Thursday, November 17, 2011

Financial and Economic Videos

It is a FTotW tradition on the week before Thanksgiving that I talk about a video on the Internet that deals with either economics or personal finance. Last year, I took a very narrow approach with the Royal Society for the Arts video on SuperFreakonomics; the video combined the audio of the SuperFreakonomics authors’ RSA presentation with an animator working on a whiteboard. Several of you checked it out and/or sent it on to friends; the link was clicked over 250 times.


This year, instead of a single video, I wanted to highlight a few videos (and the less I type, the better)!


The Great Stagnation by Tyler Cowen: Our current economic malaise stems from our lack of innovation. Life from 1901-1951 changed radically (cars, electricity in the home, radio communication, airplanes, etc…); life from 1951-2001 got better, but the scale of the innovations slowed (where is the flying car!?). (17:50)


When Ideas Have Sex by Matt Ridley (Could also be titled “The Power of Trade in Bringing About New Ideas”): Our prosperity has much to do with our trade with each other and the sharing of ideas. By sharing ideas faster, we create new ideas and products to help improve our lives. (16:27)


Both of these videos are done in the TED format: one presenter has about 10-15 minutes to present their idea in an engaging format. There are plenty of TED videos covering all sorts of ideas. I encourage you to visit their website.


Authors@Google: Burton Malkiel. Dr Malkiel gives an enthusiastic presentation on investment strategies that is not overly technical and easy to follow. (1:11:45)


Authors@Google: Richard Thaler. Dr Thaler gives a presentation on his book, “Nudge: Improving Decisions about Health, Wealth, and Happiness.”The book focuses on the field of behavioral economics and how individuals can overcome their biases to make better life choices. His presentation is light and easy to follow. (56:57)


_____@Google is a video series that highlights presentations given at Google by those not working at Google. This ranges from Chefs@Google, Authors@Google, Candidates@Google, Musicians@Google, Women@Google, etc… Over 1,187 videos have been uploaded covering a wide range of topics, people, and ideas.


Fight of the Century: Keynes vs. Hayek, Round Two: This video uses hip-hop music to explore the difference between F. A. Hayek and J. M. Keynes. The video is educational in nature and is ‘clean’ for classroom use.  (10:10)


The above videos are generally longer than your average Internet video, but they are still worthwhile to watch. As always, let me know what you think:


There is likely no financial tip next week. Have a great Thanksgiving!


Andrew Zumwalt, MS

Personal Financial Planning

University of Missouri

Columbia, MO 65211

Wednesday, November 9, 2011

Looking backwards at the dots...

Steve Jobs once said, “One can only connect the dots looking back, not forward”.  I have found that such wisdom is usually better understood by those with more to look back upon and less to look forward toward.  As of 10:30 am the day of this writing, the 9th of November 2011, the markets are down about 2% due to the European debt crisis – or so they say – which was a “dot” I never would have foreseen, when I began my career.  Recently, the European debt crisis has been the story.  Tomorrow, we may have another story, another “dot” in our inventory of “dots”.  In times like these, it is good to provide a refresher on investment principles – the lenses we should look through when viewing our investments. 


Only a few days ago, I read an article in the T. Rowe Price Report written by Ned Notzon, a retiring senior asset allocation strategist, where he passes along the lessons he has learned from his career in asset allocation.  Since I agree with him and, with the above attribution, I will summarize his thoughts below.

·         Individuals have to stop being passive about their finances.  The decisions they have to make are numerous and the responsibility for our financial success increasingly rests on their shoulders.  Each of us must take responsibility for our financial futures, if there is to be hope for the financial futures of our larger economies and for those who follow.

·         People are living much longer than they expected.  This trend is projected to continue.  The ravages of inflation, even a low rate of 2%, will destroy a retirement lifestyle if assets, such as equities, are not a part of individuals’ portfolios.   (At 2% inflation and a 30 year retirement, the last year of retirement will see average prices being 81% greater than in the first year of retirement.)

·         Even in the face of inflation, bonds still play a major role in a portfolio.  They diversify risk exposure and reduce the losses when equities “turn south”.  Not having to panic during the inevitable market cycles is a key to controlling the behavioral side of finance.

·         Speaking of behavior, some investors are reluctant to embrace any market risk, the risk where most securities move in cycles.  Yet, to gain wealth and to increase one’s purchasing power, one must take advantage of higher expected return assets (i.e., riskier assets).  On the other hand, some investors are very willing to embrace market risk and some do it at precisely the WRONG time!  They buy late, after gaining “certain” confidence in the market’s upward trend, and sell when they can’t stand the sick feeling in their stomach any longer.  Selling low and buying high is a sure way to not gain the advantages of equities.  Many years ago, the editor of Money magazine said, “Timing is everything, but impossible.”  Thus a person needs a sound investment plan that continually is rebalanced (i.e., diversified) over a long period of time, while being disciplined to continue to save more.  These actions will make sure that a plan remains true to course.  In fact, rebalancing is a gentle, disciplined way to assure that you sell portions of your portfolio when they are relatively high priced and buy more of others when they are low priced.  Research continues to point to the importance of saving money, being diversified, and having a long-run, disciplined commitment to financial success.

·         Add some inflation hedges to your portfolio; like real estate, commodities, and precious metals.  These can reduce volatility and provide exposure to different market cycles.  Yes, some have not been in favor recently (e.g., real estate) but diversification is a key to long-run performance.

·         Have some money invested in countries outside the United States.  Sure, there is some risk involved, which is why you want to invest in overseas securities.  Risk works to enhance positive returns, as well as negative returns.  Importantly, the United States is an increasingly smaller portion of the world’s economy, as a result of much of the world’s growth occurring overseas.  To protect your family’s financial future, make sure you have exposure to these growing markets in order to provide the necessary diversification, unavailable through single-country investing.

Most of the above is not new information.  It might, however, be new to you as far as your decisions are concerned. We all wish for a world where there is no poverty and upward mobility is the outcome of hard work and good personal decisions.  Certainly, there exist public policies that could be changed to improve economic mobility.  I, also, have no doubt that there are millions of private decisions that could be changed to help enhance the chance for financial success and independence.  

Thursday, November 3, 2011

Then and Now: Fed Policy Actions During the Great Depression and Great Recession

Each month the Federal Reserve Bank of St. Louis publishes a newsletter titled Liber8, which is a selection of useful economic information, articles, data, and websites compiled by the librarians of the Federal Reserve Bank of St. Louis Research Library. This month the article is titled “Then and Now: Fed Policy Actions During the Great Depression and Great Recession. It is re-printed here with permission from The Research Library. We encourage your comments and thoughts at


There is a classroom version of Liber8 available for teachers for free at:


To subscribe to their newsletter or for more information and resources, visit their website and archives at


The views expressed are those of the author and do not necessarily reflect the official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, the Board of Governors, the University of Missouri, the Personal Financial Planning Department or The Office for Financial Success.


“Regarding the Great Depression. You’re right, we did it. We’re very sorry…we won’t do it again.”

—Federal Reserve Chairman Ben S. Bernanke, November 8, 2002


Any mention of the Great Depression conjures up images of unemployed masses queuing in bread lines and frantic crowds trying to withdraw money from banks. And yet these illustrations tell only part of the story. The Great Depression was undoubtedly the most severe economic downturn in the United States and caused untold suffering among millions. To contextualize it, national output fell by about 33 percent and consumer prices plummeted by over 25 percent between 1929 and 1933; one in four workers was unemployed by 1933. The resulting protracted slump only ended at the onset of World War II.(1) In contrast, during the Great Recession of 2007-09, national output fell by only 5 percent, consumer prices increased by 1 percent, and unemployment peaked at 10.1 percent.(2)


Scholars have posited a variety of causes for the Great Depression, and the role of central banks in exacerbating the crisis has emerged as a key point. This article thus considers (i) how Federal Reserve policies during the Great Depression weakened economic conditions and (ii) how policymakers used the lessons learned from the Depression to stabilize the economy during the Great Recession.


Federal Reserve actions in the run-up to the Great Depression were important in hastening the decline in economic conditions. The speculative effects of the stock market boom in 1928-29 caused the Fed to increase interest rates to curtail the bullish trend.(3) While this policy action dampened excessive borrowing to finance stock purchases, it also brought unintended consequences. Capital spending (e.g., for equipment and infrastructure) slowed dramatically in many sectors of the economy, leading to a drop in industrial production and output growth. The infamous stock market collapse in October 1929 finally ground the economy to a halt, and the Depression hit with full force soon after.


In the early 1930s, continued policy missteps by the Fed significantly lengthened the Depression. Specifically, the Fed failed to prevent four massive banking panics from battering the economy in 1930-33. On each occasion, anxious depositors descended on banks to withdraw cash because the public had lost confidence in the ability of financial institutions to service deposit obligations. Due to fractional banking procedures,(4) banks did not have enough cash on hand to meet this increased demand. The Federal Reserve, as the lender of last resort, was in a prime position to limit the fallout by providing emergency funds to banks under distress. However, Fed policy at that time dictated that only banks with sufficient collateral or member banks of the Federal Reserve System were eligible for these funds. Consequently, cash-starved banks failed in large numbers.


The effects of the banking panics were catastrophic: The money supply(5) fell precipitously and a prolonged bout of deflation set in. As the institution directed to maintain price stability, the Fed should have flooded the economy with additional liquidity(6) to stop consumer prices from falling. However, policymakers dithered and hampered the prospects of a quick recovery. With a decline in the price level, real (or inflation-adjusted) interest rates soared.(7) As a result, borrowers became saddled with higher debt burdens, contributing to widespread defaults and bankruptcies. In addition, the increase in real borrowing costs depressed consumer and business investment, further slowing economic activity.


By 1933, government policy actions (e.g., provision of deposit insurance) helped stabilize the banking system and the economy improved significantly in the mid-1930s. As investor confidence grew, gold and other funds began to flow into the United States once again, expanding the money supply. Fed officials, though, became increasingly alarmed at the prospect of high inflation and increased reserve requirements for banks (the percentage of deposits that banks must hold in reserve). Some experts suggest that this increase caused a decrease in lending, which in turn caused the money supply to decrease once again.(8) The recession that followed in 1937-38 temporarily derailed the recovery. Although the economy rebounded again in 1939, the nation’s unemployment rate returned to its pre-crisis level only after the United States entered the war in late 1941.


By contrast, Fed policies implemented during the 2007-09 Great Recession were markedly different from those during the Great Depression. When the Recession began, the Fed acted decisively to stave off the collapse of the financial sector. Specific policies included decreasing the federal funds rate to nearly zero percent and establishing programs that lent money to banks on a short-term basis. The latter was especially significant in providing stopgap funding to American International Group (AIG), whose failure could have plunged the financial sector into further chaos. Through an expansion of its balance sheet, the Fed also facilitated the sale of distressed investment bank Bear Stearns to a commercial bank (JPMorgan Chase). In addition, to reduce the risk of deflation that devastated the economy during the Depression, the Fed made large-scale purchases of Treasury bonds in two rounds of quantitative easing.


Philosopher George Santayana (1863-1952) said that “those who cannot remember the past are condemned to repeat it.” Recent experience shows that the Federal Reserve avoided the policy pitfalls of the Great Depression. During the 1930s, inadequate Fed policy compounded the downward slide in the economy.


This experience served as a wake-up call for the Fed, however, resulting in more assured policy measures that prevented the meltdown of financial markets during the Great Recession.


By David A. Lopez, Research Associate



1 As determined by the National Bureau of Economic Research, the Great Depression officially lasted from August 1929 to March 1933. Although output rebounded significantly from 1934-37, the effects of the Depression lingered throughout the 1930s and the economy only returned to full employment when the United States entered World War II.


2 As determined by the National Bureau of Economic Research, the Great Recession lasted from December 2007 to June 2009.


3 Prior to this, the Fed reduced the discount rate on loans made to banks from 4 percent to 3.5 percent between July and September 1927. Some observers contend that this prolonged an unsustainable boom in the stock market and that the Fed should have tightened monetary conditions sooner.


4 Fractional-reserve banking is a system where banks hold a portion of their deposits (cash) in vaults or at the Federal Reserve and use the remaining cash for lending activities.


5 The two most common measures of money supply are called M1 and M2. Further information can be found here:


6 In this case, liquidity refers to the ease of obtaining credit and meeting the demand for money. The Fed increases liquidity by purchasing Treasury securities, which increases bank reserves and, all else equal, lowers nominal interest rates.


7 The real interest rate is the difference between the nominal interest rate and the inflation rate. During the Depression, nominal rates were close to zero percent and the inflation rate was negative, leading to very high real interest rates. For further information, see Carlstrom, Charles T. and Fuerst, Timothy S. “Perils of Price Deflations: An Analysis of the Great Depression.” Federal Reserve Bank of Cleveland Economic Commentary, February 2001.


8 More recent research, however, finds that an increase in the reserve requirement did not significantly affect the supply of money at that time; see Calomiris, Charles C.; Mason, Joseph R. and Wheelock, David C. “Did Doubling Reserve Requirements Cause the Recession

of 1937-1938? A Microeconomic Approach.” Working Paper No. WP2011-0021, Federal Reserve Bank of St. Louis, January 2011.



Additional Articles and Further Reading on the Great Depression


“Closed for the Holiday: The Bank Holiday of 1933,” by the Federal Reserve Bank of Boston, 1996.

Recaps the stock market crash of 1929 and the bank holiday of 1933 and resulting political resolutions.


“Remarks on Milton Friedman’s Ninetieth Birthday,” by Ben S. Bernanke at the Conference to Honor Milton Friedman, University of Chicago, November 8, 2002.

A speech providing detailed information on (i) the four key monetary policy episodes during the Great Depression and (ii) the impact of the gold standard and bank failures on the economy during 1929-33.


“Great Depression,” by Richard H. Pells and Christina D. Romer, Encyclop√¶dia Britannica.

Provides an overview of the factors that caused the Great Depression and the sources of recovery from it.



Ryan H. Law, M.S., AFC


Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director


239E Stanley Hall

University of Missouri

Columbia, MO 65211


573.882.9211 (office)

573.884.8389 (fax)