When should data that support a published study be made public? What if the study is not yet published but is merely presented to an audience of peers? Scienceblogs reports:
An Italian-led research group's closely held data have been outed by paparazzi physicists, who photographed conference slides and then used the data in their own publications.
The controversy over who gets credit is another concern but what if the data had been made public at the same time as the presentation? Then there would be no controversy over credit. However, for many reasons (personal or otherwise) researchers tend not to make their data public until publication of their study, if at all. This would be acceptable if and only if their research is presented only to their peers and does not become part of the public debate.
In many cases, especially in economics (unlike discussion on dark matter or matters of cosmology) this is hardly ever the case. When a study is trumpeted in the Wall Street Journal or the New York Times prior to publication and before data is made public then what is the status of the study? It is as if the study had already been published and had already passed peer review.
For instance, the New York Times gave some coverage to research by Kotchen and Grant on the lack of energy savings from adopting daylight savings time. Unfortunately, the data for replication is not available for download. Therefore, the conclusions from this study is unverifiable and yet it has already made it into the public domain.
Likewise, claims of success against malaria were made based on data that were not made public.
Mr. and Mrs. Gates are repeating numbers that have already been discredited. This story of irresponsible claims goes back to a big New York Times headline on February 1, 2008: “Nets and New Drug Make Inroads Against Malaria,” which quoted Dr. Arata Kochi, chief of malaria for the WHO, as reporting 50-60 percent reductions in deaths of children in Zambia, Ethiopia, and Rwanda, and so celebrated the victories of the anti-malaria campaign. Alas, Dr. Kochi had rushed to the press a dubious report. The report was never finalized by WHO, it promptly disappeared, and its specific claims were contradicted by WHO’s own September 2008 World Malaria Report, by which time Dr. Kochi was no longer WHO chief of malaria.
Thus, there is reason to make a case that data should be made public when the authors of the study feel that their research is ready to be presented to their peers (and not wait until publication) especially since it is likely that the press will report their "preliminary" findings.
Another source of controversy is the tariff-growth paradox whose authors have not made data available for download. There are reasons for this although technology is not one of them since the Internet has made downloads easy - moreover, if the authors can make their papers downloadable, why not their data?
Reasons for not making data downloadable are probably mundane:
1. Documentation - the data was possibly not well documented and only the authors can understand the structure as well as variable names. The amount of work to go back and document the data is just too overwhelming for the authors.
2. Personal - the authors have done the hard work gathering and entering the data and other authors who want to research the topic should do their own data entry and research. This reason may seem petty but it also serves as a check and verification of the original data. Unfortunately, this can be done even if the data has been made available.
David Albouy has contradicted the data on settler mortality in "The Colonial Origins of Comparative Development: An Empirical Investigation" by Acemoglu, Johnson, and Robinson. Even though Acemoglu et. al. have never made the data downloadable, they provided it to Albouy via personal communication. This did not prevent Albouy from contradicting the findings of Acemoglu et. al.
More insidious is the use of confidential data that cannot be made public. This kind of data has made it into policy circles on the effects of file sharing on music sales. The Chronicle of Higher Education has documented this debate between Stan Leibowitz who has tried to verify a Journal of Political Economy article by Oberholzer and Strumpf.
What is the use of publishing research that cannot be replicated? Hamermesh provides a good overview of the issues but the bottom line is that if a study cannot be replicated then it is worthless and if economics wants to stake its claim as a science then it should reject all articles that use confidential data.
Related to the use of confidential data but not quite as serious is the use of public but restricted data. These types of data are commonly found at NCES that are geo-coded. The restrictions are fairly onerous including the need for an application with a signed affidavit as well as being subjected to a bureaucrat's whim of auditing the user's data security arrangements. Other examples of restricted data are Medicare data, Census data without topcoding of income categories (i.e. March supplements) and Longitudinal Employer-Employee Data.
While privacy concerns are real there are a lot of data collected that can be adequately modified to protect privacy. If the Federal Reserve can make data on wealth publicly available then it is hard to believe that economists are unable to make their data sufficiently anonymous to eliminate disclosure risk.
The conclusions are thus:
1. Data must be made downloadable as soon as its authors are willing to present their findings to their peers.
2. Restricted data must be made public - disclosure risk can be eliminated even with geo-coding. NCES type restrictions are too onerous.
3. Articles based on confidential data must be summarily rejected. These studies add nothing to the knowledge base.
Saturday, February 28, 2009
Wednesday, February 25, 2009
How did banks get so big?
In previous posts here and here it was proposed that banks not become too interconnected or too big lest they fail and bring down the entire system. Mark Thoma advocates a reprivatization where banks are not allowed to get too big. It may be time to contemplate on how we got to where we are.
Back in 1994, there were economists who considered the U.S. banking sector to be too inefficient. (See for instance, Wheelock and Wilson, 1994.) As a result of low efficiencies and low profits, banks began adopting newer technologies and by 2001 improvements in bank profits became clearer. (See for instance, Berger and Mester, 2002.) Moreover, the push toward profit maximization also began to drive mergers. Akhavein, Berger and Humphrey (1997) finds that mega-mergers increased bank profits.
The conclusion that can be drawn from these (albeit short survey of) findings is that technology progress and profit maximization have driven bank mergers. Mergers can be treated with antitrust regulation and it is here perhaps that there may have been too little regulation. However, the failure may not have been the lack of regulation per se but the lack of a criteria for evaluating bank mergers. Antitrust regulators are concerned with whether mergers would have adverse effects on the services for consumers not the possibility of systemic risk. While the Fed and Treasury may also be required to sign off on these mergers then it is they who should be responsible for enforcing some kind of too big to fail or too interconnected to fail policy.
What about the case of a bank adopting an expensive technology that can only be profitable with scale economies, i.e. where mergers are the only option of becoming more efficient? An example would be economies of scale from combining IT departments. Should such mergers be disallowed? What if a bank developed a new technology that allowed it to become more competitive and grow from within? Should its growth be curbed?
There have been precedents where large firms that have grown from some competitive advantage have subsequently been broken up, for instance, AT&T. However, AT&T was broken up for competitive reasons, i.e. market power over consumers. Some may argue that the reason for this break up was inconclusive and that regulators over reacted. The fact that AT&T has now grown large again through mergers is evidence that market forces provide a rationale for being large.
Unfortunately, economics has provided very little in terms of policy guidance. How big is too big? Should a bank with a competitive advantage be regulated more heavily because of its potential to become too big? These are only a few of the questions that economists need to address after breaking up all the big banks. What's to prevent some of these from becoming too big again?
If the lesson here is that financial institutions should not become too big then what is the lesson from the following paper Are Credit Unions Too Small? by Wheelock and Wilson (2008) that seems to call for deregulation of credit unions. Here is the abstract:
Since 1985, the share of U.S. depository institution assets held by credit unions has nearly doubled, and the average (inflation-adjusted) size of credit unions has increased over 600 percent. We use a non-parametric local-linear estimator to estimate a cost relationship for credit unions and derive estimates of ray-scale and expansion-path scale economies. We employ a dimension-reduction technique to reduce estimation error, and bootstrap methods for inference. We find substantial evidence of increasing returns to scale across the range of sizes observed among credit unions, suggesting that an easing of regulations on credit union membership or activities would lead to further increases in the size of credit unions.
Back in 1994, there were economists who considered the U.S. banking sector to be too inefficient. (See for instance, Wheelock and Wilson, 1994.) As a result of low efficiencies and low profits, banks began adopting newer technologies and by 2001 improvements in bank profits became clearer. (See for instance, Berger and Mester, 2002.) Moreover, the push toward profit maximization also began to drive mergers. Akhavein, Berger and Humphrey (1997) finds that mega-mergers increased bank profits.
The conclusion that can be drawn from these (albeit short survey of) findings is that technology progress and profit maximization have driven bank mergers. Mergers can be treated with antitrust regulation and it is here perhaps that there may have been too little regulation. However, the failure may not have been the lack of regulation per se but the lack of a criteria for evaluating bank mergers. Antitrust regulators are concerned with whether mergers would have adverse effects on the services for consumers not the possibility of systemic risk. While the Fed and Treasury may also be required to sign off on these mergers then it is they who should be responsible for enforcing some kind of too big to fail or too interconnected to fail policy.
What about the case of a bank adopting an expensive technology that can only be profitable with scale economies, i.e. where mergers are the only option of becoming more efficient? An example would be economies of scale from combining IT departments. Should such mergers be disallowed? What if a bank developed a new technology that allowed it to become more competitive and grow from within? Should its growth be curbed?
There have been precedents where large firms that have grown from some competitive advantage have subsequently been broken up, for instance, AT&T. However, AT&T was broken up for competitive reasons, i.e. market power over consumers. Some may argue that the reason for this break up was inconclusive and that regulators over reacted. The fact that AT&T has now grown large again through mergers is evidence that market forces provide a rationale for being large.
Unfortunately, economics has provided very little in terms of policy guidance. How big is too big? Should a bank with a competitive advantage be regulated more heavily because of its potential to become too big? These are only a few of the questions that economists need to address after breaking up all the big banks. What's to prevent some of these from becoming too big again?
If the lesson here is that financial institutions should not become too big then what is the lesson from the following paper Are Credit Unions Too Small? by Wheelock and Wilson (2008) that seems to call for deregulation of credit unions. Here is the abstract:
Since 1985, the share of U.S. depository institution assets held by credit unions has nearly doubled, and the average (inflation-adjusted) size of credit unions has increased over 600 percent. We use a non-parametric local-linear estimator to estimate a cost relationship for credit unions and derive estimates of ray-scale and expansion-path scale economies. We employ a dimension-reduction technique to reduce estimation error, and bootstrap methods for inference. We find substantial evidence of increasing returns to scale across the range of sizes observed among credit unions, suggesting that an easing of regulations on credit union membership or activities would lead to further increases in the size of credit unions.
Monday, February 23, 2009
Some interesting modeling ideas
Via Mankiw, Jeff Sachs interesting statements really begs for a model:
President Barack Obama’s economic team is now calling for an unprecedented stimulus of large budget deficits and zero interest rates to counteract the recession. These policies may work in the short term but they threaten to produce still greater crises within a few years. Our recovery will be faster if short-term policies are put within a medium-term framework in which the budget credibly comes back to balance and interest rates come back to moderate sustainable levels....
1. Can delaying a recession result in a greater depression later on? What are the mechanics of this?
2. The corollary is the following: Can the policy of lower interest rates of the Greenspan era to avoid a recession result in an even greater depression?
3. Another corollary from low interst rates is Victor Zarnowit's notion that each boom results in over-investment and contains within it the seeds of the next recession.
Bob Shiller's idea that talking about a depression can lead to one is being discounted by Mark Thoma. Again, this begs for a model of feedback effects and the size of the feedback that is required to create a recession. An event triggers a crisis and then everyone becomes more risk averse or begins to prepare for the worst leading to a self-fulfilling prophecy. This sounds just as plausible as technological shocks.
President Barack Obama’s economic team is now calling for an unprecedented stimulus of large budget deficits and zero interest rates to counteract the recession. These policies may work in the short term but they threaten to produce still greater crises within a few years. Our recovery will be faster if short-term policies are put within a medium-term framework in which the budget credibly comes back to balance and interest rates come back to moderate sustainable levels....
1. Can delaying a recession result in a greater depression later on? What are the mechanics of this?
2. The corollary is the following: Can the policy of lower interest rates of the Greenspan era to avoid a recession result in an even greater depression?
3. Another corollary from low interst rates is Victor Zarnowit's notion that each boom results in over-investment and contains within it the seeds of the next recession.
Bob Shiller's idea that talking about a depression can lead to one is being discounted by Mark Thoma. Again, this begs for a model of feedback effects and the size of the feedback that is required to create a recession. An event triggers a crisis and then everyone becomes more risk averse or begins to prepare for the worst leading to a self-fulfilling prophecy. This sounds just as plausible as technological shocks.
Should economists debate each other?
Via Mankiw, the following article: Dismal scientists: how the crash is reshaping economics got some attention in particular the following passage:
Recently a group of economists affiliated with the Cato Institute ran an ad in the New York Times opposing Obama's stimulus plan. As chair of my department I tried to arrange a public debate between one of the signatories and a proponent of fiscal stimulus -- thinking that would be a timely and lively session. But the signatory, a fully accredited university macroeconomist, declined the opportunity for public defense of his position on the grounds that "all I know on this issue I got from Greg Mankiw's blog -- I really am not equipped to debate this with anyone."
Mankiw's response was:
My interpretation is more benign: The chairman of the department asks a professor to do something, the professor is busy and doesn't really want to do it, so he blows off the chairman with a tongue-in-cheek quip.
On a related note: I know a lot of academics who don't like debate formats. They find it too confrontational and incompatible with reasoned discussion. A prominent economics professor I know, who once faced off against Larry Summers in a debate, told me he would never put himself in that position again. But that decision has not stopped him from being a productive contributor to discussions of public policy.
I found Mankiw's response a little odd. In fact the economists that I have known at grad school are fierce debaters or at least confrontational. Some seminars were incredibly nerve wracking and at times I felt sorry for the presenter.
Moreover, this Bloomberg story on the Chicago school the legacy of Milton Friedman notes:
Friedman, who stood 5 feet 3 inches (160 centimeters), was a fierce debater, McCloskey recalls.
“He always asks, persistently, ‘How do you know?’” McCloskey, now 66, wrote in the Eastern Economic Review in 2003. “It’s a terrifying question, because most of the time we can’t say.”
Like Mankiw however, I do think the professor in question had no interest in debating because he probably preferred running regressions or building models. Alternatively, he had no interest in defending his position in a debate because he really did not believe in what he was saying. Both statements are not contradictory.
Note: The Greg Clark article in the Atlantic was not as interesting as the comments and the Bloomberg sotry was a nice retrospective on the ideas of the Chicago school and how the current crisis is overturning its principles and ideals.
Recently a group of economists affiliated with the Cato Institute ran an ad in the New York Times opposing Obama's stimulus plan. As chair of my department I tried to arrange a public debate between one of the signatories and a proponent of fiscal stimulus -- thinking that would be a timely and lively session. But the signatory, a fully accredited university macroeconomist, declined the opportunity for public defense of his position on the grounds that "all I know on this issue I got from Greg Mankiw's blog -- I really am not equipped to debate this with anyone."
Mankiw's response was:
My interpretation is more benign: The chairman of the department asks a professor to do something, the professor is busy and doesn't really want to do it, so he blows off the chairman with a tongue-in-cheek quip.
On a related note: I know a lot of academics who don't like debate formats. They find it too confrontational and incompatible with reasoned discussion. A prominent economics professor I know, who once faced off against Larry Summers in a debate, told me he would never put himself in that position again. But that decision has not stopped him from being a productive contributor to discussions of public policy.
I found Mankiw's response a little odd. In fact the economists that I have known at grad school are fierce debaters or at least confrontational. Some seminars were incredibly nerve wracking and at times I felt sorry for the presenter.
Moreover, this Bloomberg story on the Chicago school the legacy of Milton Friedman notes:
Friedman, who stood 5 feet 3 inches (160 centimeters), was a fierce debater, McCloskey recalls.
“He always asks, persistently, ‘How do you know?’” McCloskey, now 66, wrote in the Eastern Economic Review in 2003. “It’s a terrifying question, because most of the time we can’t say.”
Like Mankiw however, I do think the professor in question had no interest in debating because he probably preferred running regressions or building models. Alternatively, he had no interest in defending his position in a debate because he really did not believe in what he was saying. Both statements are not contradictory.
Note: The Greg Clark article in the Atlantic was not as interesting as the comments and the Bloomberg sotry was a nice retrospective on the ideas of the Chicago school and how the current crisis is overturning its principles and ideals.
Do one thing do it well
I came across this via Happiness Project and it had been bothering me for a while. It's one thing to have a philosophy but can a Unix Philosophy apply to life? For one thing, what does it mean in the context of our life efforts?
1. Specialize in one and only one thing in life which is what we can do best.
2. If anything is worth doing, it's worth doing well.
If it's the latter which I suspect it is then what does "well" mean? Does it mean that we should do the best we can? And what does doing our best really mean? For instance, the author of the post is learning salsa dancing which I take to mean that she does not plan on becoming World Champion Salsa Dancer but I do take it to mean that she plans to do it seriously i.e. several practices during the week including perhaps entering a competition.
But not everyone has the time to to put in such a high level of effort - does this mean then that we should not try something new? Again, I suspect not, and that to do something well is subjective and unquantifiable.
1. Specialize in one and only one thing in life which is what we can do best.
2. If anything is worth doing, it's worth doing well.
If it's the latter which I suspect it is then what does "well" mean? Does it mean that we should do the best we can? And what does doing our best really mean? For instance, the author of the post is learning salsa dancing which I take to mean that she does not plan on becoming World Champion Salsa Dancer but I do take it to mean that she plans to do it seriously i.e. several practices during the week including perhaps entering a competition.
But not everyone has the time to to put in such a high level of effort - does this mean then that we should not try something new? Again, I suspect not, and that to do something well is subjective and unquantifiable.
What happens after competition is over?
With regards to the demise of Linens and Things and Circuit City: What does this imply about competition in the realm of economics. In economic models, competition and free entry into a market is assumed to be good in the sense that it drives prices down to its marginal cost. There is a parallel in a duopoly market as well, but what happens in this case after the competitor has been killed off (even though exit was not precipitated by a price war) through perhaps better management?
Does this imply that the market can only sustain one large retailer? If so, should we expect to see a cycle where prices begin to rise at the surviving retailers to the point where there is entry deterrence? Even if the market is contestable, is rising retail prices a sign that the assumption that competition drives prices down to its long run equilibrium where entry equals exits invalid?
While these questions do not imply the demise of the assumption that competition is good for prices it also highlights the possible social cost of firm exits within the competitive model that is not accounted for: job losses, for instance. The theoretical argument is that these workers will be reallocated to another industry where they can be more productive - the evidence is scant that this happens. Research on job retraining programs for laid off and unemployed workers show that workers do not regain their full income. This research however may be biased toward older workers and may not be representative of the workforce in retailing.
The question however, remains: Are lower prices through competition always good in terms of social welfare? Do rising prices after a "cycle" of competition (or increased volatility of prices through exit and entry) invalidate the assumption that competition drives prices to a long run equilibrium? Think of the airline industry and its constant rise and fall for instance.
Does this imply that the market can only sustain one large retailer? If so, should we expect to see a cycle where prices begin to rise at the surviving retailers to the point where there is entry deterrence? Even if the market is contestable, is rising retail prices a sign that the assumption that competition drives prices down to its long run equilibrium where entry equals exits invalid?
While these questions do not imply the demise of the assumption that competition is good for prices it also highlights the possible social cost of firm exits within the competitive model that is not accounted for: job losses, for instance. The theoretical argument is that these workers will be reallocated to another industry where they can be more productive - the evidence is scant that this happens. Research on job retraining programs for laid off and unemployed workers show that workers do not regain their full income. This research however may be biased toward older workers and may not be representative of the workforce in retailing.
The question however, remains: Are lower prices through competition always good in terms of social welfare? Do rising prices after a "cycle" of competition (or increased volatility of prices through exit and entry) invalidate the assumption that competition drives prices to a long run equilibrium? Think of the airline industry and its constant rise and fall for instance.
Saturday, February 21, 2009
Why gains from trade need to be absolute
Economists have often noted that because the gains from trade are diffused but its losses focused, those against free trade are more likely to prevail in order to protect their potential losses. One notable problem with the arguments for free trade is that it does not bring down absolute prices but relative prices as explained by Dani Rodrik:
Daniel Drezner has some nice things to say about me and my blog, but then takes me to task for understating the gains from free trade in a recent entry. He writes:
In focusing strictly on the employment effects, however, Rodrik elides the biggest gain from trade -- lower prices.
Since Drezner’s point reflects a common misunderstanding about the effects of trade, it is worth some explication.
When a country opens up to trade (or liberalizes its trade), it is the relative price of imports that comes down; by necessity, the relative prices of its exports must go up! Consumers are better off to the extent that their consumption basket is weighted towards importables, but we cannot always rely on this to be the case.
Unfortunately, the misunderstanding about lower prices reflects that perhaps not only the gains from trade diffused, but those who purportedly gain from trade (consumers) don't even recognize the gains from trade! Unless prices are lower in absolute terms, consumers will not be rejoicing, unlike Fey Accompli (Via MR) or Silly Little Country (original Fey Accompli post seems to be broken for now):
Folks, I can buy a pair of panties at Wal-Mart for 88 cents. Please stop and reflect on how much of a miracle that is. I stood there under all those fluorescent lights having an “I, Pencil” moment and I almost wept when i saw that. Not because I can’t afford $5 for panties, but because I could get everything I needed for a stranded night for about $20. A little more and I could get a fresh outfit for the next day.
Beyond my own personal gain, the miracle is that those pale green panties with a little lace trim started out as a twinkle in some Cambodian manufacturer’s eye, and dozens of people were involved in getting them from there to my possession, the last person being the checkout saleswoman at Wal-Mart.
All those people took part in making sure that what I needed was there right when I needed it and for an unbelievable price. And everyone’s lives are better because they get to be a part of that process. A more humane system could never be invented, let alone implemented, by one person, or a committee, and by god, not by a government.
Now, if gains from trade were celebrated like this there would not be any need for convincing. Unfortunately, there is very little celebration in the price of cables:
And I'm not talking Monster Cable fancy-pants stuff either. The cheapest generic 6-foot HDMI cables that I could in Best Buy and Target in-store inventory were going for $29.99--a 300 percent premium over the $9.95 I spent at Amazon.com (which wasn't even that great an online price, but the shipping was free).
This experience got me to playing economist. Why, in a free market, are cables so flipping expensive? After all, these same stores carry all manner of items that are priced very competitively relative to online.
Daniel Drezner has some nice things to say about me and my blog, but then takes me to task for understating the gains from free trade in a recent entry. He writes:
In focusing strictly on the employment effects, however, Rodrik elides the biggest gain from trade -- lower prices.
Since Drezner’s point reflects a common misunderstanding about the effects of trade, it is worth some explication.
When a country opens up to trade (or liberalizes its trade), it is the relative price of imports that comes down; by necessity, the relative prices of its exports must go up! Consumers are better off to the extent that their consumption basket is weighted towards importables, but we cannot always rely on this to be the case.
Unfortunately, the misunderstanding about lower prices reflects that perhaps not only the gains from trade diffused, but those who purportedly gain from trade (consumers) don't even recognize the gains from trade! Unless prices are lower in absolute terms, consumers will not be rejoicing, unlike Fey Accompli (Via MR) or Silly Little Country (original Fey Accompli post seems to be broken for now):
Folks, I can buy a pair of panties at Wal-Mart for 88 cents. Please stop and reflect on how much of a miracle that is. I stood there under all those fluorescent lights having an “I, Pencil” moment and I almost wept when i saw that. Not because I can’t afford $5 for panties, but because I could get everything I needed for a stranded night for about $20. A little more and I could get a fresh outfit for the next day.
Beyond my own personal gain, the miracle is that those pale green panties with a little lace trim started out as a twinkle in some Cambodian manufacturer’s eye, and dozens of people were involved in getting them from there to my possession, the last person being the checkout saleswoman at Wal-Mart.
All those people took part in making sure that what I needed was there right when I needed it and for an unbelievable price. And everyone’s lives are better because they get to be a part of that process. A more humane system could never be invented, let alone implemented, by one person, or a committee, and by god, not by a government.
Now, if gains from trade were celebrated like this there would not be any need for convincing. Unfortunately, there is very little celebration in the price of cables:
And I'm not talking Monster Cable fancy-pants stuff either. The cheapest generic 6-foot HDMI cables that I could in Best Buy and Target in-store inventory were going for $29.99--a 300 percent premium over the $9.95 I spent at Amazon.com (which wasn't even that great an online price, but the shipping was free).
This experience got me to playing economist. Why, in a free market, are cables so flipping expensive? After all, these same stores carry all manner of items that are priced very competitively relative to online.
Bank holding companies vs banks
With regard to the need for nationalization, there really is no difference unlike Tyler Cowen's statements:
Thinking through the implications of said nationalization for the counterparty positions of a bank holding company, or its role in the commercial paper market, is mind-boggling. Neither the FDIC (which generally does an OK job) nor any other government agency is in any way prepared for this kind of management task. It has very little to do with standard FDIC procedures. All I hear about is "bank" this, "bank" that, etc. but again little or no talk of the bank holding company.
Of course this is only a problem for the five or six biggest financial institutions but those are precisely the issue at hand.
I usually don't like to speak so negatively, but it's the advocates of nationalization who are in denial. There is a belief that Obama, Bernanke, and/or Geithner are somehow spineless or in the pocket of the banking lobby. The sadder truth is that they understand just how ill-prepared the U.S. government, or the Fed, would be to run such an enterprise.
I do understand that if all the water runs out of the sink, as it may, nationalization will come in some form or another, however disastrous that may be. But the desire to postpone it until the last possible moment, and the desire to pursue even a small chance of avoiding nationalization, are signs of wisdom, not cowardice.
Of course this is only a problem for the five or six biggest financial institutions but those are precisely the issue at hand.
It is precisely because of these five or six financial institutions that nationalization is necessary. By the time all the water runs out of the sink and nationalization is inevitable the Treasury or Fed would have lost valuable time learning about running bank holding companies that they could have done so earlier. In any case this is the sign why postponing the inevitable will inevitably lead to a longer recession of probably in the five to ten year range.
It is also unclear whether the opinion that the Fed is ill prepared is a statement about competency of the Fed to run the an organization/company or because it doesn't really know the markets and products of the bank holding companies well. If it is the former then that can be overcome but if it is the latter then it means that financial innovations are always going to be ahead of regulators and they will never have any hope of learning how to regulate new products.
Moreover, by postponing nationalization, the authorities are losing the opportunity to bring a shadow market into regulation and decreasing uncertainty:
....The enormous amount of derivatives that had poured into the market—there are close to $600 trillion of these papers around—are also not recorded in a global or centralized manner, or in a manner that allows you to begin to quantify them. [Former SEC Chairman Christopher] Cox thought that maybe the toxic part of all of these assets was $1 trillion to $2 trillion. [Treasury Secretary Timothy] Geithner told us there's maybe $3 trillion or $4 trillion. Nobody really knows, so in a way [they've created an] informal or shadow economy. This unidentified paper is the source of uncertainty and the credit contraction.
(Interview with Hernando de Soto. HT: MR)
Meanwhile other speculations on nationalization:
From Salon: The Obama administration has contributed to that uncertainty by stressing in public an opposition to "nationalization" but failing to deliver any specificity on how it intends to proceed otherwise. Ironically, it's possible that the Obama brain trust may have decided explicitly to downplay the likelihood of nationalization, under the assumption that such rhetoric would spook the markets even further. That doesn't necessarily mean Obama, Larry Summers, and Tim Geithner are pawns of Wall Street. It could just be that they made a strategic decision to speak softly before making an intervention, rather than signaling their intentions and risking an even higher level of chaos. It's OK for Alan Greenspan to start talking positively about nationalization; each and every utterance by the Maestro no longer moves the markets like an electric shock. But if Bernanke or Geithner or Obama say the word, people will jump.
Whether or not such a strategy was in place is moot now. Investors are convinced some kind of intervention is inevitable. So they're dumping bank stocks, which further weakens the financial positions of the big banks and thereby virtually ensures that intervention is required. Fear of nationalization begets nationalization.
Which is all the more reason why it needs to happen quickly instead of piecemeal. Cries of fairness will eventually result as those who bailed out early prior to nationalization get to recoup some losses.
Jim Hamilton discusses the mechanics valuing toxic assets. He says that a debt for equity swap could be potentially destabilizing although does not discuss how -- the current volatility in bank stocks would be one perhaps but this is all the more reason why nationalization has to happen quickly if at all. His conclusion is shared by many:
What we need is not a painless resolution of the crisis, but rather a plan that puts the pain behind us.
Update: The Case For and Against Nationalization by Matthew Richardson is a very even handed discussion. Acknowledging the problems of the government running a large complex financial institution does not necessarily preclude the idea that nationalization may be the best option currently.
Thinking through the implications of said nationalization for the counterparty positions of a bank holding company, or its role in the commercial paper market, is mind-boggling. Neither the FDIC (which generally does an OK job) nor any other government agency is in any way prepared for this kind of management task. It has very little to do with standard FDIC procedures. All I hear about is "bank" this, "bank" that, etc. but again little or no talk of the bank holding company.
Of course this is only a problem for the five or six biggest financial institutions but those are precisely the issue at hand.
I usually don't like to speak so negatively, but it's the advocates of nationalization who are in denial. There is a belief that Obama, Bernanke, and/or Geithner are somehow spineless or in the pocket of the banking lobby. The sadder truth is that they understand just how ill-prepared the U.S. government, or the Fed, would be to run such an enterprise.
I do understand that if all the water runs out of the sink, as it may, nationalization will come in some form or another, however disastrous that may be. But the desire to postpone it until the last possible moment, and the desire to pursue even a small chance of avoiding nationalization, are signs of wisdom, not cowardice.
Of course this is only a problem for the five or six biggest financial institutions but those are precisely the issue at hand.
It is precisely because of these five or six financial institutions that nationalization is necessary. By the time all the water runs out of the sink and nationalization is inevitable the Treasury or Fed would have lost valuable time learning about running bank holding companies that they could have done so earlier. In any case this is the sign why postponing the inevitable will inevitably lead to a longer recession of probably in the five to ten year range.
It is also unclear whether the opinion that the Fed is ill prepared is a statement about competency of the Fed to run the an organization/company or because it doesn't really know the markets and products of the bank holding companies well. If it is the former then that can be overcome but if it is the latter then it means that financial innovations are always going to be ahead of regulators and they will never have any hope of learning how to regulate new products.
Moreover, by postponing nationalization, the authorities are losing the opportunity to bring a shadow market into regulation and decreasing uncertainty:
....The enormous amount of derivatives that had poured into the market—there are close to $600 trillion of these papers around—are also not recorded in a global or centralized manner, or in a manner that allows you to begin to quantify them. [Former SEC Chairman Christopher] Cox thought that maybe the toxic part of all of these assets was $1 trillion to $2 trillion. [Treasury Secretary Timothy] Geithner told us there's maybe $3 trillion or $4 trillion. Nobody really knows, so in a way [they've created an] informal or shadow economy. This unidentified paper is the source of uncertainty and the credit contraction.
(Interview with Hernando de Soto. HT: MR)
Meanwhile other speculations on nationalization:
From Salon: The Obama administration has contributed to that uncertainty by stressing in public an opposition to "nationalization" but failing to deliver any specificity on how it intends to proceed otherwise. Ironically, it's possible that the Obama brain trust may have decided explicitly to downplay the likelihood of nationalization, under the assumption that such rhetoric would spook the markets even further. That doesn't necessarily mean Obama, Larry Summers, and Tim Geithner are pawns of Wall Street. It could just be that they made a strategic decision to speak softly before making an intervention, rather than signaling their intentions and risking an even higher level of chaos. It's OK for Alan Greenspan to start talking positively about nationalization; each and every utterance by the Maestro no longer moves the markets like an electric shock. But if Bernanke or Geithner or Obama say the word, people will jump.
Whether or not such a strategy was in place is moot now. Investors are convinced some kind of intervention is inevitable. So they're dumping bank stocks, which further weakens the financial positions of the big banks and thereby virtually ensures that intervention is required. Fear of nationalization begets nationalization.
Which is all the more reason why it needs to happen quickly instead of piecemeal. Cries of fairness will eventually result as those who bailed out early prior to nationalization get to recoup some losses.
Jim Hamilton discusses the mechanics valuing toxic assets. He says that a debt for equity swap could be potentially destabilizing although does not discuss how -- the current volatility in bank stocks would be one perhaps but this is all the more reason why nationalization has to happen quickly if at all. His conclusion is shared by many:
What we need is not a painless resolution of the crisis, but rather a plan that puts the pain behind us.
Update: The Case For and Against Nationalization by Matthew Richardson is a very even handed discussion. Acknowledging the problems of the government running a large complex financial institution does not necessarily preclude the idea that nationalization may be the best option currently.
Thursday, February 19, 2009
Why determining causation is important
Yet economists have been shirking away from this task and have instead opted to go with correlation (and then adding the caveat that "correlation does not imply causation").
In the 'golden age' of economics structural equation modeling exploded and while these models were large complex, it allowed economists to say clearly the impact of a change in an exogenous variable. (Whether the variable is truly exogenous is another subject altogether.) Then came the "Lucas Critique" which not only destroyed the foundations of structural equation models but led economists to abandon making causal statements and instead resort to using "reduced form" estimates that illuminate little and say even less.
Two recent posts in the blogosphere point to why it is important to be able to make a causal statement in light of the current financial crisis:
1. Megan McArdle's Did World War 2 End the Great Depression or in another form in various blogs as Did the New Deal End the Great Depression - economists should be able to say that the impact of WW2 reduced the output gap by y percent, or alternatively, taken together, New Deal policies increased the output gap by x percent. If the output gap is too vague a measure then the statement can be: Because of WW2 (or New Deal policies) output was y percent higher than it would have been without WW2 (or New Deal policies).
2. Mankiw, commenting on Obama's recent plan states the following:
The expression "create or save," which has been used regularly by the President and his economic team, is an act of political genius. You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved.
While there is no way to measure how many jobs are saved, it is possible to think of the counter factual: Of what would happen to jobs if the fiscal stimulus (or whatever policy that is under consideration). In fact economists do this all the time - for instance, CGE models are used to make claims about what the gains from trade will be. (Gains from trade itself sounds like an immeasurable concept.) Likewise, DSGE or VAR models are used to make claims about the effects of monetary policy or tax cuts.
Yet today when they are needed most to make causal statements about the impact of fiscal stimulus versus tax cuts and instead of dealing with the causal impacts with modern economics tools such as VAR or DSGE or even a return to structural equation models, they have chosen to wage a war of ideology and name calling over the Internet or media.
The amount of time spent slinging mud could have been spent building models and examining and reexamining the data and if economists do not know the price of the trade off between name calling and making model based impact statements then no one really does and it all degenerates into muck raking. The more ominous trend is that economists have actually abandoned all hope of making causal statements and have made the conscious trade off that it is more beneficial to be profiled as being partisan and peddling policy snake oil than being a real economist.
Is the profession in such a mess that instead of battling it out with new models and new analysis of data that it is more welfare enhancing to revisit the Romer studies and making Great Depression analogies?
In the 'golden age' of economics structural equation modeling exploded and while these models were large complex, it allowed economists to say clearly the impact of a change in an exogenous variable. (Whether the variable is truly exogenous is another subject altogether.) Then came the "Lucas Critique" which not only destroyed the foundations of structural equation models but led economists to abandon making causal statements and instead resort to using "reduced form" estimates that illuminate little and say even less.
Two recent posts in the blogosphere point to why it is important to be able to make a causal statement in light of the current financial crisis:
1. Megan McArdle's Did World War 2 End the Great Depression or in another form in various blogs as Did the New Deal End the Great Depression - economists should be able to say that the impact of WW2 reduced the output gap by y percent, or alternatively, taken together, New Deal policies increased the output gap by x percent. If the output gap is too vague a measure then the statement can be: Because of WW2 (or New Deal policies) output was y percent higher than it would have been without WW2 (or New Deal policies).
2. Mankiw, commenting on Obama's recent plan states the following:
The expression "create or save," which has been used regularly by the President and his economic team, is an act of political genius. You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved.
While there is no way to measure how many jobs are saved, it is possible to think of the counter factual: Of what would happen to jobs if the fiscal stimulus (or whatever policy that is under consideration). In fact economists do this all the time - for instance, CGE models are used to make claims about what the gains from trade will be. (Gains from trade itself sounds like an immeasurable concept.) Likewise, DSGE or VAR models are used to make claims about the effects of monetary policy or tax cuts.
Yet today when they are needed most to make causal statements about the impact of fiscal stimulus versus tax cuts and instead of dealing with the causal impacts with modern economics tools such as VAR or DSGE or even a return to structural equation models, they have chosen to wage a war of ideology and name calling over the Internet or media.
The amount of time spent slinging mud could have been spent building models and examining and reexamining the data and if economists do not know the price of the trade off between name calling and making model based impact statements then no one really does and it all degenerates into muck raking. The more ominous trend is that economists have actually abandoned all hope of making causal statements and have made the conscious trade off that it is more beneficial to be profiled as being partisan and peddling policy snake oil than being a real economist.
Is the profession in such a mess that instead of battling it out with new models and new analysis of data that it is more welfare enhancing to revisit the Romer studies and making Great Depression analogies?
Tuesday, February 17, 2009
Nationalization is inevitable
But let's call it bankruptcy instead:
... given deposit insurance the procedure most consistent with free market principles is bankruptcy, preferably a speed bankruptcy procedure under the auspices of the FDIC which has significant expertise in this field.
A speed bankruptcy; 1) punishes current management reducing moral hazard, 2) will be less politicized if done under the auspices of the FDIC than if done piecemeal with congressional involvement and 3) will get the banks working again as soon as possible.
Notice how the term nationalization confuses the issue. First, it suggests government ownership of the banks which would indeed be a disaster. People in favor of free markets will rightly want to avoid any such outcome but ironically it's the current situation of "wait and see," and "protect the banker," which is likely to lead to an anemic recovery and eventual government ownership. Second, it confuses people on the left who think that nationalization is a way to insure that taxpayers get something on the upside. That idea is a joke - there is no upside. Taxpayers are going to have to pay through the nose but the critical point is that the taxpayers must pay the depositors whom they have guaranteed not the banks.The debate so far has been framed between a "bailout" and "nationalization." But the public rightly sees the bailout as a way to protect bankers and thus we get pressure for government ownership, which has already happened in part through government control over banker wages. Bankruptcy in contrast is a normal free market procedure, ...
... given deposit insurance the procedure most consistent with free market principles is bankruptcy, preferably a speed bankruptcy procedure under the auspices of the FDIC which has significant expertise in this field.
A speed bankruptcy; 1) punishes current management reducing moral hazard, 2) will be less politicized if done under the auspices of the FDIC than if done piecemeal with congressional involvement and 3) will get the banks working again as soon as possible.
Notice how the term nationalization confuses the issue. First, it suggests government ownership of the banks which would indeed be a disaster. People in favor of free markets will rightly want to avoid any such outcome but ironically it's the current situation of "wait and see," and "protect the banker," which is likely to lead to an anemic recovery and eventual government ownership. Second, it confuses people on the left who think that nationalization is a way to insure that taxpayers get something on the upside. That idea is a joke - there is no upside. Taxpayers are going to have to pay through the nose but the critical point is that the taxpayers must pay the depositors whom they have guaranteed not the banks.The debate so far has been framed between a "bailout" and "nationalization." But the public rightly sees the bailout as a way to protect bankers and thus we get pressure for government ownership, which has already happened in part through government control over banker wages. Bankruptcy in contrast is a normal free market procedure, ...
Monday, February 16, 2009
Why portable solar still has a ways to go
Konarka's Power Plastic:
Konarka, is showing off Power Plastic, a new lightweight, flexible, and cheap material that converts indoor and outdoor light into electricity. Think of it as a solar panel that rolls up like camera film. "Soon you may not even need batteries," Hess says, holding a prototype of a portable device that will recharge your cellphone in an hour. "We can put this stuff anywhere."
... Power Plastic, however, does have its drawbacks. So far it is not nearly as efficient or durable as traditional silicon panels. Konarka's cells convert about 6% of the light that hits them into electricity, whereas silicon solar panels typically are 16% to 20% efficient. Hess says Konarka hopes to double its efficiency within a few years. Power Plastic also doesn't last nearly as long - about five years as opposed to more than 30 with silicon panels. But Hess argues that it doesn't matter because his product will be cheap to replace.
Other alternatives are here by PowerFilm for $250 per roll.
Konarka, is showing off Power Plastic, a new lightweight, flexible, and cheap material that converts indoor and outdoor light into electricity. Think of it as a solar panel that rolls up like camera film. "Soon you may not even need batteries," Hess says, holding a prototype of a portable device that will recharge your cellphone in an hour. "We can put this stuff anywhere."
... Power Plastic, however, does have its drawbacks. So far it is not nearly as efficient or durable as traditional silicon panels. Konarka's cells convert about 6% of the light that hits them into electricity, whereas silicon solar panels typically are 16% to 20% efficient. Hess says Konarka hopes to double its efficiency within a few years. Power Plastic also doesn't last nearly as long - about five years as opposed to more than 30 with silicon panels. But Hess argues that it doesn't matter because his product will be cheap to replace.
Other alternatives are here by PowerFilm for $250 per roll.
Why I may want to visit PEI
Wayne Curtis in the Atlantic:
Prince Edward Island presents a difficult proposition for the guidebook writer. Fact-gathering trips usually involve racing from one spot to the next, scribbling notes on the fly. Yet on several forays here in the 1990s, I learned that the island resists this, instead inducing a slow-motion, vaguely narcotic mood. On the remote North Cape, I’d spend hours lying in the grass, watching the great spinning blades at the experimental wind farm, which had the feel of an art installation by Brancusi had he taken up mesmerism. Or I would find myself doubling back to the Prince Edward Island Preserve Company after coming to the realization over breakfast that I did have room in the car for a few more jars of lemon-ginger marmalade. Chain motels are starting to make inroads here, but the island is still largely the domain of old-fashioned cottage courts, many of them set in its startlingly red potato fields and with views of the ocean in the distance, and these virtually insist on a less frenetic style of vacationing—I’d walk out on my tiny porch in the morning and say hello to my neighbors on their tiny porch, and two cups of coffee later it was noon. Even the slogan of the local newspaper—“Covers Prince Edward Island like the dew”—was something from down the rabbit hole.
Then there was the area around Cavendish, on the island’s north shore. This was the heart of what I’d come to think of as the Anne Industrial Complex—a hodgepodge of restored farms and museums and gift shops and amusement parks devoted to Lucy Maud Montgomery and Anne Shirley, the author and heroine, respectively, of the 1908 novel Anne of Green Gables. Places where fact and fiction share a single habitat have always fascinated me because of the complicated cultural ecosystems they create—think of Twain’s Hannibal, Missouri, or Shakespeare’s Stratford-upon-Avon. The place influenced the author, and the author influenced the place, so you end up exploring a sort of M. C. Escher print.
Prince Edward Island presents a difficult proposition for the guidebook writer. Fact-gathering trips usually involve racing from one spot to the next, scribbling notes on the fly. Yet on several forays here in the 1990s, I learned that the island resists this, instead inducing a slow-motion, vaguely narcotic mood. On the remote North Cape, I’d spend hours lying in the grass, watching the great spinning blades at the experimental wind farm, which had the feel of an art installation by Brancusi had he taken up mesmerism. Or I would find myself doubling back to the Prince Edward Island Preserve Company after coming to the realization over breakfast that I did have room in the car for a few more jars of lemon-ginger marmalade. Chain motels are starting to make inroads here, but the island is still largely the domain of old-fashioned cottage courts, many of them set in its startlingly red potato fields and with views of the ocean in the distance, and these virtually insist on a less frenetic style of vacationing—I’d walk out on my tiny porch in the morning and say hello to my neighbors on their tiny porch, and two cups of coffee later it was noon. Even the slogan of the local newspaper—“Covers Prince Edward Island like the dew”—was something from down the rabbit hole.
Then there was the area around Cavendish, on the island’s north shore. This was the heart of what I’d come to think of as the Anne Industrial Complex—a hodgepodge of restored farms and museums and gift shops and amusement parks devoted to Lucy Maud Montgomery and Anne Shirley, the author and heroine, respectively, of the 1908 novel Anne of Green Gables. Places where fact and fiction share a single habitat have always fascinated me because of the complicated cultural ecosystems they create—think of Twain’s Hannibal, Missouri, or Shakespeare’s Stratford-upon-Avon. The place influenced the author, and the author influenced the place, so you end up exploring a sort of M. C. Escher print.
Innovation in cooking
Corby Kummer's article on the possibility of applying patent and trademark laws to food recipes, specifically bread, is a reminder that chefs/cooks do not have the benefits of any kind of intellectual property rights that inventors have. Yet the lack of intellectual property rights has not impeded innovation in cooking. Granted - developments costs are lower than inventions. Is this the only reason that innovation persists?
NYU Stern's fiscal stimulus plan
Restoring Financial Stability is the project which consumers can buy for $49.95. As part of the fiscal stimulus plan, all Wall Street executives should be required to spend 50 percent of their net wealth on this book and distribute it to the public for free.
Interestingly, two other reports: The Fundamental Principles of Financial Regulation by Brunnermeier, Markus, Andrew Crocket, Charles Goodhart, Avinash Persaud, and Hyun Shin and G30 Report (chaired by Pul Volcker) are free (for now) and thus does not provide any fiscal stimulus.
Interestingly, two other reports: The Fundamental Principles of Financial Regulation by Brunnermeier, Markus, Andrew Crocket, Charles Goodhart, Avinash Persaud, and Hyun Shin and G30 Report (chaired by Pul Volcker) are free (for now) and thus does not provide any fiscal stimulus.
Wednesday, February 11, 2009
Nationalization is impractical
Nationalisation has been my preferred solution to the current crisis. Likewise it is also the preferred solution by Roubini, Stiglitz, among others. Yet this is seen as politically impractical and infeasible. Mankiw makes a case for being impractical (although he makes the case for his fiscal stimulus package) by quoting Friedman:
The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is "politically feasible" and then to recommend it.
Obama has ruled out nationalization based on the following:
In describing his approach to the financial meltdown, Obama cited past crises in Japan and Sweden, but said neither offers much help in resolving the current credit crunch. He said Japan lost a decade by "trying to paper over the problems" of its banking system, while Sweden nationalized its banks.
"Here's the problem - Sweden had like five banks. We've got thousands of banks," Obama said. "You know, the scale of the U.S. economy and the capital markets are so vast and the, the problems in terms of managing and overseeing anything of that scale, I think, would...our assessment was that it wouldn't make sense."
"What we've tried to do is to apply some of the tough love that's going to be necessary, but do it in a way that's also recognizing we've got big private capital markets and, and ultimately that's going to be the key to getting credit flowing again," Obama added. The president's remarks came hours after Geithner oulined plans to stabilize the financial system by injecting capital into banks, helping to determine prices of toxic assets weighing on firms' balance sheets and stemming foreclosures. Wall Street, which was hoping for more details, registered disappointment with the administration's announcement, sending stock prices sharply lower.
Perhaps the silence that has greeted the latest Treasury plan by Geithner is indicative of where we'll be going along for the next 5-10 years - creeping nationalization as each bank fails and is taken over (inevitably) while the economy slides further and further down into recession. As Mark Thoma says [emphasis mine]:
To me, Geithner's attempt at reassurance, that they're not quite sure how the program will work, or if they will get it right, but be assured that they are determined to keep tinkering with the program until it does work, has just the opposite effect. It undermines confidence. Why not wait until they actually have a plan before going public? Why were they in such a rush to reveal that they aren't sure what to do, or if it will work?
While I agree that there are thousands of banks in the U.S. my sense is that the problem is only concentrated in perhaps 20-30 of the largest banks - mainly NY banks who are engaged heavily in derivatives and asset backed securities. Once we fix those, 90 percent of the other banks can become healthy again as the financial sector frictions eases.
Update:
From Mankiw:
"The word 'nationalization' scares the hell out of people," Rep. Maxine Waters, D-Calif., said on "This Week." To combat that, some clever advocates of nationalization have come up with alternative names, including "government receivership" and "pre-privatization." (Source.)
The search for alternative names can be amusing at first, but I think there is more here than mere semantics.Why are people scared about the idea of nationalization? One reason is that it is a sign of the depth of our problems. A second, more substantive reason is that it seems to point in a bad direction. I certainly do not want the government deciding who deserves credit and who does not, what kind of investments are worthy of financing and what kind are not. That is a big step toward crony capitalism, where the politically connected get the goodies, and economic stagnation awaits the rest of us.
If the government is to intervene in a big way to fix the banking system, "nationalization" is the wrong word because it suggests the wrong endgame. If banks are as insolvent as some analysts claim, then the goal should be a massive reorganization of these financial institutions. Some might call it nationalization, but more accurately it would be a type of bankruptcy procedure.
More from Roubini:
There are four basic approaches to cleaning up a banking system that is facing a systemic crisis: recapitalisation of the banks, together with a purchase of their toxic assets by a government “bad bank”; recapitalisation, together with government guarantees – after a first loss by the banks – of the toxic assets; private purchase of toxic assets with a government guarantee (the current US government plan); and outright nationalisation (call it or “government receivership” if you don’t like the dirty N-word) of insolvent banks and their resale to the private sector after being cleaned.
Of the four options, the first three have serious flaws. In the “bad bank” model, the government may overpay for the bad assets, whose true value is uncertain. Even in the guarantee model there can be such implicit government over-payment (or an over-guarantee that is not properly priced by the fees that the government receives).
In the “bad bank” model, the government has the additional problem of managing all the bad assets that it purchased – a task for which it lacks expertise. And the very cumbersome US Treasury proposal – which combines removing toxic assets from banks’ balance sheets while providing government guarantees – was so non-transparent and complicated that the markets dove as soon as it was announced.
Thus, paradoxically nationalisation may be a more market-friendly solution: it wipes out common and preferred shareholders of clearly insolvent institutions, and possibly unsecured creditors if the insolvency is too large, while providing a fair upside to the tax-payer. It can also resolve the problem of managing banks’ bad assets by reselling most of assets and deposits – with a government guarantee – to new private shareholders after a clean-up of the bad assets (as in the resolution of the Indy Mac bank failure).
Nationalisation also resolves the too-big-too-fail problem of banks that are systemically important, and that thus need to be rescued by the government at a high cost to taxpayers. Indeed, the problem has now grown larger, because the current approach has led weak banks to take over even weaker banks.
Merging zombie banks is like drunks trying to help each other stand up.
Again Roubini with Richardson:
Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end.
Nationalization -- call it "receivership" if that sounds more palatable -- won't be easy, ...
Axel Leijonhufvud calls this a balance sheet recession, and adds:
But the American ideological taboo against “nationalisation” also stands in the way of dealing with the matter in the straightforward way that Sweden did. The present administration, like the last, would like to recapitalise the banks at least partly by attracting private capital. That can hardly be accomplished as long as the value of large chunks of the banks’ assets remains anybody’s guess. Government guarantees against (some part of) losses that may be incurred might solve this problem. But it would be a strangely contrived way out of a political impasse.
Fiscal stimulus will not have much effect as long as the financial system is deleveraging. Even if that problem were to be more or less solved, the government deficit would have to offset both the decline in industry investment and the rise in household saving – a gap that is rising as the recession deepens. Here, too, the public is sceptical and prone to conclude that a program that only slows or stops the decline but fails to “jump start” the economy must have been a waste of tax payers’ money. The most effective composition of such a program is also a problem.
Almost all American states now suffer under self-imposed constitutional balanced budget requirements and are consequently acting as powerful amplifiers of recession with respect to both income and employment. The states will spend everything they get, as will a great many local governments. The point of the stimulus package is to increase spending. Income maintenance for unemployed and other low income households will also be effective.
For a definition of balance sheet recession (from above Vox link):
Richard Koo (2003) coined the term “balance sheet recession” to characterise the endless travail of Japan following the collapse of its real estate and stock market bubbles in 1990. The Japanese government did not act to repair the balance sheets of the private sector following the crash. Instead, it chose a policy of keeping bank rate near zero so as to reduce deposit rates and let the banks earn their way back into solvency. At the same time it supported the real sector by repeated large doses of Keynesian deficit spending. It took a decade and a half for these policies to bring the Japanese economy back to reasonable health.
The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is "politically feasible" and then to recommend it.
Obama has ruled out nationalization based on the following:
In describing his approach to the financial meltdown, Obama cited past crises in Japan and Sweden, but said neither offers much help in resolving the current credit crunch. He said Japan lost a decade by "trying to paper over the problems" of its banking system, while Sweden nationalized its banks.
"Here's the problem - Sweden had like five banks. We've got thousands of banks," Obama said. "You know, the scale of the U.S. economy and the capital markets are so vast and the, the problems in terms of managing and overseeing anything of that scale, I think, would...our assessment was that it wouldn't make sense."
"What we've tried to do is to apply some of the tough love that's going to be necessary, but do it in a way that's also recognizing we've got big private capital markets and, and ultimately that's going to be the key to getting credit flowing again," Obama added. The president's remarks came hours after Geithner oulined plans to stabilize the financial system by injecting capital into banks, helping to determine prices of toxic assets weighing on firms' balance sheets and stemming foreclosures. Wall Street, which was hoping for more details, registered disappointment with the administration's announcement, sending stock prices sharply lower.
Perhaps the silence that has greeted the latest Treasury plan by Geithner is indicative of where we'll be going along for the next 5-10 years - creeping nationalization as each bank fails and is taken over (inevitably) while the economy slides further and further down into recession. As Mark Thoma says [emphasis mine]:
To me, Geithner's attempt at reassurance, that they're not quite sure how the program will work, or if they will get it right, but be assured that they are determined to keep tinkering with the program until it does work, has just the opposite effect. It undermines confidence. Why not wait until they actually have a plan before going public? Why were they in such a rush to reveal that they aren't sure what to do, or if it will work?
While I agree that there are thousands of banks in the U.S. my sense is that the problem is only concentrated in perhaps 20-30 of the largest banks - mainly NY banks who are engaged heavily in derivatives and asset backed securities. Once we fix those, 90 percent of the other banks can become healthy again as the financial sector frictions eases.
Update:
From Mankiw:
"The word 'nationalization' scares the hell out of people," Rep. Maxine Waters, D-Calif., said on "This Week." To combat that, some clever advocates of nationalization have come up with alternative names, including "government receivership" and "pre-privatization." (Source.)
The search for alternative names can be amusing at first, but I think there is more here than mere semantics.Why are people scared about the idea of nationalization? One reason is that it is a sign of the depth of our problems. A second, more substantive reason is that it seems to point in a bad direction. I certainly do not want the government deciding who deserves credit and who does not, what kind of investments are worthy of financing and what kind are not. That is a big step toward crony capitalism, where the politically connected get the goodies, and economic stagnation awaits the rest of us.
If the government is to intervene in a big way to fix the banking system, "nationalization" is the wrong word because it suggests the wrong endgame. If banks are as insolvent as some analysts claim, then the goal should be a massive reorganization of these financial institutions. Some might call it nationalization, but more accurately it would be a type of bankruptcy procedure.
More from Roubini:
There are four basic approaches to cleaning up a banking system that is facing a systemic crisis: recapitalisation of the banks, together with a purchase of their toxic assets by a government “bad bank”; recapitalisation, together with government guarantees – after a first loss by the banks – of the toxic assets; private purchase of toxic assets with a government guarantee (the current US government plan); and outright nationalisation (call it or “government receivership” if you don’t like the dirty N-word) of insolvent banks and their resale to the private sector after being cleaned.
Of the four options, the first three have serious flaws. In the “bad bank” model, the government may overpay for the bad assets, whose true value is uncertain. Even in the guarantee model there can be such implicit government over-payment (or an over-guarantee that is not properly priced by the fees that the government receives).
In the “bad bank” model, the government has the additional problem of managing all the bad assets that it purchased – a task for which it lacks expertise. And the very cumbersome US Treasury proposal – which combines removing toxic assets from banks’ balance sheets while providing government guarantees – was so non-transparent and complicated that the markets dove as soon as it was announced.
Thus, paradoxically nationalisation may be a more market-friendly solution: it wipes out common and preferred shareholders of clearly insolvent institutions, and possibly unsecured creditors if the insolvency is too large, while providing a fair upside to the tax-payer. It can also resolve the problem of managing banks’ bad assets by reselling most of assets and deposits – with a government guarantee – to new private shareholders after a clean-up of the bad assets (as in the resolution of the Indy Mac bank failure).
Nationalisation also resolves the too-big-too-fail problem of banks that are systemically important, and that thus need to be rescued by the government at a high cost to taxpayers. Indeed, the problem has now grown larger, because the current approach has led weak banks to take over even weaker banks.
Merging zombie banks is like drunks trying to help each other stand up.
Again Roubini with Richardson:
Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end.
Nationalization -- call it "receivership" if that sounds more palatable -- won't be easy, ...
Axel Leijonhufvud calls this a balance sheet recession, and adds:
But the American ideological taboo against “nationalisation” also stands in the way of dealing with the matter in the straightforward way that Sweden did. The present administration, like the last, would like to recapitalise the banks at least partly by attracting private capital. That can hardly be accomplished as long as the value of large chunks of the banks’ assets remains anybody’s guess. Government guarantees against (some part of) losses that may be incurred might solve this problem. But it would be a strangely contrived way out of a political impasse.
Fiscal stimulus will not have much effect as long as the financial system is deleveraging. Even if that problem were to be more or less solved, the government deficit would have to offset both the decline in industry investment and the rise in household saving – a gap that is rising as the recession deepens. Here, too, the public is sceptical and prone to conclude that a program that only slows or stops the decline but fails to “jump start” the economy must have been a waste of tax payers’ money. The most effective composition of such a program is also a problem.
Almost all American states now suffer under self-imposed constitutional balanced budget requirements and are consequently acting as powerful amplifiers of recession with respect to both income and employment. The states will spend everything they get, as will a great many local governments. The point of the stimulus package is to increase spending. Income maintenance for unemployed and other low income households will also be effective.
For a definition of balance sheet recession (from above Vox link):
Richard Koo (2003) coined the term “balance sheet recession” to characterise the endless travail of Japan following the collapse of its real estate and stock market bubbles in 1990. The Japanese government did not act to repair the balance sheets of the private sector following the crash. Instead, it chose a policy of keeping bank rate near zero so as to reduce deposit rates and let the banks earn their way back into solvency. At the same time it supported the real sector by repeated large doses of Keynesian deficit spending. It took a decade and a half for these policies to bring the Japanese economy back to reasonable health.
Economics according to Don King
Don King: “Boxing is the last vestige of capitalism. It’s Adam Smith. It’s free enterprise. It’s The Wealth of Nations. It’s political economy. It’s supply and demand. It’s the invisible hand.”
Tuesday, February 10, 2009
Human Power Generator
This I've got to have - $995 for the generator and battery pack to produce 65W. Compare with this gasoline powered generator at $599 ($329 on sale) + $110 shipping to produce 3000W. Hmmm ... I guess its easier to burn gasoline.
Pros of human power:
1. Clean
2. Fewer mechanical parts (I think), i.e. I don't need to worry about spark plugs, oil, gasoline etc.
Cons of human power:
Will not run refriegerator, air conditioner, or furnace.
Pros of human power:
1. Clean
2. Fewer mechanical parts (I think), i.e. I don't need to worry about spark plugs, oil, gasoline etc.
Cons of human power:
Will not run refriegerator, air conditioner, or furnace.
Is Wall Street's ability to allocate capital overrated?
Yes, says Michael Lewis:
... the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.
... I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?
... Eisman wasn’t, in short, an analyst with a sunny disposition who expected the best of his fellow financial man and the companies he created. “You have to understand,” Eisman says in his defense, “I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a shit what it sold.”
on.
... Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.
But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.
What are CDOS?
... the very first thing he wants to explain is the importance of the mezzanine C.D.O. What you notice first about Eisman is his lips. He holds them pursed, waiting to speak. The second thing you notice is his short, light hair, cropped in a manner that suggests he cut it himself while thinking about something else. “You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.
His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog shit lower than the original bonds.”
After taking a fee, he passed them on to other investors. His job was to be the C.D.O. “expert,” but he actually didn’t spend any time at all thinking about what was in the C.D.O.’s. “He managed the C.D.O.’s,” says Eisman, “but managed what? I was just appalled. People would pay up to have someone manage their C.D.O.’s—as if this moron was helping you. I thought, You prick, you don’t give a fuck about the investors in this thing.”
Whatever rising anger Eisman felt was offset by the man’s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”
That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. ... But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
... the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.
... I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?
... Eisman wasn’t, in short, an analyst with a sunny disposition who expected the best of his fellow financial man and the companies he created. “You have to understand,” Eisman says in his defense, “I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a shit what it sold.”
on.
... Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.
But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.
What are CDOS?
... the very first thing he wants to explain is the importance of the mezzanine C.D.O. What you notice first about Eisman is his lips. He holds them pursed, waiting to speak. The second thing you notice is his short, light hair, cropped in a manner that suggests he cut it himself while thinking about something else. “You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.
His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog shit lower than the original bonds.”
After taking a fee, he passed them on to other investors. His job was to be the C.D.O. “expert,” but he actually didn’t spend any time at all thinking about what was in the C.D.O.’s. “He managed the C.D.O.’s,” says Eisman, “but managed what? I was just appalled. People would pay up to have someone manage their C.D.O.’s—as if this moron was helping you. I thought, You prick, you don’t give a fuck about the investors in this thing.”
Whatever rising anger Eisman felt was offset by the man’s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”
That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. ... But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
Should Easter Island be developed?
The mayor of Easter Island in Saving Easter Island in Fotune magazine:
The island's mayor, Petero Edmonds, proud owner of an iPhone and a Louis Vuitton briefcase, has no shortage of ambitious ideas. In 2006 he championed plans for a casino (it was nixed by the Chilean government). Now he's talking about a second airstrip, a deepwater port, a modern health-care system, and medical tourism resorts. During a visit to his office he touts a study that says Rapa Nui can accommodate 150,000 people - nearly three times the number of annual visitors today. "The island is strategically located between San Francisco and Sydney. We are five miles off the international routing for cargo and tourism ships," Edmonds says. "There's opportunity for everybody - and lots of it."
What Easter Island already has:
In the midst of obvious poverty and a strained infrastructure, modernity has crept in. There's cellphone coverage and Wi-Fi (albeit at dial-up speeds). There's not a Starbucks or a McDonald's in sight, but there's plenty of fresh ceviche and even a few cappuccino makers, including one at the swank 30-room hotel Explora, which opened a year ago. The resort has a swimming pool, massage rooms, world-class food, and a decent wine list.
Development was complicated by rough seas and by Haoa. She found a cave in the middle of the building site, which forced the contractors to redesign. It was worth the effort. Room rates start around $700 per night, and Explora is booked solid during peak season. Now copycats are coming. A sprawling 100-room oceanside resort, Hanga Roa, is slated to open in July, and a handful of other projects are on the books.
Meanwhile this description of the technology involved in mapping the archaeology of Easter Island took my breath away:
The plan was to secure GPS coordinates and scans of significant artifacts and then overlay them on a map with Haoa's data, cadastral information from the municipality, topographical charts, and satellite imagery. Once everything was digital, Haoa could use the map to discern patterns that even her expert eyes hadn't noticed. The national parks department could monitor erosion; the municipality could simulate extremes in the drainage system or the effect of proposed development; and the mayor's people could plot world domination - sustainably.
Kelsey and crew started by scanning the Moai in the Ranu Raraku quarry. "They're the icons of the island, and a lot of them are in really bad shape," Kelsey remembers deciding, "so let's focus on those." The team would start as early as 4 A.M., establishing GPS points for each statue and running the green lasers over all sides to capture every nook and cranny. A laser scan can capture as many as 250,000 points per second in mind-blowing detail. To demonstrate, Kelsey opens a 14-gigabyte scan on his laptop and zooms in to show the chisel marks where the statue was carved almost a millennium ago. "We were making submillimeter-accurate models in real time," he says. The scans effectively captured a moment in time, allowing researchers and planners to track erosion precisely and consider solutions - whether building overhangs for the Moai or buttressing a collapsing cliff.
The island's mayor, Petero Edmonds, proud owner of an iPhone and a Louis Vuitton briefcase, has no shortage of ambitious ideas. In 2006 he championed plans for a casino (it was nixed by the Chilean government). Now he's talking about a second airstrip, a deepwater port, a modern health-care system, and medical tourism resorts. During a visit to his office he touts a study that says Rapa Nui can accommodate 150,000 people - nearly three times the number of annual visitors today. "The island is strategically located between San Francisco and Sydney. We are five miles off the international routing for cargo and tourism ships," Edmonds says. "There's opportunity for everybody - and lots of it."
What Easter Island already has:
In the midst of obvious poverty and a strained infrastructure, modernity has crept in. There's cellphone coverage and Wi-Fi (albeit at dial-up speeds). There's not a Starbucks or a McDonald's in sight, but there's plenty of fresh ceviche and even a few cappuccino makers, including one at the swank 30-room hotel Explora, which opened a year ago. The resort has a swimming pool, massage rooms, world-class food, and a decent wine list.
Development was complicated by rough seas and by Haoa. She found a cave in the middle of the building site, which forced the contractors to redesign. It was worth the effort. Room rates start around $700 per night, and Explora is booked solid during peak season. Now copycats are coming. A sprawling 100-room oceanside resort, Hanga Roa, is slated to open in July, and a handful of other projects are on the books.
Meanwhile this description of the technology involved in mapping the archaeology of Easter Island took my breath away:
The plan was to secure GPS coordinates and scans of significant artifacts and then overlay them on a map with Haoa's data, cadastral information from the municipality, topographical charts, and satellite imagery. Once everything was digital, Haoa could use the map to discern patterns that even her expert eyes hadn't noticed. The national parks department could monitor erosion; the municipality could simulate extremes in the drainage system or the effect of proposed development; and the mayor's people could plot world domination - sustainably.
Kelsey and crew started by scanning the Moai in the Ranu Raraku quarry. "They're the icons of the island, and a lot of them are in really bad shape," Kelsey remembers deciding, "so let's focus on those." The team would start as early as 4 A.M., establishing GPS points for each statue and running the green lasers over all sides to capture every nook and cranny. A laser scan can capture as many as 250,000 points per second in mind-blowing detail. To demonstrate, Kelsey opens a 14-gigabyte scan on his laptop and zooms in to show the chisel marks where the statue was carved almost a millennium ago. "We were making submillimeter-accurate models in real time," he says. The scans effectively captured a moment in time, allowing researchers and planners to track erosion precisely and consider solutions - whether building overhangs for the Moai or buttressing a collapsing cliff.
Is it time to call investment bankers oligarchs?
Yes although I don't really see Geithner as anti-oligarch.
Update: A longer article is in the May 2009 issue of Atlantic.
The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.
A failure of economics models is that they ignore the evolution of firms - as firms become bigger and more powerful they curry favor with politicians in order to become even bigger. (See here for an example.) Or they start small but use any political influence they can to become big.
Update: A longer article is in the May 2009 issue of Atlantic.
The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.
A failure of economics models is that they ignore the evolution of firms - as firms become bigger and more powerful they curry favor with politicians in order to become even bigger. (See here for an example.) Or they start small but use any political influence they can to become big.
Fiscal stimulus
Econbrowser: Why Can't We All Just Get Along? The Great Multiplier Debate by Menzie Chinn was a great article on the origins of multipliers: DSGE, Structural equation, VAR models. He notes that there aren't too many studies that provide sources of multipliers. My question is: VAR models are fairly easy to run. Why not focus on these as a source and do some sensitivity analyses with them?
I believe however that neither a fiscal stimulus nor a tax cut will be sufficient to get us out of our current mess so the current debate both in congress and the blogosphere (economists and non-economists alike) is just theater.
I'd echo Jim Hamilton here:
What, then, do I propose? The first principle that's quite clear to me is that drops in state and local government spending, or increases in state and local taxes, are a likely response to the current situation and are clearly counterproductive. Hence I've advocated ([1], [2]) additional federal borrowing in order to provide unrestricted block grants to states. That's a simple, effective plan that could and should be immediately implemented, while still preserving complete flexibility in responding to our serious longer run challenges.
I also am very comfortable endorsing additional government investment in infrastructure for which the argument can be made that the facilities could make a significant contribution to future productivity. At the top of my personal list would be investments in the electricity transmission grid, mass transit, and basic scientific research.
And unquestionably the number 1 priority for the federal government should be to restore a functioning financial sector. That in my mind should be done in a way that maximizes the return on any taxpayer funds invested.
But rushing through new government spending plans, just for the sake of spending? Count me off of that bandwagon.
Back in October last year I thought that the panic had spread from the financial sector to the real sector and feared that we may have been too late then. Today this is all the more true. Last night President Obama was on television discussion the fiscal stimulus package before Congress. If he can inspire some confidence that will turn around our animal spirits it would be welcom.
I believe however that neither a fiscal stimulus nor a tax cut will be sufficient to get us out of our current mess so the current debate both in congress and the blogosphere (economists and non-economists alike) is just theater.
I'd echo Jim Hamilton here:
What, then, do I propose? The first principle that's quite clear to me is that drops in state and local government spending, or increases in state and local taxes, are a likely response to the current situation and are clearly counterproductive. Hence I've advocated ([1], [2]) additional federal borrowing in order to provide unrestricted block grants to states. That's a simple, effective plan that could and should be immediately implemented, while still preserving complete flexibility in responding to our serious longer run challenges.
I also am very comfortable endorsing additional government investment in infrastructure for which the argument can be made that the facilities could make a significant contribution to future productivity. At the top of my personal list would be investments in the electricity transmission grid, mass transit, and basic scientific research.
And unquestionably the number 1 priority for the federal government should be to restore a functioning financial sector. That in my mind should be done in a way that maximizes the return on any taxpayer funds invested.
But rushing through new government spending plans, just for the sake of spending? Count me off of that bandwagon.
Back in October last year I thought that the panic had spread from the financial sector to the real sector and feared that we may have been too late then. Today this is all the more true. Last night President Obama was on television discussion the fiscal stimulus package before Congress. If he can inspire some confidence that will turn around our animal spirits it would be welcom.
Is the Chicago economics department really a free market school
If they are, do they believe that markets should have perfect information? And if they believe that it should have perfect information then do they believe that labor markets function best with perfect information on wages and salaries? And if they believe that then are the salaries of the professors in the economics department public knowledge? How much does Steve Levitt make? Or Gary Becker? Or Robert Lucas?
Perhaps like a lot of us they only believe that rules should apply to everyone else but them?
Perhaps like a lot of us they only believe that rules should apply to everyone else but them?
What should I do during play dates
When K1 and/or K2's friends come around, should I:
1) Make myself scarce and hide? (My preferred solution)
2) Stay visible and ready to direct and intervene with activities/snacks if necessary but leave them alone otherwise. (I guess this would mean that I would be sitting down reading in the living room or something)
3) Participate/direct in all activities (Too exhausting)
4) Organize and direct an activity (e.g. flower making) and then let them free their creative spirits and play by themselves and combine with (2)?
5) Take them out somewhere e.g. park/ice rink?
1) Make myself scarce and hide? (My preferred solution)
2) Stay visible and ready to direct and intervene with activities/snacks if necessary but leave them alone otherwise. (I guess this would mean that I would be sitting down reading in the living room or something)
3) Participate/direct in all activities (Too exhausting)
4) Organize and direct an activity (e.g. flower making) and then let them free their creative spirits and play by themselves and combine with (2)?
5) Take them out somewhere e.g. park/ice rink?
Friday, February 6, 2009
The failure of models
Not financial models this time but weather models! Via Capital Weather Gang:
... what may have turned out to be the blizzard of 2009 ultimately existed solely in computer model simulations of the weather. Despite their best efforts, the models with impersonal acronyms like "GFS" and "ECMWF" could not force the storm scenario they had predicted to come to fruition. A dusting of snow fell around Washington, and a few inches in New York and Boston, but that was far from the one to two feet that was projected at one point.
The non-storm event provided an interesting case study in how communicators of weather information should balance the need to attract eyeballs, in the form of viewers and readers, with the uncertainties inherent in forecasting that can make even the best forecast go bust. Remarkably, despite an early consensus of the computer models that a major storm was likely on Groundhog Day (that consensus had crumbled by last weekend), most media outlets -- including the Capital Weather Gang -- limited their hype to a Category 2 situation rather than a Cat 5 "hype-cane."
Although there were probably others who leaned too heavily towards hyping the storm, the most notable example of a media organization that balanced the ratings/uncertainty equation in favor of hyping the storm beyond what was meteorologically justified was AccuWeather Inc., the Pennsylvania-based private forecasting company that has a reputation in the weather forecasting industry as frequently being bullish on predicted snowfall amounts.
Update from CWG :
At times toward the end of last week there was a consensus among the computer models meteorologists use to help predict the weather, which go by acronyms such as "GFS," "ECMWF" and "UKMET," that the AccuWeather forecast could come true. But, there were also times when these models fluctuated wildly, showing a big snowstorm on one run and virtually no snow at all on a run six or 12 hours later (most models are run every six or 12 hours).
... Nevertheless, it must be emphasized that up until late Saturday and early Sunday there was a very realistic possibility of AccuWeather hitting a home run. -- sometimes even blind squirrels find an acorn. Had the storm occurred as AccuWeather had predicted, you'd likely never hear the end of AccuWeather claims about how wonderfully skillful it had been -- rather than acknowledge the role of old fashion good luck.
... Generating a more complete picture of the full range of possible forecasts is the basis for ensemble forecasting, where a single model is run up to 50 times, each time with a set of slightly different initial conditions (to account for possible inaccuracies in the measured initial conditions). Each of these runs is known as an ensemble member, and together the ensemble members provide a reasonably good portrayal of possible outcomes (e.g., storm track and intensity) and their relative likelihood. The more members that show a given scenario -- for example, a storm hugging the coast and producing significant snows, or instead a storm tracking too far off the coast to produce meaningful precipitation -- the greater the chance that scenario will pan out (at least in theory).
Some lessons here for economic models as well?
... what may have turned out to be the blizzard of 2009 ultimately existed solely in computer model simulations of the weather. Despite their best efforts, the models with impersonal acronyms like "GFS" and "ECMWF" could not force the storm scenario they had predicted to come to fruition. A dusting of snow fell around Washington, and a few inches in New York and Boston, but that was far from the one to two feet that was projected at one point.
The non-storm event provided an interesting case study in how communicators of weather information should balance the need to attract eyeballs, in the form of viewers and readers, with the uncertainties inherent in forecasting that can make even the best forecast go bust. Remarkably, despite an early consensus of the computer models that a major storm was likely on Groundhog Day (that consensus had crumbled by last weekend), most media outlets -- including the Capital Weather Gang -- limited their hype to a Category 2 situation rather than a Cat 5 "hype-cane."
Although there were probably others who leaned too heavily towards hyping the storm, the most notable example of a media organization that balanced the ratings/uncertainty equation in favor of hyping the storm beyond what was meteorologically justified was AccuWeather Inc., the Pennsylvania-based private forecasting company that has a reputation in the weather forecasting industry as frequently being bullish on predicted snowfall amounts.
Update from CWG :
At times toward the end of last week there was a consensus among the computer models meteorologists use to help predict the weather, which go by acronyms such as "GFS," "ECMWF" and "UKMET," that the AccuWeather forecast could come true. But, there were also times when these models fluctuated wildly, showing a big snowstorm on one run and virtually no snow at all on a run six or 12 hours later (most models are run every six or 12 hours).
... Nevertheless, it must be emphasized that up until late Saturday and early Sunday there was a very realistic possibility of AccuWeather hitting a home run. -- sometimes even blind squirrels find an acorn. Had the storm occurred as AccuWeather had predicted, you'd likely never hear the end of AccuWeather claims about how wonderfully skillful it had been -- rather than acknowledge the role of old fashion good luck.
... Generating a more complete picture of the full range of possible forecasts is the basis for ensemble forecasting, where a single model is run up to 50 times, each time with a set of slightly different initial conditions (to account for possible inaccuracies in the measured initial conditions). Each of these runs is known as an ensemble member, and together the ensemble members provide a reasonably good portrayal of possible outcomes (e.g., storm track and intensity) and their relative likelihood. The more members that show a given scenario -- for example, a storm hugging the coast and producing significant snows, or instead a storm tracking too far off the coast to produce meaningful precipitation -- the greater the chance that scenario will pan out (at least in theory).
Some lessons here for economic models as well?
Thursday, February 5, 2009
Roundabouts as fiscal stimulus
MR pointed to fiscal stimulus for bloggers and I thought I'd entertain myself with another idea based on John Staddon's article which I had related to something else previously here. John had written in the Atlantic that there were too many road signs in America and that the proliferation of signs had reduced humanity's ability to make judgments. (I overstate, but never mind.) He had also suggested replacing 4-way stops or 2-way stops + cross traffic does not stop signs with roundabouts and noted that in Britain some roundabouts are nothing more than a painted circle in the centre of the intersection.
For someone who lives in Washington DC, roundabouts in NW are just about the biggest nightmare. Take Westmoreland Circle. It has two lanes around the circle with six roads intersecting it and it seems that everyone is confused about which lane to be in - cars in the inner lane, i.e. closest to the center never seem to be able to change to the outer lane when they need to. In John's world, an ideal roundabout should only have one lane and everyone takes their turn merging into the circle. Washington DC drivers are not well known for courtesy so his suggestion to make roundabouts smaller as drivers get used to them (thereby making the approach roads to the roundabout longer) are not going to go down too well. Unless it's absolutely quiet I stay on the outside of the circle so that I can always get out at the road I want. Of course, I get honked by those who want to try to merge into the lane I'm in. Uggh! What a mess!
Next take Ward Circle. This is a roundabout with traffic lights! Talk about built in redundancies. I've been familiar with one or the other before moving here and I was amazed at this one when I first encountered it. After 10 years of living here I still end up in the wrong lanes going onto Massachusetts Ave from Nebraska. This is one miserable circle that should be ended.
But what does all this have to do with fiscal stimulus? For someone who is averse to all these large circles and who drives through neigborhoods to avoid the very large roundabouts I encounter a great deal of 4-way stop signs as well as the dreaded 2-way stops+cross traffic does not stop plust 2-way stops without the cross traffic does not stop. The last of these is my concern. Those with the stop don't always look to see if the traffic from the right or left has a stop and I've been in many near collisions in these intersections (some of these are my fault.)
I think a roundabout in all neighborhoods are a great idea and good use of fiscal stimulus funds. These are small projects that can be undertaken by neighborhood associations or even homeowners. They can be spent quickly (which is good, right?) by going to the neighborhood landscape or garden store (Buy American is good, right?) and they also have positive side effects:
1. Fewer stop signs means fewer stop and go for the car which reduces greenhouse gases.
2. While painted cricles are fine, I prefer potted plants or a large ficus tree in a large pot. More plants = less CO2 and perhaps even more Christmas lights. No we don't really want those because of the extra energy they consume so scratch Christmas lights.
3. Fewer stop signs means we are forced to think and use our judgment which means we become wiser and perhaps if we had been wiser we might not have gotten into this financial crisis in the first place.
4. Quick to implement - Team Obama signs it into law and all we need to do is save our receipts and go up to the Treasury steps where Secretary Geithner is hanging out who can then reimburse us and perhaps use our receipts for his tax deductions. Recycle, reuse and reduce!
5. It may even start a bubble in the landscaping industry which is just what we need to lift us out of our recession. Overinvestment in plants and trees which is in turn good for the earth - a positive externality from a bubble at last!
For someone who lives in Washington DC, roundabouts in NW are just about the biggest nightmare. Take Westmoreland Circle. It has two lanes around the circle with six roads intersecting it and it seems that everyone is confused about which lane to be in - cars in the inner lane, i.e. closest to the center never seem to be able to change to the outer lane when they need to. In John's world, an ideal roundabout should only have one lane and everyone takes their turn merging into the circle. Washington DC drivers are not well known for courtesy so his suggestion to make roundabouts smaller as drivers get used to them (thereby making the approach roads to the roundabout longer) are not going to go down too well. Unless it's absolutely quiet I stay on the outside of the circle so that I can always get out at the road I want. Of course, I get honked by those who want to try to merge into the lane I'm in. Uggh! What a mess!
Next take Ward Circle. This is a roundabout with traffic lights! Talk about built in redundancies. I've been familiar with one or the other before moving here and I was amazed at this one when I first encountered it. After 10 years of living here I still end up in the wrong lanes going onto Massachusetts Ave from Nebraska. This is one miserable circle that should be ended.
But what does all this have to do with fiscal stimulus? For someone who is averse to all these large circles and who drives through neigborhoods to avoid the very large roundabouts I encounter a great deal of 4-way stop signs as well as the dreaded 2-way stops+cross traffic does not stop plust 2-way stops without the cross traffic does not stop. The last of these is my concern. Those with the stop don't always look to see if the traffic from the right or left has a stop and I've been in many near collisions in these intersections (some of these are my fault.)
I think a roundabout in all neighborhoods are a great idea and good use of fiscal stimulus funds. These are small projects that can be undertaken by neighborhood associations or even homeowners. They can be spent quickly (which is good, right?) by going to the neighborhood landscape or garden store (Buy American is good, right?) and they also have positive side effects:
1. Fewer stop signs means fewer stop and go for the car which reduces greenhouse gases.
2. While painted cricles are fine, I prefer potted plants or a large ficus tree in a large pot. More plants = less CO2 and perhaps even more Christmas lights. No we don't really want those because of the extra energy they consume so scratch Christmas lights.
3. Fewer stop signs means we are forced to think and use our judgment which means we become wiser and perhaps if we had been wiser we might not have gotten into this financial crisis in the first place.
4. Quick to implement - Team Obama signs it into law and all we need to do is save our receipts and go up to the Treasury steps where Secretary Geithner is hanging out who can then reimburse us and perhaps use our receipts for his tax deductions. Recycle, reuse and reduce!
5. It may even start a bubble in the landscaping industry which is just what we need to lift us out of our recession. Overinvestment in plants and trees which is in turn good for the earth - a positive externality from a bubble at last!
Wednesday, February 4, 2009
Mountain top removal
Someone from Clean Water Action came knocking tonight asking for a donation which I obliged with a token sum. I usually don't give to those who go door to door but tonight was an exception. It was extremely cold standing at the door talking but what really made change my mind was an article he pulled out to show how water was being affected by mountain top removal. (See here for instance.)
The odd thing was that it was such a coincidence that I was reading about mountain top mining. On any other day I may have said no but it just so happens that I am currently going through a series of articles on montain top removal mining by Erik Reece as well as in a recent Smithsonian magazine. What I read really, really bothered me especially was how entrenched coal interests have totally disregarded small mountain communities - in essence poisoning their air, water and in some cases terrorizing the citizens. The scary thing is I am part of the entrenched coal interests whether I like it or not. If there is one word that describes the feeling I have, it is outrage. Yet at the same time I am both shocked and awed at the audacity of the operation. Reece estimates that it only takes 9 people with heavy equipment to remove coal from a mountaintop.
Yet the authors are right in saying that many people are oblivious to this because it takes place in remote places and only small communities are affected. And yes, there are those special interests that do landscape the area after the coal has been removed - building golf courses or making the entire area buildable. It is painful to read about.
The articles are:
1. Salon's review of Erik Reece's book Lost Mountain
2. A preview of Erik Reece's book
3. Orion Magazine's article on Erik Reece's book
4. Smithsonian Magazine's article on mountain top removal mining
The pictures that accompany them however, speak more loudly.
And from the Smthsonian magazine: Should this be counted as an unintended consequence?
Then, in 1990, Eastern coal mining, long in decline, got a boost from an unlikely source: the Clean Air Act, revised that year to restrict sulfur dioxide emissions, the cause of acid rain. As it happens, central Appalachia's coal deposits are low in sulfur.
The odd thing was that it was such a coincidence that I was reading about mountain top mining. On any other day I may have said no but it just so happens that I am currently going through a series of articles on montain top removal mining by Erik Reece as well as in a recent Smithsonian magazine. What I read really, really bothered me especially was how entrenched coal interests have totally disregarded small mountain communities - in essence poisoning their air, water and in some cases terrorizing the citizens. The scary thing is I am part of the entrenched coal interests whether I like it or not. If there is one word that describes the feeling I have, it is outrage. Yet at the same time I am both shocked and awed at the audacity of the operation. Reece estimates that it only takes 9 people with heavy equipment to remove coal from a mountaintop.
Yet the authors are right in saying that many people are oblivious to this because it takes place in remote places and only small communities are affected. And yes, there are those special interests that do landscape the area after the coal has been removed - building golf courses or making the entire area buildable. It is painful to read about.
The articles are:
1. Salon's review of Erik Reece's book Lost Mountain
2. A preview of Erik Reece's book
3. Orion Magazine's article on Erik Reece's book
4. Smithsonian Magazine's article on mountain top removal mining
The pictures that accompany them however, speak more loudly.
And from the Smthsonian magazine: Should this be counted as an unintended consequence?
Then, in 1990, Eastern coal mining, long in decline, got a boost from an unlikely source: the Clean Air Act, revised that year to restrict sulfur dioxide emissions, the cause of acid rain. As it happens, central Appalachia's coal deposits are low in sulfur.
Why do developing countries have to take IMF advice
But developed countries can choose to ignore them? The obvious answer is because they can - plus they don't need IMF blessing to get bailout funds.
Naked Capitalism rants (to sympathetic ears):
The Obama Administration, if the Washington Post's latest report is accurate, is about to embark on a hugely expensive "save the banking industry at all costs" experiment that:
1. Has nothing substantive in common with any of the "deemed as successful" financial crisis programs
2. Has key elements that studies of financial crises have recommended against
3. Consumes considerable resources, thus competing with other, in many cases better, uses of fiscal firepower.
The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was. We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company. Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting).
Why is this a bad idea? Let's turn to a study by the IMF of 124 banking crises. Their conclusion:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.In case you had any doubts, propping up dud asset values is a form of forbearance. Japan had a different way of going about it, but the philosophy was similar, and the last 15 year illustrates how well that worked.
What we have from Team Obama is a bigger abortion of a :"throw money at bad bank assets" plan that I feared in my worst nightmare. And (when we get to the Post preview), they have the temerity to invoke triage to make what they are doing sound surgical and limited.
Moreover, WSJ reports:
To outline his fears about the U.S. economy, Raghuram Rajan picked a tough crowd.
It was August 2005, at an annual gathering of high-powered economists at Jackson Hole, Wyo. -- and that year they were honoring Alan Greenspan. Mr. Greenspan, a giant of 20th-century economic policy, was about to retire as Federal Reserve chairman after presiding over a historic period of economic growth.
Mr. Rajan, a professor at the University of Chicago's Booth Graduate School of Business [and then chief economist at the IMF - my note], chose that moment to deliver a paper called "Has Financial Development Made the World Riskier?"
His answer: Yes.
Incentives were horribly skewed in the financial sector, with workers reaping rich rewards for making money, but being only lightly penalized for losses, Mr. Rajan argued. That encouraged financial firms to invest in complex products with potentially big payoffs, which could on occasion fail spectacularly.
He pointed to "credit-default swaps," which act as insurance against bond defaults. He said insurers and others were generating big returns selling these swaps with the appearance of taking on little risk, even though the pain could be immense if defaults actually occurred.
Mr. Rajan also argued that because banks were holding a portion of the credit securities they created on their books, if those securities ran into trouble, the banking system itself would be at risk. Banks would lose confidence in one another, he said: "The interbank market could freeze up, and one could well have a full-blown financial crisis."
Two years later, that's essentially what happened.
Many of the big names in Jackson Hole weren't ready to hear the warning. Former Treasury Secretary Lawrence Summers, famous among economists for his blistering attacks, told the audience he found "the basic, slightly lead-eyed premise of [Mr. Rajan's] paper to be misguided."
[emphasis mine]
No guts, no glory? How about nationalization of the financial industry? Unfortunately, I think now that it is too late for even this extreme move to make a large impact (in terms of stabilizing the market) in the short run (6-months). If the Fed were to move it would need something equivalent to a Powell Doctrine. Nationalization cannot be piece meal, i.e. one bank at a time - doing this would erode confidence in banks that are possibly marginal and driving their stock prices down so far that they become bad banks.
Indulge my wild imagination:
1. Treasury identifies 20-25 largest banks that are too big/interconnected to fail. Expand the list as needed.
2. At the end of the week or over the course of the weekend, federal authorities perhaps with SWAT team and armed police and national guard support surround all these financial institutions.
3. No one enters or leaves without permission. All records impounded and taken over by feds. Feds installs new management (possibly with same old faces).
4. Trading in all banks cease.
5. Pay of all top executives regulated. (Scratch this: The Obama administration is already doing it.)
6. Feds work on plan to combine all banks taken over into one large supernational bank that takes part in directed lending to stimulate economy. For now, let's call it the big bad bank.
7. Supernational bank to sit on toxic assets to the point that they either recover or are written off. On net these assets should pay zero anyway since the supernational bank becomes the two sides of the same asset trade. All assests that can be netted to zero should be done so. Or
8. In then next 5 to 10 years, Fed works on spinning of supernational bank back to the public.
I like #2 best along with Jack Bauer and John McClane blasting away at some pasty faced banker or lawyer.
But to return to reality, Prof. Rajan recommends the following instead (no guns are involved):
Instead of heavy regulation, he says, the incentives of Wall Streeters need to change so that punishments for losing money are in line with rewards for earning it.
Naked Capitalism rants (to sympathetic ears):
The Obama Administration, if the Washington Post's latest report is accurate, is about to embark on a hugely expensive "save the banking industry at all costs" experiment that:
1. Has nothing substantive in common with any of the "deemed as successful" financial crisis programs
2. Has key elements that studies of financial crises have recommended against
3. Consumes considerable resources, thus competing with other, in many cases better, uses of fiscal firepower.
The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was. We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company. Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting).
Why is this a bad idea? Let's turn to a study by the IMF of 124 banking crises. Their conclusion:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.In case you had any doubts, propping up dud asset values is a form of forbearance. Japan had a different way of going about it, but the philosophy was similar, and the last 15 year illustrates how well that worked.
What we have from Team Obama is a bigger abortion of a :"throw money at bad bank assets" plan that I feared in my worst nightmare. And (when we get to the Post preview), they have the temerity to invoke triage to make what they are doing sound surgical and limited.
Moreover, WSJ reports:
To outline his fears about the U.S. economy, Raghuram Rajan picked a tough crowd.
It was August 2005, at an annual gathering of high-powered economists at Jackson Hole, Wyo. -- and that year they were honoring Alan Greenspan. Mr. Greenspan, a giant of 20th-century economic policy, was about to retire as Federal Reserve chairman after presiding over a historic period of economic growth.
Mr. Rajan, a professor at the University of Chicago's Booth Graduate School of Business [and then chief economist at the IMF - my note], chose that moment to deliver a paper called "Has Financial Development Made the World Riskier?"
His answer: Yes.
Incentives were horribly skewed in the financial sector, with workers reaping rich rewards for making money, but being only lightly penalized for losses, Mr. Rajan argued. That encouraged financial firms to invest in complex products with potentially big payoffs, which could on occasion fail spectacularly.
He pointed to "credit-default swaps," which act as insurance against bond defaults. He said insurers and others were generating big returns selling these swaps with the appearance of taking on little risk, even though the pain could be immense if defaults actually occurred.
Mr. Rajan also argued that because banks were holding a portion of the credit securities they created on their books, if those securities ran into trouble, the banking system itself would be at risk. Banks would lose confidence in one another, he said: "The interbank market could freeze up, and one could well have a full-blown financial crisis."
Two years later, that's essentially what happened.
Many of the big names in Jackson Hole weren't ready to hear the warning. Former Treasury Secretary Lawrence Summers, famous among economists for his blistering attacks, told the audience he found "the basic, slightly lead-eyed premise of [Mr. Rajan's] paper to be misguided."
[emphasis mine]
No guts, no glory? How about nationalization of the financial industry? Unfortunately, I think now that it is too late for even this extreme move to make a large impact (in terms of stabilizing the market) in the short run (6-months). If the Fed were to move it would need something equivalent to a Powell Doctrine. Nationalization cannot be piece meal, i.e. one bank at a time - doing this would erode confidence in banks that are possibly marginal and driving their stock prices down so far that they become bad banks.
Indulge my wild imagination:
1. Treasury identifies 20-25 largest banks that are too big/interconnected to fail. Expand the list as needed.
2. At the end of the week or over the course of the weekend, federal authorities perhaps with SWAT team and armed police and national guard support surround all these financial institutions.
3. No one enters or leaves without permission. All records impounded and taken over by feds. Feds installs new management (possibly with same old faces).
4. Trading in all banks cease.
5. Pay of all top executives regulated. (Scratch this: The Obama administration is already doing it.)
6. Feds work on plan to combine all banks taken over into one large supernational bank that takes part in directed lending to stimulate economy. For now, let's call it the big bad bank.
7. Supernational bank to sit on toxic assets to the point that they either recover or are written off. On net these assets should pay zero anyway since the supernational bank becomes the two sides of the same asset trade. All assests that can be netted to zero should be done so. Or
8. In then next 5 to 10 years, Fed works on spinning of supernational bank back to the public.
I like #2 best along with Jack Bauer and John McClane blasting away at some pasty faced banker or lawyer.
But to return to reality, Prof. Rajan recommends the following instead (no guns are involved):
Instead of heavy regulation, he says, the incentives of Wall Streeters need to change so that punishments for losing money are in line with rewards for earning it.
At the start of 2008, he suggested that bonuses that financial workers make during boom times should be kept in escrow accounts for a period of time. If the firm experienced big losses later, those accounts would be drained.
Mr. Rajan also urges other safeguards. Along with Chicago colleagues Anil Kashyap and Harvard economist Jeremy Stein, he's come up with a plan to create a form of financial-catastrophe insurance that firms would buy into.
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