Monday, January 30, 2006

Thank You, Mr. Greenspan

This is likely to get lost in the plethora of Greenspan tributes this week, but I will add mine anyway. As an educator, I have particularly enjoyed teaching economics, particularly issues related to monetary policy during Mr. Greenspan's tenure at the Fed. The issues that arose and the events that shaped this era were interesting from an educational perspective. And his handling of the events and explanation of the issues were always enlightening, at least to me.

While my high school teaching background was behind me by the time Mr. Greenspan took office, I was doing teacher education programs through the late 1980s and early 1990s, often at the local branch of a Federal Reserve Bank. Mr. Greenspan's handlings of the 1987 stock market crash, as well as the recession in the wake of the first Gulf War were, to me, textbooks to be used with other educators.

After coming to the Federal Reserve Bank of Chicago, it was interesting to be "near the inside" to see how policy issues and financial events were handled. And having numerous opportunities to hear him speak left me with an appreciation for his abilities. While many people derided "Greenspeak", I frequently said that one only had to read his statements to understand them. Yes, they were challenging, but they were understandable if you took the time to think your way through them.

Anyway, thank you for teaching me and others, Mr. Greenspan, by your thought, your word and your action. It's been appreciated.

Comments and thoughts are welcome.

Posted by TSchilling at 4:06 PM | Comments (0)

Monday, January 23, 2006

Financial Literacy, Investing 101

It appears that many bloggers are linking to "It Is What It Is." (Unfortunately, access has been restricted. So here's the same information courtesy of The Big Picture.) The topic is compound interest. The chart is a classic for teachers to use. It assumes a 10% return on investment. And it makes a powerful statement for investing as early as possible.

Some people point out that it does not take into account the effects of inflation. Granted, but then you "inflation adjust" your contributions. Show this to your students. I suspect you'll get the attention of a few of them.

Let us know how it goes.

Posted by TSchilling at January 23, 2006 3:35 PM

I like the idea that endowing each infant with the capital of a half a years income at birth would be sufficient to provide for their entire retirement.

Posted by: Lord at January 23, 2006 6:24 PM

I linked to it as well, but I saw it at Barry Ritholtz's site. Anyway, the comments section has been quite active.

Posted by: William Polley at January 25, 2006 8:48 AM

Thursday, January 19, 2006

Is It What We Know or What We Think We Know?

One of the more interesting aspects of my study of economics is finding out what the great economists actually said, as opposed to what is ascribed to them. Reading Smith, Marx, Keynes, etc. both widely and in full context, often provides a different perspective to the various schools of thought.

Arnold Kling on Tech Central examines the importance of understanding the difference. By highlighting the ideas attributed to Keynes and contrasting those with what Keynes actually wrote; one understands how economic theory can be abused or misapplied by people who claim they know what the author meant.

You might want to use this when discussing the schools of economic thought or how economic theory is applied.

Your thoughts on the article are welcome.

Posted by TSchilling at January 19, 2006 8:17 PM

Great blogs, Tim--- I need to check this site daily. You are good!

Posted by: Julie Chismar at January 29, 2006 3:37 PM

Friday, January 13, 2006

The Yield Curve as a Tool in High School Economics

I'm not sure how many high school economics teachers use the yield curve in their classes. I'm not even sure how many high school economics teachers are confident enough that they understand the yield curve to bring it up. I suspect that those who are teaching Advanced Placement Economics are certainly doing so. Beyond that...I'm not certain. I know I wasn't comfortable doing so. I understood the idea. But back when I was teaching in high school, I just wasn't sure I could explain it adequately.

The current yield curve certainly poses a problem for professionals at all levels. There is some value to the position stated in the article at by John Berry. He cites a Goldman-Sachs economist, who states that part of the reason for the current state of the curve has to do with the Fed's credibility in keeping inflation under control. That, in turn, means that lenders are accepting a smaller inflation premium for the long-term.

One might also wonder to what extent the curve reflects a desire among anxious or conservative lenders to find a low-risk investment. It may be that people seeking treasury securities are willing to forgo some return in order to get a lower risk of default. Certainly, U.S. Treasuries could be seen as filling that need, given their track record.

How do you explain the situation to your students? Or do you not even discuss the yield curve?

Posted by TSchilling at January 13, 2006 7:29 PM

I am with you on teaching the yield curve. I do teach the yield curve--it really isn't covered well in the book--but I am rarely satisfied the kids understand the concept of the curve. In addition, just the mention of the yield curve causes eyes to glaze. I do remember one year in Fed Challenge at the District competition I had one student completely prepared to discuss the curve. A bright young man who independently augmented his understanding of the yield curve. Yet, there was no question on the yield curve and he commented on the way home: "No one cares about the yield curve!"

Thursday, January 12, 2006

Economics in History

One item I've always tried to stress to my students is that economics is a product of its times. The theories that are developed are meant to explain and address problems, and as such may or may not have on-going application.

Bryan Caplan at Econ Log cites an interesting anecdote from another source regarding the efforts of U.S. economists to manage the post-World War II economy in Germany, and Hermann Goering's advice to them.

The message? Maybe the U.S. economists were trying to apply the "new", dominant Keynesian theory. Your thoughts?

The cited link is also interesting.

Posted by TSchilling at 3:05 PM | Comments (0)

Friday, January 6, 2006

Gresham, Fiat Money and Credibility

The Cleveland Fed's October 1, 2005 issue of Economic Commentary had an interesting article on Gresham's Law. Teachers of economics, history, or economic history will likely find it interesting. But, as is demonstrated in the conclusion, it's mostly in a historical context that Gresham's Law has application.

The authors point out that Gresham's Law generally applies only to commodity-based money -- fiat money generally does not suffer from the effects of Gresham's Law. The exception to this is government interference in the circulation of currency. As the article points out, in high-inflation countries, it is the bad money that is driven out and replaced by good money (currency that holds its value). If the government raises the cost of using the low-inflation currency high enough (for example through imprisonment or other such punishment), then the high-inflation, or bad money, will drive out the good.

The example might then be used to explain the importance of the central bank's maintaining a low-inflation environment, which will encourage the economic players to prefer the national currency to others.

As always, your comments are welcome.

Posted by TSchilling at January 6, 2006 3:02 PM

Here's an additional useful citation that the Cleveland Fed article didn't include: George Selgin, Gresham's Law.
EH.Net Encyclopedia, edited by Robert Whaples. June 10, 2003.

Posted by: Lawrence H. White at January 6, 2006 4:48 PM

I've managed to save up roughly $53,528 in my bank account, but I'm not sure if I should buy a house or not. Do you think the market is stable or do you think that home prices will decrease by a lot?

Posted by: Courtney Gidts at May 19, 2006 9:27 PM

I don't know, and I personally don't believe soliciting financial advice over the internet from people you don't know is a good idea. This is especially true given the magnitude of the transaction you're about to undertake. There are way too many factors to consider giving you a glib, off-the-cuff answer.

Posted by: Tim Schilling at May 19, 2006 9:49 PM

Tuesday, January 3, 2006

Worthwhile Reading

Over the holiday, I had opportunity to read The Undercover Economist by Tim Harford. It was a great read and worth picking up, if you've not already done so. I know some people are doing the compare/contrast with Freakonomics but I can't, not having read the latter.

I can say that Harford's book does an excellent job clarifying a number of issues and can easily be used in the classroom, either as a source of information for you, or as an auxiliary text. Financial markets, price theory, health care, trade, and economic development are all explained in simple language.

I'd be interested in the comments of others who have read the book.

Posted by TSchilling at 5:33 PM Comments (0)