Day: November 7, 2008

Dueling Federal Reserve Banks!

A few weeks ago, three economists at the Federal Reserve Bank of Minneapolis set off a debate among Internet-addicted economists by claiming that, in essence, lending to the real economy was just fine and anyone who said there was a credit crisis was wrong. (See my initial reaction, as well as links to the original paper and several perspectives.) Now we have been treated by four economists at the Federal Reserve Bank of Boston, who argue that there was, in fact, a credit crisis. In particular, they say:

“the aggregate figures in [the original paper] do not reveal the weakening in new lending”
lumping together AA and A2/P2 commercial paper hides the problems for A2/P2 issuers
lumping together all durations hides the fact that commercial paper shifted from longer durations to shorter durations
even though most corporate lending is via bonds, not direct bank lending, households and small businesses rely heavily on banks

and similar points. Take a look; some of the charts are fascinating.

419,000 Jobs Vanish

240,000 jobs lost in October; September revised from 159,000 to 284,000; August from 73,000 to 127,000. That’s 419,000 jobs less than we thought we had a month ago. It’s 651,000 less than there were three months ago. And because we need 140,000 new jobs each month just to keep place with population growth, that’s over 1 million fewer jobs than the economy would need to maintain unemployment where it was three months ago. Unfortunately, everyone expects this quarter and next quarter to be worse than last quarter. On top of that, unemployment is a lagging indicator: because of the transaction costs in firing and hiring workers, companies exhaust their other cost-cutting opportunities before laying people off, and they don’t hire again until they are certain that the economy is growing again.

More than 22% of the unemployed have been out of work more than six months, which is usually when unemployment benefits expire. For this and other reasons, only 32% of the unemployed were receiving state benefits in October. These are more reasons to expand unemployment benefits in multiple directions, at the very least for a limited time period. Alan Krueger has described the other ways our unemployment insurance system is broken.

Unfortunately, there is fear that President Bush (remember him?) will veto the stimulus package, including extended unemployment benefits, that the Democrats want to pass in November, thereby accomplishing nothing except delaying it by two months. Sigh.

Recession in Silicon Valley

Silicon Valley is often touted as an example of what is best about American capitalism – entrepreneurial, risk-taking, innovative, hard-working, and sometimes fabulously successful. Of course, it is also periodically criticized as a land of con men and get-rich-quick schemes.

Sequoia Capital, perhaps the most venerated VC firm in the Valley, held a “secret meeting” in October to discuss the impact of the credit crisis and economic downturn on the technology industry and startup companies. The slides have been leaked, beginning with a tombstone with the words “R. I. P. Good Times.” (By the way, those of you not from the business world – particularly those with academic backgrounds – may find the presentation amusing for the way it combines large amounts of incommensurate data with an extreme scarcity of verbs, thereby avoiding the need for a coherent argument. My favorite is slide 42. But believe me, this is far better than most business presentations.)

One of the first employees of my company has a much more original and intelligent perspective on what the recession means for Silicon Valley.

AIG, Credit Default Swaps, and “Risk Management”

Since the Lehman credit default swaps settled without the sky falling, there has been a small wavelet of support for the once-obscure financial instruments that are widely blamed for amplifying the effects of the financial crisis, including a Forbes.com op-ed entitled “Credit Default Swaps Are Good for You.” I happen to agree that CDS can play a useful role in enabling bond investors to hedge against the risk of default, and thereby make it easier for some institutions to get credit. But it’s a bit premature to proclaim that all is well and good in swapland.

Most obviously, there is the troubling matter of AIG, which has recently received additional scrutiny from the likes of the New York Times and the Wall Street Journal (subscription required). AIG has already burned through most of its initial $85 billion loan from the government, has drawn down half of a separate $38 billion loan for its securities lending business, and recently got permission to sell up to $20 billion of commercial paper to the Fed. (And remember, when negotiations over the AIG bailout began around September 12, the company was saying it only needed $20 billion.)

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