

Jimmie Johnson becomes the second man in history to win 3 straight Sprint Cup Championships.*
He's truly one of the most dominant sportsmen of our time. Chad Knauss becomes the first crew chief to threepeat. 8 championships for Hendrick Motorsports.

The final race was just exciting enough to keep you watching. Carl Edwards won yet again but fell just short of a championship, lucky he didn't run out of gas at the end.

When I started watching NASCAR at the beginning of last season, I wasn't sure which driver or team to pull for. Hendrick was dominating and all their drivers were winning. I liked how they just seemed smarter than all the other teams. I initially pulled for Kyle Busch but then realized he was a rude punk. I thought about rooting for Casey Mears but realized that he didn't seem to have the guts to finish well. I couldn't root for Jeff Gordon because I already knew who he was and where's the fun in that? That left Jimmie, he defending champ, who always seemed to finish well. He was a nice enough guy, had wholesome sponsors (Lowes and Kobalt Tools), and his crew chief was who I wanted to be in life. I decided that #48 team would be my choice.

Jimmie and Chad are consistently good when they have to be. Their worse finish in The Chase was 15th. Chad outsmarts the other chiefs, and Jimmie outdrives the other drivers.

Next season will look different, as the financial crisis affects NASCAR more than any other sport. So, it's a bittersweet ending to the season.
We've proudly dressed Elias in one of his #48 onesies just about every Sunday. We need to get him some more Kentucky basketball gear now so he can be their good luck charm too.

*(for you non-NASCAR folk, you always call the championship by its current sponsor. So, Cale Yarborough won 3 straight Sprint Cup championships from '76-78 even though it was called the Winston Cup back then, and the Nextel Cup last year).

Saturday, November 15, 2008

Our government is protecting us

In case you had worries that the gift card you bought your mom for Christmas wouldn't be usable because the store went bankrupt, then here's some good news:
The FDIC is insuring gift cards up to $250,000. HT: FT Alphaville.

Gonna be a greatly scaled down Christmas this year, folks. (Thank God).

Friday, November 14, 2008

Not ready for basketball

A few people I graduated with and know love of UK basketball have asked me: "Are you fired up for basketball season?"

The answer is: "No." or "Not yet."

Especially as I got online tonight to follow the play-by-play and find that Kentucky lost 111-103 to VMI. I wasn't ready for that.

Time constraints are pretty huge in my life right now. I have a list of priorities, and the only truly free time I have is on Saturdays and Sundays. I watch college football (which I'm still enjoying) and NASCAR (which ends this week). So, with NASCAR out of the way, Sundays will be freed up... maybe for basketball. Or, more properly, for calculus. Yes, that's a pressing priority right now. And not a fair trade!

And it's hard to focus on any sport when we have a potentially world-changing G20 meeting happening to address a global financial crisis that has repercussions every day for how I teach my classes and how we might live for the next generation or so.

The bad thing about basketball is that most games are on weeknights and on ESPN. My weeknights aren't that free, I go to bed at 9pm, and we don't get ESPN. I haven't had time to check the Lexington paper much to get basketball hype. My parents sent me a DVD of this year's Big Blue Madness.

If you're a new reader to this blog, March becomes the most important time of my year as I collect massive amounts of basketball-related data in order to do regression analysis and forecast team performance in the tourny. After March, I'm kind of exhausted. Last year was one of the most compelling Final Fours ever.
This March, I hopefully will still be passing Calc II. I wonder if I'll have time to even think about filling out a bracket.

So, I'm not ready now. But, come January 4, the Louisville game, I'll be ready to go I'm sure. Until then, I still have my HD dynasty that is apparently more important to me than real-life basketball.

Thursday, November 13, 2008

Hmmm...troubling

On Tuesday the Fed announced it was increasing the interest rate it pays on bank's excess reserves to 1%, equal to the Federal Funds target rate. Dr. James Hamilton, who runs the very educational/helpful Econbrowser blog had a great post last month on why the Fed is encouraging banks to lend to the Fed instead of, say, each other or other entities. This fit nicely into our textbook material today, which allowed me to share it (although I spent a long time making sure I understood it well enough to teach it).

The Fed's balance sheet is expanding, it's projected to be $3 trillion very soon (it was only $800 billion a year ago). This is beginning to draw some attention.

The Fed is making huge emergency loans to AIG, buying up commercial paper, acquiring a lot of assets. It doesn't have the means to do that like it wants on its own, so it is having Treasury supply it with cash via the sale of new Treasury securities, and banks increasing their reserves (ie: lending to the Fed).

The fact that they're raising the interest rate paid to banks in order to provide even more incentive to lend money to the Fed means that the Fed needs even more money to buy even more assets. $2 trillion hasn't been enough! (Note: I was wrong in my post yesterday about why the Fed wants banks to hold excess reserves).

(Geek note: I spent a good 15 minutes giving my class my bogus info [didn't know it at the time] from the aforementioned Econbrowser page on why there wasn't an arbitrage opportunity for banks to borrow at .27% from GSEs and then lend to the Fed at a 1% rate. One heartening thing for me is that PhD economists are trying to figure out why the no-arbitrage assumption doesn't apply to the Fed funds market right now. Oh well).

In a slightly related note, I saw Treasury Secretary Henry Paulson on NewsHour tonight and was a little disgusted. (Jim Lehrer was a poor choice for an interviewer, he knows nothing about finance/economics). He talked out of both sides of his mouth. Would have been nice if he'd said:
"You know, we knew there was a big problem but we didn't know how to handle it correctly. We thought buying troubled assets was the way to go, but later listened to economists who said we weren't thinking it through well enough. They were right. We're making this up as we go."

Instead it was: "We should have passed the TARP sooner. Things are better now than they would have been. Everything is under control, except the general economy. That's a mess that we can't fix. I never said I could fix that mess, but maybe I'm a bad communicator. We've addressed the housing issue by not really addressing it. It will bottom out sometime, and until then we're in a mess. Oops, I didn't say that either."

There's this assumption that he knows what he's doing. So far, doesn't look like it.

Wednesday, November 12, 2008

The other shoe is about to drop?

Credit card losses hit new highs. (HT: Across the Curve)
"Credit card companies have been setting aside money to cover credit losses, but analysts estimated the lenders would still need higher provisions."

American Express is now a nationally chartered bank holding company, allowing it to get access to loans from the Fed. This is a sign that American Express would have been in trouble otherwise. One possible reason the Fed is encouraging banks to hold more excess reserves: further asset depreciation, including nonsecured loans (ie: credit cards).

I just sent an email to my Money and Banking class that is typical of the last two months. Fed policy changes dramatically faster than we can cover the topics in class. What was true in class yesterday is no longer true today. The textbook, published last year, is now obsolete. I should have just called the class "Financial Crises and Monetary Policy" and taught topics around the latest news of the week.

*UPDATE!:* The Treasury Department now wants to subsidize the credit card (and auto loan) industry. I agree with Tyler Cowen: Bad idea.

Tuesday, November 11, 2008

Book Review (#21 of 2008)

Shameful that I've not finished a book in a couple months. This is mostly because I'm not driving as much so I can't listen to audio books as much. I'm also spending most of my "free" time reading textbooks, have gone through several of those. I'm also reading required texts that take up my time.

But, our trip to St. Louis afforded me to finish one book I started long ago:

An Army at Dawn- The War in North Africa 1942-1943, by Rick Atkinson (Part I of his Liberation Trilogy).
Atkinson is considered the foremost military historical writer of our time. I read his book on the 101 Airborne in Iraq, where Gen. David Petraeus first became a star.

This book is a very detailed look at how war is hell. How all operations are disorganized chaos. There are horrors of war and then there are the horrors of day-to-day survival in that war. Survivors are just lucky.

Was the North Africa campaign necessary? It trained a large number of Allied soldiers, prepared them for the invasion of Europe. But, wouldn't it have just been better to invade Europe and avoid the circuitous route taken by invading Africa and then Sicily? Probably.

This book is a great historical documentary. No one tells the soldiers' stories like Atkinson.
I give it 3.5 stars of 5.

Monday, November 10, 2008

Eager to Teach Macro

There will be no better time to take Principles of Macroeconomics than next semester. I'm happy to be teaching the only two sections here. I've gotten the textbook I want and the classes should be quite full.
Why will it be interesting? Because every day there is a new article out about the need for a fiscal stimulus-- an increase in government spending meant to offset the downturn in the business cycle. Paul Krugman is advocating a $600 billion stimulus today. China just announced a $586 billion stimulus package (which may not mean anything... they might spend that much anyway).

This is pure Keynesian economics, and the history debates on the blogosphere over the past week have been interesting. That will make the class more interesting.

The Fed is taking "historically unprecedented" actions in the realm of monetary policy. This makes for some wonderful graphs and interesting discussion.

Plus, I've just gotten armed with a bunch of new curriculum, videos, games, etc. from my weekend at the Fed. It will be good.

I'm also teaching Personal Finance which will also be great. No better time to figure out how to budget, save, and plan ahead than during an economic downturn.

Almost there!


Jimmie Johnson and Chad Knaus put on another dominating performance yesterday in Phoenix. Jimmie is now almost to his 3rd consecutive championship, something done only once before in the 50+ years NASCAR has been around. He has to finish at least 36th in the next race to clinch the title.

I watched most of last night's race but switched over to to the end of the KC Chiefs game while the race was red flagged after a wreck. I switched back over later only to see ABC playing America's Funniest Home Videos, and thought I must have just missed the end.

I didn't. ABC didn't show the end of the race. It's now known as the "Heidi Game" of NASCAR. Apparently, they decided enough was enough.

"To go to 'America's Funniest Home Videos,' that hurts," Johnson said.

Dan Wetzel writes that Johnson is "Tiger good," but not "Tiger popular."

Maybe if I wasn't a #48 fan I'd be bored. But I freakin' love NASCAR. Might makes right in sports-- other teams should go out and find a driver as good as Jimmie and a crew chief as smart as Chad Knaus. Otherwise, he might just go for 6 in a row.

With the potential bankruptcies of Ford, GM, and Chrysler, NASCAR is facing some peril. That makes me sad, but I don't believe in giving them another multi-billion dollar bailout just to keep my preferred race team supported.

Sunday, November 09, 2008

Extreme Makeover

I usually don't watch Extreme Makeover: Home Edition because I don't like tear-jerker exploitations and often feel the resources could be put to better use in another country.

I watched tonight's episode because I heard it described as offensively over-the-top because of the many disabled people doing the construction work.
It was over-the-top, but extremely humbling. In fact, I recommend watching it. The story of Sam Malek, the physically challenged coffee shop owner, is incredible. Googling found this St. Louis Magazine article about him from 2007. I spend at least half my days feeling sorry for myself or wishing I could change things about myself or situation. And then I see an episode like tonight and realize how blessed and selfish I am.
So, if you want a humbling experience and a reality check watch this week's episode. Warning: It's over-the-top emotional.

Notes from the Fed Conference

I learned a good bit at the conference and had a great time. The St. Louis Fed has a beautiful new conference facility. It's like walking into a palace. And not a dime from taxpayers, the Fed independently funds itself (they make the money, duh).

The auditorium was like the United Nations' auditorium. Plush chairs, great technology. They gave everyone (60+ people) a laptop to play with for one demonstration.
Very nice meals provided and an open bar. I abstained and kept the professors from other Baptist schools accountable (much to their chagrin, I imagine).

It was great to meet other eco/finance professors like myself and hear their words of encouragement about how the first semester of teaching is always the worst. I learned about other college's curriculum and what other instructors were finding effective in the classroom. The Fed is constantly putting out curriculum, games, study helps, etc. for students so that was great to learn about.

The first day of the conference was mostly spent listening to officials talk about the current financial crisis and the Fed's response. Since I spend hours a day reading the latest articles and economist blog discussions, I was very up to speed. I could tell the forecaster who presented reads the same blogs that I do. Nice. Myself and a couple other nerds asked some questions to try and glean information we're not going to see published in the newspaper. I didn't get to ask as many as I'd have liked, of course, but I enjoyed every minute of the discussions.

Here are a few notes I made that I think are most important:
Kevin Kliesen, Associate Economist in the Research Division. Forecaster.
Long term:
Real GDP growth rate will begin a steady 25-year decline starting in 7-8 years when baby boomers begin to retire.
Short term:
CPI expected to be at 3-4% annual growth in 4th quarter of '08.
TIPS rate not a good indicator of inflation, other than Nouriel Roubini no one is predicting deflation.
200,000 jobs expected to be lost in October.
Fed is concerned about volatility in the stock market. "Incredible; startling."
Fed is concerned about volatility in investment driven by uncertainty and adverse selection problems.
Credit crunch: "Lending is not contracting. Certain parts of the credit market are frozen [commercial paper]."
Bank lending is going way up, but CP way down. Banks becoming more important part of external fund sourcing for firms.
36% increase in the Monetary Base in the last year. "No historical precedent."

Consensus forecast:
Short, shallow recession (with increasing probablity of a long, protracted recession).
Indicators point to severity (citing OECD paper from August '08)
Risks:
1. Equity prices falling more (maybe housing recovers by end of '09?)
2. A lot more money is in the pipeline now... how will the Fed contract it?
3. FY 2009 deficit: $1 trillion. Can we sell T-bills at the same interest rate?

Another economist presented the history of the housing bubble and its aftermath. Not much new there.

Q&A session:
Fed is engaging in quantitative easing. So much liquidity in the market that it's hard for them to hit their Fed Funds target rate.
Great concern over the Fed's "exit strategy." How do you contract the money supply now without a major recession?

James Bullard, the new St. Louis Fed President, spoke at a dinner the first evening. He expressed his concern for the loss of independence for the Fed as it's now being "blurred" with Treasury in the minds of many Americans. He disliked the bank recapitalization scheme and liked the TARP plan. He wanted to the government to be as hands-off as possible and let it run its course. He saw the look on Ben Bernanke's face when he was told AIG was in trouble and "it wasn't pretty." He said it was crucial that Obama assemble his economics team ASAP and that the transition be "seamless." Regulatory reform isn't sensible right now, wait until clearer heads prevail. We won't know the crisis is over until it's over.

Wednesday, November 05, 2008

Turmoil vs. Stability: The Fed's Response



That is the title of the conference I'll be attending in St. Louis this weekend, hosted by the St. Louis Fed. It's free of charge to university educators and there will be some sessions on improving classroom instruction. I'm pretty pumped.

How to pronounce "Missouri"

One thing you may have caught last night were all the political pundits saying "Missour-ee" in one sentence and then correcting it with "Missour-uh" the next.
Jim Lehrer on PBS explained this very early on in the evening. The Western half of Missouri says "Missour-uh," and people at the University of Missouri in Columbia swear that's the only way to pronounce it. The eastern half (including St. Louis) say "Missour-ee."

This played out in the gubernatorial election here. Jay Nixon, a Democrat, made sure that he said "Missour-uh" in all of his ads. Ken Hulshof, a Republican congressman who got blown out last night, said "Missour-ee" in his (relatively few) ads. To people on this side of the state, the difference was clear. Nixon was making the point that he was from here, while Hulshof was "out of touch" from spending too much time in Washington.

I say "Missour-ee" when I speak, but I'm always self-conscious about it wondering if people hear that and immediately think "outsider!" If my non-midwestern accent doesn't give me away (I tend to lay a Western Kentucky accent pretty heavily on purpose...sometimes I'll turn it into an East Tennessee one just to annoy people) the way I pronounce Missouri probably tells people all they want to know about me.

Monday, November 03, 2008

When marginal cost > marginal revenue, you should stop production

If you haven't heard, Starbucks is giving out a free tall coffee to everyone who shows up at their stores on Tuesday and just says "I voted." I imagine that's going to be a lot of coffee handed out.

Let's see, Starbucks' stock has lost over 50% of its value in the last 12 months, they've closed hundreds of stores, and consumers are buying less of everything. I know what will turn things around-- giving out millions of freebies! Well, they might as well be patriotic on their way out of business. (I'm just sad we live a long way from the nearest store).

Sunnier skies

For a markedly rosier outlook on the economy and the financial crisis (and the spectre of deflation), check out Dr. Casey Mulligan's blog. It's very textbook and very helpful.

"Shouldn't a housing bust have the opposite effects of the housing boom? The party line about the economy is that the housing boom was a time of inefficient excess. Shouldn't a period of low housing investment bring efficient prodigality: that is, MORE GROWTH FOR GDP AND EMPLOYMENT and less growth for consumption? Why then does the party line feature gloomy predictions for real GDP and employment growth going forward?"
This is a good point. The increase in saving (due to less consumption) should result in lower interest rates, greater investment, and greater future economic growth. He proves the point that non-residential investment is on the rise. Holding all else constant it should also result in a decrease of selling U.S. assets to foreigners and an "improvement" in the trade balance (more exports relative to imports).

However, all else isn't held constant. Public (ie: government) dis-saving should offset (crowd out) much of the private saving. An exogenous increase in demand for dollars abroad to buy risk-free Treasury assets has contributed to a dollar depreciation, potentially worsening the trade deficit and hampering export growth.

Anyway, Dr. Mulligan projects no deflationary problems and greater economic growth than other economists are predicting.