Category: Current Affairs
No, No, No!
Fannie Mae said it will set aside the loan of a woman who shot herself
as sheriff’s deputies tried to evict her from her foreclosed home…."We’re going to forgive whatever outstanding balance she had on the
loan and give her the house," Faith said. "Given the circumstances, we
think it’s appropriate."
In other words, the taxpayers are now subsidizing self-injury.
The countercyclical asset, a continuing series
Nicer than tasers:
Mr. Borg, past
president of the North American Securities Administrators Association,
adds that in past market downturns he saw people turn to chinchillas, worm farms and super-breeds of rabbits.
Emus, too, were big. "Eventually, people got tired of them and just let them go," he says. "To this day, you’ll be in West Texas and a big
emu running wild will just come up next to your car."
Here is the link and thanks to John De Palma for the pointer. The National Alpaca Registry is doing well:
Peggy Parks, a 49-year-old auditor in Johnstown, Pa., turned to an
unusual farm animal. "I’ve lost a fortune in stocks, and my 401(k) is
falling through the floor. I feel comfortable in alpacas," she says.
She invested $56,000 in a small herd that she believes has a better
outlook than most mutual funds because of the animals’ breeding
potential.
Sentences to ponder
I think it’s very telling that in two days of hearings and two weeks of discussion we have yet to see *any* detailed mechanism for how Paulson’s plan will increase the supply of, say, inventory loans.
Here is more, mostly on the commercial paper market, interesting throughout.
Is sanity on its way?
Maybe, just maybe:
The U.S. Senate may consider expanding the authority of the Federal Deposit Insurance Corporation as part of a package of legislation to reduce turmoil in the financial markets, Senate Banking Committee Chairman Christopher Dodd said today.
You’ll note that the FDIC specializes in concentrating its actions on insolvent banks, which is exactly what we should be doing. The FDIC also has experience in this area, believe it or not.
Bailout plan fails in the House
Seriously. 205-228. They can still revote, by the way. Maybe this is one of those "field experiments" I have read about…
Michael’s bleg beg
He sounds like a very loyal MR reader to me:
Would you be willing to post a financial crisis topic bleg thread, where people can submit questions in comments and you occasionally pick from those questions?
I have so many questions as I try to get a handle on this stuff. I bet others do too, and that many questions are the same.
I make no promises but ask away…
And I haven’t forgotten your earlier requests, I hope to return to many of them once we are out of the woods.
The Workhouse Test
The new Bailout plan has some interesting restrictions on CEO compensation and golden parachutes. For example:
…a prohibition on the financial institution making any golden parachute payment to its senior executive officer during the period that the Secretary holds an equity or debt position in the financial institution.
This could either be a disaster or a saving grace. If you think the situation is very dire and also that Wall Street is ruled by greed then it’s a disaster as the captain may prefer to go down with his ship, rather than give up the golden parachute (life-jacket?). Thus, those who think the situation is very dire must be gambling on CEO altruism!
On the other hand, if you think that there is still private capital out there ready to buy at the right price then this clause may mean a smaller public bailout than many are predicting.
It all reminds me of the workhouse test.
Is a Potential Bailout Making Things Worse?
Ken Rogoff says yes. Elizabeth Warren at Credit Slips summarizes Rogoff’s discussion at a Harvard Roundtable (video):
Any liquidity crisis is caused by the promise of a government
bailout. Ken said [Actually this was Greg Mankiw, AT] that his many friends in investment banking said that
there is plenty of money to invest in financial services, but right now
it is "sitting on the sidelines." Why? Because the financial services
industry does not want to pay the terms required to get that money back
in circulation (e.g., give up equity). As he put it, why do business
with Warren Buffett who will negotiate a tough deal, if you believe
that the government will ride in soon with cheaper cash?Ken [this is correct, AT] also talked about the need to shrink the financial services
sector. He thinks it is good that the investment banking houses are
failing and many people on Wall Street are losing their jobs because,
in his view, we have an oversupply in that sector and our economy just
can’t support it.Ken’s background with the IMF and on the Board of the Federal
Reserve add a certain credibility to his assessment of conditions on
Wall Street. If he is right, the $700 bailout is saving some
investment bankers’ jobs in the short term, but overall it is just
making the financial system worse.
In a related point Felix Salmon suggests that the Ted Spread may not be a valid measure of distress when the Fed is providing lots of liqudity.
…if you’re a bank, you really neither want nor need three-month
interbank funding right now. Global central banks, led by the Federal
Reserve, have flooded the system with so much overnight liquidity that
you can get as much cash as you need, at a much lower interest rate,
directly from your central bank, overnight. The choice between that and
locking in a high interest rate for three months is a no-brainer.
The WaMu Speed Bankruptcy
The Washington Mutual "speed bankruptcy" seems like a good model for the rest of the industry. The FDIC took over the bank, wiped out the shareholders, and immediately auctioned it off to JP Morgan who paid $1.9 billion. Depositors are secure.
Notice that to do the deal, JP Morgan raised $10 billion in the equity markets and their shares rose. Moreover, the issue was oversubscribed so they may go back for more. All this illustrates that at least some of the substitute bridges from savers to investors that I have talked about continue to work (on the latter point see also Arnold Kling and Steve Landsburg).
Hat tip to Garrett Jones.
Who should make this decision come January 20?
Israel gave serious thought this spring to launching a military strike
on Iran’s nuclear sites but was told by President George W Bush that he
would not support it and did not expect to revise that view for the
rest of his presidency, senior European diplomatic sources have told
the Guardian.
Here is the story, from The Guardian. I hope you all have given this matter some thought…
A Supply Side Approach to the Crisis
Yesterday I pointed out that credit is still robust. Growth rates are declining, however, and many people say the real crunch is around the corner. Thus, today I want to suggest a new approach to dealing with the crisis that will have benefits regardless of how the crisis unfolds.
I see the key issue as follows: Banks bridge the gap between savers and firms. We want to keep capital flowing to firms even when some of the bridges collapse. One approach tries to prop up the collapsed bridges, a second approach tries to route funds across substitute bridges. A third approach is to increase the flow pressure – in other words, I suggest a temporary but large stimulus to savings.
I suggest that for the next 12 months contributions to an IRA account will never be taxed. We can modify this in various ways to cap contributions at a certain level etc. We can even make the proposal progressive – for the next 12 months contributions to an IRA account will never be taxed and the government will match $1 for every $10 saved for anyone with income below a certain threshold. The main idea is to increase savings.
The increase in savings will help deal with our current problems by offsetting any credit crunch. (Some of the savings will also help to recapitalize banks.) In addition, the U.S. needs a higher savings rate regardless. During the 1990s as measured savings rates declined to zero commentators argued that rising asset values compensated. Well asset values are now falling so true savings are negative – thus we need to increased savings.
A big benefit of this proposal – lower taxes, higher savings and a savings bonus to those with lower incomes – is that it should appeal to both the right and the left.
Betting markets in everything
Will Congress approve a bail-out package for banks before September 30? Right now the contract is selling at about 79, which usually translates roughly into a 79 percent chance of approval.
Note however that the marginal utility of money here does differ across worldstates. Assume that the marginal utility of money is higher (people are poorer) with no bail-out. That makes some people want to bet against the bail-out as a form of insurance, thereby raising the price of the "no bail-out" contract. (Addendum: that was bad phrasing — no one has to intend insurance as long as the MUs of money differ across the world-states.) In other words, the real implied chance of a bail-out is higher than 79 percent.
Economists Speak
An excellent Open Letter on the Bailout signed by many economists. Hat tip to Justin Wolfers.
As economists, we want to express to Congress our great concern for the plan
proposed by Treasury Secretary Paulson to deal with the financial crisis. We are
well aware of the difficulty of the current financial situation and we agree
with the need for bold action to ensure that the financial system continues to
function. We see three fatal pitfalls in the currently proposed
plan:1) Its fairness. The plan is a
subsidy to investors at taxpayers’ expense. Investors who took risks to earn
profits must also bear the losses. Not every business failure carries systemic
risk. The government can ensure a well-functioning financial industry, able to
make new loans to creditworthy borrowers, without bailing out particular
investors and institutions whose choices proved unwise.2) Its
ambiguity. Neither the mission of the new agency nor its
oversight are clear. If taxpayers are to buy
illiquid and opaque assets from troubled sellers, the terms, occasions, and
methods of such purchases must be crystal clear ahead of time and carefully
monitored afterwards.3) Its long-term effects. If the plan is
enacted, its effects will be with us for a generation. For all their recent
troubles, Americas dynamic and innovative private capital markets have brought
the nation unparalleled prosperity. Fundamentally weakening those markets in
order to calm short-run disruptions is desperately short-sighted.For
these reasons we ask Congress not to rush, to hold appropriate hearings, and to
carefully consider the right course of action, and to wisely determine the
future of the financial industry and the U.S. economy for years to come.
Ike Brannon, where is my talk?
My Wednesday evening, 6:30 p.m., Washington, D.C. talk on the financial crisis. Both I and some MR readers would like to know, so please leave the answer in the comments. If you know Ike, could you please forward this inquiry to him? My email for him isn’t working and tomorrow I am on the road.
And for those of you wondering about my Bloggingheads.TV with Robin Hanson, Robin had a cold and we will reschedule it.
Won’t Get Fooled Again
