Wednesday, December 30, 2009

Farewell to the year of the bailout

Now that 2009 has come and mostly gone, we can all feel a little bit older and a little bit more indebted. This year saw the stimulus package, the first trillion dollar annual deficit, and the worst unemployment in a generation. Hopefully with the new year some sense will be restored to the financial principals of this nation.

What to look forward to in the new year?:

The tallest building known to man will be opened
The Winter Olympics in Vancouver
The World Cup in South Africa
The final Space Shuttle mission
The Boy Scouts of America turn 100
The Decennial Census
The Midterm Elections on November 2

Here's to hope in 2010

Tuesday, December 8, 2009

One instance where centralization is beneficial

Amidst many stories about continuing unemployment, Tiger Woods and his seven mistresses, and the mindless stories about the shopping season, I found an interesting story courtesy of Bloomberg. In this tale of wonder, a country sees impending trouble from overinvesting as an economy recovers and decides to take action, limiting the amount of lending in the coming year to avoid an investment bubble. This country has a neighbor who lived across a pond and saw the same thing several years ago, but instead gave out extra money thinking that everyone would contiue growing forever. In fact, this neighbor actually lowered interest rates when the economy was booming, while removing any regulations on risky investing in collateralized debt obligations and mortgage-backed securities.

Can you believe the first country is China and the second is us?

The moral of the story is that some regulations make sense if there is irrational behavior going in a market. The first message should be that when an economy grows the amount of money needs to grow slower to prevent inflation. Doing the opposite, ie lowering interest rates during expansion, overheats the economy and causes bubbles to form as riskier and riskier moves become necessary to "beat" the market since inflation cuts down on real gains. The second message is that the completely unregulated financial world in the US is not something the rest of the world is emulating us on, and it is to our detriment that we continue down a course of lax regulation and unfree trade while the rest of the world does not.