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REMINDER: All investment, economics, and finance related material now appears at the new IaconoResearch.com. For the time being at least, this has become a personal blog covering a variety of mostly unrelated topics.

Robert Shiller and the Fed’s “Credibility Trap”

On March 16, 2011, in Asia, Economy, Housing, Stocks, by Tim

On perusing US Dollar, FOMC, and the Japan Crisis: The Dog That Didn’t Bark at Jesse’s Cafe earlier today, there were two items of interest that seemed worth sharing here, the first being more ominous warnings from Yale economist Robert Shiller, he being one of those rare dismal thinkers who can actually spot asset bubbles in real time.

Shiller recently noted, “the housing bubble was the largest asset bubble in US economic history, since at least 1895″ which is as far back as his records could go and, anyone wanting more details on this subject might want to have a look at this YouTube video of Shiller where talks about some of the housing data he’s collected.

In a Bloomberg interview, Shiller warned about winding down Fannie Mae and Freddie Mac since, basically, they are the mortgage market today as commercial banks are still in something of a mortgage funk, only moderately interested in originating mortgages to earn a fee but showing little desire to carry them on their books.

In a CNBC interview on Monday, Shiller suggested that the Japan quake and tsunami could have a huge negative impact on the current stock market rally, one that he’s long thought was not squarely based on fundamentals. He pointed to a big plunge in the Japanese stock market one full week after the Kobe earthquake in 1995, suggesting that an event such as this takes some time to register with investors and traders and that we could see a similar development later this week.

As for the other item in the title above – the Fed’s “Credibility Trap” – that’s a phrase that I just read for the first time this morning (though others seem to be talking about it too these days), an idea that is particularly relevant after yesterday’s soothing words from the central bank that “subdued inflation trends and stable inflation expectations are likely to warrant exceptionally low levels for the federal funds rate for an extended period”.

After this morning’s surge in producer prices – up at an annual rate of 10 percent over the last six months – and what could be a surprising report on consumer prices tomorrow, that would be an interesting phrase to watch on Google Trends. The phrase  liquidity trap sprang to life there just a couple of years ago, but, so far “credibility trap” doesn’t register.

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Balance Sheet Recessions Explained

On March 13, 2011, in Debt, Economy, by Tim

This video has popped up in a number of places recently – Richard Koo explains what a balance sheet recessions is, how we got into one, and why QE1, QE2, QEx are not helping.

Like many other areas of contemporary economic thought, what bugs me most about this “juicy rationalization” of our current predicament is that, it as if the world’s economists woke up one day only to discover that everyone had borrowed and spent too much money, just like, in October of 1929, the stock market crashed, and thus the trouble began.

Reckless expansion of money and credit rarely ends well, something that far too few policymakers and dismal scientists seem to acknowledge as the root cause of the worst two financial market and economic disasters of the last century.

Perhaps Jeremy Grantham put it best not long ago after being asked how he would remedy the world’s economic ills when he quipped, “Well, I wouldn’t start from here”.

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Economists Still Defend the Fed

On February 22, 2011, in Economy, WTF?, by Tim

Obviously, with a name such as the one that adorns my blog, I have my own notions about how the world works and the role that economists play in it, but these two graphics from the recently conducted Q1 Kaufman poll of economics bloggers (which they kindly asked me to participate in) demonstrate how the nation’s central bank still has their tentacles firmly around the economics profession in this country.

First, after many reports over the years (including, most recently, by the Financial Crisis Inquiry Commission) about how both former Fed Chief Alan Greenspan and current Fed Chief Ben Bernanke have failed the nation (though they’ve been pretty good to Wall Street banks), they are seen in a favorable light by the poll respondents.

Why might this be?

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Keen on Keiser

On January 17, 2011, in Economy, by Tim

Steve Keen, Associate Professor in economics and finance at the University of Western Sydney and author of “Debunking Economics” talked with Max Keiser last week from an economics conference in Colorado  (start at about the 13 minute mark).

As Keen details after checking in on some of the presentations, the profession doesn’t seem to have learned much over the last few years (much to the delight of Wall Street one would presume) setting the stage for an even bigger disaster sometime in our future.

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In Praise of Paul Krugman

On December 28, 2010, in Commodities, Economy, by Tim

Well, not really. But, the Nobel Prize winning uber-Keynesian economist who regularly extols the virtues of deficit spending at the New York Times does make some very good points about why hyper-inflation has not yet occurred in this item today, points that clearly are not understood by inflation alarmists whose ranks include a good number of elected officials.

The entire post is included below because it is one that will be worth looking back upon in another year or two, perhaps around the middle of the decade (though recent developments would suggest sooner rather than later), to see how much the Federal Reserve bank balance sheet hole-filling morphs into significantly higher levels of money supply and inflation.

Now, keep in mind that, since the Labor Department has been neutering the consumer price index through various measures in recent decades, hyper-inflation is a virtual impossibility, but, the bad news for consumers is that 10 or 20 percent annual inflation as reported in the CPI will feel like hyper-inflation to most people. Anyway, here’s why we’re not yet Wiemar:

Partying Like It’s 1923: Or, The Weimar Temptation

There’s an observation I’ve tried to make in a number of columns and blog posts, but maybe haven’t gotten across as clearly as I should: namely, the extent to which current economic discourse is being warped by what we might call the Weimar Temptation, the desire to see everything in terms of the evils of deficits and the money printed to cover them.

The hyperinflation story is, after all, satisfying both intellectually and morally. A weak, spendthrift government can’t limit its spending to match its revenues; it loses the confidence of investors, so it has to print money to make up the difference; and too much money chasing too few goods leads to ever-higher inflation.

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Krugman & Hard Money: Smell the Disdain

On December 9, 2010, in Debt, Economy, by Tim

So, big surprise here, uber-Keynsian Paul Krugman doesn’t think much of anything having to do with hard money (i.e., money that can’t be created with a simple touch of a computer key) as he details in this item at his New York Times blog the other day:

There’s a widespread impression that Keynesian fiscal policy has failed. I would argue that this impression is wrong — that the truth is that it was never tried. But surely one clear lesson of recent events is the macroeconomic value of currency flexibility: Poland, Iceland, Sweden have all benefited from currency depreciation during the worst times.
…
Oh, and this:

Pence said he supports comments made by World Bank President Robert Zoellick last month that global leaders should reconsider gold’s place in the global monetary system.

“The time has come to have a debate on the role of gold,” Pence said.

In other news, Republicans have demanded that doctors consider reintroducing the practice of treating illness by bleeding their patients.

While the comments about gold shouldn’t come as too big of a surprise, we are once again reminded of the beauty of defending Keynesian economics – you can always say that some outrageous (and quite impossible) amount of deficit spending and/or money printing is required to heal the economy and, then, after that amount is not offered up, you can say that policymakers just didn’t try hard enough.

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