The Political Economy Project of Towson University
(home)
inquiry into the causes of the well-being of mankind

December 2, 2008, 4:00-5:15, Stephens 111
(note new location - Stephens 111):

Understanding the financial mess - continued one more time
student-faculty discussion with guidance by Prof. Howard Baetjer
(all TU staff also invited and welcome)

This will be our third session on the current financial mess, after Dr. Pomykala's presentation of November 4 and our discussion of November 18.

In this discussion we'll continue to focus on the role of the Federal Reserve in the housing bubble and its aftermath.  To do so, we'll continue discussing, "Federal Reserve Policy and the Housing Bubble," by Professor Larry White of the University of Missouri - St. Louis.  This paper was presented at the Cato Institute Monetary Conference in Washington, D.C. on November 20, 2008. 

Our agenda:

Background:  What are subprime mortgages?  What are mortgage-backed securities?

For those who could not come last time, I recommend this superb, simple, stick-figure cartoon explanation of the underlying problem, which we watched last time.  (Warning, much of the language is coarse.) 

I also recommend a portion of a lecture that Professor White gave this summer at the Foundation for Economic Education, available as an audio file.  In the list that appears at this link, click on "The Subprime Lending Crisis, Part I."  I particularly recommend the portion from minute mark 8:16 to 20:22.  We could not get this to play last time, but we'll play and discuss it during our session December 2.  If you can listen to it beforehand you'll be that much better prepared.  (Note that a wide variety of FEE lectures are available via podcast for free at iTunes.)

New background source added for this week:

For a superb summary of how mortgage underwriting standards were eroded over time as government policy, read "Anatomy of a Train Wreck," by Prof. Stan Liebowitz.  It's stunning, and a good read.  It is to Liebowitz's work that Prof. White refers in the lecture mentioned in the previous paragraph.

Main topic: Did the Federal Reserve, through "easy money policy," inflate the housing bubble?  We'll discuss Professor White's arguments that it did.

Here is Professor White's paper: "Federal Reserve Policy and the Housing Bubble."  It is only eleven double-spaced pages, including graphs.  Try to read pages before our discussion, but come anyway if you can't.  Bring a copy.  And bring a thoughtful friend.  We'll continue discussing the key points and skim over the technical parts.

Two additions made November 17:

From Russ Roberts on how difficult it is to understand and predict the workings of something as complex as the economy.

October 29, 2008: "Housing Boom, Bust and an Artificial Shortage" featuring Randal O'Toole.  This might be useful in understanding why housing prices rose so rapidly in certain areas and not others.