IMF on Fiscal Policy

Report of Dec 29, 2008

EXECUTIVE SUMMARY
The current crisis calls for two main sets of policy measures. First, measures to repair the financial system. Second, measures to increase demand and restore confidence. While some
of these measures overlap, the focus of this note is on the second set of policies, and more specifically, given the limited room for monetary policy, on fiscal policy.
The optimal fiscal package should be timely, large, lasting, diversified, contingent, collective, and sustainable: timely, because the need for action is immediate; large, because the current and expected decrease in private demand is exceptionally large; lasting because the downturn will last for some time; diversified because of the unusual degree of uncertainty associated with any single measure; contingent, because the need to reduce the perceived probability of another “Great Depression” requires a commitment to do more, if needed; collective, since each country that has fiscal space should contribute; and sustainable, so as not to lead to a debt explosion and adverse reactions of financial markets. Looking at the content of the fiscal package, in the current circumstances, spending increases, and targeted tax cuts and transfers, are likely to have the highest multipliers. General tax cuts or subsidies, either for consumers or for firms, are likely to have lower multipliers.

Keynes vs 50 Hoovers

Krugman speaks up for the problems of states' spending cut, which echos what I posted previously. Alas,50 little Hoovers... Thank God that the Federal goverment is no Hoover.

Keynes, father of macroeconomics, is regaining the spotlight on the stage of the world economy.

China Growth Fantasy

Yasheng Huang wrote a good article about the China's growth fantasy.

About State Budget

Minnesota State just released his budget forecast for 08-09 and 10-11, total $5.2 Billion shortfall. The governor then wants to cut the spending. I will say it is the right thing on the wrong time. So it is still the worng thing to do. So I wrote a letter to a person regarding this issue:

As an economist, I would like to express my personal opinion regarding the state budget crisis to you. I think the last thing our governor (as well as other state governors) should do right now is cut the spending. In normal times, it is good to keep your budget balanced. But now is not. We are in a deep recession causing from the decline of aggregate demand, private sectors are laying off employees and cutting back. As a part of MnSCU, we should be responsible for the economy and be countercyclical. If we cut the spending now to match the projected revenue, we might find further lower realized revenue in the future. In other words, we might enter a vicious cycle.
I think our governor should not focus on what programs to cut but should work hard to get the federal funding to gap the shortfall. President-elect Obama had announced a at least $500 billion stimulus package.
Here I summarized several economists and professionals sharing the same idea with mine from New York Times.

We had learned lessons from the Great Depression in the 1930s and the “Lost Decade” in the 1990s in Japan. So we can and should avoid the same mistake this time. Facing the severe economy slump, President-elect Obama is smart to stop talking raising tax on the rich after he got elected. After we totally recover from the recession in the future, we could then think about spending cut or tax raising. Believe it or not, I predict that the forthcoming federal stimulus package will include helping with states’ deficits. So my hope is that we and our governor could hang in there for a while until federal stimulus money kicks in. If Governor Pawlenty really wants to cut the spending, he could cut his own salary to $1 like some CEOs.

My Solution to Current Recession - Gym Boom

When people are talking about what the government should do to save our economy, most economists say to increase government spending on infrastructure. But what exactly are these infrastructures? Do we need to build more interstate highways? Do you need to repave the bridge if it is just fine? Besides the projects on transportation, schools, alternative energy R&D, etc, we need another new infrastructure to pave the way of 21st centry like Eisenhower did the interstate highways system in the 1950s. I call it the health infrastruture. Let's spend lots of money to build the state-of-the-art gyms (like treadmill with TV, indoor track, pool, sauna, etc) in every towns and every universities across the country.
First, save the economy in the short run. Second, develope Americans' health in the long run to reduce the rising health cost.
Becuase of its externalties, government should provide us the free acess to these health facilities like libraries, parks, etc. We should not pay to the fitness centers to get healthy.

We Have Been in the Recession for One Year!

Finally, NBER made the recession offical!

Fed Intervention: Managing Moral Hazard in Financial Crises

Here by Fed Dallas.

Beautiful Bubble

Atlantis the Palm Hotel in Dubai had a grand opening recently, which cost about $1.5 Billion.
Amazing show! Here is the intro video of the Hotel.

7 Tips to Get the Bailout

Funny tips for getting the bailout from government.
But Big three CEOs used their ways to DC...... so no bailout!

Nobel Economists Offer First Aid for Global Economy

SPIEGEL asked five previous winners of the Nobel Prize for economics to provide their own advice for what world leaders should do.
Even the Godfather of free market - Robert Lucas also calls for a overhaul of financial regulation.

And finally I see Wall Street firms make a smart, correct, and self-regulated move. See Goldman Sachs and UBS.

Hedge Fund Testimony

Congress grilled five of the country's top hedge-fund managers.
It is a 2-hour testimony.

Too Big To Fail

Minneaoplis Fed President came to Winona State to give a speech to our students.
Here is the script about the issue of "too big to fail."

Franklin Delano Obama?

Paul Krugman made a nice point for Obama in NYT.

New President

It is exciting to see Obama to be the next President of the US.
One of the reasons of his win is economy. People said:
1992 - It is the economy, stupid!
2008 - It is the stupid ecnomy!

So how to deal with the economy from now on?
My view is as follows,
1. Increase government spending on infrasturure (more public transportation in metro area), human capital (K12 education system), alternative energy research.
2. Let the Fed do his job.
3. Financial system overhaul. There are so many principal-agent problems out there. The smart regulation is needed.
4. Before we recover from the current recession, put buget deficit problem aside.
5. Before we recover from the current recession, don't think about increasing tax on the rich!
6. If we want to deal with income inequality issue, work hard on reducing health care cost. The current system is a complicated mess.
7. After we recover from the current recession, increasing consumption tax is better than income tax. We should save a little bit more. Current account deficit is an issue we have to face finally.
8. In the long run, a little more tax on gas consumption (Pigou Tax) and securities trading (Tobin tax) sound good to me.

Short Video about Financial Crisis

Nice done and neat video to introduce the current banking problem.

Import Certificates

Today I read this article written by Warren Buffet several years ago about his worries of US trade deficit, which is still substantial amount today. His solution is quite dramatic but not yet applied.

Joe The Plumber

After the final Presidential debate of 2008, Joe the Plumber become the natioanl celebrity.
Here is what happpened the other day. Tax is always an interesting economic issue.

Paul Krugman Wins Economics Nobel

Krugman getting the Nobel is a very interesting result amid current financial crisis.
His contribution is explained here and here.
Update: Krugman explains his own work. Edward Glaeser honors Krugman's work.

Messy Fannie Mae

Charles Duhigg had an in-depth report on the mess of Fannie Mae. For example, one paragraph says:

Whenever competitors asked Congress to rein in the company, lawmakers were
besieged with letters and phone calls from angry constituents, some orchestrated
by Fannie itself. One automated phone call warned voters: “Your congressman is
trying to make mortgages more expensive. Ask him why he opposes the American
dream of home ownership.”

Paul Romer and Gary Becker on Financial Crisis

Paul Romer had an insightful opinion about realists and fundamentalists on economy. In short, fundamentalists are against bailout while realists are supporting bailout.
Gary Becker is one of the realists. See his "We are not headed for depression" in WSJ.

Modern Finance 101 and Credit Default Swap

Here provides a neat chart of modern financial products.
60 minutes provides a good report on Credit Default Swap (CDS).

Sept. Madness

WSJ had a good and detailed article about what went wrong since Government let Lehman go.

Greg Mankiw posted this funny chart to highlight this Sept. madness.

Math and Science in India

WSJ had this article about India's cram schools for college entrance exam. It is pretty astouning. This reminds me of Taiwan, which had similar things before. This is perhaps how most Asian students develope their math and science skills.

Comments on Financial Crisis

Larry Summers on bailout and budget.
Robert Shiller says everybody clam down. .
Lawrence White on WaMu.

Toto, We Are Not In Kansas Anymore!

Princeton had a panel discussion on current financial crisis.
See here.

American Bailouts History

See here for the past.

Here is the latest one.

Remarks by Charles Evans

A decent academic analysis and reference of current finance crisis by Charles Evans, President of Fed Chicago.

Bailout Joke

Here.

Why It Happened So Fast?

Many people are asking why three major investment banks disappeared within 6 months.
Here is one reason, the article back to Nov, 2007. It bothered me that the investment banks still decided giving out so many bonuses amid the housing slump and subprime morgage crisis.

Diamond and Kashyap on the Recent Financial Upheavals

Here.