Month: February 2009
I saw a sign today that might fill your markets in everything and countercyclical assets categories."Foreclosure Bus Tours800-XXX-XXXX"The availability of the tours is the market is anything.Equity in the tour company will be the asset.
He praises its moderation. His conclusion is: "It could have been much worse."
The old rating system granted up to five stars but now the maximum number of stars is ten. This signals that they wish to start exaggerating the quality of the product. When there are only five stars you know that they are laying their reputation on the line when they grant five stars to a new CD. (Michelin of course won't give a restaurant more than three stars. They don't calculate out to the fourth decimal place along a scale of one thousand.) If the music isn't good you can decide to stop trusting them. But say they give a new release eight, nine, or who knows maybe eight and a half stars? What exactly are they trying to say? Yes they are putting their reputation on the line when they give ten stars, but this will happen so infrequently that it will be harder to judge their overall trustworthiness.
Evaluation systems with fewer and grosser distinctions are often more credible because they are easier to monitor.
1. Laurence M. Ball, Money, Banking, and Financial Markets. A truly modern money and banking text; could this be the best money and banking text ever? I don't yet see an Amazon link for it but presumably it will be out soon. (Addendum: Link is now here.)
2. William Flesch, Comeuppance: Costly Signaling, Altruistic Punishment, and other Biological Components of Fiction. An excellent book on why we find fiction and narrative so satisfying; the notion of vindication is central to the hypothesis. Recommended.
3. David Post, In Search of Jefferson's Moose: Notes on the State of Cyberspace. This book is written in the style of Jefferson in at least one way. I mean that as praise.
4. Joel Kraemer, Maimonides: The Life and Times of One of Civilization's Greatest Minds. Fills in many of the pieces about his life and work; it seems he lived part of his life as a practicing Muslim.
Here is the story, but this bit caught my eye:
Potential strains in relations between the US and Canada were exposed today when Barack Obama, on his first foreign trip as president, hinted at renegotiation of the North American Free Trade agreement.
Obama at a joint press conference with the Canadian prime minister, Stephen Harper, tried to square a campaign pledge to renegotiate the agreement while at the same time avoid sparking a trade war with Canada.
Obama told reporters at the press conference in Ottawa he wanted to
begin talks on adding provisions to the agreement relating to workers
and to the environment.
On this one it is announced in Canada but the real victim is Mexico. The simple truth is that so far economic policy has fallen short of being good. Some (not all) left-wing bloggers may be reluctant to say this so early in the tenure of such a long-awaited administration, but perhaps a few of them are thinking it. There is the stimulus, the Geithner banking plan, and the housing plan. Of course there are differences of opinion but perhaps it is fair to say he is straining to be one out of three?
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I thank Patrick Hidalgo for the pointer.
2. NCAA as cartel.
4. "Suicide by cop."
5. Finally, a campus boycott I can support.
6. Democratic chess.
7. Peter Orszag, the effective economist.
Try "evidence for fiscal stimulus," with the quotation marks. Maybe that is funny wording, but only three results come up (plus this post, presumably, soon enough), and two of them are from this blog.
I thank Leigh Caldwell for the pointer, here is his interesting post (includes a joke) on that same topic.
The ever-worthy Mark Thoma rounds up reactions and analyses, including some critical remarks from CalculatedRisk and some praise from Felix Salmon. Willem Buiter is negative (worth a read). Simon Johnson says it's not enough. WSJ surveys a few reactions as well. I'll add some observations:
1. Housing prices ought to be lower, and as quickly as possible. So aiding homeowners cannot be justified on the grounds of propping up prices, which is difficult to accomplish anyway. Such aid has to be justified in some other way. The main argument is that our ex post procedures for foreclosures are not what we would have chosen ex ante, had we known that such a severe housing and financial crisis could be possible. That opens up some room for beneficial intervention, but a good plan it still hard to pull off.
2. When it comes to refinancing the Fannie and Freddie loans, and expanding those agencies, how many foreclosures will this avoid? We should be reducing the size of the mortgage agencies rather than putting another $200 billion into them.
3. We should not be helping people stay in their homes if their mortgage payments are at 43 percent of their income. (The bill requires banks, in such cases, to lower interest rates until monthly payments are at 38 percent of income. The government then steps in to lower payments to 31 percent of income.) I don't feel moral outrage (although it is morally outrageous), I just don't think it is a good use of money. I also wonder how it works when your income is quite variable year to year. Are they sure there is no way to game this?
It will in the short run prevent some (enough to matter?) foreclosures. But it won't keep up the long-term price of homes or prevent eventual foreclosures when the home has negative equity. It adjusts interest rates on the payments, not principal on the loans (thank goodness).
Most of all it is a bad precedent which we will live to regret. It is a significant move away from the idea of commercial decisions based on contract.
by the way, suggests that lenders will have veto rights over these
"renegotiations" by choosing to foreclose instead of accepting the lower payments. But foreclosure is quite costly for the bank, so I don't feel so much better.
By the way, aren't we trying to help the banks?
4. Sellers receive various bonuses for modifying eligible mortgage loans. This is ideally a Pareto improvement if more of these contracts could be modified than is currently the case. My doubt is whether the subsidy will affect many modification decisions; so far I don't see that lenders are putting a lot of effort into renegotiations. Here is a good article on when modifications work and when they do not. I doubt if an extra 1k will make much difference.
5. Guidelines for modifying eligible mortgage loans are established. Ideally this could give more scope to the Coase theorem, but see my reservations under #4.
Felix Salmon, who likes the plan, nonetheless offered up a scary bit:
But really nobody has a clue how much it will cost: that's entirely
dependent on whether or not the plan succeeds in arresting the fall of
The bottom line: #3 is a deal-killer for me. Just say no, and you don't even need a moral hazard argument (they are overrated, anyway) to see why this is troubling. I'd like to see the plan's proponents predict how many foreclosures it will forestall and be willing to take their lumps if they are wrong.
on Tuesday, Mr Greenspan said that “in some cases, the least bad
solution is for the government to take temporary control” of troubled
banks either through the Federal Deposit Insurance Corporation or some
Here are answers from many economists, here was mine:
In my view, fixing the banking sector is more important than getting
the stimulus right. So if you can afford to lose the money, go to a
large bank (more likely to be insolvent), find their most overpriced
service, and buy as much of it as you can. That way you are doing your
part to recapitalize our banking system.
If you’re stuck for ideas, just keep on using ATM machines, owned by
other banks, so you can pay large fees to take out small sums of money
from your checking account. When you need to, take all of your
withdrawals and deposit them back in the account once again and start
all over with the process.
Here is a good post on that topic, hat tip to Kevin Drum. It's not as simple as you think. So when someone says "The government should close down insolvent banks" he needs to specify which measure of insolvency he has in mind. It makes a big difference.
Most of you have heard about the Japanese gdp report; it implies an annualized rate of decline of almost 13 percent. OK, they depend on exports but why is it so dire there?
You also may have heard that the Phoenix Suns have been trying to unload All-Star players Amare Stoudemire and Shaquille O'Neal. They are not hoping to get equal talent in return but rather they need to lower their payroll. (Why pay $75 million a year for a fringe playoff club?) And the New Orleans Hornets, former contenders, traded center Tyson Chandler simply to unload his salary.
I think of the Suns or Hornets as similar to a highly leveraged institution. I don't know the debt level of their corporate structure but that is not the point. The Suns have been spending lots in recent years toward the goal of ever-rising prices for season tickets and corporate boxes. Does that strategy sound familiar? If the future price hikes don't come on the main asset, they can't afford their obligations and so they will try to shed illiquid and hard-to-value assets into an unwilling market. Sound familiar? (As an aside, I wonder if barter is one way to jump start trading in illiquid financial assets.)
Does this sound familiar?:
"You've got a market loaded with motivated sellers and only a very
small group of buyers," one NBA executive told ESPN.com. "It's really
ugly. Owners are scared to death right now."
Institutions can have receipts and obligations which require growing revenues even if they don't have much explicit debt on their books. I think also of the artistic non-profits which invested in expensive facilities, in the hope of ever-rising donations from their investment banker patrons. Many other parts of the economy may be "leveraged" in this fashion, with or without high levels of debt.
Japan, of course, has high levels of government debt and also a demographic problem. I wonder whether their future-oriented export strategies make them even more leveraged, de facto, in a manner resembling the (former) business strategy of the Phoenix Suns.
One lesson of this crisis will be how deep the concept of leverage extends. That's another reason why this is fundamentally a crisis of sectoral shifts.
The ProPublica site maps/graphs infrastructure spending per unemployed worker against the unemployment rate but in effect that puts the number of unemployed people on both sides of the regression/graph and if there is any measurement error this can result in bias. The graph with spending per unemployed worker is similar to the above but with a slightly more negative slope.