Baseline Scenario

I’ve spent a lot of time lately scouring the blogosphere looking for materials to incorporate into my macro classes that will explain the financial crisis to beginning economics students. I’ve uncovered a treasure trove of material that I will be sharing in future posts. I’d like to start with a remarkably informative website that I have only recently discovered.

Simon Johnson is a Professor of Economics at MIT, senior fellow of the Peterson Institute for International Economics, and a former chief economist of the IMF. Professor Johnson hosts a brilliant blog called the Baseline Scenario that is dedicated to explaining what happened to the global economy and what we can do about it.

In a riveting interview on Bill Moyer’s Journal on PBS Professor Johnson argues that there can be no real solution to our economic predicament until we restore basic integrity to the financial system. Johnson is highly critical of Treasury Secretary Timothy Geithner’s plan to address the financial crisis which proposes to inject up to 2.5 trillion into the financial system.

Professor Johnson's argument is that the big money center banks constitute an oligarchy that is exerting excessive influence on our system of political economy.

Some excerpts from Professor Johnson’s interview with Bill Moyers:

"I think I'm signaling something a little bit shocking to Americans, and to myself, actually. Which is the situation we find ourselves in at this moment, this week, is very strongly reminiscent of the situations we've seen many times in other places.

But they're places we don't like to think of ourselves as being similar to. They're emerging markets. It's Russia or Indonesia or a Thailand type situation, or Korea. That's not comfortable. America is different. America is special. America is rich. And, yet, we've somehow find ourselves in the grip of the same sort of crisis and the same sort of oligarchs...

I have this feeling in my stomach that I felt in other countries, much poorer countries, countries that were headed into really difficult economic situation. When there's a small group of people who got you into a disaster, and who were still powerful. Disaster even made them more powerful. And you know you need to come in and break that power. And you can't. You're stuck...."

While some of the material on the Baseline Scenario blog is quite challenging there is a section called Financial Crisis for Beginners which has explanations of some of the key financial concepts for the newbies. Professor Johnson has also posted webcasts of some of the sessions of his MBA level Global Crisis class at MIT last semester.

The Fed cut rates

The Federal Reserve cut two important interest rates yesterday, and indicated that it may be reluctant to cut rates further in the future. The Fed is predicting a slowdown of growth.

Here is the Press Release from the Federal Reserve Open Market Committee (FOMC).
Press Release

Release Date: October 31, 2007

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.
Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh. Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.

You’ll learn more about the Federal Reserve and monetary policy in Chapter 13 of your text.

Extra Credit: How many regularly scheduled open market meetings does the Federal Reserve Open Market Committee hold each year? When is the next meeting? If you are the first student to send me an e-mail (kwoodward@saddleback.edu) with the answers, you will be rewarded with two extra credit Discussion Board points. Only one blog extra credit question per student can be answered in any given week for Discussion Board extra credit.

The Age of Turbulence

Alan Greenspan was the Chairman of the Federal Reserve from 1987 to 2006. Before that he was Chair of the Council of Economic Advisers under President Ford and an adviser to Presidents Nixon and Reagan. In my opinion no other single individual had has much influence and impact on maroeconomic in the past forty years as Alan Greenspan.

This September, Greenspan published a memoir of his experiences in the world of economics entitled The Age of Turbulence. Greenspan calls his book a “detective story”, and he received an advance of more than $8 million from his publisher. The Age of Turbulence is certainly one of the most important books of the year, and required reading for anybody who wants to stay on top of economic affairs.

The Age of Turbulence is divided into two parts. The first half is a memoir that traces Greenspan’s rise from student to jazz musician to the world's most powerful economist. We learn that Greenspan was the only child of divorced parent, and is an ardent student of math, music and baseball.

The second half of the book is an astute look into the economies of today and the future. Here Greenspan discusses of the current world situation and a prediction of what the economy will look like in the year 2030 while he outlines the rise of the modern global economy. The “maestro” discusses many different macro topics including stock market crashes, the rise of China, the transformation of Russia, economic populism in Latin America, energy, education, income inequality, the dot com and housing bubbles, and the effects of globalization. Reading the second half of the book one chapter at a time will give you time to reflect on the analysis.

I have enjoyed reading the Age of Turbulence which is why I am recommending it as a subject for you Discussion Board Post. The writing is direct and lively for an economist, and the paragraphs are short. Don’t worry there aren’t any graphs! Facts and statistics (positive economics) fill the pages, but Greenspan is not shy about giving his normative perspective on many of the macro issues that he discusses in the book.

I believe that reading the Age of Turbulence will make a lot of the ideas and concepts in your e-text come alive. Sharing the knowledge about macroeconomics that you gleaned from reading the book is preapproved as a Discussion Board post. If you decide to review the book for your Discussion Board post I would like you to concentrate on macroeconomic themes in the second part of the book: growth, recessions, inflation, globalization, deficits, etc. If you decide to review Greenspan’s book you will still need at least three references to key terms in your textbook, but you need not have any references to on-line sources. Your post should meet the minimum word requirement of one thousand words.

The book is available at fine booksellers everywhere, including Costco. It also should be available at most public libraries. If you are into podcasts you can download the book from i-Tunes.

Here is a direct link to a Jon Stewart interview with Greenspan on Comedy Central. Click here for an audio interview with the former central banker on NPR’s Fresh Air program.

Extra Credit: Greenspan advised six presidents in the course of his career. Which two Presidents does he consider the smartest and why? If you are the first student to send me an e-mail at kwoodward@saddleback.edu with the answer, you will be rewarded with two extra credit Discussion Board points. Only two points extra credit per student can be earned in any given week from the blog questions.

The Steady Fed

One of the main learning objectives in Economics 2 online is to understand the impact the Federal Reserve System and monetary policy. (Chapter 12 in the Colander text, Chapter 13 in Krugman and Wells)

Yesterday, March 20 2007, The Federal Reserve decided to keep the all important federal funds rate steady at 5.25%. This lack of action was widely expected. The Fed has not changed rates for six straight meetings.

According to Bloomberg, which is an excellent source of economics news: “For the first time since the Fed ended a two-year run of interest-rate increases in August, the central bank yesterday signaled that its next move might be either to lower or raise borrowing costs, instead of just the latter. The Federal Open Market Committee's statement omitted a previous reference to ``additional firming'' in favor of the more general ``future policy adjustments.''

The shift indicates officials may have concluded the risks of a deeper recession in the housing market make it hard to raise rates to bring down inflation more quickly.”

Here is the full text of the Fed’s statement about the state of the economy:

“The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 2-3/4 percent.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Output evidently continues to grow at a solid pace despite the rise in energy prices, and labor market conditions continue to improve gradually. Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.

Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. “

The stock market moved higher after the release.

Extra Credit: How many regularly scheduled open market meetings does the Federal Reserve Open Market Committee hold each year? When is the next meeting? If you are the first student to send me an e-mail (kwoodward@saddleback.edu) with the answers, you will be rewarded with two extra credit Discussion Board points. Only one blog extra credit question per student can be answered in any given week for Discussion Board extra credit.

Global forces have taken control of the economy.

Mike Mandel who holds a Ph.D. in economics from NYU is one of my favorite macro mind writers. He has written a big think piece in the current issue of Business Week, called: Can Anyone Steer This Economy? The subtitle of the article says it all: “Global forces have taken control of the economy. And government, regardless of party, will have less influence than ever.” Mandel argues that the fiscal and monetary policy levers just don’t work the way they did in the past, and includes a nice chart to show why. U.S. policy makers become comparatively powerless as globalization expands. Washington just doesn’t have the economy under control anymore. I urge you to read the whole article or at least listen to the podcast. Along with the article Business Week Online includes a slide show on “Ten of the Biggest Blunders in U.S. Economic Policy.” Lots of good ideas here for a Discussion Board topic.

Let me share a few pithy quotes from Mandel’s article with you.

Excerpts from: Can Anyone Steer This Economy? By Michael Mandel:

“Sometime next year--perhaps around Christmas 2007, if current trends continue--the U.S. will hit a milestone. For the first time in recent memory, the cost of imported goods and services will exceed federal revenues. In other words, Americans will soon pay more to foreigners than they do to their national government…

No matter which party you belong to, or which Big Idea or school of economic policy you subscribe to, one thing is clear: Globalization has overwhelmed Washington's ability to control the economy. Whether you're a Republican supply-side tax-cutter, a Wall Street deficit hawk of either party, or a Silicon Valley techie type, your preferred levers of economic policy just don't work as well as they once did….

Clearly, education is key to competitiveness. "If an educated population is the engine of change, then we're doing a really, really lousy job," says Claudia Goldin, a Harvard economist who is co-authoring a book about education and technology. "We have been un-subsidizing higher education for some time."

…real wages for young Americans with a bachelor's degree have declined by almost 8% over the past three years. Nobody knows the reason for sure, but some economists suspect that global competition has something to do with it.

The idea of a national economic policy may be fundamentally out of date in a world of global markets. Washington is no longer the center of the economic universe.”

Extra Credit: Imports account for what percentage of U.S, GDP? Foreign money finances what percentage of U.S. domestic investment? The answers can be found in Can Anyone Steer This Economy? If you are the first student to send me an e-mail (kwoodward@saddleback.edu) with the answers, you will be rewarded with two extra credit Discussion Board points. Only two points extra credit per student can be earned in any given week from the blog questions.

No surprise: the Fed hits the pause button again

Here is the Press Release from the Federal Reserve Open Market Committee (FOMC). No surprises here for faithful readers of this blog. The bottom line: the FOMC is on pause when it comes to interest rates. We’ll get to look at the third quarter GDP report on Friday. The Fed is predicting a slowdown of growth.

Release Date: October 25, 2006

For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.

Extra Credit: So what is the “federal funds rate”? You can bet you’ll be asked about this on your final exam. If you are the first student to send me an e-mail (kwoodward@saddleback.edu) with the answer, you will be rewarded with two extra credit Discussion Board points. Only two points extra credit per student can be earned in any given week from the blog questions.

Fed Watching: The FOMC Meeting

An understanding of monetary policy in action is essential to developing an understanding of macroeconomics. The powers that be at our central bank (usually called the “Fed”) began a two-day policy meeting today. Today members of a twelve person special committee at the Fed, called the Federal Open Market Committee (FOMC), scrutinized data relating to economic growth and inflation. The FOMC is the principal decision making body of the Fed. The primary function of the FOMC is to direct monetary policy for the U.S. economy. The FOMC has eight regularly scheduled meetings in a given year. The next meeting will be held on December 12.

Tomorrow morning the twelve members of the FOMC will take a vote concerning the direction of short-term interest rates. Shortly after the vote, the FOMC will issue a Statement explaining their action or inaction with regard to interest rates. An army of Fed watchers will then hit the online media giving their spin on what the Fed is thinking about the direction of the macro economy. Not one macroeconomist that I know of expects the Fed to change its interest rate target on Wednesday. Rather the Fed watchers will be dissecting the Press Release for hints of what the Fed will do in the future when the interest rate “pause” is over.

You can find out more about the Fed and monetary policy in Chapter 12 of your text book. If you think that you know a lot about the Fed, try your hand at this Fed quiz.

Extra Credit: I want to be on the FOMC because I want to influence interest rates in the economy. How do I go about it? And who is that guy in the picture? If you are the first student to send me an e-mail (kwoodward@saddleback.edu) with the answer, you will be rewarded with two extra credit Discussion Board points. Only two points extra credit per student can be earned in any given week from the blog questions.

Fed Watching

Fed Watching is a major pastime among macroeconomists. Evaluating monetary policy keeps us safely off the streets. The Federal Reserve Open Market Committee (FOMC) has a lot to worry about these days as usual. The housing market is slowing, yet inflation remains stubbornly high in spite of falling energy prices. No wonder it decided to “pause” (do nothing) after its last several meetings. Today the Fed released the minutes of the September 20 FOMC meeting, where you can see some details behind the Fed’s take on the course of the economy.

“In their discussion of major sectors of the economy, meeting participants focused especially on developments in the housing market. Although the situation varied somewhat across the nation, housing activity was continuing to contract in most regions. Home sales had slowed considerably, and anecdotal reports suggested that more buyers were canceling contracts for purchases. Participants noted that inventories of unsold homes had climbed sharply in many areas and that builders were taking a number of measures to reduce inventories. Both permits for new construction and housing starts had declined significantly. Available measures of home prices suggested that appreciation had slowed considerably but prices in most areas were not falling, although some sellers were reported to be providing various inducements to potential purchasers that reduced effective prices.” (From the Minutes of the Federal Open Market Committee, September 20, 2006)

You are encouraged to try your hand at Fed watching for one of your Discussion Board posts. Read Chapter 12 in your text book, and check out the Fed links under Macro Web Links on Blackboard.

I’ll bet the Fed stays in monetary policy pause at its next FOMC meeting later this month.