Old Whine in New Bottles: Commercial Real Estate Lobbies For Bailout

The commercial real estate industry would like a bailout – see my preview/links to testimony before the JEC today. This is not a surprise – even some of the most libertarian people I meet think the government should help them personally when times are bad. Is there a case treating commercial real estate as special?

The sector is definitely taking a beating, but who is not? This lobby’s most sophisticated advocates are arguing that various Fed facilities can be extended to support commercial real estate financing, i.e., so there is no cost to the government’s budget or your future taxes.

This is illusory. Continue reading “Old Whine in New Bottles: Commercial Real Estate Lobbies For Bailout” →

The Finest of the Flavors

Richard Thaler has a simple argument for plain-vanilla financial products. Mike at Rortybomb deals with some of the predictable objections. This is also similar to Adam Levitin’s position on credit cards, which I wrote about a while back.

I’m in favor, although I don’t think it will be enough to simply make the vanilla offering available; in that case nothing would stop lenders from paying higher commissions to brokers in order to steer customers toward exploding mortgages.

By James Kwak

Bankslaughter, Tort Law, and Optimal Deterrence

Felix Salmon has been helping popularize Paul Collier’s idea of bankslaughter. (No, it’s not what you wish it were.) The idea is that there would be a crime called bankslaughter, or “managing a bank irresponsibly.” If a bank blows up, there could be a criminal investigation to determine if the bank managers behaved recklessly (more on that term later); if so, they would be convicted. The analogy is to manslaughter, which is actually a family of crimes; Collier probably means criminally negligent homicide, or causing death through negligent or reckless (more on those terms later) behavior.

Not surprisingly, the conservatives are not happy about this, even though it seems to conform to the conservative principle that people should bear responsibility for the consequences of their actions. (Or maybe that only applies if you are a pregnant teenager.) Salmon cites John Carney, who calls bankslaughter “the worst idea of the week.”

Continue reading “Bankslaughter, Tort Law, and Optimal Deterrence” →

The G7/G8: Why Bother? (A Viewer’s Guide)

The G7 was originally conceived as a form of steering committee for the world economy (antecedents). Existing formal governance mechanisms, around the IMF and the UN, seemed too cumbersome (and too inclusive) during the 1970s, with the breakdown of fixed exchange rates, assorted oil shocks, and the broader shift of economic initiative towards Western Europe and Japan.

And the G7 had some significant moments, particularly with regard to moving exchange rates in the 1980s. More broadly, behind the scenes, it served as a communication mechanism between the world’s largest economies (“coordination” is a dirty word in G7 policymaking circles). And it was probably a good thing in the 1990s that Russia wanted to join the G7 – hence the G8 once a year, although many of the most important technical meetings are just the G7.

But today, honestly, what’s the point? Continue reading “The G7/G8: Why Bother? (A Viewer’s Guide)” →

Recently Bailed-Out Banks Refuse to Take California IOUs

The Wall Street Journal (via Calculated Risk) reports that a group of large banks has announced that it will not accept IOUs issued by the state of California. The group includes the four horsemen of the financial crisis: Citigroup, Bank of America/Merrill/Countrywide, JPMorgan Chase/Bear Stearns/WaMu, and Wells Fargo/Wachovia.

Write your own ironic commentary.

By James Kwak

Still Skeptical About Banks

It’s getting somewhat lonelier being a large financial institution skeptic, although there still a lot of us left. I would say that among the skeptics, the general view is that we may have seen an end to bank panics for this cycle – I’m not sure anyone is saying there will definitely be another crisis in the near future – but we may not have, and we may come to regret not taking stronger measures now. (How’s that for prognostication?)

Lucian Bebchuk, in Project Syndicate (a well-intentioned collaboration that manages to sound ominous and conspiratorial), makes the argument in clear terms. First, the recent stress tests only projected losses through 2010, ignoring the large number of loans and mortgage- and asset-backed securities that mature in later years. More fundamentally, though: “Rather than estimate the economic value of banks’ assets – what the assets would fetch in a well-functioning market – and the extent to which they exceed liabilities, the stress tests merely sought to verify that the banks’ accounting losses over the next two years will not exhaust their capital as recorded in their books.” Put another way, the focus has been on the accounting value of assets, not their economic value; so for a given asset, as long as it doesn’t have to be written down before the end of 2010, there is no problem.

Bebchuk also points out that the ability of banks to raise equity capital should not be taken as an “all clear” sign. As he and others have previously argued, equity in large banks by its very nature represents a leveraged bet whose downside risk is limited by the implicit government guarantee. That is, as a shareholder, if the economy does OK and bank assets appreciate in value, you get all of the upside (leveraged by the bank’s liabilities); if the economy does terribly and bank assets fall in value, your losses are not only limited to the amount of your investment, they are further limited by the implicit guarantee that the government will not wipe you out. That guarantee is weaker than the implicit guarantee on bank liabilities, but it is still there; given the way the government has treated Citigroup, Bank of America, and GMAC, betting on the “no more Lehmans” policy seems like a sensible bet.

Most attention is now focused on the battle over financial regulation (if it isn’t on health care and energy), which is appropriate. But it may be premature to declare victory over the financial crisis.

By James Kwak

The Fed Makes A Bid

Policymakers like to make particular kinds of statements at a “low attention” moment, e.g., right before a holiday weekend. This gets items onto the public record but ensures they do not get too much attention. And if you are asked about these substantive issues down the road, you can always say, “we told you this already, so it’s not now news” – usually this keeps things off the front page.

Released on July 3rd (a federal holiday), and buried inside the Washington Post on Saturday (p.A12): An important speech (from June 26th) by the New York Fed’s controversial President, William C. Dudley. Continue reading “The Fed Makes A Bid” →

The Efficient Market for Cristiano Ronaldo

Cristiano Ronaldo, perhaps the best soccer player in the world and still only 24 years old, was sold by Manchester United to Real Madrid for 94 million euros (that’s just the transfer fee, and has nothing to do with his salary). Ronaldo:

“I think it’s a fair price. If Manchester and Real agreed on the price, there is nothing to add.”

Eugene Fama could not have put it any better. Perhaps Ronaldo has an investment banking career in his future.

Update: tkt points out in the comments that Zinedine Zidane was actually more expensive in real terms. If I recall correctly his transfer fee was over 70 million euros in 2001, so that’s almost certainly right.

By James Kwak

The Mystery of Rating Agencies

Calculated Risk has a routine post about S&P increasing its loss projections for subprime and Alt-A loans and for the mortgage-backed securities built out of those loans. These announcements have been so common over the last several months that I usually don’t even think about them. But today I had a thought about them: these are forecasts, which means that they should not get worse just because the economy is getting worse. Forecasts should only change when there is new news that affects expectations about the future. So if you take these rating agency reports at face value, they imply not only that the economy is getting worse (by traditional measures such as the unemployment rate), but that there is new bad news about the future of the economy, despite all this talk you hear about green shoots and a recovery. If there is only old news, then that should have been “priced in” to S&P’s forecasts already.

So what gives? Do the rating agencies see some new perils in the economy that are being overlooked? Or are they just stretching out a writedown in their forecasts over several quarters? Under the latter theory, they should have known what would happen to subprime and Alt-A loans the same time people like Calculated Risk did – that is, several months ago – but it would be too embarrassing to do a massive writedown all at once, so they are spreading it out over time for respectability.

By James Kwak

Little Hoovers, Part-Time Employment, and Me

Paul Krugman is generally credited with coining the term “fifty little Hoovers” to refer to our state governments and the current economic crisis. The macroeconomics textbook says that when a recession hits, the government should implement expansionary policy, whether monetary – making cheap money available – or fiscal – borrowing money and spending it to compensate for falling private-sector demand. However, states have no monetary policy, since they don’t control the money supply, and they generally can’t engage in expansionary fiscal policy, because most have made it prohibitively difficult to borrow money and go into deficit. So in a recession, states tend to cut spending and raise taxes, which only compound the effect of a recession. Since most states’ fiscal years end on June 30, some of the effects of this belt-tightening should be hitting right about now.

One thing that states spend money on, but that people generally don’t think about, is legal services for poor people. I think about this because I am spending the summer working (for free) for a legal services provider in Massachusetts. In Massachusetts, like in many states, funding for legal services for the poor comes mainly from two sources: (a) interest on lawyers’ trust accounts (IOLTA) – that is, the short-term interest paid on money that your lawyer is holding for you for some reason; and (b) direct appropriations in the state budget.

Continue reading “Little Hoovers, Part-Time Employment, and Me” →

The Importance of Mark Thoma

David Warsh has an article about economics blogging that is focused on Mark Thoma. Mark isn’t the most controversial blogger on the Internet, but he is one of the most invaluable, because he provides long excerpts of lots of economics material, from all different perspectives. (He also has his own points of view, but he is willing to entertain people who don’t agree with him. He is also gracious and welcoming to new bloggers (like we were not so long ago). If you have a general interest in economics and don’t subscribe to him, check him out.

By James Kwak

The Jones Doctrine: Economic Development For Afghanistan

The administration is signaling a new strategy for Afghanistan: “economic development and governance”. On the front page of the Washington Post last week, President Obama’s national security adviser, James L. Jones, told Bob Woodward:

“The piece of the strategy that has to work in the next year is economic development. If that is not done right, there are not enough troops in the world to succeed.”

This is an appealing statement. But does it make any sense?

Continue reading “The Jones Doctrine: Economic Development For Afghanistan” →

Catching Up with the Bandwagon

Sorry about the recent silence; I’ve been trying to kill off a rewrite of a paper, and sometimes I find that to get things done you just have to be singleminded about your priorities.

In case you haven’t seen them yet, I wanted to point out a couple of things that have been making the rounds of the Internet:

Most of the people writing about health care reform on economics blogs – present company included – are not health care economics specialists. Uwe Reinhardt is. So when he writes about “rationing health care,” I recommend reading (hat tip Mark Thoma).
Brad Setser is branching out from foreign reserves, holdings of U.S. government and agency bonds, and China – on which he is probably the leading figure on the Internet – to, well, everything. Visit the Council on Foreign Relations’ “Crisis Guide: The Global Economy” and click on Motion Charts. There are four charts in the sidebar to the right. For each one, you can watch Setser on video, or you can click the “Interact with Motion Chart” link and play with it yourself.

Happy reading.

By James Kwak

How To Buy Friends And Alienate People

The banking industry is exceeding all expectations. The biggest players are raking in profits and planning much higher compensation so far this year, on the back of increased market share (wouldn’t you like two of your major competitors to go out of business?). And banks in general are managing to project widely a completely negative attitude towards all attempts to protect consumers.

This is a dangerous combination for the industry, yet it is not being handled well. Just look at the current strategy of the American Bankers’ Association. Continue reading “How To Buy Friends And Alienate People” →

This Is Their Reform Strategy For Big Banks?

Anil Kashyap is one of our leading researchers on banks. His book with Takeo Hoshi on the evolution of the Japanese corporate finance is a must read on the twists and turns that built a great economy and then laid it low. And he has many other papers and relevant recent commentary.

Professor Kashyap has a sharp perspective the administration’s financial sector reform thinking, in part because he has long worked alongside key people now at the National Economic Council (the NEC, by the way, has disappointingly little transparency; even Treasury is more open).

So we should take him seriously, writing Tuesday in the Financial Times, on the importance of the proposed new “funeral plans” for banks. Continue reading “This Is Their Reform Strategy For Big Banks?” →