Category: Current Affairs

Markets in everything, gypsy threat point edition

by  Tyler Cowen in

I do not read Italian, but Stefano offers me the following summary:

Gypsies exploit their bad reputation to make money. That's what happened in the provinces of Macerata, Ascoli Piceno and Ancona. A group of Gypsies coming from Veneto figured out an original way to swindle real estate agencies. Three of the Gypsies would show up at construction sites driving an expensive car and wearing nice clothes; they would get in touch with the sales office and and put down a down payment in cash for an apartment, sight unseen. After a couple of days they would then show up with their entire families, obstreperous and in tatters. This would trigger an immediate buy-back of the sale contract: the real estate agency would promptly pay back three times the amount of the down payment to get the apartment back (an apartment that the Gypsies did not in fact really want). Real estate agencies reporting this scheme to the police set in motion an investigation that resulted in three of the Gypsies being indicted for fraud. Their loot has been estimated around 300k Euros.

Here is the article.

Fortunately, the appetite for U.S. government debt can be taken for granted

by  Tyler Cowen in

Mike Perry, a loyal MR reader, sends me this:

The U.K. failed to find enough
buyers for 1.75 billion pounds ($2.55 billion) of bonds for the
first time in almost seven years as debt investors repudiated
Prime Minister Gordon Brown‘s plan to stem the worst economic
crisis in three decades.

Gilts slumped after the London-based Debt Management
Office, which manages bond auctions on behalf of the Treasury,
said investors bid for 1.63 billion pounds of the 40-year
securities. The last time the U.K. government was unable to
attract enough investors was in 2002 when it tried to sell 30-
year inflation-protected bonds. The yield on the 4.25 percent
gilt due 2049 rose 10 basis points to 4.55 percent.

Not a small detail — Department of Whoops

by  Tyler Cowen in

The joint venture funds would be able to draw on Fed Talf financing — which is a surprise concession.

That's from today's FT.  Previously it had been thought that Talf was to finance new lending, not legacy assets.  That's where the whoops comes in.  Do you not worry that the future independence of our central bank has been tossed out the window?

At first I thought these numbers were a typo

by  Tyler Cowen in

From this story:

To entice private investors like hedge funds and private equity
firms to take part, the F.D.I.C. will provide nonrecourse loans – that
is, loans that are secured only by the value of the mortgage assets
being bought – worth up to 85 percent of the value of a portfolio of
troubled assets.

The remaining 15 percent will come from the
government and the private investors. The Treasury would put up as much
as 80 percent of that, while private investors would put up as little
as 20 percent of the money, according to industry officials. Private
investors, then, would be contributing as little as 3 percent of the
equity, and the government as much as 97 percent.

A.I.G. bonuses

by  Tyler Cowen in

Outrage, outrage, blah, blah, blah, etc.  Often I feel that some topics are too obvious to blog.

The real lesson is that this is another reason not to nationalize banks.  It means politicizing every decision which ends up in the newspaper.

Here is a good post on why the bonuses should be paid.

Outrage, outrage, blah, blah, blah, etc.

Addendum: Vanya comments:

If you don't think a massive transfer of wealth from one segment of the
population to a small elite based solely on political influence, not
value creation, is an outrage then you're not much of a human being
Tyler.

The banking crisis as a foreign policy issue

by  Tyler Cowen in

Here is some simple background:

If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz
& Company, other institutions, including pension funds and American
and European banks “will face their own capital and liquidity crisis,
and we could have a domino effect.” A bailout of A.I.G. is really a
bailout of its trading partners – which essentially constitutes the
entire Western banking system.

No one wants to say it, but essentially the Fed has been bailing out European banks. 

The inflation-adjusted cost of the Marshall plan has been estimated at about $115 billion in current dollars.  If we end up spending $250 billion on AIG, how much of that sum will go to European financial institutions and might it someday exceed the scope of the Marshall plan?  (I do not, by the way, think that central banks ought to treat foreign creditors differently.)

One attempt to formulate a bailout plan for eastern Europe just failed.  This is round one in a series of longer negotiations.  As the European financial crisis worsens, and Germany asks itself whether it will bail out Ireland and Hungary and maybe others, it will become increasingly clear that major foreign policy crises are afoot. 

The best actual marker of the progress of the financial crisis is not stock or real estate prices, but rather how well international cooperation holds up.

I wish to thank Michael Mandel for a conversation related to these topics.

Headlines of the day

by  Tyler Cowen in

1. 6.2% Contraction Rate in 4th Quarter — Budget Based on Brighter Projection (that title is found only on the paper version).

2. Democrats Limit Future Financing for Washington Voucher Program.

3. Obama moves to undo rule on abortion procedures: "The Obama administration moved Friday to undo a last-minute Bush
administration rule granting broad protections to health workers who
refuse to take part in abortions or provide other health care that goes
against their consciences."

That's from today alone.  I ask you: What song or song title comes to mind?

Obama’s budget plans

by  Tyler Cowen in

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
    efficiencies.
  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.

Not any good reason for this

by  Tyler Cowen in

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?

Free Market Bank Nationalization

by  Alex Tabarrok in

I believe that bank nationalization is now very likely.  It may even be desirable.  The term nationalization, however, clouds judgment on both sides of the debate.  It's better to think of what we want to do as bankruptcy.  Many of the major banks are insolvent.  When the liabilities of an ordinary firm exceed its assets the firm enters one of a variety of types of bankruptcy procedure during which management is often removed, the firm is sold or reorganized and liability holders take ownership or are paid off at a discount.  Notice that we do not call a bankruptcy procedure, nationalization, even though it typically occurs under the auspices of a government employed judge. 

When it comes to the banks the issue is more complicated than with an ordinary firm because the major liability holders are depositors whom the government has guaranteed.  As a result, the ultimate liability holder is the government.  But now, as a thought experiment, imagine that we had private deposit insurance.  What would a private insurance firm do in this situation?  Would it pander to the current bank management and carry the zombie banks on its books, hoping and waiting for a miracle?  Or would it step in, remove current management, pay off the depositors, reorganize and then sell the banks to recoup its losses?  I believe a private insurer would follow the second path, the fact that the government is not yet ready to do this indicates how powerful bankers are in Washington.  Thus, given deposit insurance the procedure most consistent with free market principles is bankruptcy, preferably a speed bankruptcy procedure under the auspices of the FDIC which has significant expertise in this field.

A speed bankruptcy;  1) punishes current management reducing moral hazard, 2) will be less politicized if done under the auspices of the FDIC than if done piecemeal with congressional involvement and 3) will get the banks working again as soon as possible.

Notice how the term nationalization confuses the issue.  First, it suggests government ownership of the banks which would indeed be a disaster.  People in favor of free markets will rightly want to avoid any such outcome but ironically it's the current situation of "wait and see," and "protect the banker," which is likely to lead to an anemic recovery and eventual government ownership.  Second, it confuses people on the left who think that nationalization is a way to insure that taxpayers get something on the upside.  That idea is a joke – there is no upside.  Taxpayers are going to have to pay through the nose but the critical point is that the taxpayers must pay the depositors whom they have guaranteed not the banks.

The debate so far has been framed between a "bailout" and "nationalization." But the public rightly sees the bailout as a way to protect bankers and thus we get pressure for government ownership, which has already happened in part through government control over banker wages.  Bankruptcy in contrast is a normal free market procedure, it emphasizes that the firm has failed and current management should be removed.  Framing the issue in this way, for example, makes it clear that only the depositors should be protected and under reorganization there should be no control over wages on future management (wages are going to have to be high to get anyone to take on the task).  Finally the idea of bankruptcy makes it clear that the goal is to get banks solvent, under new management, and back under private control as quickly as possible.

Addendum: Garett Jones nicely lays out the case for doing the normal thing.