Monday, December 17, 2007

Concerns, But For A Different Reason

You're probably tired of hearing about me, so I'll actually talk about economics today.

To a certain extent, I think a lot of the hubbub surrounding the subprime mess/crisis/problem is justified. We have yet to see a ton of red ink that is destined to splash on the balance sheets of numerous financial institutions. But I'm not really worried about it.

I don't think it's the prelude to a very long Japan-style housing-led economic malaise as was brought up on Slate a few days ago. Neither do I think it sparks a short-term trickle-down recession brought on by coal replacing the typical Christmas bonus.

Obviously, I don't have the expertise to actually summon up any convincing data on why this is true. Otherwise, I would have another paper to write. For a short answer, though, let's consider the perspective of those involved. Take your average North American central banker, who in recent times has been more than happy to throw kerosene on the economy. Who do they spend more time with? Bond geeks or Wal-Mart customers? Which of these has a bigger impact on the economy in aggregate?

As a first exhibit, consider the Google news search for "november inflation". On the first page, I'm counting American inflation higher than predicted (0.4% rise in the core for the month of November), eurozone inflation higher than predicted (plus separate articles on German, French, Polish, and Finnish inflation - all individually higher than expected), and Chinese inflation higher than expected.

Plus, if we haven't already forgotten, the USA had 4.9% real growth last quarter. Either way, my reading of the cards doesn't spell big trouble.

What I am more concerned about is moral hazard. I don't think the financial world could have asked for a more sympathetic ear from our money-printers. Rate cuts, expanding the definition of acceptable collateral on SPRAs and other repos, etc. Heck, it even seems like there's federal pressure on TD - who hasn't been afflicted by the mess - to cough up a billion for the common good.

What's that line about economists predicting nine of the last three recessions?

POSTSCRIPT: Trying to nail down an honours topic. Right now, looking at an ill-defined intersection somewhere at the corner of endogenous growth, development, and location theory. It would help if the two profs I'd like to work with weren't taking off to Asia for the winter, and the remaining macro guy is teaching too many courses (five and a half!) to supervise.

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