Friday, August 28, 2009


OMGSH guys, remember that time I got into a huge 2 hour argument with that guy outside my office from the LaRouche organization or whatever it's called?

Check this out!

So the argument that I had with the guy outside my office was about oil prices and speculation. LaRouchies were stopping people on the street and telling them that speculators were the reason oil prices were so high. When they stopped to tell me this, I asked, "have you considered reverse causality?"

I argued that speculators were perhaps betting on higher oil prices BECAUSE oil prices were rising. Maybe it's not the speculators who are driving prices up. Rather, it is our increased demand for oil that is driving oil prices up...

And then, of course, we got into an argument about whether climate change is real. They don't believe in climate change.
They also hate Britain.
I don't really know why...Britain has good scones. Mmmm. Scones...

Anyway, Susan, Anli and I wrote this in response to an ECON 321 [Money & Banking] p-set question. We mentioned oil speculation...

Financial asset markets often fail to exhibit the "law of demand" we learn in ECON 101, in which price increases lead to decreasing demand and increasing substitution. In these financial asset markets, however, rising asset prices actually cause higher demand and falling asset prices are a signal to sell. This failure of the "law of demand" in financial asset markets means that asset price movements feed upon themselves. Once they're going up, they continue to do so. As the Economist writes, "asset prices pull themselves up by their own bootstraps." But once there is a downturn, prices drop very quickly.
In the case of Lehman's collapse, one can argue that the reluctance of other financial institutions - BofA and Barclays - to buy Lehman, even at bargain prices, served as an indication that the government and other banks were losing faith in the financial system. After the collapse of Lehman, the prices of such debt instruments as MBSs and CDSs fell in price, further contributing to higher debt to asset rations for surviving banks. This led to a freeze-up in credit as surviving institutions tried to liquidate their balance sheets.
The market for oil and oil speculation is another example of the failure of the "law of demand." During the summer of 2008 [when I got into that argument with the LaRouchie!], many domestic consumers of oil complained that high prices were being driven by speculation. However, the Economist argued that in reality, high prices may have been driving speculation.

[To which the LaRouchies would say, "but how can we trust The Economist? it's from Britain!"]


As I bury myself in GRE books, I find myself daydreaming about grad school. Ugh, I really just want to go to school. On that note...

This post reminded me of Stuy, which is NOT a private school.

Correlation between income and SAT scores for this year. Greg Mankiw and I had the same reaction to this...
If only I could also sell millions of textbooks every year. Haha.

Jenn, Toby, do we really want to be professors? I'm convinced professors have the best lives...

Tuesday, August 18, 2009

Response from Professor Case! (Of the Case-Shiller Index)

Response from Professor Case @ Wellesley regarding Nami's question on my previous post:
Thanks, Professor!

wait, what about this in america, now?
from homeowners to renters?
explain plz

Response from Professor Case:
In 1989, Greg Mankiw and David Weil wrote a paper called "the baby boom the baby bust and the housing market." It made a big splash because it said the housing market would collapse in the U.S. during the 90's. He found a very strong correlation between household formation and house prices. Since the baby boomers were housed and the baby bust meant fewer households would be formed, he called for a big bust. Needless to say he was wrong. The 1990's and 2000's saw the biggest boom ever. I wrote a paper called "Land Prices and House Prices in the United States" published in an NBER volume edited by Jim Poterba some years ago, taking issue with Mankiw's result. I am attaching a copy. The real issue is how long will the boomers stay in their houses? I suspect they will stay a long time. They also buy houses like we buy cars...many own more than one. Consumer confidence is also not a strong predictor of behavior. Look at pages 40-45....Finally they forgot the 1990 census we discovered about 10 million folks that we didn't know we had.... I also wrote the attached paper fpr Brookings


...contrary to what you read, there may no be such a big housing market effect...Quigley and I also find that falling house prices don't lower spending

Karl E. "Chip" Case

Friday, August 7, 2009

What Would Obama Do? And What Does Greg Mankiw Do?

South Korea just wrapped up its free trade agreement with India. WSJ article here. It's been kind of hard to tell how Obama will address the issue of free trade...The Washington Post speculates...

Class of 2009, rejoice! Unemployment may be a lagging indicator, but do recent numbers give us hope? Or will we have to be more patient?

Also, I think this is so cute! Greg Mankiw at a Jason Mraz concert?! Haha.

Monday, August 3, 2009

Candles vs. the Sun

I have rediscovered my love for Bastiat's Petition [brilliantly witty]. Too bad Bastiat is dead. I feel we could have been great friends!

Lunch and Lecture with Subir Lall!

Thoughts after having lunch with Subir Lall, an expert on Korea at the IMF...

From Rice to Riches. (Like the rice pudding place in Soho!)
After the division of the Korean peninsula at the 38th parallel in 1945, the economy of South Korea was comparable to those of Cameroon, Ghana, and Malaysia. However, it effectively utilized foreign aid and pursued measures that would boost exports. Thus, South Korea established itself as the 16th largest economy by GDP by pursuing export-led growth. It has improved human welfare through what Robert Barro calls "capitalism without apology." As GDP per capita increased for Koreans, so too did domestic demand. This increased domestic demand may help Korea get through the financial crisis as it mitigates the sharp decrease in global demand. However, it is not enough to maintain medium to long term growth. Some issues that need to be addressed: rigid labor market, economic diversification, low savings rate.

The Labor Market
Although flexible labor markets can cause unemployment to be higher in countries like the U.S. than in countries like Korea (b/c it is much more difficult to fire people in Korea), in the long run, flexible labor markets promote long term growth through quicker and more efficient redistribution of resources. Dr. Lall commented that although the U.S. has done well in promoting flexible labor markets, it has not provided an adequate social safety net for times like these when the flexible market can cause unemployment to reach very high rates. Historically, the U.S. has relied on credit to serve as a social safety net. People would borrow against future earnings to get through times of frictional unemployment, etc. However, credit is not a guaranteed social safety net, as we discovered during the "credit crunch." Like the U.S., Korea also needs to expand and improve its existing social safety net. While doing so, it also needs to promote more flexible labor markets that will be necessary in order to allocate resources efficiently and promote long term growth.

The Government
One thing Korea has done well in the face of the crisis is execution. In the U.S., the passing of a fiscal stimulus bill does not immediately lead to a distribution of funds. However, when a fiscal stimulus bill is passed in Korea, they are quick to get funds where they are most needed.

Economic Diversification
Because Korea has depended on export-led growth for so long, its government is accustomed to providing incentives for export industries. However, these industries no longer need government support, and Korea might get more bang for the buck, or wham for the won?? if it were to provide incentives for entrepreneurs. Korea has an abundant supply of human capital and needs to find more outlets for its educated workers. Dr. Lall suggested that Korea pursue Silicon Valley type projects.

Korea also needs to expand its labor market and work its women! Korea isn't all that into gender equality, and I always tell my mom that I can't marry a Korean guy because I find them to be chauvinistic. I say this because I think it's kind of true, and also because it annoys her to no end that I don't date Korean guys. Haha.
Anyway, back to economics...productivity in non-tradable sectors stands at about 2%, while that of the manufacturing sector stands at about 4.6%. In order to compensate for the low productivity in the services sector, Korea needs to expand its labor market. It needs to include young people, old people, get the idea.

Save, save, save!
If you go to outlet malls in New York or Boston, I promise, you will run into a group of Korean tourists. That's right. Outlet malls are a Korean tourist attraction. Why? Because Koreans are obsessed with designer clothes, bags, shoes, napkins...everything.

The Washington Post recently had an article about this phenomenon. At lunch, Dr. Lall mentioned the article, and I opened my bag and was like, "oh yeah! This article!" Haha. What a dork I am.
Anyway, low savings is dangerous in countries like Korea because the population is aging. Well, all populations age of course, but the birth rate is not high enough for the ratio of workers to old people to remain constant.

Wow! I'm amazed by how much I learned just by having lunch with Dr. Lall. I told him I felt like I was back at Wellesley sitting in a lecture. [a great thing for someone who is homesick for college!]