Really good links - Nominal GDP targeting - Shadow banking - Milton Friedman's thermostat - Origins of the national debt - QE2 and market factors

David Beckworth - The case for nominal GDP targeting - "Mark Thoma wants to hear the case for nominal GDP targeting. This approach to monetary policy requires the Fed stabilize the growth path for total current dollar spending. As an advocate of nominal GDP level targeting, I am more than happy to respond to Mark's request. I will focus my response on what I see as its three most appealing aspects: (1) it provides a simple and intuitive approach to monetary policy, (2) it focuses monetary policy on that over which it has meaningful influence, and (3) its simplicity makes it easier to implement than other popular alternatives. "

Interview with Gary Gorton - Shadow Banking; The Rise of Repo; Growth of Securitization; Information Sensitivity; The Collapse of Repo; Regulatory Reform; Creating Collateral, not Insurance; Vulnerability to Panic

Nick Rowe - Milton Friedman's Thermostat

Brad DeLong - Alexander Hamilton and the Origins of the National Debt - "Back in the early 1790s, the national debt was close to 40% of annual GDP. It was close to 40% because the first Treasury Secretary, Alexander Hamilton, thought it was a good idea to make it close to 40%. <..>
        The most important reason, however, was that Alexander Hamilton was Secretary of the Treasury in a country where the rich were at best uneasy about the revolution and independence. Of America's upper class as it stood in 1775, full half of them were gone: had fled to Britain or Canada during the Revolutionary War. Those who remained remembered that back before 1775 the British monarch had protected property, that the British army and navy had protected them against deprivations of all kinds, that it was quite clear who the police worked for. Now you have a republic with a much broader electorate. Might politicians run on a platform of soaking the rich and redistributing wealth to the poor? Thus the rich people were nervous--and at least thinking about how maybe it would be good if the British came back and ruled again.
        This was where Alexander Hamilton had his good idea. Suppose, he thought, he could set things up so that the rich owned a lot of U.S. government bonds. Then if the British returned--well, the British were not going to pay off the Revolutionary War debt of the United States of America under any circumstances. Having a national debt was a way to bind the United States rich to the country--giving them a stake in the new republic's survival. And by large it worked: the national debt was a national blessing."

John Hussman - QE2 and market factor analysis - "The key event related to QE2 wasn't its formal announcement, but was instead the Op-Ed piece that Ben Bernanke published a few days later in the Washington Post, which essentially advanced the argument that the Fed was targeting a "wealth effect" in stocks and other risky assets, in hopes of getting people to consume off of that perceived wealth. At that moment, Bernanke unleashed a speculative bubble in risky assets, and a selloff in safe ones. This has rewarded risk-seeking and punished risk-aversion, but it has also unfortunately driven the markets into an overvalued, overbought, overbullish, rising-yields condition that has historically ended in steep and abrupt losses.
        Ned Davis Research tracks a set of "factor attribution" portfolios, which measure the performance between the top 10% of stocks ranked by a given factor, and the bottom 10% of stocks as ranked by that factor. The factors are things like market beta, dividend yield, 26-week momentum, and so forth. Essentially, the these factor portfolios track the return of hypothetical portfolios that are long the top 10% and short the bottom 10% of stocks based on any given variable.
        The performance of these 133 factor portfolios over the past 13 weeks offers tremendous insight into the extent to which the Federal Reserve has encouraged speculative risk. Investors are chasing stocks with the greatest exposure to market fluctuations, commodities, credit risk, small-cap risk and volatility. Conversely, securities demonstrating reasonable valuation, stability, quality, or payout have been virtually abandoned by investors. Here is a sampling:

FACTOR	FACTOR GROUPING	13-WEEK RETURN
Market Beta	Risk	17.80%
Raw Materials Beta	Commodity Sensitivity	17.47%
Credit Spread Beta	Macro Economic Sensitivity	14.66%
Small vs. Large Beta	Style Sensitivity	12.54%
Silver Beta	Commodity Sensitivity	10.87%
Sigma Risk (Volatility)	Risk	10.73%
Operating Cash Flow Yield	Valuation	-4.02%
EPS Stability	Quality	-5.56%
Value vs. Growth Beta	Style Sensitivity	-5.87%
Return on Invested Capital	Profitability	-6.61%
Dividend Yield	Valuation	-9.34%
10-Year T-Note Beta	Macro Economic Sensitivity	-9.55%
High vs. Low Quality Beta	Style Sensitivity	-15.70%

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