(Part 3) Top products from r/badeconomics

On a high level? Banks take reserves and loan them out, but are required to keep some amount on hand given reserve requirements. They can hold more reserves if they want, and this is called excess reserves.

A one-time increase in reserves held by banks given to them by the Fed (this is called high powered money) causes an overall increase in the money supply higher than one-for-one (so 1 dollar turns into more than 1 dollar) thanks to a "money multiplier".

In the 60s, it was theorized that the money multiplier was 1/1-rr (where rr is the required reserve ratio). It's a bit more complicated than that now, but the idea stays the same: an injection of high powered money can increase the amount of money in the system more than just the initial amount of money. From Hubbard and O'Brien's book that I reference below there's an alternative and more realistic model of the money multiplier (warning: power point download).

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However, the Fed doesn't target the money supply, it targets inflation. To change inflation it just adjusts interest rates by swapping bonds for reserves in the Fed Funds market. This increases the money supply. Through this increase in the money supply, the Fed suppresses real interest rates and increases the quantity demand of loans, which increases real output. So, through an interest rate channel, chg(M)->chg(output).

This has an impact on real variables, despite what 9/11 truthers MMTers would have you believe. See my R1 of MMT here, along with exceptional comments by /u/Integralds.

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For a really good in depth look at banks, money and financial markets I suggest going through Hubbard and O'Brien's Money, Banking and the Financial System. I have heard Mishkin's book is good too, but I have not used it.

I'll defer to Alan Blinder on this one. The passage, which I have truncated considerably, is in Chapter 10 of the book. Here it is:

>"...There is a strong, though not necessarily accurate, belief that proprietary trading by commercial banks was among the root causes of the financial crisis. Was it? That’s a matter of definition. If we use the conventional definition of proprietary trading—actively buying and selling assets for the banks’ own accounts—there is relatively little evidence that proprietary trading got big commercial banks into the soup, and small banks never did much of it, anyway.

>"If, on the other hand, we classify as proprietary trading the fateful decisions to retain significant volumes of their own MBS and CDOs on their balance sheets (“eating their own cooking”), there is little doubt that proprietary trading led them down the primrose path.

>...Volcker had a point. (Doesn’t he always?) Not only is it patently unfair to ask taxpayers to cover a bank’s trading losses, but it also sets up terrible “heads I win, tails you lose” incentives...

>...But there are serious practical problems with the Volcker Rule. How can regulators distinguish, in concrete cases, between proprietary trading for the bank’s own account and market making on behalf of a client? (Answer: With great difficulty.) How can they tell hedging, of which society approves, from gambling, of which it may not? (Answer: Only by knowing the bank’s entire portfolio, if even then.)* If proprietary trading is chased out of heavily supervised commercial banks, where will it go? To less-well-supervised investment banks? To totally unsupervised hedge funds? Would that make the financial system safer? (Answer: It’s not obvious.) What if a giant nonbank investment house with a huge trading book was on the verge of failure? Should we follow the Lehman precedent and let it go under? (Answer: That doesn’t sound too appealing.)

>One major practical problem in designing regulatory restrictions on proprietary trading is how to distinguish between trading for the bank’s own account and trading for other purposes, such as market making or serving customers. Easy, you say. Just determine whose money is at risk—the bank’s or the customer’s. Well, that’s the right starting point, but it’s not quite enough.

>Consider this simple example: A bank, acting as a dealer, gets a customer order on Monday to buy $10 million worth of CDS on a CDO of subprime mortgages called BS-I. But it’s a thin market, so the bank doesn’t have a seller at the ready. To service its customer, the bank temporarily takes the other side of the trade itself: It sells the CDS to its customer, and maybe doesn’t find a real CDS seller until Thursday. Did that constitute market making for the customer? Well, I guess so. But for four days the bank held a short position in the CDS on BS-I; it was putting its own money at risk. For those four days, the trade looked and felt proprietary.

On another subject, may be of interest to some. cc /u/mberre /u/commentsrus So I just got this little book. It's quite interesting so far, particularly those with econ history interests. The Industrial Revolution: A Very Short Introduction When buying it I underestimated just how Very Short of an introduction it is. But part way in it seems well written and pretty informative. Would recommend.

>It seems to me that the gist of conservatism relies on two things, (1) mistrust of a priori (utopian) reasoning and revolutions, (2) and trust in incremental changes by past experiences and wisdom.

If you one day feel like challenging this conception of yours, i recommend taking a look at the book The Reactionary Mind: Conservatism from Edmund Burke to Sarah Palin by Corey Robin.

• Expected Returns by antti Ilmanen
  
• Asset Management by Andrew Ang
  
• maybe Asset Pricing by Cochrane
  
  The last one doesn't really give you an overview of real-world institutional details as much, whereas Ang and Ilmanen both have really extensive introductions to this. Both Ang and Ilmanen spend some time on the economics of why this works -- utility-function-based explanations of why we should expect things to have positive expected returns anyway -- but they add a lot on how this looks IRL (how the relevant instruments and markets for them actually work, what classes of investors tend to buy them and why, what kinds of risk factors they're exposed to, etc)
  
  Edit: I recommend against Ben Graham's book actually if you want a broad overview. I don't think he even touches factor investing, for example. Focuses on how to pick stocks by valuing the company on a fundamental basis which...shouldn't add value. Has little tie in to academic finance, unlike Ilmanen and Ang which both give you a good idea of what the seminal papers in various areas are and what's going on in the literature lately.

Mini physics lecture coming right up! I think /u/slugwind is our resident physicist so she (I think, sorry if otherwise) might be able to give you some more insight.

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At its core the uncertainty principle is telling you that you fundamentally cannot know both the velocity and position of a particle with complete accuracy for both. Knowing more about one means that you know less about the other. Here's a nice explanatory anecdote that I'm stealing from this book:

Say you've got a camera set up in a room, there's a fly buzzing around, and you can adjust the shutter speed of your camera. If you crank up the shutter speed and look at the resulting picture you can tell exactly where the fly is, but you don't know anything about its velocity (remember that velocity is a vector, it has a value for speed and direction). Conversely, if you slow down the shutter speed and look at the resulting picture the fly is very blurry, but you can infer from the shutter speed how fast it was going and in what direction.

That's pretty much the core of it. By sacrificing knowledge about velocity (increasing shutter speed) you can know more and more about the fly's position. By sacrificing knowledge about its position you can know more about its velocity. What you can't do is have great information about both simultaneously.

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Now, as this pertains to your post, I would argue that because decisions are made based on the information available to the agent at the time things like the uncertainty principle can be extrapolated upward, if only because knowing everything is impossible.

Margin of Safety by Seth Klarman. The market has spoken and it's the best.

More seriously, I'd go with Security Analysis by Benjamin Graham and David Dodd. It's a little more dense compared to Intelligent Investor, but definitely digestible with an undergrad understanding of econ.

*Oh, and the Hull text is the derivatives bible.

I would need to see some research on that. A very good book about congestion in general and why people choose longer commute times is Traffic

The pure mechanics component consists of multivariable differential calculus, a little bit of multivariable integral calculus, and a bit of linear algebra; plus substantial comfort what might be called "systems of equations differential calculus." The fastest way to cover this material is to work through the first five or so chapters of Kaplan's advanced calculus book or something similar. Do the exercises. Your basic Stewart Calculus doesn't adequately cover the systems-of-equations part and Kreyszig's Advanced Engineering Mathematics book is at the right technical level but has all the wrong emphasis and coverage for economists. Kaplan's book isn't ideal, but it's about as close as you're going to get. (This is a hole in the textbook market...)

The theoretical portion mainly consists of basic point-set topology and elementary real analysis. The fastest way to cover this material is to chop through the first eight chapters of Rudin's undergraduate book.

Yale has a lovely set of Math Camp notes that you should also work through side-by-side with Kaplan and Rudin.

To see economic applications, read those two books side-by-side with Simon and Blume's book.

The first chapter of Debreu's Theory of Value covers all the math you need to know and is super slick, but is also far too terse and technical to realistically serve as your only resource. Similarly you should peek at the mathematical appendices in MWG but they will likely not be sufficient on their own.

That's interesting. I might want to pick up those for entertainment because a lot of previous election proposals have been really hard to find.

Edit: Obama 2008 for example seems to have one. Romney 2012 (although this seems much worse quality -- little snippets from speeches and stuff)

If you want some more material you have got this 1000 page book which I believe uses some sort of Marxian econophysics with influences from other heterodox approaches.

Well, to borrow from Charles Murray, "Fishtown" just told "Belmont" to fuck off.

It is. If you are interested in reading pop economics then Paul Krugman's book looking at trade is probably your best bet.

If you are looking for something more academic NBER's international trade program is a good first stop.

Chang represents a fairly extreme heterodox position and one that is trivial to empirically disprove.

Edit: Also obligatory economic consensus has no relationship to economic policy point even though its only slightly related. Pop economics usually inhabits the space where something can sounds good to the untrained ear but in reality is nonsense (like Krugman on his blog whenever he is not discussing trade), books telling people "you should be angry and do something" appeal to people more then "keep calm and carry on". In reality all these books do is further entrench the already awful bad economics mindset in the general public and politicians. Economics is not particularly divisive and usually there is a clear policy for every issue (and usually not what any politician is talking about) but it serves political interests to pretend it is divisive.