My initial thoughts on Brunnemeir and Sannikov paper

Unable to attend to see Markus K. Brunnemeier at the Rutger seminar to discuss one of his current papers in progress "A Marcoeconomic Model with a Financial Sector", I still wanted to provide my comments on the paper.

After reading the paper and the published slides by Brunnemeier and Sannikov, I learned that this most recent financial crisis wasn't the first and will probably not be the last in this sector and have occurred at roughly 10-year intervals becoming less common with the role of the central bank. The paper puts the financial sector at the center of the model as the financial intermediaries are leveraged similar to certain young entrepreneurial firms.

With the financial sector and leverage in the system, the model moves money from less productive agents to more productive agents. This is where Brunnemeier introduces the concept of inside money in addition to the outside money of the system. With the inside money, Brunnemeir comments that an essential ingredient of the model is that any expert who manages capital must absorb at least a fraction of risk that affects the value of the capital.

That is where leave my initial thoughts around the Brunnemeier paper but I still see value in digging into the amplification effect on the overall system. For those who are interested in the slides on this work, here is the link...slides for A Marcoeconomic Model with a Financial Sector.

Comment on Blog post from "Some Ideas in Financial Economics"

In reading the recent post http://www.eden.rutgers.edu/~gaoch/econ514.html, I do agree with the comments around the impacts of outsourcing of certain industries but I would argue that the demographics of the workforce has a bigger impact on the lack of the improvement in the nonfarm payroll employment data.

With the baby boomer generation entering the early retirement age, I feel there is a large impact of individuals rolling right into retirement after a layoff rather than re-entering the workforce.

Deficit crosses above 10% GDP, a level not seen since World War II

With the recent monthly release of the US Federal Budget deficit by the Congressional Budget Office, 2010 is shaping up to break the record for the largest federal budget deficit projected at approximately $1.5 Trillion (Figure 1.0). This will send the % to GDP metric above the 10%+ mark, the highest level since the World War II range of 22%-28% in 1943-1945.

Figure 1.0 - US Federal budget deficit

With the frequency of US debt issuance at these historical low rates, one has to question when the future credibility and reliability of the US economy. The US government is placing a huge bet on reviving the economy with a large dose of stimulus funding, but with the market continue to have patience as the currently approved stimulus has run its course? And what will be the reaction of yet another stimulus package?

There will be a time of reckoning as the the current yields will not be enough reward as the deficit grows and other foreign investors (ie. China) will want to diversify their holdings away from a concentrated US Treasury portfolio. Only time will tell, but many others do agree and have posted similar concerns on the below blogs:

Kurt Brouwer at Seeking Alpha

Peter Suderman at Reason.com

First Post

Welcome All to Econ 514 -

This is a blog dedicated to post and publish my thoughts and analysis for my Economics 514 Graduate class at Rutgers University.

Stay tuned for some more postings.

Elias