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.

Notes on Financial Meltdown

Rogoff's opnion Here.
Macroblog's analysis Here.
WSJ's report Here.
NYT's report Here.

What a Crazy Weekend!

The financial hurricane hit Wall Street this weekend. See this.
Krugman had a simple comment.

Getting Real About Health Care

Robert Samuelson had an analysis on the US health care. I agree with this sentence very much:

"The central health care problem is not improving coverage. It's
controlling costs."

The Fall of the Freddie Mac and Fannie Mae

NYT had a good report on the fall of these two mortage giants. The story is as dramatic as the rescue of Bear Stearns in March.

What is the Fair Tax?

Makiw wrote this article about future tax policy. Is he supporting Obama?

Recession Looms in Japan

Another Japanese leader quits as recession looms.

Compared with Japan, US seemed to be OK in terms of economy over the past decade.

Hedge Fund Wizards

Here is an interesting illustration about hedge funds.
I feel a little bit confused that finance professors call on regulations on financial innovations while some economics professors say no.

WSJ has a latest report on hedge funds.

Blanchard Spoke

Blanchard, who is a famous macroeconomist, took a position in IMF.
His interview mentioned about the global economic outlook.

Revised Q2 GDP

The revised number of the US GDP growth (3.3%) surprises a lot of ecnomists.
I am not surprised at all. It says one thing: we were not in Ression, at least not yet!! I had heard a lot of people saying we were in the worst recession after Great Depression over the past year. But it did not happen.
I was skeptical about it from the beginning. Why? Because I believe in this survey.
We should not expect a recession would come so frequently and seriously like several decades ago. Also don't underestimate the ability of Fed amid many negative shocks. The Fed had learned several hard lessons from the past history.

Rajan Had Told You So

Economist Rajan had warned us about the problem of financial system three years ago in Jackson Holes Meeting. This time he comes back to the meeting and everyone listens.

Snapshot of the US Economy Equality

The Recent Report of the US Economy Equality from Census Bureau.

Real median household income in the United States climbed 1.3 percent between 2006 and 2007, reaching $50,233.
Meanwhile, the nation’s official poverty rate in 2007 was 12.5 percent, not statistically different from 2006. There were 37.3 million people in poverty in 2007, up from 36.5 million in 2006. The number of people without health insurance coverage declined from 47 million (15.8 percent) in 2006 to 45.7 million (15.3 percent) in 2007.

What Tax Rate is Fair?

Macroblog raises this big issue.

Treasure Island of Economics and Finance

Videos of the Nobel Laureate Meetings at Lindau, Germany, in August, 2008

Stiglitz (2001): The Global Financial Crisis: Lessons for Policy and Implications for Economic Theory
Scholes (1997): The Role of Liquidity and Risk Transfer Services in the Economy
Yunus (2006): Social Business is the Solution

Note: Peace Price

Myerson (2007): Leadership, Trust, and Power: Dynamic Moral Hazard in High Office
Solow (1987): Low-wage Work in Europe and America
Kydland (2004): From Dynamic Inconsistency to Models with People
Mundell (1999): The Currency and Exchange Rates
Phelps (2006): The Good Life Needs an Economy of Dynamism
Granger (2003): Evaluation of Global Econometric Models
Fogel (1993): Forecasting Changes in the Cost of Health Care: 2000-2040
Aumann (2005): Rule Rationality vs. Act Rationality
Nash (1994): Ideal Money and Asymptotically Ideal Money

Note: Remember the movie "A Beautiful Mind"? Here is the real guy.

Panel Discussion: “Systemic Risks in Financial Markets”, Profs. Scholes, Stiglitz, Yunus and McFadden

How to Invest $10,000 and Sleep Well?

A former student emailed me a question about investment:

Hello Professor Yu,

I'm not sure if you remember, but I took your Econ 202 last spring. I was hoping I could get a little advice from you. I have around $10,000 that I can invest in something. I would like to invest the money since I am still young, it should have more time to compound that way. I don't really know what type of investment would be a wise choice at this age and with that much money. If you could give me a little advice on what to consider I would really appreciate it. Thank you for your help and time. Have a good semester.

[Name Withheld]

Below is my response:

I am glad to hear from you.
It is good to have some extra money to invest for the future.
If you could hold the money for at least five years (the longer, the better) , I would suggest you to put the money in some kind of stock index fund. There are two reasons for this.
First, it has the lowest management fee compared to mutual funds. Second, it is well diversified compared to single stocks.
Never ever buy a single stock because it is too risky. You might buy a stock like Google when you are lucky or Enron (or Bear Stearns) when you are not.
In the long run, stock index will give you a higher return than bond or money market index.
If you ask me what kind of stock index fund, I will say the simplest form: S&P 500 in the US. For example, Vanguard 500 Index Fund is a good one.
I put my 401K money in this kind of funds. By the way, NOW is a good time to buy stock index fund since stock market price is not high.
Also, I won’t give the advise for those who cannot hold their investment for at least five years. So if you only want to do the short-run speculation, ignore what I said above. I am not certain for this kind of investment.

Oil Speculations Dominate!?

A Few Speculators Dominate Vast Market for Oil Trading from Washington Post.

A Conversation with Austan Goolsbee

Charlie Rose interviews with Austan Goolsbee, Obama's economic advisor.

Top 50 Banks

Vault shows this top 50 prestigious commercial and investment banks employers.
It is odd that Bear Stearns ranks 16! I though the firm has already disappeared.

A Tale of Two Monetary Policies

The difference of monetary policy between the US and Europe explained by Martin Fledstein.

New Evidence of Permanent Income Hypothesis

Martin Feldstein wrote a good piece in WSJ.
But it seems he was one of those who asked for tax rebate. See here.

Democracy for China?

Two artiles for this issue.
By Arthur Kroeber.
By Robert Reich.
Let's see the future of China.

Funny Election Videos

Celebrity or President?
John McCain's Ad here.
And then Paris Hilton's here, which is hilarious.

The Era of Financial Triumphalism

I agree with what Ken Rogoff said about the financial freedom and regulation.

Structural Break of Human Capital Accumulation

This article by David Brooks from New York Times saying that there is a structural stop of the US human capital accumulation since the 1970s. And it is the most important issue facing the US. But it still did not explain what was going on since the 1970s.

The Debt Trap

New York Times showed a video about the finance tragedy of Diane McLeod.
Here is a comment later on from NYT.

The story tells us that Americans should save more.

Regional Business Cycles

James Hamilton's lecture for his paper: Regional Business Cycles.

Help Homeless

An interesting conversation:

So, I was talking to this little girl, Catherine, the daughter of some friends, and she said she wanted to be President someday.

Both of her parents, liberal Democrats, were standing there with us and I asked Catherine, 'If you were President, what would be the first thing you would do?'

Catherine replied, 'I would help all the homeless people.'

'Wow, what a worthy goal you have there, Catherine.' I told her, 'you don't have to wait until you're President. You can start now by coming over to my house and cleaning up all the dog poop in my back yard and I will pay you $5 dollars. Then we can go over to the grocery store where the homeless guy hangs out, and you can help by giving him the $5 dollars.'

Catherine (who was about 5) thought that over for a second, while her mom looked at me seething, and Catherine replied, 'Why doesn't the homeless guy come over and clean up the dog poop and you can just pay him the $5 dollars?'

'Ah', I said, 'Welcome to the Republican Party.'

Again, Econ Major is Good!

The most lucrative college majors from Forbes.
Economics is number 2 out of 20 majors.

The Milton Friedman Institute

Today I read a funny report.
I can understand the controversy between conservative economics department and the generally liberal humanities and social sciences.
But I was shocked to read something like this:
"For many people who travel around the world, the university has had a pretty bad reputation that is tied to the Chicago School and economic principles that Milton Friedman advocated," said Yali Amit, a U. of C. statistics and computer science professor.

I have no idea that people in computer science have problems with Friedman!!??!!

Do you want to name it the Karl Marx Institute?
To avoid dispute, why don't we just call it the Nonpartisian Moderate Institute?

Rising Gas Price and Outsourcing

Rising gas price might have this impact on outsourcing.

Blinder Says that There Are Two Kinds of Bubbles

Two bubbles; two paths from NYT.

Spence Comission Report: A Watershed of Economic Development!?

I think that Spence Report on economic growth and development has a very important implication.
Here are some responses:
1. From Martin Wolf.
2. From Dani Rodrik.

The May Retail Sales Surprise

The news somehow challenges Permanent Income Hypothesis and Ricardian Equivalence.

Why is Economics the Largest Major in Harvard?

This article provides good answers.
I completely agree with this part: "Economics is good training for business school, law school, or a career in public policy."

A Video Interview with James Hamilton

Hamilton is an icon in time series econometrics. In this interview, he talked about a lot of insightful topics, e.g. regime switching model, monetary policy, current financial meltdown, oil price, future research, etc.

Student-Loan Market

From WSJ.

Economics Major is Good!

Econ majors earn ($52,926) more than most of other majors. Evidence is here.

Is Finance's Economic Role Ebbing?

From WSJ.

The Reason of Income Inequality and Solutions

Mankiw offers a reason.
Solution 1: See here.
Solution 2: See here.

Global Financial Warrior

Very Funny Video made by Stanford Economics graduate students.
It is about monetary policy and John Taylor, famous economist.

Enough With the Interest Rate Cuts

Martin Feldstein said it is enough from WSJ.

The best and worst states for taxes

From MSN.

Fake Money but Real Stock

My colleague Mike showed me this website: Inspectedc.om
It would be a good example of random walk of stock prices.
Stock price is unpredictable from its own past.

Updated: One student of mine refered me to this website that gives you $1,000,000 virtual money to play real-world stocks.

Shiller on the Proposed Finanical System Overhaul

From NYT by Robert Shiller.

Legacy of Greenspan

WSJ has an interview with Alan Greenspan about his responsibility of recent housing bubble. I think his interest rate policy is fine. But he could have done more on regulation and supervision then.

No Dissertation

A funny video made by UC Berkely PhD students.
Comment: PhD students can't sing!

Bernanke's Testimony on April 2, 2008

Bernake's economy outlook and warn of recession in front of the US Congress.

Map of Mortgage Conditions

Fed provides this Dynamic Maps of Nonprime Mortgage Conditions in the US.
It is not informative though.

A Table of Subprime Loss

Total loss is up to $232 Billions now.

About Taiwan

Taiwan had its Presidential election on March 22. Here are some related articles lately.
3/18 Taiwan Strait Tightrope from WSJ.
3/20 Taiwan Heads for Thaw With China from WSJ.
3/22 Opposition Wins Taiwan's Election from WSJ.

Bear Stearns

Newsnight Video 1 and Video 2 about Bear Stearns.
Reuters Video 3.

Greenspan on the Current Financial Crisis

Alan says that we will never have a perfect model of risk but adding "animal spirits" factor might help.

Krugman on Current Financial Crisis

Krugman has a pretty comprehensive view for the US credit crunch now.

A Typical Chinese Factory

From this video, we can see the perfect example of two factors of a production function: labor and physical capital. China has a lot of them.

Introduction to Balance Sheet

A Video for Balance Sheet about Buying Housing.

Feldstein and Meltzer on Current Economy

A video forum.

Demographic Problems

Two opposite demographic problems for African and developed counties.
1. High fertility in Afica.
2. Aging boomers in the US.

Credit Crunch Updates

1. Carlyle Fund.
2. Bear Sterns.

Krugman on the Fed's Lending Program

Betting the Bank from NYT by Krugman.

The Inequality Myth

The inequality Myth by Brad Schiller.

Term Securities Lending Facility

The Federal Reserve announced today an expansion of its securities lending program.
It is called Term Securities Lending Facility (TSLF).

The Subprime Mortgage Comic

This is a very funny comic slide.

HT: Mankiw

Basel II

Mortgage Fallout Exposes Holes in New Bank-Risk Rules from WSJ.

Interview with Warren Buffett

CNBC had a long interview with Warren Buffett.
Transcript 1, T 2, T 3, T 4, T 5, T 6, T 7, T 8, T 9, T 10, and T 11.

In T 2, Warren mentioned the company in Winona but the host didn't know it.

Q: Among the CEOs within the universe of publicly traded companies in which Berkshire doesn't have an ownership position, which CEO do you believe is doing the best job on behalf of shareholders?
A: Well, there's a number of them. The fellow at Fastenal has done a very good job.
Q: I'm sorry. Which company?
A: Fastenal.

The Global Status of Dollars

A nice article from WSJ about the current status of dollars.

Turmoil of Municipal Bonds

From WSJ.

The Politics of Trade in Ohio

A nice article from NYT about NAFTA.
In summary, "It's the voters, stupid!"

Hedge Funds Update

A nice piece from WSJ on the strategies and prospects of hedge funds lately.

Who Is The Leading Economic Power Today?

A interesting polling result from Gallup.

Another Bank in the Dow

From WSJ.

A Stimulating Notion

The idea of giving flagging economies a fiscal boost is back in fashion.
From Economist.

Alpha and Beta of Currency Managers

From Vox.

CEO's Family Deaths and Company's Performance

I think this article (Scholars Link Success of Firms To Lives of CEOs) from WSJ is one of the most bizarre research on empirical finance.

World Growth Forecast in 2008 by IMF

Here.

Krugman on Recession

Krugman says that this looming recession would be longer than the previous two.
Here from NYT.

Rogoff on China

From FT.

Not Burdening Our Children

Mankiw's birthday wish from NYT.

China Exports Inflation

From NYT.

The surprising success of naïve GDP forecasts

From John Faust. I am not surprised at this though.

How to Recession-Proof Your Career

Planning Ahead Can Boost Your Chances of Keeping, Finding a Job
By SARAH E. NEEDLEMAN January 29, 2008; WSJ. Page B6

Recession fears are causing more than just stock-market jitters this winter. They're also shaking some workers' confidence in their ability to continue earning a paycheck.
In December, overall worker confidence reached the lowest level recorded in 2007, according to a monthly report from Spherion Corp., a recruiting and staffing company. Roughly 2,800 workers were surveyed on their confidence in their personal employment situation and the broader employment environment.
Past economic downturns have led to layoffs throughout corporate America and, at least temporarily, a tighter labor market. But some industries tend to be more vulnerable than others when the economy is in a slump.
Even if there isn't an official recession, a number of areas are already seeing layoffs and hiring freezes. Industries affected by the recent mortgage crisis and home-building downturn, such as real estate, construction, banking and law, are among the hardest hit so far, say recruiters.
Some employers in struggling industries manage to do better than their peers during downturns, says Dale Winston, chairwoman and chief executive of Battalia Winston International, an executive-search firm in New York. She cites Goldman Sachs as a current example. "There are certain companies that are counter to their cycles and making a fortune because they're shorting the market," she says. "Even in the midst of the [1920s] there were people making money." But those were the exceptions.
While jobs in housing-related industries may be at most risk, a recession could reverberate to other parts of the labor market. Consumer-products manufacturers and retailers are usually the hardest hit in a downturn, along with travel and hospitality businesses, says Ms. Winston. Shoppers tend to cut back on their discretionary spending when finances are tight, she explains, and homeowners are currently grappling with high energy prices and mortgage payments. "People only have so many dollars to spread around," she says.
In contrast, hiring generally remains robust during a recession in industries that serve consumers' critical needs such as health care and energy, notes Ms. Winston. "We have an aging population in the U.S.," she says. Plus, she adds, "nobody's going to stop driving their cars or lighting their homes."
Employers in what recruiter Chris Morgan calls "sin and comfort" industries, such as alcohol makers and distributors, gambling institutions and cigarette manufacturers, also tend to fare well during economic slumps. In addition, wealth-management firms stay in favor as people often become more protective of their finances, says Mr. Morgan, managing partner and founder of Lantern Partners, an executive-search firm in Chicago.
The hiring outlook varies for industries that aren't characteristically durable or weak in a recession. Eighty-two percent of 1,400 chief information officers and 86% of 1,400 chief financial officers polled last month in separate surveys by Robert Half International said they foresaw no change in their staffing activity for the first quarter of 2008.
For people working in the industries that are most likely to be hit with economic woes, some strategic planning can boost the odds that they will stay employed or find new work, say career experts.
Here are some strategies for recession-proofing your career.
Stick around. If you work for a company in distress, your first instinct may be to jump ship. But if your new employer later decides to lay off workers, you'll likely be most at risk of getting a pink slip, warns Ms. Winston. In many cases, "it's last in, first out," she notes.
Be a good sport. Following layoffs, you may be asked to take on additional work that was part of a former employee's responsibilities. This may involve handling tasks that you dislike or are overqualified for. But expressing dismay could put your employment at risk should there be more layoffs, cautions Gary Rich, president of Rich Leadership, an executive-advisory firm in Pound Ridge, N.Y. Displaying a positive attitude is more likely to pay off in the long run. "Companies remember those who helped them out through a tough time," he says.
Haven't been asked to take on extra projects? Volunteer to help, advises Mr. Rich. You'll demonstrate that you're a team player committed to the company's success.
Work harder. Act the way you did when you were gunning for a promotion, says Lantern's Mr. Morgan. "Companies are less likely to get rid of star performers."
Work smarter. Look for ways to help your employer overcome the specific challenges it faces most in a recession, advises Mr. Morgan. "Think about your company's situation in the same fashion that your boss is thinking about it," he says. "You can be more useful by identifying ways to reduce costs, increase revenue or reposition a product or service."
Dust off your résumé. Prepare for the worst ahead of time by making sure your résumé is up to date, urges Shawn Graham, author of "Courting Your Career: Match Yourself With the Perfect Job" (Jist Publishing, 2007). If you rush to get it done following a sudden dismissal, the odds of making a typographical error or omitting important details will increase.
Network now. Don't wait until you need help finding a job, says Debra Feldman, a job-search consultant in Greenwich, Conn. Make a special effort to reconnect in a meaningful way with past bosses, former colleagues, academic advisers and other potential advocates. Reaching out to them only in times of distress can be a turnoff, she says. Also, make sure to offer yourself as a resource to your contacts as well. The gesture will provide an incentive for them to reciprocate.
Take a pay cut. If layoffs are rampant at your company, consider offering to accept a temporary salary reduction, suggests Mr. Morgan, who speaks from experience. During the dot-com bust in 2001, he voluntarily agreed to an 18% decrease in his base pay at a search firm specializing in technology recruiting. "I was the last one left," he recalls. The ploy helped him prolong his time at the beleaguered company while he began hunting for a new position, which he landed about six months later, he says.
Search internally. If you see a layoff coming in your division or department, it may be easier to search for another position at your firm because you've already proved yourself, says Mr. Graham. For example, if you work in media relations, you may qualify for a sales role because of your experience selling story ideas to news outlets, he says. Be sure to network with colleagues who work in those areas to learn about job openings before they're advertised publicly and to see if you can secure a referral, he adds.

Parsing the Fed Januuary 08

Original statement.
From WSJ.

Siller On Confidence of Financial Market

A nice article from Robert Siller in NYT.

THE key to maintaining economic stability is well-placed confidence in the
markets. Bubbles, by contrast, result from misplaced confidence.
We are living in a post-bubble world, following the stock market bubble of the 1990s and the real estate bubble of the 2000s. That is the backdrop for the current crisis. We need to restore confidence in the markets’ basic ability to function, not in their presumed tendency to make us all rich by always going up.
Some short-term remedies are under way. President Bush has said that fiscal policy is urgently needed to address the current situation and has reached tentative agreement with Congress on a temporary tax cut of $150 billion. This might increase the official federal deficit from about 1 percent of gross domestic product to something like 2 percent, about where it was a couple of years ago. And on Tuesday, the Federal Reserve under its chairman, Ben S. Bernanke, made an emergency between-meetings cut of three-quarters of a percentage point in the federal funds rate. The move brought that benchmark rate down to its level midway into the 2001 recession, and the Fed has signaled that it stands ready to make further cuts.
While a temporary tax cut and interest rate cuts are good ideas, they don’t address the underlying crisis of confidence. If these measures succeed merely in making people consume more, running to the malls and making the already-negative personal saving rate even more negative, they won’t restore faith in the financial markets.
One main response to the Depression that helped prevent another from occurring was a set of tools that improved confidence by truly improving market security. One of these was the Federal Deposit Insurance Corporation, in 1933, but there were also a large number of others, especially the Securities and Exchange Commission the next year.
These were not obvious innovations and, in fact, were highly controversial at the time. Indeed, it is never obvious how the government should foster well-functioning markets. The fundamental role of governments in promoting markets is clear, but the design of their instruments must make creative use of a great deal of information about financial theory, human psychology and existing institutions and practices. The successful markets we have are a result of considerable inventive effort.
The F.D.I.C. was controversial because it was established amid the ruins of various state-level deposit insurance plans that had just gone bankrupt. Critics at the time also argued that federal deposit insurance would encourage unsound banking. But it turns out that the F.D.I.C. was a very good idea. It restored confidence in the banking system during the Depression, and with hardly any cost.
The S.E.C. was similarly controversial. Critics said it would hamstring or straitjacket the markets. But it is now the model for securities regulation around the world.
We need such inventive effort today. It won’t be easy, but the first step would be to set up a national study commission and to pay for serious creative research on how to adapt important ideas, like deposit insurance and securities regulation, to a modern financial world.
Mr. Bernanke certainly knows the importance of well-functioning markets. In his 2000 book, “Essays on the Great Depression,” he wrote persuasively that runs on the banks and extensive defaults on loans reduced the efficiency of the financial sector, prevented it from doing its normal job in allocating resources, and contributed to the Depression’s severity.
The Depression-era problems he studied are mirrored by similar issues today, and they need urgent attention. The very fact that many people feel they can no longer rely on some of our financial institutions may bring a self-fulfilling prophecy, which could then fundamentally harm economic activity.
The mortgage market is suffering. People are having a hard time getting mortgages, and mortgage originators are finding it harder to sell their mortgages to those who would repackage them in mortgage securities.
The commercial paper market is suffering, too. The amount of outstanding asset-backed commercial paper, which has become a main element of an unregulated, uninsured, shadow banking system, has fallen 30 percent since August.
Other credit markets are also having problems. For example, some municipal borrowers have already had the credit ratings of their debt lowered because of the downgrading of Ambac, a municipal bond insurer, by Fitch Ratings. Problems in the bond market are likely to multiply if there are further downgradings of Ambac, or downgradings of other insurers like MBIA.
CONFIDENCE in our brokerage firms is suffering. With every announcement of major losses, some people start to wonder whether they can rely on these companies.
The Bank of England’s bailout of the mortgage lender Northern Rock in September was truly urgent. The bank was experiencing a run, the first in Britain since 1866. The newspaper photographs of long lines of people waiting on the street to withdraw their money probably rekindled dormant fears. People tend to remember such dramatic stories because they remember when their own confidence has been shaken.
The Northern Rock bailout was needed because ordinary depositors had begun to worry about their saving accounts. It was necessary to show them that they didn’t have to be worried. Improvements in the deposit insurance system in Britain began immediately after this crisis.
In the United States, the very least we can do is to raise the F.D.I.C.’s limits on insured deposits. The limit of $5,000 in 1934 was 12 years’ worth of per capita personal income at the time. The limit was last raised in 1980, to $100,000, which was then 10 years’ income. But because of inflation and economic growth, that limit is less than three years’ income today.
The Federal Deposit Insurance Reform Act of 2005 did not raise that ceiling, though it will start indexing the limit to inflation in 2010. We have allowed deposit insurance to go three-quarters of the way to extinction.
The insurance limits of the Securities Investor Protection Corporation, which protects customers when brokerage firms fail, were also last raised in 1980 — to $100,000 in cash accounts and $500,000 in securities — and thus have suffered an equally drastic erosion in real value. Such erosion could suddenly matter if the crisis, or even just the psychology of the crisis, were to worsen.
But far beyond this, at a time when so many problems have arisen outside the limits of existing federal insurance programs, we need to do more than update the programs for inflation. We need to consider the fundamental principles on which they were based, stress-test them for today’s environment and consider extending them in creative ways.

Taxman Could Slow Stimulus Plan

A typical time lag problem from fiscal policy.
From WSJ.

We Are NOT In a Recession, Not Even Close

From Mark Perry.

Panel of Sovereign Wealth Funds

From Slate.

CBO Budget and Economic Outlook

Here is the big report and here is the summary.

Every Major U.S. Bank Was Profitable Last Year

An analysis from John Berry.

Fed's Big Move

The Fed cut the Fedeeral funds target rate by 0.75% to 3.5% this morning. Here is the statement.

US States GDP

This is a cool and interesting map.

HT: Mike Wenz

Publishing FOMC Economic Forecasts

Here from FRBSF Economic Letter.

Rep. Marcy Kaptur vs Bernake

This is a very funny moment in Congress.

Critics of Federal Reserve Chairman Ben S. Bernanke argue that he is ill-served by not having experience on Wall Street. Rep. Marcy Kaptur (D-Ohio) apparently didn't share that concern.
At yesterday's House Budget Committee hearing, Kaptur, after criticizing the role banks played in the housing crisis, asked Bernanke to respond. After all, she said, he used to be chief executive of Goldman Sachs, the giant investment bank.
Kaptur had apparently confused him with Treasury Secretary Henry M. Paulson Jr., who was formerly chairman of Goldman.
"I got the wrong firm?" Kaptur asked, after Bernanke corrected her.
"I was CEO of the Princeton economics department," Bernanke clarified, referring to his time as department chairman at the university.

Fiscal Stimulus

1. Bush Proposing $145 Billion Fiscal Stimulus Plan to Spur Economy.
2. Economists Debate the Quickest Cure.
3. Commentary from Bruce Bartlett.
4. Martin Feldstein predicts the future pretty well. See here in September 07 and here December 07.
5. Alan Blinder has a nice paper on fiscal policy in 2004.

Tax Competition

This video presents the benefit of the tax cut. There is always a disagreement on this issue.
A typical trade-off example of efficiency and equality.

The Education of Bernake

NYT says that Fed Chairman Bernake is in a difficult situation now. I think he will deal with these shocks (recession, inflation, and whatever) well in the long run.

Some Different Thoughts

Tyler Cowen has this interesting NYT article with different thoughts for events in 2007.

2008 January Economic Indicator

An analysis from Econbrowser.

Taiwan Legislative Election

An analysis after Taiwan Legislative Election from WSJ.

The opposition party's overwhelming victory in Taiwan's legislative elections brings the island closer to having a government intent on improving ties with China after years of worsening discord that have hampered its economy.
In Saturday's vote, the Kuomintang, or Nationalist Party, took 81 of 113 legislative seats, a larger-than-expected win that gives the party powerful momentum toward its goal of retaking the presidency in an election in March, after eight years as the opposition.
The results were a staggering blow for President Chen Shui-bian, who has championed the island's independence and defiantly rejected Beijing's claim that it is part of China's rightful territory. Mr. Chen's Democratic Progressive Party -- which had been the largest single party in the legislature -- won just 27 seats Saturday. Mr. Chen, who will leave office in May, resigned as DPP chairman to take responsibility for the setback.
The outcome seems certain to cheer investors, who have long complained that antipathy between Taiwan and China under Mr. Chen has constrained Taiwan's stock market and economy. Taiwan's benchmark stock index ended Friday at 8029.31, about 9% below its level when Mr. Chen first took office in May 2000.
Diana Wu, a trader at Capital Securities Corp., predicted the index could test highs of 8400 or more today. Analysts also predicted the New Taiwan dollar would strengthen.
Attention will focus on whether Ma Ying-jeou, the Harvard-educated former Taipei mayor running as the Kuomintang's candidate for president, can carry the momentum to victory March 22.
Polls show him with a healthy lead over DPP candidate Frank Hsieh, a former premier who is widely seen as more moderate than Mr. Chen on cross-strait policy. Mr. Hsieh said yesterday he would take over as DPP chairman.
While Mr. Ma doesn't favor near-term unification with China, he also rejects Mr. Chen's confrontational approach and has said he hopes to improve ties. As a result, a victory by the Kuomintang candidate could ease tension in the Taiwan Strait and reduce the chances of a military conflict there that could also embroil the U.S., Taiwan's most important backer.
Analysts say Beijing would also be far more willing to deal with Mr. Ma on issues such as ending a ban on direct flights between the two sides. The ban was put in place shortly after the Kuomintang fled to Taiwan in 1949 amid civil war with the Communists. "There would be progress in investments in China for the financial industry and a possible breakthrough regarding direct flights to China if Ma wins," said Ms. Wu.
China's government had no immediate reaction to Saturday's vote. Chinese analysts said the outcome could lead to improved ties. "We're very happy about the big failure of Chen Shui-bian," said Hou Ruoshi, an expert on foreign affairs at China's Zhejiang University. "It raises the possibility of a victory for Ma Ying-jeou."
The Kuomintang has its first outright majority in the legislature in more than a decade, though in recent years it has narrowly controlled the body through alliances with smaller parties. A victory for Mr. Ma in March would create a unified government and break the gridlock that has slowed policy making during Mr. Chen's tenure.
"With a unified government, it'd be easier for the government to push through reforms, including more fiscal-spending, cross-strait reforms," said Frederic Neumann, a Hong Kong-based economist for HSBC. He expects Taiwan's economic growth to slow to about 4% this year -- analysts estimate it grew by more than 5% in 2007 -- but says he will raise that forecast if Mr. Ma wins in March.
Saturday's vote represented a reversal for the DPP. For the first time in four elections since 1995, the party failed to increase its share of legislative seats. Mr. Chen and his party have in recent years made headway embedding a stronger sense of Taiwan's separate identity into its political culture.
That reversed Kuomintang efforts during most of its five-decade rule to inculcate the population with a mainland Chinese identity -- requiring people to speak Mandarin instead of the Fukienese dialect that residents commonly call "Taiwanese." Today, even Kuomintang politicians like Mr. Ma, who was born to parents from mainland China, must frequently speak Taiwanese at campaign rallies. Support for unification with China is tiny.
But many in Taiwan have tired of Mr. Chen's combative approach, and of his repeated efforts to use identity issues at election time. Perhaps more important, a series of corruption scandals involving people close to Mr. Chen has shattered his party's reputation for probity -- at a time when the Kuomintang has made progress cleaning up its image, long tainted by association with corrupt practices.
Mr. Chen accepted "full responsibility" for Saturday's defeat. "The results of this election are the worst setback in the history of the DPP," he told reporters. "I am truly apologetic and embarrassed by the election results."

A Primer on Fiscal Policy

If, When, How: A Primer on Fiscal Stimulus from Hamilton Project of Brookings Institution.
A good introduction and summary of fiscal policy.

Bernake's Speech in January

Title: "Financial Markets, the Economic Outlook, and Monetary Policy" on January 10, 2008.
Update: In Q&A, Bernake talks about recession.

Challenges for the world’s divided economy

By Martin Wolf.
Here is a related paper by Reinhart and Rogoff.

Freakonomics

If you have read the best-selling book "Freakonomics," you will not be surprised at the author's new study on prostitution. The original paper is here. You can find more interesting and stunning research on Steven D. Levitt's website.
Update: This article provides good summary in related research.

Recession?

Everyone is talking the possibility of a recession. And NBER has an updated memo.
It says that they would watch the report from Macroeconomic Advisers, LLC.

Oil Hits $100

WSJ has a detailed analysis and graphic display on surging oil price.

Wal-Mart Effect

Is Wal-Mart a poison or antidote to local communities? See this article from Fedgazette.

Intrade Market

This article analyzes the Obama and Cliton's prices in the intrade on NH primary night.
I think the intrade futures (or spot) market's incorrect prediction is simply reflecting the fact that the product per se (primary) is unpredictable.

Hyperinflation in Zimbabwe

A serious hyperinflation problem long haunts Zimbabwe. And this fact proves a simple lesson from macroeconomics: government printing too much money will bring nothing but a davastation.

2008 New Year Reading

1. Stagflation Cometh by Joseph Stiglitz
2. A Recession Shoudn't Be in Your 2008 Forecast by John Berry
3. A New IMF Role: Global Stablizer by Harold James
4. Financial Globalization and US Current Account Deficit by Higgins and Klitgaard
5. World Top 10 Most Polluted Places from Scientific American