I've been thinking about some things that have passed from the spotlight, but may still be relevant to understanding the financial crisis and the current state of the economy. If you're an economist, or play one on the Internet, please share your thoughts either in the comments below or with a link back from your blog.
1) If it had been available, would M3 data have provided an early warning about the financial mess?
In March of 2006 the Fed stopped publishing M3 data because "the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits." I'm all for fiscal responsibility, but, with the benefit of hindsight, would M3 have indicated a looming disaster? I would think that problems in the credit markets would vacuum up assets in the financial markets causing M3 to fall. Perhaps such an effect would not have been large enough to notice until it was too late.
2) How can we best balance unemployment, the minimum wage, deflation, and inflation over the coming year or two? (And, what are your expectations?)
The US Department of Labor lists the minimum wage at $5.85 in 2007 and $6.55 in 2008. It is scheduled to rise to $7.25 in 2009. Did the 2007 and 2008 minimum wage rate hikes contribute to our worsening economy? Won't the 2009 bump drive unemployment way up? Perhaps I should ask: what are your expectations about deflation? How many months of deflation are we likely to have? Would it be wise for the Fed to allow greater inflation, perhaps by not taking the newly minted money out of circulation, once the hemorrhaging has stopped?
3) Was it speculation that drove oil to its peak last summer and is speculation driving it down now?
I'm not even sure that I accept the premise that speculation contributes anything (except liquidity) to the oil market. Last summer I scoffed at the speculation argument. Now, I'd like to know how much travel has fallen off, whether vast new reserves of oil have come online, or whether other market forces are driving the oil price. Looking at oil today and last summer, is it possible to quantify speculation? For instance, can we determine that last summer's oil price was driven higher by, say, 20% because of speculation?
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