Rational Markets?

People talk about efficient markets and how information and decision making run markets. I have done some reading recently and have done some thinking. Do we really have efficient markets? How do we call markets efficient when they fall victim to wild swings in asset prices and create bubbles that aren't really there? Well---- in short, we are humans and we do not react rationally all the time. Proper information + rational decision making= Efficient markets. This thought process is simple on the surface but requires some deeper thought in the long run. We as humans fail to make rational decisions all the time and our markets suffer. If you want to learn more about this idea you can read " Animal Spirits: How Human Psychology Drives the Economy and Why it Matter for Global Capitalism." This book mentions various reason why we do not live in a world of rational markets. There are arguments against this idea, but that is why we call this the Great Economic Debate!

Coulde cash for clunkers= a crash for car sales?

First, I would like to say that I agree with the government. I think that cash for clunkers is one of the best ideas that our government has come up with during this economic debacle. On the other hand, I do feel uneasy with the government directing this support to one industry. For those who disagree with CFC(Cash for Clunkers) I do agree that this legislation will eventually lead to a slump in auto sales once it ends sometime in the future. Also, I dont necessarily agree with the government directing capital flows, which should be done by the free markets. It is sad that CFC has been the best program because the government has wasted much of the stimulus on government excess. I have no problem with infrastructure spending, but giving money to ridiculous pork barrel spending is in the long run going to harm to this nation. I would like to see the government allocate larger amounts of the stimulus towards tax cuts which can give this economy a jump start. With any temporary tax relief there is always going to be a fall off. Tax cuts of this degree are ment to stimulate short term demand. Who know maybe the recent increase in auto sales will allow American auto companies and American auto workers to get on their feet again. Overall I approve!

Have we gotten ahead of ourselves?

Recently, the the three major indices in the US, SP500, NASDAQ, DJIA have left investors with some good returns. It made me think though have we taken to big a step. Most of this movement is contributed to corporate earnings that have beaten estimates. On the other hand, while 70% of companies have beaten estimates much of this attributed to cost cutting and very little has to do with increased sales. These cost cutting efforts have led to higher unemployment and will eventually lead to lower consumer spending. The University Of Michigan poll shows that consumer sentiment is still falling and consumer spending is also. At what point will corporate earnings start to beat top line earnings estimates? I think unemployment will slow dramatically late in '09 and then we will see spending start to increase. Also, as banks will hopefully have improved their capital levels and will extend more credit. We can see unemployment above 10% throughout '10 and lending still at depressed levels. I think we will see a minor correction of 5% and then we will ascend to 1100 on the SP500. Maybe I am getting a little ahead of myself. Well anyway, we need to proceed with caution and realize that markets my react quickly, but the economy will not. Best of luck! Hopefully, future policy decisions by the White House and Congress will not squeeze out any hopes of a recovery.

Does Healthcare reform = a better America?

This has been a debate for more then 50 years and is still raging. President Obama spoke to the media about the bill that is moving Congress, but he really did not clarify anything behond stage one. Some conservatives insist this is true socialized medicine, but it is not. This bill does not legislate a single payer system (free medical care) and thank God. One of my favorite writers, Thomas Sowell, makes a great point when he points that people commonly mix health care and medical care. There is no doubt that the United States has the best medical care in the world. On the other hand, we do not have the best health care (obesity, alcoholism, etc.) This health care is part of our society and this reform will do very little, at best, to change this. Also, I heard from Nancy Pelosi, on Capitol Hill, that the are going to use cost controls as a tool to slow inflation. Wow!, I about lost it. I will tell you one class she never took in college and that is "Principles of Economics." She and her Liberal Democrats buddies do not care that cost controls will only inflate prices even more in the future. But she does not think or care about anything past the next election cycle. Why should she? If cost controls are put in place it will reduce the amount of supply available because who wants to supply a product at a below market price. This will lead to inflation of goods and rationing of care. I do have some words for the Republicans, they need to join the cause. With a "philibuster proof" Senate they need to do everything they can to put their "mark" on the bill. I do agree with the President that something needs to be done, whether that is this bill or not. The Congress needs to take its time and think carefully what they are doing. America does not need another out of control entitlement program to slow this country down. So in closing we need to be careful where we walk and take our time fixing a problem that is key to this countries future success.

Return of Keynesian Economics?

I was reading recently on the action the Fed and the Treasury are taking. What struck me was the similarities between the current recession and the Great Depression. There is a "great debate" on issue of, Is this the worst economic situation we have been is since the 30's? Well as we all know from US History class, the First 100 Days of the Roosevelt saw significant policy changes. Of which were Social Security, FDIC, WPA, etc. This era was the beginning of what many the call the Keynesian Era, which promotes government stimulus to boost demand in the domestic economy. This is what we are currently seeing in the Obama adminisstration. What people fail to realize is that these progressive policies did not fix the Great Depression, it was WWII, and unfortunately policies like TARP(Bush) and $787bn stimulus(Obama) will not either! Also, many of Keynesian's were based on a country with constrained capital flows and minimal free trade. Keynes funded his government deficit on printing money! Keep in mind the gold standard was still around and he did not concern himself with inflation with the degree that modern economies have to fight constantly. So will we see Keynesian Era II or will supply siders win this "great debate?"

Let the Games Begin!

This blog is one to foster economic thought and debate. No matter if you are a devout Keynesian or a fan of Milton Friedman this blog is here to constantly challenge our thoughts and beliefs. There is not better opportunity than the current economic crisis to test our economic ideals. I welcome anyone to comment and add their 2 cents. This "great debate" will cross ideological spectrums and thought processes, but that is good. We should open up our minds to different thoughts and only then can we truly accept our own ideas or find others. Best of luck and let the games begin!