The economic policy debate is a sham.

Great article that discusses what economists think about the major policy issues that our (non-economist) politicians are debating.

Felix talks about the good news on jobs

A nice analysis (with graphs).

The winning portfolio?

Apparently a passive portfolio of 50% bonds and 50% stocks wins out in most markets.  

There are probably a few things going on here:  First bonds and stocks provide great diversification.  Second, because the weights are fixed, there is no market timing going on here.  Market timing, as we know is a fast way to loose wealth.  Third, the stock portfolio is indexed.

In otherwords: diversify, don't market time and index.  Simple.

Post Crash Book Recommendations

Via Craig Newmark.  The Big Short comes out as the most popular - I've read it and I would recommend it highly.

Ragu Rajan on the the cause of the financial crisis and Paul Krugman

Ragu Rajan is a very well respected finance professor at the University of Chicago. He recently wrote a book called "Fault Lines" which details his views on what caused the financial crisis.

In this article he rebuffs many of the criticisms levied against his analysis by Paul Krugman. (Krugman won the Nobel prize for economics in 2008).

Rajan argues that the financial crisis can be attributed to a range of factors coming together to create almost a perfect storm. Not least of which was the encouragement of subprime lending by Fannie and Freddie.

Overall, this is a great read.

Follow the events that lead to the financial crisis

The BBC has another nice graphic showing a time line of events..

Alan Greenspan - it will happen again...

The ex-fed chief talks about the current mess and the likelihood of it happening again.

The cost of the financial meltdown

An interesting graphic from the BBC. The UK doesn't look too healthy.

Rolling Stone: Blame Goldman Sachs

I haven't had a chance to wade through this one, but Rolling Stone has a long article on how Goldman has had its fingers in every major bubble in recent history.

Felix Salmon, also reviewed the article and found much to agree with.

Finally, Felix gets a response from GS.

I have to say though that Mr Salmon's stock went down a bit with me after he referred to vegans as "bonkers".

Anyhow, good stuff if you've got some spare time to read it all.

Is the worst over?

According to NPR, "most" economists think so. Unfortunately, what really matters is that most consumers think so too.

What caused the financial crash...?

A whole bunch of things according to this graphic..

Bonds for the long run?

The fairly well known book by Jeremy Siegel, "Stocks for the long run" presented the wealth effects of buying stocks vs. bonds. The basic idea - stocks outperform bonds in the long run.

Bloomberg.com has an article showing that since the Carter years, this hasn't quite held up if you count recent market movements.

Clearly, this graph is dependent upon the stock index used and also the starting point, which is a little arbitrary.

Worst crisis since 1930

The (newly designed and very nice looking) Wall Street Journal website has a great article about the current financial problems. This is not a discussion of how we got here, but more specifically of why it is hard to correct the problems. The key is an orderly de-leveraging of financial firms. Firms have to unwind their debt and build up capital. Unfortunately, as they sell assets to reduce positions, the value of these assets decline, worsening their capital position. We're in a sort of death spiral. It is looking more a more likely that more government intervention will be needed to help these firms get out of their debt positions. This obviously brings with it unpleasant questions about who gets bailed out and who doesn't.

What is clear is that going forward, credit will not be as easily available. Particularly to more marginal borrowers, and those who want to borrow at very high leverage rates.

From a personal finance side, I take the view that first you want to remain very well diversified, and second, when the recovery comes, which it will, you want to be in the market. Therefore, I am staying the course.

Not a happy day for stocks

The market was down today by over 4%, making this the worst trading day in 7 years. It is surprising that it didn't fall further. The bankruptcy of Lehman, the takeover of Merrill and the continuing problems at AIG and WAMU all point to massive weakness in the financial sector. Top it all off with more weak numbers about the economy and surprisingly better news about oil prices (which hurt oil stocks) and you are in for a bad day.

My MBA students manage a real money portfolio and we took big hits on energy stocks - with Constellation Energy and Frontier Oil both down over 15%. Citigroup was also off 15%. On the bright side, consumer non-durables did relatively well - showing their general recession proof qualities. Overall the portfolio was off about 3.7%, which at least wasn't as bad the market overall.

Recession worries

Unfortunately, if you start talking about it enough it might happen. US consumer confidence has plummeted. We may be entering the inevitable recession.

Link: BBC