Join us for the next live webcast of my MIT class on the global crisis. Details after the jump…
From 4pm to 7pm Boston time, we’ll talk about (1) GM, to bailout or not, and how this fits with the likely direction of the US economy; (2) the G20 meeting this weekend, including what happened and why; (3) the overall flow of the crisis around the world and back to the United States. I’ll be testifying on Capitol Hill on Wednesday, and will try to preview some of the more relevant points in class.
You can find background reading for any of these topics on http://BaselineScenario.com: just look at relevant tags (e.g., G20), search for the keywords, or look under the category “Classroom.”
For part of the class our guest will be Jeff Shames, a very experienced investor.
As before, you can post your questions here, and we’ll try to deal with them during class; we keep an eye on the website during the session.
Our technical team sends the following information…
The live webcast will be in RealMedia format. Here’s the link to the webcast: http://web.mit.edu/webcast/sloan/2008/simon_johnson/sloan-financial_crises-simon_johnson-E51345-18nov2008-1600-350k.ram
RealPlayer version 8 provides all required functionality for viewing this webcast. Here’s a link that provides some verification resources for viewers of RealMedia content: http://web.mit.edu/smcs/help/realhelp.htm
A recording will be available to download later in the week, probably on Thursday.
The Baseline Scenario 
Why is Canada’s financial system in better shape than the US? They are integrally linked with the US economy and have some declining demand problems, to no ones surprise, but they do not have bank solvency problems. What actions and policies kept Canada out of deep trouble?
Why were extensive levels of fraud and conflict of interest in US mortgage markets (origination, rating, securitizing, sales to buy-side) allowed to flourish in late 2005, 2006, 2007, and early 2008? Which government organizations should have noticed and taken action? Why did this not happen? Remember, the phrase “liar’s loan” became a popular phrase in 2007 – when everyone knew this was common practice, why was no action taken?
In your opinion, how will the monetary policy of the United States affect dollarized countries?
I live in El Salvador, a fully dollarized economy that is also heavily dependent on remittances from immigrants living in the US.
As a country that has given up its own currency we do not have monetary policy of our own.
Thanks and congratulations for the site and the class they are very helpful.
I refer to a question that stuck in my mind when I listened with horror to “Another frightening show about the economy” this American Life. Alex Blumberg / Adam Davidson asked “should I be mad, and if so who should I be mad at?”
Now that we have a clearer understanding of who to be “mad at”, are those who were in “responsible” positions both in commerce, regulation and government going to be held accountable for their actions? Or as Mike highlights above their in-action?
Finally has the cost relating to above of investigations, auditing, legal, etc. been taken into account in the bailout?
One of the things that seems troubling about the TARP is that it is essentially taking a fixed amount of taxpayer dollars and making direct equity investments in banks and other financial institutions who at least dressed up like banks for halloween. And now they are considering investing – either as debt or some debt-like equity instrument in GM. The troubling part is that the government and poiitics and not the market seem to picking winners and allowing others to fail. And that the flow of money is taxpayer -> government -> new breed of GSE.
How about this? In the wake of 9/11, many states instituted sales tax holidays to stimulate consumer spending. If we agree that what is needed is a stable and sufficient capital base for these companies (equity), why institute a tax holliday for capital gains Similar programs could be put in place for housing and to stimulate lending. In my southern background, we would say “put a pork chop in everyone’s back pocket and then soo who the dogs chase.” Some examples:
Capital Gains: Institute a program that sets the capital gains tax rate to 0% on all share owned on jan 1 2009 and held for at least 3(?) years.
Housing: Similarly set cap gains to 0% and maybe even passive income tax to 0% for residential properties purchased in 2008-2009.
Lending: Reduce or eliminate the income tax paid by banks on interest income on loans originated in the next 6 months.
The exact proposals need work I am sure. But the thinking is that why can’t we construct programs that attract private capital, where the market makes the decisions on winners and losers AND where taxpayers only lose future revenue under a scenario where the program has been successful (e.g. equity prices are up substantially and we missed out on capital gains that arguably would not even have been there without the tax stimulus or similarly we lose on increased housing values or increased lending…).
The discussion in the class about setting a legal leverage level, left out one difficulty.
The old safety margin of having 80% loan to 20% equity was reasonable amount of safety when housing prices were rising. With housing prices falling to unknown levels, maybe we would need 50% or more equity as a minimum. That level of equity was the loan situation I found in New Jersey in the mid-1970s.
The consequences of setting these levels could be disastrous. The consequences of not setting that equity level would be a disaster that might or might not be worse than setting it.
Regarding the bailout (or not) of GM. The feeling I got was that Simon thought it would be bad in unknown ways to have GM go bankrupt *now*, because of its huge footprint in the financial system. If times were better, then Jeff’s argument about using govt money *after* bankruptcy would seem reasonable.
After the extensive media coverage, it’s doubtful anyone who reads the news will buy GM vehicles now or in the near future, unless the bailout is so big that it erases all doubt of GM’s sustainability (unlikely). Would the goal then be to keep GM on life support until a more convenient time (from the financial world’s perspective) to let it go bankrupt? Something along the lines of an AIG-type “rescue”? But if GM is going to go, there is probably a huge political incentive to have it happen before the new president is inaugurated, rather than after. Sadly, this will probably trump other considerations.