Archive for February 2009

Simply worth noting

February 14, 2009

Greg Mankiw’s Blog: News Flash: Economists Agree

I do wonder if the percentages will change. #13 is my favorite.

#13 The government should restructure the welfare system along the lines of a “negative income tax. (79%)

This is very worthwhile.

February 14, 2009

Bill Moyers Journal . Watch & Listen | PBS

A good quote from Simon Johnson:

SIMON JOHNSON: I think it’s quite straightforward, in technical or economic terms. At the same time I recognize it’s very hard politically, okay? What you need to do is the stress test that, actually, Secretary Geithner outlined in his speech on Tuesday.

BILL MOYERS: Which is?

SIMON JOHNSON: That’s where you go and you check the bank’s books, and you say, okay, not only do we use market prices, not pretend prices, not what you wished things were worth, what they’re really worth, okay, in the market today. We use that to value your loans and the securities that you have, your assets, right?

And we also assess what will happen to the value of the things you own if there’s a severe recession. So that’s the idea, it’s a stress test, like when you go to see the doctor, they put you on a treadmill, and make you run to see how your heart is going to behave under stress.

So you’re looking at how the bank’s balance sheets will look under stress. And then you say to them, “This is our assessment of the amount of capital you need to cover your losses, and to stay in business, and be able to make loans, through what appears to be a severe recession.”

And, as the president said, we may lose a decade. So we’ve got to be very hard headed, and all the officials forecasters are still too optimistic on that. This is the amount of capital you need. Now you have a month, or two, to raise this amount of capital privately.

And when this was done in Sweden, by the way, in the early 1990s, they did it to three big banks. One of the three was able to go to its shareholders, raise a lot more capital, and stay in business as a private bank, same shareholders. That’s an option. Totally fine. However, the ones that can’t raise the capital are in violation of the terms of their banking license, if you like.

We have no problem in this country shutting down small banks. In fact, the FDIC is world class at shutting down and managing the handover of deposits, for example, from small banks. They managed IndyMac, the closure of IndyMac, beautifully. People didn’t lose touch with their money for even a moment. But they can’t do it to big banks, because they don’t have the political power. Nobody has the political will to do it.

So you need to take an FDIC-type process. You scale it up. You say, “You haven’t raised the capital privately. The government is taking over your bank. You guys are out of business. Your bonuses are wiped out. Your golden parachutes are gone.” Okay? Because the bank has failed.

This is a government-supervised bankruptcy process. It’s called, in the terminology of the business, it’s called an intervention. The bank is intervened. You don’t go into Chapter 11 because in that’s too messy. Too complicated. There’s an intervention, you lose the right to operate as a bank. The FDIC takes you over. I think we agree, everyone agrees, we don’t want the government to run banks in this country.

BILL MOYERS: Never done it before.

SIMON JOHNSON: Never done it before. It’s not gone well anywhere in the world. And the idea of getting your money out of the bank being like visiting the DMV to get your driver’s license, it’s not appealing, okay?

That’s not what we’re going to do. That’s not what the Swedes did. That’s not the state of the art – it’s not what the real banking experts are going to tell you to do. They’re going to say, you set it up, you set up the government intervention, and there’s various technical ways to do this, so that you re-privatize very quickly.

Now, it might take three months, it might take six months. It’ll depend on the overall macro economy turning around. But there’s a lot of private money out there. Let’s call it private equity.

These people would like to come in and buy these re-privatized banks. You would attach antitrust provisions to this, so the banks are broken up as part of this transaction. Senator Sanders has a great saying. He says, “Any bank that is too big to fail is too big to exist.”

And he’s exactly right. So, in this transformation, you’re bringing in private equity. You’re using, I think this is, to me, the right idea, and what we’ve learned in our country, is you’re using part of the powerful financial lobby against another part. You’re using private equity, that would do very well in this, against the inbred insider big bankers. And you’re doing this in a way so that the taxpayer decides who the new owners are.

The new owners come in and do a lot of the restructuring. They’re going to fire all of these managers. I can honestly assure you that. They’re going to put in new risk management systems. They’re going to have to make the banks smaller. And the taxpayer is going to retain a substantial equity interest. So as these banks recover the value of our investment goes up. And that’s how we get upside participation.

BILL MOYERS: So you’re not talking about nationalization, are you?

SIMON JOHNSON: I’m talking about a scaled up FDIC intervention. I think we need the FDIC to be empowered. And to have the political support necessary to get this job done.

Right on!

February 10, 2009

Paul Kedrosky: When Governments Attack ! (Or At Lease Cause Depressions)

The Current Financial Crisis: What Should We Learn from the Great Depressions of the Twentieth Century? – Staff Report 421 – Publications & Papers | The Federal Reserve Bank of Minneapolis

Another good quote from the paper Paul links

The people and the governments of some countries may decide that there should be some sort of social insurance for workers who lose their jobs, for households who lose their homes, and even for firms in some sectors or regions. If so, this insurance should be provided directly and not indirectly through massive and indiscriminate bailouts of firms.

The lesson from the ‘lost decade in Japan’ is that they had no growth because productivity stopped growing, presumably because the Japanese kept zombie banks and zombie firms going. There was little ‘creative destruction’ nor innovation. It also didn’t help that the Japanese paved much of the country over with bridges to nowhere. But it is the productivity growth that matters–and you probably need market forces to get the productivity growth.

A great quote from the Financial Times

February 8, 2009 / Comment / Opinion – Keynes and the triumph of hope over economics

“…we call for trillion dollar stimulus plans on the basis of little more than citing John Maynard Keynes – and politicians revere us. Citing Keynes gives us special licence to talk economics without using any. To paraphrase the lawyers’ dictum, when the facts are on our side, we pound the facts; when theory is on our side, we pound theory; and when neither the facts nor theory are on our side, we pound Keynes– and to great effect.”

Keynes did a lot of great work, but here it is over 70 years later and people are still arguing about what he really meant; and it is difficult to make a lot of what Keynes said internally consistent…

I wish that I believed that a giant government spending stimulus would work to fix things,

February 8, 2009

because I would then support it, and with vigor.

Anyone who says that they have ‘computed’ how do to a stimulus is believing too much in a dodgy model.  Anyone who says ‘Nixon said that we are all Keynesians now’ in order to justify this  spending package is 30 years out of date.

We need to fix our banking system.  That likely involves building new financial institutions-or at least letting the dinosaurs die.

Our problem now is that everyone wants to invest ‘risk-free,’ so savings are going into cash, bank accounts, and government bonds and not being used for business investment or  consumer spending.   But in aggregate it is impossible for all this to really be ‘risk-free’ investment and instead is leading less production, investment, and consumption today.  Real physical investments are risky.  My guess is that once people start recognizing the inflation risk in cash, bank accounts, and government bonds, then capital will flow to businesses and eventually to consumers, and we will start to slowly recover.

The best the government can do now is to help the most economically vulnerable people quickly, and work on rebuilding financial institutions; not necessarily rebuilding the financial institutions that brought us here, either.

Increasing the money supply is eventually going to make it evident that money not intermediated into real investments is simply a waste.  Then people will spend on current consumption and start to invest in real physical projects again.

I should add that investing in public goods-if they have real economic value-is a perfectly sensible thing to do.  But it is not stimulus.

One of the pleasures of walking your daughter to the bus stop everyday

February 5, 2009

is noting that she has skipped to the bus stop every single day since the beginning of the school year.  I sometimes skip now myself.

Here is why so much of the stimulus is tax cuts:

February 4, 2009

People will spend them, increasing demand, at least in the short term.  The cuts will help financially constrained people the most.  And those are the people who should be helped.

I am not sure what the long term effects are though.  The big question is the insurance benefits versus the ex-ante incentive effects.  While I think that the incentive effects are small now, I am not so sure the next time.  That’s the rub.


“The Reaction of Consumer Spending and Debt to Tax Rebates — Evidence from Consumer Credit Data” (S. Agarwal, C. Liu and N. Souleles)

We use a new panel dataset of credit card accounts to analyze how consumers responded to the 2001 federal income tax rebates. We estimate the monthly response of credit card payments, spending, and debt, exploiting the unique, randomized timing of the rebate disbursement. We find that on average consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt. But soon afterwards spending increased, counter to the canonical Permanent-Income model. Consistent with liquidity constraints, spending rose most for consumers who were most likely to be initially constrained by their credit limits, whereas debt declined most (sosaving rose most) for unconstrained consumers. More generally, the results suggest that there can be important dynamics in consumers’ response to ‘lumpy’ increases in income like tax rebates, working in part through balance sheet (liquidity) mechanisms.