Month: April 2009

Mandelson Moment

If you want an unusual insight into our potential future, take a look at Channel 4’s interview on Thursday with Peter Mandelson (UK’s Business Secretary, very close to Gordon Brown and a key person around the G20 summit).

In this clip, Mandelson comes on around the 12:48 mark (after Peer Steinbruck, the German finance minister, provides some complacent sound bites.)

But the surprising statement comes after the short interview with me (I start at 17:40 approx; Mandelson comes back around 21:38).  I have no idea if Mandelson knew this could happen, but Jon Snow (the anchor) goes back to him and asks if he agrees with me that the UK could borrow from the IMF. Continue reading “Mandelson Moment” →

Making Creditors Suffer

Tyler Cowen, co-author of a prominent independent economics blog, has an article in The New York Times explaining “Why Creditors Should Suffer, Too.”

What the banking system needs is creditors who monitor risk and cut their exposure when that risk is too high. Unlike regulators, creditors and counterparties know the details of a deal and have their own money on the line.

But in both the bailouts and in the new proposals [for financial regulation], the government is effectively neutralizing creditors as a force for financial safety.

I couldn’t agree more (except for the bit about the regulatory proposals, and that’s just because I haven’t read them closely). We need creditors who will pull their money or demand tougher terms from financial institutions that are doing things that are either too risky or just plain stupid; that’s theoretically a more efficient and cheaper enforcement mechanism than regulatory bodies.

Continue reading “Making Creditors Suffer” →

Be Nice

Comments are an important part of this blog, and I’m sure that many of you read the blog as much for the comments as for the posts. I’m also very proud of the knowledge, intelligence, and writing ability of our commenters. Simon and I write about a wide range of topics, and so it is never a surprise to me to find comments from people who know any particular topic far better than I do. Looking at other economics blogs, I think we have one of the best discussion communities around, with both a large number and a high average quality of comments.

However, there has been a recent increase in the number of comments that can be construed as offensive in one way or another. While most hardened Internet commenters can probably take a personal  attack now and then, I’m afraid this will intimidate some people and deter them from joining the discussion. So we are creating some guidelines for comments, which are really nothing more than what you should have learned in kindergarten.

1. No profanity.

2. No attacks or insults aimed at other commenters. Calling a public official an idiot is one thing; calling someone who just wrote a comment an idiot is another.

3. No attacks or insults aimed at entire categories of people based on race, gender, religion, national origin or identity, or something similar.

If I see comments falling into these categories, I will delete them. I am also adding filters on a few words to flag comments for moderation. I expect most of those comments will be approved. For example, if you use the word “moronic,” I just want to check that you are referring to, say, the Commodity Futures Modernization Act, not a previous comment.

Thank you for all of your comments. For those of you who do not comment, thank you for reading the blog. It’s no exaggeration to say that Simon and I would not be doing this if it were not for all of you.

By James Kwak

Ben Bernanke: More Important Than The G20 Summit

It may strike you as extraordinary that the G20 summit barely touched on what is, arguably, the key policy issue going forward – what will central banks do, including the detailed when and how of avoiding falling wages and prices (deflation).  Fiscal stimulus is already almost fully in play around the world, regulatory reform will at best be slow and not relevant to the recovery, and “we promise to avoid an irresponsible protectionist trade war” is nice but more about not making things worse rather than getting our economies going again.  Funding and leadership model change for the IMF can help prevent emerging markets from cratering, but in terms of impact on global growth or unemployment, it’s second order relative to the macro policies of the world’s largest countries.

The real issue is monetary policy, including interest rate cuts where there is still room for these – to me the biggest news of the week was actually that the European Central Bank cut rates by less than expected (its main interest rate stands at 1.25 percent).  This confirms the ECB still does not see deflation as a clear and present danger.  Look at all the downward pressures in the European economy, from East European collapses (and associated West European banking problems) to property market declines in the UK, Ireland and Spain (and what that means for banking) and export industry stress (and they have bankers too).  The ECB is taking an extraordinary and – to my mind – incorrect position.  If they truly wait until deflation is “fully in the data” (central bank jargon), it will be too late.

The dramatic trans-Atlantic, or at least eurozone-dollar, contrast is in terms of monetary policy, not fiscal stimulus or attitudes towards future regulation.  In our piece in the Washinton Post Outlook section on Sunday (already online), we provide an updated back story on how exactly the Fed and its chair got to the point of taking bold and unprecedented moves towards expansionary monetary and credit policy.  Continue reading “Ben Bernanke: More Important Than The G20 Summit” →

Obama Wins At G20: Europeans Lose Control of IMF

The big news at the G20 was obviously about the IMF, with the Americans pulling out an impressive deal on funding (compare with our predictions…). But the money is not the biggest achivement. The big move was in terms of who will run the IMF in the near future – as I explain my NYT.com column this morning, there is an implicit and almost immediate shift towards emerging markets.

President Obama had just the right tone yesterday.  Admittedly, he was helped by the fact that we no longer have anything to be arrogant about, but still the way he reached out to other countries – while also pointing out that they made big mistakes and are currently in trouble – conveyed exactly the right message.  The US will do much better if it lets emerging markets and developing countries have a serious and permanent place at the big table. 

Among other things, this will fundamentally change the way the IMF operates.  As a symbol and for its potential impact on the international economy moving forward, yesterday’s final loss of European control over the IMF really matters.

By Simon Johnson

The Mark-to-Market Myth

Today the Financial Accounting Standards Board voted – by one vote – to relax accounting standards for certain types of securities, giving banks greater discretion in determining what price to carry them at on their balance sheets. The new rules were sought by the American Bankers Association, and not surprisingly will allow banks to increase their reported profits and strengthen their balance sheets by allowing them to increase the reported values of their toxic assets.

This makes no sense, for three reasons.

1. Investors and regulators are not idiots. They know what the accounting rules are. If banks claim they were forced to mark their assets down to “fire-sale” prices, investors can look at the facts themselves and apply any upward corrections they want. Now that banks will be able to mark their assets up to prices based solely on their own models, investors will the downward corrections they want. It’s a little like what happened when companies were forced to account for stock option compensation as expenses; nothing happened to stock prices, because anyone who wanted to could already read the footnotes and do the calculations himself.

Continue reading “The Mark-to-Market Myth” →

Taking Care of Our Grandchildren

There is a lot of rhetoric these days about making our grandchildren pay for our spending today. Like any “deficits are always bad” argument, this one doesn’t even meet the plausible metaphor test. That is, grandparents routinely spend money (thereby reducing their grandchildren’s eventual inheritances) on things that will make their grandchildren’s lives better.

As Nancy Folbre puts it in Economix (the New York Times blog):

Think of the United States economy as a family farm in need of modernization. Energy prices are going up, but all the tractors are gas guzzlers. Some of our fields have accumulated toxic levels of pesticide, and we need to develop new and better technologies of sustainable production. Our grandchildren want to run the farm, but will need good health and a college education to do it well.

Spending money on increased energy efficiency, research and development, health, and education could increase the value of their assets, helping them repay debt.

That’s just her closing metaphor; I recommend the entire article (it’s pretty short). There is a legitimate debate about what government spending actually benefits our grandchildren and what doesn’t, but it doesn’t make sense to say that every incremental dollar of current spending is hurting our grandchildren.

I tried to make this point on Planet Money, but I like Folbre’s story more.

By James Kwak

Comments and the Spam Filter

If your comments are not showing up: We use WordPress.com, and its optional spam filter, Akismet. I have no control over what Akismet flags as spam. Ordinarily it is very good, but I just looked in the spam folder and noticed that an unusually high number of legitimate comments got accidentally flagged as spam. I freed those I found from spam-land (which should help those of you who are serial commenters), but this problem may recur. I don’t have time to check the spam filter very often, but I will try to glance at it now and then.

We also filter for certain abusive or profane words and for people with a history of writing abusive comments (personal attacks on other people).

By James Kwak

The New Masters of the Universe

Back in the early days of the Clinton administration, James Carville was credited with saying something like this:

I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 basball hitter. But now I would like to come back as the bond market. You can intimidate everybody.

The story back then was that bond investors, by buying or selling Treasury bonds, could lower or raise the government’s cost of borrowing and interest rates across the economy, depending on how they felt about government policy.

Today bond investors have discovered a much more direct lever over government policy. I’ve already written about the importance of bondholders in dealing with the financial sector. This week we are seeing their power over the auto industry.

Continue reading “The New Masters of the Universe” →