What to do when you find yourself pushing on a string?

Keep pushing!

I'm pretty sure that when I was a brand new economist at the Richmond Fed circa 1969 I was the first person to put a reference to the money supply in the draft of the President's FOMC remarks.

I really am sure of that; but others probably remember it differently, and I have no proof.

I was a young, newly-minted "monetarist," you see, having been raised on Milton Friedman's writings and been taught by Friedmanites once or twice removed. In addition to monetarism, I was also a believer in flexible exchange rates, the topic of my first Monthly Review article at the Richmond Fed. I wasn't the only believer on the staff, but we were still a minority  toiling in the wilderness.

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When recession becomes an issue, as it now is, the remedy involves increasing total spending, or aggregate demand, to match the capacity of the economy to produce goods and services at full employment.

One way to view aggregate demand is by its spending components such as consumption, investment, and government spending. This "Keynesian approach facilitates a focus on fiscal policy.

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Because of the financial crisis and the deepening recession, more economic literacy is being recommended once again. When I was there, the Dallas Fed had several programs to teach economics to teachers so they could teach it to their students. Teachers often asked me what were the most important economic concepts to teach students who wouldn't be taking additional courses in economics.  Here are my Top-10.

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"There ain't no money in poetry.  That's what sets the poet free.
I've had all the freedom I can stand."
Guy Clark, Cold Dog Soup

In the beginning, there was the stretch for yield that led to subprime, best described in a Japanese Haiku:

If regular loans
Don't earn enough to suit us
Maybe bad loans will.

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We've all heard of guilt by association. I've recently come to realize that its first cousin is guilt by classification. The phenomenon isn't new to me, but the label is. It came to me last Sunday (December 14) while reading an article by Gretchen Morgenson in the New York Times. I admire her work very much. Her articles have taught me much, especially in the early months of the subprime crisis, and most especially by personalizing its villains and its victims.

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My quick reaction to the Fed's shock and awe policy actions on Tuesday may be found at Forbes.com.

Prior to the FOMC's announcement, when the entire focus of expectations was on the target Fed Funds rate, I anticipated a reduction of 50 basis points, but I didn't think it mattered much since the Fed Funds rate was already trading below its target rate of one percent. See CNBC's Squawk Box interview. Going all the way to a zero to quarter percent target range was a bold move in itself, but the more important part of the action was the purchase of mortgage-backed securities and agency debt and reiterating the coming help for consumer credit shortly. The FOMC clearly is willing to do whatever it can to pull us out of this dangerous financial crisis and minimize the damage of the recession.

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The American Spectator (online) has been running an excellent series of articles on the damage mark-to-market accounting has been doing to our financial system. They have some real heavyweight authors, plus myself. I'm a heavyweight in a different sense.

The series is introduced by Editor-in-Chief, R. Emmitt Tyrrell, Jr. accessible from my article. Once there, you can follow the trail to the following:

Newt Gingrich,

Brian Westbury, FT Advisors

Edward Yingling, President of the American Bankers Association,

William Isaac, former director of the FDIC

Gary Wolfram, Professor of Economics, Hillsdale College

The word "Keynesian" is usually used pejoratively in the crowd I hang around with, intellectually speaking. It connotes to them, too much reliance on the government to stabilize the economy, leading perhaps to too much government over time, and less individual liberty that goes with that territory.

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In my last blog for the New York Times, I reviewed the effect of our trade balance on GDP. We've had a deficit (imports>exports) for several years, which is a net minus, or drag, on GDP. However, in recent quarters, in part because of the decline in the dollar until lately, the deficit has shrunk, exerting a positive influence on the change in GDP. (A minus times a minus equals a plus.) In some quarters, including the 2^nd and 3^rd of 2008, the positive change in the trade balance has been greater than the change in GDP itself.

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While I'm trying to think of something to say, let me just say some things I've been thinking.

Best Investment Advice 

The best investment advice I've heard is from Will Rogers, who advised:         

"You buy your stock, and, when it goes up, sell it.  If it don't go up, don't buy it."

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(How a Good Thing Can Make a Bad Thing Worse)

This morning's employment report confirmed that the recession has recently moved into steeper decline.  Payroll employment declined by a staggering 533 thousand, and the unemployment rate increased from 6.5 percent to 6.7 percent. The increase in the unemployment rate would have been greater except for a decline in the labor force, presumably because of discouraged job seekers. From December 2007 to Dec 2008 the economy shed 1.9 million jobs.

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While spending and investing billions of dollars-or is it trillions?-trying to heal the sick credit markets, the government continues, inexplicably, to ignore the low-hanging free fruit of suspending or modifying mark to market accounting. We are hoisting ourselves on our own petard by adhering strictly to accounting rules that unnecessarily threaten to put thousands of viable financial institutions out of business.

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The business cycle dating committee of the National Bureau of Economic Research today announced their determination that the peak of the last expansion occurred in December 2007, coinciding with the peak in employment. This means the recession started in January 2008, the month employment began to decline. Although they consider other factors as well, the labor market was the primary factor in this case.

This means that we've already been in recession longer than the past two recessions, which were relatively shallow as well as brief. Commentators would make a mistake, however, if they start applying rule of thumb to this recession using the January 2008 beginning date since the employment losses were relatively modest for a recession period through August.  In September and October, 2008, employment losses steepened and, judging from new applications for unemployment insurance, will have continued to do so in November. That will likely be confirmed Friday morning, December 5th.

What I mean about not applying rules of thumb is that for the first 9 months or so, the recession was mild; and it's becoming much more serious now. For some purposes, September might be a more relevant starting date than January. You might think of it as a recession within a recession.

Congratulations to Bob Gates and to President-elect Obama for making an excellent decision, even if I did recommend it in my latest post. Congratulations are also due on the appointment of my former Fed colleague Tim Geithner as Treasury Secretary and Larry Summers for the White House economic post. I've only met Larry a couple of times, but I've heard him at several conferences and found him most impressive. Both are excellent appointments. I don't know the other members of the economic team, but they have good reputations. It looks like we're off to a promising start.