Monthly Archives: January 2008

It’s still the economy

So what’s up with the stimulus package and how come (every English teacher I ever had just rolled over in their grave) some people say it’s enough or too much or not enough? Why doesn’t anybody know, you ask? Who do we believe? (I’d say me, but I’m cynical and I’d be fibbing.)

Well, obviously you must be thinking that economics is a science, like chemistry, where you can do the math and figure things out. Economics is considered a social science (which puts it in the same part of science you’ll find political science. If there’s a lunatic fringe of science, that’d be it.). That means we’re guessing, and, although they’re educated guesses, a crystal ball is still involved heavily.

The problem is that it takes so long for things to percolate their way through the economy. The 3/4% drop in the interest rates the Fed made will take anywhere from six to none months to show real effect and the extent of that effect can be moderated or enhanced by other stuff that’s happening out there in the real world.

The other real issue is that perceptions and expectations are involved. You’ve seen how expectations of how this or that company ought to do can effect the stock price. If the market thinks Pear, Inc. ought to be making 6% profits and they announce 5.5%, Pear stock drops through the floor because that wasn’t meeting the expectations. Pear is still generating good profits, they just aren’t doing as well as other people expected them to do. Is that realistic, those kinds of expectations? No, but it does move the stock markets.

And that’s what the 3/4% drop in the interest rate was designed to do in several ways. First, that was the biggest change in that rate since the 1980s and, in the sea of expectations, big is huge, so to speak. (I couldn’t resist, sorry.) Second, the Fed, which was created in 1913 to try to mellow the economy away from huge rises and drops in the economy, has never, ever, ever done something to interest rates except after their regularly scheduled meetings. Doing something a week before a meeting was unheard of. That was supposed to make a huge hit with the stock market and prevent an expected 400 point drop in the market. Well, the stock market didn’t drop 400 points, but the rate cut had less effect than many economists and the stock market expected. So the new expectation is that 3/4 points wasn’t enough and the Fed will do more on Wednesday – to the tune of either a quarter- or a half-point more.

Aside: The Fed Chairman has, with that 3/4% rate cut, put himself directly into the expectation business. He in effect told the stock market that he will jigger rates to make them feel better. In my never humble opinion, that step may have been necessary, but it will cost him big time down the road in terms of making the Fed appear to be more malleable politically. For an independent banking structure, that’s trouble right here in River City.

Will that be enough? Well, what does your crystal ball say? Mine just looks sparkly. Remember expectations? Well, if you are a politician, right now you are thinking “Well, that may be enough and it may not. If it is enough, then I’m cool and the little people who vote for me are too. But if it’s not enough and nobody does anything now to make things better way off down the road, well, that’ll be primary time and everybody will blame me.” Nobody wants to take the fall for not doing enough to fix the economy.

Plus, if the government waits to do something until after it sees how this round of jiggering the economy goes, and it wasn’t enough, not doing enough now will make things even worse later. Since doing too much now will also make inflation go up, they’re between a rock and a hard place. But it’s much easier to say “We did more because we were worried about you little people” rather than “We didn’t do anything and you got screwed.”

Economic policy, in a nutshell

The government has two ways to control the economy. Fiscal policy involves the government doing things like adjusting taxes or spending to make changes in the economy. Monetary policy is done by the Federal Reserve Bank (which is independent of the political process to some degree).

The Fed adjusts the money supply by loosening and tightening interest rates, which affects the amount of money in circulation and the amount of credit available. What the Fed does is strictly a supply and demand operation. They change the supply of money in order to change the demand for it. The theory is that if there is more money in circulation, more will get spent. If there is less money available, less will get spent.

If the Fed lowers the discount rate, banks get charged less for money they borrow. As the banks pass the lower interest rates on to their customers, (both businesses and people) they borrow more money. This increases the amount of money in circulation, speeds up the economy and increases inflation. The big problem at the moment is that it takes time for all this action to flow through the economy.

The Fed dropped the discount rate by 3/4% this morning. Did you go out and buy that new house or car yet? I thought not. Alter all, the economy sucks right now. What kind of an idiot would go out and buy a house? Unless they had no fear that their business might be hit by the economic problems and no fear that they might get laid off, jumping onto big debt seems to be a dumb thing to do.

So how does what the Fed just did help at all? Good question! You won’t see much substantial personal effect yet. What it will do is more long term (think somewhere in the range of six months). The booboo will get better eventually. What it does right now is more a matter of perceptions. Perceptions and expectations drive the stock market, and to a degree, the economy. For a long time, economists believed in supply and demand as what made the economy go around. But supply and demand does and doesn’t answer everything. Remember that house you haven’t bought yet? Well, since you think the economy is headed down, you’re not likely to take advantage of lower interest rates. You’re letting your perceptions of what’s happening drive the economy more than monetary policy is driving it. And, especially if you’re sensible, you’re going to keep postponing that house buy for a bit until you think that the downturn/recession/whatever is close to being done with but the interest rates are still low.

The big names in economics (like Milton Friedman, known to economists as Uncle Miltie, and John Maynard Keynes) had different theories of how to move the economy where the government wants it to go. Friedman believed in slow gradual change using monetary policy, partly because the economy is like a super tanker  it moves and turns really slowly (this is considered conservative in approach). Keynes believed in fiscal policy (more liberal). It’s faster. It does more to impact what’s happening in your wallet than anything. Last time (2001), the President and Congress gave each taxpayer $400 or $600 bucks as a rebate/refund in the hopes people would immediately go spend it like they were rich or something. They’ll probably do that again. (Psst. Soon would be good for me, guys!)

The big issue is who gets the extra money, not (fortunately) whether it’s coming or not. Tax cuts (or rebates or whatever) can be targeted to the upper levels of the income strata or to the middle class. (Notice that we seem to have conveniently gotten to the point that there’s nobody but the middle class and the upper income. Nobody wants to be on the bottom rungs of the ladder.) People who make the least money pay no taxes (well, in a sense they don’t. Uncle Sam takes their money, but gives it back without interest once they file a return.) so giving them a tax rebate doesn’t help them at all. The middle class, which apparently runs from barely above minimum wage to somewhere in the low six-figure range, is where many are talking about sending the help. The hard parts are that Congress has to decide who gets the money and how soon it comes. Then the president has to agree. Some sort of a tax rebate probably wouldn’t go anywhere until summertime. (The IRS is busy doing taxes now.)

Edit: Preliminary research by the Brooking-Urban Institute Tax Policy Center: more than 70% of the proposed tax rebate from the administration goes to people who make over $134,000, and less than 10% reaches the bottom 40%, making less than $27,000). We’re talking a difference of around $16 if you’re at the bottom end of things and $1,100 if you make over $80,000.

It’s the economy, stupid

And it appears to be melting down. Yesterday, while our stock market was closed due to the Martin Luther King birthday holiday, the rest of the world wasn’t. Several Asian markets had “a correction” yesterday, which officially means a 10% drop for the day. Forecasters had been saying they expected the Dow Jones to drop 400 points today. (You can bet on how you think the market will perform, and it’s legal. It’s called buying “futures.” Basically, you are gambling when you buy futures. You pick what you think will happen, and by when, and then you put your money where your mind is.)

Both Wachovia and Bank of America announced horrible results (BOA is the one who just bought Countrywide Mortgage, another sub-prime mortgage lender,  remember, as well as Liberty Bank, a sub-prime mortgage loser. That may make BOA the biggest loser in the industry.). BOA actually still made a profit, but profits dropped by 95% due to the sub-prime loan crisis. If you’re their CEO, you have to think that’s going to affect your tenure, somehow. Can you say “Golden Parachute,” boys and girls?

The Fed just dropped interest rates by three-quarters of a point and that’s highly significant. First, it wasn’t done during their regular meeting; it was an emergency rate cut. Second, they normally change rates by a quarter-point at a time. When they use a half-point change, it means Whoa, Nellie! to the economy. Three-quarters of a point is a panic slam on the brakes.

It’s the recession, stupid. If your 401(k) (if you have one) is invested in stocks, you might want to seriously consider bonds, treasury notes, or money market savings accounts. The rate of return may suck, but it will be positive.

Edit: The Dow Jones Industrial Average dropped 400 points, right out of the gate, rebounding only slightly at news of the interest rate cuts.

See ya, Garcia!

Pedro Garcia, the head of Metro Nashville Schools, has announced he’s leaving. I hope no one is surprised. I’ve expected it for years (well, since before he came here). That’s a job that no one could be good enough at, but I suspected a guy who’s Hispanic would have a harder time than others. I used avoid listening to the news so I wouldn’t have to hear Larry Brinton spew hate on Pedro night after night after night. I think he could have succeeded here and made the schools better but now someone else gets the chance. Good luck wherever you go, Pedro.

School scores got better and I’m mixed about what that means. Teaching to tests is a crazy way to run a school system. Career ladder for teachers died a sudden death too. No teacher in the state wanted to deal with the idea that they might not be “the bestest teacher ever” and the plan for picking the best was contrived by committee so it was destined to fail.

When I was a kid, you learned or you stayed in the fourth grade until you got it, or you got to be 18 and could leave school. Nobody makes hard decisions any more.

Pat Paulsen is (still) running for president

I responded to Joe Powell’s questions and happened to mention that I missed Pat Paulsen in the presidential race. Well, his daughter left a comment and it seems that Pat is running for 2008 too! This is great news for us older types. Pat is dead serious about his campaign and it’s easy for him, especially since he actually is dead.

First, being dead already, he makes a perfect candidate for libertarians to support. I mean, after all, it’s not like he’s going to push a bunch more laws through Congress. Plus, is thinking inside the box really all that bad? America is in a grave situation after the last few years and who understands these problems better? None of the other candidates, that’s for sure! They’re all alive. How could they understand?

Second, he can win. He beat Ross Perot in the North Dakota primary of 1992.

Third, he’s a centrist candidate. Why vote for a leftie or a rightie when you can vote dead center?

Pat Paulsen – he’s the true grass roots candidate. You want change, America? Get it from the ground up!

Go ahead, contribute to his slogan contest. How often do you get a chance to react to straight lines like this?

Edit: Just remember, no dead president ever took us into war or ran the economy into a recession, only live ones. Besides, let’s see any of you spend your way out of this recession without a dead president. They stand behind everything you buy. If they can vote, they can run!

Well, it’s Detroit Auto Show week

It’s the time of the year when Detroit showcases all the new and prototype models at the auto show in Detroit. The highlight this year appears to be the Dodge Ram truck, which was driven to the auto show in the company of 100+ longhorn cattle and a dozen cowboys. I guess if illustrates how valuable a vehicle this is for those urban cowboys — or how good the traction is when you’re driving through streets filled with cow patties. Or something. Someone thought this was a good idea. And they got paid for it.

Oh good. I was so worried about this

It seems that Dr. Phil is going to help Brittney. He showed up at her hospital room, I guess to give her some of his wondermous tough love. However, rather than asking Brittney what she was thinking, he asked himself that question and decided putting her in front of the camera might not be all too wise.

Me, I can’t see dropping it, Dr. Phil, and I think you need to go back. After all, think about that huge segment of the population that’s shaving their heads bald, going in and out of rehab like a yo yo, wearing short skirts with no underwear, running their SUV over somebody’s foot, slamming into someone’s car in a parking lot and leaving without notifying the owner, and beating up cars with an umbrella. You’re not helping all these people by walking away from this. Why, next thing you know, people will start thinking you’re just exploiting Brittney.

Apparently they’re just as dumb on the other side of the pond

Car guys. Love them or hate them, at least we’re consistent. Jeremy Clarkson, a presenter on the British car show Top Gear, wrote a newspaper editorial in the Sunday London Times that accused privacy activists of being over the top and over-reactive about privacy leaks.

“I have never known such a palaver about nothing. The fact is we happily hand over cheques to all sorts of unsavoury people all day long without a moment’s thought. We have nothing to fear.”

He felt so strongly that he included his bank account information in the editorial. (Go ahead, guess what’s coming next.)

Yep, using the information, someone debited £500 from his account.

TED stuff

TED is a lot of things. It is a conference about ideas. It is a springboard for discussions and it is becoming a place where ideas can be discussed. Not just ideas like what color should we paint the bathroom but ones like how the mind works, what makes us happy, how can we rethink poverty and dozens more. These are inspired talks by some of the planet’s greatest doers and thinkers.

It’s also where they post videos from the conference. One of the newer videos they posted this week is 5 dangerous things your should let your kids do. It’s worth watching.

Yossi Vardi also talks about the dangers of local warming, which afects all male bloggers. Although many of the presentations have humor, this one is really funny (although it isn’t in the same category as is there a god?).