Independent Insight RSS Feed

Even more on nominal wages

bcarliner — 2008-12-03T23:27:54Z

A few more notes on the did-FDR-prolong-the-Depression front: 1. Gauti Eggertsson has an interesting paper arguing that NIRA policies, by reducing the expected rate of deflation, were actually expansionary. 2. There have been a lot of responses to my demonstration that the usual argument about the contractionary effects of wage increases doesn't apply in a liquidity trap. [...]

Desperate times, etc.

bcarliner — 2008-12-03T23:28:05Z

Can we print our way to recovery? KENNETH ROGOFF suggests we rev up the printing presses:It is time for the world's major central banks to acknowledge that a sudden burst of moderate inflation would be extremely helpful in unwinding today's epic debt morass. Yes, inflation is an unfair way of effectively writing down all non-indexed debts in the economy. Price inflation forces creditors to accept repayment in debased currency. Yes, in principle, there should be a way to fix the ills of the financial system without resorting to inflation. Unfortunately, the closer one examines the alternatives, including capital injections for banks and direct help for home mortgage holders, the clearer it becomes that inflation would be a help, not a hindrance. Modern finance has succeeded in creating

"Is The Deficit A Threat To A Future Recovery?"

bcarliner — 2008-12-03T23:28:05Z

Jamie Galbraith responds to the question posed by the National Journal, "Is the deficit a threat to future recovery?" James K. Galbraith, National Journal: No. The question is grossly misconceived. Right now and for the immediate future, the budget deficit...

"On Financial and Human Capital"

bcarliner — 2008-12-03T23:03:14Z

Robert Reich: Of Financial Capital and Human Capital: Why We're Bailing Out Wall Street While Allowing Our Schools to Get Clobbered, by Robert Reich: Our preoccupation with the immediate crisis of financial capital is causing us to overlook the bigger...

Lead Director Pins G.M.’s Hopes on Federal Rescue

bcarliner — 2008-12-03T23:03:06Z

The lead outside director at the General Motors Corporation said Wednesday that bankruptcy was not a “viable approach” to saving the troubled auto giant, and pinned G.M.’s hopes for survival on getting $18 billion in aid from the federal government, The New York Times’s Bill Vlasic reports from Washington. In a rare interview, the director, George [...]

Fed’s Kroszner: Don’t Blame CRA

bcarliner — 2008-12-03T20:06:24Z

Federal Reserve governor Randall Kroszner , a conservative economist on leave from a teaching post at the University of Chicago Booth Graduate School of Business , says the Community Reinvestment Act isn t to blame for the subprime mess, despite some accusations to the contrary. " First, only a small portion of subprime mortgage originations are related to the CRA. Second, CRA- related loans appear to perform comparably to other types of subprime loans. Taken together we believe that the available evidence runs counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis," he said in a speech today in Washington . The Community Reinvestment Act, which dates to the 1970s, was crafted to combat discrimination and red-lining. It requires regulators to press banks to lend to low-income and minority neighborhoods. Kroszner s speech summarized research the Fed has been doing on two basic questions: (1) What share of subprime loans were related to CRA? Answer: Loans that are the focus of the CRA represent a very small portion of the subprime lending market, casting considerable doubt on the potential contribution that the law could have made to the subprime mortgage crisis. (2) How have CRA-related subprime loans performed relative to other loans. Answer: [D]elinquency rates were high in all neighborhood income groups, and that CRA-related subprime loans performed in a comparable manner to other subprime loans. Fed economists found that about 60% of higher-priced loan originations the technical definition of subrpime went to middle- or higher-income borrowers or neighborhoods who aren t targeted by CRA. More than 20% of the higher-priced loans were extended to lower-income borrowers or borrowers in lower-income areas by institutions that aren t banks and aren t covered by CRA. The striking result, Kroszner said: Only 6% of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes. This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis. Banks can also meet CRA obligations by buying loans from mortgage brokers, he noted. But less than 2% of the higher-priced loans (those would help banks meet CRA requirements) sold by independent mortgage companies were purchased by CRA-covered institutions. Image: http://feedads.googleadservices.com/~at/pHjahjOhnbebDC7lo1PsIwNf6AU/i Image: http://feedproxy.google.com/~f/wsj/economics/feed?d=41 Image: http://feedproxy.google.com/~f/wsj/economics/feed?i=LN3oosQ5 Image: http://feedproxy.google.com/~f/wsj/economics/feed?i=YMWBeMIj Image: http://feedproxy.google.com/~f/wsj/economics/feed?d=52 Image: http://feedproxy.google.com/~r/wsj/economics/feed/~4/0rgryC6YzDQ

Is it true that foreigners finance American debt?

bcarliner — 2008-12-03T23:03:11Z

This is the question raised by Brenda Rosser in a couple of posts at Econospeak Is it true? To which Barkley Rosser (no relation to Brenda and in fact living on the opposite side of the world-it really is an odd and small blogosphere sometimes) replies in part as follows: Brenda, The Chinese central bank has been buying lots of US Treasuries to help keep the dollar up and the yuan/rmb down, so that US citizens will continue to buy Chinese exports. It is that simple. With apologies to Prof. Rosser (a huge ally in the Social Security debate) I suggest that rarely is anything related to such matters 'that simple'. Not being an expert here I fall back on the only tools I really have. Which is to say official government data sets and a calculater. In this case I am going to start with this table which shows holdings of US Treasuries by month from Sept 2007 to Set 2008 MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES . And after a little examination of the numbers it would appear that the answer to Brenda's question is not in fact 'Well, duh' but instead 'Well lets see if we can make sense of the actual numbers'. Because as usual everything is simple if you ignore the complexities. The first thing to note is that while China was indeed the largest foreign single holder of Treasuries in Sept 2008 that is actually something new, for every other month shown Japan actually held more. Nor do the numbers show that China was buying aggressively, in four of the months in the table their net holdings actually dropped. If we would have been having this discussion in July (with data through June) the answer to Brenda's question, at least in relation to China would have been 'Well not really' with Chinese holdings increasing on average $4 bn a month over a nine month period. (Social Security's cash surplus loaned to Treasury over this period would have been about double that and its accumulated balance right at 4X that of China). Still obviously China is the biggest single current player, after all in the three months from June to September they added $81 billion to their portfolio. On the other hand over that same period 'Carib Banking Centers' added $63 billion to theirs, while the UK (which includes tax sheltering Channel Islands) added $58 bn. Now given banking secrecy laws in these countries it is impossible to know how much of these asset purchases were on behalf of Americans or American based MNCs, but clearly it is a number well north of zero. If we proceed to look at these numbers in percentage terms China is essentially holding steady, maintaining right at 20% of all such foreign holdings. That is as the U.S. stepped up borrowing they stepped up lending but only in proportion to the new debt being issued. Nor were they getting backstopped by the rest of East Asia: Japan, Hong Kong, Taiwan, Thailand all reduced their holdings modestly, while Korea and Singapore held fairly steady over this period. If we back up and look at who dramatially stepped up over the course of the year we get some unexpected suspects, particularly is we look at the percentage increases: UK $120 bn to $338 bn, Carib Banking $99 bn to $185 bn, Oil Exporters $137 bn to $182 bn (no surprise there), but then we have Luxembourg going from $58 bn to $91 bn, Russia from $32 bn to $70 bn, and Norway from $22 bn to $52 bn. Now some of this can be explained by oil prices but by no means all, I don't recall that either the Caribbean or Luxembourg as being particularly dotted with oil wells. Nor would they seem to be huge net exporters to the U.S. It is easy to get mesmerized by the sheer size of China and the fact that just about everything sold at WalMart (and most everywhere else) comes from East or Southeast Asia. But those who would explain everything by pointing to current trade accounts or the Chinese desire to prop up the yuan/rmbi have some explaining to do. Because there is a sea of money flowing to Treasuries (totalling up to more than 80% of the new demand) from outside Asia. And the question of how much of that money ultimately has American fingerprints on it is a good one, after all we know there are huge tax avoidance games going on, and some of that cash will inevitably end up in foreign held Treasuries. ___________________________ While I am at it can we get some overall perspective on the debt? If we visit the Treasury's Debt to the Penny we can see the following totals: Debt held by the Public $6.4 trillion Intragovernment holdings $4.2 trillion Total $10.6 trillion Okay that is a lot of change. On the other hand it includes some $2.3 trillion in Social Security asset/liabilities/Special Treasuries/'phony IOUs' (pick one) that will not start being redeemed until 2023. In some sense our 'real debt' (that which could be dumped on the market tomorrow) is limited to that $6.4 trillion. Still a lot of change. But to keep an apples to apples approach what was that number on Sept 30th? $5.8 trillion (my Hank P has been busy). How much of that was held by (ostensibly) foreign holders? $2.86 trillion. By China? $585 billion. Or 10% of all debt then held by the public, 5.5% of all total debt. Frankly the notion widely promulgated over the last few years that the U.S. was hopelessly exposed to some decision by the CCB to dump Treasuries always seemed overblown. And the ability of Treasury to raise even more than that over a two month period ($5.8 trillion to $6.4 trillion since Sept 30th) seems to have proved the point. I am not so naive as to believe that the world will continue to effectively lend money to the U.S. for returns that are effectively negative for unlimited periods of time. But I do suggest that to reduce everything to the Current Trade balance with China and the willingness of the PRC to prop up exports by buying dollars is just that: reductionism that does in fact ignore the complexities, in part by not putting the numbers in context. Image: http://feeds.feedburner.com/~r/blogspot/Hzoh/~4/473893739

I’m with Mephistopheles

bcarliner — 2008-12-03T23:03:07Z

Paul Krugman makes the case for deliberately providing too much of an economic stimulus. Here I want to examine the counter-case, for which I think there is a valid argument, although it doesn’t seem to be the argument that anyone is actually making. In the end, though, I agree with Professor Krugman: too much is better than too little. Here’s the thing, though: there is one big advantage in doing too little economic stimulus. I mean, doing some, doing a significant amount, but not quite enough. The advantage (as I have argued in many of my recent posts) is that it doesn’t cost anything, because it can be financed with seignorage. Professor Krugman makes the case that, from the point of view of the condition of the economy – the tradeoff between output and inflation, which is what macroeconomists usually care about – it is better to do too much, because, if you do too much, the Fed has the power to undo the excess by raising interest rates (whereas, if you do too little, there is nothing the Fed can do about it, since we’re in a liquidity trap). But as most people writing for the public acknowledge (or insist), there is more to care about than the condition of the economy. There is also the condition of the government’s finances. As far as the government’s finances are concerned, it is not just a bad idea to do too much; it is a bad idea to do enough . As long as you don’t do enough, standard textbook macroeconomic theory (at least the Keynesian kind, which is the one most influential among economic forecasters) says that there will be disinflationary, and ultimately deflationary, pressure. It’s a pretty simple point of logic. “Doing enough” is defined as getting the economy on a track where the unemployment rate will go down to the NAIRU (or possibly lower, if deflation takes hold and we are trying to reverse it). What other definition could there be? Then by definition of the NAIRU (the “non-accelerating inflation rate of unemployment,” which, if looked at from the other direction, is the non- de celerating inflation rate of unemployment, or eventually the non-accelerating deflation rate of unemployment), the inflation rate will tend to keep falling. Therefore, the Fed can keep creating money, financing the Treasury, and there will be no inflation (or any other deleterious effects that I can think of). Once you do enough, not only does the government have to start doing real borrowing to finance its deficit; it also has to pay real interest on the outstanding debt. The government is like a monopolist facing a kinked demand curve. As long as you stay below the kink, the more you produce, the better. But as soon as you get to the kink, all Hell breaks loose. Not only are you unable to sell your marginal “new” products for a profitable price; the price of your inframarginal “old” products starts to go down too. This puts us in a position rather like Goethe’s Faust. (I’ve only read selected passages, and those in very loose translation, so I’m relying on someone else’s analysis here, and probably an inaccurate memory even of that.) Faust is granted unlimited knowledge, until the point where he can say it is finally enough, that he has reached the culmination of human experience. At that point his soul belongs to the Devil. Similarly we are granted unlimited economic stimulus, until the point where we can say it is finally enough. At that point we are damned to Eternal Debt. But as I argued in an earlier post , even with a debt-financed stimulus, we have a net free lunch, in the same sense that Ricardians argue that international trade provides a net free lunch. With the stimulus, there is more produced today than there would otherwise be, and at no point in the future will production have to be reduced in order to pay for the increased production today. There is unambiguously more. There may be issues about distribution, as there are with trade, but overall there is unambiguously more. Perhaps the current generation benefits at the expense of future generations, but the current generation gains more than the future generation loses. I want to say one other thing. Even with the biggest fiscal stimulus anyone can imagine, our debt-to-GDP ratio will still end up lower than it was at the end of World War II. As I recall, that situation didn’t work out too badly. In fact, as a representative of the Future Generations that were affected by that debt – a representative who has a self-defrosting refrigerator-freezer, an automatic washing machine and dryer, a dishwasher, an air conditioner, a flat-screen color television set, a VCR/DVD player, several personal computers, an air-conditioned car with automatic transmission and power brakes that gets 35 MPG on unleaded gasoline, a blackberry, wireless internet access, immunity to polio, the ability to make a living without putting my pants on, and the opportunity to go to sleep after dusk in New York and wake up before sunrise in London despite the time difference – I would like to thank our grandparents for choosing damnation. Hell doesn’t really seem all that bad. And in Goethe’s version, doesn’t Faust end up going to Heaven?

The decline and fall of General Motors

bcarliner — 2008-12-03T23:02:56Z

Riding my bicycle last night through Oakland, I almost veered off the road when I saw a gas station advertising $1.86 a gallon for regular unleaded. I always assumed that a severe economic downturn would pummel oil prices and delay the advent of peak oil, but I have to concede that I never thought I would see gasoline for under two dollars a gallon in California again in my life. The price of crude oil to be delivered in January on the New York Mercantile Exchange, as of this writing, is $47.47, a full hundred dollars a barrel lower than it was in July! As energy analyst Geoffrey Styles noted on Monday, "Oil remains a cyclical business, as anyone who's been around it for a while understands, but this is ridiculous." Even so, low gas prices have done absolutely nothing for American automaker profitability. Whether this is because consumers are smart enough to realize that during the lifetime of whatever car they purchase right now, gas prices will inevitably surge back up again, or whether it's simply, as the auto industry claims, a result of a cratering economy, there is no getting around the reality that the November sales figures, as economist James Hamilton documents, are extraordinarily bad: I was running out of vocabulary last month to describe just how bad October was for the domestic automakers. But whatever you want to say about October, November was significantly worse. When I first saw the figure for November sales of cars manufactured in North America -- 236,000 units -- I thought maybe somebody had mistyped the first digit. Even 336,000 would have been a very bad month. But 236,000 is 17 percent below the dreadful October figure and 40 percent below the number sold in November of 2007. In 2007, Hamilton adds, GM recorded a loss of $37 billion dollars -- and that was before the bottom dropped out of the economy. This year looks to be considerably worse. In the restructuring plan GM presented to Congress on Tuesday, GM also declared: "The company's balance sheet... includes a ($60) billion negative net worth position at September 30, 2008." By any standard, that's a pretty big hole to dig yourself out of. I am inclined to believe GM's execs when they say that without help, they cannot remain a going concern. GM says it needs $4 billion this month to keep going and another $4 billion in January. And that's just for starters. In return for all the cash, the company promises that it will accelerate development of fuel efficient cars, trim the number of brands it produces, and extract cost-cutting sacrifices from all of its stakeholders. (Already, the UAW is promising concessions from labor. ) (You can read the plan here, and a sharp summary from Time's Justin Fox here. My favorite part: GM's promise to "immediately" cease "all corporate aircraft operations, unfortunately impacting approximately 50 hourly and salaried employees." Translation: All those mean comments from politicians about CEOs flying their jets from Detroit to Washington are going to mean we have to lay off a bunch of pilots and airplane mechanics.) But what do we make of this? "With Federal support, GM will invest significantly in reinventing the automobile, with special emphasis on fuel efficiency, energy independence, and reductions in greenhouse gas emissions." (Sounds kind of like GM is asking to be made a subsidiary of the Sierra Club doesn't it?) Better late than never? Frankly, I don't think such promises mean anything, absent rigorous government control and requirements. GM asks for the creation of an oversight board, but that's thin gruel. The sales figures, the state of the economy, the strategic errors Detroit has made over the years all add up to a pretty compelling conclusion. There's no way out for the Big Three as currently constituted, and depending on management beholden to shareholders, as Felix Salmon argues this morning, is a fool's game. I do believe that simply allowing the companies to collapse would be an unbearable body-blow to current U.S. economy, but I have joined the ranks of those who don't trust Detroit to fix itself, no matter how much the Fed's loan the car manufacturers. It's time for a government-administered Chapter 11 bankruptcy that fundamentally restructures the American auto industry. But of course General Motors says in its own restructuring plan that bankruptcy is absolutely, positively, not an option because of the "stigma" such an action would incur "in the eyes of consumers." On this latter point, it cannot be emphasized strongly enough how much a bankruptcy will depress sales of an auto manufacturer's products due to consumer fears of long-term warranty, resale value and service-related issues. Earth to GM: No one is buying your cars right now! Your business is kaput. How much more stigma can bankruptcy add than your own mismanagement has already spawned?

Why Wall Street Always Blows It

bcarliner — 2008-12-03T23:27:56Z

The Atlantic was kind enough to ask me to write an article explaining how the hell we just blew yet another monstrous financial bubble whose bursting is now blowing our economy to smithereens. Specifically, they wanted to me to explain how, time after time, so many smart people could be so stupid--on Wall Street and elsewhere. They reached out to me because, in the last bubble, I was one of those people. Here's are some of the key points: Bubbles are as much a part of free-market capitalism as storms are of weather: They have happened since the dawn of time, and they'll happen until the end of time, regardless of what we try to do to stop them. Most conventional wisdom about bubbles is wrong Most decisions made in bubbles are rational--they're just not made for the reasons most people think Business risk and career risk are as important to most people's decision-making as investment risk--especially when you're playing with someone else's money No one entity, person, or industry can "cause" bubbles: We're all to blame Everything's obvious in hindsight, but when bubbles are forming, it is very easy to believe that "it's different this time." "It's different this time," by the way, are the four most expensive words in the English language. The credit bubble that is now bursting is massive enough that we probably won't see another one like it for 30-40 years. When we do, our children will tell us "it's different this time." And here's the article itself. Hope you enjoy! Why Wall Street Always Blows It by Henry Blodget sponsored by: E-mail Article Printer Format W ell, we did it again. Only eight years after the last big financial boom ended in disaster, we're now in the migraine hangover of an even bigger one-a global housing and debt bubble whose bursting has wiped out tens of trillions of dollars of wealth and brought the world to the edge of a second Great Depression. Millions have lost their houses. Millions more have lost their retirement savings. Tens of millions have had their portfolios smashed. And the carnage in the 'real economy' has only just begun. What the hell happened? After decades of increasing financial sophistication, weren't we supposed to be done with these things? Weren't we supposed to know better? Yes, of course. Every time this happens, we think it will be the last time. But it never will be. First things first: for better and worse, I have had more professional experience with financial bubbles than I would ever wish on anyone. During the dot-com episode, as you may unfortunately recall, I was a famous tech-stock analyst at Merrill Lynch. I was famous because I was on the right side of the boom through the late 1990s, when stocks were storming to record-high prices every year-Internet stocks, especially. By late 1998, I was cautioning clients that 'what looks like a bubble probably is,' but this didn't save me. Fifteen months later, I missed the top and drove my clients right over the cliff. Later, in the smoldering aftermath, as you may also unfortunately recall, I was accused by Eliot Spitzer, then New York's attorney general, of having hung on too long in order to curry favor with the companies I was analyzing, some of which were also Merrill banking clients. This allegation led to my banishment from the industry, though it didn't explain why I had followed my own advice and blown my own portfolio to smithereens (more on this later). I experienced the next bubble differently-as a journalist and homeowner. Having already learned the most obvious lesson about bubbles, which is that you don't want to get out too late, I now discovered something nearly as obvious: you don't want to get out too early. Figuring that the roaring housing market was just another tech-stock bubble in the making, I rushed to sell my house in 2003-only to watch its price nearly double over the next three years. I also predicted the demise of the Manhattan real-estate market on the cover of New York magazine in 2005. Prices are finally falling now, in 2008, but they're still well above where they were then. Live through enough bubbles, though, and you do eventually learn something of value. For example, I've learned that although getting out too early hurts, it hurts less than getting out too late. More important, I've learned that most of the common wisdom about financial bubbles is wrong. W ho's to blame for the current crisis? As usually happens after a crash, the search for scapegoats has been intense, and many contenders have emerged: Wall Street swindled us; predatory lenders sold us loans we couldn't afford; the Securities and Exchange Commission fell asleep at the switch; Alan Greenspan kept interest rates low for too long; short-sellers spread negative rumors; 'experts' gave us bad advice. More-introspective folks will add other explanations: we got greedy; we went nuts; we heard what we wanted to hear. All of these explanations have some truth to them. Predatory lenders did bamboozle some people into loans and houses they couldn't afford. The SEC and other regulators did miss opportunities to curb some of the more egregious behavior. Alan Greenspan did keep interest rates too low for too long (and if you're looking for the single biggest cause of the housing bubble, this is it). Some short-sellers did spread negative rumors. And, Lord knows, many of us got greedy, checked our brains at the door, and heard what we wanted to hear. But most bubbles are the product of more than just bad faith, or incompetence, or rank stupidity; the interaction of human psychology with a market economy practically ensures that they will form. In this sense, bubbles are perfectly rational-or at least they're a rational and unavoidable by-product of capitalism (which, as Winston Churchill might have said, is the worst economic system on the planet except for all the others). Technology and circumstances change, but the human animal doesn't. And markets are ultimately about people. To understand why bubble participants make the decisions they do, let's roll back the clock to 2002. The stock -market crash has crushed our portfolios and left us feeling vulnerable, foolish, and poor. We're not wiped out, thankfully, but we're chastened, and we're certainly not going to go blow our extra money on Cisco Systems again. So where should we put it? What's safe? How about a house? House prices, we are told by our helpful neighborhood real-estate agent, almost never go down. This sounds right, and they certainly didn't go down in the stock-market crash. In fact, for as long as we can remember-about 10 years, in most cases-house prices haven't gone down. (Wait, maybe there was a slight dip, after the 1987 stock-market crash, but looming larger in our memories is what's happened since; everyone we know who's bought a house since the early 1990s has made gobs of money.) We consider following our agent's advice, but then we decide against it. House prices have doubled since the mid-1990s; we're not going to get burned again by buying at the top. So we decide to just stay in our rent-stabilized rabbit warren and wait for house prices to collapse. Unfortunately, they don't. A year later, they've risen at least another 10 percent. By 2006, we're walking past neighborhood houses that we could have bought for about half as much four years ago; we wave to happy new neighbors who are already deep in the money. One neighbor has 'unlocked the value in his house' by taking out a cheap home-equity loan, and he's using the proceeds to build a swimming pool. He is also doing well, along with two visionary friends, by buying and flipping other houses-so well, in fact, that he's considering quitting his job and becoming a full-time real-estate developer. After four years of resistance, we finally concede-houses might be a good investment after all-and call our neighborhood real-estate agent. She's jammed (and driving a new BMW), but she agrees to fit us in. We see five houses: two were on the market two years ago for 30 percent less (we just can't handle the pain of that); two are dumps; and the fifth, which we love, is listed at a positively ridiculous price. The agent tells us to hurry-if we don't bid now, we'll lose the house. But we're still hesitant: last week, we read an article in which some economist was predicting a housing crash, and that made us nervous. (Our agent counters that Greenspan says the housing market's in good shape, and he isn't known as 'The Maestro' for nothing.) When we get home, we call our neighborhood mortgage broker, who gives us a surprisingly reasonable quote-with a surprisingly small down payment. It's a new kind of loan, he says, called an adjustable-rate mortgage, which is the same kind our neighbor has. The payments will 'reset' in three years, but, as the mortgage broker suggests, we'll probably have moved up to a bigger house by then. We discuss the house during dinner and breakfast. We review our finances to make sure we can afford it. Then, the next afternoon, we call the agent to place a bid. And the house is already gone-at 10 percent above the asking price. By the spring of 2007, we've finally caught up to the market reality, and our luck finally changes: We make an instant, aggressive bid on a huge house, with almost no money down. And we get it! We're finally members of the ownership society. You know the rest. Eighteen months later, our down payment has been wiped out and we owe more on the house than it's worth. We're still able to make the payments, but our mortgage rate is about to reset. And we've already heard rumors about coming layoffs at our jobs. How on Earth did we get into this mess? The exact answer is different in every case, of course. But let's round up the usual suspects: The predatory mortgage broker? Well, we're certainly not happy with the bastard, given that he sold us a loan that is now a ticking time bomb. But we did ask him to show us a range of options, and he didn't make us pick this one. We picked it because it had the lowest payment. Our sleazy real-estate agent? We're not speaking to her anymore, either (and we're secretly stoked that her BMW just got repossessed), but again, she didn't lie to us. She just kept saying that houses are usually a good investment. And she is, after all, a saleswoman; that was never very hard to figure out. Wall Street fat cats? Boy, do we hate those guys, especially now that our tax dollars are bailing them out. But we didn't complain when our lender asked for such a small down payment without bothering to check how much money we made. At the time, we thought that was pretty great. The SEC? We're furious that our government let this happen to us, and we're sure someone is to blame. We're not really sure who that someone is, though. Whoever is responsible for making sure that something like this never happens to us, we guess. Alan 'The Maestro' Greenspan? We're pissed at him too. If he hadn't been out there saying everything was fine, we might have believed that economist who said it wasn't. Bad advice? Hell, yes, we got bad advice. Our real-estate agent. That mortgage guy. Our neighbor. Greenspan. The media. They all gave us horrendous advice. We should have just waited for the market to crash. But everyone said it was different this time. Still, except in cases involving outright fraud-a small minority-the buck stops with us. Not knowing that the market would crash isn't an excuse. No one knew the market would crash, even the analysts who predicted that it would. (Just as important, no one knew when prices would go down, or how fast.) And for years, most of the skeptics looked-and felt-like fools. Everyone else on that list above bears some responsibility too. But in the case I have described, it would be hard to say that any of them acted criminally. Or irrationally. Or even irresponsibly. In fact, almost everyone on that list acted just the way you would expect them to act under the circumstances. Keep reading at The Atlantic

Peter Schiff - and Shawn Tully - Were Right

bcarliner — 2008-12-03T23:03:05Z

Have you seen this video? Entitled Peter Schiff Was Right, 2006-2007, it is an amazing, nine-minute compilation that features Mr. Schiff, the president of Euro-Pacific Capital, suffering the slings and arrows of various market gurus like Arthur Laffer, as he bravely predicts - again and again and again - in various television appearances that [...]

Securitization: Dead parrot, or half-dead parrot?

bcarliner — 2008-12-03T20:06:22Z

Arnold Kling, riffing on something I wrote the other day about the end of investment banking as we've known it, writes: I think of securitization as like the dead parrot in the famous Monty Python sketch. Trying to rescue it or revive it strikes me as madness. I keep saying that we need to revert to [...]

But how to get the Chinese shopping?

bcarliner — 2008-12-03T20:06:24Z

First, keep them working LET's add one more idea to the discuss of Chinese exchange rates below. Brad Setser quotes Martin Wolf, who writes:Countries with large external surpluses import demand from the rest of the world. In a deep recession, this is a “beggar-my-neighbour” policy. It makes impossible the necessary combination of global rebalancing with sustained aggregate demand. John Maynard Keynes argued just this when negotiating the post-second world war order.In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy.Some argue that

Symmetrically Bold and Decisive?

bcarliner — 2008-12-03T20:21:26Z

I read this week's leader in the Economist and it has irked me. " Bold and decisive action " is what it called for, to muscle the global economy back on a path to growth, and to address the threat of deflationary spiral. " Bold and decisive action " indeed! What irked me was not the call to arms, as it has irked others, for I will admit to being reluctantly though pragmatically sympathetic, but rather the hypocrisy of the call NOW by the self-professed champion of free markets. For it should be obvious to all NOW, that the reason why we are here, NOW, is the very lack of bold and decisive action by leaders, monetary authorities and regulators to address the inexorable build-up of excess credit creation, asset-price bubbles, as well as unsustainable fiscal policies coupled with unaddressed mercantile and exchange-rate policies in Asia. As such, any editorial call-to-arms should be prefaced with a " mea culpa " for admitting that their prior apologetic stance towards policy and regulatory neglect was incredibly short-sighted, for it not only fostered unimaginably large mis-allocations of resources, but created problems of such magnitude that large-scale socialization becomes the only viable option to prevent something approximating systemic collapse. This last phrase may sound like hyperbole, but most - even the Austrians amongst us (including perhaps Hayek too, admittedly in his old age were he alive)- would admit it is closer to the truth than not. It seems fair then, that any such mobilization of resources, or call upon the populace (and its descendants) to foot the bill, either through the burden of debt, or the imposition of a future inflationary regime, must highlight and categorically admit past mistakes, clearly for the avoidance of future doubt. < br / > < br / > Failing this, there remains (for such an Editorial Leader) possible redemption for their lack of a mea culpa, if they perhaps attempted to quantify the present value of past benefits deriving from said policy neglect (externalities included) against the present value of costs and lost output attributed to mother of all post-war busts. But alas, The Economist is silent. Sadly, I am not a sufficiently qualified macroeconomist to weigh up such a complex cost vs. benefit question. But it is my belief - whether derived through my financial Calvinist sympathies - that we passed that threshold sometime in the latter part of the last decade (1997 ?!?) at about the time that " irrational exuberance " was banished from the ex-FRB Chairman's metaphorical arsenal. And in passing that threshold, each dollar spent thereafter was a dollar yielding diminished marginal returns to the future for the sake of present consumption thereby disastrously delaying the confrontation with fiscal and financial realities that would be met, sooner later, by market forces if not address directly through policy. Yet, it ismmy hunch, that even if it were - in pure financial terms - an economic wash (which it may very well be), the erosion of systemic confidence, the squandering of the commercial flexibility and diplomatic advantage attached to the Dollar as the global reserve currency, the impact of volatility upon investment decisions, the unnecesary delay by (primarily) Anglo-Saxon nations in converging their lifestyles and finances towards sustainable levels with their deleterious effects would likely tilt the cost vs. benefit determination in favor of more prudent fiscal and monetary policies yielding more moderate growth punctuated with mild rolling recessions - a proverbial victory for the tortoise over the hare. That's my story, and I'm sticking to it, until plausibly convinced otherwise. < br / > < br / > There was no shortage of American triumphalism following the dissolution of the Soviet Union. And be certain that I shed no tears for this event, for conclusions regarding the inherent lameness of Central-Plan Economics were not wrong. But make no mistake, the decade since " irrational exuberance " was banished should be seen as an unmitigated failure of the unmitigated market, and here too, we should shed no tears in writing its epitaph. Issues of grandest importance indeed. I just wish more of our opinion formers would have had the humility to accept their culpability.

The Tyranny of the Shareholders

bcarliner — 2008-12-03T20:06:24Z

What does AIG have in common with the auto industry? Beyond bailouts, of course. One answer is that public shareholders are really part of the problem, rather than part of the solution. In a publicly-listed company, management works, first and foremost, for shareholders. At AIG, the incentives are even more skewed: the CEO, Edward Liddy, is working for $1 a year -- plus a large slug of equity. And so we end up with a situation where Liddy wants yet another AIG bailout , this one to reduce the amount of interest that the company is paying to the government, leaving more money for shareholders. It's similar to GM's protestations that bankruptcy is not an option -- but management would say that, because they work for shareholders, and shareholders would get wiped out under any bankruptcy proceedings. The problem is that these companies are insolvent, and shareholders should be wiped out, sooner rather than later. But because they're still hanging on by their fingertips, they're refusing to accede to the inevitable. The value of their shares is minuscule, but because they control the management of these multi-billion-dollar companies, they're a massive obstacle to any sensible reorganization. At AIG, Treasury is at least the single largest shareholder, and should tell Liddy to shut up: his job is to manage the company, and if he doesn't want to do that for $1 a year, he should resign, or renegotiate his contract. His job should not be to try to maximize the value of the rump equity held by himself and other shareholders: this is just another situation where minority shareholders really don't have much in the way of rights, and have to go along with whatever the majority shareholder wants -- even if the majority shareholder is getting lots of interest on preferred stock investments and the minority shareholders aren't. At GM, Congress should provide financing within a Chapter 11 bankruptcy, and get the shareholders out of the way that way. Once it's already in Chapter 11, management can hardly continue to say that bankruptcy is not an option. And shareholders won't have a significant seat at the table any more, which will reduce the number of stakeholders who need to be placated. The WSJ reports: In the past several days, congressional representatives have met with bankers and bankruptcy experts to discuss the possibility of a so-called prearranged bankruptcy for either GM or Chrysler, these people said. One idea that emerged from the talks would have the U.S. government put up as much as $40 billion to fund reorganizations under bankruptcy for GM and Chrysler, these people said. Let's do it, and end the tyranny of the shareholders, and of the managers who work for them. Related Links Jump-Starting a Bailout Help Us or We Die Driving an Auto Merger