• 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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• Friday, January 23rd, 2009
A roundup of economic news from around the Web.
Stimulus Skepticism: On his Marginal Revolution blog, Tyler Cowen says we just don’t know how effective stimulus will be. “I fully admit that I don’t trust the oft-cited evidence that tax cuts are 4x better stimulus than government spending boosts; I think the result is a mirage from underspecified models. Overall we simply don’t know how well the proposed stimulus will work — if at all (is aggregate demand always the relevant war?). It’s a kind of Hail Mary pass, an enduring belief in aggregate demand macroeconomics at the theoretical level, even in light of broken banks, sectoral shifts, and nasty, failing expectations, all mixed in with hard to spend well, slow to come on line, monies. Yes it could work but our agnosticism should be strong rather than just perfunctory. “
Krugman Criticism: Writing for the New York Times, Paul Krugman has some criticism of Barack Obama’s inauguration speech. “But my real problem with the speech, on matters economic, was its conventionality. In response to an unprecedented economic crisis — or, more accurately, a crisis whose only real precedent is the Great Depression — Mr. Obama did what people in Washington do when they want to sound serious: he spoke, more or less in the abstract, of the need to make hard choices and stand up to special interests. That’s not enough. In fact, it’s not even right.â€
Soros on Banks: Writing for the Financial Times, George Soros gives his views on the best way to fix the banks. “The hard choice facing the Obama administration is between partially nationalising the banks, or leaving them in private hands but nationalising their toxic assets. Choosing the first course would inflict great pain on a broad segment of the population – not only on bank shareholders but also on the beneficiaries of pension funds. However, it would clear the air and restart the economy. The latter course would avoid recognising and coming to terms with the painful economic realities, but it would put the banking system into the same quandary that proved the undoing of the government sponsored enterprises (GSEs) – Fannie Mae and Freddie Mac. The public interest would dictate that the banks should resume lending on attractive terms. However, this lending would have to be enforced by government diktat because the self-interest of the banks would lead them to focus on preserving and rebuilding their own equity. Political realities are pushing the Obama administration towards the latter course.â€
Compiled by Phil Izzo
Category: Economy
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Tags: aggregate demand, agnosticism, bank shareholders, barack obama, broken banks, financial times, george soros, government spending, great depression, hail mary, hard choices, inauguration speech, marginal revolution, new york times, paul krugman, pension funds, private hands, theoretical level, tyler cowen, unprecedented economic crisis |
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• Friday, November 21st, 2008
A roundup of economic news from around the Web.
Lame-Duck Economy: In the New York Times, Paul Krugman worries about a power vacuum at the height of the crisis. “How much can go wrong in the two months before Mr. Obama takes the oath of office? The answer, unfortunately, is: a lot. Consider how much darker the economic picture has grown since the failure of Lehman Brothers, which took place just over two months ago. And the pace of deterioration seems to be accelerating.â€
Treasury Borrowing for Free: On his blog, Brad Setser says that it’s not a good thing that the Treasury can borrow for free right now. “Treasury yields aren’t hard to calculate. But they are still my favorite indicators of the scale of the current crisis. The fact that so many are willing to lend so much to the US Treasury for so little is a clear indicator of a lack of confidence in other financial asset. Dr. Krugman is right. Market analysts are more or less saying the same thing: ‘“Where the credit markets are trading, it’s all but implying a 1929 scenario,†said Joe Balestrino, fixed income strategist at Federated Investors’â€
Give Us the Money: On his maverecon blog, William Buiter puts his tongue in his cheek and says that his small company is going to apply to become a bank. “If we cannot get bank holding company status for our company, we will fly our (separate) private jets to Washington DC to appeal for congressional support for our business as a quintessential heartland enterprise. The very fact that we are not systemically important makes us systemically important. The reason is that if we can get money from the U.S. government, anyone can. And if anyone can, there is no longer any reason for fear, excessive caution and pessimism. Consumers will spend again. Banks will lend again. Companies will invest again. Just give us the money.â€
Compiled by Phil Izzo
Category: Economy
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Tags: bank holding company, brad setser, buiter, congressional support, credit markets, federated investors, financial asset, izzo, lack of confidence, lehman brothers, market analysts, oath of office, obama, paul krugman, pessimism, power vacuum, private jets, secondary sources, treasury yields, us treasury |
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