Less Than Zero

The economy's got so abominable
That constraints on the Fed are phenomenal,
But the will to inflate
Makes a negative rate
Seem potentially real, if not nominal.

Thanks to Marketplace radio, it has come to my attention that members of the general public are still concerned about the Fed's inability to drop interest rates below zero. Because of the so-called "zero lower bound" problem, it may seem that the Fed has run out of monetary tools to stimulate the economy. In terms of nominal interest rates, this is correct. That's why, according to Marketplace Money economics editor Chris Farrell, it may be time for the Fed to "get real":

The Fed can create a negative "real rate" under certain conditions. Two quick definitions: "Real" means adjusted for inflation and "nominal" means the stated rate. So if the fed funds rate is at zero (nominal) and inflation is running at 2.5 percent, the real rate (inflation-adjusted) is below zero. In other words, if the Fed's nominal rate is at 0 percent and the inflation rate is 2.5 percent, then the real rate of interest is -2.5 percent. The Fed could lower the real rate of interest by pushing for a higher rate of inflation -- say, 3 percent (for a -3 percent real rate). Among others, it's an approach that New York Times columnist and Nobel laureate Paul Krugman has written about favorably.

Tax-Time Limericks

Happy St. Patrick's Day! I sat down with Tess Vigeland of Marketplace Money to recite listeners' verses on taxes. Among the submissions was one by Mad Kane, who is heard here in her own voice. Erin (and taxes, unfortunately) go bragh!

The text of all the verses may be found on the Marketplace Money website.

Taxing St. Patrick's Day

I will visit Marketplace Money the weekend of St. Patrick's Day, to join host Tess Vigeland in a wee bit o' limerickin' about taxes. If you have one you'd like to hear on the air, why not leave a comment here?

Alternatively, you can drop by the Marketplace Money Facebook page, and add your verse to the growing collection. Sláinte!

Industrialist Obama

"To create better jobs in the shorter view,
Manufacturing needs the support of you,
For to firm up the health
Of our national wealth,
We must build some more cars and export a few."

President Barack Obama, in his State of the Union address on Tuesday night, predicted that manufacturing products for export would turn the US economy around. The President singled out companies such as General Motors and Master Lock as examples of this potential. Such rhetoric made Marketplace reporter Heidi Moore wonder whether we could build enough stuff to fill the financial hole left by crisis-riven banks. After all, the financial sector accounted for one third of US corporate profits before the bubble burst. Responded University of Maryland economics professor Peter Morici:

"We cannot succeed as an economy without a strong manufacturing base." While Wall Street has made a lot of money, Morici says, "It's nothing compared to the wealth generated by labs that come out of manufacturing."

Check Your Emotions

Investors, with faces quite ashen,
Their holdings may clamor to cash in,
But advisors persuade
That it's best not to trade
In a greedy or panicky passion.

Down 600 points, up 400 points, down 400 points again - the volatility of the stock market this week may induce emotional volatility on the part of those whose retirement savings are tied up in it. However, at such times it is best to remember that the investor's two worst enemies are their own fear and greed, which may prompt rash decisions with adverse long-term consequences. As the legendary early 20th century trader Jesse Livermore once said: "The successful trader has to fight these two deep-seated instincts. Instead of hoping he must fear; instead of fearing he must hope." For more on this topic, listen to this weekend's Marketplace Money on public radio, where an expert panel will answer listeners' questions about how to respond to the market upheaval.

Disclaimer: nothing in this post should be considered as investment advice, for which the reader should turn instead to a qualified investment advisor.

Why Did the Market Fall?

Said an equity trader, "I'll cop to this:
I can't tell why we tanked from the top to this,
But the punters of punts
All concluded at once -
There's no basis for being an optimist."

From London and Frankfurt to New York and Tokyo, stocks fell around the world on Thursday and continued on into Friday. The S&P 500 closed at 1200, a level not seen since last December. Many were caught by surprise and looked for the catalyst that would explain such a dramatic global correction; but, as Marketplace's Heidi Moore put it in her blog,

"No one knows... 'The Market' is too large, too sprawling, and is filled with people moving their own investments for their own reasons. Saying “the market was worried about recession today” is like saying “all the waves in all the oceans started to worry about global warming.”"

Still, once may hazard a guess that, with the removal of the US debt ceiling as a focal point for fear, market participants could look around and notice that nothing else was going right.

Debt Ceiling Limericks on the Radio

David Lefkovits, the creator of Dr. Goose, sat down with Tess Vigeland of public radio's Marketplace Money to swap limericks on the debt ceiling crisis, including those sent in by her listeners.

Here is the interview, courtesy of American Public Media:



You can read the full text on the Marketplace website; the listeners' limericks can be found here.

Ill-Defined Contribution Plan

For things that aren't broke to be mended
May bring consequence oft unintended,
As the craftiest plan
Of mouse and of man,
Economic'ly, time and again did.

Tess Vigeland of public radio's Marketplace Money recently highlighted the surprising finding of a study first published in The Wall Street Journal: Given a default option of saving a minimal amount in their 401k plans, many employees will take it, rather than setting aside the greater portion of earnings they would have saved on their own initiative. This is too bad, because automatic enrollment at 3% of salary has been widely introduced by defined contribution plan sponsors since being mandated in a 2006 federal law. Statistical modeling has shown that many participants opt for the default, 3% withholding rate when, left to their own devices, they might have "maxed out" their retirement savings.

Dr. Goose on Marketplace Radio

Bill Radke of Marketplace Radio featured Dr. Goose (or his alter ego, David Lefkovits) on the Marketplace Minute.  Round One of the Limerick Smackdown goes to Goose, er.. Lefkovits, but look out for Round Two!