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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

    Category: Economy  | Tags: , , , , , , , , , , , , , , , , , , ,  | Comments off
    Washington Impasse Makes Goldman Forecast Gloomier
    Author: John Travis
    • Friday, November 21st, 2008

    Goldman Sachs economists, who had one of the most bearish forecasts around, just downgraded their estimates to show the economy sinking even further.

    GDP will fall an annualized 5% in the current quarter — worse than the previously forecast 3.5% decline — with a contraction continuing through the middle of next year due to “continuing signs of falling domestic and foreign demand, labor market deterioration, renewed tightening in financial conditions and an apparent impasse in fiscal policy pending the transfer of power to the Obama administration in late January,” Goldman economists said in a note to clients Friday morning.

    The current quarter remains the worst in the forecast, but the output drops will be far from over this year. Goldman Sachs now estimates annualized declines of 3% in the first quarter of next year (previously estimated as a 2% decline) and 1% in the second quarter of 2009 (previously showing flat GDP). Output in the second half of next year was estimated at 1% on average.

    While citing “persistent downside surprises” in part for the lowered estimates in the current quarter, the Goldman economists say “the main reason for the downgrade to our forecast is the policy impasse that has developed in Washington and the tightening in financial conditions it has provoked. It is now reasonably clear that a second fiscal package will not be enacted until after the Obama administration takes office in late January. Other potential measures of support — deployment of TARP funds and more aggressive expansion by the GSEs, for example — likewise await the transfer of power.”

    Their estimate for the unemployment rate — reported at 6.5% in October — is now 9% by the end of next year, up from the earlier 8.5% forecast, with continued increases in 2010. “This forecast, if correct, makes the current recession unequivocally the worst single downturn on record since World War II insofar as increases in joblessness are concerned, and it raises the prospect that this recession could eventually exceed the five-point cumulative increase posted during the double-dip recessions of 1980 and 1981-1982 combined,” the Goldman economists say.

    They also expect after-tax economic profits of U.S. companies to drop 25% in 2009, rather than the previously expected 20% fall. That would mark the biggest decline since 1938.

    Their forecast does not include fiscal stimulus, however, due to uncertainty about the timing and magnitude. They acknowledge “the probability is rising” that the next round of stimulus will exceed the $200 billion they’ve been assuming. But “any significant impact seems unlikely” until the second quarter of 2009 at the earliest.

    Inflation is expected to slow sharply as the economy contracts. The consumer price index fell last month and should show a year-over-year decline of 1.4% in third quarter of 2009 due to the reversal of energy and food prices, Goldman’s economists forecast. But they add, “we do not expect a broad-based, sustained pattern of significant price decline that would normally be associated with the term ‘deflation’ over the forecast horizon.” –Sudeep Reddy

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