A little humor

This clip from South Park has got to be an all time favorite!

What a creative way to explain some of the causes of the crisis.

I found this great video while searching around another blog.

Tricky Policy

     What follows is a response to the the Economist's article "Economics focus: War footing” of Sept 4, 2010.

     This article discusses the challenges of simultaneous fiscal and monetary policy implementation. Having reached interest floors, central bankers are concerned with the sole option of applying fiscal policy. Although neither fiscal nor monetary policy is ineffective in theory; Eric Leeper’s presentation addresses the practical difference, whereas monetary policy undergoes vast economic analysis, “fiscal policy is highly politicised.” Politicization decreases the timeliness and effectiveness of policy, leading Leeper to say “Fiscal alchemy can undermine monetary science.”

     Leeper warns, if the public loses confidence in the Government’s ability to cover the cost of its fiscal stimulus and the central bank will “inflate away the debt,” hyper-inflation may ensue. To prevent this problem central bankers are calling for austerity measures or limits to fiscal stimulus. Along with the historically low interest rate environment, inflation expectations have been driven away, similar to Japan’s “lost decade.” To avoid deflation, Mr. Leeper suggests, “simultaneous fiscal and monetary expansion.”

     A key caveat to quantitative easing is that central bankers cannot “force banks to lend or companies and households to borrow.” Therefore, although QE is intended to increase the money supply and lower interest rates, the potential benefits may never reach the economy. This would lead to sustained high unemployment and the threat of deflation.

     The depression of interest rates and long-term threat of inflation caused by QE must be carefully dealt with. This is evident from the United States’ implementation of fiscal and monetary stimulus during WWII, which led to inflation thereafter. To avoid such a problem stimulus must be injected into the economy today and fiscal austerity imposed in the future. 

“A Bull Market in Pessimism”

     The following is a brief summary and response to the Economist article “A Bull Market in Pessimism” from Aug. 21, 2010.

     Currently in a tough place, the Federal Reserve is facing two threats: deflation and inflation. The Fed must tread lightly to avoid spiraling either monetary effect out of control. Were the Fed to inflate its way out of potential deflation, real-returns would rapidly turn negative (especially given the current low interest rate environment), thus leading to a mass exodus of Treasury bond-holders. Furthermore, were the fed to raise interest rates, bond-holders would also be squeezed out of the market, given the inverse relationship between bond prices and yields, the value of their bonds would decrease. As if the situation were not challenging enough, by purchasing Treasuries with the monies provided by maturing mortgage debt the Fed is adding to the downward pressure on Treasury yields. These combined effects; along with increased investor demand for Treasuries (putting further downward pressure on yields) has positioned the Fed with an inflexible exit strategy. Given the challenging situation the Fed’s attempts to alter monetary policy will likely be rife with error. 


The Economist