An interesting piece of analysis via TBP about rising gas prices crowding out retail and industrial consumption. The premise is sound but fails to acknowledge the already stimulative effect of a $2.50 decline in prices from their 2008 peak…

Noted financial blogger Barry Ritholtz comments on macroeconomic housekeeping, the unexplored links between shrinking demand and credit-starved supply, and support for commodities and commodity-linked markets/currencies once institutional capital resumes its existential search for yield…

While many observers are still consumed by the economic complexities of the financial crisis, historians have been busy making predictions about the ominous geopolitical implications of a destabilized global economy, rising unemployment, falling incomes, and swelling ethnic tensions. Much like its individual citizens, countries in the aggregate tend to retrench in the face of uncertainty about the future, and that could lead to some dangerously myopic decision-making in the months and years ahead…

“The human mind cannot grasp the causes of phenomena in the aggregate. But the need to find these causes is inherent in man’s soul. And the human intellect, without investigating the multiplicity and complexity of the conditions of phenomena, any one of which taken separately may seem to be the cause, snatches at the first, the most intelligible approximation to a cause, and says: ‘This is the cause!’ ”
— Leo Tolstoy, War and Peace, Book IV, Part 2, Chapter 1, first paragraph

Contagion could be used to describe much of the activity in the capital markets over the last 40 years, as global financial flows have accelerated, trade and capital barriers have disappeared, regulatory oversight has diminished, and financial innovation has made the packaging and sale of securities as easy as ordering a Big Mac combo. From defaults on recycled petrodollars in the early 1980s, to the Mexican peso crisis in 1994, to the “Asian Contagion” in 1997-98, and most recently the Great Collapse of 2008, what began as sanity checks on asset values and risk metrics quickly evolved into stampedes of herding capital feeling to higher ground.

“In 1969, a 14-year-old Beatle fanatic named Jerry Levitan, armed with a reel-to-reel tape deck, snuck into John Lennon’s hotel room in Toronto and convinced John to do an interview about peace. 38 years later, Jerry has produced a film about it. Using the original interview recording as the soundtrack, director Josh Raskin has woven a visual narrative which tenderly romances Lennon’s every word in a cascading flood of multipronged animation. Raskin marries the terrifyingly genius pen work of James Braithwaite with masterful digital illustration by Alex Kurina, resulting in a spell-binding vessel for Lennon’s boundless wit, and timeless message...”

Few economists now doubt that private household spending and corporate investment will rescue the economy on their own. The debate now lies in the scale and scope of the government’s intervention, as the only institution with the access to capital, macroeconomic scope, and investment horizon needed to jump-start the labor market, keep production cycles from seizing up, and create the necessary conditions for manageable lending and spending to resume.

A visual schematic of America’s stimulus dollars at work, as proposed under the recently approved House bill…

This TED talk by mathematician Steven Strogatz “shows how flocks of creatures (like birds, fireflies and fish) manage to synchronize and act as a unit when no one’s giving orders”. The parallels to market behavior and financial panic are implicit but obvious. We often perceive of our decisions during a crisis as unique and self-preservational, but the tendency toward spontaneous order is a powerful impulse. Coordinated reaction to natural threats, be it a hungry seal or predator hawk, can often increase a group’s biological fitness and probility of survival, while a coordinated reaction to financial crises can actually amplify individual risk – like Strogatz’s example of London’s Millenium Bridge – and only make matters worse…

For nearly a quarter century, Milton Friedman’s monetarists and their acolytes at the Federal Reserve have pursued American prosperity on the assumption that the sheer quantity of money in the economy, along with the degree to which it turns over annually, are the principal levers shaping macroeconomic fundamentals. For the better part of the 20th century that assumption held true as money supply was carefully managed, rising when the economy needed a boost and contracting when it was overheating.

The theory draws its roots from a colossal failure by the Federal Reserve during the Great Depression.

Scientists and market commentators have long been aware of the susceptibility of the markets to any single investment philosophy. The rise of early program trading contributed to the historic one-day loss of nearly 23% on Black Monday in 1987. Recent experiments with risk securitization may cost trillions of borrowed dollars to unwind and decades to fully digest.

The past, present, and future of Wall Street according to its unofficial biographer…

The existence of black markets in virtually every economy on the planet is a testament to human resourcefulness and natural entrepreneurship. For those that are building tunnels under Gaza’s border with Egypt, $100,000 and a few months work can generate up to $10,000 a day in fees, and help to provide critical supplies and less critical desires into the struggling Gaza strip. One economist has estimated that roughly 90% of the annexed economy is driven by these covert smuggling operations. Unfortunately, along with tea, cows, washing machines, and gas flow AK-47s, drugs, and anti-aircraft missiles as soaring Gazan demand meets profitable Egyptian supply…

Assuming that our lot in life is simply a function of hard work, acquired skills, and a bit of good luck, the only real difference between liberals and conservatives is the degree to which we believe that those who fall on hard times – for whatever reason beyond their control – deserve a helping hand. How we publicly spend on that assistance is not only a question of socio-political philosophy, but also a matter of practical statecraft. Whether “leveling the playing field” or simply “setting the rules of the game”, pharohs, kings, and presidents have all made use of their regulatory oversight with varying degrees of success. This piece in the Boston Review by noted macroeconomist Dean Baker explores the…

The latest in a long series of articles on the Rational Post sharing a common refrain: those who forget economic history are condemned to repeat it…

Originative sin: the future of banking

By John Plender at FT.com, January 4 2009

For the late John Kenneth Galbraith, an acute observer of market folly, finance and innovation were fundamentally incompatible. Every new financial instrument, he said, “is, without exception, a small variation on an established design, one that owes its distinctive character to the … brevity of financial memory”. The world of finance “hails the invention of the wheel over and over again, often in a slightly more unstable version”.

If there’s any doubt remaining among global power-brokers that short-term foreign policy objectives are fundamentally flawed, recent events in the Levant have provided ample evidence. Such tribal conflict has played out in the Garden of Eden since northern Neanderthals and southern proto-human colonies first crossed paths during the last major Ice Age. Since that time, control over the region has changed hands a number of times, from Semetic tribes to Egyptian pharaohs to Roman Catholics to Muslim traders to Christian crusaders to Muslim Turks, and so forth. For every fence that was built and every line that was drawn, rivals always built a bigger ladder or dug a deeper tunnel. And so the feud was passed from generation to generation,…

For those still convinced that the Federal Reserve is the lynchpin in some grander economic conspiracy, this brief history of central banking in America should put some of your doubts to rest…

Myth #1: The Federal Reserve Act of 1913 was crafted by Wall Street bankers and a few senators in a secret meeting.

On the Georgian resort hideaway of Jekyll Island (which has some excellent golf courses, by the way), there once met a coalition of Wall Street bankers and U.S. senators.  

This brief history of regal extortion draws some parallels to today’s “sinister” Federal Reserve, though the links are less tenuous than Dr. Hoye and others often suggest…

As the Annus Horribilis finally comes to an end, many forecasters in the policy and financial communities have been left licking their wounds. This effort from Moises Naim and his team at Foreign Policy tries to capture the best of the worst and is certainly worth a look…

This time series from Robert Shiller puts recent house price fluctuations and their associated derivatives in an important historical perspective…