Monthly Archives: February 2009

From Here To A Lost Decade

Posted on February 21, 2009 by | 33 Comments

Why don’t all recessions seem to teeter on the brink of turning into a “lost decade” as President Obama described, accurately, our current predicament?

In a standard recession, some people (or firms or governments) cut back on their spending.  But others either maintain their spending or actually buy more.  A recession is typically a good time to invest in relationships and buy longer-lasting assets; for example, it’s a good time for private universities (with endowments) to hire faculty, build labs, and acquire the land for new buildings.  Anyone with a long time horizon, deep pockets, and access to cash ordinarily thinks in these terms.

But instead of this kind of countercyclical private sector investment behavior, Drew Faust, the President of Harvard this week sent a downbeat message to her stakeholders, Continue reading →

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Dublin (and Vienna) Calling

Posted on February 20, 2009 by | 20 Comments

If you think credit default swap (CDS) spreads are informative with regard to developing pressure points and issues that policymakers should focus on (or will likely spend hectic weekends dealing with), you should look at the latest CDS spreads for European banks.  The Irish story we have already flagged.  I’m also concerned that developments in East-Central Europe are starting to affect the prospects for West European banks, most notably in Austria. Continue reading →

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Everyone Get in Line

Posted on February 19, 2009 by | 30 Comments

For months now, Ricardo Caballero has been proposing yet another solution to the toxic-asset problem: universal, government-provided insurance for the assets. He recently let loose a double-barrelled volley in both the FT’s Economists’ Forum and the WSJ’s Real-Time Economics blogs. I believe he is correct that this would solve the problem: if the government is insuring any bank assets that the banks want them to insure, then the banks are protected from any further write-downs, and they are healthy by construction. However, there are other ways of getting to the same outcome. One would be for the government to pay face value (or current book value) for any assets that the banks would want to sell. Another would be to take over every single bank that fails Mr Geithner’s stress test, pull out all of their bad assets, and reprivatize them. All of these solutions will result in banks that are not encumbered by the fear of further writedowns on toxic assets.

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A Step in the Right Direction

Posted on February 19, 2009 by | 18 Comments

I don’t have a lot to add to Simon’s article about the housing plan in The New Republic – as you might imagine, we did talk about it – but I do want to take issue with the title, “Insufficient Boldness.” One quirk about writing for other publications is that you usually (not always) have complete control over the body of the article, but no control of the title (and often you don’t know what the title will be  until you see it printed).

Continue reading →

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President Obama’s Housing Plan

Posted on February 19, 2009 by | 24 Comments

There is an old saying among experienced economic policymakers, “in a major crisis, do not err on the side of being insufficiently bold.”  And we know that President Obama’s economic team are avowed proponents of this approach.

The housing plan unveiled yesterday is impressively comprehensive – I go through some of the details in a post this morning on The New Republic’s Site.  But is it bold enough?  Continue reading →

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Kidnapping Chrysler

Posted on February 18, 2009 by | 44 Comments

In this brief interval before the new housing plan is announced, I’ll try to sneak in a comment on the auto bailout, and the plans submitted by GM and Chrysler yesterday. This may be an obvious question that many people have thought about, and got some discussion in December, but: Why does Cerberus (the private equity firm that owns Chrysler) need money from the government?

Continue reading →

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YLS Conference on the Financial Crisis

Posted on February 17, 2009 by | 7 Comments

If you are a true crisis junkie (or you are having trouble falling asleep tonight and need more to read), my own Yale Law School held a conference on the financial crisis, its causes, and potential solutions (including better regulation) on Friday. There were a number of famous names present, including Lucian Bebchuk, Christopher Mayer (of the Hubbard-Mayer proposal), Anil Kashyap, and others. You can look at the agenda or check out the readings for sessions one, two, three, and four (each includes links to PDFs of the papers).

And where was I during all of this? I was home with my daughter.

(Let me know if you find something particularly important that I should read – I’m finding it impossible to keep up.)

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The “Good Bank” Proposal

Posted on February 17, 2009 by | 55 Comments

There has been a small but increasing amount of attention being given to the “good bank” idea: instead of creating a government entity to buy toxic assets from existin banks – or nationalizing existing banks, removing their toxic assets, and then reprivatize them – why not create brand new, good banks with the same government money, enabling them to lend money unencumbered by previous bad decisions, and then privatize them? (Willem Buiter floated this idea on January 29, and Paul Romer has a similar proposal in the WSJ,  although I’m proud to say that Nemo, who has his or her own blog, raised it in a comment on this blog two weeks earlier.)

Romer suggests using government capital to create new, healthy banks that can essentially compete with the existing banks, which can then be treated under existing rules and regulations – if they become insolvent, they get taken over; some of their liabilities (like FDIC-insured deposits) are guaranteed, and some aren’t – and that’s that. Buiter goes a step further and recommends taking away banking licenses from the legacy bad banks and making them institutions that just run off their existing assets, in part by selling their good assets to the new good banks.

Continue reading →

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Posted in External perspectives

Germany Shows Leadership (?)

Posted on February 17, 2009 by | 17 Comments

In the discussion over whether or not Ireland and other eurozone countries face serious economic issues (e.g., as suggested by the credit default swap, CDS, market), we have been joined by an unlikely ally: the German Finance Minister, Peer Steinbrueck.  To avoid any misunderstanding, here is the exact wording from  Bloomberg this morning: Continue reading →

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Reprivatization After Paulson

Posted on February 16, 2009 by | 52 Comments

The worst possible way to nationalize would be to assume responsibility for the liabilities of banks, at the same time as not putting in place adequate oversight and failing to ensure that the taxpayer gets any upside.  Even worse, we could install managers with a proven track record of incompetence.  Anyone who proposed such a scheme today – as we collectively kick the tires of plausible alternative approaches – would be dismissed as an ridiculous crank.

Yet it is exactly this kind of nationalization that we – or, more specifically, Hank Paulson – already did. Continue reading →

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Can the Public-Private Plan Work?

Posted on February 16, 2009 by | 57 Comments

Back in September, Simon and I wrote two op-eds on the governance and pricing challenges of buying toxic assets. As many people have noted, those problems have not gone away. The latter, in particular, represents a formidable barrier to Tim Geithner’s latest proposal to create a public-private partnership to relieve banks of their toxic assets. (In summary, the problem is that banks do not want to sell at the price the free market will offer, because (a) they think the assets will be worth more later and (b) doing so would force them to take writedowns that might make them insolvent.)

Lucian Bebchuk also wrote an op-ed on this topic in September, and to his credit he is still trying to turn “TARP II” into something feasible in his new paper, “How to Make Tarp II Work.” The paper has some good ideas but I’m not sure it solves the basic problem, which unfortunately has to do with the laws of arithmetic.

Continue reading →

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Every Consensus Must End

Posted on February 16, 2009 by | 58 Comments

The prevailing consensus on any economic policy is a fascinating beast.  For years it can stay put, seemingly immovable, and even – in some cases – becoming enshrined in legislation or central bank statute.  One day it begins to shake, ever so slightly; under the pressure of events, a wider range of serious opinion develops.  And then, all of a sudden, the consensus breaks and you are running hard to keep up.

We saw this last year with regard to discretionary fiscal policy – fiscal stimulus – in the US.  Eighteen months ago, very few mainstream economists or other policy analysts would have suggested that the US respond to the threat of recession with a large spending increase/tax cut.  The consensus – based on long years of experience and research – was that discretionary fiscal policy generates as many problems as it solves.  To argue against this consensus was to bang your head against a brick wall, while also being regarded as not completely serious.  Continue reading →

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The Irish Question

Posted on February 15, 2009 by | 18 Comments

My Friday post on Irish credit default swap (CDS) spreads seems to have fed into a productive debate among experts on the Irish economy.  Still, there is something of a puzzle here. Continue reading →

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Tracking the Household Balance Sheet

Posted on February 15, 2009 by | 30 Comments

One concept that has gotten a lot of attention the last few months is the household balance sheet: the relationship between household assets and liabilities, and what that means for household behavior (consumption versus saving). Though not the precipitating factor in the current crisis, the weakening of household balance sheets (fewer assets, same liabilities, less net worth, more anxiety) has likely had a significant effect in depressing consumption, which has been the single largest factor in our recent decline in GDP. The Federal Reserve recently released a snapshot of the household balance sheet in its triennial Survey of Consumer Finances, so we can see what the situation looks like in some detail. The survey was actually taking in 2007, but with a few adjustments we can see what the current balance sheet looks like.

On the headline level, median income fell from $47,500 to $47,300 (all figures are in constant 2007 dollars), while median net worth (assets minus liabilities) grew from $102,200 to $120,300. No surprise there: we already knew wages stagnated, while real estate and stocks appreciated. However, since the survey was conducted in 2007, median net worth fell by 17.8% according to the Fed estimate, to $99,300, and that’s just to October 2008. Given that the cumulative returns of the stock market have been about -15% since October 31, and that housing prices have fallen as well (and the Fed used a housing index that has fallen less than the Case-Shiller index*), that net worth is probably between $90,000 and $95,000 – significantly less than in 2004, and back around 1998 levels ($91,300).

Continue reading →

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The G7 Are Asleep At The Wheel. Why?

Posted on February 14, 2009 by | 49 Comments

The global crisis approaches another major twist in its downward spiral.  A key barometer of financial and fiscal pressure – the credit default swap (CDS) spread – has widened sharply for Irish government debt over the past few days; the markets think that the risk of a sovereign default is rising sharply.  Immediate action is needed to forestall a dramatic deterioration of growth prospects across Europe and around the world. Continue reading →

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