Favorite Quote Ever

I think it sums up my summer job description:

"The Federal Reserve's job is to take away the punch bowl just as the party gets going."

-William McChesney Martin

I infer that this "punch" has inhibitive qualities...

I am Federal Reserve bound!!

That's right, I FINALLY figured out what I am doing during the final summer of my college career. This summer I will be interning in the Risk & Policy Analysis Unit at the Federal Reserve Bank of Boston. The building outside of South Station that I affectionately refer to as the "cheese grader" (see for yourself http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_Boston) will be my home for three glorious months!

A lot of people have asked me, "What are you going to do?" WELL, the Risk & Policy Analysis Unit is a part of the bigger Bank Supervision Division of the Federal Reserve. Within this unit there are people that oversee the implementation/policy research of/for of the Basel II Accords (bank regulation stuff), there are people that are doing financial risk models, and monetary policy research. I will be working with four people, 2 CPAs, an Economist, and a former insurance salesman on a research project detailing the behaviors of Money Market Mutual Funds over these past, few (kind of) critical years of recession.

This, of course, begs another question- what is a Money Market Mutual Fund (MMMF)?? Well, basically they are these open-ended funds that mainly invest in short-term debt securities. I know you are thinking (WHAT??), but it isn't that difficult to understand. Basically companies and our government go into debt (YAY) and when they do this they need money to fund that debt- so they divide that debt into a lot little securities that we can buy from them to give them money immediately and then they pay it back to us later with a little extra on top (like mini-loans). These MMMFs are full of these little loans and you can invest in a certain fund and get paid dividends for funding all these different debts. These funds are generally thought to be safe since they usually are full of treasury securities (government debt), commercial paper (debt from companies that need that cash quick), and other bonds. The unique thing about all these is that they are all short-term (expire anywhere from one day later to one year later) and this is why they are considered pretty safe- you get your money back soon. This IS safer because we are far more able to predict market fluctuations in the near future versus further into the future.

What we are trying to investigate this summer is how these big funds' holdings changed during the financial crisis and why- which should be interesting (will report back with answers-hopefully!).

Other than free gym membership and good pay, I should be able to expand my knowledge of finance over the summer and be able to make some pretty awesome risk models by the end!! Thanks Mom, Dad, Grandmas, Aunts and Uncle for supporting me (and Josh and Megan for listening to me ALL THE TIME).

Goldman In Trouble??

When I visited NYC in October of this past year, we went to several prominent financial firms and when we asked anyone from any of those banks which was the best in NYC the answer was always the same, Goldman. The SEC suit brought against Goldman on the 16th took several of my future financial analyst friends by surprise because of Goldman's previously squeaky-clean reputation may be in jeopardy. The allegations against it are basically that Goldman created a Mortgage-Backed Security product (Abacus 2007-ACI or whatever) that they marketed to consumers "unfairly." The SEC claims that Goldman chose not to disclose crucial information about the security to consumers, leading them to buy it (an incur the subsequent $1 billion losses) when they otherwise wouldn't have. Basically there is this hedge fund Paulson & Co (John NOT Hank) that Goldman told investors supported this product and had already invested in it, which is a really big sign of faith since this fund is giant and highly esteemed in the financial community. Well, it turns out that Paulson & Co actually bet against the product (did the exact OPPOSITE) of what Goldman said and investors got screwed.

My question is really how much of this can the SEC really prove? The NYT has interviewed several, prominent law professors that say the SEC has chosen a particularly difficult suit against Goldman that may result in nothing being done at all. Was Goldman at fault? Probably, but who wasn't? The SEC basically has to prove that the context of the deal (the way the company marketed the product to potential investors) caused them to invest when they otherwise wouldn't. This is different from most SEC suits where they instead choose to criticize the CONTENT of the marketing strategies. How is the SEC going to prove that investors wouldn't have invested if the product was marketed differently? They probably aren't.

It seems to me that the SEC is really trying to crack-down on lax financial regulation (which it absolutely should) after a slew of ponzi schemes (damn you Madoff) and securities backed by basically no collateral arose in the wake of the most recent financial crisis. There is now increased chatter about a possible suit being brought up against AIG for its questionable practices, is this really the most productive way to deal with the financial crisis? We can all surely agree that Goldman, AIG, Lehman, and the whole lot of them messed up, but is the answer to bring suits against all of them? AND, are the small profits that they made here and there from deception even comparable to the subsequent losses incurred because of the crash in real estate prices?

China's Currency

http://www.washingtonpost.com/wp-dyn/content/article/2010/03/25/AR2010032503772.html

Much pressure has been put on Treasury Secretary Tim Geithner to officially declare China a "currency manipulator," which makes it sound like we have a lot more authority than we really do to change China, let's face it...we need them. Make no mistake that they need us too since we are one of the vital tools allowing them to remain "currency manipulators," namely our abundance of purchasable debt (Treasuries) that China has been hoarding like spare pennies. It is incredible how the media and society have been able to convince people that you need a fancy degree to understand currency manipulation- it need NOT be confusing!!

Basically, we can think of each currency as a good in a market. When there is a lot of a good around, the price of that good is comparatively lower (or the currency is worth less). This is because it is common and therefore not as desirable, in economics we call this excess supply of goods. On the flip side, when there is too little of a good (like gold!) it is worth comparatively more (currency is more valuable) since it is more desirable. Predictably, we call this excess demand of goods. This is ALL the theory background you really need to understand what China is doing- here is how it goes:

1. China seeks to have a semi-fixed exchange rate against the U.S. dollar (more like a ballpark rate). This is now about 6.something Chinese Yuan to the U.S. dollar.

2. It is hard to keep this exchange rate fixed- why? Well, China has cheap exports, so a lot of people want to buy them. To buy them you need to convert your currency to Yuan, so demand for Yuan goes up. From our above theory, we know this SHOULD make the price of Yuan (or its value) increase (this is when the manipulation comes into play!).

3. China doesn't want its exports to get more expensive (they like people buying crap from them- go figure) so they buy every foreign asset (like our Treasuries) they can find. What does this do?? WELL- they are able to FLOOD our banks with their currency and therefore increase the supply of yuan in our market. This increase in supply will lower the demand, and therefore, the value of the Yuan back to the set rate that China likes.

I think we need not worry because this process is EXHAUSTING and China cannot keep it up forever. With the U.S. recession, our asset yields have gone way down (Yeah America!) and China is now losing massive amounts of money by buying them- so it may also be no longer worth it to do this manipulation. Many Economists have guessed that they Yuan is anywhere between 20-30% undervalued, but the good news is that it has appreciated slightly in the recent months. If the Yuan-dollar exchange rate is allowed to float China might also gain the advantage of more controlled monetary policy since they will be able to pursue an inflation rate instead of having to worry about keeping their fixed exchange rate.

Scared? Don't be. While China's undervalued currency does take a toll on our export markets (since their goods are comparatively cheaper), there is no way that we can blame our lost jobs and devastating unemployment rate on them. Sorry guys! Hopefully our financial recovery will kickstart productive sectors of our economy, or some sort of structural reform will take us out of the woods!

Our friend Ben ponders the increased deficit

http://www.nytimes.com/2010/04/15/business/economy/15fed.html?ref=business

NEWS FLASH: We are spending more money than we have- oh wait, this isn't exactly new. While the recent years have boasted increased deficit spending (5-6% of GDP) it was definitely unavoidable (unless you like depressions???). Bernake's concern for this rise in deficit spending is justifiably calm since we have bigger fish to fry. The recovery is going- but it is slow and the effects of all the money the Fed has been pumping into the economy these past few years is hardly apparent.

As people begin to shake off the fear of impending doom, we are still unaware of the long-term effects of this extreme swing in the business cycle. The jobs bill that Obama pushed through Congress is really just another stimulus package and banks are still hoarding reserves, which means Bernake is obligated to keep interest rates at nothing until they decide it is safe enough to lend those fund out to the public. Once banks kickstart their fractional reserve systems and this liquidity is freed up we can begin to expect higher prices, rising nominal interest rates and bigger inflationary expectations. This may be the point when we want to start reigning in the deficit- but not now.

Another testament to the state of the economy is our unemployment rate, startlingly enough the NYT declared that 44% of the unemployed have been actively looking for jobs for over 6 months- uh oh. With this recession coming to a close we must ask ourselves, are these jobs still there? Could this recession have taken them with it? This may sound preposterous but that is entirely possible. The U.S. has been terribly unproductive in several industries *cough* automobile *cough* and this could be the time to abandon shop and search for other industries we have comparative advantage in- just a thought. Usually the majority of the unemployed find jobs quickly, and the fact that that it is becoming less common should set off alarm bells! What could this mean for unemployment insurance, welfare, and Medicaid- Oh MY!

I would wait on that deficit, or at least like a job first!

First Post!

Greetings!

My name is Maria Onaindia and I am giddy junior in the Economics Department at Wellesley College. I am starting this blog for my friends and family who desperately wonder why I love economics so much and what I spend all my time doing. This blog will provide me with a forum to express my positive economic knowledge with the occasional normative jab, along with my personal endeavors on and off campus to grow into an economist.

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More to come!