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February 25, 2009


By Wade Rousse

With all of the talk about certain banks being nationalized, it seems logical to discuss the term. However, nationalization is currently being used very loosely. No one seems to know exactly what it means.

The Webster on-line definition is as follows:

Nationalization - acquisition and operation by a country of business enterprises formerly owned and operated by private individuals or corporations.”

That definition seems pretty straightforward. Here’s an example of nationalization in the banking sector. Suppose a bank becomes insolvent. The common stock of that bank will trade to zero. Therefore, common share owners will be wiped out (their equity no longer exists). If the government thinks the systemic risk of allowing that bank to fail is too large, it takes complete ownership of the bank, bad debt and all. At that point, the bank is nationalized.

In the current environment, this is not how the term is being used. However, from a historical perspective, I think this is what’s meant by “nationalizing a bank.” Perhaps the current loose use of the term is what is causing cynicism among the public. I think what the public and some television personalities are referring to as nationalization is really just government assistance.

Any thoughts about the current misinterpretation of nationalization?

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Posted by Wade at 3:01 PM | Comments (0) | TrackBack

February 9, 2009

Technological Progress

By Wade Rousse

An economy is analyzed by investigating its inputs (capital and labor) and its output (GDP). The difference between the percentage change in output and that of input is sometimes called the Solow Residual. It is the portion of GDP growth that can’t be explained by the growth in capital and labor. Robert Solow was the first person to illustrate how to calculate the residual.

According to economist Edward Prescott, this unexplained portion of economic growth can be interpreted as a measure of technological progress. Over time, the Solow Residual fluctuates substantially. Prescott argues that these fluctuations display the importance of technological shocks as a source of business cycle volatility.

If this is the case, is there a possibility that history will show it was a technological shock, not a fiscal “stimulus” package, that led us out of the current recession?

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Posted by Wade at 9:57 PM | Comments (2) | TrackBack

February 2, 2009

Growing and "Using" Balance Sheets

By Cindy Ivanac-Lillig

As analysts write about the Fed’s latest actions, they refer frequently to how we are “using” our balance sheet. Here are the FOMC’s own words from January 28th: “measures…likely to keep the size of the Federal Reserve's balance sheet at a high level.”

What does this mean? For those with some background in corporate finance, this may be a real head-scratcher. Can a major U.S. retailer simply “use” its balance sheet to get out of a difficult situation? Not in the real world of business or commerce, but when it comes to monetary policy, this idea of “using” a balance sheet makes a bit more sense.

Why? Well, if you were in charge of keeping the money supply at a level where prices are stable and there is full employment, you would probably want to expand the money supply at this time -- since our economy is currently experiencing negative growth (producing less goods and services). To do this, as a good student of the Fed, you would probably want to lower the Fed Funds rate to make lending more appealing and have the money supply grow through the banking system. But since that rate is already at or very close to 0%, what else could you do to expand the money supply? You may try to simply buy things! This will help put more money into circulation. Obviously, the Fed is intervening in a strategic fashion right now, but in essence I would say that expansion through purchasing and lending is the name of the game. When you buy things, or lend money, what you purchase or the loan itself becomes an asset on your balance sheet. This is most likely what people mean when they say the Fed is “using” its balance sheet.

Now, two important questions:
• Does this expansionary policy necessarily affect M0 (monetary base) and M1? The Fed recently reported a reduction in reserves held at the Fed. Does that necessarily translate into a reduction of M0 and M1?

• And if that question isn’t provocative enough, is there a difference between “credit-easing” and “quantitative easing?” The difference may be in the art and not the science, but what do you think?

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Posted by Cindy at 11:15 PM | Comments (1) | TrackBack