Archive for February, 2009

Much ado about nationalization

25 February 2009

The word “nationalize” has at least one great use, in the punchline of a hilarious Winston Churchill story.

But in the current media firestorm over bank nationalization, maybe it’s time to abolish the word as harmful to thought.  (David Paul seems to agree.)

I’ve used the term myself and like the idea of the government temporarily seizing control of the big zombie banks, but “nationalization” has been bandied about so loosely that it’s lost its meaning.  Many people described the Bush-Paulson capital injections (via purchases of preferred stock that gave the government small nonvoting stakes in some banks) as nationalization, when they were really just crude subsidies (as Willem Buiter pointed out).  And if it’s nationalization for the government to temporarily take over a failing bank so as to help depositors and creditors,  avoid systemic risk and arrange for the orderly sale of its assets, then we’ve been doing it for over 75 years, ever since the creation of the FDIC.  In fact, by some compelling accounts, Sheila Bair’s FDIC has been the one shining light in this crisis.

(more…)

Credit crunch update

21 February 2009

The “credit crunch” was at the heart of the media coverage of the financial crisis as it came to a crescendo last fall, but I haven’t heard much about it lately.  From what I do hear, the credit markets have loosened up quite a bit, with the big exception of mortgage loans that once got repackaged as securities.  Seems nobody wants to buy mortgage-backed securities (new or old) anymore, which is more than understandable.  I don’t either.

John Authers of the Financial Times recently noted that the commercial paper market, whose tightening last fall was evident in a big spike in interest rates, has eased considerably, as has the market for corporate bonds:

‘… there is evidence that banks’ problems may have been ring-fenced for the short-term. As Mark Lapolla of Sixth Man Research in California points out, use of the Federal Reserve’s commercial paper facility, for making short-term loans to companies, has dropped in the past few weeks, so businesses are finding other sources of finance. Large companies are issuing bonds after months when this was impossible.’

Authers seems to think the risk of a systemic collapse is now past:

‘The market believes that financial stocks could go to zero without damaging the rest of the economy. They are down 28 per cent for the year while no other sector is down more than 12 per cent.’

(more…)

A dead economist for our time

16 February 2009

The new Economist has a great piece on Irving Fisher, the great American monetary economist who articulated the destructive aspects of deflation better than anyone before him.  Fisher was a weird dude — eugenics and Prohibition were among his passions — but his “Debt-Deflation Theory of Depressions” (the lead article in the first issue of Econometrica in 1933)  lives on.  Virtually every monetary economist since, from Milton Friedman to Ben Bernanke, has absorbed Fisher’s lessons.  So has the Federal Reserve.  Nobody tries to defend deflation anymore.

A fine piece in the new Forbes, “The Real Lesson of the New Deal,” by ex (in more ways than one) Reaganite Bruce Bartlett, complements it nicely.  Bartlett sketches the devastating effects of deflation in the early 1930s and throws in some sensible points about policy in the Great Depression.  (Hat tip: Jeff Sachse.)

$6 billion pile-up

14 February 2009

Real GDP kind of did fall 5% last quarter, just as consensus forecasts had it and worse than the official drop of 3.8%.  This story’s a couple weeks old (been busy), but just as the latest unemployment numbers are much worse than they look, the fact that the actual (annualized) drop was “only” 3.8% is actually a sign of weakness, not strength. The NYT and other sources noted that a big reason for the discrepancy was a surprise increase in unsold inventories.

What struck me was the item in the Commerce Department news release that showed that the inventory pile-up actually accounted for all of the discrepancy.  It was 1.3% percent of GDP, i.e., the entire difference between the 3.8% drop in GDP, and the 5.1% drop in “real final sales of domestic product.”

(more…)

Turning Japanese?

14 February 2009

Yesterday’s NYT continues the paper’s excellent coverage of the financial crisis with Hiroko Tabuchi’s article “In Japan’s Stagnant Decade, Cautionary Tales for America.” Notable quote:

‘“I think they know how big it is, but they don’t want to say how big it is. It’s so big they can’t acknowledge it,” said John H. Makin, an economist at the American Enterprise Institute, referring to administration officials. “The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks.”’

When someone from the American Enterprise Institute says it’s time to nationalize, then it’s probably time for policymakers to show a little openness to it (e.g., “only as a last resort,” “we’re not ruling out anything”).

(more…)

Big zombies

12 February 2009

Must . . . eat . . . money

(hat tip: Julia)

Many economists have been warning that the net-worth problems of the banks are a lot bigger than the $700 billion that’s been allocated to deal with them.  Some have said a TARP II, TARP III, etc., to the tune of $2 trillion or so may be necessary to fix the banks once and for all.  Now Dr. Doom himself, Nouriel Roubini, says the banking system is just plain insolvent, and by about $3.6 trillion.  The specter of 1990s-Japan-style zombie banks in the U.S. is no longer a specter but a reality, it seems.

(more…)

Obama’s economists, Part I

10 February 2009

This is a topic I’m sure I’ll be returning to many times.  Among my greatest post-election disappointments was Larry Summers’s comment that it was a misconception that deregulation was somehow responsible for the financial crisis.  Hello?  And I still don’t know what to think about Tim Geithner — New York Fed experience a big plus, accomplice role in flawed Paulson bank bailout and AIG handout a red flag (though the “just following orders” defense may apply here).  Clearly Geithner and the overall economic policy of the Obama Administration will be much more of a known quantity after 11 a.m. this morning when Geithner gets his “moment in the sun” to announce the new bailout plan.

In Sunday’s New York Times, Frank Rich, not for the first time, rips Obama’s economic team as pretty much the same Summers-Robert Rubin crew that rubber-stamped every major deregulatory initiative in sight, giving rise to behemoth too-big-to-fail banking conglomerates and unregulated credit default swaps.  A lot of it is familiar, but I’d missed this news item from last week.   Reports are that the great Paul Volcker, the former Federal Reserve chair who conquered double-digit inflation in the early ’80s and has been a voice of sanity in financial policy ever since, is being frozen out of policy discussions by Summers.  (This brings to mind Willem Buiter’s line that “adding Larry to a team is like putting a whale in an aquarium.”)  Now, the Economic Recovery Advisory Board that Obama set up and tapped Volcker to head is officially supposed to be an  independent voice, separate from the cabinet and Summers’s National Economic Council, so maybe the idea is to keep them separate and avoid a groupthink mentality.   But the word is that Volcker isn’t happy with his current treatment.   We’ll see what happens now that the Economic Recovery Advisory Board is finally up and running.

(more…)

Stat of the day: AAA ratings

10 February 2009

This one floored me:

“In January 2008, there were 12 triple A-rated companies in the world. At the same time, there were 64,000 structured finance instruments, such as collateralised debt obligations, rated triple A.”

— Goldman Sachs Chief Executive Lloyd Blankfein in The Financial Times, 9 Feb. 2009

Finance imitates baseball:  AAA is now bush league.

Jobless in January

10 February 2009

Last Friday’s unemployment report for Jan. 2009 is bad old news by now — 598,000 jobs lost in January (worst one-month job loss since 1974); 3.6 million lost since the recession began in Dec. 2007, half of that in the last three months; an unemployment rate of 7.6% (worst since 1992).  But as with most unemployment reports, the news beneath the surface is even worse.

For starters, the reported data, like most economic data, are seasonally adjusted, so they take into account the fact that economic activity is heavier in some months (like December) than others (like January).  Seasonal adjustments are well and good as regards making valid comparisons across time, but it’s hard to seasonally adjust people.  The not-seasonally-adjusted unemployment rate for January was an eye-popping 8.5%.

And, once again, the standard unemployment rate is only for people actively looking for a job and does not count discouraged job-seekers, involuntary part-time workers, etc.   The BLS adds those into the “U-6 unemployment rate,” which is the one that shows the full amount of misery, and for January it was 13.9% (seasonally adjusted) or 15.4% (not seasonally adjusted).

Hard times.

Nationalize it, mon

10 February 2009

petertoshThe sticking point in the lingering credit crunch seems to be the remaining toxic assets (or dodgy assets, as the Brits call them) on the balance sheets of so many banks, especially the big problem banks that are getting government bailouts or are in line for them.

The sticking point in the policy question of how to remove those toxic assets as an obstacle to normal financial intermediation seems to be valuation, i.e., as Winston Churchill is said to have put it, a matter of haggling over the price.   No small haggle, this.   It’s often said that there is no market for these assets, and that appears to be true in the sense that there seems to be an unbridgeable gulf between what banks say those assets are worth (97 cents on the dollar?) and what they’ll fetch on the open market (38 cents on the dollar?  The numbers are from a New York Times article, 2 Feb. 2009, and refer to a particular mortgage-backed bond.  A division of Standard & Poor’s estimated the bond’s value at 87 cents or 53 cents under a less optimistic scenario. )  Treasury Secretary Tim Geithner’s plan for the remaining $350 billion of last fall’s bank bailout is due to be unveiled Tuesday, and advance word is that it calls for the Treasury to buy up a lot of those toxic assets and quarantine them in a “bad bank.”

(more…)