Saturday, January 29, 2011

Spring 2011; Econ 101: Macroeconomics: T-TH 9:25-10:40

*******How I am going to deal with the final exam scheduling conflict: is here

********Please fill out student evaluations: Links Here

I will be posting course material here. As you probably noticed there is a direct link to this post on the right hand side of the blog. The material posted here is for: Econ 101: Macroeconomics; Spring 2011 T-TH 9:25-10:40 Section: I can be reached at: andrew.a.bossie@gmail.com Office Hours: Tuesday and Thursday: 7:00 to 8:00 and 10:40-11:00 If I am not in the classroom (PH154) I will be in the adjunct office in the economics department: PH300B




Readings (etc):








Planet Money Episode #216: “How Four Drinking Buddies Saved Brazil” (iTunes: Free 20 min)


Inside Job: On Netflix . I have not been able to find this available anywhere on the web for free.
Homework:


1. Must be handed in during class.
2. Must be stapled. Assignments not stapled will lose a letter grade
3. You must answer all questions. Failure to answer one question will result in a check minus. Failure to answer more than one question will result in a zero.
4. Rules for Emailing homework assignments (emrgencies only)
a. Must be a single, legible pdf or word document.
b. Must be time stamped before the begining of class on the day it is due.


Homework Assignment #2: Due March 10th
Homework Assignment #3: Due April 12th

Homework Assignment #4: Due April 28th

Final Prep:


**I had promised to have the problem set posted on Thursday afteroon, and I did.  Blogger then went down for some reason and they erased all of Thursday's new post.  Anyway they had said they would restore the posts and they haven't.  I apologize, this is kind of terrible timing.

Midterm #2

Problem set

Answers to the first sample final.  We will over over both tests on Tuesday May 17th

There is some overlap with the homework, but I wanted to give you a complete final so you can get a sense of what they are like.  Obviously there are no questions about the readings.

Final Chapters: 10, 12, 13, 14 (money), 15 ,15 appendix, and readings.




Spring 2011; Econ 215: Money and Banking; T-TH 8:00-9:15



How I am going to deal with the finals scheduling conflict: is here

Please fill out student evaluations: Links Here

I will be posting course material here. As you probably noticed there is a direct link to this post on the right hand side of the blog. The material posted here is for: Econ 215: Money and Banking Spring 2011; T-TH 8:00-9:15


Room PH154


I can be reached at: andrew.a.bossie@gmail.com Office Hours: Tuesday and Thursday: 7:00 to 8:00 and 10:40-11:00 If I am not in the classroom (PH154) I will be in the adjunct office in the economics department: PH300B. If it is before 9:00ish you have to call me on the phone outside of the economics department. Usually I can hear you if you knock, as well.





"Reading" Assignments:


Planet Money Episode #235: “A Giant Stone Coin At The Bottom of the Sea” (ITunes: Free 21 min) http://www.npr.org/blogs/money/2011/01/28/131963928/the-friday-podcast-a-giant-stone-coin-at-the-bottom-of-the-sea


Planet Money Episode #216: “How Four Drinking Buddies Saved Brazil” (iTunes: Free 20 min) http://www.npr.org/blogs/money/2010/10/01/130267274/the-friday-podcast-how-four-drinking-buddies-saved-brazil



March 29:




This American Life Episode #355: “The Giant Pool of Money” (iTunes: 99cents 1 hour)

Matt Taibbi: The Great American Bubble Machine
Inside Job: On Netflix. I have not found any place to watch this for free.

Homework Assignments:
1. Must be handed in during class.
2. Must be stapled. Assignments not stapled will lose a letter grade
3. You must answer all questions. Failure to answer one question will result in a check minus. Failure to answer more than one question will result in a zero.
4. Rules for Emailing homework assignments (emrgencies only)
a. Must be a single, legible pdf or word document.
b. Must be time stamped before the begining of class on the day it is due.

Homework Assignment #4: Due 4/28


Final Prep:

**I had promised to have the problem set posted on Thursday afteroon, and I did.  Blogger then went down for some reason and they erased all of Thursday's new post.  Anyway they had said they would restore the posts and they haven't.  I apologize, this is kind of terrible timing.

We will over over both tests on Tuesday May 17th

There is some overlap with the homework, but I wanted to give you a complete final so you can get a sense of what they are like.  Obviously there are no questions about the readings.

Final Chapters: 5, 6, 10, 14, 15 and readings.

Money and Banking Podcasts

This American Life Episode #355: “The Giant Pool of Money” (iTunes: 99cents 1 hour)

http://www.thisamericanlife.org/Radio_Episode.aspx?episode=355

This American Life Episode #375: “Bad Bank” (iTunes: 99cents 1 hour)

http://www.thisamericanlife.org/radio_episode.aspx?sched=1285

Planet Money Episode #216: “How Four Drinking Buddies Saved Brazil” (iTunes: Free 20 min)

http://www.npr.org/blogs/money/2010/10/01/130267274/the-friday-podcast-how-four-drinking-buddies-saved-brazil

Planet Money Episode #208: “How to Spend 1,249,999,999,999.39 (Itunes: Free 23 min)

http://www.npr.org/blogs/money/2010/08/31/129558498/the-tuesday-podcast-how-to-spend-1-249-999-999-999-39

Planet Money Episode #235: “A Giant Stone Coin At The Bottom of the Sea” (ITunes: Free 21 min)

http://www.npr.org/blogs/money/2011/01/28/131963928/the-friday-podcast-a-giant-stone-coin-at-the-bottom-of-the-sea

Thursday, January 6, 2011

After Reading Hyman Minksy's "Stabilizing an Unstable Economy".

I made my way through Hyman Minsky's "Stabilizing an Unstable Economy". While I don't 100% agree with Minsky--or rather I dont think Minsky 100% applied to the current Recession--I have to say the book is astoundingly prescient and much of what Minsky says seems more appropriate now than it did in 1986 when the book was published.

Anyway, I go a couple of things from Minksy:

First, I obviously got a better fleshed out version of the Minsky business cycle.

Second, is that he has "complete" theory of post-war stability (in the US) which is something I have been looking for since I had read Rogoff and Reinhart's "This Time is Different" which has some really interesting contrasts between the first 30 years of the post war era and the secon 30 years. I also have been wondering about this because Charles Calomiris dismissed the post-war stability. Gary Gorton has also dismissed the stability of the whole FDIC period from it's creation to 2007 as an accident of history.

Anyway, Minsky seems to agree with with Gorton and Calomiris in that FDIC essentially existed as something to be innovated around. I also thing Calomiris is right about the problems with FDIC though I think Gorton's "21st Century bank run" in repo markets story--which has nothing to do with FDIC is more relevent to the Great Recession. Anyway, Minsky places the stability of the post-war era not in how banks were operating but in the fact that corporations were not terribly reliant on banks. Minsky's basic claim is that it took about 20 years for the corporate sector to work through the savings it had accumulated in the 40s. It was only when corporations had in increase demand for external finance that innovation and instability started to set in. Minsky also places the beginning of post-war financial instability in 1966 with the Credit Crunch. I'm betraying my ignorance here, but I would have named the S&L crisis as the start of modern era of financial instability.

Third, Minsky also pretty clearly articulated what I believe is the Keynesian theory of finance. In a nutshell the Minskian/Keynesian theory of finance is a demand side theory of finance. The financial system will come up with the funds the investment sector asks for provided it can earn a positive return. I find this interesting because it is essentially the opposite way of thinking about savings/investment as the baseline "General Equilibrium Model" in the GE model the infinitely forward looking household makes all of the decision for the economy based on it intertemporal consumption preferences. This is a strictly supply side model in which investment is passive warehouse for future consumption. GE models also lead to Ricardian equivelence--the indifference between financing government with taxes and debt--because financing government spending through debt simply cause the supply side to adjust their savings behavior 1 to 1 in anticipation of a future decline in consumption brought on by the eventually higher taxes needed to pay back the debt.

On the other hand a more holistic was of looking at savings/investment is by using the simple "loanable funds" simple supply and demand. The problem with the simple supply and demand model is that--as Keynes points out in the "General Theory"--there is no phenomenon that will only shift one curve. If your econ 101 professor was responsible he would have hammered into your brain the limitations of using supply and demand to make predictions when both curves shift. Depending on the direction of the shifts, either the price (the interest rate) or the quantity of loanable funds will be indeterminate. Usually shocks to the loanable funds market shift both supply and demand in the same direction, which makes the direction of the change in the interest rate indeterminate.

So one either gets a holistic model or opposing models that you can make predictions with because one curve is either constant, vertical, horizontal or irrelevant (or some combination of the 4). I don't have a lot to say about this except to say that this seems like the central empirical issue of what kind of influence government can have over the economy.

Finally--and I'm burring this-- I started reading Minsky because my search for a good explanation of Keynes' "General Theory" because I was completely confused about what Keynes was talking about. Turns out the reason I didn't understand was because I was looking for the Aggregate Supply/Demand and the IS/LM models that I teach to undergraduates. Minsky has a great chapter about the intellectual history of my confusion and so I could go back to reading "The General Theory" without wondering where the hell the sticky wages and the self correcting mechanims were.

Monday, January 3, 2011

The Demand For Treasuries.

There have been a number of things lately such as the SS debate, reading both the General Theory and Hyman Minsky's "Stabilizing and Unstable Economy", and--not least of all--my dissertation that have got me thinking about the demand for treasuries. We are used to thinking about government debt as a supply side phenomenon, simply politicians turning on the printing presses so to speak.

To illustrate, here is a question from my final (both Marco and Money and Banking) that I asked:


In the US right now corporate investment is extremely low as corporations are now holding historically high levels of liquid assets instead of spending their profits. As well, foreign savings continues to flow into the US because US assets/investments increasingly looks good compared to European assets. Finally, private savings rates are increasing as American households try to "repair their balance sheets" and make up for wealth lost when the housing bubble popped. Use the “Savings/Investment Identity” to show what must happen if capital inflows and households savings are increasing while at the same time investment is decreasing.

To answer this question you need this identity:

Investment (I) = Private Savings (PS) + Capital Inflows (KI) +Government Savings (GS)

Necessarily, if the events I outlined are true, Government Savings has to fall, that is, the government has to run a deficit. Now, this is an idenity and it doesn't tell you anything about what is driving what. But the way I framed the identity it is all about the demand side for treasuries. In a weird way, the extension of the Bush tax cuts following on the heals of the Eurozone crisis can be seen as a kind of market response to demand.

Anyway, I decided to dig around in the Fed's Flow of Funds and the Federal Government's Budget data to see what the demand side has looked like historically.

Right away I'm gonna deal with the mot controversial part of this little exercise. I am including the Social Securty Trust Fund as part of the demand for debt. Here is my version of a graph I'm sure you've seen a million times:



Figure 1

So Social Security is about half of the debt that the federal government owes itself. The reason I have included social security is because even though it is classified as debt that the government owes itself it also represents (potentially) future public debt. Social Security debt is held in special "non-marketable" treasuries and so currently they aren't part of the market for treasury bonds and to that extent the debt is actually different than debt to the public.

However, as the Social Security system starts to take in less money than gets paid into it the Social Security Administration will cash in those bonds. In order to pay back those bonds the federal government will have to pay that back with taxes or issue new debt issued to the open market. Social Security is "postponed debt to the public". I need to be careful and point out that this is not a problem with SS. I'm not much of a deficit/debt hawk and to the extent the debt is worrisome the issue is how we manage the debt/GDP ratio. The shift of trust fund debt to the public would have no effect on the debt/GDP ratio. Depending on how rapidly the trust fund got used up it may have an effect on treasury bond yields but that seems to me like mostly a secondary concern.

I don't want to dwell on Social Security. The dudes (gender neutral!) over at Planet Money have a really good podcast about social security. Maybe my next post will be about Social Security. Anyway, I do need to admit a couple of things. First, it's a little unfair to single out social security for my analysis but I had to make my graphs intelligible. The social security trust fund made up about $2.6 trillion of the $4.3 in debt the government owes itself at the end of 2009. So I'm ignoring $1.7 trillion which is a lot even when talking about an $11.8 trillion deficit.

That $1.7 is mostly made up of the:

Civil Service Retirement Fund ($750 billion)
Department of Defense retirement and Medicare funds ($144+ $295 billion)
The Medicare trust fund ($390 billion)

Anyway, the vast majority of the debt the government owes itself is the investment of retirement entitlements of one kind or another. But like I said, i had to keep my graphs reasonably clear so I'm ignoring $1.7 trillion!

Alright so here is the first graph:



Figure 2


This graph is included for completeness but its kind of hard to read because the Great Recession kind of explodes the graph. It's a good place though to look to explain a few things. First, of all these are "flows" which means what is being shown here are either new (net) purchases or sales of treasuries by each sector for each year. Secondly, the "Remainder" line represents the total new treasury issued in each year minus the sectors show in the graph. It just shows how much of the new treasury debt issued was bought by the sectors I'm looking at. If the Remainder is positive it means the sectors shown under account for new treasury issues in each year. If the Remainder is negative the sectors shown over account for new treasuries. Finally, I chose 1975 as the starting point because that's around when the post-war debt/GDP ratio bottomed out.

I'm going to chop off the Great Recession (and come back to it later. Here we have a picture of what should probably be called the structural deficit that started in the early 80s:

Figure 3

In figure 3 I have lopped off 2007-2010 or, roughly speaking, the Great Recession. I have also put everything into 2005 prices. I am not so sure that was a good idea but I felt like keeping it in nominal dollars distorted the relative importance of each sector over time. I would have preferred to make this a logarithmic chart, but I can't because there are negative values. Anyway, this this is essentially unreadable and won't make sense until after looking at figure 4. However, two things are pretty clear. First, the financial industry seems pretty important to the demand side through the 80s. Second, while state and local government (includes "regular budget" and pension funds) sell off a lot of treasuries in the 90s their purchases seem to recover in the mid 2000s. However, in the 90s households start dumping treasuries and don't look back (until 2008!). Did all the money wind up in the stock market? Did treasuries become a quaint, old timey way to save?

Okay so Figure 4 can help make sense of Figure 3:

Figure 4

So figure 4 is not really "to scale" in any way. Each bar represents 100% of treasury purchases by the sectors I'm looking at (plus the remainder) for each year. However, this does not give any sense of the relative scale of each year. For that look at figures 1 and figures 2.

What's interesting about this chart is that there seems to be a clear shift in the demand for treasury bonds that takes place in the mid 90s. It looks to me like "core demand" shifts from the financial industry to foreign demand. As well in the 90s there seems to be shift of demand from state and local government to Social Security. However, remember these are all shares of a pie that is growing every year. If you look back at figure 2 it seems more that state and local demand remains steady (though falls a little) while SS demand starts to take off in the late 80 due to the 1983 Social Security Amendment.

I found the results from figure 5 to be pretty surprising:


Figure 5

I chose 1971 because that's when the US went off the gold standard (officially) and I was curious to see if that meant anything. Now what'ss obvious here is how important foreign "official" institutions (mostly foreign central banks) are as a source of treasury demand. I had taken the role of the US dollar as a "reserve currency"--as a currency other central banks hold as a way of managing their own currencies-- for granted. However, it is quite striking how important our role as a reserve currency is in creating demand for our treasury bonds. Other countries prefer to hold treasury bonds instead of dollars because they are essentially as safe as dollars and they pay a return.


I want to go over two things. First, I don't think this post would be complete without a graph of the last couple of years (at least through 2009, which is all I have numbers for):



Figure 5

The scale of figure 5 is nominal dollars. The Fed sold off a whole bunch of treasury bonds in 2008 in order to purchase (or sometimes exchange) for things that were not treasury bonds like a Mall in Oklahoma (Planet Money Again). Foreign demand went through the roof and financial business came back to buying treasuries. Foreign demand is probably going to get stronger now that Europe is becoming more and more of a mess, a phenomenon called "flight to quality". As far as the financial industry buying treasuries that's a function of the Fed loaning tons of money to banks basically for free. Banks and other financial intermediaries then take the money and buy safe as houses treasury bonds and take home the difference. It helps keep treasury bond yields low and Wall Street bonuses flowing.

Finally, I'm not 100% sure I've done a good job making it clear how important governments are to the demand for treasuries. Here is one more homemade chart:

Figure 6

I double checked this graph after I made it because I find it really surprising. I feel that this really makes it clear how important political entities are to the demand side of the treasury debt market. I know I'm trying to play both sides of the fence here by saying that SS should be thought of as simply postponed debt to the public and then putting it up here as part of "political" debt. But I think its justifiable because a lot of the discussion these days is about "the market" for treasury bonds and how market bond vigilantes may soon send us the way of Greece and Ireland. However, the vast majority of treasury debt is dependent on political decisions and political entities (in 2009, the gray area of figure 6 was only $3.4 trillion of 11.9 trillion). Here again Social Security is useful as illustration. While I do believe Social Security is "real debt" the political debate today seems to be all about trying to avoid having to turn these non-marketable securities into "general fund" debt very quickly or at all either by cutting benefits or by raising current taxes. As well, it seems highly unlikely that the Chinese are going to stop pegging the Yuan to the dollar any time soon even if they are going to tweak it here and there. As well, the Fed is obviously extremely sensitive to what it does to the treasury market and even a good portion of the private market debt are essentially back door "open market purchases" made through arbitraging financial intermediaries.

Now, I'm not willing necessarily to call demand based on political decisions more stable, but it's not obvious that even if the fantasy of bond vigilantism came true that they would have necessarily that much of an effect.

Oh and also on the "we aren't Greece or Ireland" tip. I feel like this is a good place to put this graph from the Financial Times:

Figure 7

The basic point to be made here is that the analogy is not between the US and the second tier developed nations of the Eurozone. The proper comparison is the comparison between the US, the financial center of the world with the world's reserve currency is with the UK when it held that position. However, I do have to admit it's not entirely clear which UK we are talking about. The post Napoleon UK was an empire experiencing very robust growth on the whole. The post Hitler UK on the other hand was the shell of a collapsed empire that eventually needed to be bailed out by the IMF in the mid 70s.

it should be pointed out that the post WWII UK had lost it's prominent position as the worlds financial center with the world's reserve currency. The US remains strong on both fronts. While there is much talk of China, their financial markets are still in their infancy and you aren't even allowed to trade Yuan. Before their own subprime crises the EU looked like it could possibly be a contender but that seems far more remote now although this crisis may bring the Eurozone closer to a fiscal union which they would need to compete effectively with treasury bonds. At any rate the US seems pretty secure as the worlds tallest midget.