Will China and India Dominate the 21st Century?

Check out this video: Will China and India Dominate the 21st Century Global Economy? If so, is that bad for America? What will losing economic dominance mean?

Helicopter Ben to the Rescue

Watch this great video of superhero Helicopter Ben Bernanke saving the U.S. economy. Thanks to the Mankiw blog for the link.

Wikipedia explains how Helicopter Ben got his nickname via Milton Friedman:

In 2002, when the word "deflation" began appearing in the business news, Bernanke gave a speech about deflation. In that speech, he mentioned that the government in a fiat money system owns the physical means of creating money. Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money. (He referred to a statement made by Milton Friedman about using a "helicopter drop" of money into the economy to fight deflation.) Bernanke's critics have since referred to him as "Helicopter Ben" or to his "helicopter printing press".

Where to Invest

I have stated before that this market provides a great buying opportunity for long-term investors. The question becomes what to buy. Picking the winners is always difficult, especially in a market like we have now. In this article Knight Kiplinger ("Knight" is a pretty cool name) suggests avoiding the risk of picking the winners and buying the whole market. I agree. I have been buying the market via the Vanguard Total Stock Market Index Fund. Indexing is a great way to invest, for a convincing case on index investing read A Random Walk Down Wall Street by Burton Malkiel, a Princeton economist.

Buffet Says its Time to Buy U.S. Stocks

Warren Buffet shares this wisdom in the New York Times, explaining why he sees now as a great time to buy U.S. stocks:

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

Who should you vote for?

Take the Select A Candidate survey and find which candidate matches your stand on the issues. On a related topic, much has been made of the fact that the stock market tends to do better while a Democrat is in the Whitehouse, Mankiw discusses the issue in this post. Remember that correlation is not the same as causation. After all, there are many stock market theories that are irrational such as the hemline theory and the NFC Super Bowl idea.

Tragedy of the Commons

Private property is the cornerstone of a market economy. The tragedy of the commons describes the dilemma in which multiple individuals acting independently in their own self-interest can ultimately destroy a shared resource even where it is clear that it is not in anyone's long term interest for this to happen. When resources are commonly owned, incentives ensure that the resource will be depleted. Think cows and whales. In spite of the fact that cows are a major food source and it is illegal to kill whales, it is whales that are in danger of extinction - mainly because of property rights. Play the Tragedy of the Bunnies game for fun with this concept.

Credit Crisis Explained

This link is a great clip on the cause of the crisis. Click on the streaming video clip.

AIG and Credit Default Swaps

Click on this link and then the streaming video link to for a great piece on AIG and credit default swaps.

Bailout Analogy

For a good analogy of why the bailout is necessary try this article by Charles Wheelan

The Fire Next Time

Here's the best analogy I can offer. Suppose a guy down the street has been smoking in bed for the last 20 years. That's a stupid, irresponsible thing to do, and lots of people have told him so.

He just happens to live next to another idiot who stores containers of gasoline in his garage. He, too, ought to be fully aware that this is a foolish thing to do.

Predictably enough, the guy smoking in bed starts a fire that explodes in force when it hits the gasoline-filled garage next door. Now there's a hell of a blaze going on. If these two guys lived alone in a remote area of rural Montana, we wouldn't have much to discuss. But they don't. Instead, the fire is spreading down their residential suburban street, burning houses where nobody smokes in bed or keeps gasoline in the garage.

Damage Control

That's about where we are right now with the financial crisis. The question isn't whether we should rush to save the morons responsible and put ourselves at risk in the process. We shouldn't. The question is whether we should intervene to save the rest of the neighborhood. We should.

The fire department may end up helping our smoker and gas-can man just because it's an unavoidable part of fighting the larger fire. That's unfortunate, but it's not a good reason to call off the fire department. I don't get enough utility out of standing amid the smoldering ruins of their houses to justify the risk that the same thing may happen to my house a few hours later.

If you want to fine these guys, or put them in jail, or take away what's left of their property -- fine. That seems perfectly appropriate. But just make sure you take care of the fire first, because that's what's dangerous here.

SNL and the Financial Crisis

Follow the link to Mankiw's blog and watch the SNL clip...funny stuff.

A Buying Opportunity?

The markets have taken a pounding, this might be a buying opportunity. Warren Buffett, richest man in the world, said, "you should get greedy when others are fearful and fearful when others are greedy."

The Ted Spread

The attention of most people during the current financial crisis has been on the stock market. While the crisis is reflected in the price of stocks, the real crisis is in the credit markets. Economists look at the Ted Spread, which shows the yield spread between U.S. Treasuries and inter-bank loans. The greater spread reveals the fear that banks have in lending to each other. For a more complete explanation, click here. Normally, the Ted spread is 10 to 50 basis points or .1 to .5 on the graph, for a current read click here.

Who is to blame: Wall Street or Washington?

Politicians are having a field day blaming the current financial crisis on Wall Street greed. True, the financial sector did not use good judgement in their risk management, but government has a much larger role than most are talking about. Check out a clip from this article by Russ Roberts:

David Klein

Part of this story is true. The fall in housing prices did lead to a sudden increase in defaults that reduced the value of mortgage-backed securities. What's missing is the role politicians and policy makers played in creating artificially high housing prices, and artificially reducing the danger of extremely risky assets.

Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.

For 1996, HUD required that 12% of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60% of their area's median income. That number was increased to 20% in 2000 and 22% in 2005. The 2008 goal was to be 28%. Between 2000 and 2005, Fannie and Freddie met those goals every year, funding hundreds of billions of dollars worth of loans, many of them subprime and adjustable-rate loans, and made to borrowers who bought houses with less than 10% down.

The Invisible Heart

Students,

As you are reading The Invisible Heart, feel free to post questions, comments, or concerns to the blog for your classmates to read and react to. I will also post a comment now and then.