"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Tuesday, March 2, 2010

Really great links - Fed funds rate - Okun's Law - Naked CDS - Tim Duy - bubble in Australia - book cost illusion - gold

Olivier Coibion, Yuriy Gorodnichenko - When will the Fed raise interest rates? - "The Taylor rule with a response to the growth rate of output generates interest rate predictions which are quite consistent with financial and professional forecasts of future interest rates. The key to this consistency is that the historical behaviour of the Fed (since Volcker) has been characterised by a strong response to output growth, which returns to normal levels quickly, rather than solely the output gap, which recovers only gradually. Hence, there is a broad consensus that, given current information and barring political or populist pressures, one can reasonably expect the Federal Reserve to start raising interest rates toward the end of this year in its attempt to balance the risks of higher inflation against prolonging the current economic downturn."

Justin Wolfers - Okun's Law - "What’s good news for Okun’s law, though, is bad news for the economy. This alternative measure of output growth suggests that the recession may have been deeper, and longer-lasting than previously thought, although data for the fourth quarter aren’t yet available. While many economists believe the recession ended in the second quarter of 2009, this income-based measure of output kept shrinking in the third quarter, too. And while the expenditure-based measure is back to its level from the third quarter of 2006, the income-based measure suggests that output is still 3.5 percent below that level. That’s a pretty big hole to dig out of." (H/T DeLong)

Sam Jones - FT Alphaville - The benefits of naked CDS - "Firstly, any naked CDS buying – as slated by Mr Münchau – occurred, by hedge funds at least, well before the current crisis. Hedge funds have not been the most significant buyers of CDS in recent weeks. (Banks, stuffed to the gills with sovereign debt thanks to the ECB, have) Ergo, there is no speculative, opportunistic “attack” underway to try and push Greece further into catastrophe (as Mr Münchau notes, Greece seems content to do this all on its own anyway).
Secondly, and more importantly, however, hedge funds, completing their clever trade, have been buyers of Greek government debt, or else insurers of other holders as CDS writers. In a market where one of Greece’s principal market makers -– Deutsche Bank –- says it will not buy Greek bonds, and where European politicians are having to force their own national banks to do so in order to try and avert the threat of a Greek bond auction failing, the boon from hedge funds looking to hoover-up Greek debt is undeniable.
And the only reason they are in the market to buy is because of naked CDS positions they laid on many months -– and in some cases years -– ago."

Tim Duy - "Interesting that we should be debating the necessity of raising inflation targets when we can't even get the Fed to direct policy at the target we already have. But I suspect the Fed believes that doing anything more would be the equivalent of raising inflation expectations, a bridge they are not ready to cross."

Bond Vigilantes - Property bubble in Australia - "On my first night out in Sydney I was fortunate enough to get chatting to a couple of the locals who were out celebrating, one of them having just completed the purchase of her second property. The other, who already has two, thought it totally normal that two girls in their mid 20’s - one an interior designer, the other a shop assistant - should be able to do this."

Adam Ozimek - book cost illusion - "Is there a name for when consumers are willing to pay less for something because they falsely perceive that costs have gone down? This is apparently the conundrum facing publishers, who have found that many consumers believe that a significant portion of the cost of a book is the price of the physical book, and thus expect that without printing costs, e-books should be significantly cheaper. It seems that the cost illusion that publishers have benefitted from for so long is finally coming back to bite them."

Soros - when he sees a bubble he buys - "George Soros is helping drive up gold prices by doubling his bet in a market even he considers a “bubble” as Goldman Sachs Group Inc., Barclays Capital and HSBC Holdings Plc predict more gains before it bursts."

Scott Sumner - Indeed my only disagreement with those on the left is about incentive effects, not ethics. I think the supply-side effects of high taxes and subsidies (in the long run) are much more important than many others believe, indeed they are much more important than common sense suggests. Thus I favor a low-tax welfare state similar to Singapore, which spends enough to eliminate severe poverty, and also provide universal health care, education, etc. BTW, Singapore spends much less than we do, so calling for the US to move to that “welfare state” system is equivalent to calling for dramatically lower taxes on the rich.

ADMINISTRIVIA - subheading changed from "Scientifical Learnings of Kazachian Macroeconomists for Make Benefit Glorious Nation of America" to "Delicious Journeys Through Macroeconomics for the Purpose of Making Central Bankers Visibly Uncomfortable in the Presence of Really Great Links about Their Errorrs"

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