Economic Theory — And Jim Lehrer — in Song

BY Elizabeth Shell  November 4, 2010 at 11:06 AM EST

You know baby, in the years I’ve been your central banker

We’ve done a lot of overnight repo lending

And it’s been good, it’s been so good

But the economic situation has gotten serious now

And baby, one night just isn’t enough

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So many questions. So little time. But frankly, we all need a break after this week’s hullaboo: in Washington at the Fed and in voting booths across this land, the land made expressly for you and me.

Thus today’s posts are for your amusement, as well as edification.

The first comes from our friend Merle Hazard (aka investment advisor Jon Shayne), whose work we’ve featured before on Making Sen$e.

His latest is a collaboration with one Curtis Threadneedle, channeling the spirit of the late Barry (the Walrus of Love) White. The song: “Quantitative Easin’,” a lesson in current Fed monetary policy. Watch it here, for those who want to be the first on their block to say, “I saw it before it went viral.” (A complete Merle Hazard discography can be found at his website.)

In response to yesterday’s announcement by the Fed to engage in a second round of quantitative easing, Shayne had this response:

I breathed a sigh of relief because they are going “all the way out the yield curve” and also buying “the long bond.” In other words, the 30-year as the song predicted.

The weighted averaged duration (think “maturity”) of the pending purchases is in the five to six year range. That just means that they are buying more heavily on the short end than the long.

Duration and maturity are, to a first approximation, the same thing, though not if you get into the fine details. (Duration takes account of the timing of both interest and principal payments; maturity looks at principal only.) For example, I took a look today at a Treasury note that matures in five years, and it has a duration of 4.9 years. When interest rates are very low, duration will be nearly the same as the maturity; as they get higher, duration becomes shorter and shorter than maturity.

Today’s second offering comes from the songbook of venerable folkie Loudon Wainwright III, some of whose “Songs for the New Depression” will be featured, one imagines, at his upcoming performance in New York City on Dec. 3 as part of The Economist’s The World In 2011 Festival.

Among these ditties, up on YouTube in a home video version, is “The Paul Krugman Blues.” The song is one of the few examples of the blues genre, I’m guessing, in which Jim Lehrer is mentioned by name.

A warning to Krugmanophobes: Wainwright’s song is as genuflectional as Hazard’s work is non-partisan.

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Now the credit markets are misbehaving

I think they need a spanking

That’s why I’m ready to show them

Some very special central banking

Quantitiative Easin’ lyrics by Curtis Threadneedle and Merle Hazard.