Friday, December 28, 2007

Deconstructing Krugman

It seems that few economists can raise the ire of other economists the way Paul Krugman can. In his latest column on trade, Krugman begins to discuss the increasing downward pressure being exerted on US wages by increased trade with developing nations.

As Krugman lays out the basic framework of his argument, he takes pains to state (twice) that he is not a protectionist. He does state in his final thought, however, that we should be wary of knee-jerk acceptance of trade and that we should listen to those who question trade.

This final thought has lead to two interpretations by Dani Rodrik and Greg Mankiw.

For his part, Mankiw seems intrigued by Krugman's thoughts(although would like to see the data backing them up) but wonders if we should take trade-questioners seriously if they are really just closeted protectionists.

Rodrik jumps on Mankiw's statement and asserts that people who question trade should not all by labeled as protectionists.

In fairness, I don't think that is what Mankiw was saying, that everyone who questions trade is necessarily a "protectionist" (which seems to be a bad word in economist circles.) What Mankiw (I think) was asking was if we know someone is a protectionist, should we listen to their views on trade? (presumably because their views will be highly skewed against trade).

My answer to Mankiw is yes, we should list to different (intelligent) views on trade, even if they are posited by a protectionist. Trade is crucially important to the economic growth of humanity and needs to be discussed, examined and deconstructed from many different angles. The purpose of this IMO is not to try to find a way to stop trade, but to continually try to find ways to make it better.

And to Rodrik I would agree that applying blanket terms to describe people's views is not helpful, but that is not what Mankiw was doing in this instance.

Good review of what caused the subprime mess...

... also check out the final thought on the piece about the possible "cleansing" effects of a recession.

Economics Blog : Are Manufacturers' Inflation Worries Growing?

Remember what I said earlier on inflation?

Right now manufacturers are eating the increases in raw materials, but that may not last much longer.

My concern on inflation is simple, the US imports a lot of stuff, including commodities and raw material. A falling US dollar means all that stuff if going to cost more; a USD from a year ago bought more imports than it does now.

Up until now, manufacturers have absorbed these costs so as to not lose marketshare, but eventually these manufacturers (as profit-maximizing entities) will have to pass along those higher costs to the consumer, and viola: inflation.

Consumer confidence up...sorta

A quick compendium of economists' take on consumer confidence is about as clear as mud.

Confidence is up...sorta.

Spending is up...sorta.

More subprime woes in the works...kinda.

Basically, it is going to be hard to judge the economy by what people say, rather you're going to have to do it by what people do. People may say they have confidence in the economy, but if they're not going to buy houses and not going to go shopping, then clearly their confidence is slipping.

And oh, BTW, businesses don't seem it be in a great rush to spend either.

Housing: The slow band-aid method

Housing prices are "sticky", meaning that they don't just bounce up and down the way stock prices do. Rather, the housing market corrects itself in a manner that is analogous to slowly and painfully peeling off a band-aid. News reported here in the WSJ suggests however that the traditional slow peel of a housing correction this time may be more like the quick and efficient band-aid rip method. (still painful, but at least the pain comes and goes in a shorter period of time)

Rather than housing prices slowly dropping to eventually reach the bottom in a few years time (some estimates I heard where that we would still be fishing around the bottom as far into the future as 2012) it looks like the decline may be more rapid, possibly bottoming out sometime in 2009.

The obvious follow-on thought is that with a quicker drop, we could begin a quicker recovery. Housing prices going up sooner would relieve pressure on consumers who are currently feeling crushed under the weight of low savings and low housing prices. A rise in 2009 could help bring the economy back from any slowdown (or recession) we are likely to experience in 2008.

Sunday, December 23, 2007

How to Avoid Recession? Let the Fed Work - New York Times

I agree with Mankiw here that the economy should be handled with a very light touch from a policy level, especially considering how unpredictable markets currently are and how potentially fragile the entire financial system may be. (Still almost 200 basis points between LIBOR and 3 month Treasuries).

I would actually go further than Mankiw and suggest that even the Fed should stay out of the way and not mess further with interest rates.

Here are my concerns:

1) Inflation: I understand the need to boost the availability of capital, but cuts in interest rates will have a continued eroding effect on the dollar and as we import so much stuff, the price of that stuff is bound to go up. Interest rates drop, the dollar drops and inflation shoots up, that is my fear.

2) I heart savings: There has been a continued downward trend in US savings. I dunno, this can't be healthy. I'm not begging for a recession, but a bit of financial pinch may encourage consumers to save more, which may shore up the dollar and may even help restore some consumer confidence (especially for those consumers who right now are shaken by a drop in their home values and have no money in the bank.)

How to Avoid Recession? Let the Fed Work - New York Times

Thursday, December 20, 2007

MBIA says it has $30.6 bln exposure to CDOs - Yahoo! News

Daily stories like this is why there is an existential crisis in financial markets, as illustrated by the LIBOR/Treasuries spread.

This story is but one small example of many more to come....

MBIA says it has $30.6 bln exposure to CDOs - Yahoo! News

DIY financial crisis monitoring

Great quick article on a short-hand way to track the growing financial crisis, track the difference between LIBOR and Treasuries. LIBOR is the rate one bank loans to another and in theory should carry only slightly more risk (higher interest rate) than US Treasuries. Sure, Treasuries have the backing of the US government, so that should be pretty secure. But LIBOR has the backing of our entire financial system, which should be pretty secure as well.... but it seems it isn't.

Based on my readings, the difference between LIBOR and Treasuries will continue until the market feels that all the bad news from the financial industry has been articulated, but that could take a long time...

Gauging the credit crunch: A do-it-yourself guide

Monday, December 10, 2007

Dani Rodrik's weblog: Real wisdom on trade

Yet another article to get to when I'm done with school. I've build a larger reading list post-school than I ever had during school!

I think Dani Rodrik gets unfairly labeled as anti-trade or anti-globalization. I admit, I haven't read a ton of his work, but what I have read makes me think he's more of a skeptic, wanting to point out the problems and inefficiencies in global trade.

To my mind, this doesn't make him anti-trade, but an important voice in asking the question how to make trade better.

As I read more of his material, we'll see if my opinion remains the same.

Dani Rodrik's weblog: Real wisdom on trade

Saturday, December 08, 2007

Market Power: Mobile Phones Empower the Base of the Pyramid (by NextBillion Writers Rob Katz and Ana Escalante) | - Development Through Enterprise

Lot of talk about the role mobile phones play in promoting development around the world, so is there space for OLPC? Is the future of development a mobile device and something as clunky as a laptop (no matter how well designed) will remain a relic of western IT usage?

By pushing PCs on developing countries, are we really just force-feeding them a technology they really don't want/need?

Market Power: Mobile Phones Empower the Base of the Pyramid (by NextBillion Writers Rob Katz and Ana Escalante) | - Development Through Enterprise