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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

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