• 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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• 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.â€
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.â€
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.â€
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.â€
Compiled by Phil Izzo
Category: Economy
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Tags: administration plan, baseline scenario, ben bernanke, capital stock, common shares, deck chairs, dividend payments, econbrowser, economic news, friday morning, holders, james hamilton, kwak, market rally, paul krugman, plain vanilla, preferred shares, preferred stock, sinking feeling, stock prices |
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• Wednesday, January 14th, 2009
A roundup of economic news from around the Web.
More Than Stimulus: Martin Wolf of the Financial Times writes that stimulus alone won’t save the U.S. economy. “First, there must be a credible program for what Americans call “deleveragingâ€. The U.S. cannot afford years of painful debt reduction in the private sector — a process that has still barely begun. The alternative is forced write-downs of bad assets in the financial sector and either more fiscal recapitalization or debt-for-equity swaps. It also means the mass bankruptcy of insolvent households and forced write-downs of mortgages. All this would also lead to big one-off increases in public debt. But those increases would probably be much smaller than those generated by a decade of huge fiscal deficits. The aim is to have a slimmer and better-capitalized financial system and a healthier non-financial private-sector balance sheet, sooner rather than later. The troubled asset relief program should be used for these purposes. It will need to be bigger. Second and most important, the structural current account deficit has to diminish. The US private sector is no longer in a position to run huge financial deficits as an offset to the demand-draining external deficits. The public sector can do so only for a few years. In the long run, the world economy must be sustainably and healthily rebalanced. This is a huge challenge for international economic diplomacy. It is also an essential element of sound domestic policy.â€
Fed Balance Sheet: Writing on the Econbrowser blog, James Hamilton looks a Fed Chairman Ben Bernanke’s speech yesterday and wonders about the risks the central bank is taking on. “That sounds to me like an exit strategy for how to get out of this if everything works out just right and the problems all go away. And what’s the exit strategy if it doesn’t work? I suppose more lending facilities.†Separately, on the Atlanta Fed’s macroblog, David Altig plays down the inflationary implications of the expansion of the Fed’s balance sheet.
Compiled by Phil Izzo
Category: Economy
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Tags: atlanta fed, ben bernanke, current account deficit, davi, econbrowser, economic diplomacy, economic news, exit strategy, external deficits, fed chairman, financial sector, financial times, fiscal deficits, james hamilton, macroblog, martin wolf, public debt, recapitalization, stimulus, world economy |
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