Month: December 2008

The Guardian Trust Company of Detroit — the good ol’ days

It was, however, the run on the Guardian Trust Company of Detroit, a bank controlled by Edsel Ford, scion of the Ford motor family, that transformed the new crisis into a national one.  The Guardian Trust had done well during the 1920s financing consumer purchases of Ford cars.  When auto sales dried up in the early 1930s, the bank found itself in serious trouble and had been forced to borrow from the RFC.  In early 1933, the RFC balked at providing more money unless the sponsors, who were, after all, the second richest family in the country after the Rockefellers, put in more capital.  Patriarch Henry Ford, now in his seventies and increasingly autocratic and unreasonable, refused to bail out his son.  He had a long-standing antipathy to bankers and could not quite grasp why banks should be allowed to use the money he deposited for making risky loans  — "It’s just as if I put my car in a garage and when I came to get it, I found somebody else had borrowed it and run it into a tree," was the way he saw it.  Faced with a statewide run on its banking system, on February 14, the governor of Michigan issued a proclamation closing all 500 banks in the state for eight days.  The residents of Michigan woke up on Saint Valentine’s Day to find that all that they could draw upon was the cash in their pockets.

That is from pp.442-3 of Liaquat Ahamed’s Lords of Finance: The Bankers Who Broke the World, a truly timely book.

As for the GTC, here is their Detroit Art Deco building, still standing.  Here is the lobby ceiling.  The splendid building is a National Historic Landmark.

Merry Christmas, here is your gift

The Fed’s decision was a welcome holiday present for GMAC’s major
investors, GM and Cerberus Capital Management, which bought a 51
percent stake in GMAC in 2006…The Fed board granted GMAC’s application on an emergency basis,
eliminating the normal process of comment and review in favor of
immediate action.

GMAC is now a bank, even though they haven’t reached requested levels of capitalization.  Here are more detailsElizabeth Duke voted against. 

I believe that moving more assets under government guarantees is exactly the opposite of what we should be doing.

Addendum: More comment from Felix.


Martin Feldstein argues that military spending should be part of the stimulus

Jacob Hacker argues that health care reform should be part of the stimulus

Zoo and Aquariums Look for Slice of Stimulus Pie

Keep in mind that no matter what your view of health care reform, the goal of our next round of health care policy changes should not be to spend as much money on labor costs as quickly as possible.

This is an object lesson — in progress — of how bad decisions end up getting made. 

There will be no slice of stimulus pie for me this Christmas, though perhaps we will manage tamales de elote.

The Twelve Days of Christmas

…shopping online raises the price for the gifts by nearly $9,500.

Overall the "nine ladies dancing" cost no more than last year, but the "eight maids a-milking" are governed by the increase in the federal minimum wage.  Here is much more information about the gifts and what they cost.  Perhaps for environmental reasons, the inflationary pressure in the index comes from the swans:

Swans, which vary widely in price because of their scarcity, have
caused big swings in the index. The gift package this year would shoot
up to $21,080.10 if the swans were included because the going price for
the seven is $5,600. That is a 33 percent increase, or $1,400, for the
swans compared with the price last year.

Bagehot: Beware the busy banker

As Walter Bagehot, the great nineteenth-century editor of the Economist who reveled in the quaint paradoxes of English life, described them, members of the Court [TC: they governed the Bank of England] were generally "quiet serious men…(who) have a good deal of leisure."  Indeed, he felt it an ominous sign for a private banker to be fully employed.  "If such a man is very busy, it is a sign of something wrong.  Either he is working at detail, which subordinates would do better and which he had better leave alone or he is engaged in too many speculations…and so may be ruined."

That is from Liaquat Ahamed’s Lords of Finance: The Bankers Who Broke the World, which I am still enjoying.  Here is my previous post on the book.

The latest from Harvard

Harvard University’s admission that it lost $8 billion from its $36 billion
endowment fund, as staggering as it sounds, may grossly underestimate the true magnitude of the
loss between from July 1 through Oct. 31 2008.  According to a source close the Harvard
Management Corporation (HMC), which runs the fund for Harvard, the  loss is closer to $18
billion if the losses on the fund’s illiquid investment are realistically appraised.

That’s Edward Jay Epstein, via Megan McArdle.  As Megan points out, no one should be surprised by this and in fact I would be surprised if that were the full extent of the damage.

Markets in everything China fact of the day

The cult-like fascination with the game has even spawned a World of Warcraft-themed restaurant in China, complete with dishes inspired by the game.

The article has other interesting features, mostly on the value of WoW experience in the job market.  Here is one bit:

…employers specifically instruct him not to send them World of Warcraft
players. He said there is a belief that WoW players cannot give 100%
because their focus is elsewhere, their sleeping patterns are often not
great, etc.

Good, humorous uses of "etc." are not easy to come by.

Gold fact of the day

…the world produces a cube of gold that is about 4.3 meters (about 14
feet) on each side every year. In other words, all of the gold produced
worldwide in one year could just about fit in the average person’s
living room!

The total amount of gold, ever produced by mankind, is estimated to fill only one-third of the Washington Monument.  Here are the calculations, including an estimate for the even more scarce platinum.  Hat tip to Jason Kottke.

The edge of the knife

Money market funds, an increasingly popular place to park cash, will
need to raise fees or close to new money to remain profitable as yields
hover at near-zero, according to industry managers…

Jim McDonald, who runs taxable money market funds for T Rowe Price,
said: “You can’t make money in this situation. If short-term interest
rates stay where they are, it’s virtually impossible to run a
government [bond] fund and make any money. You can close the fund,
that’s one option.”

Vanguard last week closed two of its money market funds to institutional investors, while Credit Suisse said it would quit managing money market funds in the US and liquidate $8bn in assets across its three funds.

Here is more.  Here is my earlier post on the Tsiang equilibrium.  That’s, sadly, my mantra for the coming year: the Tsiang equilibrium.  Some call it the liquidity trap, but in fact they have different microfoundations and different solutions.  The Tsiang equilibrium is in principle easy enough to spring out of, at least if the government stops guaranteeing everything, but no one knows how to get from here to there.

Will he usher in a reign of futarchy?

Dr. Holdren, now a physicist at Harvard, was one of the experts in natural resources whom Paul Ehrlich enlisted in his famous bet against the economist Julian Simon
during the "energy crisis" of the 1980s. Dr. Simon, who disagreed with
environmentalists’ predictions of a new "age of scarcity" of natural
resources, offered to bet that any natural resource would be cheaper at
any date in the future. Dr. Ehrlich accepted the challenge and asked
Dr. Holdren, then the co-director of the graduate program in energy and
resources at the University of California, Berkeley, and another
Berkeley professor, John Harte, for help in choosing which resources
would become scarce.

He’s been named as Obama’s chief science advisor.  Here is more information.  Read this too.  I was disconcerted to see the close connections between Holdren and Ehrlich. 

Interest on reserves, continued

I was intrigued by this passage, from Interfluidity:

Interest rates are, for the moment, excruciatingly low. But a subsidy
to the banking system, once put into place, will be quite hard to
dislodge. So, let’s imagine that the Fed will pay interest on bank
reserves in perpetuity, that it will pay such interest at or near the
risk-free short-term interest rate, and that the expansion of the Fed’s
balance sheet is more or less permanent. How large a subsidy to the
banking system do the interest payments on reserves represent? Some
problems are arithmetically challenging, but not this one. The present
value of a perpetual stream of market-rate interest payments is
precisely the amount of the principal. Therefore, the present value of
the Fed’s de facto commitment to pay interest to banks on $800B
of freshly created reserves is $800B. We fought and wailed and gnashed
our teeth over potentially overpaying for TARP assets. Meanwhile, we
are quietly allowing the Fed give away, as a direct, literal subsidy,
more than the entire $700B that Paulson was allowed to play with. Note
there is no question about this being an "investment": The interest
payments that the Fed is now making to banks on its suddenly expanded
balance sheet are not loans. The banks owe taxpayers absolutely nothing
in return for this windfall.

I take that calculation to be a very rough one, and possibly an overstatement, but the point remains of interest.  It also can be argued that interest on reserves is a bad signal for at least two reasons:

1. It signals the Fed fears being left holding the intra-day Fedwire bag if a major bank goes under, and

2. It signals the Fed thinks major banks need such a subsidy.

The cited post is interesting throughout.

Very good sentences

Anyway, it’s striking that the worst of the crisis is hitting states that largely didn’t experience a housing bubble.

Here is more, from Paul Krugman.  That is another reason why I think that aid to homeowners will not hit the target and why I think markets are failing to solve an economic calculation problem.  The economy needs some new things to do but another bubble will not work, much of finance is frozen or contracting, and economic and political uncertainty is encouraging a scramble for liquidity and decisions to wait.  We can see the information — about what to do next, economically — disintegrating before our eyes.

Are men or women more tolerant of inappropriate gifts?

As you go shopping for Christmas presents this holiday, bear in mind
that buying the wrong gift for a man could put your relationship with
him in jeopardy, whereas buying a bad gift for a woman is far less

Neither I nor Robin Hanson agree.  Here is the discussion.  The authors do present a rationale for their hypothesis:

The researchers think their findings are consistent with the tendency
for women to act as guardians of relationships, and that their positive
reaction to the receipt of a bad gift was a form of psychological
defence against the disappointment of receiving a dud present.

is, in response to the relational threat posed by receiving a bad gift
from a partner, women may be more motivated than men to protect their
sense of similarity to the gift-giver," the researchers said, adding
that this reflects "the broader tendency for women – more than men – to
guard relationships against potential threats."

What do you all think?