Keynes wasn’t all wrong. He just wasn’t all right.

Keynes’ General Theory of Employment, Interest and Money revolutionized economic thought in 1936 and ignited a debate that continues to this day. Prior to Keynes, classical economists correctly believed that economies have self-correcting mechanisms that maintained prosperity and full employment. Keynes argued that the propensity of firms to invest could be too low compared with that of household savings, leading to recurring depressions. Keynes believed that through government fiscal policy, i.e. lower taxes and higher spending, that the government could help the private sector and restore full employment. Politicians seem to have forgotten the part of the policy about lower taxes for the most part.

Credit Reports

Sing it with me, you know the words:

"F-R-E-E that spells free, credit report dot com, baby..."

The commercials are catchy, quirky and make a good point- check your credit reports or you won't discover things that may negatively impact your score. So is freecreditreport.com the place to do this?

Free Energy and Free Lunches

The famous economist Milton Friedman is attributed the quote "there is no free lunch". Say a salesperson offers you a free lunch just for coming to his seminar. Obviously, he hopes to sell his wares at the seminar. The profits on those sales pay for the "free lunch" and so collectively, the free lunchers are paying for their own lunch- hence it is not really free.

What is Money?

I had an exchange with a commenter in the thread after my post about the Fed.  Seems he saw a video (the link is in the thread, I don't really recommend that anyone waste 47 minutes of their valuable time watching the thing) called 'Money as Debt' by Paul Grignon, a Canadian gentleman who is all up in arms about the concept of fiat money, especially of the type known as credit money.

Unemployment

Hey! We got an e-mail:

Guys-

Can you straighten me out on unemployment statistics. I dimly remember a commentary from someone about different versions of the unemployment statistics. The commentator seemed to imply that whatever administration was in charge always picked the version of the statistics that made them look best. Am I remembering this correctly? If we use a consistent measurement for the last 20 years, how does our current unemployment trend look?

The Truth About Social Security

It's an election year which means speeches, commercials and news banter about political issues and the candidates' respective stances.  In the interest of public relations, candidates' views on Social Security are diced into sentence fragments and sound bites which does little to address the real issue.  Compounding the problem is that few people understand how the system works and where the funds go leading to all sorts of myths, misperceptions and exaggerations.  Let's examine how the system works so you can make your own decisions about the best approach to fixing it.

The Fed - Part II

In part I, we talked a little bit about what the Fed does, and how it tries to juggle its multiple mandate to safeguard the banking system, achieve the highest level of employment possible, and keep inflation under control.

The Fed - Tool of the New World Order or Jewish Conspiracy? Part I

How about 'none of the above?'  Of course, there are many people who would pick both, and add a few choice words as well.  It is true enough that the founding fathers were very suspicious of central banks, and worked hard to prevent the United States from having one.  These days, though, a country without a central bank is like a hockey team without a goalie - it's not against the rules, but it would lead to some wild action.

Financial Institutions- Is Your Money Safe?

The headlines have been full of bank troubles and failures like Indy Mac.  The FDIC recently stepped in to save Indy Mac depositors in July and this action is expected to cost the FDIC some $4 to $8 billion.  This is in addition to the approximately $1.2 billion in other FDIC bank rescues so far in 2008.  Given such news, it is timely to discuss how assets are protected and why you should not worry about it.

Watching the Credit Crisis Like the Pros

Credit crisis... credit crunch... we all hear the terms, but what do they mean to the average schmoe?  Well, for one thing, it means that even though the Fed has lowered the 'Fed Funds' rate to 2%, and the yield on 10-year US Treasuries is around 3.80%, rates on things like mortgages, car loans, and credit cards are persistently high.  For example, Freddie Mac - one of the two big agencies that guarantees mortgages, the other being Fannie Mae - says that 30-year conventional, conforming mortgages averaged 6.52% with 0.7 points last week.  Conventional and conforming means that the borrower and the loan size meet Freddie's ever-stricter requirements, and points, for those who've never had a mortgage, are upfront costs.  One point is one percent of the loan - so the more points, the more expensive it is to get the loan.  Contrast this with the situation at the beginning of this year, when the credit crisis was already in full swing - 10-year yields were 0.20% lower, at 3.60%, but a 30-year mortgage guaranteed by Freddie was 0.45% lower, at 6.07% with only 0.5 points.  Go back further and the difference is even more dramatic - in the first week of January 2006, 10-year Treasuries gave a 4.37% yield, but a 30-year mortgage cost just 6.21%, with 0.5 points.  So government bond rates have fallen 0.57% since then, but mortgage rates have risen 0.31% and 0.2 points.  Not to mention the fact that nobody gets a mortgage anymore without 20% down, a good credit record, and firm proof of employment and assets.  At the beginning of 2006, banks were practically begging you take money, regardless of income or assets.

Banks, Bubbles and Blame

Greedy banks; not enough regulation; too much regulation; flippers; Wall Street greed; Republicans; brokers; Democrats; ratings agencies, developers; oil prices and foreigners.  These are all reasons, definitively claimed by those citing them, as the sole reason for the “mortgage crisis” currently in the headlines.  Anything garnering so much attention, particularly in an election year, is ripe for misunderstanding and poor presentation of the facts.  I can’t think of a more timely topic on which to apply financial skepticism and truly understand the crisis’ underpinnings.

To understand where we are today, we need to start by understanding how the mortgage market operates.  Historically, when one wanted to buy a house they went to their local banker, presumably one they knew, and asked for a loan.  The banker would assess the potential borrower’s credit, require a large down payment, check all their documentation and then decide if they were worthy of a loan.  In those days, banks earned money by borrowing cheap (deposits) and lending it out to worthy borrowers at a higher rate.  As long as the loan didn’t default, the bank kept the difference as profit, so making “good” loans to capable borrowers was the goal.  The bank’s greatest risk came if there was a regional downturn.  If the local plant closed, how were all those formerly good borrowers going to pay?  As a bank, you had risk concentrated geographically.