economics – Page 7

Tag: economics (page 7 of 10)

Evidence that we should not freak out, episode I

Paul Krugman has argued that bank recapitalization is the most logical response to the financial crisis, and in his column today he credits UK prime minister Gordon Brown for leading the world down that path. The Dow is up almost 600 points right now, so maybe the markets like that move.

The “Sweden Plan” is upon us

October 11, 2008 / Rafe / 0 Comments

Nouriel Roubini explains how the provision that enables the federal government to directly buy equity in banks came to be added to the bailout bill. (You have to register to read the full article.)

The short description is that Democrats in Congress added the provision during the negotiations. Liberal economists like Brad DeLong argued in favor, and Tyler Cowen explained why the plan may not work in America.

In general, these are the times when all of the economics bloggers earn their stripes. Apart from software development, I’d say that economics is perhaps the best covered topic in the blog world (celebrity gossip notwithstanding). There are brilliant bloggers representing just about every school of economic thought, and for the most part they engage with one another rationally and without malice.

Over the next few months and years, we’ll learn a lot about which of the schools offer the best insight into what’s happening right now.

Evidence that we should freak out, episode II

October 10, 2008 / Rafe / 4 Comments

Here’s more confirmation that the inability or unwillingness of people to lend money to one another is what’s driving the ongoing bad news in the financial markets. It is essentially twice as expensive for IBM to borrow money this year than it was last year:

IBM raised $4 billion today with the sale of 5 year, 10 year and 30 year bonds. I will relate the story of the bond in the 10 year sector.

I shall begin with the IBM bond which matures in 2017, which is one year shy of the bond that the company offered today. It is not exactly the same but we can compare. That bond traded one month ago at a spread of about 170 basis points to the 10 year Treasury. Yesterday, a salesman with whom I converse, (and friend of the blog) sold some to a customer of his at T+265 basis points.

Today when IBM offers the new 10 year bond the market forced that gilt edged untainted by the credit crisis technology company to pay T+388 basis points. It was over 120 basis points cheaper than a comparable bond traded yesterday. That is a sign to me that the credit markets are in the direst state and that funding is drying up for corporate America.

As the author points out, if it’s this difficult for IBM to sell debt, most other companies are effectively shut out of the credit market entirely.

Evidence that we should freak out, episode I

October 10, 2008 / Rafe / 1 Comment

This is the first installment in a new series, “evidence that we should freak out.” I’ve even created a new “financial collapse” tag for future reference.

Grain is piling up in Canadian ports because the sellers will not accept the lines of credit normally used by buyers to guarantee the purchase. FP Passport has the details.

Our current crisis in a nutshell

September 21, 2008 / Rafe / 0 Comments

In a guest post at the Freakonomics blog, economists Doug Diamond and Anil Kashyap explain the current financial crisis in FAQ form. For example, here’s the nut of the problem with Fannie and Freddie:

Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards.

Elsewhere at the New York Times, Paul Krugman explains why the bailout plan the Treasury Department is floating is a bad idea: see No deal and Thinking the bailout through.

Best economic joke of the day

September 16, 2008 / Rafe / 0 Comments

Best joke of the day goes to Tyler Cowen. I love gallows humor.

The politics of Freddie Mac and Fannie Mae

September 8, 2008 / Rafe / 0 Comments

Andrew Leonard posts about the politics of Freddie Mac and Fannie Mae:

The critical difference between right and left points of view on this issue is that the right thinks the government shouldn’t be involved at all in the housing market, while the left believes that Fannie Mae — which was originally created during the Great Depression as a fully public agency entrusted with propping up the housing market — never should have been transformed into a semi-public, semi-private entity in the first place. This gets to the heart of a distinction made by Paul Krugman in his blog today between “nationalization” and “deprivatization.” Headlines declaring that Fannie and Freddie are being “nationalized” are running rampant through the blogosphere, summoning up visions of banana republics kicking out Yankee oil companies in the name of the revolution! But what’s really happening is that the bastard halfway privatization of Fannie Mae has now been revoked.

And here’s why Fannie Mae and Freddie Mac weren’t really the problem in the first place:

We shouldn’t be shocked at all that Wall Street went completely overboard in its love affair with housing market manipulation. That’s what happens when a market is left to its own devices, and government eschews its oversight responsibility. That’s what always happens. And when the mess gets big enough, government has to step in and clean everything up, which means that even if the feds had kept their hands totally clean — if there had been no Fannie Mae and Freddie Mac muddying the waters — some kind of public entity would have had to be created as the government vehicle for correcting market failure.

How the mortgage crisis winds up

September 7, 2008 / Rafe / 2 Comments

Tyler Cowen posts on the coming bailout of Fannie Mae and Freddie Mac. Bottom line: after all of the stupidity, greed, and outright fraud, we the taxpayers will all pay up to make sure that the housing market doesn’t fully collapse. If you see a house flipper, mortgage broker, or investment banker who didn’t overextend themselves and lose everything, I think you should be allowed to punch them once in the face with impunity.

Back in April, David Einhorn gave a speech called Private Profits and Socialized Risk. The title alone sums up the current situation.

The bottom line, though, is that the government must bail out these agencies. Here’s why. Freddie Mac and Fannie Mae buy up mortgages and package them as investments that are sold to institutional investors (like foreign governments, among others). They purchase these instruments even though they pay a relatively low interest rate because they assume that the US government will guarantee that the Freddie Mac and Fannie Mae won’t default on those investments. If that assumption does not hold, the securities sold by Freddie Mac and Fannie Mae will have to pay a much higher interest rate to make up for the higher than anticipated risk profile. That, in turn, will drive up the mortgage rates home buyers pay, slowing down the housing market and killing demand for more expensive homes.

Letting these two quasi-governmental companies fail would crater an already failing housing market, destroying an awful lot of wealth. That’s not something any politician is going to let happen if they can stop it (nor should they). The US is sort of like the family where the single income earner takes month’s wages and blows them at the casino. You may hate them for what they did, but you still have to take them back in because they’re the only one with a job in the first place.

Update: Add Fannie Mae and Freddie Mac to the list of things about which I know more than Sarah Palin.

Really big government

July 30, 2008 / Rafe / 1 Comment

Andrew Leonard on the housing bailout bill that President Bush just signed:

Without any hoopla, President Bush signed the 2008 Housing and Economic Recovery Act at 7 a.m. Wednesday. The lack of celebration was understandable. The new bill puts taxpayers at so much potential risk that Congress had to simultaneously authorize raising the statutory ceiling on the national debt by $800 billion just to make sure it will have breathing room to make good on its new promises. The message from the White House: Big government just got a whole lot bigger.

And here, in one paragraph, is why libertarianism will never be a mainstream political movement in the United States:

In other words, it’s the kind of bill that the heirs of Ronald Reagan have been decrying for more than a quarter century. Too bad for them: The new bill is all the proof America needs to show that when push comes to shove, no American administration, even one as willfully stubborn and reality-challenged as the current White House, will keep its faith in letting the free market handle its own problems while all else fails.

Tom Vanderwell on moral hazard

July 22, 2008 / Rafe / 5 Comments

Paul Kedrosky has a guest post from Tom Vanderwell on moral hazard. Moral hazard describes a situation where parties behave differently because they do not expect to bear the full consequences of their actions. For example, when a guy in a bar acts especially belligerent because he’s got his big, tough friend with him, that’s moral hazard at work.

Free market purists argue that moral hazard distorts the free market, and so firms and investors should not be insulated from risk. In other words, the FDIC should not exist, because then the risk of bank default would force customers to be more informed about the loans their banks make. This would cause banks who make risky loans to lose business, and thus strengthen the banking industry.

Of course, there are reasons why we protect people from the consequences of risk, even if it introduces moral hazard to the equation. Only rarely do only the people taking on unwise risks suffer the consequences when their bets don’t pay off, which leads Vanderwell to this question:

But how can we prevent a total meltdown of the housing and mortgage market (what would happen if Fannie and Freddie actually went under) without absolving some of the participants (for this particular discussion, we’ll limit it to Wall St., the Ratings Agencies, the Mortgage Companies, and the Banks who wrote the loans oh, and the mortgage lenders themselves if they did anything criminal or fraudlent) of at least some of their consequences?

He has some suggestions.

Needless to say, moral hazard is a concept that is of great interest to insurers. Malcolm Gladwell wrote an article in 2005 explaining why moral hazard isn’t really a concern when it comes to health insurance.

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