Author Archives: lippmanb

(Revised) Hail to the Banking System

Each year, the Federal Reserve test that determines whether a large bank can withstand an economic slump. If a bank passes this test, then it is considered resilient in the event of negative economic activity. It is like a stress test. This story is covered by both the Wall Street Journal and the Washington Post.

After conducting the test, 29 out of the 30 big banks passed this test. Zions Bancorp was the only bank that did not pass this test. This means two things. One, it would probably be a good idea to invest with someone else other than Zions Bancorp. Second, this means that people can trust the banking system with their assets. The Financial Crisis of 2008 did involve the failure of a large bank, Lehman Brothers Holdings. Thomas Donahue, the chief of the U.S. Chamber of Commerce praised the banking system on CNBC. He does not agree with common grievances against banks. Banks have paid back their debts to the federal government plus the interest. It is true that there have been a few bad apples in the banking system, such as Bernie Madoff, but that does not mean that this industry cannot be trusted. People cannot distrust the entire banking system just because there have been a few people who ruined people’s lives with it.

I believe that people cannot believe everything that they read in the media. The banking system is very trustworthy. Sure, there have been some bad people in the past, such as Jordan Belfort or Mark Hanna. However, it is important to know that banks take legality very seriously, as do FINRA and the SEC. My father used to work in financial law enforcement, and now he works in anti-money laundering with Goldman Sachs. It is his job to prevent his company from doing business with anyone who’s money is not clean. In other words, he helps keep Goldman out of trouble. He also helps prevent insider-trading. His company takes compliance very seriously. He is a reason why we can trust the banking system. He helps ensure that money is being handled ethically and legally.

If the government supports the banking system, what reason do we have not to? The banks have paid back their debts and the interest. Furthermore, the government is testing their resiliency in the event like what happened in 2008. The banking system is a trustworthy industry, and anyone who says otherwise needs to do a little more research.


Congratulations to Matthew Gentzkow!

One of the most prestigious awards in economics is the John Bates Clark Medal. It is granted by the American Economic Association, or AEA. This award is granted to an economist, who is under the age of 40, who made a significant contribution to the field. The only economic award considered to be more prestigious than the Clark Medal is the Nobel Prize in Economic science. Many famous economists, such as Paul Krugman, Milton Friedman and Joseph Stiglitz.

The 2014 winner of this very prestigious award is Matthew Gentzkow. He is a professor at the University of Chicago’s Booth School of Business. Gentzkow’s work was in media slant. He studied bias in the press and how it affected society. In addition, he is studying how the internet has been affecting mankind in various ways, such as academic. Not only does his study use political and social aspects, but it also uses economic aspects. Data on the media has not been a large part of economics due to a lack of it. Gentzkow has been trying to make data not he media a larger part of economics.

According to the Wall Street Journal and the New York Times, his studies have concluded that television has been beneficial to society. Children who grow up in cities performed better on tests than children who had less exposure to television. The other benefit that television provides is to children in non-English speaking households. The studies have shown that television has helped these children perform better in school. The UChicago News mentioned that he has been described as a “pioneer in media economics”.

Media economics is becoming an important area of study. Press bias has shown to have large impacts on people. Relating it to economics makes perfect sense. A bias in the press could have its effects on economic activity. A newspaper article, or a television news segment could influence people to make a certain consumption and/or investment decision. If a significantly large number of people made this same decision, it could have a noticeable effect on the economy. An example of this would be that some economists believe that consumption is the backbone of the economy. They could slant their news to try to encourage a large number of people to continue to spend money with the hopes that it would help the economy recover from a recession. This may seem like a positive use of media for this. However, it could get to the point that output increases too much and the economy becomes overheated. This would be a period of inflation. Another negative effect of slant in the media is that a firm could use it to influence individuals to invest in it. Media economics can provide us with a lot of information considering how much of an impact television and the internet have had on society since their inceptions. Social media would also be included in this. With media economics, it seems like the sky is the limit


Mortgage Beginning to Thaw?

Mortgage lending, which was the main cause of the financial crisis of 2008, is finally making its comeback. The role it played in the Financial crisis of 2008 is that subprime loans were being made and mortgages were being securitized. The market became too saturated with these Mortgage-back securities, or MBS’s, and the market popped. The asset lost all liquidity and people lost their equity. This created a credit freeze. According to the Wall Street Journal, mortgage lenders are regaining confidence in the housing market. Standards are still high, but lenders are accepting lower credit scores and reduced down-payment requirements. The reason why banks are doing this is because they believe that lending to borrowers who do not have perfect credit or can pay large down-payments will help generate future profits.

At the same time, the Senate has proposed a new reform for mortgage lending. In a nutshell, the risk would be taken on by private investors, as opposed to taxpayers. A New York Times article mentions that the main purpose of the bill is to decrease government involvement in mortgage lending. It would promote private capital in this sector. The government would sell a secondary insurance on MBS’s. This way, the first loss would be taken by the private sector, and it would reduce the need for government intervention. The downside is that this means that borrowers will be subject to higher interest rates because private investors need compensation.

The Washington Post provides another reason why we should be optimistic about the housing market. Foreclosures with positive equity has been on the rise. In the third quarter of 2013, this was at about 24%. Today, it is at 35%. In other words, more than a third of foreclosures have positive equity. The article attributes this to timing. It is important to know that the process of foreclosure can take a long time. This can be a year, or even longer than that. During that time, prices can vary to a great degree at that time. Home prices have been rising sharply. This means that more and more people who foreclosed have gained equity during the foreclosure process.

What to make about all of this? It seems that the housing market has a bright future. We learned a lot of important lessons from the financial crisis of 2008. The bursting of the housing market taught us about subprime lending the hard way. The higher standards can help with the prevention of a crisis like this in the future. Housing prices are rising, therefore people’s equities are on the rise. This makes mortgage lending more attractive to lenders. Therefore, they are more able to earn profits. Furthermore, if there were to be a crisis, this new proposal in the Senate could be like insurance against it. The government would not need to making the same kind of bailouts that it did in 2008. Another housing burst would cause the same kind of budget deficit that we saw in 2008

China “Slowing Down”

China’s figures for the first quarter of the year were released. The country grew at a rate of 7.4%. The Wall Street Journal and Washington Post articles’ headlines describe this is as slowing down. Considering the fact that this is a slower growth rate than that of the previous quarter, which was 7.7%. The journal reports that analysts expected it to be 7.5%, so it is a little lower than expectations. In a New York Times article, a spokesman of the National Bureau of Statistics said that the economy was still growing at a relatively faster rate.

Two of the largest contributors to this “slowdown” are the low exports and the weak housing market. Combined, they decreased by 27.2%. The weakness of China’s housing market has also made foreign investors anxious.

I am not surprised that low exports and a weak housing market were two of the larger contributing factors to this slowdown. They decreased by 27.2%! That is more than a quarter in a decrease. I would not be surprised if the housing market alone was a big contributor. There are more and more empty homes, and they have been becoming more and more expensive, and out of reach for the middle class. The housing situation is absolutely ridiculous.

The reason why I have put “slowdown” in quotation marks is that the economy is still growing at a very fast rate. Yes, 7.4% is less than 7.7%. Regardless, these are still very high growth rates. At the same time, this could be the beginning of China’s permanent cool-down. The country has been skyrocketing. What comes up, must come down. The housing market’s situation is enough to decrease foreign investments. Furthermore, the government is trying to keep at an artificially low level. When exports decrease, output decreases. If this trend continues for all of these aspects, I believe that it is possible for China to see growth that is less than 5%. Investments are very important to an economy. Investments contribute to output, which is related to growth. When investments come in, then output grows. Exports contribute to output as well, and they two have the same relationship. Investors being scared away and decreases in exports can combine to a much larger decrease than if it were just one of them that were slacking. IF this rate continues.

Obviously the continuation of this current slowdown is not guaranteed, but it could happen. China has been having problems with two components of its output. It is very likely that China’s economy could turn around. All we can do is play the waiting game.

March 2014’s Retailiation

First of all, no, that is not a typo in the title of this post. The fact of the matter is that retail sales have reached a seasonally adjusted $433.9 billion in the month of March. This is a growth rate of 1.1%. This is the best monthly gain since September 2012. That is 18 months, or a year and a half ago. The Wall Street Journal predicted a .8% increase last month. This was based on February’s gain of .7% in the retail area. To put this in perspective retail spending has grown 3.8% since March 2013. The Washington Post reports that two of the larger contributors to this growth were in automobiles and furniture. Automobile sales rose 3.1%, and general merchandise grew 1.9%. An example of general merchandise would be Wal-Mart or Target. This is the largest that general merchandise has seen since March 2007, which was before the recession.

According to the New York Times, we are in a “Great Moderation”. This means that we are experiencing the same steady growth in economic activity and jobs that we saw before the Great recession. During this “Great Moderation”, the economy is less likely to experience a slump, or anything like that. The economy could be on track to being what it was before the financial crisis.

In a few of my other posts, I discussed the retail market in this country and how it is important to the economy. Without a doubt, the harsh winter definitely weakened it. As the winter thawed, so did the retail market. With sales increasing, that means that consumption is on the rise too. This is important for increasing output. Consumption is an important part of output and is integral in helping a troubled economy recover from a slump. Apparently, March 2014 was a month of record numbers. It also exceeded expectations.

Taking all of this into account with the idea of a “Great Moderation”, I would say that Americans can be a little more optimistic about their nation’s economy. As previously mentioned, March was a month of record growth rates. Furthermore, we are seeing the same kind of economic activity that we saw before the drastic downturn in 2008. Before the recession, the United States economy was very strong. We are seeing similar signs of that today. If this were to continue, then the recession would be a thing in the past. This could very well be the light at the end of the tunnel that America has been dying to see since 2008.

M1 Over the Years

The M1 money supply, which is comprised of paper currency and checkable deposits has seen drastic changes since the year 1959. The largest influence on the M1 money supply is undoubtedly the Federal Reserve, or the Fed. By purchasing assets, such as bonds, the Fed is increasing M1. When the Fed sells assets, it is decreasing M1. One effect of increasing the M1 money supply is that interest rates decrease. This can be seen with the Keynesian Liquidity Preference Model.

The Fed can have multiple reasons to increase the M1 money supply. One reason would be to stimulate investment. As previously mentioned, a larger money supply decreases interest rates. A lower interest rate will see more investments. This, in turn, will help increase output because investment is a part of aggregate demand. Increased demand will increase output.

With this graph we can see an increasingly upwards trend in the M1 money supply. The largest spike is in about 2008. The answer for this is very obvious. This was the year of a late financial crisis. At this time, the Fed was purchasing many toxic assets that could not be purchased by anyone else. Furthermore, the economy fell into a recession. The best response for the Fed would be purchase assets, which is a stimulative policy. To this day, the Fed is still using stimulative monetary policies. That is why the slope of the graph is still steeper than it is anywhere else.

This year, the Fed did announce that it would taper monetary policy. This means that it will start to decrease its asset purchases. Therefore, it will put less and less money into the M1 supply. If this were to continue, then the slope of the graph would decrease and it would begin to look like a negative parabola, or like the top of a hill. We can see this a little bit. If one were to look at the very end of the graph closely, there would be a slight decrease in the slope of the graph. However, the slope is still steeper than any slope before 2008. This indicates the beginnings of the Fed’s tapering. This is only done when the Fed is optimistic about the economy’s future. Hopefully, this is the beginning of the end of this recession. It has affected the whole world on so many levels. The world economy suffered a huge blow from it. This could be the light at the end of the tunnel for which the world has been yearning.

Output Over the Years


As we can see, this graph represents GDP, or output in the last 66 years. It is also clear that all of this is based on 2009 Dollars. This means that it is real GDP, as opposed to nominal GDP. It does not take the price level into account. Overall, we have noticed an upward trend with an increasing slope. In 1947, year 1, real GDP was about $2 trillion.

We can see that the first real slump is between 1973-1975. The slope of the graph is negative at that point. The reason for this is that there was an recession during that time. Two causes of this were an oil crisis and a stock market crash. Furthermore, other nations were developing. This increased competition in industries, such as steel, for North American and European countries. This forced them to re-structure the cores of their industrial areas. The stock market crash opened everyone’s eyes to this economic downturn.

The next recession happened between 2008-2009. The United States economy is still recovering from it to this day. The main cause was the large amount of sub-prime mortgage loans that banks were issuing. These mortgage-backed securities, MBS, were not very liquid assets. When the housing market popped, then the securities took a large hit. just like the recession in the mid 70’s, the slope of the line in the graph is negative. Overall, this recession saw a large loss in money for financial institutions. This is why it is considered to be the worst downturn since the Great Depression.

At the end of the graph, which is in the year 2013, real GDP is at about $16 trillion dollars. This is  8 times as much as it was in 1947. Using knowledge of logarithms, and the rule of 70, we can conclude that the economy grew about 210% over the span of 66 years. Output being 8 times larger means that it doubled three times. Each time output doubles, there is a growth of 70% in platonic terms. Three doublings would mean that the economy grew 210%.

Going back the recession of 2008, a speculation can be made, under a few conditions. If the financial crisis did not happen, and the upward trend of real GDP growth continued, output would be at about $17 trillion. The recession set the economy back by  about $1 trillion. In my opinion, this means that the current economic slump will be over when the economy’s output makes up for that $1 trillion. This is not to be treated like a debt, but more like staying on course. The economy will need to keep increasing output in order to get out of the downturn.

Unemployment According to FRED


What can we see with this graph representing the changes in the unemployment rate in the past 60 years (approximately)? We can clearly see that the unemployment rate in this graph on FRED goes through periods of crests and troughs. It seems to hover around the natural rate, 5%. The exception is in the late 70’s and the 80’s. The lower troughs of the graph are above the natural rate. This tells us that unemployment during that time was very high. In approximately 1981, the unemployment rate was over 10%. That is a very bad unemployment rate, and it indicates economic troubles. From the mid 90’s to the first decade of the new millennium, we can see that the unemployment rate hovered around 5% again.

We can see that in recent years, the unemployment rate has been very high. Part of this can be attributed to the recession of 2008. The positive is that the unemployment rate has been declining since 2010. This is a sign that the economy has been creating more and more jobs this decade. Right now, we can only hope that this trend continues. Personally, I hope that it does because I will be graduating in a bout a year, and I would like to have a job ready. In a few of my previous posts about unemployment, there has been an increasing trend in the creation of jobs this year. Each month has seen more jobs created than the previous. As I mentioned in these other posts, one of the reasons for this is the weather changing. With the winter winding down, more jobs are created. Last month, the United States added a little less than 200,000 jobs. If more than 200,000 jobs are added this month, then that would be another step in the right direction.

Going back to Mankiel’s book, A Random Walk Down Wall Street, we cannot base our decisions on previous trends. As we can see on the graph, the unemployment rate does not follow a perfectly linear trend. Stocks do not follow perfectly linear trends either. Right now, one would expect that the unemployment rate would continue to decrease because it has been this decade, according to the graph. However, something unexpected and unpredictable could happen, such as a natural disaster, that could leave a lot of people jobless. If this were to happen, then the unemployment rate would skyrocket.

Mankiel also mentions that there is more than meets the eye with investments. Once again, we could treat the unemployment rate like a stock in terms of unpredictability. I mentioned in a previous post that one reason why the unemployment rate is decreasing is that the size of the labor force is also shrinking. We need to keep background details, such as this, in mind when analyzing and making predictions and assumptions.

(Revised) Electronic Money: Revisited

In class, Professor Kimball has discussed his strong support for the discontinuation of paper money, and for it to be switched to be electronic. He has written countless blog posts about it. One of which is about the zero lower bound, or ZLB. Along with that, he contributed an article to Slate that made connections to bitcoin. Professor Kimball’s main claim about eliminating the ZLB is that negative interest rates are crucial to the economy’s recovery. Negative interest rates will cause increases in investments. The main function of eliminating the ZLB is to decrease the incentive to save, therefore stimulating consumption. Consumption is important for combatting the recession, and a huge increase in consumption would help raise output.

It seems that this idea has been catching on. An article in the Wall Street Journal, discussed the elimination of paper currency as well. However, this was more from a legal standpoint. According to the article, crime has been declining very quickly since the 1990’s. The article mentions that a possible reason why is that people have been using cash less and less. Cash is very anonymous, which means that it is integral to illegal transactions.

To this day, I have been having trouble completely agreeing with Professor Kimball’s stance on the elimination of paper currency. I agree that the ZLB is created by paper currency. I also believe that this idea could work in theory. When interest rates decrease, consumption and investment go up. This is because the interest rate is the opportunity cost of spending money, as opposed to saving it. A lower interest rate means that by spending, the individual is giving up less than he would if the interest rate was higher. The biggest problem for me is that creditors will disappear. Positive interest rates make creditors want to lend money because the borrower will pay back more money in the future. Nobody would want to lend money at a negative interest rate. Why would somebody want to lend money when he or she knows that the borrower will pay back less money in the future?

I do agree with every legal standpoint in this discussion. Electronic money is very easy to trace. A bank, or the government can know when and where a transaction is made. The same cannot be said about paper currency. If paper money were to be eliminated, how would a drug dealer be able to sell his product? Would the buyer pay him with Square? The answer is “no” because the government would be able to see it.

More About Jobs: Figures and Theory

According to recent data about job creating, there has been an increasingly upward trend of job creation in the country. The Wall Street Journal reported the number of jobs created in each month of the first quarter of 2014. In January, 139,000 jobs were added to the economy. February saw 178,000 jobs added to the market. And March’s job creation number:…(drumroll, please)… 191,000 jobs. The unemployment rate fell from 6.7% to 6.6%. It is important to keep in mind that February and January were the months of the brutal polar vortex. The economy is indeed thawing, according to the previously mentioned figures.

The Washington Post attributes March’s job creation figures to growth in specific American industries, such as construction, finance and automobile production. The construction industry added 20,000 jobs, which is 4,000 more than the average across the past three months. The financial industry added 5,000 jobs to firms of different sizes. The automotive industry exceeded analyst expectations. Sales rose 6% to 1.5 million.

If these trends continue, unemployment could become less and less of a problem. Since each month of the first quarter of 2014 produced more jobs than the previous month, it is safe to say that the US economy is gaining momentum in the labor market. We cannot be sure if these trends will continue, but we can hope that they do. If all goes well, the US economy could see more than 200,000 jobs added this month. This, in turn, could help increase the nation’s economic output, which could combat the current economic slump.

A New York Times article discusses the theory of job creation. According to the article, the people who give others jobs, employers, do not do it out of the kindness of their hearts. This is similar to why producers produce goods in Adam Smith’s Wealth of Nations. They do it because it is in the best interest of their firms. They do it so their firms can create a supply that meets the demand, and so they do not lose to competitors. These people, however, are not the jobs creators. The job creators are the consumers and investors. They are the ones who provide firms with money, which is used to expand and improve production.

To put all of this together, one could attribute the increasingly upward trend of jobs added to the economy to the fact that people are consuming and investing more. This could be a feasible claim. When firms have more money, they can produce in larger quantities and more efficiently. Using this theory, it seems that the way to continue this trend of job creation is to consume and invest more. Every time a firm makes money and expands, it will need to hire more people to keep everything running as smoothly as before the expansion. This money comes from purchase of the product and investments. These firms can afford to hire more people when they have more money.