Point/Counterpoint: Does the U.S. Need More Government Stimulus?

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Most economists say that the U.S. economy will return to growth in the current quarter. But the job market is expected to continue to remain under pressure. Some have argued that another round of stimulus is necessary to prop up the job market. Here Laurence Seidman, Chaplin Tyler Professor of Economics at the University of Delaware, makes the point that the costs of a high jobless rate are greater than the price of more stimulus. John Silvia, chief economist at Wells Fargo, responds that more stimulus would be counterproductive as the economy sits on the cusp of recovery.

Laurence Seidman says:

There’s no excuse for letting the unemployment rate stay above 8% all next year when it can be prevented for only an additional 2 percentage points in federal debt as a percentage of GDP.

Yet, according to the respected macro-econometric model of Ray Fair of Yale, that’s just what we’re doing unless we immediately multiply the magnitude of the fiscal stimulus package.  Congress set the magnitude last February when the unemployment rate was 7.6%.  Now the unemployment rate is 9.5%.

There’s no need to renegotiate the components of the stimulus package.  Congress just has to vote to multiply all components of last February’s package by M for the last two quarters of 2009.  I recommend M=4, an injection of $800 billion instead of $200 billion; the Fair model’s forecast for M=4 is shown under “Stronger Stimulus.”

According to the model, M=4 will cause federal debt as a percent of GDP to be only 2 percentage points higher than if there had been no fiscal stimulus due to positive feedback effects on tax revenue and GDP from the fiscal stimulus.

Unemployment Rate
Quarter No Stimulus Current Stimulus Reduction Stronger Stimulus Reduction
2009.2 9.1% 8.9% 0.2% 8.9% 0.2%
2009.3 9.8% 9.3% 0.5% 8.7% 1.1%
2009.4 10.4% 9.4% 1.0% 7.8% 2.6%
2010.1 10.7% 9.3% 1.4% 7.1% 3.6%
2010.2 10.8% 9.1% 1.7% 6.7% 4.1%
2010.3 10.8% 8.8% 2.0% 6.7% 4.1%

John Silvia says:

We have heard repeated calls for another stimulus to jumpstart the economy; however, these proposals are poorly positioned to set the economy on a sustainable, noninflationary growth path.

First, the context of another stimulus would be different, as the economy has begun to stabilize.  Another fiscal stimulus would only amplify the cycle, creating risks for interest rates and inflation, with significant global monetary easing already in place.  Recent trends in the dollar and federal deficit have raised concerns from foreign investors on the sustainability of U.S. policy.  The impact of another stimulus in a changed economy runs the risk of steroid induced, short-run growth at the cost of significant long-run losses of economic muscle.

Second, Washington policymakers have failed to recognize structural change in the economy and continue to push pro-cyclical policies.  The first stimulus emphasized short-run job gains with temporary funding that are unsustainable.  The push to restart consumer spending, despite risks of renewed leverage, will only delay the necessary increase in national saving required to meet future federal deficits.

Third, the initial Obama Administration stimulus needs more time to work.  Politicians are quick to overpromise to American voters were eager for solutions, but in a society of microwave meals, the economy is a slow cooker.  Despite estimates from the nonpartisan Congressional Budget Office (CBO) that most of the stimulus impact would not begin before late 2009, politicians promised returns far sooner.

Finally, policy-makers are acting at cross purposes.  Feared costs of proposed policy on healthcare, energy and taxes outweigh uncertain future benefits, freezing both hiring and investment decisions.  While some policy initiatives may benefit society in the long run, the costs of uncertainty today are astronomical.  Moreover, earmarks, the cost of passage for the last stimulus, use taxpayer funds inefficiently.  Another stimulus would require further political grease.

“How Wars, Plagues, and Urban Disease Propelled Europe’s Rise to Riches”

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[Note: Travel day today, so I am letting things that are posted do most of the talking. I'll add what I can along the way.]

"This column
explains why Europe’s rise to riches in the early modern period owed much to
exceptionally bellicose international politics, urban overcrowding, and frequent

Cruel windfall: How
wars, plagues, and urban disease propelled Europe’s rise to riches, by Nico
Voigtländer and Hans-Joachim Voth, Vox EU
: In a pre-modern economy, incomes
typically stagnate in the long run. Malthusian regimes are characterised by
strongly declining marginal returns to labour. One-off improvements in
technology can temporarily raise output per head. The additional income is spent
on more (surviving) children, and population grows. As a result, output per head
declines, and eventually labour productivity returns to its previous level. That
is why, in HG Wells' phrase, earlier generations "spent the great gifts of
science as rapidly as it got them in a mere insensate multiplication of the
common life" (Wells, 1905).

How could an economy ever escape from this trap? To learn more about this
question, we should look more closely at the continent that managed to overcome
stagnation first. Long before growth accelerated for good in most countries, a
first divergence occurred. European incomes by 1700 exceeded those in the rest
of the world by a large margin. We explain the emergence of this income gap by a
number of uniquely European features – an unusually high frequency of war,
particularly unhealthy cities, and numerous deadly disease outbreaks.

The puzzle: The first divergence in worldwide incomes

European incomes by 1700 were markedly higher than they had been in 1500.
According to the figures compiled by Angus Maddison (2001), all European
countries including Mediterranean ones saw income growth of 35% to 180%. Within
Europe, the northwest did markedly better than the rest. English and Dutch real
wages surged during the early modern period.

How exceptional was this performance? Pomeranz (2000) claimed that the
Yangtze Delta in China was just as productive as England. Detailed work on
output statistics suggests that his claims must be rejected. While real wages in
terms of grain were some 15-170% higher in England, English silver wages
exceeded those of China by 120% to 550%. Since grain was effectively an untraded
good internationally before 1800, the proper standard of comparison is the
silver wage. Estimates for India suggest a similar gap vis-à-vis Europe (Broadberry
and Dasgupta, 2006).

Urbanisation figures support this conclusion. They serve as a good proxy
since people in towns need to be fed by farmers in the countryside. This
requires a surplus of food production, which implies high labour productivity.
Since agriculture is the largest single sector in all pre-modern economies, a
productive agricultural sector is equivalent to high per capita output overall.
Figure 1 compares European and Chinese urbanisation rates after the year 1000
AD. Independent of the series used, European rates increase rapidly during the
early modern period. Our preferred measure – the DeVries series – increases from
5% to nearly 10% between 1500 and 1800. The contrast with China is striking.
There, urbanisation stagnated near the 3% mark.

Figure 1. Europe versus China urbanisation rates, 1000-1800


In a Malthusian world, a divergence in living standards should be puzzling.
Income gains from one-off inventions should have been temporary. Even ongoing
productivity gains cannot account for the “first divergence” – TFP growth
probably did not exceed 0.2%, and cannot explain the marked rise in output per

The answer: Rising death rates and lower fertility

In a Malthusian world, incomes can increase if birth rates fall or death
rates increase (Clark, 2007). Figure 2 illustrates the basic logic. Incomes are
pinned down by the intersection of birth and death schedules (denoted b and d).
The initial equilibrium is E0. If death rates shift out, to d’,
incomes rise to the new equilibrium Ed1. Similarly, lower
birth rates at any given level of income will lead to higher per capita incomes.
In combination, shifts of the birth and death schedules to b’ and d’ will move
the economy to equilibrium point E2.

Figure 2. Birth and death rates, and equilibrium per capita


We argue that there were three factors – which we call the “Three Horsemen of
Riches” – that shifted Europe’s death schedule outwards: wars, epidemics, and
urban disease. Wars were unusually frequent. Epidemics were common, with
devastating consequences. Finally, cities were particularly unhealthy, with
death rates there exceeding birth rates by a large margin – without
in-migration, European cities before 1850 would have disappeared.

Figure 3 shows the percentage of the European population affected by wars
(defined as those living in areas where wars were fought). It rises from a
little over 10% to 60% by the late seventeenth century. Tilly (1992) estimated
that, on average, there was a war being fought somewhere in nine out of every
ten years in Europe in the early modern period.

Political fragmentation combined with religious strife after 1500 to form a
potent mix that produced almost constant military conflict. While the fighting
itself only killed few people, armies marching across Europe spread diseases. It
has been estimated that a single army of 6,000 men, dispatched from La Rochelle
to fight in the Mantuan war, killed up to a million people by spreading the
plague (Landers, 2003).

Figure 3. Share of European population in war zones


European cities were much unhealthier than their Far Eastern counterparts.
They probably had death rates that exceeded rural ones by 50%. In China, the
rates were broadly the same in urban and rural areas. The reason has to do with
differences in diets, urban densities, and sanitation:

  • Europeans ate more meat, and hence kept more animals in close proximity,
  • European cities were protected by walls due to frequent wars, which
    could not be moved without major expense, and
  • Europeans dumped their chamber pots out of their windows, while human
    refuse was collected in Chinese cities and used as fertiliser in the

Epidemics were also frequent. The plague did not disappear from Europe after
1348. Indeed, plague outbreaks continued until the 1720s, peaking at over 700
per decade in the early 17th century. In addition to wars, epidemics were spread
by trade. The last outbreak of the plague in Western Europe occurred in
Marseille in 1720; a merchant vessel from the Levant spread the disease, causing
100,000 men and women to perish. Since Europe has much greater variety in terms
of geography and climate than China, disease pools remained largely separate.
When they became increasingly connected as a result of more trade and wars,
mortality spiked.

Triggering European “exceptionalism”

In combination, the “Three Horsemen” – war, urbanisation, and trade-driven
disease – probably raised death rates by one percentage point by 1700. Once
death rates were higher, incomes could remain at an elevated level even in a
Malthusian world. The crucial question then becomes why Europe developed such a
particular set of factors driving up mortality.

We argue that the Great Plague of 1348-50 was the key. Between one third and
one half of Europeans died. With land-labour ratios now higher, per capita
output and wages surged. Since population losses were massive, they could not be
compensated quickly. For a few generations, the old continent experienced a
“golden age of labour”. British real wages only recovered their 1450s peak in
the age of Queen Victoria (Phelps-Brown and Hopkins, 1981).

Temporarily higher wages changed the nature of demand. Despite having more
children, people had more income than necessary for mere subsistence –
population losses were too large to be absorbed entirely by the demographic
response. Some of the surplus income was spent on manufactured goods. These
goods were mainly produced in cities. Thus, urban centres grew in size. Higher
incomes also generated more trade. Finally, the increasing number and wealth of
cities expanded the size of the monetised sector of the economy. The wealth of
cities could be taxed or seized by rulers. Resources available for fighting wars
increased – war was effectively a superior good for early modern princes.
Therefore, as per capita incomes increased, death rates rose in parallel. This
generates a potential for multiple equilibria. Figure 4 illustrates the
mechanism. The death rate increases over some part of the income range, which
maps into urbanisation rates. Starting at E0, a sufficiently large
shock will move the economy to point EH, where population is again

Figure 4. Equilibria with “Horsemen effect”


In the discussion paper, we calibrate our model. The effect of higher
mortality on living standards is large. We find that we can account for more
than half of Europe’s precocious rise in per capita incomes until 1700.


To raise incomes in a Malthusian setting, death rates have to rise or
fertility rates have to decline. We argue that a number of uniquely European
characteristics – the fragmented nature of politics, unhealthy cities, and a
geographically heterogeneous terrain – interacted with the shock of the 1348
plague to create exceptionally high mortality rates. These underpinned a high
level of per capita income, but the riches were bought at a high cost in terms
of human lives.

At the same time, there are good reasons to think that it is not entirely
accidental that the countries (and regions) that were ahead in per capita income
terms in 1700 were also the first to industrialise. How the world could escape
the Malthusian trap at all has become a matter of intense interest to economists
in recent years (Galor and Weil, 2000, Jones, 2001, Hansen and Prescott, 2002).
In a related paper, we calibrate a simple growth model to show why high per
capita income at an early stage may have been key for Europe’s rise after 1800 (Voigtländer
and Voth, 2006).

In the “Three Horsemen of Riches”, we ask how Europe got to be rich in the
first place. Our answer is best summarised by the smuggler Harry Lime, played by
Orson Welles in the 1948 classic “The Third Man“:

"In Italy, for thirty years under the Borgias, they had warfare, terror,
murder, bloodshed, but they produced Michelangelo, Leonardo da Vinci and the
Renaissance. In Switzerland, they had brotherly love; they had 500 years of
democracy and peace – and what did that produce? The cuckoo clock."

We argue that a similar logic held in economic terms before the Industrial
Revolution. Europe’s exceptional rise to early riches owed much to forces of
destruction – war, aided by frequent disease outbreaks and deadly cities.


Bairoch, P., J. Batou, and P. Chèvre (1988). La Population des villes
Europeennes de 800 à 1850: Banque de Données et Analyse Sommaire des Résultats
Geneva: Centre d’histoire economique Internationale de l’Université de Genève,
Libraire Droz.

Broadberry, S. and B. Gupta (2006). “The
Early Modern Great Divergence: Wages, Prices and Economic Development in Europe
and Asia, 1500-1800
”. Economic History Review 59, 2–31.

Chow, G. C. and A. Lin (1971). “Best
Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by
Related Series
”. Review of Economics and Statistics 53(4), 372–375.

Clark, G. (2007).
A Farewell
to Alms: A Brief Economic History of the World
. Princeton: Princeton
University Press.

de Vries, J. (1984).

European Urbanization 1500-1800
. London: Methuen.

Galor, O. and D. N. Weil (2000). “Population,
Technology and Growth: From the Malthusian Regime to the Demographic Transition
and Beyond
”. American Economic Review 90(4), 806–828.

Hansen, G. and E. Prescott (2002). “Malthus
to Solow
”. American Economic Review 92(4), 1205–1217.

Jones, C. I. (2001). “Was
an Industrial Revolution Inevitable? Economic Growth Over the Very Long Run
Advances in Macroeconomics 1(2). Article 1.

Landers, J. (2003).

The Field and the Forge: Population, Production, and Power in the Pre-Industrial
. New York: Oxford University Press.

Maddison, A. (2001).
The World Economy. A
Millennial Perspective
. Paris: OECD.

McEvedy, C. and R. Jones (1978). Atlas of World Population History, Facts
on File
. New York.

Pomeranz, K. (2000).
The Great
Divergence: China, Europe, and the Making of the Modern World Economy
Princeton, N.J.: Princeton University Press.

Phelps-Brown, H. and S. V. Hopkins (1981).

A Perspective of Wages and Prices
. London. New York, Methuen.

Tilly, C. (1992).

Coercion, Capital, and European States, AD 990-1992
. Oxford: Blackwells.

Voigtländer, N. and H.-J. Voth (2008). “The
Three Horsemen of Growth: Plague, War and Urbanization in Early Modern Europe
CEPR discussion paper 7275.

Voigtländer, N. and H.-J. Voth (2006). “Why
England? Demographic Factors, Structural Change and Physical Capital
Accumulation during the Industrial Revolution
”. Journal of Economic
11, 319–361.

Wells, H. G. (1905).

A Modern Utopia

“Why had Nobody Noticed that the Credit Crunch Was on its Way?”

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letter to the Queen
attempting to explain why economists missed the financial crisis:

Her Majesty The Queen
Buckingham Palace


When Your Majesty visited the London School of Economics last
November, you quite rightly asked: why had nobody noticed that the credit crunch
was on its way? The British Academy convened a forum on 17 June 2009 to debate
your question… This letter summarises the views of the participants … and we
hope that it offers an answer to your question.

Many people did foresee the crisis. However, the exact form that
it would take and the timing of its onset and ferocity were foreseen by nobody.

There were many warnings about imbalances in financial markets… But the difficulty was seeing the risk to the system as a
whole rather than to any specific financial instrument or loan. Risk
calculations were most often confined to slices of financial activity, using
some of the best mathematical minds in our country and abroad. But they
frequently lost sight of the bigger picture.

Many were also concerned about imbalances in the global economy
… known as the ‘global savings glut’. … This … fuelled the increase in
house prices both here and in the USA. There were many who warned of the dangers
of this.

But against those who warned, most were convinced that … the financial wizards had found
new and clever ways of managing risks. Indeed, some claimed to have so dispersed
them through an array of novel financial instruments that they had virtually
removed them. It is difficult to recall a greater example of wishful thinking
combined with hubris. There was a firm belief, too, that financial markets had
changed. … A
generation of bankers and financiers deceived themselves and those who thought
that they were the pace-making engineers of advanced economies.

All this exposed the difficulties of slowing the progression of
such developments in the presence of a general ‘feel-good’ factor. Households
benefited from low unemployment, cheap consumer goods and ready credit.
Businesses benefited from lower borrowing costs. Bankers were earning bumper
bonuses… The government benefited
from high tax revenues… This was bound to create a psychology of denial. It was a cycle
fuelled, in significant measure, … by delusion.

Among the authorities charged with managing these risks, there
were difficulties too. … General pressure was for more lax regulation – a
light touch. …

There was a broad consensus that it was better to deal with the aftermath of
bubbles … than to try to head
them off in advance. Credence was given to this view by the experience,
especially in the USA … when a recession was
more or less avoided after the ‘dot com’ bubble burst. This fuelled the view
that we could bail out the economy after the event.

Inflation remained low and created no warning sign of an economy that was
overheating. … But this meant that interest rates were low by historical
standards. And some said that policy was therefore not sufficiently geared
towards heading off … risks. … But on the whole, the prevailing view
was that monetary policy was best used to prevent inflation and not to control
wider imbalances in the economy.

So where was the problem? Everyone seemed to be doing their own
job properly… And according to standard measures of success,
they were often doing it well. The failure was to see how collectively this
added up to a series of interconnected imbalances over which no single authority
had jurisdiction. This, combined with the psychology of herding and the mantra
of financial and policy gurus, lead to a dangerous recipe. Individual risks may
rightly have been viewed as small, but the risk to the system as a whole was

So in summary, Your Majesty, the failure…, while it had many causes,
was principally a failure of the collective imagination of many bright people,
both in this country and internationally, to understand the risks to the system
as a whole. …

We have the honour to remain, Madam,
Your Majesty’s most humble and obedient servants

Professor Tim Besley, FBA
Professor Peter Hennessy, FBA

[See also

At your own risk

Economists were beholden to the long boom

Exchequer Tallies

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The “first experiment with derivative financial instruments”:

Theory of Games
and Economic Misbehavior, by George Dyson, Edge
: …There are numerous precedents for
[the derivatives now haunting us].

As early as the twelfth century it was realized
that money … can be made to exist in more than one place at a single time. An
early embodiment of this principle, preceding the Bank of England by more than
five hundred years, were Exchequer tallies — notched wooden sticks issued as
receipts for money deposited with the Exchequer for the use of the king. “As a
financial instrument and evidence it was at once adaptable, light in weight and
small in size, easy to understand and practically incapable of fraud,” wrote
Hilary Jenkinson in 1911. …

A precise description was given by Alfred Smee…
“The tally-sticks were made of hazel, willow, or alder wood, differing in length
according to the sum required to be expressed upon them. They were roughly
squared, and one end was pointed; and on two sides of that extremity, the proper
notches, showing the sum for which the tally was a receipt, were cut across the
wood.” 11

On the other two sides of the tally were written,
in ink and in duplicate, the name of the party paying the money, the account for
which it was paid, and the date of payment. The tally was then split in two,
with each half retaining the notched information as well as one copy of the
inscription. “One piece was then given to the party who had paid the money, for
which it was a sufficient discharge,” Smee continues, “and the other was
preserved in the Exchequer. Rude and simple as was this very ancient method of
keeping accounts, it appears to have been completely effectual in preventing
both fraud and forgery for a space of seven hundred years. No two sticks could
be found so exactly similar … when split in the coarse manner of cutting tallies; and certainly no
alteration of the … notches and inscription could
remain undiscovered when the two parts were again brought together. …” 12

Exchequer tallies were ordered replaced in 1782 by
an “indented cheque receipt,” but the Act of Parliament (23 Geo. 3, c. 82)
thereby abolishing “several useless, expensive and unnecessary offices” was to
take effect only on the death of the incumbent who, being “vigorous,” continued
to cut tallies until 1826. “After the further statute of 4 and 5 William IV the
destruction of the official collection of old tallies was ordered,” noted Hilary
Jenkinson. “The imprudent zeal with which this order was carried out caused the
fire which destroyed the Houses of Parliament in 1834.” 13

The notches were of various sizes and shapes
corresponding to the tallied amount: a 1.5-inch notch for £1000, a 1-inch notch
for £100, a half-inch notch for £20, with smaller notches indicating pounds,
shillings, and pence, down to a halfpenny, indicated by a pierced dot. The code
was similar to bar-coding… And the self-authentication achieved by
distributing the information across two halves of a unique piece of wood is
analogous to the way large numbers, split into two prime factors, are used to
authenticate digital financial instruments today. Money was being duplicated:
the King gathered real gold and silver into the treasury through the Exchequer,
yet the tally given in return allowed the holder to enter into trade,
manufacturing, or other ventures, producing real wealth with nothing more than a
wooden stick.

Until the Restoration tallies did not bear
interest, but in 1660, on the accession of Charles II, interest-bearing tallies
were introduced. They were accompanied by written orders of loan which, being
made assignable by endorsement, became the first negotiable interest-bearing
securities in the English-speaking world. Under pressure of spiraling government
expenditures the order of loan was soon joined by an instrument called an order
of the Exchequer, drawn not against actual holdings but against future revenue
and sold at a discount to the private goldsmith bankers whose hard currency was
needed to prop things up. In January 1672, unable to meet its obligations,
Charles II declared a stop on the Exchequer. At the expense of the private
bankers, this first experiment with derivative financial instruments came to an
end. …

Wealth Inequality

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Daniel Little on wealth inequality:

Wealth inequality, by Daniel Little
: When we talk about inequality in the
United States, we usually have a couple of different things in mind. We think
immediately of income inequality. Inequalities of important life outcomes come
to mind (health, housing, education), and, of course, we think of the
inequalities of opportunity that are created by a group's social location (race,
urban poverty, gender). But a fundamental form of inequality in our society is a
factor that influences each of these:
inequalities of wealth
across social groups. Wealth refers to the ownership of property, tangible and
intangible: for example, real estate, stocks and bonds, savings accounts,
businesses, factories, mines, forests, and natural resources. Two facts are
particularly important when it comes to wealth: first, that wealth is in general
very unevenly distributed in the United States, and second, that there are very
striking inequalities when we look at the average wealth of major social groups.

Edward Wolff has written quite a bit about the facts and causes of wealth
inequality in the United States. A recent book,

Top Heavy: The Increasing Inequality of Wealth in America and What Can Be Done
About It, Second Edition
is particularly timely; also of interest is

Assets for the Poor: The Benefits of Spreading Asset Ownership
summarizes his conclusion in these stark terms:

The gap between haves and have-nots is greater now–at the start of the
twenty-first century–than at anytime since 1929. The sharp increase in
inequality since the late 1970s has made wealth distribution in the United
States more unequal than it is in what used to be perceived as the class-ridden
societies of northwestern Europe. … The number of households worth $1,000,000
or more grew by almost 60 percent; the number worth $10,000,000 or more almost
quadrupled. (2-3)

The international comparison of wealth inequality is particularly
interesting. Wolff provides a chart of the share of marketable wealth held by
the top percentile in the UK, Sweden, and the US, from 1920 to 1992. The graph
is striking. Sweden starts off in 1920 with 40% of wealth in the hands of the
top one percent, and falls fairly steadily to just under 20% in 1992. UK starts
at a staggering 60% (!) in the hands of the top 1 percent in 1920, and again,
falls steadily to a 1992 level of just over 20%. The US shows a different
pattern. It starts at 35% in 1920 (lowest of all three countries); then rises
and falls slowly around the 30% level. The US then begins a downward trend in
the mid-1960s, falling to a low of 20% in the 1970s; and then, during the Reagan
years and following, the percent of wealth rises to roughly 35%. So we are
roughly back to where we were in 1920 when it comes to wealth inequalities in
the United States, by this measure.

Why does this kind of inequality matter?

Partly because significant
inequalities of wealth have important implications for such things as the
relative political power of various groups; the opportunities that groups have
within and across generations; and the relative security that various
individuals and groups have when faced with economic adversity. People who own
little or nothing have little to fall back on when they lose a job, face a
serious illness, or move into retirement. People who have a lot of wealth, by
contrast, are able to exercise a disproportionate amount of political influence;
they are able to ensure that their children are well educated and well prepared
for careers; and they have substantial buffers when times are hard.

Wolff offers a good summary of the empirical data about wealth inequalities
in the United States. But we'd also like to know something about the
mechanisms through
which this concentration of wealth occurs. Several mechanisms come readily to
mind. People who have wealth have an advantage in gathering the information
necessary to increase their wealth; they have networks of other wealth holders
who can improve their access to opportunities for wealth acquisition; they have
advantages in gaining advanced professional and graduate training that increase
their likelihood of assuming high positions in wealth-creating enterprises; and
they can afford to include high-risk, high-gain strategies in their investment
portfolios. So there is a fairly obvious sense in which wealth begets wealth.

But part of this system of inequality of wealth ownership in the United
States has to do with something else: the workings of race. The National Urban
League publishes an annual
report on "The
State of Black America." One of the measures that it tracks is the "wealth gap"
— the differential in home ownership between black and white adults. This gap
continues to persist, and many leaders in the effort towards achieving equality
of opportunity across racial groups point to this structural inequality as a key
factor. Here is a very good

on home ownership trends for black and white adults done by George
Masnick at the Joint Center for Housing Studies at Harvard (2001). The gap in
the 1990s fluctuated around 28% — so, for example, in 1988-1998 about 52% of
blacks between 45 and 54 were home owners, whereas about 80% of non-Hispanic
whites in this age group were homeowners (figure 5). Historical practices of
mortgage discrimination against specific neighborhoods influence home ownership
rates, as do other business practices associated with the workings of
residential segregation. Some of these mechanisms are illustrated in Kevin Kruse
and Thomas Sugrue's

The New Suburban History
and Kevin Boyle's

Arc of Justice: A Saga of Race, Civil Rights, and Murder in the Jazz Age

provides an absorbing account of how challenging "home ownership" was for
professional black families in Detroit in the 1920s.

So what are the remedies for the very high level of wealth inequality that is
found in the United States? Wolff focuses on tax remedies, and certainly these
need to be a part of the story. But remedying the social obstacles that exist
for disadvantaged families to gain property — most fundamentally, disadvantages
that derive from the educational opportunities that are offered to children and
young people in inner-city neighborhoods — is crucial as well. It seems
axiomatic that the greatest enhancement that can be offered to a young person is
a good education; and this is true in the question of wealth acquisition no less
than the acquisition of other socially desirable things.


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In an article reminiscent of Cows accused of spending a lot of time in fields, Floyd Norris writes in the NYT:

Politicians Accused of Meddling in Bank Rules

He continues with more sound (if rather obvious) comment:

Accounting rules did not cause the financial crisis, and they still allow banks to overstate the value of their assets, an international group composed of current and former regulators and corporate officials said in a report to be released Tuesday.

The report, from the Financial Crisis Advisory Group, also deplored successful efforts by politicians to force changes in accounting rules and said that accounting standards should be kept separate from regulatory standards, contrary to the desire of large banks.

The report is here.


This post is by from Deus Ex Macchiato

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In an article reminiscent of Cows accused of spending a lot of time in fields, Floyd Norris writes in the NYT:

Politicians Accused of Meddling in Bank Rules

He continues with more sound (if rather obvious) comment:

Accounting rules did not cause the financial crisis, and they still allow banks to overstate the value of their assets, an international group composed of current and former regulators and corporate officials said in a report to be released Tuesday.

The report, from the Financial Crisis Advisory Group, also deplored successful efforts by politicians to force changes in accounting rules and said that accounting standards should be kept separate from regulatory standards, contrary to the desire of large banks.

The report is here.

Sector Update for July 29th

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Last week’s sector review noted that the bullish intermarket themes were in unison, with impressive breadth to the market rally. That strength has carried over to the most recent trading week, as most of the sectors have retained positive Technical Strength readings. Recall that Technical Strength is a quantification of short-term trending, with +500 representing a very strong uptrend; -500 a very strong downtrend; and scores between -100 and +100 suggesting no significant trending. As we see above, all of the sectors are in uptrends with the exception of financial shares. The health care sector is leading the pack in relative strength:


With new 20- and 65-day highs continuing to outpace new lows and advance-decline lines for the major averages in new high territory, the health of the uptrend remains strong. It would not be surprising for traders and investors to use pullbacks in Technical Strength as buying opportunities, given the increasingly common belief that the S&P 500 Index will vault above 1000 before there is any correction of significance. I will be tracking the indicators daily via Twitter to assess the strength and momentum of the market (follow here).

links for 2009-07-29

This post is by from Economist's View

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MasterCard, Cigna, Cabela, Expedia Surge

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Expedia, Inc led gainers in the S&P 500 index with a rise of 13.4%. Amkor Technology, Inc beats second quarter estimates. BorgWarner Inc posts another quarterly loss on charges, the stock plunges 60%. MasterCard surged after quarterly profit. Cigna gained on revised earnings outlook.

Sony, Honda, Mitsubishi Electric Surge

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Earnings dominated trading in Tokyo. Industrial production increased 2.4% in June and in the quarter surged 8.3%. Sony surged after it reported lower than expected loss. Honda soared after it offered better than expected annual earnings.

Wall Street’s Script: Should We Follow It?

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Good Evening: Yet another afternoon rally after morning weakness allowed the major U.S. stock market averages to finish mixed today. Some earnings misses, along with some so-so economic data set the tone in the early going, but enough buyers showed up by day’s end to turn 1% losses into gains for both the NASDAQ and Russell 2000. That the markets remain resilient even as they are “overbought” shows how much the mood has changed since the turn back in March. With he S&P still looking like it wants to test resistance up at the 1000 level, it’s fair to ask just what forces are pushing stocks higher these days. Yesterday I showed how analysts and technicians were doing their part to get clients to invest at these levels, so today we’ll examine what market strategists, institutional investors, and individual investors are thinking. It is pretty clear that, except among individual investors, risk appetites have been rising at an impressive rate. To many on Wall Street (more than a few of whom had their glasses fogged when peering into 2007, 2008, and the first half of 2009), it’s time to pull out the post-recession script and invest accordingly.

U.S. stock index futures were flat during the wee hours this morning, only to sink with the rising sun. Europe, which had opened to the upside, started weakening after Deutsche Bank reported a disturbing rise in loan loss provisions. U.S. Steel, Coach, and Office Depot then reported disappointments of varying degrees, more than offsetting good news from Amgen and a few others. Index futures were pointing to losses of 1% or so when the Case-Shiller home price data was released 30 minutes prior to the open (see below). Home prices actually rose for the first time in 3 years (on a month over month basis — yoy declines are still in the high teens). This news helped to contain the early selling in New York, and the indexes rallied back to the unchanged mark almost as soon as trading commenced.

At 10 am edt, however, the Conference Board reported that its latest measure of consumer confidence ticked down for the second straight month. Posting 46.6 versus expectations closer to 50, this confidence figure inspired anything but. The averages retreated between 1% and 2% within the next 90 minutes, and the economically sensitive names (materials, miners, energy, etc.) swooned even more. And yet, yet again, the averages were able to grind their way back to unchanged by day’s end (though not so for the aforementioned cyclical companies). The NASDAQ’s 0.4% gain edged ahead of the Russell 2000, showing that managers are trying to capture alpha by adding beta, while the Dow Transports (- 1.3%) finished in the omega spot.

Treasurys were uniformly higher in the morning, only to also finish mixed at the bell. A poor 2 year note auction left yields on shorter maturities higher by 2 to 4 bps, though the long end held firm. An 8 basis point drop in the 30 year bond implied that more than one trader was compelled to reduce curve steepening positions. The dollar was mixed, but mostly finished higher, and the commodity traders were just as surprised as the curve traders. Hurt by falling energy and metals prices, the CRB index declined almost 1% today.

Market strategists are supposed to peer into the future and tell investors what they think lies ahead for the stock market. Mostly, they’re just bullish. The Great Recession and the bear stock market that began in 2007 gave them pause, and some of Wall Street’s finest became cautious. A couple of them were even bearish for a spell, but the rally off the March lows has many of them convinced that both economy will soon recover and that a new bull market is at hand. The London-based strategy team at Credit Suisse was indeed one of the teams that worried openly in 2008, and, like many others, they now view Mr. Market with favor.

In the attached “Market Focus: Shaping Up”, the CS team argues that a rally to S&P 1000 will likely NOT auger a resumption of the bear market. They think instead that risk assets are poised to climb a thick wall of worries back to “pre-Lehman levels” (above 1200). They cite, among other reasons, a “thundering herd of pessimists”. Since Bank of America-Merrill Lynch months ago dispensed with David Rosenberg and Rich Bernstein in favor of strategists more in keeping with the Merrill logo, I find the allusion puzzling. What’s also interesting is that the CS team seems to be ignoring their own “Risk Appetite Indexes”, which are nearing euphoria territory.


Herds of pessimists, thundering or cowering, are actually pretty hard to find among strategists these days. And, according to State Street’s Investor Confidence Index at least, so, too is it hard to find bearish behavior among the institutional investors they track. I’ve never really given their poll much attention, but at least it is not some bland (and therefore suspect) survey. No, the folks at State Street track actual positions in customer accounts. The following excerpt from today’s press release tells the whole story, but the sound bite take is: Investors are acquiring risk positions (read: equities) at the briskest pace since 2004. It wouldn’t be the first time since the turn of the Millennium that institutional investors spoke like bears but invested like bulls. In addition to CS’s “climbing a wall of worry” cliché, I’ll offer my own — “watch what they do, not what they say”.

“Developed through State Street Global Markets’ research partnership, State Street Associates, by Harvard University professor Ken Froot and State Street Associates Director Paul O’Connell, the State Street Investor Confidence Index measures investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors. The index is based on financial theory that assigns precise meaning to changes in investor risk appetite, or the willingness of investors to allocate their portfolios to equities. The more of their portfolio that institutional investors are willing to devote to equities, the greater their risk appetite or confidence.
“The index results strongly reflect increasing investor strategies designed with a view that the global recession will wane more rapidly than many had feared,” commented Froot. “Investors are now adding risk to their portfolios at an impressive rate, faster than we have seen in several years. In fact, this is the highest level the ICI Global index has reached since mid 2004. That is an impressive turnaround over last October, when the ICI Global reached its lowest-ever-recorded level of 82.1.” (source: State Street press release below)

So, if analysts, technicians, strategists, and institutional investors are positively disposed toward equities, who is left to turn bullish? Individual investors, that’s who. More bullish than any other group of investors at the top of the tech bubble in 2000, the 401K crowd has, like their retirement accounts, not fully recovered from what’s transpired since 2007. According to the latest poll by the American Association of Individual Investors (AAII — see below), bears still outnumber bulls among smaller investors. Closer to becoming part of the weekly jobless claims statistics than the average strategist or asset manager, individuals are understandably cautious, in spite of (perhaps because of?) all the bullish advice they are receiving from professionals these days. These poor souls, if one listens to the laments of financial advisors who can’t seem to get their clients to plunge into stocks, don’t understand history. They don’t understand that, according to the perceived wisdom on Wall Street, that stocks have already bottomed and the economy will soon follow. Next stop, Nirvana!

AAII Poll: Results as of July 23, 2009
This week’s survey results saw bullish sentiment rise to 37.60%, below its long-term average of 38.9%. Neutral sentiment fell to 20.00%, below the long-term average of 31.0%. And bearish sentiment fell to 42.40%, above the long-term average of 30.0%. (source: American Association of Individual Investors)

Bullish 37.60%
Neutral 20.00%
Bearish 42.40%

It’s possible the Quants, Strategists, Technicians, and asset managers have built an unassailable consensus this time , but I’ll throw my lot in with the little guy, anyway. With a broken credit bubble that followed a broken housing bubble that followed a broken stock bubble, how can Wall Street be so sure that our capital markets will now follow the script from previous, post-WWII recessions? Is it wrong that individual investors remember how Wall Street analysts and strategists trotted out this same, “stocks bottom 3 to 6 months prior to the bottom of a recession, so you’d better buy now!” rationale back when the economy bottomed in 2001, only to see stocks make much lower lows in 2002? The herd pushing equity products might be right for a spell, and the S&P might even take a peek above 1000. But this is no ordinary time we find ourselves in, and the tremendous forces of credit contraction and money printing are colliding to set fresh history with each passing day. How can anyone claim they know what the future holds in such an uncertain environment? We’re all actors without scripts these days.

– Jack McHugh

U.S. Stocks Drop on Disappointing Consumer Confidence, Earnings

U.S. Economy: Home Prices Rise, Consumer Confidence Declines

Investor Confidence Index Rises from 115.8 to 119.4 in July


Shake-up at UKFI stuns City

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Top City of London bankers were stunned on Tuesday by news of a shakeup in the team that runs the UK taxpayer’s stake in the banking industry, raising fears of a “massive hole” in the management of a portfolio that could eventually be sold for more than £100bn. Chancellor Alistair Darling said that John Kingman,…

China State Construction soars on debut

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China State Construction Engineering Corp soared on its first trading day in Shanghai after the builder sold stock in the world’s largest IPO in 16 months, reports Bloomberg. Shares of Beijing-based State Construction, China’s largest housing contractor, jumped as much as 90% to Rmb 7.96 and traded at Rmb 7.12 by mid-morning local time,…

Microsoft and Yahoo near deal

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Microsoft and Yahoo are on the brink of sealing an online alliance that could create a more formidable rival to Google in the search business. The deal had yet to be formally concluded late on Tuesday but the major terms had been agreed in principle, suggesting an announcement could come on Wednesday….