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August 29, 2008

Do the rich ignore prices?

As gas prices have risen, most people have cut back on their driving. But many people believe that folks with ample income don't worry about prices and don't make cutbacks when prices go up. Is this true?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, first, certainly both the price of something and how much income you have affect how much we buy. And in general, the higher one's income, the more that you buy of things like gasoline. But the issue here is if income trumps price. That is, if you have a lot of income, can you just ignore the price? Well, based on a new study specifically on gas prices, the answer is a big no. What this study did is look at the responses of drivers with different income levels to higher gas prices. And what the study found is that not only did the rich cut back on gas purchases just like lower-income people when gas prices rose, but they actually cut back more than folks with lower incomes. And I think there are two possible reasons for this. One is that the rich do much more discretionary driving - driving outside of going to work and shopping and school - and that's easier to cut back on. Second reason, the rich may have more cars, so it's easier for them to shift from less fuel-efficient cars to more fuel-efficient cars when the price goes up."

Posted by Dave at 08:00 AM

August 28, 2008

How big is real estate?

Much of the economic downturn we're presently in seems to have been sparked by issues in real estate. Does it make sense that one sector, such as real estate, can move the entire economy?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, this is really a question about numbers, so let's look at these numbers, and let's look at them for North Carolina. In 2006, the latest year for which we have full data, total economic activity in North Carolina amounted to about $350 billion. Now, if you look at construction of all types, the construction industry accounted for $7 billion of that. If you look at the buying and selling of property, that was another $17 billion. Now, if you look at financing, we don't have a breakdown of financing of real estate versus other things, but if we take all financing, that's $16 billion. So you add up those three numbers, it comes to $40 billion, $40 billion out of $350 billion is 11 percent of the total. Then, however, there's this so-called multiplier effect, the fact that if you lose income in one sector, that means that sector is going to be buying less from its suppliers - people are going to be spending less - and a typical multipler is 2. So that brings that 11 percent up to 22 percent, so you could say that real estate broadly defined could account for as much as 22 percent of the North Carolina economy. And I think in that context, you could say, yes, if that sector has some big problems, it could certainly affect the entire economy."

Posted by Dave at 08:00 AM

August 27, 2008

Is college still worth the cost?

The upward bump in salaries that college graduates earn relative to high school graduates has actually declined this decade. Does this mean that a college education has lost its luster in the job market?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"No, not at all. What's been happening, really over the last 30 years, is that the extra pay, if you will, that a college graduate earns relative to a high school graduate has been going up at relatively fast rates. Now this decade though, that increase has stopped, and you did hear about a slight - it was just very slight decline - in the premium. But this still means that someone with a college degree is going to be much, much better off in terms of their salary. In fact, right now, someone with a bachelor's degree will earn about 80 percent more than a person with a high school degree. And this is still near an all-time high. For example, in 1980, it was only 40 percent. So we shouldn't read this latest statistic as indicating that somehow college isn't worth it. In fact, college is still worth it. But what it does mean is we may be seeing a leveling off of this premium, and it may not be going up much anymore, at least in the near term, probably as a result of the slow economy and also as a result of the increase in the supply of college-educated workers."

Posted by Dave at 08:00 AM

August 26, 2008

Bank failures

A chill went up the spine of many investors when they heard about the federal takeover of a big California bank. So now people have another worry to add to the list of economic problems: bank failures. The biggest question on most people's minds is: Should I feel safe about my money in banks?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"The general answer is a big 'yes.' You need to do a couple of things. You first of all need to find out of your financial institution - your bank or savings and loan - is federally insured. Most of them are, but make sure it is. Secondly, you need to make sure that the amount of money you have in your account is under the maximum that will be insured. Usually, that's $100,000. There are some accounts where it's as much as $250,000. If you're above that, then you need to move your money. You need to move some of that money and set up a different account at the bank under a different name or go to another bank. Just make sure that your accounts are under the federal insurance limit, and after that, you're going to be fine. This is why this federal insurance was set up. Every year, we do actually have banks fail. This is not uncommon. The number of failures tend to go up if the economy is bad, like it is now. Actually, the largest number of bank failures - of financial institutions, I should say - did not occur during the great depression of the 1930s. Actually, it occurred during the 1980s, the so-called savings and loan crisis, when we had a lot of savings and loans go under. But people should sleep fine at night. We're not going to have a big banking collapse in this country. But do follow those couple of recommendations that I gave, and you'll be fine."

Posted by Dave at 08:00 AM

August 25, 2008

Property reappraisals

Most counties in North Carolina reappraise real estate like homes very infrequently, maybe only once every 8 years. One problem this creates is the "sticker shock" owners have when their property value and potentially their property taxes take a big jump. The General Assembly tried to address this issue during their just concluded session. What did they do?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, I think the General Assembly realized that these long periods between reevaluations or reappraisals can create problems, like the one we mentioned, especially when property values are rising, and people may see over 8 years, gosh, their property value goes up 100 percent. And then they worry about, gee, are my taxes going to go up. So what the General Assembly did is actually pass a new law - now, it only applies to counties with populations of 75,000 or more, but that's most counties. It essentially says that if the market value of properties in a county gets out of whack - I'll use that technical term, out of whack - with the appraised values by more than 15 percent, either 15 percent on the high end or 15 percent on the low end, then this law comes into effect, and it says that the county has to do a reappraisal of property within 3 years regardless of where the county may have been on its typical reappraisal schedule. So what this means is it's not going to allow property values - or market values, what you're property's really worth - to get too far out of line with what the appraised value says. And I think this is actually a good law. Now, counties can still adjust the property tax rate downward if they see property values go up to minimize the impact on property taxes. But, again, I think it's a good law because it does keep those two values, the appraised value and the market value, more in line and prevents them from spreading out and becoming very, very different."

Posted by Dave at 08:00 AM

August 22, 2008

Why gas prices could go down?

In recent weeks there's actually been some good news on gas prices. They've stopped rising and have even retreated somewhat. What's going on? Many forecasters saw no end in sight to the seemingly relentless rise in prices.

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, I think we can all collectively pat ourselves on the back for this trend. The real issue here, of course, over the long run has been that gas prices went up because worldwide demand for gas is increasing faster than the worldwide supply, and that's basic 101 economics. But in response to the higher prices - and, of course, in our country, we got up above $4 a gallon - eventually, economists knew that people would change their behavior, and now we're getting numbers out showing that we have changed our behavior big time. In fact, for the month of May, nationwide, driving is down about 5 percent. Now, that may not seem like a lot, but that is a big dip when you consider the oil and gas markets. So what this means is if we're driving less that means demand, in economics lingo, is going down. You've still got the same supply, so that will put downward pressure on prices. And in fact, this is exactly what we're seeing. We're seeing oil prices trend downward. As oil prices go down, we're going to see gas prices go down. Now, the big question is: Is this temporary or is it part of a trend? No one knows exactly, although there are some forecasts out there that suggest that we could see a downward trend - not every day - but a downward trend in oil and gas prices for, perhaps, two years."

Posted by Dave at 08:00 AM

August 21, 2008

How bad is inflation?

It seems like the economy is being battered by three things now: job losses, problems in the housing market, and higher inflation. Let's focus today on inflation. How bad is it? Are we seeing some of the worst statistics on inflation in recent years?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, if this will make people feel better, we really aren't seeing the worst inflation that we've ever had. In fact, 30 years ago, we had inflation in double-digit levels. Right now, the latest reading that we have on overall inflation shows that prices are going up at about a 5 percent rate. That's on average, some are going up more, some going up less. But the interesting thing here is that it's really an inflation problem in two areas: food and fuel. In fact, if you take out food and fuel - which account for about 20 percent of consumer spending - you find that for the other 80 percent of what we spend our money on, prices are going up at about 2.4 percent a year, only slightly higher than the 2.2 percent average for this entire decade. So I think it's safe to say that we don't really have a runaway inflation problem in our economy. We have an inflation problem in two areas - food and fuel - and actually on that count there is some reason to be optimistic. Many forecasters see fuel prices and food prices - at least in the short term - actually going down."

Posted by Dave at 08:00 AM

August 20, 2008

Trade and low-income households

One of the biggest economic changes in recent years has been the reduction in trade barriers between countries. Some say this change has, in particular, hurt low-income households by moving many factory jobs to foreign countries. Is this the consensus among economists?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, we've seen this impact probably more so than any other state right here in North Carolina, as we've lost tens of thousands of jobs in textiles, apparel and furniture as those jobs have gone to countries in Asia in particular, where labor costs are much lower. So the question is: Is world trade just a big negative, essentially for low-income households? And the answer, I think is a little more complicated. In fact, we have a new study that really complicates the answer because the new study says that if you look at the benefits of trade, in particular look at the fact that trade has allowed the prices of many products that we buy - like clothing, manufactured products - to go down. And then you look who buys those manufactured products, and what you find is low-income people actually spend a higher percentage of their income on those products whose prices have gone down as a result of increased world trade. And so the conclusion here is that there are pluses and minuses, particularly for low-income people. Yes, a low-income person may have lost their job and had, perhaps, to move to a different kind of job because of trade. But on the other hand, many of the things they're buying have gone down in price. Now, unfortunately, the authors aren't able to combine those two and say on net, is a particular household better off or worse off. But at least this does give us some parameters to consider that issue."

Posted by Dave at 08:00 AM

August 19, 2008

Changing what we eat

The world - and especially the developing world - is changing. One of ways we see this change is in changing buying habits of food by consumers in countries like China, India and Southeast Asia. Just what's happening and how can it possible affect you and me? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, what economists have noticed is that what people eat does vary with their income. As consumers move up the income ladder, they tend to eat more protein like meat. Now meat costs more and so, obviously, you need higher income to afford it. But large increases in meat consumption can have a wider impact on the entire food chain, and here's the reason. It takes 7 pounds of grain to produce 1 pound of meat, meaning that the animal has to eat 7 pounds of grain in order to be valuable for 1 pound of meat and protein. So when meat consumption rises - and particularly in developing countries like China, India and Southeast Asia, where they are switching from directly eating grain to meat - actually our worldwide use of grains like wheat and corn is going to skyrocket. And this has been happening in the world. If you look at charts, you see that the world consumption of grains has gone up tremendously, even while, as I said, consumers are shifting more away from directly eating grains to meat. So what does this mean for you and me in the supermarket? Well, it means that grain prices are up, and grain is a feed into not only meat, but it's a feed into obviously chickens, who produce eggs. It directly effects things like the price of bread. So that is one reason why we have seen big jumps in the prices in those products. It's because this big jump in the worldwide use of grains is behind it."

Posted by Dave at 08:00 AM

August 18, 2008

Teenage unemployment

"Mike, you and I both had jobs as teenagers. As I reflect, I think working then was important not so much for the money but rather for the work skills I learned, like being on time, taking orders and working with others. Is paid work something teenagers can still easily do today?"

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, of course we still have to work on that taking orders part, I don't know how well you learned that. But, no it's actually become much harder - unfortunately I think - in many respects for teenagers to get work. In fact, the gap between the teenage unemployment rate and the national unemployment rate is the highest it has been in 25 years, meaning that teenage unemployment is way off the charts. I think there are several reasons for this. One is we do have a higher minimum wage. In fact, we just got the latest up tick on that a couple of weeks ago. And of course, teenagers tend to have low skills, so they are going to be most adversely affected potentially by a higher minimum wage. Also I think companies are requiring more maturity in workers as our economy has become more competitive. And really, that upfront person you have in the store is actually much more important perhaps than in the past. So they are hiring more older teenagers, perhaps, if they do go the teenage route than younger ones. Then of course, this year we've got the slow economy. We also have labor laws requiring teens to work in nonhazardous jobs, and the definition of that has expanded. And then we also have another fact here that I find very interesting. Companies are giving their full-time employees vacation periods other than during the summer. So it used to be that a lot of your regular workforce was gone during the summer. You had to have teenagers come in. Now you're going to have, perhaps, some of your regular workforce there during the summer. That reduces the need to hire teenagers."

Posted by Dave at 08:00 AM

August 15, 2008

Where are we cutting?

With most families seeing their paychecks effectively shrink as prices rise faster than wages, spending cutbacks have to be made? So do we have any statistics telling us what households are doing without or at least with less of?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Yes, we do, and this is actually very interesting, I think actually very rational on the part of households. Where we see households cutting back the most is on big-ticket spending items. They're not buying as many cars and trucks. They're not buying as much furniture, building supplies and materials, all of those big-ticket items that cost a lot of money, people are cutting back on. Now on the flip side, we're obviously spending more at the gasoline station. We're also spending more at the supermarket and on health care. Of course, the supermarket because of food prices being up. Now, one interesting area, at least to me, where we haven't cut back is on eating out. You would think perhaps that people would say, 'Well, that's an area where we can cut back on, eat out less, eat in more, and we'll save money.' But actually currently, the statistics show that that's not the case. People are eating out as much as they were last year, and in fact, eating out is actually up about 5 percent over last year, although some of that is due to higher prices. So what I think might be happening is people are saying, 'Ok, we're not going to buy as many big-ticket items - we're cutting back there - but we're still going to treat ourselves to a meal out.' But I think as time goes on if the economy continues to remain sluggish, we're probably going to see those restaurant meals fall by the wayside."

Posted by Dave at 08:00 AM

August 14, 2008

Voting with your feet

One of the most important elements of economics is reaction. Both businesses and consumers will react to economic conditions, and these reactions will bring change. An example of such a reaction is the concept of voting with your feet. What does this colorful term mean in economics?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I love this term. What it simply means is that people will move to communities that offer better amenities at better costs, and they will move away from communities that offer less desirable amenities at higher costs. But in doing so, these costs will be balanced out. That is, the communities that they move to, prices will go up or rents will go up. The communities that they move away from, prices will go down and rents will go down, and that provides some compensation between the communities that are desired and the communities that aren't desired. And let me give you two recent examples of this. There was a study in California that showed that people are moving to communities that have better environments, less pollution. However, in doing so, they're increasing the prices of houses in those environmentally sound communities. There was a second study right here in North Carolina that found that property values of homes were found to fall in communities where announced sexual offenders moved to. So this was an indication, obviously, that people were moving away from those communities and in doing so, property values went down. So this is how people can actually register their opinions, their desires, their wants by moving and voting with their feet."

Posted by Dave at 08:00 AM

August 13, 2008

Retirees and economic development

When people think of economic development, they usually think about bringing in a factory, processor or some other company, but one of the biggest societal trends is the emerging retirement of the 78-million-strong baby boomers. Can these retirees be a source of economic development?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"They absolutely can, and in fact, many communities right here in North Carolina are doing that. What these communities realize is that if you attract baby boomers to come to your community - retired baby boomers - to come to your community to retire, they're going to bring income. They're going to bring their pensions. They're going to bring their Social Security. They're going to spend a lot of that income in your community. And of course, that means that's going to generate demand for new consumer service businesses, from food to health to financial. And then on the cost side, what communities like about well-heeled retirees is they don't bring children to educate. Their children are gone, and in fact, if you look at the local level, children and the education of those children is the biggest local public expense. So you're absolutely right, retirees can be a big source of economic development for local communities."

Posted by Dave at 08:00 AM

August 12, 2008

The whole picture on alternative fuels

Everyone is looking for the next big fuel to replace oil and gas. Some of the candidates are solar power, wind power, wave power, geothermal and hydrogen. Scientists in Canada have even made fuel from the kudzu plant. However, is it enough just to say a fuel has been successfully made from some source or process?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"No, in some sense that may be the easy part. It's just the first step in a process. There are a whole bunch of steps that you have to go through in getting a fuel to the final user. You obviously have to develop the fuel, but you also then next have to get it to people. You have to have the infrastructure to move that fuel to the final user. This is actually now an issue now with ethanol. It's an issue with wind power. For example, there's a proposal right now being talked about to dramatically increase our use of wind power in the country. You essentially have to build a whole new infrastructure to deliver that to consumers. Another question is whether the fuel is safe, both to develop and use. That's an issue with hydrogen. And then finally, that fuel has to pass the economic test. Can it be produced, can it be delivered at a price that is competitive with other prices and other fuels? And that's an issue, for example, right now and still is with solar power. With solar power, you have to incur all those enormous costs up front in order to install the panels. So this is certainly not to disregard alternative fuels. I think we are on a move in our country to look for alternative fuels, but it's not that easy. It's a very complicated and expensive process."

Posted by Dave at 08:00 AM

August 11, 2008

Selling metals

There have been several stories in the news about people selling metals; not only gold and silver but also products made of steel, copper and aluminum. Is this just a matter of folks needing money, or is there more to the story?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, I think certainly part of it is the fact that people do need money. People are not seeing their incomes going up with the rate of inflation, so they're looking anywhere where they can get some extra cash. But I think there's another element at work here, and that is that if you look at the last couple of years in terms of what's been going up in price, metals have been going up in price dramatically. Now this is because of the worldwide economic boom, especially in developing countries. So the metals, for example, that we mentioned - many of them are used in construction - they have been enjoying big price increases. Now, some analysts say that we may have seen a peak in these metals prices, at least soon. And so we may see metals prices actually fall in the next six months to a year. So it may be that what some people are doing is just practicing good investment advice. They're trying to sell their metals at a high point; selling high, they bought low, and therefore, they're making a big profit."

Posted by Dave at 08:00 AM

August 08, 2008

Real pay

In today's leaner economic times, people are looking closely at their paychecks. For some, the start of a new fiscal year in July is when pay raises are given. How should we look at our pay raises, especially in light of our ongoing economic challenges?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, first of all, we hope that our listeners do get a pay raise. But even if you get a pay raise, it could actually be a pay cut. Now, how so? Well, if your pay raise is less than the inflation rate. Right now the annual inflation rate is running around 4 percent. So that means that if you get a pay raise of less than 4 percent, you are actually falling behind. Now of course, you are not falling behind as much as if you didn't get a pay raise, but the point here is always compare your increase in pay to what the inflation rate is. We look at that difference as the real pay raise, R-E-A-L. Now what has been happening to most North Carolinians - at least based on the data we have for this year - is their pay raises have not been keeping up with inflation. In fact, they have been falling behind by about one percentage point."

Posted by Dave at 08:00 AM

August 07, 2008

The slowdown comes to North Carolina

North Carolina's economy outperformed the nation's in 2007. Our job market and household income held up better, and contraction in the housing market wasn't as great. Are these positive trends continuing in 2008?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, unfortunately the answer is no. It looks like recently - and by recently, we mean the first quarter of this year - the downturn in North Carolina has accelerated. Now this actually follows our typical pattern. If you look at previous slowdowns or recessions that both the country and North Carolina have been in, North Carolina begins the slowdown later than the nation, but then we also have a deeper slowdown or a deeper recession. So we are following the pattern with beginning later. The big question, the big question is are we going to have a deeper slowdown or a deeper recession here? That is, will our recession turn into an avalanche? Now, one good sign that suggests that maybe not this time that will happen is that our job losses during this slowdown have been much less than during the comparable period in the last recession. And I think this is because of - number one - the booming export market is helping our manufacturing companies. And number two, our traditional manufacturing sector has become much leaner, and they simply don't have the number of jobs there to lose. So we hope these trends continue."

Posted by Dave at 08:00 AM

August 06, 2008

Investing with the bears

The stock market is officially in a bear market, meaning average losses are now 20 percent off their recent high. For investors, both big and small, the biggest question is whether to stay or go. For people in the stock market, should they continue to hold stocks for should they sell?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, this is the question of the day, and we have been here many times before. That's one good reason for looking at this. We do know that the stock market does come back. It won't stay down. It will go back. The question of course is when? So what is the average investor supposed to do? Well, there are some rules of thumb here. One rule of thumb says that if you are going to need that money that you have in the stock market within a reasonably short period of time - three, four, five years; say you are close to retirement - you are probably better off moving it out of the stock market and not taking your chances that the market could go down even more. Now, obviously what you give up there is the chance that just as you move your money, the market starts to go up. So certainly there could be a downside to that strategy. On the other hand, if you are a young investor and the money you are putting in the stock market is for use 10, 15, 20 maybe 30 years down the road, the standard advice is to stay pat. In fact, maybe even increase and accelerate your purchases of stocks if you feel like this is a good buying opportunity. So it really depends on your time perspective as well as your tolerance for risk."

Posted by Dave at 08:00 AM

August 05, 2008

Changing diets

The world, and especially the developing world, is changing. One of the ways we see this change is in changing buying habits of food by consumers in countries like China, India and Southeast Asia. What's happening, and how can it affect you and me?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, what's happening is that as consumers in those countries are becoming richer - their average incomes are going up - they are changing what they eat. They are moving away from eating basic foods to more complex foods. And one of the more complex foods they are eating more of is meat. Now the implication of that, however, is that meat to produce takes a lot of, for example, grain. In order to produce one pound of meat, the farmer has to use seven pounds of grain. So, for example, therefore, when people go from eating grain directly - which they had been doing in China and India - to now eating more meat, they are going to have to use more grain. And in fact, the use of grain around the world has gone up dramatically. What does that mean for you and me? Well, it means the prices of things like wheat and corn we are seeing go up. And of course, wheat and corn are, again, feeds into the meat system and the broader meat system. So we are seeing meat prices go up. We are seeing bread prices going up. We are seeing egg prices going up. So this is all part of a chain reaction that economists would argue is really based on changing buying habits for food in those developing countries."

Posted by Dave at 08:21 AM

August 04, 2008

Elasticity and gas prices

There's a major concept in economics called price elasticity of demand. Some economists say this concept is at the root of understanding why gas prices have gone up so much this year. Let us in on the secret.

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, it's not a big secret, but for most products that we consumers buy, if the price goes up, we buy less. Now, this year in the world, the world has been trying to buy more gas and oil than is available. So we definitely have seen a price rise, but we've seen a big price rise because oil and gas, I think most people would consider to be necessities. And this is where the concept of price elasticity of demand comes in. For a necessity, you have to have a gigantic rise in price for people just to reduce their consumption by a little bit. So, for example, this year, the world has been trying to buy 5 percent more oil and gas than there is available, someone's had to reduce their consumption. What we could have very well seen - and, indeed, we have seen - is a big price increase - 35 to 45 percent up - in order to get us to have that rather small 5 percent reduction. And this is typical, again, with something like gas and oil. With something like beef, not so much. You could have a very small price increase, and people would reduce their consumption because they would go to another product. So I think economists are arguing that this simple concept rather than something like speculation is the root cause of why we've seen gas prices go up so much this year."

Posted by Dave at 08:00 AM

August 01, 2008

Who are Fannie and Freddie?

Two large corporations, Fannie Mae and Freddie Mac, have been in the news recently concerning their financial stability. Experts are worried about the link between these companies and the mortgage market and broader economy. Give us the details.

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, these names stand for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, and they are corporations that operate on what's called the secondary mortgage market. What that means is they go and buy mortgages that individual banks or savings and loans have made to people like you and me. They buy those mortgages then they sell them to investors. Now they do offer a tax advantage because although there is not an explicit backing by the federal government, it is thought that if these two big companies had problems, the federal government will back them. And this is exactly what's happening right now. They are having problems; we've seen their stock go down. The issue here is that these are gigantic corporations. Their total debt would come to five trillion dollars. And the federal government will not allow them to fall because if they did the entire mortgage industry could shut down. So there is likely to be some cost to the taxpayer of propping these corporations up for the time being. The question simply is, how much?"

Posted by Dave at 09:07 AM