What can 12 banks

When the Federal Reserve and its 12 regional banks were established
in 1913, the first goal, a central bank that could act as a
lender of last resort, was achieved, even if Fed policy makers
failed in this role during the Depression. But it was not until 1951
that the Federal Reserve finally

Financial bubbles

What may surprise you is that one of the reasons there will
certainly be future bubbles is that the Federal Reserve has done
such a good job of taming inflation and stabilizing the economy.
That environment, as it happens, is a perfect petri dish for the
kind of speculation that gives rise to financial bubbles. That’s one
of the unexpected downsides of the victory over inflation

Effect of Payment Rate on Losses

As noted earlier, the payment rate is the percentage of outstanding balances
paid (collected) on average monthly. Our first stress test aims to evaluate
the impact of fluctuations in the payment rate on principal amortization
and cumulative losses. To this end we stressed our base case payment rate
of 8% by 50% and 100%. The results are shown in Exhibit 7.1.
Our example reveals that payment rates are inversely related with
cumulative losses and length of amortization period. Intuitively as the
payment rate increases the time required to make the necessary principal
payments decreases and, therefore, investor’s exposure decreases as
well. Notably, with less outstanding principal exposed to time, cumulative
losses decrease. We are left to draw the conclusion

Market bubbles

Market bubbles are also on our list of the difficulties that investors
will have to grapple with in the years ahead. Newborn
bubbles are not bad, of course. They are just strong trends, surges
in consensus opinion that can be a great thing for investors who
are quick enough to take advantage of them. But no investor who
lived through the end of the preceding century and the beginning
of this one needs a lesson in the damage bubbles can do when
they blow up and then burst.

China closed economic relationship

We explain why China has had a close enough economic relationship
with the U.S. economy and its monetary policy to almost
justify calling it the 51st state. We think this relationship is a bulwark
against a messy resolution of the problem with the current
account deficit. But an orderly reduction in the current account
deficit and the avoidance of a sudden break with China still will
not mean that American investors will escape any pain from the
rebalancing of the nation’s current account credit deficit. A reduction in
this deficit still will mean a weaker dollar, higher interest rates,
and higher consumer prices

United States does not unexpectedly turn off the credit spigot

What we want to do with this book is make this addition of
risk as understandable and palatable as possible. We show you
how low your current risk level probably is, and outline intelligent
ways to raise it. We also show you how to take other steps to
diversify your portfolio, an essential part of managing your risks.
Then, we look at risk from another perspective—the what-if
perspective—as we examine what can go wrong in the current investing
environment.For example, we explore the threat of those twin deficits. We
think the current account deficit, which must be reduced at some
point, can be slimmed down without too much damage. But that
assumes that there is no threat of protectionism and that the rest
of the world, which has been happy to keep lending to the United
States, does not unexpectedly turn off the credit spigot.

The art in scientific thinking—whether in physics, biology, or economics

The art in scientific thinking—whether in physics, biology, or economics—is
deciding which assumptions to make. Suppose, for instance, that we were dropping
a beach ball rather than a marble from the top of the building. Our physicist
would realize that the assumption of no friction is far less accurate in this case:
Friction exerts a greater force on a beach ball than on a marble. The assumption
that gravity works in a vacuum is reasonable for studying a falling marble but not
for studying a falling beach ball.