I thought I might be able to come up with some witty comments as well as contrast the styles/voice/narration of the three books that I've read:
1. Arundhati Roy's God of Small Things
2. Richard Flanagan's Gould's Book of Fish
3. Rachel Cusk's The Lucky Ones
Unfortunately, I haven't been able to come up with anything except that of the 3 books, in terms of voice, Gould's Book of Fish is very distinctive (although the best I've read is Robert Bausch's The Gypsy Man). Roy's narration is almost melodic and the best word that I can come up with is that it has a "lilt" to it. Unfortunately, the narration jumps back and forth through time that (at my age) I was easily confused and kept having to go back to look at some chapters to verify the time line. Rachel Cusk's was interesting in that the collected stories in the book are all linked by characters that at first seem tangential to the original story. For me it didn't really have a beginning or and end although the narration was smooth enough to carry the book along.
I read these books mostly over lunch and I would not recommend (1) and (2) as "lunch" books. Some of the description of bodily processes almost made me lose my lunch.
Monday, November 17, 2008
Friday, November 7, 2008
Credit crunch revisited
After this post I decided to take a look at: A note on pitfalls of credit crunch regressions
The credit crunch regression:
Δy(t) = β0 + β1 × Δb(t) + ε(t),
where Δy(t) and Δb(t) denote growth rate of output and loans from banks. ε(t) is an i.i.d. error term. The regression should detect statistically significant effect of Δbt with a positive estimate
of β1.
Using simulations in a Kiyotaki-Moore (KM) economy, the author notes:
In KM model, the credit crunch regression only works fine if the technology shocks are expected to be long-lived.
I.e. Neither the model by the author nor the regressions are as general as they appear to be.
The credit crunch regression:
Δy(t) = β0 + β1 × Δb(t) + ε(t),
where Δy(t) and Δb(t) denote growth rate of output and loans from banks. ε(t) is an i.i.d. error term. The regression should detect statistically significant effect of Δbt with a positive estimate
of β1.
Using simulations in a Kiyotaki-Moore (KM) economy, the author notes:
In KM model, the credit crunch regression only works fine if the technology shocks are expected to be long-lived.
I.e. Neither the model by the author nor the regressions are as general as they appear to be.
Water technologies
I thought that this was interesting:
The article talks about desalination using oil tankers based off-shore and then leads into:
Desalination, of course, is well and good for communities that are close to the ocean and that can afford relatively expensive water. In the villages of sub-Saharan Africa, that's not the case. Forty-two percent of the region's population lacks access to a safe water supply, and the impact of waterborne diseases on public health is staggering: Of the 396 million cases of malaria every year, the majority are in sub-Saharan Africa; 90 percent of those who die from the disease are children under 5. About 100 million Africans are infected with the parasitic disease schistosomiasis, which kills tens of thousands annually, also mostly children. The death toll from diarrheal diseases is probably much higher. What's more, a lack of reliable, clean water precludes meaningful economic development. By one estimate, some 40 billion hours a year are spent collecting water in sub-Saharan Africa -- or roughly a year's labor for the entire work force of France. The work usually falls to women and children, who are left with little time for things like growing food or going to school.
Moving Water Industries, an 82-year-old, family-owned manufacturer of water pumps based in Deerfield Beach, Florida, has been selling portable pumps for irrigation and flood protection in Nigeria for more than 30 years. But its mission in Africa has taken on a new focus: addressing the problem of safe drinking water in rural villages. The company's solution is the SolarPedalFlo, a solar- and pedal-powered pump that can provide filtered and chlorinated water for thousands of people a day -- three to four times the amount that can be produced from a borehole equipped with a hand pump. Each unit costs about $15,000.
The article continues with on-site treatment technologies that does not require storage of chlorine as well as other technologies on the horizon. This was another one that I found interesting:
As a kid, Mark Sanders hated brushing his teeth with cold water. But watching all that clean, drinkable water run down the drain as it warmed up bugged him. So at the age of 9, he began thinking about ways to capture it and save it for some other purpose -- say, flushing the toilet. Three decades later, during a visit with his wife's family in drought-stricken Oklahoma in 2000, he took up the problem again with a newfound sense of urgency.
On the plane ride home to Louisville, he made a sketch of a water recycling system that would take used water from the bathroom sink, disinfect it, and reroute it to the toilet tank for flushing. Back home, he took the drawing to a friend who did home remodeling, and two weeks later -- with a hot glue gun, some PVC pipe, and a Tupperware container -- the friend had a prototype working in his own home. Sanders, a CPA by trade and at the time the CEO of a large medical practice, patented the system, built a basic website, and began touting the system to anyone he thought might be interested. The result: thousands of hits for the site and affirmation that the interest was out there.
... The AQUS System -- named one of the 100 best innovations of 2007 by Popular Science magazine -- uses standard plumbing parts and can be installed by a professional plumber in about two hours. Priced at $395 (before rebates), it can save up to 6,000 gallons of water a year in a two-person household.
The article talks about desalination using oil tankers based off-shore and then leads into:
Desalination, of course, is well and good for communities that are close to the ocean and that can afford relatively expensive water. In the villages of sub-Saharan Africa, that's not the case. Forty-two percent of the region's population lacks access to a safe water supply, and the impact of waterborne diseases on public health is staggering: Of the 396 million cases of malaria every year, the majority are in sub-Saharan Africa; 90 percent of those who die from the disease are children under 5. About 100 million Africans are infected with the parasitic disease schistosomiasis, which kills tens of thousands annually, also mostly children. The death toll from diarrheal diseases is probably much higher. What's more, a lack of reliable, clean water precludes meaningful economic development. By one estimate, some 40 billion hours a year are spent collecting water in sub-Saharan Africa -- or roughly a year's labor for the entire work force of France. The work usually falls to women and children, who are left with little time for things like growing food or going to school.
Moving Water Industries, an 82-year-old, family-owned manufacturer of water pumps based in Deerfield Beach, Florida, has been selling portable pumps for irrigation and flood protection in Nigeria for more than 30 years. But its mission in Africa has taken on a new focus: addressing the problem of safe drinking water in rural villages. The company's solution is the SolarPedalFlo, a solar- and pedal-powered pump that can provide filtered and chlorinated water for thousands of people a day -- three to four times the amount that can be produced from a borehole equipped with a hand pump. Each unit costs about $15,000.
The article continues with on-site treatment technologies that does not require storage of chlorine as well as other technologies on the horizon. This was another one that I found interesting:
As a kid, Mark Sanders hated brushing his teeth with cold water. But watching all that clean, drinkable water run down the drain as it warmed up bugged him. So at the age of 9, he began thinking about ways to capture it and save it for some other purpose -- say, flushing the toilet. Three decades later, during a visit with his wife's family in drought-stricken Oklahoma in 2000, he took up the problem again with a newfound sense of urgency.
On the plane ride home to Louisville, he made a sketch of a water recycling system that would take used water from the bathroom sink, disinfect it, and reroute it to the toilet tank for flushing. Back home, he took the drawing to a friend who did home remodeling, and two weeks later -- with a hot glue gun, some PVC pipe, and a Tupperware container -- the friend had a prototype working in his own home. Sanders, a CPA by trade and at the time the CEO of a large medical practice, patented the system, built a basic website, and began touting the system to anyone he thought might be interested. The result: thousands of hits for the site and affirmation that the interest was out there.
... The AQUS System -- named one of the 100 best innovations of 2007 by Popular Science magazine -- uses standard plumbing parts and can be installed by a professional plumber in about two hours. Priced at $395 (before rebates), it can save up to 6,000 gallons of water a year in a two-person household.
Blood donation
Gave blood last week and reached my four gallon donation the previous donation. The ARC seem to be more efficient these days although I wish they would stop using SSNs for identifying information.
Anyway, came across this (ht: Mark Thoma): Incentives for altruism? The case of blood donations:
Using a longitudinal dataset including the donation histories of all donors of an Italian town as well as demographic and employment information on the donors, we have studied (1) the impact of a legislative provision that guarantees Italian blood donors who are employees a paid day off work, and (2) the impact of an incentive scheme that offers symbolic rewards (“medals”) with social recognition value but no economic value to repeat donors. Our current results show that donors not only do not refuse the day-off incentive, but they respond to it by clustering their donation in those days (such as Fridays) which carry a high return in terms of consecutive days of leisure. This indicates that "material" considerations dominate over the potentially negative social-image effects of responding positively to economic incentives. We also show that the day-off privilege leads donors who are employees to make, on average, one extra donation per year.
I can certainly agree that a day off is warranted. I've noticed that over the years it's taking me ever increasingly longer to get over the effects (wooziness/light-headedness/weakness) of blood donation. Currently, I'm not really fully back to myself until about 5 hours later.
Anyway, came across this (ht: Mark Thoma): Incentives for altruism? The case of blood donations:
Using a longitudinal dataset including the donation histories of all donors of an Italian town as well as demographic and employment information on the donors, we have studied (1) the impact of a legislative provision that guarantees Italian blood donors who are employees a paid day off work, and (2) the impact of an incentive scheme that offers symbolic rewards (“medals”) with social recognition value but no economic value to repeat donors. Our current results show that donors not only do not refuse the day-off incentive, but they respond to it by clustering their donation in those days (such as Fridays) which carry a high return in terms of consecutive days of leisure. This indicates that "material" considerations dominate over the potentially negative social-image effects of responding positively to economic incentives. We also show that the day-off privilege leads donors who are employees to make, on average, one extra donation per year.
I can certainly agree that a day off is warranted. I've noticed that over the years it's taking me ever increasingly longer to get over the effects (wooziness/light-headedness/weakness) of blood donation. Currently, I'm not really fully back to myself until about 5 hours later.
Tuesday, November 4, 2008
Auto sales
Jim Hamilton posted this chart on auto sales and I thought that maybe 2004-2007 might have been artificially high due to low interest rates and some kind of consumption boom so I thought I'd take a look at a longer series.
Credit crunch
In this post I had claimed that the effects of the financial crisis on the real side of the analysis was too anecdoctal. I am not the only skeptic judging by the following post (Part 3 of Where is the Credit Crunch at MR):
Back in February I pointed out that despite all the talk of a credit crunch commercial and industrial loans were at an all-time high and increasing. In September I once again pointed to data showing that bank credit continued to be high (even if growth was slowing.) At that time I also discussed how bank loans were not the only source of funds for business investment and that many substitute bridges exist which transform and transmit savings into investment. I suggested that despite the panic the problems which exist in the financial industry may be relatively confined to that industry.
Three economists at the Federal Reserve Bank of Minneapolis, Chari, Christiano and Kehoe, now further support my analysis pointing to Four Myths about the Financial Crisis of 2008.
Mark Thoma (pointing to The Economist) and Felix Salmon disagrees.
In a subsequent post, I commented:
The phrase "credit crunch" needs to be defined. I don't believe that looking at prices and quantities alone can determine if we're in a "credit crunch". Suppose that there are 4 states in the economy: high, low, normal and crisis. And suppose further that we are currently in a crisis state. A "credit crunch" is the gap between the current (crisis) quantities (or prices) and one of the 3 other states. I would be conservative and say that a credit crunch should be defined as the gap between "crisis" and "low-state" quantities and prices. If we are going to be in a recession, is the current quantities/prices lower/higher that they "should" be? Going into a recession, is a business owner that would have qualified for loans in a low-state not currently able to get a loan? This is the measure that I think is more interesting.
I may have been mistaken by looking solely at the business sector, however.
Naked Capitalism looks at international trade volumes:
One of our pet themes in recent weeks is that the fall in trade traffic, indicated and possibly overstated by a dramatic fall in the Baltic Dry Index, is due at least in part to difficulties in arranging and getting other banks to accept buyers' letters of credit. For those new to this topic, international trade depends to a large degree on letters of credit. While they can help finance shipments, an even more fundamental role is that they assure the shipper that he will be paid for the cargo sent. Without banks using letters of credit as the means to send payment to exporters, parties that are new to each other or conduct business with each other infrequently could never trade with each other (one type, a documentary letter of credit, requires that forms, often a very long and elaborate set of them, verifying that the goods have been inspected and certified, that customs, have been cleared and all relevant charges and duties paid, be presented and vetted before payment is released).
More on the Baltic Dry Index is here and here. Some background is here and here.
In any case I thought I'd toss in a few more anecdotes from the latest issue of Inc Magazine.
1. About Nau, an apparel store that went bankrupt (Too much too fast or credit crunch?):
In 2005, half a dozen outdoor-clothing guys got together at Portland's Urban Grinds coffee shop to sketch out their new retailing concept. Times were good, and they were feeling supremely confident. Their big idea was to combine the eco-friendly and mountain-climbing chic of Patagonia with the fashion-forward urban cool of, say, Prada. Not only would their clothes be practical on the trail, but they would look sleek and hip in the city as well. Nau would design its own fabrics with new sorts of eco-friendly materials. Even Nau's retail outlets -- the plan called for 150 of them -- would be constructed from recycled wood and plastic.
The team also decided to funnel 5 percent of sales from each item to dozens of worthy nonprofit organizations that buyers could choose from. The clothes would be pricey, but shoppers could feel good that by buying a $40 T-shirt or a $350 jacket, they would also be doing some good. ...
The company, with its five stores and four more under construction, assumed additional financing would always be around the corner. Then the credit crunch hit. With no recourse to bank financing, the team implored its biggest investors for additional funding. But the investors who had been so generous just a few months earlier clammed up. "Everyone on the board understood we had gotten in too far to turn around and pare this thing down," says Gomez, then board chairman of Nau. The money was gone. The board voted to close down Nau's stores and suspend all business.
2. Norm Brodsky seems to make a lot of sense to me:
... Not so long ago, you could still get what bankers affectionately referred to -- in private -- as an "air-ball loan." That was a loan based not so much on your assets but almost entirely on your relationship and history with the bank. Yes, the bank would glance at your company's earnings and cash flow, just to be sure you could make your payments and weren't about to go bankrupt, but the relationship mattered most.
We needed to borrow $4 million to cover the building costs, ... a week later, the bank president called and said that because we weren't giving a personal guarantee, the bank would lend us the money only if we made a "substantial" deposit, by which he meant an amount equal to 50 percent of the loan. I pointed out that a deposit of that size was hardly necessary from a security standpoint. Our development company had unencumbered assets of $7 million. Once the construction was finished, the value of these assets would rise to more than $16 million. The risk to the bank was minimal. But it turned out that risk wasn't the issue. "In order for us to make loans, we need deposits," he said. "Things are very tough right now."
"In that case," I said, "I think I'd rather give you a personal guarantee." I didn't like the idea of tying up my money in a bank account.
"OK," he said. "I'll run it by the board." Another week went by, and he called me back. "The board would really like to lend you the money," he said, "but we only want to deal with people who are customers."
"Fine; we'll open an account," I said.
"You would still have to make a substantial deposit," he said.
It was June by then, and every day brought news of another troubled bank. The big issue, I realized, was the Telluride bank's solvency, not mine. "Why don't you send me the bank's balance sheet," I said.
"Sure," he said. "But why?"
"The FDIC only insures $100,000 per account," I said. "If I'm going to make the kind of deposit you're asking for, I want to know where my money's going."
When the bank's financials arrived, I showed them to my partner Sam, who has served as the point person in our company's banking relationships. "What would you do?" I asked.
"I wouldn't put more than $100,000 in any bank right now," he said.
I knew he was right. I told the Telluride bank that we weren't going to need its money after all. If necessary, we would do the financing ourselves.
... So what does all this mean? I have no doubt that companies like mine will still be able to secure the bank financing we need -- mainly because we don't need it that badly. I worry about smaller companies that really do need bank financing and may have a hard time getting it. That will have ramifications throughout the economy. Yes, interest rates are still relatively low, but cheap debt does you no good if no one will lend to you.
Part of the problem, I sense, is that the bankers themselves are still trying to figure out the new rules and standards. If you are going for a bank loan, I would suggest you ask right away, "What does it take to qualify for a loan these days?" And make sure your finances are in order. Developing a relationship with a bank is still important, but you are going to need earnings and liquidity.
Back in February I pointed out that despite all the talk of a credit crunch commercial and industrial loans were at an all-time high and increasing. In September I once again pointed to data showing that bank credit continued to be high (even if growth was slowing.) At that time I also discussed how bank loans were not the only source of funds for business investment and that many substitute bridges exist which transform and transmit savings into investment. I suggested that despite the panic the problems which exist in the financial industry may be relatively confined to that industry.
Three economists at the Federal Reserve Bank of Minneapolis, Chari, Christiano and Kehoe, now further support my analysis pointing to Four Myths about the Financial Crisis of 2008.
Mark Thoma (pointing to The Economist) and Felix Salmon disagrees.
In a subsequent post, I commented:
The phrase "credit crunch" needs to be defined. I don't believe that looking at prices and quantities alone can determine if we're in a "credit crunch". Suppose that there are 4 states in the economy: high, low, normal and crisis. And suppose further that we are currently in a crisis state. A "credit crunch" is the gap between the current (crisis) quantities (or prices) and one of the 3 other states. I would be conservative and say that a credit crunch should be defined as the gap between "crisis" and "low-state" quantities and prices. If we are going to be in a recession, is the current quantities/prices lower/higher that they "should" be? Going into a recession, is a business owner that would have qualified for loans in a low-state not currently able to get a loan? This is the measure that I think is more interesting.
I may have been mistaken by looking solely at the business sector, however.
Naked Capitalism looks at international trade volumes:
One of our pet themes in recent weeks is that the fall in trade traffic, indicated and possibly overstated by a dramatic fall in the Baltic Dry Index, is due at least in part to difficulties in arranging and getting other banks to accept buyers' letters of credit. For those new to this topic, international trade depends to a large degree on letters of credit. While they can help finance shipments, an even more fundamental role is that they assure the shipper that he will be paid for the cargo sent. Without banks using letters of credit as the means to send payment to exporters, parties that are new to each other or conduct business with each other infrequently could never trade with each other (one type, a documentary letter of credit, requires that forms, often a very long and elaborate set of them, verifying that the goods have been inspected and certified, that customs, have been cleared and all relevant charges and duties paid, be presented and vetted before payment is released).
More on the Baltic Dry Index is here and here. Some background is here and here.
In any case I thought I'd toss in a few more anecdotes from the latest issue of Inc Magazine.
1. About Nau, an apparel store that went bankrupt (Too much too fast or credit crunch?):
In 2005, half a dozen outdoor-clothing guys got together at Portland's Urban Grinds coffee shop to sketch out their new retailing concept. Times were good, and they were feeling supremely confident. Their big idea was to combine the eco-friendly and mountain-climbing chic of Patagonia with the fashion-forward urban cool of, say, Prada. Not only would their clothes be practical on the trail, but they would look sleek and hip in the city as well. Nau would design its own fabrics with new sorts of eco-friendly materials. Even Nau's retail outlets -- the plan called for 150 of them -- would be constructed from recycled wood and plastic.
The team also decided to funnel 5 percent of sales from each item to dozens of worthy nonprofit organizations that buyers could choose from. The clothes would be pricey, but shoppers could feel good that by buying a $40 T-shirt or a $350 jacket, they would also be doing some good. ...
The company, with its five stores and four more under construction, assumed additional financing would always be around the corner. Then the credit crunch hit. With no recourse to bank financing, the team implored its biggest investors for additional funding. But the investors who had been so generous just a few months earlier clammed up. "Everyone on the board understood we had gotten in too far to turn around and pare this thing down," says Gomez, then board chairman of Nau. The money was gone. The board voted to close down Nau's stores and suspend all business.
2. Norm Brodsky seems to make a lot of sense to me:
... Not so long ago, you could still get what bankers affectionately referred to -- in private -- as an "air-ball loan." That was a loan based not so much on your assets but almost entirely on your relationship and history with the bank. Yes, the bank would glance at your company's earnings and cash flow, just to be sure you could make your payments and weren't about to go bankrupt, but the relationship mattered most.
We needed to borrow $4 million to cover the building costs, ... a week later, the bank president called and said that because we weren't giving a personal guarantee, the bank would lend us the money only if we made a "substantial" deposit, by which he meant an amount equal to 50 percent of the loan. I pointed out that a deposit of that size was hardly necessary from a security standpoint. Our development company had unencumbered assets of $7 million. Once the construction was finished, the value of these assets would rise to more than $16 million. The risk to the bank was minimal. But it turned out that risk wasn't the issue. "In order for us to make loans, we need deposits," he said. "Things are very tough right now."
"In that case," I said, "I think I'd rather give you a personal guarantee." I didn't like the idea of tying up my money in a bank account.
"OK," he said. "I'll run it by the board." Another week went by, and he called me back. "The board would really like to lend you the money," he said, "but we only want to deal with people who are customers."
"Fine; we'll open an account," I said.
"You would still have to make a substantial deposit," he said.
It was June by then, and every day brought news of another troubled bank. The big issue, I realized, was the Telluride bank's solvency, not mine. "Why don't you send me the bank's balance sheet," I said.
"Sure," he said. "But why?"
"The FDIC only insures $100,000 per account," I said. "If I'm going to make the kind of deposit you're asking for, I want to know where my money's going."
When the bank's financials arrived, I showed them to my partner Sam, who has served as the point person in our company's banking relationships. "What would you do?" I asked.
"I wouldn't put more than $100,000 in any bank right now," he said.
I knew he was right. I told the Telluride bank that we weren't going to need its money after all. If necessary, we would do the financing ourselves.
... So what does all this mean? I have no doubt that companies like mine will still be able to secure the bank financing we need -- mainly because we don't need it that badly. I worry about smaller companies that really do need bank financing and may have a hard time getting it. That will have ramifications throughout the economy. Yes, interest rates are still relatively low, but cheap debt does you no good if no one will lend to you.
Part of the problem, I sense, is that the bankers themselves are still trying to figure out the new rules and standards. If you are going for a bank loan, I would suggest you ask right away, "What does it take to qualify for a loan these days?" And make sure your finances are in order. Developing a relationship with a bank is still important, but you are going to need earnings and liquidity.
Monday, November 3, 2008
Verdict on Lehman failure
Look's like the verdict is in. From Economist:
CONFRONTED by blaze after blaze in recent weeks, America’s financial firemen have rushed to douse the flames—with one exception. Unable to persuade any rival to take on a battered Lehman Brothers, the government was left with a hard choice: spray the investment bank with public money or let it burn. In choosing destruction, the government has provided a painful lesson in the dangers of doing the right thing at the wrong time.
In a sense, Lehman’s misfortune was not to have hit trouble earlier. After broking the sale of Bear Stearns, another Wall Street firm, and nationalising the country’s mortgage agencies, officials felt an example needed to be made so as to combat “moral hazard”, or the risk that banks will act recklessly if they know they will be bailed out when their bets sour. Hank Paulson, the treasury secretary, believed Lehman’s problems were sufficiently well advertised to have given derivatives markets time to prepare for the worst.
He was partly right: the credit-default swaps market has buckled but not broken. But Lehman’s bankruptcy shredded the last remnants of confidence in American International Group, an insurer, and crystallised fears over the stability of the remaining free-standing investment banks, Goldman Sachs and Morgan Stanley. Alarm over “counterparty” risk—the risk of a borrower or trading partner failing to cough up—turned into outright terror, paralysing money markets. “It was the mistake of a lifetime,” says one senior bank executive, echoing the view across Wall Street.
What lessons can be taken from this for future financial crisis?
1. Make clear from the outset which institutions will be saved and which won't. The price of uncertainty is more uncertainty and the cost of uncertainty can be higher than a bailout. Thus, it is sounding like the government needs to either make it clear from the start that it is all or nothing. All will be saved or no one. The latter is unlikely due to systemic risks. Case by case treatment only increases uncertainty - plus the process is very non-transparent.
2. No institution is too small to fail. Interlinkages can be disastrous so perhaps the prudent thing to do is to save them all.
3. Moral hazard can still be averted by nationalization.
CONFRONTED by blaze after blaze in recent weeks, America’s financial firemen have rushed to douse the flames—with one exception. Unable to persuade any rival to take on a battered Lehman Brothers, the government was left with a hard choice: spray the investment bank with public money or let it burn. In choosing destruction, the government has provided a painful lesson in the dangers of doing the right thing at the wrong time.
In a sense, Lehman’s misfortune was not to have hit trouble earlier. After broking the sale of Bear Stearns, another Wall Street firm, and nationalising the country’s mortgage agencies, officials felt an example needed to be made so as to combat “moral hazard”, or the risk that banks will act recklessly if they know they will be bailed out when their bets sour. Hank Paulson, the treasury secretary, believed Lehman’s problems were sufficiently well advertised to have given derivatives markets time to prepare for the worst.
He was partly right: the credit-default swaps market has buckled but not broken. But Lehman’s bankruptcy shredded the last remnants of confidence in American International Group, an insurer, and crystallised fears over the stability of the remaining free-standing investment banks, Goldman Sachs and Morgan Stanley. Alarm over “counterparty” risk—the risk of a borrower or trading partner failing to cough up—turned into outright terror, paralysing money markets. “It was the mistake of a lifetime,” says one senior bank executive, echoing the view across Wall Street.
What lessons can be taken from this for future financial crisis?
1. Make clear from the outset which institutions will be saved and which won't. The price of uncertainty is more uncertainty and the cost of uncertainty can be higher than a bailout. Thus, it is sounding like the government needs to either make it clear from the start that it is all or nothing. All will be saved or no one. The latter is unlikely due to systemic risks. Case by case treatment only increases uncertainty - plus the process is very non-transparent.
2. No institution is too small to fail. Interlinkages can be disastrous so perhaps the prudent thing to do is to save them all.
3. Moral hazard can still be averted by nationalization.
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