28 August 2008

21 August 2008

"Education" is Flawed

"Today, there are two worlds that use the word education with opposite meanings: one world consists of the schools and colleges (and even graduate schools) of our education complex, in which standardization prevails. In that world, an industrial training mega-structure strives to turn out identical replicas of a product called "people educated for the twenty-first century"; the second is the world of information, knowledge, and wisdom, in which the real population of the world resides when not incarcerated in schools. In that world, learning takes place like it always did, and teaching consists of imparting one's wisdom, among other things, to voluntary listeners."

Jesse, I thought you'd find this interesting.

08 August 2008

A Second Stimulus?

"Before last Thursday, there was no second stimulus proposal. Now there's a proposal from the Chairman of the Senate Appropriations Committee, Senator Byrd (D-WV), but we have seen no indications that House or Senate Democratic leaders have signaled support for that proposal."

Greg Mankiw has a source in the White House with the scoop.

07 August 2008

Decisions, decisions...

"With mounting inflationary pressure, the Fund added: “Policy trade-offs between inflation, growth and financial stability are becoming increasingly important.”"

This is from an article in The Financial Times covering the outlook offered in a report issued by the International Monetary Fund concerning the credit crunch.

What I see happening is high commodity price inflation combined with a now risk-averse financial system and limited economic growth in the U.S. because of dampened consumption. We've been financing our consumption for the past decade or more, so now that we can't borrow anymore consumption will fall and the economy will slow or stall. Cutting the federal funds rate in an attempt to affect real interest rates hasn't had much impact and probably won't while the general outlook for lending and investment remains extremely risk-averse. The Federal Reserve has maintained financial system stability through the use of new tools such as the TAF, the TSLF and the Primary Dealer Credit Facility as well as the Bear Sterns bail-out...but preventing a meltdown hasn't restored confidence in the markets to previous levels.

So, consumers can't borrow to consume and firms can't borrow to invest and the result is declining consumption and crawling (if not negative) economic growth. Rapid and sustained commodity price increases are driving inflation upward (let's hope the weak labor market constrains wage growth, otherwise a wage-price spiral will be the next calamity). And maintaining financial system stability isn't restoring confidence in the basic ability of the financial system to channel funds from savers to borrowers.

The Federal Reserve is trying to juggle a few balls at once, and the appropriate response to these problems isn't easy to come by.

Lowering the federal funds rate further probably won't have much of an effect considering the fear of risk in lending right now; the net effect on the economy would be nil, so this isn't really an option (or one with any impact, anyways).

Raising the federal funds rate would drive real interest rates higher than they otherwise would be in the current situation, further curtailing growth, but at the same time relieving the upward pressure on prices and thus constraining inflation (before long-term inflation expectations become unanchored) and restoring some faith in price stability. This is a possibility, but the cost is slow or negative growth (and rising unemployment). The FOMC expressed concerns about both growth and inflation in it August 5th policy statement, but didn't say which was the priority at this time. Personally I would argue that inflation should be the priority right now. I say this because inflation expectations are very difficult and take a long time to cement. If inflation expectations are unanchored now it could take 10 years to correct, making it difficult for growth to occur during that time because of uncertainty about prices and interest rates offered on loans.

Growth can bounce back and forth relatively quickly, compared to inflation expectations. Raising rates might not be such a bad move.

Wishful Thinking

"The company [Freddie Mac] also reiterated its commitment to raising at least $5.5 billion from investors."
...
"The company’s [Freddie Mac] entire worth as measured by the stock market was $4.2 billion as of Wednesday afternoon."

Yeah, right. Here is the NY Times article.

06 August 2008

Olympic Politics

"...it’s becoming clear that the I.O.C.’s decision to give the 2008 Olympics to Beijing is its worst call since 1936. Now that it’s too late to turn around, China is busy breaking all its promises to improve human rights, allow uncensored coverage, or even—for God’s sake—clean up the air in Beijing so that marathoners don’t fall dead in the streets. I know we’re supposed to say nice things about China as a rising power and welcome it to the world stage because anything else inflames Chinese nationalism. But the Chinese leadership wants to have it both ways: quick to criticize President Bush for interfering in China’s sovereign affairs when he had the decency to meet Chinese dissidents this week, but eager to cash in on all the geo-political benefits that the Olympics will bring. China didn’t even bother to abstain last month but instead vetoed sanctions against Robert Mugabe at the U.N. Unlike Germany in 1936, China is prettifying its streets without pretending to prettify its foreign policy."

From an interesting post on the blog Interesting Times at The New Yorker.

05 August 2008

FOMC Meeting

Well, the FOMC statement has been released.

"Economic activity expanded in the second quarter..." and "...the inflation outlook remains highly uncertain."

And once again Dallas Fed President Richard W. Fisher voted to increase the target for the federal funds rate (I agree with his action).

This statement is nearly identical to that of the June 25 meeting. However, the Committee did express a "singificant concern" about the upside risks to inflation, something not mentioned in previous statements. Inflation indicators are ticking up ever faster and it seems as though the Fed has lost traction in reagards to the use of the federal funds rate; mortgage rates and interest rates for corporate debt are not being signifcantly affected. So instead of keeping the federal funds rate low and adding to the upside risks to inflation, why not start raising the federal funds rate slowly?