Month: February 2009

Welcome to New Readers

We’ve had a big surge of first-time visitors since Simon’s interview with Bill Moyers started broadcasting last night. We hope you enjoy the site and return often. You can also get free updates using an RSS reader or via email.

On the chance that some of you are new to the economics blogs, I wanted to suggest a few other sites you might also want to check out (in addition to our Financial Crisis for Beginners section). We are nowhere close to the be-all and end-all of information about the global economy, and in any case the more perspectives you get, the better.

  • Planet Money is an excellent, excellent podcast for people who are relatively new to the world of economics and the financial crisis, and for people who commute and can listen to it in their cars. I listen to it for fun.
  • Calculated Risk and naked capitalism are good sources for near-real-time news about the crisis and the economy in general. Calculated Risk has a particular focus on housing and mortgages; naked capitalism has incisive commentary from one side of the political spectrum.
  • Econbrowser is more technical and data-oriented; more advanced readers will like this one.
  • Economist’s View and Marginal Revolution provide in-depth articles applying economics to broad range of phenomena.
  • RGE Monitor is the home of Nouriel Roubini and also aggregates articles from all over the Internet.

Of course, we would love to see you again here.

(Feel free to add other suggestions in the comments.)

Bill Moyers Journal Tonight: American Banking Oligarchs

A lot of people seem to be worrying about American bank oligarchs and how to break their political power.  Bill Moyers has obviously been thinking about these issues for a long time, and he invited me to come by yesterday to talk more about how we got into this situation and how we might – if we are very lucky – get out with our economy more or less intact.   Continue reading “Bill Moyers Journal Tonight: American Banking Oligarchs” →

The Stress Test: Time for Transparency

Like many people, I was disappointed by the Financial Stability Plan announced on Tuesday. But I think there is one glimmer of hope: the “stress test.”

A key component of the Capital Assistance Program is a forward looking comprehensive “stress test” that requires an assessment of whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected. (Emphasis added.)

The stress test is supposed to indicate which banks are healthy and which aren’t (so they can be fixed or closed). We need this for the reason most of you already know: nobody thinks the banks (meaning, mainly, the big ones) are healthy. The New York Times has a good summary of the situation. Nouriel Roubini thinks U.S. banks are facing another $1 trillion in write-downs. The IMF thinks it’s more like $500 billion. The only people who think the banks are healthy are the bankers themselves:

“Our analysis shows that the banks have varying degrees of solvency and does not reveal that any institution is insolvent,” said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, a trade group whose members include the largest banks.

Edward L. Yingling, president of the American Bankers Association, called claims of technical insolvency “speculation by people who have no specific knowledge of bank assets.”

Continue reading “The Stress Test: Time for Transparency” →

The G7 Needs To Act, This Weekend, On Ireland

Look at the latest Credit Default Swap spreads for European sovereigns (these are the data from yesterday’s close).  As we’ve discussed here before, CDS are not a perfect measure of default probability but they tell you where things are going – and changes within an asset class (like European sovereigns) are often informative.

European CDS have been relatively stable – albeit at dangerously high levels – for the past month or so.  But now Ireland has moved up sharply (the green line in the chart).  We’ve covered Ireland’s problems here before (banking, fiscal and – big time – real estate); type “Ireland” into our Search box for more.

My point today is simple: a key warning sign just moved from orange to red. 

Continue reading “The G7 Needs To Act, This Weekend, On Ireland” →

Ransom Note Interview

Following my post Thursday morning regarding a potential massive financial/macroeconomic heist – let’s call it the ransom note (“give us all your money, and you can have your economy back”) – Adam Davidson had the great idea of interviewing the author.

We did so Thursday afternoon as part of a NPR Planet Money podcast that we co-hosted and, if all goes well, you can hear the results Friday afternoon.  I tried to convey the tone (and in one case, the precise content) of your comments in the discussion.  And the author …  well, listen for yourselves and tell me what you think – you can post comments here or at Planet Money.

Europe Is in Bigger Trouble than the U.S.

This is a theme that Simon in particularly has been sounding. Now, according to the Telegraph, a confidential European Commission memo confirms this. To review, the basic problems, relative to the U.S., are:

  • Disproportionately large banking sectors (the Iceland problem) in some countries, such as the U.K.
  • High exposure to U.S.-originated toxic assets (up to 50% of those assets, I have heard estimated).
  • Major exposure to emerging markets, primarily Eastern Europe and secondarily Latin America, which have been harder hit by this crisis than anyone else.
  • Higher pre-crisis national debt levels (for many but not all countries).
  • For countries that use the euro, no control over monetary policy.

Continue reading “Europe Is in Bigger Trouble than the U.S.” →

Robbery Note – From The Banking Oligarchs This Morning

The modern bank robber calmly hands a note to the teller, asking for money and making a moderately specific scary threat.  The robber, of course, expects the teller to hand over unmarked bills without a fuss.

This morning’s “research” note from a major international bank is entitled, “Falling Short: The government needs to buy toxic assets,” and the heart of their one page argument is, with the emphasis as in the original, Continue reading “Robbery Note – From The Banking Oligarchs This Morning” →

Rahm Emanuel’s and David Axelrod’s New Dilemma

The President’s top political counselors face the following dilemma.  They want to be tough on banks because that makes sense politically and, presumably, because it fits how they – with considerable relevant experience – would like to address the deeper underlying problems in the financial system.

But at least some prominent economic counselors to the President strongly disagree.  The Treasury Secretary, in particular, articulates the view that being tough on the banks and top bankers would further worsen credit markets and thus deepen/prolong the recession.  Mr Geithner wants to try other routes, and while he does not rule out imposing policies that banks would not like, it is not in his Plan A or likely a feature of his Plan B.

The President has evidently sided with Treasury, either because he decided they have superior technical competence, or because Emanuel and Axelrod themselves gave way when the experts stared them down.

The dilemma is this.  Continue reading “Rahm Emanuel’s and David Axelrod’s New Dilemma” →

No Wishful Thinking

At management team meetings at my old company, there was a slogan I was known for: “No wishful thinking.” I would trot it out whenever I felt like our expectations for the future (say, our sales projections, or our product delivery dates) were being influenced by our desires for the future. Let’s say, for example, that you have to hit your sales target, raise more money, or lay people off. It is very easy to plan around hitting your sales target, because the other options are unpleasant. But that would clearly be folly.

I thought of this when listening to an interview Adam Posen did for Monday’s Planet Money (beginning around the 6-minute mark). The Geithner Plan had not yet been announced, but Posen already had the right diagnosis: wishful thinking. The administration, on his analysis, is hoping that it will be able to turn the economy around without having to take tough measures with the banks.

Martin Wolf puts it this way:

[H]oping for the best is what one sees in . . . the new plans for fixing the banking system. . . .

The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive.

Continue reading “No Wishful Thinking” →

Now, About That Stimulus Bill

As I understand them, the Republicans’ main reasons for opposing the stimulus bill (0 votes in the House, 3 in the Senate) were: (a) the bill contains too much evil government spending, (b) it doesn’t spend money fast enough to affect the economy, and (c) it’s too big. There are really no grounds for bipartisan agreement on (c), especially since many Democratic economists believe the stimulus is too small given the yawning output gap. But even conceding for a moment that (a) and (b) are valid concerns, I’m still baffled by the reduction of state aid from $79 billion to $40 billion. (See the New York Times comparison here.)

According to the Center on Budget and Policy Priorities, states are facing new budget shortfalls of $51 billion this fiscal year (ends June 30) and at least $94 billion for next fiscal year. Direct federal government aid to states will do no more than partially fill those budget gaps and enable state and local governments to keep people employed instead of firing them – teachers, firefighters, etc. While one might have concerns about whether the government can spend money on new programs efficiently, in this case the money will go to basic services that the government is already providing. This is only wasteful if you take the extreme view that all government spending in general is wasteful and any excuse to reduce it is a good one (the old “starve the beast” argument). The money can be spent quickly, because all the mechanisms needed to spend it already exist. Even if it is spent over several months (because people earn their salaries over the year), it will still have an immediate stimulative effect, because people who have jobs spend a lot more than people who don’t have jobs. It will have a high multiplier, because every dollar of government payrolls counts as one dollar of GDP, so the multiplier on government salaries is roughly the multiplier on tax cuts plus one. And it will even save a little money in unemployment benefits.

There are a lot of things one can argue about in the Senate version of the stimulus, but this I just don’t understand at all.

So Now We Know . . .

Counting down to the announcement of the Geithner plan, the New York Times has this account of how it came into being (and why it should be called the “Geithner plan,” although maybe Larry Summers is hiding behind him):

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

Mr. Geithner, who will announce the broad outlines of the plan on Tuesday morning, successfully fought against more severe limits on executive pay for companies receiving government aid.

He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.

I’m not a huge fan of executive compensation caps, as I think they are something of a sideshow. But I think the general approach of playing nice with banks and their shareholders is a mistake, because it leads to intransparent subsidies like the privately-financed bad bank is sure to be. (If the government is guaranteeing assets bought by private investors, as is widely rumored, it’s still a subsidy; it’s just not as obvious as writing a check.)

Continue reading “So Now We Know . . .” →

Secretary Geithner’s Speech: A Viewer’s Guide

At 11am this morning, from the Cash Room at the Treasury, Secretary Geithner will lay out his vision (and hopefully some convincing details) regarding how to get the US financial system back on its feet.  What should we listen for as indications that this is heading in the right direction? Continue reading “Secretary Geithner’s Speech: A Viewer’s Guide” →

Is Saving Good?

For a complete list of Beginners articles, see Financial Crisis for Beginners.

Way back in October, one of our readers sent in a question which can be paraphrased roughly as: “During the boom everyone said we should be saving more. Now people are saying we should be spending more. What gives?” This question has been sitting in my inbox unanswered. Until now.

Two of the leading economics blogs in the world (OK, the English-speaking world) published posts entitled “The Paradox of Thrift” yesterday, solving my problem for me. Tyler Cowen started off with a link to Matthew Yglesias, who wrote a non-technical explanation of the sort I usually do in my Beginners posts. Read that first. (Cowen adds some semi-technical notes that you may or may not understand.) James Hamilton then gives a technical explanation, but by “technical” here I’m only referring to first-year undergraduate macroeconomics, so most people should be able to follow. Read that second, at least through the second paragraph after the second graph.

Yglesias basically says that if you save instead of spending, your bank can lend the money out to someone else to spend instead of you. It might go to your neighbor’s home equity line to buy a new flat-screen TV, in which case the economic impact is the same as if you had bought a flat-screen TV. Or it might go to some entrepreneur who is building a new factory, in which case the short-term GDP impact is the same (the money gets spent), but the long-term economic benefits are arguably higher (because in the long term we need new capital investment for the economy to continue growing). Hamilton shows the same thing with a simple equation. In the immediate term, S (personal savings) and I (private investment) both contribute to GDP, so one is just as good as the other; but in the long term, we need I, so savings are good.

However, it does not necessarily follow that every dollar saved necessarily and magically becomes another dollar invested. There are many reasons why increased savings may result not in increased investment, but simply in the same level of investment, which means total output (GDP) will be lower. Yglesias, Hamilton, and Cowen all point out various examples of why this can happen. In a dismal economic climate like the current one, entrepreneurs may not want to build new factories (put another way, demand for credit may not exist, so the banks have no place to lend the money). Or the savings may be going into zombie banks that are hoarding cash instead of lending it out. Or the economy may simply not be able to adjust fast enough: in order to shift out of cars and into anti-gravity hovercraft, it may just not be possible to retrain the workers fast enough to put all the available capital to use.

So in the long term, there are good things about a higher savings rate, not least that it will reduce the number of people facing poverty in their retirement years. But if we get there too quickly, it could exacerbate the recession we are going through.

Baseline Scenario, 2/9/09

Baseline Scenario for 2/9/2009 (11pm edition, February 8): link to pdf version

Peter Boone, Simon Johnson, and James Kwak, copyright of the authors.

Summary

1) The world is heading into a severe slump, with declining output in the near term and no clear turnaround in sight. We forecast a contraction of minus 1 percent in the world economy in 2009 (on a Q4-to-Q4 basis), making this by far the worst year for the global economy since the Great Depression. We further project no recovery on the horizon, so worldwide 2010 will be “flat” relative to 2009. Continue reading “Baseline Scenario, 2/9/09” →