Category: Economics

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. 

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.

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.

I saw a sign today that might fill your markets in everything and countercyclical assets categories.

"Foreclosure Bus Tours

800-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."  

Here is the offer:

We are offering you the unique chance to re-instate the value of
certain US and Canadian Stocks. For selected stocks, TLH Heliskiing and
Last Frontier Heliskiing will accept up to a maximum of $10,000 in
stock per person to be accepted as payment for their heliski trip. The
value of this stock will NOT be calculated at today’s price but at the
price on 01-July-2008. Stocks must be transferred to TLH Heliskiing and
Last Frontier Heliskiing using our preferred broker.

I thank Patrick Hidalgo for the pointer.

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. 

One source,
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
house prices.

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.

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.

Mark Thoma makes fun of Judd Gregg for thinking that tax cuts pay for themselves.  Mark is right to make fun.  What a ridiculous thing to believe.  All the good economists know that it is spending increases that more than pay for themselves.  

John Hoehn, a loyal MR reader, directs my attention to the following:

The funny thing is, my job is better than that.