Month: February 2009

Italy countercyclical fact of the day

Here is another good one from John De Palma:

Revenue raked in by Italy’s mob
surged 40 percent last year, turning crime into the nation’s No.
1 business, Eurispes said in its annual report.

Income increased to 130 billion euros ($167 billion), up
from about 90 billion euros in 2007, according to figures
supplied by Eurispes and SOS Impresa, an association of
businessmen to protest against extortion. Drug trafficking
remains the primary source of revenue, bringing in about 59
billion euros, and the mob earned 5.8 billion euros from selling
arms, the Rome-based Eurispes research group said today.

Petty Cartels

Entrepreneur Erroll Tyler doesn't want a bailout, his amphibian tour buses don't needing bailing out.  What he does want is to bring his service to Boston but a local cartel appear to have a lock on the licenses issued by the city government.  Here's a short video making the case, including law professor Randy Barnett who argues that the 14th amendment should be interpreted to protect economic liberty.

I agree with Jeffrey Sachs

Greg Mankiw points us to this article by Sachs, excerpt:

Barack Obama’s economic team is now calling for an unprecedented
stimulus of large budget deficits and zero interest rates to counteract
the recession. These policies may work in the short term but they
threaten to produce still greater crises within a few years. Our
recovery will be faster if short-term policies are put within a
medium-term framework in which the budget credibly comes back to
balance and interest rates come back to moderate sustainable levels….

We need to avoid
reckless short-term swings in policy. Massive deficits and zero
interest rates might temporarily perk up spending but at the risk of a
collapsing currency, loss of confidence in the government and growing
anxieties about the government’s ability to pay its debts. That outcome
could frustrate rather than speed the recovery of private consumption
and investment. Deficit spending in a recession makes sense, but the
deficits should remain limited (less than 5 percent of GNP) and our
interest rates should be kept far enough above zero to avoid wild
future swings.

The new *American Economic Journal*

I received my third one Friday and it is called Economic Policy.  A few weeks ago I received a macro journal and another journal which I can no longer remember the theme of (micro maybe?).  In case you don't know these multiple journals have supplemented the one-size-fits-all American Economic Review, which was a single issue every three months.

I don't intend any criticism of the editors, as it seems (based on a mere perusal) they have done a good job in each case.  But the coming of the American Economic Review was for me an event to look forward to.  Now it feels like a bunch of journals are crossing my desk and I wish to be done with them.  If they are going to expand, I would rather get just one more additional journal.  Maybe it's not actually an advantage that they can publish more articles; somehow they all seem less important and I feel as if the real quantity of research — defined in part by its salience to a broad community — has gone down. 

Husband’s Day in Iceland

The article opens in this manner:

On Bondadagur, or Husband's Day, the menfolk of Iceland
are spoiled by their wives and girlfriends, who serve them with
traditional delicacies such as ram's testicles and sheep's head jelly,
a recipe for which is handily included in the latest online edition of
Iceland Review, alongside the latest bulletins on the economic meltdown.

It is interesting throughout.

Obama’s budget plans

This guy sure knows how to keep a blogger busy.  Matt Y. has a good summary:

  1. Obama wants the 2013 deficit to be half the size of the 2009 deficit he inherited.
  2. The 2010 deficit is going to be large.
  3. Specifically, we’ll go from $1.2 trillion in 2009 to $1.5 trillion in 2010 to $533 billion in 2013.
  4. Spending cuts are expected to come from the expiration of
    stimulus money, from a reduction in “emergency” appropriations for Iraq
    and Afghanistan, from reductions in Medicare Advantage giveaways to
    private insurance firms, and I believe from some other form of medical
  5. Revenue enhancements are projected to come from the
    expiration of the Bush tax cuts, from ending the hedge fund manager’s
    loophole, and from carbon auction permits.
  6. Overall, the idea is to get back down to a deficit of about 3
    percent of GDP, but to have a better health care system when we do it.

The (short-run) Obama health care plan?

Don't take this as definitive, but it's more than I've seen elsewhere:

Obama's budget request would create "running room for health reform,"
the official said, by reducing spending on some health programs so the
administration would have money to devote to initiatives to expand
coverage. The biggest target is bonus payments to insurance companies
that run managed-care programs under Medicare, known as Medicare

The Bush-era program has attracted nearly a quarter of Medicare
beneficiaries to private health insurance plans that cover a package of
services such as doctor visits, prescription drugs and eyeglasses. But
the government pays the plans 13 to 17 percent more than it pays for
traditional fee-for-service coverage, according to the Medicare Payment
Advisory Commission, which advises Congress on Medicare financing

Officials also are debating whether to permit people as young as 55
to purchase coverage through Medicare. That age group is particularly
vulnerable in today's weakened economy, as many have lost jobs or seen
insurance premiums rise rapidly. The cost would depend on whether
recipients received a discount or were required to pay the full price.

There's also a good deal of information about Obama's proposed budget in that article.  On health care, here is Alex's earlier post on Medicare Advantage.  Medicare at age 55 is an idea I don't hear much about; is the goal to lower the standard by ten years, every now and then, to move toward a single payer system?  I would think that the 55 and overs would have an incentive, and the power, to block the extension of Medicare to everyone else and thus free-ride on a medical infrastructure financed by others.  The Medicare extension also has to cost real money.  If you believe in adverse selection, offering Medicare at any given premium will attract only the worst risks at that premium level.  So what's the break-even point?  Overall the real gains from spending more money are in public health programs for the relatively young.

Pricing illiquid bank assets

Interfluidity has an idea:

There's another way to generate price transparency and liquidity for
all the alphabet soup assets buried on bank balance sheets that would
require no government lending or taxpayer risk-taking at all. Take all
the ABS and CDOs and whatchamahaveyous, divvy all tranches into $100
par value claims, put all extant information about the securities on a
website, give 'em a ticker symbol, and put 'em on an exchange. I know
it's out of fashion in a world ruined by hedge funds and 401-Ks and the
unbearable orthodoxy of index investing. But I have a great deal of
respect for that much maligned and nearly extinct species, the
individual investor actively managing her own account. Individual
investors screw up, but they are never too big to fail. When things go
wrong, they take their lumps and move along. And despite everything the
professionals tell you, a lot of smart and interested amateurs could
build portfolios that match or beat the managers upon whose conflicted
hands they have been persuaded to rely. Nothing generates a market
price like a sea of independent minds making thousands of small trades,
back and forth and back and forth.

Via Thomas Barker, here is an even more radical idea.

Banks vs. bank holding companies

I continue to see many bloggers suggesting that bank nationalization is a fait accompli and that anyone who isn't on board right now is in denial.  It is far less common that bloggers give serious consideration to the difference between a bank and a bank holding company.  In fact I usually don't see that critical distinction mentioned at all.

If the government nationalized (or "pre-privatized"…whatever) Citibank, Citicorp would go bankrupt and we would be back at a Lehman Brothers scenario again.  So the government would have to take over Citicorp too.  That goes way, way beyond anything the Swedes did or for that matter it goes well beyond WaMu. Shall I turn the mike over to Wikipedia?

Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate Travelers Group on April 7, 1998.
Citigroup Inc. has the world's largest financial services network,
spanning 107 countries with approximately 12,000 offices worldwide. The
company employs approximately 300,000 staff around the world, and holds
over 200 million customer accounts in more than 100 countries. It is
the world's largest bank by revenues as of 2008.

You can read about Travelers Group here.

Thinking through the implications of said nationalization for the counterparty positions of a bank holding company, or its role in the commercial paper market, is mind-boggling.  Neither the FDIC (which generally does an OK job) nor any other government agency is in any way prepared for this kind of management task.  It has very little to do with standard FDIC procedures.  All I hear about is "bank" this, "bank" that, etc. but again little or no talk of the bank holding company.

Of course this is only a problem for the five or six biggest financial institutions but those are precisely the issue at hand.

On nationalization, Bernanke is very much on the ball.  He said this:

Federal Reserve Chairman Ben Bernanke said this week, is “that you tend
to lose the franchise value, that the counterparties and others don’t
want to deal with you because they don’t know your future.”

I usually don't like to speak so negatively, but it's the advocates of nationalization who are in denial.  There is a belief that Obama, Bernanke, and/or Geithner are somehow spineless or in the pocket of the banking lobby.  The sadder truth is that they understand just how ill-prepared the U.S. government, or the Fed, would be to run such an enterprise.

I do understand that if all the water runs out of the sink, as it may, nationalization will come in some form or another, however disastrous that may be.  But the desire to postpone it until the last possible moment, and the desire to pursue even a small chance of avoiding nationalization, are signs of wisdom, not cowardice.

When you read about nationalization, and see only the word "bank," and not "bank holding company," be very afraid of the advice on tap.

Addendum: Here is a different but related piece on banks vs. bank holding companies.

Slumdogs and Millionaires

Hernando de Soto makes an apt comparison between slumdogs and millionaires in an interview with Barrett Sheridan of Newsweek.

What makes a market economy possible is that people are able to find out facts about each other and about their enterprises in spite of the fact that they don't have direct physical contact. So the question is, how do you get to know things? How do you get facts? You will find out that most of the facts you want are in property papers. One of the things that developing countries miss is that close to 80 percent of their enterprises are actually not fully recorded as property.

….The enormous amount of derivatives that had poured into the market–there are close to $600 trillion of these papers around–are also not recorded in a global or centralized manner, or in a manner that allows you to begin to quantify them. [Former SEC Chairman Christopher] Cox thought that maybe the toxic part of all of these assets was $1 trillion to $2 trillion. [Treasury Secretary Timothy] Geithner told us there's maybe $3 trillion or $4 trillion. Nobody really knows, so in a way [they've created an] informal or shadow economy. This unidentified paper is the source of uncertainty and the credit contraction.

…That shadow hopefully is a temporary condition in the United States and in Western Europe. And it might pass in a year or 10 years, but it will pass. That passing condition that's occurring now in developed countries, that's a chronic condition in developing countries. We're always chronically in credit crunches–because you don't know who owns what, nobody dares lend to somebody else. Bringing the law to emerging markets is possibly the most important measure that can be taken to help these countries become rich.