Tag-Archive for ◊ baseline scenario ◊

Secondary Sources: Bounceback, Policy Confusion, Housing Plan
Author: John Travis
• Thursday, March 05th, 2009

A roundup of economic news from around the Web.

  • Bounceback: On Econbrowser, Menzie Chinn weighs in on a brewing debate in the blogosphere over whether recessions are followed by strong growth. “Given that output is trending upwards (at about 3% per annum, in log terms) in a deterministic fashion, then the argument that big drops in output are accompanied by faster growth rates makes sense. That being said, I think that additional information is always useful. And in this case, I stressed (in my last discussion of this graph) that the overpredicted growth rates were for the recoveries associated with financial system problems, such as a credit crunch. This means (in my opinion) that it is essential to fix the banking system in order for the faster growth to be realized.”
  • Policy Confusion: Simon Johnson on the Baseline Scenario warns about policy confusion. “Policy confusion is rampant. Did the government effectively sort-of nationalize Citigroup last Thursday when it said Vikram Pandit will stay on as CEO? If that wasn’t a nationalization moment (i.e., an assertion that the government is now the dominant shareholder), what legal authority does the Treasury have to decide who is and is not running a private company? Will debtholders be forced to take losses and, if so, how much and for whom? As part of last week’s Citigroup deal, preferred shareholders – whose claims had debt-like characteristics – were pressed into converting to common stock. You may or may not like forced debt-for-equity swaps, but be aware of what the prospect of these will do to the credit market. Junior subordinated Citigroup debt (securities underlying enhanced trust preferred shares) were yesterday yielding 26%… Confusion in policy breeds disorder in companies, and disorder leads to the loss of value. This is the reality of severe crises wherever they unfold; we have not yet reached the worst moment. And, of course, there are many more shocks heading our way – mostly from Europe, but also potentially from Asia.”
  • Troubling Housing Proposal: On the naked capitalism blog, Yves Smith looks at some troublesome aspects in the Obama administration’s housing proposal. “Something sensible, likely to work, but possibly damaging to the fragile banking establishment is to be avoided at all costs (Larry Summers apparently does not subscribe to the widely held economic precept that the highest and best use of a market is to set clearing prices, and in this case, letting prices drop to clearing levels is necessary and ultimately unavoidable. The goal of policy should be to prevent an overshoot on the downside, not to impede the correction). I have read the Treasury mortgage mod program, and it’s a bit fuzzy on certain details, but there was enough that was troubling without being clear on all the program wrinkles. First, it appears the program is a five year payment reduction program. While the guidelines are silent here, reasonable people would infer that the payment relief will be added to principal (particularly since the monthly borrower incentive for keeping current, is paid the servicer on behalf of the borrower to reduce principal, which suggests it is to offset principal increases).”

    • Compiled by Phil Izzo

    Category: Economy  | Tags: , , , , , , , , , , , , , , , , , , ,  | Comments off
    Secondary Sources: Bernanke Rally, Bank Plans, Swedish Model
    Author: John Travis
    • Wednesday, February 25th, 2009

    A roundup of economic news from around the Web.

  • Bernanke Rally: On the Econbrowser blog, James Hamilton is skeptical of the ties between Ben Bernanke’s comments yesterday and the stock market rally. “Tuesday’s stock market rally was pretty impressive. But can the mere words of the Federal Reserve Chair actually produce a 4% increase in the value of the U.S. capital stock? … OK, so if it wasn’t reassurances from Bernanke, do I have a better explanation for what could have produced such a big move in stock prices? No I don’t, other than to suggest that perhaps we were in pretty much the same situation Tuesday afternoon as we had been on Friday morning.” In the post, Hamilton references an item on Paul Krugman’s Conscience of a Liberal blog, where Krugman is critical of Treasury plans. “What we want to do is clean up the bank’s balance sheet, so that it no longer has to be a ward of the state. When the FDIC confronts a bank like this, it seizes the thing, cleans out the stockholders, pays off some of the debt, and reprivatizes. What Treasury now seems to be proposing is converting some of the green equity to blue equity — converting preferred to common. It’s true that preferred stock has some debt-like qualities — there are required dividend payments, etc.. But does anyone think that the reason banks are crippled is that they are tied down by their obligations to preferred stockholders, as opposed to having too much plain vanilla debt? I just don’t get it. And my sinking feeling that the administration plan is to rearrange the deck chairs and hope the iceberg melts just keeps getting stronger.”
  • Explaining Common Equity: Writing for the Baseline Scenario blog, James Kwak aims to offer an updated overview of the differences between common and preferred shares. “I still don’t understand why people care so much about whether the government owns more or less than 50% of the common shares. This just seems like a fig leaf. The more important issue which people can argue about is whether government is controlling Citigroup’s day-to-day operations. (Some say that’s good, some say it’s bad.) According to The New York Times, this is already happening. Alternatively, if you want to minimize government control, the government could tie its own hands; for example, no matter what its percentage ownership, the government’s stock purchase agreement could say that it has the right to appoint a minority of the board of directors but no more than that.”
  • Lesson From Sweden: On the Peterson Institute’s RealTime Economic Issues Watch blog, Anders Aslund looks at what the U.S. can learn from the Swedish model. “The common American idea that the Swedish bank resolution involved major nationalization is a sheer misunderstanding. Only one failing private bank, Gota Banken, was merged with an equally bankrupt state bank. Sweden avoided private-public partnerships, of which Fannie Mae and Freddie Mac are the most telling and repulsive example, because, as Larry Summers so memorably has stated, public-private partnerships usually means that profits are privatized and losses nationalized. In sum, in Sweden bad debts were not taken over by the state or transferred to any aggregator state bank; but each bank, private or state-owned, established its own bad bank. The Swedish model avoided the trading of depressed assets in the midst of the crisis, while they were internally valued at their low market value. If nobody can assess the value of an asset, it is probably not worth much. Only one bankrupt bank was nationalized.”
  • Fixing Banks: Writing for voxeu, Salvatore Rossi looks at what’s needed to fix the banking industry. “There are two schools of thought on how to get credit flowing again. One suggests buying the toxic assets, the other says to recapitalize banks. This column says that both approaches are necessary, though the right balance will vary across nations. The real difficulty is aligning incentives – in both pricing assets and recapitalizing banks, bank managers’ interests may thwart governments’ objectives.”

    • Compiled by Phil Izzo

    Category: Economy  | Tags: , , , , , , , , , , , , , , , , , , ,  | Comments off
    Secondary Sources: Nationalize, Mortgage Deductions, Good/Bad Banks
    Author: John Travis
    • Tuesday, February 24th, 2009

    A roundup of economic news from around the Web.

  • Privatize the Banks: Writing for the Baseline Scenario, Simon Johnson says it’s time to privatize the banks, since they have been de facto nationalized already. “Why have we de facto nationalized? Because the private credit system – particularly large banks – is weakened and not getting any better. Attempts to deal with the problem banks are apparently blocked by the political power of influential bankers. How then do we really privatize? By exercising leadership: take over insolvent banks and immediately reprivatize them. The new controlling owners can replace the boards of directors (tell me: why haven’t they resigned already?), and these boards can decide who to keep and who to let go from existing management. The taxpayer retains a significant number of shares (or the option to buy common stock) as a way to ensure upside participation – the economy will one day recover, and that will be a very good day for owners of the remaining banks.” Separately, on Salon’s How the World Works blog, Andrew Leonard looks at who’s against bank nationalization. “Barry Ritholtz has a list of who he thinks are for or against nationalization. The first five names on the anti-list are Barack Obama, Tim Geithner, Lawrence H. Summers, Barney Frank and Bernanke. What do those names all have in common? They are in the government, and their every utterance moves markets. Which means, according to David Kotok, the chairman of the money management advisory firm Cumberland Advisors, whose thoughts on the financial markets are frequently featured at Ritholtz’s blog, The Big Picture, that they are almost by definition prohibited from forthrightly endorsing nationalization!“
  • Home Mortgage Deductions: Writing for the New York Times’s Economix blog, Edward Glaeser suggests eliminating a sacred cow. “The Great Depression provided an opportunity to rethink old policies in a major way. In the current morass, everything should, once again, be open for debate. One sacred cow that has long been in need of a good stockyard is the home mortgage interest deduction. So, in the spirit of libertarian progressivism, I suggest gradually reducing the upper limit on the deduction to loans of up to $300,000, and then refunding the tax revenues in a more productive manner. “
  • Good and Bad Banks: On their blog, Susan Woodward and Robert Hall say that a key to having a good bank-bad bank scenario work is to give the bad bank ownership of the good bank. “Much thinking about bank policy takes an old-fashioned point of view by assuming that a bank finances all of its assets through deposits. The good-bank/bad-bank separation has no advantage in that traditional setting. But for a bank that is mostly financed by non-deposit borrowing, moving the non-deposit liabilities to the bad bank has an advantage in dealing with insolvency.”
  • Formula That Killed Wall Street: Writing for Wired, Felix Salmon looks at the model that helped bring down the market. “David X. Li, it’s safe to say, won’t be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li’s Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees. How could one formula pack such a devastating punch? The answer lies in the bond market, the multitrillion-dollar system that allows pension funds, insurance companies, and hedge funds to lend trillions of dollars to companies, countries, and home buyers”

    • Compiled by Phil Izzo

    Category: Economy  | Tags: , , , , , , , , , , , , , , , , , , ,  | Comments off
    Secondary Sources: G-20 Guide, Animal Spirits, Stimulus
    Author: John Travis
    • Saturday, November 15th, 2008

    A roundup of economic news from around the Web.

  • G-20 Guide: On the Baseline Scenario blog, Simon Johnson offers some indications of successes and failures that can come from the G-20 meeting. “We should have some indications of how things are going by the end of Friday (today). Any big announcements will probably be floated or previewed in some way by 11pm Washington time. We’ll know a lot more after the end of the formal meeting, mid-afternoon Saturday, when we’ll see the final communique. Then, of course, come the press conferences and the spin. And, in case anyone has forgotten the lessons of October 19th-12th (when the Europeans did a spectacular last minute U-turn on bank recapitalization), most of Sunday – U.S. time – is also available. So feel free to go home and announce major new policy initiatives. But it’s not all of Sunday, as Asian markets open in the early evening US East Coast time, and their initial reaction can influence the broader passing of market judgment on Monday.”
  • Reviving Animal Spirits: Writing for the Project Syndicate, Robert Shiller talks about a crisis of confidence. “The erosion of animal spirits feeds on itself. Immense market volatility serves only to reinforce people’s sense that something is really wrong. A volatility feedback loop begins: the more volatility, the more people feel they must pay attention to the market, and hence the more erratic their trades. Perhaps the saving grace in this situation is that animal spirits can and sometimes do change direction. Confidence is a psychological phenomenon, and can make seemingly capricious jumps up as well as down. The most promising prospect for a return of business confidence now would be some kind of public inspiration. In the U.S., President-elect Barack Obama seems to have the charisma to create this, and his status as the first minority president marks a major historical transition that might have great positive psychological impact in the U.S. and around the world.”
  • Depression Economics: Writing for the New York Times, Paul Krugman says that the U.S. needs massive stimulus to get the economy up and running. “All indications are that the new administration will offer a major stimulus package. My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion. So the question becomes, will the Obama people dare to propose something on that scale? Let’s hope that the answer to that question is yes, that the new administration will indeed be that daring. For we’re now in a situation where it would be very dangerous to give in to conventional notions of prudence.”
    • Category: Economy  | Tags: , , , , , , , , , , , , , ,  | Comments off