Two Financial Thoughts for the Day

1. What’s with this “real economy/Main St.” vs. “financial markets/Wall St.” business? Does anyone who has been following these kinds of crises for longer than me know if that’s a new way of framing this or an old one? How do we distinguish the “real” and “fake”* economies anyway? Sociologist and Business Prof. Jerry Davis said at a panel on the financial crisis yesterday that Main St. has become Wall St., as everyday people discuss credit default swaps, LIBOR and the TED spread, etc. I wonder if they were ever separable, and/or what people really mean by that. Perhaps what’s new is that Main St. is becoming aware that it has always been Wall St. as well.

2. According to the Fed’s FAQ, the goal of monetary policy is to promote “sustainable economic growth, full employment, and stable prices.” These three targets of monetary policy are measured by national income statistics, unemployment statistics, and inflation statistics, all of which came into being** after the Fed (which was created in 1913). The original purpose of the Fed, it seems, was to create a publicly run system to prevent and manage banking crises (a role played by JP Morgan in two crises at the end of the 19th and beginning of the 20th century). If Timothy Mitchell (1998, 2002) is correct, the Fed is now tasked with solving problems that literally could not have existed when the system was created. Hm.

* While “Main St.” clearly opposed “Wall St.”, it’s less clear to me what opposes “real economy”. “Fake” is the obvious opposite of real, but that seems to lack nuance and I don’t see it used. Is it the “financial markets” or “financial economy”? Is it just “Wall St.” with no real opposed term to “real economy”? I’m not sure.
** More or less anyway. Some of the ideas are much older, of course, but the first measures that were seen as up to date and reliable came in the 20s and 30s. See, for example, Revolution in U.S. Government Statistics 1926-1976 for details.



  1. Hey Dan, I think that the division between the “real economy” is similar to the expression on university campuses to say the “real world.” The university is just as much a part of the “real world” as anything else, but there is something to be said for the insulation that universities provide. In this sense, I think that the “real economy” is the economy of things that we can see, fell, touch that most of us can relate to on a day-to-day basis as opposed to credit default swaps, mortgage-backed securities and other things that are “real” in the sense that they exist, but not so real in the sense that we can see what they are.

    In fact, we are in this whole mess because we can’t see what those things are.

  2. One mean but plausible hypothesis is that the expression “real economy” (if you take it as opposed to, say, “formal economy”) was invented by economists to refer to what their science do not really deal with.

  3. I dunno about the divisions between real and financial economy, but I just wanted to chime in that I used to be a clerk for TED Spread futures traders in high school. It was about the most boring market in the damn world – but interesting because it was a contract that kinda spread across the CBOT and CME – US treasuries (CBOT) to eurodollars (CME). On the other hand, the LED spread was all CME. And if it’s possible, even more boring.

    BTW, when you clerk and trade futures spreads, you learn to do wicked fast basic math.

  4. Adam

     /  October 18, 2008

    “the Fed is now tasked with solving problems that literally could not have existed when the system was created.”

    By solving problems do you mean diddling the money supply to adjust the statistical measures or diddling the money supply to adjust the activity which is represented by the statistical measures?

  5. @Adam – The link between the representations and the underlying activity is of course problematic, but I mean something a bit more conceptual than whether or not the Fed is effective. I mean that “sustainable economic growth”, for example, may not have been a thinkable problem and certainly was not a well-defined, measurable one before sometime in the 20th century. The Fed would have had no way to gain traction on the problem even were it thinkable. Growth, in the aggregate, was not well-defined. Same for unemployment or inflation.

    There’s a story in the Gov’t Stats thing I linked about unemployment statistics in the 1920-1921 period. A group of experts got together, debated, and voted that unemployment was between 3.5 and 5 million. Previous attempts to measure unemployment in a census question simply failed. In part, the world did not yet make sense for the models – too few people were employed in large, stable organizations, for example, and too many people were self-employed or small farmers, etc. The unemployment rate, as now conceived, measured and acted upon, simply wasn’t a thing in 1913.

  6. Adam

     /  October 19, 2008

    “The unemployment rate, as now conceived, measured and acted upon, simply wasn’t a thing in 1913.”


    And older methods of tracking unemployment and poverty were no longer relevant. For example, during the colonial period, when voting was tied to property ownership and payment of town taxes the overseers of the poor were were able to get a handle on unemployment, in part, by watching changes in the voting rolls: the unemployed or underemployed dropped off the voting roll when they petitioned to be relieved from paying taxes. Of course, too, society was more face-to-face back then.

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