• 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.â€
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.â€
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).â€
Compiled by Phil Izzo
Category: Economy
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Tags: assertion, banking system, baseline scenario, blogosphere, bounceback, citigroup, common stock, credit crunch, debt securities, econbrowser, economic news, last thursday, menzie chinn, nationalization, pandit, policy confusion, preferred shares, recessions, simon johnson, swaps |
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• 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.â€
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 buyersâ€
Compiled by Phil Izzo
Category: Economy
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Tags: advisory firm, andrew leonard, barack obama, barney frank, barry ritholtz, baseline scenario, boards of directors, common stock, economix, edward glaeser, great depression, home mortgage, insolvent banks, lawrence h summers, nationalization, new york times, problem banks, sacred cow, simon johnson, tim geithner |
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• Tuesday, January 27th, 2009
A roundup of economic news from around the Web.
Stimulus Analysis: The Congressional Budget Office has released its analysis of the fiscal stimulus package. “Frequently in the past, in all types of federal programs, a noticeable lag has occurred between sharp increases in funding and resulting increases in outlays. Based on such experiences, CBO expects that federal agencies, states, and other recipients of funding would find it difficult to properly manage and oversee a rapid expansion of existing programs so as to spend added funds quickly as they expend their normal resources. The seasonal nature of some spending also affects the speed at which activities can be conducted; for example, major school repairs are generally scheduled during the summer to avoid disrupting classes.â€
Stand Up to Bankers: Writing for the Financial Times, Peter Boone and Simon Johnson say that in order to save banking through recapitalization, the U.S. has to stand up to bankers. The most politically robust solution is for the government to acquire not voting stock but warrants – the option to buy such stock. These warrants would convert to common stock when sold, and a Resolution Trust Corporation-type structure could manage the disposal of these controlling stakes into the hands of private equity investors. New owners would restructure bank operations, fire executives and break up the banks (particularly if some anti-trust provisions were added). The sticking point will be banks refusing to sell assets at market value. The regulators need to apply without forbearance their existing rules and principles for the marking to market of all illiquid assets. The law must be used against accountants and bank executives who deviate from the rules on capital requirements. This will concentrate the minds of our financial elite. Either they will raise capital privately or the government will provide, but this time on terms favorable to the taxpayer. The bankers’ lobby, of course, will protest loudly. Good thing we now have a US president who can stand up to it.â€
Euro Trouble: Martin Feldstein, writing for voxeu, ponders the fate of the euro. “In these circumstances, it is possible that one or more countries might actually withdraw from the Eurozone. It is clear why some national political leaders – or would be leaders – might consider such an option. Doing so would allow their reinstated national central bank to choose an easier monetary policy. The national central bank could also create the currency needed to act as a lender of last resort to national commercial banks. The country’s fiscal authority would no longer be bound by the restrictions of the Stability and Growth Pact and could therefore pursue a large fiscal stimulus. The international value of the currency could adjust to make local products more competitive. A country might threaten to leave the Eurozone unless policy became more expansive. If policy did not change, it might face the difficult choice between leaving the Eurozone and losing face by backing down from its threatened action.â€
Compiled by Phil Izzo
Category: Economy
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Tags: bank executives, bank operations, common stock, congressional budget office, financial elite, fiscal stimulus, forbearance, illiquid assets, outlays, private equity investors, rapid expansion, recapitalization, resolution trust corporation, robust solution, seasonal nature, simon johnson, sticking point, stimulus package, type structure, voting stock |
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