If you, like me, were wondering what was going on behind the scenes when GM and Chrysler were fighting for their lives, we now have one insider's account. The government's "car czar" Steven Rattner tells his story in Fortune magazine.
Rattner has harsh words for both companies.
At GM's Renaissance Center headquarters, the top brass were sequestered on the uppermost floor, behind locked and guarded glass doors. Executives housed on that floor had elevator cards that allowed them to descend to their private garage without stopping at any of the intervening floors (no mixing with the drones).
Got this note and the chart above from Carl B. Weinberg of High Frequency Economics. Weinberg writes about the shrinking of credit in the eurozone and Britain:
Analysis of money and credit growth over centuries has taught economists the following lesson: No economy has ever grown without an accommodating increase in money and credit. One does not have to be an economist to see this contraction of money and credit as an unambiguous signal that these economies must contract, probably in a deflationary environment.
Weinberg, a decided bear, predicts we'll see the effects of shrinking credit by the end of this year. He continues:
We have already seen a retraction of bank lending to households wreak havoc with consumers' expenditures -- particularly expenditures on consumer durables, autos and homes. Households are increasing their savings rates -- paying down credit, or simply not borrowing more -- and this has caused a major economic contraction. Call this the first leg of what we now expect will be a much bigger global economic downturn. We fear that companies will fail for lack of credit to finance inventories -- which remain too high relative to sales anyway -- working capital to fill orders and trade. A new round of layoffs will ensue. These failures and job losses will permanently damage the economy.
A year after the start of the financial crisis, economists are starting to write their histories of what went wrong. And they're not all converging on the same plot points.
The other week, Luigi Zingales and John Cochrane from the University of Chicago challenged the familiar storyline that things really came unglued after the government let Lehman Brothers fail.
Zingales and Cochrane looked at some data (basically one of our favorite indicators, the Ted Spread) and argue the dramatic market freak out happened not after Lehman, but later, when Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson opened their mouths. Zingales and Cochrane write in the Wall Street Journal:
In effect, these speeches amounted to "The financial system is about to collapse. We can't tell you why. We need $700 billion. We can't tell you what we're going to do with it." That's a pretty good way to start a financial crisis.
I made some calls to look into their claim. Mark Gertler at NYU, who has worked with Bernanke, wasn't buying it. He told me:
Glen Pizzolorusso at the wheel of his Range Rover, one of five cars he owned before the subprime mortgage market went bust. (Courtesy of Glenn Pizzolorusso)
[Ed: We're bumping this post up for the folks coming in from This American Life. Also, for the dialog with its author that has broken out in the comments.]
Glen Pizzolorusso got his start in the mortgage industry in his father's company, at age 14. Still in his 20s, by 2007 he'd worked his way up to running his own sales team, making $100,000 a month and helping to inflate the bubble that became the current global economic crisis. When that bubble burst, he told us the story for This American Life's Giant Pool of Money episode.
Here, Pizzolorusso writes about the difference between his old definition of success and his new one.
I see a Porsche convertible drive by, sky blue, tan leather interior, gorgeous, and immediately a feeling of envy comes over me. I think that's a natural feeling, but I can't help wondering what is the motivation behind the purchase of such an expensive piece of machinery. Is it a burning desire to own the pinnacle of German automobile engineering? Is it a love for speed, wind blowing in your face, freed from the perils of Corporate America? Or is it a symbol of success, a long career, countless promotions, 60-hour workweeks, a remedy for the stress that accompanies such dedication?
For me, it was all of the above. After seven long years of 60+ hours a week in the subprime mortgage industry, I had achieved what I had set out to accomplish: success.
"Economists may not be any better at making decisions about their field than the general public is at choosing which detergent to buy." (Pigstub / Flicker Creative Commons)
During this first anniversary month of the financial crisis, we're running guestpostsfrom economists about what they've learned in a miserable year. Today David Garman, who teaches econometrics at Tufts, explores the ways his own thinking has changed -- and hasn't -- and explores how hard it is to know whom to trust.
The financial crisis has had relatively little impact on my views about economists' models of macroeconomics or financial markets. Ironically, this is because my views have been little influenced by some of the most highly lauded economists of the last 30 years. Since I do not specialize in macroeconomics and have not taught it in many years, it has been easy for me to watch the evolution of the field with skepticism. The crisis has had a significant impact on my views about the ways that economists and policy makers decide which models and which analysts to believe.
Since the Great Depression, economists have produced many models of macroeconomies and financial markets. Some of these models produce contradictory conclusions.
On this first anniversary of the financial crisis, we're running guestposts from economists about what they've learned in a miserable year. Today Simon Johnson, who teaches at MIT's Sloan School of Management, writes about how economics has changed in his classroom.
I used to think of research and teaching as largely disconnected activities. Certainly there were spillovers in both directions, but my MIT MBA students were mostly interested in hands-on issues pertaining to entrepreneurial start-ups and company operations around the world, and my 20 years of research on economic crises often seemed somewhat distant from their concerns (except, perhaps, for students from Argentina, Russia or other emerging markets).
After staring in the face of global financial collapse, and narrowly avoiding a Second Great Depression in the United States over the past 12 months, all this has changed.
Today we heard from economics professors Atif Mian and Amir Sufi about what they've learned in the financial crisis.
Economics professor Ascension Mejorado of New York University also recently considered for us how the financial crisis would change the way the discipline is taught. Mejorado's answer? Not much. She writes:
Textbooks are not implementing any substantial changes in response to the current crisis. Those authors who want to address this problem just introduce a section in the chapter on money and banking or in the chapter on the business cycle. But, unfortunately, they still see it as a problem "of people," not as a problem "of the system." To understand what is going on they should have to change their approach and rescue the ideas of the classical authors, from Smith to Marx. Of course, they are never going to do that and neoclassical economics will just see this crisis as a blip in the growth path of the system. Some are even saying that we are almost out of the crisis... and Bernanke's last testimony before Congress is fueling this idea too.
During this first anniversary month of the economic crisis, Planet Money will feature economists talking about what they've learned from a miserable year. First up: Atif Mian and Amir Sufi, who teach at the Chicago Booth School of Business.
The dramatic collapse of financial markets in the fall of 2008 captivated the world's attention and sent the stock market reeling. But the collapse of financial markets was a symptom of a more troubling underlying condition: U.S. households dramatically increased their leverage, or debt, from 2001 to 2007. Our research suggests that the historic growth in household debt preceding the financial crisis was the primary driver of the onset and deepening of the current recession.
The central lesson we as economists have learned from the crisis is that an unsustainable increase in household debt is one of the most serious threats to the U.S. economy. Going forward, policy-makers, regulators and researchers must recognize the central role of household financial health in causing economic turbulence if we are to avoid repeating this painful episode. This is not the first time excessive household leverage preceded a severe economic downturn, and the effect of household debt on the economy is not unique to the United States.
Our own research emphasizes three lessons from the recent U.S. household leverage crisis:
The S&P 500 has begun bouncing back, but it's still far below its level at the start of the recession. (Click to enlarge.) (Robert Benincas and David Wright / NPR)
That leaves a lot of financial wreckage to sort through. NPR's Robert Benincasa and David Wright have charted key categories -- including the look, above, at the S&P 500.
The Cleveland Fed is trying their hand at breaking down economics for "people who aren't policy wonks." In this video, a researcher breaks down the 4 C's of systemic risk: contagion, correlation, concentration and context and then proposes a three tiered system for regulating these types of financial institutions (that part comes in at 5:58). It's a pretty good explanation although I did find the technique somewhat familiar.
The Census Bureau and the Commerce Department report today that inventories fell by 1.1 percent in June, a little less than the 1.2 percent drop in May and .2 more than economists expected. Inventories are down 9.8 percent from June 2008, as manufacturers and wholesalers stop stockpiling goods for customers who aren't showing up.
Sales rose .9 percent after being flat in May -- that's down 18 percent from a year ago.
The Congressional Oversight Panel is warning that federal efforts to help struggling banks aren't doing enough to help smaller institutions. The panel, chaired by Elizabeth Warren, homed in on what it sees as shortcomings in the Public-Private Investment Plan, or PPIP.
Designed to encourage investment in the toxic mortgage-backed securities that fueled the current financial crisis, PPIP has been scaled back from $100 billion to $30 billion. Warren and COP argue in their August analysis that PIPP doesn't reach far enough. Calculated Risk pulled this part of the report:
The problem of troubled assets is especially serious for the balance sheets of small banks. Small banks' troubled assets are generally whole loans, but Treasury's main program for removing troubled assets from banks' balance sheets, the PPIP will at present address only troubled mortgage securities and not whole loans. The problem is compounded by the fact that banks smaller than those subjected to stress tests also hold greater concentrations of commercial real estate loans, which pose a potential threat of high defaults. Moreover, small banks have more difficulty accessing the capital markets than larger banks. Despite these difficulties, the adequacy of small banks' capital buffers has not been evaluated under the stress tests.
Some people look back at the start of the crisis and wonder how things would have played out if the government had decided to save Lehman Brothers. Lehman's failure fed a chain reaction that essentially froze the credit markets.
So why didn't Treasury save Lehman? Then Secretary Henry Paulson has said the government tried to broker a deal but couldn't, and was worried that another bailout would present a real moral hazard, encouraging even riskier behavior down the road.
Lawrence McDonald, a vice president at Lehman, has a different take. McDonald has a new book out which lays the blame at the foot of a handful of Lehman executives, particularly CEO Richard Fuld.
McDonald, on Morning Edition today, described a meeting between Fuld and Treasury Secretary Henry Paulson in the spring of 2008.
Mr. Fuld said something along the lines to the Treasury secretary: He said 'You know I've been in my seat a lot longer than you were in yours at Goldman Sachs, Don't tell me how to do things. I'll do things at my speed.' And I think right there, Lehman's fate might have been sealed.
In our efforts to understand what went wrong at the credit rating agencies, we visited Frank Raiter. He worked at Standard and Poors but is now far from Wall Street, happily clearing land for a farm in rural Virginia and caring for a turtle in his office.
Raiter has been critical of his former employer, who he says rejected his requests to get better data and build better models. S&P disputes that.
In the interest of letting you all make up your minds, here's a link to video of an interview and lecture Frank Raiter gave at Cornell University.
And here's part of a response S&P gave to Congress after Raiter testified on Capitol Hill.
As we understand it, Mr. Raiter's claim is that S&P refused for commercial reasons to adopt an allegedly superior "new" model to analyze the credit risk of mortgage loans underlying certain RMBS transactions. The allegation is baseless.
I'd almost forgotten, but before President Obama's $787 billion stimulus package, President Bush signed a stimulus package called the Economic Stimulus Act. It contained roughly $95 billion in tax rebates that went out last spring. (This was a huge economic experiment: the package was more than twice as large as the $35 billion in rebates that went out in 2001.)
Ever since then economists have been trying to figure out how well it worked.
The Congressional Budget Office just posted this analysis.
And I'm afraid the answer is that we may never know.
As the graph above illustrates, our economy is so large that it's hard to detect whether $95 billion in rebates really spurred people to spend more.
The Federal Reserve may ease up on its buying of U.S. Treasury notes and bonds, reports the Wall Street Journal (subs. requ'd.). Buying Treasurys has been a key part of its plan to get cash to financial institutions, stimulate lending and drive down the interest rate. The paper says Fed officials think the economy has begun to stabilize, so it can back off the buying.
After the jump, an actual slideshow of charts about Treasury notes -- and more.
If you took out a mortgage in 2007, there's an over 20 percent chance you'll default on it.
At least that's according to the number-crunchers at the the Federal Housing Administration. Their data comes from the Mutual Mortgage Insurance Fund -- the FHA fund that insures mortgages on homes for one to four families. Their report shows the percentage of mortgages that have defaulted over their loan lifetime, and how they expect the default rate to continue in the future, based on the year they were taken out.
Even after the 10 big banks pay back their bailout money and exit TARP, say analysts, the Treasury stands to make as much as $4.6 billion on the $68.3 billion it loaned them. In exchange for the loans, the Treasury got warrants giving it the option to buy a bank's shares at a set (read: discounted) price until 2018 -- a situation most banks don't like.
Treasury Department just sent out this statement saying that 10 of the largest financial institutions have been cleared to repay their bailout money, totaling as much as $68 billion.
In addition to Treasury's potential income from sale of the warrants, these 10 institutions have already paid dividends on the preferred stock totaling approximately $1.8 billion over the last seven months. Dividend payments received for all CPP participants are approximately $4.5 billion to date.
(CPP is the capital purchase plan, where the government bought preferred shares in over 600 banks, totaling $199 billion.)
There are plenty of other places for the taxpayers to lose money, with the auto companies, for instance, or through the programs administered through the Federal Reserve Bank.
As we mentioned over the weekend on This American Life, the credit rating agencies at the center of the financial crisis have been around for something like a century. The folks at Standard and Poors pulled the tome in the photo above from their library for us. Back in the day the rating agencies published these phone book sized things on a regular basis for investors. (The binding on this one read "Feb-June 1942 VOLUME 1".)
I had a fascinating lunch and interview with economist Ariell Reshef. The interview will be on the podcast next week, but I thought some folks might enjoy reading his paper (feel free to skip the Greek-letter math formulas) that, he says, shows actual mathematical evidence that Wall Street folks really do make too much money.
OK, OK, I know that most of you don't need any proof. You're already convinced.
But Reshef is an academic. He can't just say he's convinced. He has to show the proof.
There seems to be a battle brewing between Rep. Barney Frank (D-MA) and Rep. Collin Peterson (D-MN) over who gets to rule over derivatives.
Barney Frank, of course, runs the House Financial Services Committee. He is looking to fundamentally overhaul financial market regulation. We keep hearing that he wants to have ALL financial market regulation under his committee's umbrella. Which makes some sense: one system, one unified approach.
But then there's Collin Peterson. He runs the Committee on Agriculture. His most famous contribution is the controversial, much loathed and much loved (depending on your zip code) Farm Bill. Peterson wants derivatives to fall under his committee.
What do financial derivatives have to do with agriculture? And why are these two Dems fighting?
I love this video, showing how much $100 million is compared to the US government budget. BTW, it's roughly comparable to how much those AIG bonuses are compared to the size of the economic crisis.
"It's as easy as AIG," is the slogan for AIG's Delaware-based savings and loan bank. Compared to AIG's huge insurance operations, the bank is tiny, but it was key in getting AIG assigned to its chosen regulator -- the Office of Thrift Supervision.
The Office of Thrift Supervision is a federal regulator that specializes in savings and loans. As we learned in our regulatory arbitrage show, federal regulators market themselves to institutions. For AIG, the OTS was an easy pick because they offered two key bonuses:
1. regulation of its holding company
2. international regulation
We've been saying for weeks that these bank stress tests are a bit of a ... I don't want to say "joke." Let's just say that we've expressed the view that not many investors or folks on Wall Street take them all that seriously. We knew, in the beginning, that they aren't pass/fail, which we took to mean they are a bit of a whitewash.
I don't know what to think of them now. I do know that we'll find out soon how "the market" (that final judge, it seems) views them. And it should be clear, pretty soon, if we were wrong in saying these things are irrelevant.
Felix Salmon once told me that what he loves about blogging is that you get to find out very quickly how wrong you are. I'm trying to join him in feeling all excited about that.
Today we had the amazing Nassim Taleb in for what I'm hoping will be the bulk of the Wednesday podcast. What can I tell you now? He takes milk with his tea, but he puts the milk in after the water. And he says inflation is coming, maybe even hyperinflation.
Hyperinflation is scary, but so is the specter of no inflation (or even deflation, where wages and prices go into a sustained fall). In the graph above, Alan Cordova tracked the difference in yields for Treasury bills of varying lengths. That "spread" shows how much higher a return investors demanded -- and Treasury provided -- on loans lasting longer than a month. For an investor, the risk of Treasuries has mainly to do with inflation. That is, you're generally not worried that the government won't pay you back, but rather that inflation will spike and the $100 you put in for won't buy as much as you expected when you finally get it.
The picture you're seeing here shows that investors expected inflation to fall back around 2006 and 2007, but now they're expecting inflation to rise, and not by a frightening amount. By demanding a somewhat higher yield on a one-year Treasury bond, for instance, they're just trying to build in a meaningful profit.
After the jump, two trading days -- one weird, one normal.
Just catching up to a great take on banks' balance sheet problems from Calculated Risk.
They take the next step with our simplified chart of a balance sheet, making room for toxic legacy assets on the left. And then there are the question marks:
These "??????" assets are either future retained earnings or additional money from the government. Although the bank is balance sheet insolvent, the bank will never be business insolvent because the government will continue to provide money to cover losses.
What Treasury Secretary Geithner is doing right now "is known as the 'Zombie' bank approach," the site says. And maybe that's okay, Calculated Risk argues, provided enough healthy banks remain to pull the economy along. But with Citigroup and Bank of America comprising 40 percent of the U.S. bank system, the zombie scenario is not so comfortable.
Man, I do not envy whoever gets the job of regulating systemic risk. This chart is from the IMF's just released Global Financial Stability Report and it's an attempt to show (yes, those numbers mean something) how all these institutions were linked by credit default swaps.
Bonus: The story includes gem of a quote from Federal Reserve Chairman Alan Greenspan about the concept of "too big to fail."
"I always took the position when I ended up on the Hill that Fannie and Freddie were not too big to fail. Needless to say, my fingers were crossed behind my back."
You may have noticed that in its story this morning about a possible "surgical" bankruptcy for GM, the NYT reported that this surgery wouldn't come for free.
The U.S. government might have to loan the automaker as much as $77 billion. That's right. GM has gotten $13.4 billion so far, but bankruptcy could require much more aid.
The additional loans are called "bridge loans" or Debtor In Posession (DIP) loans. And the idea is that the company, even in bankruptcy, needs extra gas in the tank so it can keep going long enough to become profitable again.
I just had a conversation with Jack Williams, the resident scholar at the American Bankruptcy Institute, and a professor at Georgia State University. Here's a quick Q&A.
Credit card borrowing hit the skids in February as Americans stopped borrowing. Overall, consumer borrowing fell out by an annualized rate of 3.5 percent. But the credit cards led the way at 9.7 percent.
In the chart above, the line for household debt includes mortgages, student loans, car loans and credit cards.
Check out the closer look with a chart of borrowing by quarter, after the jump. That federal line -- wow.
I've heard it said many times that the U.S. had basically stopped making mortgage-backed securities. But I'd never actually seen the data. That chart there is one reason there is less money available for mortgages.
Our podcast on the savings rate drew a lot of comments. I promise you we will get back to Social Security and Medicare in much more detail. (See recent bad news here and this grim chart.) But putting that and the intergenerational warfare aside, one of you asked about Kent Smetters' assumption that the savings rate should naturally adjust to an appropriate level.
I've been puzzling over that too. Since it seems to contradict the Keynesian "paradox of thrift" argument that by saving and not spending, we can send the economy into a downward spiral.
I emailed Steve Fazzari, a self described "radical Keynesian" who explained things this way:
The Financial Accounting Standards Board is going to vote tomorrow on changes to the so-called "mark-to-market" accounting rule.
Don't get me wrong. It's a big deal. It could dramatically change the balance sheets of some banks, because they could value their assets at a price other than what they could sell them for today.
But the discussion about the rule is driving me crazy. Everyone is speaking in shorthand that makes the rule seem totally insane.
Harvard professor Lucian Bebchuk is proposing a fix for Treasury Secretary Timothy Geithner's plan to deal with toxic assets. In today's Washington Post, Bebchuk argues that the government needs to do more to make private investors compete to take part in the program. He writes:
If the private side were to contribute only 8 percent of the capital, the government should seek to keep the highest fraction of the upside that would be consistent with inducing such participation. To this end, potential private managers would submit bids indicating the minimum share of the fund's upside that each manager would be willing to accept for an 8 percent investment, as well as the size of the fund that the manager would establish if accepted into the program. Treasury officials should then set the share of the upside going to the private side in each of the funds under the program at the lowest level consistent with establishing funds that collectively have the aggregate target capital.
If you're living in the swath of America from Texas up through the Dakotas, maybe you're seeing the world the way New Geography's Joel Kotkin is. He writes:
[O]nce you get away from the coasts -- where unemployment is skyrocketing and economies collapsing -- you enter what may be best to call the zone of sanity.
The zone starts somewhere in Texas and goes through much of the Great Plains all the way to the Mexican border. It covers a vast region where unemployment is relatively low, foreclosures still rare and much of the economy centers on the production of basic goods like foodstuffs, specialized equipment and energy.
Kotkin pinpoints Kansas City as the new center of paradise, calling it a place where the housing bubble scarcely happened and social stability rules.
Down 2 percent from January to February Margaret Kempner/Brown Brothers Harriman
The New York Stock Exchange just delivered the latest figure for one alternate economic indicator, margin debt at the New York Stock Exchange. This figure tracks how much money people are borrowing to buy stock -- a figure that has been in rapid decline.
Currency analyst Marc Chandler of Brown Brothers Harriman tells us he has been watching for signs across the economy that investors -- individual or corporate -- are getting rid of debt, or deleveraging.
As you can see in the graph, margin debt plunged quickly at the start of the economic crisis. It fell 22 percent from September to October 2008. But from January to February, we saw a decline of 2 percent.
In our conversation about who we should blame for the global financial crisis, quite a few of you have pointed the finger at the repeal of the Glass-Steagall Act, which separated commercial banks from securities firms. Listener Elise Schuster points us to this New York Times article from 1999 recently reposted by BoingBoing. The title of the article is "Congress Passes Wide-Ranging Bill Easing Bank Laws." It reads:
...Consumer groups and civil rights advocates criticized the legislation for being a sop to the nation's biggest financial institutions. They say that it fails to protect the privacy interests of consumers and community lending standards for the disadvantaged and that it will create more problems than it solves.
The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.
I've been learning a lot about the Federal Deposit Insurance Corporation lately. That's the agency that insures our bank deposits and takes over our failed banks. I've spent time with some of the 600 new staff they are hiring, and we working away at another This American Life/Planet Money collaboration that looks at what actually happens when the FDIC takes over a failed bank.
Still, no matter how much time I spend learning about this stuff, I am taken aback every time Friday rolls around and a few more banks fail. Yes, at least one bank fails almost every week in our country right now. Last Friday there were 3 banks and 2 credit unions. (Read a strange story about one of those credit unions here.) We are now at 20 failures since the start of 2009.
By now we're pretty familiar with the concept of securitized debt, particularly mortgages that were packaged and sold as investments. These, of course, became problematic when the housing bubble burst, mortgage defaults spread, and mortgage-backed securities imploded.
But what about other types of consumer debt that are wrapped up with a bow and traded on the market? Could securitized credit card debt be the next crisis in the making?
U.S. consumer revolving credit debt (including credit cards) has risen 20 percent in the past five years from $799.8 billion in 2004 to $960.4 billion in 2008 according to the Federal Reserve. Preliminary numbers for January 2009 show that figure continued to grow to $961.3 billion.
WHAT: The Treasury's plan to buy toxic assets from bank, help the banks and open up credit markets. The goal here is to lure investors into partnering with the government and buying up to $1 trillion in toxic assets.
THE PROBLEM: The banks have all these toxic assets they want to get rid. The banks don't want to sell those assets at fire sale prices. Fire sale prices are all that anyone is willing to pay at the moment. So the banks continue to face billion dollar losses and the toxic waste continues to mess up the flow of credit.
WHO: This plan would use the resources of the Treasury, the Federal Reserve and the FDIC (the agency that insures our bank deposits) to make this appeal to investors: help us take us buy these toxic assets and we'll meet you more than halfway. We will match your investment and then we will offer you a cheap loan. Then we will guarantee that loan.
The government hopes with these subsidies private investors will love buying up toxic assets.
Stocks are surging today after the Treasury Department's announcement of a new plan to get rid of toxic assets from the banks' balance sheets. But as an article in Bloomberg this morning noted -- stocks may be up, but the bond markets are still depressed.
The average spread between U.S. Treasuries and U.S. financial corporate bond yields was 8.55 percentage points at the end of last week. They reached a record high of 8.81 percent earlier this month (according to the Merrill Lynch U.S. Financial Corporates Index.) This spread is a good indicator of risk aversion, in normal times the spread between Treasuries and investment grade corporate bonds is less than one percent.
Economist Brad DeLong from University of California at Berkeley has a helpful Q&A about the new Treasury plan up on his blog Grasping Reality with Both Hands. DeLong's take is that the plan is a good start, but that more work is needed. He writes:
...Our guess is that we would need to take $4 trillion out of the market and off the supply that private financial intermediaries must hold in order to move financial asset prices to where they need to be in order to unfreeze credit markets, and make it profitable for those businesses that should be hiring and expanding to actually hire and expand.
Q: Oh.
A: But all is not lost. This plan consumes $150 billion of second-tranche TARP money and leverages it to take $1 trillion in risky assets off the private sector's books. And the Federal Reserve is taking an additional $1 trillion of risky debt off the private sector's books and replacing it with cash through its program of quantitative easing. And there is the fiscal boost program. And there is a potential second-round stimulus in September. And there is still $200 billion more left in the TARP to be used in other ways.
We've gotten a lot of questions from you about toxic assets. What does a toxic asset look like? How many there are? And of course: When oh when will they go away?
What does one look like? Here is the documentation for a residential mortgage backed security. It's 402 pages long. This one contains 4,921 mortgage loans, which had a value of $1.18 billion. Here's an evaluation of how this particular asset is doing.
How many are going bad? Here's a table showing what rating S&P (one of the three major rating agencies) gave some of these things initially, and how much the ratings have fallen. This report summarizes the state of affairs. About 40% have been downgraded.
I wish there were an online translator for Fedspeak to English, but until that great day we'll do our best. Here's an explainer for what the Federal Reserve announced yesterday.
Q: What is the Fed doing?
Basically it's going to increase the amount of money out there by a trillion dollars.
Q: How the heck do you do that?
The Fed has the power to create money essentially out of thin air. It does this by buying things (typically treasury bonds) from the market. So the Fed takes the bond, pays for it with money. Voila, the money supply has grown.
The Federal Reserve's decision to buy $1 trillion in Treasury bonds and mortgage securities comes at what's called the Zero Bound. The Fed has already lowered its key interest to nearly zero, and now it has to find new ways to get money into the economy to get it moving again.
Looking around for more information on the zero bound, I came across this 2004 paper "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment" written by none other than Federal Reserve Chairman Ben Bernanke. (It's nice to know he's been studying it.) The paper can be a bit dense at times, but it does provide a good analysis of "quantitative easing."
After writing my post yesterday, I thought of a simpler way to put things:
Until this crisis passes, can we, as a nation, please just agree that Congress, the President and the Treasury Secretary are too busy to waste their time on any problem worth less than, say, $10 billion?
I wanted to put the cutoff at $100 billion, but I do think it's appropriate for those folks to deal with the bailouts of Citi and Bank of America, which are not that high.
But, clearly, with any problem less than $10 billion, the President, members of Congress, and Geithner could say something like this:
I've reported some tough stories, but this one is really, really hard to get right. Not emotionally. I'm as mad as everyone at these stupid bonuses, but I've been more upset about worse things that I've seen.
It's hard because I think the best perspective is a bit subtle, a bit nuanced, and I don't think there is much acceptance of that now.
I was in Iraq in May and June of 2003. To us reporters on the ground, it was clear the occupation was a full-on disaster, but word hadn't leaked out to the U.S. yet. When I came home on vacation, my friends -- even my lefty, anti-war friends -- were convinced that the occupation was going well. (Nobody believes me these days, but I swear it's true. You probably thought things were going well then.)
I've studied quantum mechanics. I'm fine with subatomic particles being in multiple places at once. The warping of space-time? Extra dimensions? I'm cool with all that.
But financial accounting? Boy, some strange stuff in there, as I was reminded of yesterday.
The moves in financial markets can be impossible to figure out. Today, Citigroup was the hero of the stock market, jumping 35 percent, and it helped the Standard and Poor's 500-stock index shoot six percent higher.
And the reason: Citigroup said it was profitable for the first two months of the year. Businesses should be profitable -- right? For Citigroup, this is the first positive piece of news about profits since 2007. It has reported losses for the past five quarters in a row and recently was being talked about as a candidate for nationalization.
Last October, as credit markets reeled from the bankruptcies of Lehman Brothers and Washington Mutual, the government takeover of AIG and the eleventh-hour acquisition of Merrill Lynch by Bank of America, new data shows that record amounts poured into the U.S. Treasury. The cash came from government and private sources overseas, all seeking to snap up Treasury notes, or T-bills. They spent some $147 billion as the U.S. rushed to finance the bailouts.
We are starting to think about our next big project for NPR and This American Life.
We might do something on who is to blame for the current crisis and we'd like your help.
For many, the answer is obvious. The problem is that there are lots of folks with different obvious answers.
Right now, I'd like to get some input: who do you blame and why?
Here's a list of the people and institutions I hear most often. Please note: I am NOT saying this is my list of who I think should be blamed or that I agree with all of the reasoning. This is just a list of what I hear from others. Some, I think, are probably certainly to blame, others that I've listed are almost certainly not.
A quick outtake from our podcast interview with economist Howard Rosen:
"Today we learned that there are 12.5 million people who are unemployed, and we have another 8.6 million people who are working part-time because they cannot find full-time jobs. Now, you're talking about 20 million people in this country who are either unemployed or underemployed. I don't want to freak out people, but the unemployed number, we start talking about 15, 16 percent."
Rosen notes that the government typically revises unemployment figures. For now, the broadest measure of unemployment stands at 14.8 percent.
race to the top = race to the bottom data source: Bloomberg
Simon Johnson of MIT sent me this chart last night. It shows the price you have to pay if you want insurance against, say, Citigroup defaulting on a bond you might own.
The higher the price, the worse shape the market thinks that company is in.
Almost one in every eight U.S. homeowners is now late on the mortgage or actively in foreclosure, reports the Mortgage Bankers Association.
Economist and Planet Money guest Amir Sufi noticed the news and sent us an e-mail with the subject line "Scary." He writes:
"[T]his financial and economic crisis begins and ends with the U.S. housing market. The data from the Mortgage Bankers Association suggests we're still in big trouble.
Click to enlarge: Components of Gross Domestic production Alan Cordova/NPR
On Friday, the Bureau of Economic Analysisannounced
a sharp decline in real gross domestic product -- the sum of all goods and services sold in the United States, adjusted for inflation.
The BEA's big number was -6.2 percent, which is the amount the U.S. economy would have declined if it had sustained four quarters identical to the last one. Annualized percentage rates are a standard convention in finance; even when they describe a period of time other than a full year, economists and bankers prefer knowing that all percentage rates express annual projections.
GDP is calculated by adding four numbers: (1) consumption, (2) gross investment, (3) government spending and (4) net exports.
Margin Debt at the NYSE courtesy of Margaret Kempner at Brown Brothers Harriman
If you think of the current economic crisis as the result of people and businesses borrowing too much, then you can think of the cure as getting rid of that debt. That's the view from Marc Chandler, currency strategist at Brown Brothers Harriman.
I felt sorry, at a personal level, for our Treasury Secretary, a very smart man imprisoned in a series of talking points, desperately afraid of the consequences of holding an honest conversation.
and
Mr. Geither's unspoken assumption is that fixing our financial system implies ensuring that incumbent troubled financial institutions are "strong". But that's not right. Our financial system is composed, in part, of financial institutions, but it is supposed to be larger and more robust than any specific firm.
This chart tracks the relationship between household debt and gross domestic product. You'll see two years when Americans' debt becomes 100 percent of GDP -- 1929 and 2007. It's the chart that made Columbia professor David Beim say:
"The problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us... We've been living very high on the hog. Our living standard has been rising dramatically in the last 25 years. And we have been borrowing much of the money to make that prosperity happen."
People are debating whether Treasury Secretary Tim Geithner delivered fluff or substance in yesterday's interview with Adam Davidson. Simon Johnson, former chief economist of the IMF and a Planet Money regular, heard this:
The bottom line is that the government will support the credit system a great deal and in many innovative ways, but Treasury will try really hard to avoid FDIC-type takeovers/reprivatizations of large banks. This is quite striking, and presumably the hope is that a big "no nationalization" rally in the price of banks' common equity will turn the tide more generally.
The U.S. government has released more information about the stress tests it'll be preforming on the banking system in the coming weeks. The tests will measure a bank's situation against a pair of economic scenarios for the end of 2010 -- "baseline" and "more adverse" -- to see whether it can survive.
In the baseline scenario, the economy is growing at 2.1 percent, unemployment's at 8.8 percent, and housing prices have fallen 4 percent from the end of 2009. In the adverse scenario, those numbers are .5, 10.3 and -7.
Our friends over at Baseline Scenario have posted another one of their helpful beginners guides, this one deals with a proposed plan to convert taxpayers' holdings in Citigroup from preferred to common stock. The plan is aimed at helping Citi boost its tangible common equity, the value of its common shares. From Baseline Scenario:
Citi wouldn't actually get any new cash from the government, but it would be relieved some of the dividend payments (currently close to $3 billion per year), and of the obligation to buy back the shares in five years. This is a real benefit to the bank's bottom line, and hence to the common shareholders. At the same time, though, Citi would issue new common shares to the government, diluting the existing common shareholders (meaning that they now own a smaller percentage of the bank than before). In theory, the amount by which the shareholders in aggregate are better off should balance the amount of dilution to the existing shareholders.
The government starts its stress tests of the banks this week and some expect TCE to play an important role.
Earlier this week, budget carrier JetBlue announced that anyone who loses a job would be allowed to cancel their reservation without penalty. Based on the British carrier Flybe's "redundancy insurance," the program is schedule to run through June 1.
I had a fascinating talk with a government official who will, sadly, have to go unnamed and undescribed.
I wanted to know if the rumors are true and many in government see nationalization of the banks as an inevitability; that several large banks are, basically, insolvent. If the government shuts them down, there is no other bank big enough to buy them all. So, the government has no choice but to own them.
This is, of course, a huge topic in the news. It's a massive transformation of the U.S. government's role in private markets. In short, it's the kind of thing that someone like me--a business reporter--would like to hear a loud, healthy debate about.
Amir Sufi, an economist at the University of Chicago Booth School of Business, sent some quick thoughts about President Obama's new plan for helping homeowners avoid foreclosure. We're aiming to talk to him more this week, for the podcast. For now, he writes:
The primary focus of the plan is to bring down interest payments on mortgages, but the plan does nothing to help reduce mortgage principal. As a result, the Obama administration is relying heavily on the notion that households will continue to pay their mortgage if they have a lower interest payment, even if the value of their home is less than the value of the property. I fear that it won't work.
Have you been hearing this idea, from President Obama and others, that Sweden is the model to follow (not exactly what Obama said, but others have)?
I just had a great conversation with Leif Pagrotsky. He's a Swedish politician who was in government when they had their banking crisis. He wrote a great note on how Sweden's experience is not that close to ours.
Some highlights from the talk (which will come to you in the podcast soon):
A senior official (that's how reporters were instructed to refer to the person) at Treasury last week described the public-private partnership idea for buying up the toxic assets as an "intellectual breakthrough."
That view doesn't seem to be widely shared on Wall Street, especially since Treasury hasn't given any details. But I can see part of the appeal.
NPR's numbers guru Robert Benincasa sends this post:
A new briefing paper gives lawmakers yet more tools for solving the financial crisis -- or maybe for endless arguing and limited action. The 10-page report, from the Congressional Research Service, offers a handy list of 26 causes. Each cause comes in a neat one-paragraph thumbnail and includes a punchy counter-argument.
On the housing bubble: "The crisis was triggered by the bubble bursting, as it was bound to do."
Counter-argument: "It is difficult to identify a bubble until it bursts, and Fed actions to suppress the bubble may do more damage to the economy than waiting and responding to the effects of the bubble bursting."
After the jump, argument and counter-argument on "Black Swan Theory."
Earlier this month, the Council on Foundations released a report detailing the impact of the financial crisis on independent philanthropies. Overall asset values declined by 28 percent.
Another chart, about shifting targets, after the jump.
There's a lot of complaining about how the banks have gotten billions of dollars in taxpayer aid, but lending is still sluggish. People want to know what exactly the banks are doing with all that money.
It's a fair question. But it's legitimately hard to answer.
Say my parents give my wife and me a $50 check for our anniversary. Inevitably I sit down to write a thank-you note and want to explain how I spent it. And I never really know. I threw it in the checking account. So maybe it went to fix the muffler on the car. Maybe I used it when we went out to dinner the other week. Maybe it paid part of the rent, or maybe I'll use it to pay our taxes.
I left the Treasury Department yesterday with lots of questions about how the proposed public-private fund to buy up toxic assets would actually work.
One potential problem: What if the bank has a toxic asset it thinks (hopes) is worth 40 cents on the dollar. But the investors running the fund think there's no way it's worth more than 20 cents. Then no trade, right? The banks are still stuck with it. We haven't fixed the problem.
Economists and auction experts Peter Cramton and Larry Ausubel just posted something laying out how you might set up one of these public-private funds. It's basically a kind of investment bank which is co-owned by private investors and the government. It would purchase the toxic assets through a reverse auction. (Reverse auction stories here and here)
I could also imagine a solution where the government sets up a few of these banks which would compete to buy the assets. I'm not sure either of these gets around the problem outlined above though.
This week promises to be a great big economic rodeo, with the stimulus bill moving forward-ish in Congress and Treasury Sec. Tim Geithner set to announce the latest, greatest plan for saving the banks.
Simon Johnson and James Kwak ring in today with a look at the latter, on their Baseline Scenario:
Our unsustainable debt-fuelled boom, in other words, produced both the conditions for a major global financial disaster, and a political strengthening of the people who benefited most from the risk-taking and associated compensation packages that made this disaster possible. Ending the financial crisis is relatively straightforward - a forced recapitalization and change of ownership/management in the banking system - although this will not immediately lead to an economic recovery (more on that here). But seen in deeper political terms, decisive action to restructure large banks is almost impossible. Such action would require overcoming perhaps the single strongest interest group in the United States today.
Johnson and Kwak offer strong medicine for doing that: break up the banks until they're no longer too big to fail. Johnson's coming to a Planet Money podcast near you; meanwhile, don't miss his and Kwak's explainer on national debt.
The other week we searched the globe (pretty much in vain) for some place sheltered from the economic storm.
India came up as a major economy that might be somewhat insulated.
Ken Rogoff from Harvard just got back from the World Economic Forum. He attended a party where Indian policymakers and business leaders were relatively cheerful. And it wasn't just because Slumdog Millionaire got nominated for the Academy Awards.
Harvard's Ken Rogoff commented to us recently that when you're in the middle of a recession, it never seems like it will end. We pulled up this story from the New York Times in 1983. Unemployment had risen to 10.8%.
Today's figures showed the impact of a recession that is now the longest since World War II. The average unemployment rate for 1982 was 9.7 percent, the highest since 1941. For December, 12,036,000 people were out of work, up slightly from November and the most since 1933. There were 99,093,000 people working, down just slightly from November.
The Treasury Department appears to be backing away from the idea of creating a "bad bank" that would take on the (other) banks' toxic assets.
So how do you save the banks? Senator Charles Schumer says government insurance for the toxic assets is becoming "a favorite choice." In other words, the banks pay the government a bit of money, and if those toxic assets lose value, the government covers some of the losses.
One problem with the bad bank idea was that government would have to figure out what to pay for those toxic assets. But the insurance idea has the same difficulty. Sure you don't have to price the assets, instead you get the equivalent problem of pricing the insurance.
The only "benefits" of an insurance arrangement are: (a) it's much less obvious that the government is giving bank shareholders a gift; and (b) the way Citi and B of A were structured, it wouldn't require a lot of cash from Treasury (and hence from Congress), because most of the guarantee was provided by the Fed.
A while back we set up an imaginary boxing match between two economists over whether the stimulus package is a good idea, or a terrible awful one.
Here's round two: The guy in the blood red shorts (Russ Roberts) interviews his sparring partner (Steve Fazzari) on this EconTalk podcast.
They have a great very deep debate about whether its better for people to save or spend that goes beyond the discussions we've had on the podcast. Take a listen.
An open letter to everyone in the finance industry: Stop telling us reporters that you won't talk to us on the record! We are in a massive, global financial crisis brought about, in no small part, because of the complexity and confusion of the finance industry. It is essential that you help us bring clarity to American citizens, taxpayers, voters.
Don't tell us that "the media" gets things wrong. Do a bit of research. Find out which reporters seem to get things right and talk to them. (I, of course, would like you to start with us at Planet Money).
I spent yesterday trying to get someone from the auditing industry to talk to me. Auditing. This is the part of finance devoted to transparency. Nobody would talk on the record. Many people expressed serious concerns about how the fiscal stimulus bill has been written, but nobody would go on the record with those concerns.
Planning your next move? Wondering where your state stacks up now that the football season is almost over? The Bureau of Labor Statistics publishes monthly unemployment data. I've made a chart from labor force data, one of two ways unemployment is measured (the other is from payroll data). Click here to see the past three months of data. I was surprised to see places like Oregon and D.C., where there have been no big layoff announcements, near the top of the list. What are you seeing?
People keep asking why someone doesn't just start up a new, squeaky-clean bank that everyone trusts -- one unencumbered by toxic mortgage backed-securities.
There are new banks popping up, though last year saw a drop (see chart). The American Bankers Association says there were 62 newly chartered banks that qualified for FDIC insurance.
Most of these are small community banks, though. Vista Bank in South Carolina has three offices and a pretty bare-bones website. Vision statement: "VistaBank will be recognized as the financial institution of choice." That's it. No way it will be taking the place of Citibank anytime soon.
The challenge in starting up a new bank is the same you would face opening any new business. You need start-up capital, which these days is hard to come by.
The folks at Baseline Scenario have a nice walk-through of the problems the banks are facing and the possible fixes. They imagine it Lord of the Rings-style with a "Bank of Middle-Earth" stuck with toxic assets.
Option 1: Bank Mitosis : Bank of Middle-Earth splits into a good bank (Bank of Gandalf) and a bad bank (Bank of Sauron)
Option 2: Little Red Riding Hood fix: Create a "Big Bad Bank" for the bad assets.
As they explain, both solutions have problems.
It's worth mentioning that we're not really in new territory here. The International Monetary Fund deals regularly with countries that have to fix up their banks. Sweden managed it just fine.
Like a lot of news about the global economy of late, this strikes me as just sad.
The British government announced Wednesday that it will spend up to a quarter of its two billion pounds in contingency reserves ($2.7 billion) set aside for the 2012 London Olympics to bail out building projects because they cannot attract private sector funding.
Construction of the Olympic village and the adjoining media center could have been delayed and even stopped because of the credit crunch and officials said the cash was needed to get them built in time for the opening ceremony.
You've been hearing a lot about John Maynard Keynes, the British economist of the early 20th century who, 63 years after his death, is suddenly the single-most important thinker if you want to understand President-elect Obama's plan to get us out of this economic whole.
We're going to do a lot on Keynes. I'm on Morning Edition this Friday and This American Life over the weekend talking about the man.
I've been reading the masterful biography by Robert Skidelsky. Just get it. It's fun and fascinating even if Keynes were not, suddenly, basically running our country.
And I will give plenty of time on this blog and the podcast and on the radio to Keynes's important ideas, but I have to get some things off my chest: the things about Keynes that absolutely drive me crazy. That make me furious and frustrated and angry.
I've had the benefit of having the past few weeks off. I got a lot of reading done and have been able to catch up on a ton of movies. (The Wrestler is not as good as people say it is, but Frost/Nixon and Milk were much better than I expected. I'm betting it's Frank Langella for Best Actor.)
One other thing I did was rewatch the six-hour PBS documentary "Commanding Heights: The Battle for the World Economy" that aired back in 2002. I remember seeing it then and, while having a few key issues with it, liked it a lot. The series is based on a book by Daniel Yergin - who is best known for writing the terffic The Prize: The Epic Quest for Oil, Money, and Power, that won the Pulitzer Prize for General Non-Fiction in 1992 - and Joseph Stanislaw, first published in 1998. It is available on DVD but also free on PBS's website.
I think the series is fascinating background for anyone trying to put what is happening to today's economy in larger context.
I finally carved out enough time to read the Washington Post series on the near-death of AIG. It's quite good, has interviews with many central figures. And it's told not in black and white, but shades of grey, the villains unclear.
Though there certainly were those who worried:
Park spelled out his reasoning in meetings and conversations with colleagues over the next several weeks. It was as if he had scratched the needle across an old record album at full volume.
And those who did not:
"It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions," Cassano said.
Amusingly, while I was reading the article this Google-supplied ad popped up at the bottom of the page:
Credit Default Swap
Trade US High-Grade And Credit Default Swaps Now. Get More Info!
www.MarketAxess.com
Calculated Risk has a terrific look at America's rising number of part-time workers -- more than 8 million of them, according to the latest reports. The blog calls the increase "stunning." An accompanying chart makes clear why.
Partly it is, or it may be. We talked about this a bit on the radio, but the basic idea is that when we're worried about the future we tend to spend less, which can backfire.
Say you don't buy that new car, then maybe the auto manufacturers have to lay someone off, and that someone then can't go hiring your company to do whatever it does. And on and on...
The idea is called the Paradox of Thrift. Paul Krugman, the Nobel Laureate and New York Times columnist, talks about it here.
Some free-market types disagree, arguing "Consumers Don't Cause Recessions." From that link: "My friend Bill Anderson actually derives sustenance from his hatred of Paul Krugman; at lunch one time, Bill skipped a sandwich and instead just bought a New York Times."
Economist Russell Roberts battled his way through our Friday podcast, arguing against a federal stimulus package to revive the economy. Now Roberts is back, on his own blog, where he tees off on President-elect Barack Obama's proposed tax cuts.
Roberts writes:
"[A]n increase in spending coupled with lower tax collections is an INCREASE in taxes. AN INCREASE in taxes. NOT A TAX CUT. If I spend more money and collect less, the government is promising to collect more taxes in the future. It is not a tax cut. Not a tax cut. Not a tax cut. And when you don't cut rates but rather give people a lump sum of $500, there are no incentive effects other than to increase the probability that the US Treasury will be unable to honor its obligations in the future."
The smart folks at Calculated Risk take a look this week at the connection between unemployment and sales of new homes.
Typically, new home sales bottom out during a recession and then start growing at least three months before the worst is over. Unemployment, on the other hand, can peak as late as a year after the recession ends. That makes sense, because companies start hiring once they feel confident that business will keep growing.
So far, so good, right? Calculated Risk says this is not your typical recession. Right now, we've still got falling home sales and rising unemployment. What we'll have next, they write, could be anyone's guess.
From Baseline Scenario, home of Simon Johnson and James Kwak, comes a tutorial on the Federal Reserve and interest rates. Johnson, you might remember, walked us through the mechanics for a podcast this month.
Satyajit Das, our favorite expert in credit default swaps, sent this for your New Year's Eve enjoyment:
"Shell-shocked investors are coming to terms with the financial carnage of 2008. The value of investments fell to such depths that investors needed specialised diving equipment just to find what anything was worth.
When Martin Sullivan, the former president and CEO of AIG, appeared before Congress this year, he blamed a seemingly arcane accounting rule for contributing to his company's woes: The "mark-to-market" rule that requires companies to value their assets at what they would sell for in the marketplace, even if they weren't planning to sell them for a while.
Banks had also been complaining about mark-to-market, saying it made their balance sheets look worse than they were.
But a new report by the Securities and Exchange Commission now says the mark-to-market rules "did not appear to play a meaningful role in bank failures occurring during 2008."
Congress ordered the Securities and Exchange Commission to review mark-to-market as part of the $700 billion bailout bill. The report recommends keeping the rule in place.
The Bespoke Investment Group charts the returns on a single dollar invested with Bernie Madoff. Let's just say it puts a new spin on vertical integration.
In his other life, NPR's esteemed science correspondent Robert Krulwich explains everything about everything for ABC News. This week Krulwich took on deflation, in an animated cartoon that we'd put right here on the blog if they'd let us. Instead, just for you and totally free, a link.
Yesterday the Federal Reserve lowered its target for the federal funds rate to between zero percent and 0.25 percent. How will this affect the rate consumers pay for home and auto loans?
Got this from Robert Benincasa, NPR's numbers guru:
Besieged managers of food banks, social service and housing agencies coping with increased demand and dwindling funds can get a quick lesson in how the nation's philanthropic foundations might help them.
The Foundation Center has started tracking grants, loans and other help to local charities with an online interactive map, hoping to encourage the flow of money to the front lines of the economic downturn.
The website Seeking Alpha today takes on the question of whether lowering mortgage rates would help stabilize home prices and thus the economy. Short answer: Maybe.
Meanwhile, a listener named Tevya writes:
You said last week that a lower interest rate (say, 4.5%) would make you seriously consider buying a house. I hear everywhere that low interest rates are good for home buyers, but I think the reverse is true. Lower interest rates don't really "get me more house for my money," they actually end up driving the prices higher (or sustaining the already inflated prices) because all the potential buyers have access to these lower rates. Then, when the interest rates eventually go back up (which they will have to do to prevent hyper-inflation) the value of my home will come back down to earth and I'll suddenly be stuck in my house with negative equity.
We don't do financial advice here at Planet Money, but this story in the Times was interesting in a broader sense.
Typical advice for investing is that you should diversify. Don't buy just one type of stock. Buy different kinds, and bonds. The idea being that if stocks are plummeting, people are shifting their money somewhere else, like maybe bonds. So you lose on stocks, but you may gain on the bonds.
But in times of crisis these relationships fall apart.
Chart comes from the Bureau of Labor Statistics. You can make your own here.
Of course, we don't know what happens to the line off the right side of the graph. You can't tell above, but it's headed up pretty steeply. Check out today's report.
Got this from a person who works in risk analysis for a credit card company:
I work for a credit card company, and I see our risk tolerance continuing to tighten, as we continue cutting lines, closing accounts, and reducing contingent liability. The huge injection from the feds has not changed our risk objectives, and now, in the holiday season, we are still cutting lines, quickly.
So are credit markets going to loosen as a result of the injection? No.
At least part of it is. As we noted earlier, the Treasury department is insuring (already very safe) money market mutual funds. Treasury just gave me the numbers. They have pulled in $332 million in insurance premiums, and haven't had to pay anything out.
"We've made money on it so far," says Jennifer Zuccarelli, a spokesperson for the Treasury Department.
As one of you pointed out in the comments section, and as Treasury readily admits, there is a footnote here.
I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.
Thomas Jefferson 1802
Now, I think this is a bit of a cheap shot. And it's unfair--I mean, in the 206 years since he said this, banks have contributed way more to US wealth than the bits of trouble they've caused. Jefferson wanted this to be an Agrarian nation. We now know that means a poor nation. I feel like I've always been on Hamilton's side of the Jefferson-Hamilton fights over the future of the US economy. Well, I think I am, I don't really know enough to make such a big statement.
But, hey, it's a great quote and perfect and I just couldn't resist.
Our friend and economist house caller, Simon Johnson (along with Peter Boone and James Kwak), has a great post today on his site with some suggestions for how the government might handle this crisis better.
His post has an awful lot in it. What I like most is the suggestion that the Treasury Department tell us clearly what they are planning to do and why they are planning to do it. What sorts of banks will be rescued without question, which ones don't need full-out rescuing but can get that precious stock injection.
If I were investing in banks, I would have no idea what to think. Do I buy some bank stock with no way of knowing if they might collapse tomorrow or if the government might swoop in and help them up? Or maybe the government will choose some totally different approach all of a sudden?
The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.
Our friend and Economic House Caller, Simon Johnson, has a disturbing piece on the Wall Street Journal site, about how the financial crisis is far from over. Headline: the U.S. government has no good options but can choose from the least lousy.
From Google Trends, take a look at the spike in searches for the word "deflation" in recent months.
Meanwhile, the Consumer Price Index plunged a record 1% in October, largely on lower energy costs.
Wall Street analysts were expecting an 0.8 percent decline and it was the biggest drop since the U.S. Labor Department began collecting monthly data in 1947.
Slate's Big Money website has put together a video explainer for those who want to understand bonds a bit more but don't want to fall asleep. It's done in a Schoolhouse Rock style, which should make sense to anyone over the age of 30.
Am I wrong? Did Generation Y grow up on Schoolhouse Rock too?
For those who have been kept up at night wondering what new regulations of the global financial market should and could look like, here's a blog post for you.
We hear a lot about regulation these days. It's a complex topic and everyone seems to have an opinion. Some ideas are just plain noise while others could end up formulating the basis of some of the biggest changes to the global economic system in a half century. At this point, it's impossible to know which is which.
Take a read. We plan to offer up a bunch of similar posts about possible new financial regulations in the coming weeks. And, of course, feel free to give us some of your thoughts too.
The Washington Post has the first of a two-day series on the evolution of Treasury Secretary Hank Paulson from a free marketeer to one of the most famous market interventionist of the early 21st century.
Among the best tidbits: It was Paulson who first suggested the Securities and Exchange Commission temporarily ban short selling of financial stocks this fall.
Not everyone likes historian Niall Ferguson . I get it. Saying the Harvard prof is a self-promoter is like saying Hank "King Henry" Paulson appears a bit unsure of how to deal with the financial crisis this week. There's understatement and then there's understatement.
Despite that, I'm a fan. One plug: "The War of the World: Twentieth Century Conflict and the Descent of the West" is a really good book.
Here's his historical take on the recent economic downturn in Vanity Fair this month.
Here's another exploring whether the current financial crisis means the global balance of power is shifting for good. In short, it looks at whether the relationship between China and America - ok, a term he annoyingly termed as "Chimerica" several years ago -- is likely to move in China's favor.
Treasury Secretary Henry Paulson and the Bush Administration are likely in for more criticism that they lack a cohesive plan to deal with the financial crisis. Why? This morning, the Treasury Department said the $700 billion rescue plan would not be used to purchase banks' troubled assets as originally planned.
Yes, banks are going to get some of that cash directly injected to their balance sheets. But Paulson now says a new goal for the program is to support financial markets, which supply consumer credit in such areas as credit card debt, auto loans and student loans.
Mr. Paulson says almost half of the nation's consumer credit is provided through selling securities that are backed by pools of auto loans and other such debt. He said these markets had "for all practical purposes ground to a halt" and needed support.
Richard Posner, one of most cited legal scholars alive, has a new post on the blog he co-writes with Nobel laureate Gary Becker . It's his take on the silver lining of economic downturns.
On the surface, it reads a bit like an ode to Phil Gramm and his ilk who scoff at our nation of whiners. It's actually more of a plain-old market defense of why it's better to go through the pain now rather than delay it for an inevitable future. He does, however, support a tax increase right now.
Take a look and let us know what you think.
Here's a brief excerpt:
A depression increases the efficiency with which both labor and capital inputs are used by business, because it creates an occasion for reducing slack.One might think that a firm that has slack in good times will have as much incentive to reduce it as it would in bad times; slack (failing to maximize profits) is an opportunity cost, which in economics has the same motivational effect as an out-of-pocket expense. But firms are organizations, and organizations experience agency costs, which are more difficult to control in good times than in bad. If a firm's profits are growing, it is easier for the firm's executives to skim some of the profits, pocketing them in the form of excessive compensation or perquisites, than when the firm is shrinking. In the former case, stockholders will be doing well, so the pressure they exert through the board of directors to minimize the extraction of rents by executives and other employees will be less intense than when the firm is at risk of collapse. When the depression ends, the firm will have lower average costs, though they will drift upwards as the firm re-grows.
Now that an automaker bailout seems to be gathering serious steam in Washington, this seems to be a good time to get all sorts of opinions about whether taxpayers will benefit under a Detroit handout.
It's not easy getting good numbers on wages in the auto industry. University of Michigan professor Mark Perry has tried to come up with some. Here's his estimate of the average hourly compensation for employees at the Big Three, which includes hourly pay plus benefits. GM, Ford and Chrysler: $73.20; Toyota: $48; workers in other industries: $28-47.
Perry believes it's better if we let the market take its course and allow foreign car makers who have an industry price advantage to essentially take control of the global auto market.
Here's a vote for the other side. Their take: the auto industry has such a huge impact on the overall economy due to the large number of actors involved in producing, selling and maintaining a car that there is no other choice but to help the U.S. auto industry get off life support.
The long-maligned U.S. dollar has made some of its sharpest gains against foreign currencies in decades as a global economic slowdown is spurring demand for the greenback.
Here's an interesting brief on why it's happening and why a strong dollar is likely here for a while.
The stimulus package, of which 100 billion yuan is earmarked for this quarter, will be spent on low-rent housing, roads, railways and airports and infrastructure in rural areas. The funds, equivalent to almost a fifth of China's gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said yesterday on its web site.
This probably says a lot about how boring and nerdy I can be at times, but I watched a recent 90-minute presentation by a number of Harvard economic heavy hitters last night. (It's also available on the school's Web site.)
It's actually fascinating and the panelists kept the discussion in terms all of us can understand. The panel includes Harvard Business School's dean, Jay Light; bankruptcy expert Elizabeth Warren; and Nobel prize winner Robert Merton.
You can watch the whole thing or move around during the talk. Take a look.
The closely watched rate at which banks lend money to each other -- known as the London interbank offered rate, or LIBOR -- fell on Wednesday to its lowest level in almost four years, indicating severe strains in the money market continue to ease. That's important for everyone because the LIBOR is the rate used to calculate interest on trillions of dollars of home mortgages, student loans and credit cards.
The interest rate for three-month loans fell to 2.51 percent today, from 4.82 percent on Oct. 10. It's the 16th straight daily decline. The LIBOR hasn't been as low since the failure of Lehman Brothers Holdings Inc. on Sept. 15.
Yes, things remain very very scary. But a little good news never hurts....
A number of financial experts now fear that the federal government's $143 billion attempt to rescue troubled insurance giant American International Group may not work, and some argue that company shareholders and taxpayers would have been better served by a bankruptcy filing.
Stocks are starting November on a wobbly note and have been bouncing around all day. The reason for today's peripatetic market performance is newly released manufacturing data for last month.
According to the Institute for Supply Management, its measure of U.S. manufacturing activity fell to its lowest level in 26 years last month as credit conditions tightened and as disruptions remained from Hurricane Ike. The trade group reported that its index of manufacturing activity fell to 38.9 in October from 43.5 in September. It was the weakest reading since September 1982 and well below the 41.5 economists had predicted.
One bit of good news today: constuction spending fell less than expected as continued weakness in residential housing was off set by a stronger than expected performances in the non-residential market.
John sends this link about the Baltic Dry Index. It measures the cost to ship goods around the planet.
Some people like the Baltic Dry Index as a way to measure the real economy because it tells you how much stuff is moving around for delivery, right now, and how much that's costing. You don't have to worry that speculators are driving up the cost of wheat in 2009 or whenever. You just look on there and see what's actually moving.\
We'll try to take a closer look at this next week.
They created the International Monetary Fund, the World Bank and much of the way business and finance are conducted today. The 44 nations gathered in New Hampshire in 1944 hammered out the Bretton Woods Agreement, a kind of economic constitution for the globe.
The planet's economy looking, um, shaky just now, NPR's Scott Neuman asks whether it's time for a new Bretton Woods. One historian tells him:
"There's a broad sense on the part of the Europeans that the international monetary, financial and trade institutions are stuck -- that they haven't worked properly for some time and in a sense they see this crisis then as an opportunity to address a long-standing set of concerns about how the international economy ought to function."
World leaders are set to start a new summit on the economy in Washington, D.C., on Nov. 15. Few expect anything as sweeping as Bretton Woods to emerge.
Pictured at right: the scene this morning at BWI airport, courtesy of those freewheeling Southwest employees.
The funny thing is, Southwest has actually lost money because it had bet fuel prices would stay high.
I note a failure of the free market here also. The coffee shop wanted to charge 40 cents extra for whipped cream. Shouldn't there be an entrepreneur standing outside the door with a can, offering it at 39 cents?
When your nation is in economic trouble -- and I mean really big economic trouble -- you call in the cavalry, in the form of the International Monetary Fund. The IMF comes in and loans your nation great heaps of money. Its officials climb around in the national financial records and make lots of recommendations for belt-tightening. The process never sounds like much fun, but if you need help from the IMF, you're not in any position to argue.
Lately, the IMF has been making plans for Iceland, Ukraine and Hungary. Economist Brad Setser, a frequent guest on our podcast, makes the argument today that the IMF isn't big enough to do what's being asked of it. The IMF needs to be lending hundreds of billions, Setser writes:
Erik Saltwell, who brought you the cool Google gadget so you can track the TED Spread (our favorite barometer of the credit crisis) has done a new one for the VIX, known as the fear index. The VIX is a measure of how volatile people expect the stock market to be over the next 30 days.
Erik is using the National Terror Alert system colors. The gadgets appear Green for "low risk" up to Red for "severe." The VIX is solidly in severe territory right now.
California occupies a weird place in the American economy, and American politics, right now. It is the center of the housing crisis that helped cause the financial crisis that will probably tip the presidential election. More than any other state, it gave America subprime lending, no-money-down buying and the booming foreclosure market. Yet the state's economy and specific problems go undiscussed in presidential politics because its votes are already counted for the Democratic Party.
So whatever happened to Plan A, wherein the government buys those toxic assets?
Peter Cramton at the University of Maryland who has been working on a possible design for the auction to do that says he and his colleagues have been in contact with the government on a daily basis.
Cramton says and as far as he knows, the government still plans to buy up toxic mortgage-backed securities. That's what the rest of the $700 billion is for. (The first $250 billion is going toward shoreing up the banks more directly by buying stock in them.)
"Things are moving very quickly," he said in an email.
Capital-S Socialists would like to object in particular to the idea that having the government buy into banks is a socialist move. From the Times:
"It doesn't make any sense," said Zelig Stern, a taxi driver and the secretary of the party's New York chapter. "Corporate socialism can't exist -- it's a contradiction in terms."
From The Big Money comes a prescription for American banks, now that the federal government is taking an ownership stake in so many. Edward Hadas writes:
[G]o slow on innovation. A new pharmaceutical can't be sold until it is demonstrated to be both safe and effective. New financial products should be put through roughly similar paces -- consideration of the possible economic advantage, analysis of what could go wrong, small trials to see whether the theoretical analysis works in the real world.
Anyone else have a hard time imagining Wall Street really, truly slowing down for that?
Caterpillar Inc. said its profits fell 6.4% last quarter. The construction equipment manufacturer said it expects much of the developed world will be in recession next year.
As we mentioned earlier, Caterpillar, like many companies, was having a hard time getting cash during the credit crisis.
This is not the heart of finance beating again, this is a massive shock to the heart to try to get it beating. And it didn't work.
Will Aston-Reese, one of our two favorite credit market traders and frequent Planet Money guest (as well as All Things Considered guest) sent me a note this morning critiquing the positive news in a New York Times story. Translation follows.
I'm sure that you have both seen the NY Times by now. I had a message waiting for me this AM from a MM [Money Market] customer who told me that a stealth lender hit several very large Yankee banks late yesterday. The total was in the billions and the term was in the 3-4 months. I believe that this is more of the same, i.e., a "Bailout bank" lending to try to unfreeze the markets.
That fact aside, we have seen no spillover this AM in selling. Bids are creeping up and money is nowhere to be seen.
As for the Times article, despite the reports of money flows out there, I am not seeing the change in sentiment that Mr. Miller purports to see.
In normal times (in other words, before September 15th of this year), Will and his coworkers at Tradition Asiel Securities played an essential role in the global economy. When large banks need to borrow money for a few days or a few months, they would call Will and ask him to find someone to lend them a billion or two.
Looking back, it was one of those things that made things go from bad to really bad.
After the government let Lehman Brothers go under, a big famous money market fund (the Reserve Primary Fund) which had lent money to Lehman "broke the buck." That means that everyone who had invested a buck in the fund and expected a little interest back were learning instead that the investment was worth less than a buck.
Those investors lost money. And that was never supposed to happen with money market funds.
The most costly -- and most controversial -- of the moves provide billions in extra tax relief to big banks such as Wells Fargo & Co. and Spain's Banco Santander SA. Another change gives aid to investors stung by the auction-rate securities meltdown. Still another shift relaxes tax rules to help big multinationals bring back cash from overseas.
The total sums involved aren't clear, but the cost will easily amount to tens of billions of dollars, tax experts say.
Pateria add, "[I]t also obviously ties in to the question being raised by many right now about whether the Fed/Treasury/FDIC approach right now is creating even bigger firms that are a more extreme version of 'too big to fail' than we already had."
He gave Henry Paulson an "F-" for his presentation of the bailout plan. He thinks Alan Greenspan is getting too much blame. And he is very sure the world is not ending.
You heard from Wharton's Jeremy Siegel in our last podcast.
Here's a great profile of him that ran in the Philadelphia Inquirer, after he had been warning of a possible dot-com crash. The story includes this quote:
"It's kind of frightening the power he has obtained. He made billions of dollars disappear with his words."
I put that question to Mike Useem, an expert on such things at the Wharton School at the University of Pennsylvania.
He's trained scores of top executives. And actually Neel Kashkari (the man now in charge of the Treasury's $700 billion bailout) took his class years ago. This last week, Useem's class was a bunch of journalists, including me.
I talked to him after in his office, where you will find a book about the Challenger space shuttle disaster sitting on the bookshelf.
Listen as Useem explains what went wrong. And why the solution could involve Winston Churchill.
As you may have heard on our latest podcast, the commercial paper market is still stuck. Banks and large companies that want to borrow money short term are having a hard time.
So when will the market come back to life? Why are those lenders still skittish?
Well, I talked to a couple of them, and here's how they explained it:
From listener Mark Davis comes this link to a gripping Portfolio story on derivatives. Jesse Eisinger calls them the "$58 trillion elephant in the room." Which is really, really big, right?
So the government is planning to spend billions of dollars buying those toxic mortgage assets from banks.
But how does it make sure it doesn't get ripped off?
I went to a dress-rehearsal of the buy-up run by some auction experts at the University of Maryland. There was something like $14,000 at stake, and over a dozen students playing for keeps.
And yes, some -- like the student above -- were looking for ways to game the system.
We just had back-to-back interviews with two economists (Christopher Carroll of Johns Hopkins and Anil Kashyap of Chicago) who both said today's move by the government -- buying shares in several large banks -- will help end the immediate crisis.
Kashyap, though, says there are huge problems with the way the U.S. government will buy the stocks. Specifically, he's upset that Treasury will allow banks to give unlimited dividends to their shareholders.
This could result in banks taking billions of taxpayer dollars and then giving it as a gift to shareholders. That is a bad thing, he says, for many reasons. It's just not fair and is a lousy deal for taxpayers. Worse, it will decapitalize the banks (make their balance sheets smaller) just when they so desperately need to recapitalize. He says that's the kind of silliness that created a decade-long slowdown in Japan.
All in all, though, he says the good outweighs the bad in this move. Although he desperately hopes the U.S. people will demand from Congress a cap on bank stock dividends.
We'd like to understand, better, how the credit crunch is affecting regular folks and businesses around the country and the world.
So, please post here or send an email to planetmoney - at - npr.org.
We can keep things entirely confidential, if you prefer. But, if you're game, we'd love to record an interview. Let us know what you'd like.
Oh, and if you are doing just fine and have no trouble with credit and, perhaps, have just received a big loan or some such, please let us know that, too.
I'm spending the weekend catching up on the huge pile of books and articles that have been piling up.
I'm surprised at how much I'm enjoying Ben Bernanke's Essays on the Great Depression. He's actually a really good, lively writer and it is so on point, it is all about the credit aspects of the Great Depression. I would love a chance to interview him now.
Just in time, Sarah Caroll of UPENN Law School and Wenli Li of the Federal Reserve have released a study of homeowners who filed bankruptcy. The wanted to see how many filers kept their house and how many entered foreclosure. The results are interesting.
First, close to 30% of the filers lost their houses in foreclosure despite filing for bankruptcy. The rate rose to over 40% for those who were 12 months or more behind on their mortgage payment, about the same fraction as among those who entered into foreclosure directly.
I give Sen. John McCain props for coming out with a specific proposal to deal with the mortgage crisis, even if its political chances are iffy. Too bad it's not a better idea.
Early this week, McCain presented a plan to purchase defaulted mortgages directly. He is pitching it as a bailout for homeowners rather than Wall Street.
The devil's in the details. As Georgetown professor Adam Levitin says, the plan, which appears based on the Home Owners Loan Corporation of the 1930s, isn't likely to work because the vast majority of residential mortgages today are securitized.
That means the government would have to pay full value for the mortgages out of the securitization pools. Or, Levitin says, it looks like McCain may be suggesting the mortgage industry voluntarily support the plan. That seems like a tough call right now. Take a read.
I'm a numbers guy. So amid all this week's downbeat economic news, it's important to look at some longer-term issues and data.
I have to think worries about the credit crunch, consumer spending and recession are nearly fully priced into stocks and that the unprecedented global intervention into the credit market in recent weeks will begin to unfreeze them at some point soon.
Maybe not; I've been wrong before. But as former Fed chief Paul Volcker said in his Wall Street Journal op-ed this morning, government has many tools to help ease a crisis like this.
It's also important to remember that the U.S. economy is still incredibly strong in the long run. Even today, if you travel around the world and ask anyone where they would like to do business -- where a good business idea can get funded and flourish the most -- it remains the U.S. Innovation remains one of the strongest underpinnings of the U.S. economy and that's not likely to change soon.
And now some data. Here's the World Economic Forum's Global Competitiveness Report 2008-2009 showing the U.S. still tops the world in overall competitiveness. There's an interactive version of the report and it includes loads of information and an interesting map showing the world competitive rankings.
Bets are on that the federal government will have no choice but to push a Main Street stimuluspackage filled with all kinds of goodies as soon as early next year. It'll likely include checks in peoples' mailboxes like those that came early this year, help for strained state governments and even money for infrastructure projects. The est. cost: another $150 billion.
When I was doing my piece on naked shortselling, one of the things short sellers told me, and will tell anyone who'll listen, is that they provide a floor for the market.
What that means is this: In short selling, you borrow the stock you want to short from someone, sell it at a high price, wait a while, then buy it back at a low price and return it to the person you borrowed from. That buying back is key. If you don't buy it back, you can't return it to the people you borrowed it from, and that would be bad for you. So, while short selling, it's true, might lead people to target certain companies they don't like, it also insures that there will be buyers, since the short sellers will have to enter the market eventually to repurchase the stock they shorted.
Now, during this last week, when the Dow has been dropping like a feather on the moon, there's also, perhaps not coincidentally, been a ban on short selling. Could the short sellers' dire warnings be coming true? By removing them from the normal functioning of the market, Securities and Exchange Commission chairman Christopher Cox might have removed the very people you can rely on to stop a stock market plunge. Has he, in effect, made things worse by trying to make things better? It certainly wouldn't be the first time that's been true of government intervention in the free market.
Amid all of the economic nuttiness of the past few weeks, there is one thing that's for certain: all of this isn't likely to end until housing prices fall back to their natural levels.
So how far are prices likely to keep falling? It's anyone's guess really. But there are some key indicators that economists point out -- and, of course, then disagree about -- that probably provide some hints.
Historically, home prices have increased roughly in line with real income growth. That was until about 2001.
(Update: added below is a comment from reader Dan Schlung for you math whizes. He crunches his own numbers and figures out it will be 2.19 years before he sees prime home prices in his native Chicago.)
Larry Ausubel (above) and Peter Cramton at the University of Maryland have laid out a detailed plan for how the government might go about buying up hundreds of billions of dollars worth of those toxic mortgage backed securities no one wants with something called a "reverse auction."
They're two of the world's experts. And they've been talking with people in the government.
I went by to see them yesterday.
"This would be the largest auction ever," said Cramton. "That anybody has been involved with on the planet earth."
There are lots of tricks to making sure the auction gets you a fair price, and can't be gamed by some clever wall street guys.
Nobel Prize-winning economist Gary Becker and legal heavyweight Richard Posner have a joint blog that's a terrific read.
This week, Becker has an interesting piece on why news that the feds want to take an equity stake in banks is a bad idea. He worries it will lead to government getting involved in business decisions. Could a congressman demand a bank open new branches in their district? Or stop a company from moving jobs oversees even if the unpopular move saves money? The two also have some comments about limits on executive pay.
That $700 billion bailout gives the U.S. government great freedom to buy up troubled assets. So far, we've mostly talked about the government purchasing bad mortgages or bundles of mortgages known as mortgage-backed securities.
Today, the Federal Reserve took a different tack, snapping up commercial paper -- the short-term loans that banks and other businesses use to float their daily operations. For the past few weeks, the commercial-paper market has all but been frozen.
Our NPR colleague Dina Temple-Raston takes a chilling look at the move. She writes:
In a sign that the Federal Reserve isn't convinced that the $700 billion financial rescue plan put in place last week will be enough to resurrect the morbid credit markets, the central bank said Tuesday that it would begin to buy unsecured short-term loans known as commercial paper.
We had a good question from listener Dan Griner on the podcast. He asked if he should follow Jim Cramer's advice and sell all his stocks.
Simple answer: no.
Longer answer: Absolutely Not.
We don't offer personal financial advice here on Planet Money. Believe me, you wouldn't want it if we did.
But these wise words from the always-worth-reading Megan McArdle sum up the smart view:
Don't look. Seriously, don't look. I have no idea what's going on with any of my equity investments, because that is not short term money that I need to keep my eye on.
If you look you will get upset, and you will be tempted to do something stupid. I can't guarantee that the market won't drop further and you won't regret having held on. But as a general rule, selling into a massive liquidity crisis is a pretty bad idea. Selling in a panic because your assets just dropped 30% is almost certainly a bad idea.
The good news is that while the stock market can take a long time to recover, it historically doesn't actually go down for more than a couple of years.
Yeah, that's not very good news. But unless you're planning to retire right now, my advice remains the same: don't look.
Our friend, Satyajit Das, sends a note from Australia.
He is the credit derivative expert who was featured in Alex's story on our recent hour on This American Life.
Alex and I just love talking to Das (he goes by his last name). He can bring a sense of flair and drama to the discussion of credit derivatives. That is hard. We have not found a lot of opportunities to use the words "flare" and "drama" in the same sentence as "credit derivatives."
It's nice to give Das's book a plug, since I've stolen ideas from it for stories. Like the one in which I explain risk management by looking at the pollen shakes when doused in water.
De-leveraging -- Fairy Tale Endings
By Satyajit Das
In the Arabian Nights, the beautiful princess Scheherazade buys one day of life at a time by recounting fantastic fables that entrance the King who has condemned her to die. Investors and traders are currently telling each other fairy tales to buy one day at a time to stave off the inevitable.
We just heard the This American Life story Alex and I did with Ira, about the financial crisis.
As soon as it was over, my dad and my uncle called to say they liked it a lot but still had a crucial question: you say it's scary, but how is it scary to me? How does the crisis affect regular people?
I do think I could have done a better job of laying this out.
We will be focusing on this question intensely over the coming weeks. The truth is, the crisis is still somewhat contained to big banks and large corporations. It is harder for people to get a loan, but it's far from impossible.
It's hard to do good narrative journalism about a thing that might happen. It's always easier to tell good, juicy stories about things that have happened, already, to real people.
NPR's Chris Arnold sends this, which he titles "A back door in the plan for an alternative bailout approach: Lawmakers leave room for a simpler way to prop up banks."
That simpler way is known as "stock injection." Arnold writes:
Treasury Secretary Paulson seems convinced that the best way to solve the immediate financial crisis is to buy up hundreds of billions of dollars worth of bad debt on the books of financial firms. Others disagree. They ask, why not just give cash to the banks to prop them up without buying their toxic mortgage-related securities?
Some say, given capital requirements for banks, you get $12 dollars in debt assistance for every $1 of cash you directly pump into a bank. So why not just do that? And take stock in return so the government gets paid back? Basically, they say the government should do what Warren Buffet did when he invested in Goldman Sachs. Give them some cash, take some stock. This is along the lines of what Sweden did to prop up its banks during a banking and real estate crisis in the early 1990's.
This is not the approach Paulson has been pushing for. But it's becoming clear that the legislation left room for this approach to be applied in some cases as the Treasury Secretary sees fit. Which leaves the door open down the road, if Paulson has a change of heart, or if the nation has a different Treasury Secretary.
Adam Davidson says he got a tip about this, too. I'm looking for specific language in the bill (for download). Adam says he's been told the relevant sections are 106, 107 and 113.
The House of Representatives may vote tonight on a reworked version of the $700 billion Wall Street bailout. Some would argue Main Street has already cast its vote, a resounding no that says as much about the grassroots as the financial crisis.
"Whatever happens with the bailout bill, I don't think this genie can be stuffed back into the bottle," writes Micah Sifry, editor of the Personal Democracy Forum. "An old way of doing things is dying, and the new one being born isn't quite in place yet."
Sifry tracks the swell of dissent over at Weekend Edition's Soapblox blog.
NPR's Dina Temple-Raston just filed a report highlighting the Fed's news that banks are lining up to borrow from its emergency lending facility. Here's a brief run down:
The London Inter Bank Overnight Rate is the interest rate at which banks lend to each other. It is considered a good barometer of how much banks trust each other -- and it has been on the rise for four days. Partly because of that banks and institutional firms are going to the Fed to get cash.
The central bank released a report Thursday showing commercial banks averaged $44.5 billion in daily borrowing over the past week -- compared with a little over $39 billion the week before.
The net number of illegal immigrants entering the United States has slowed significantly in recent years, and has fallen below the number of those entering the country legally, according to a report released Thursday by the Pew Hispanic Center, a Washington think tank.
The findings are sure to bring comment from many different points along the political spectrum. A key point that is likely to get less attention is what the findings mean for the economy and long-term issues like state and federal budgets and even taxes.
So everyone was making fun of the fact that the bailout bill includes a lot of unrelated provisions, including an exemption for children's wooden arrows from an excise tax.
After a number of unreturned phone calls about this, I reached Jay McAninch, CEO of the Archery Trade Association.
He told me that there is a standing 43 cent tax on arrow shafts. It's meant, he says, to be levied on adult arrows (think hunting or the Olympics) which can cost $10.
But kids' wooden arrows cost only something like 75 cents. So for those, the tax amounts to over 50%.
"Church groups and Boy Scouts are paying a serious price," he said."It's almost crippling their programs."
The arrow tax, by the way, ends up going to the state wildlife programs.
Those of you interested in alternate takes on rescuing Wall Street might want to take a look at Rep. Peter DeFazio's No Bailouts Act. DeFazio wants the FDIC to rework its magic from the Savings and Loan crisis of the 1980s and '90s. We podcast this yesterday and then wrote this up for NPR.org today.
DeFazio's big pitch for the bill is that it could stabilize banks without piling on more national debt:
"If we borrow $700 billion and throw it at the big houses on Wall Street, who's going to lend us the money to fix Main Street?"
After the collapse of Lehman Brothers and the forced sale of both Bear Stearns and Merrill Lynch to commercial rivals last month, Morgan Stanley and Goldman Sachs are all that is left of that once-mighty cadre of investment banks that ruled Wall Street for decades.
How long the two continue to survive is an open question.
The firms continue to project the image that they can weather the storm without any more big changes. Both recently took the extraordinary step of converting themselves into bank holding companies, which will allow them to take regular bank deposits and to bolster their liquidity.
In high-profile deals, each has taken in billions of dollars in new capital over the past week. Japanese giant Mitsubishi UFJ paid nearly $9 billion for a 21% stake Morgan Stanley; Warren Buffett's Berkshire Hathaway Inc. sunk $5 billion in Goldman and other investors poured in another $5 billion.
Still, the firms are far from out of the woods yet. And a growing number of analysts are openly suggesting the two banks seek out cash-rich foreign buyers before they join the other credit crunch road kill.
This pitch for Main Street backing the Wall Street rescue got a nod from New York magazine's Daily Intel. It goes likes this:
Normally if too many depositors happened to take money out (not in a panic, but just by happenstance) the bank would simply borrow cash from another bank. That's nearly impossible right now. Banks are generally unwilling to lend to each other. Banks can still borrow from the Federal Reserve, but they are so desperate for cash right now that they are accepting any interest rate, and the Fed is finding it nearly impossible to control short-term interest rates. Today banks took overnight loans from the Fed at 7%, 3 1/2 times the target rate set by the Fed. This is historically unprecedented.
You may think of banks as just taking in your savings and loaning it out to someone else, making money by pushing money around.
But they provide a real service. A bank that has say $100 million, can loan out TEN TIMES that amount, a BILLION dollars.
That money allows pizza places, hospitals, factories to borrow and expand.
"The thing is," says Ira Jersey at Credit Suisse, "you scale that up to some of the largest firms that have filed for bankruptcy or are being taken over by the FDIC lately, you just realize there is a significant portion of the $12 trillion in bank assets that no longer is going to be out there and being used for making consumer loans or making loans to other businesses."
That's the worry.
The Washington Post has a good story today looking at who is having trouble getting loans and who isn't.
NPR's Corey Flintoff takes a look today at which European banks are in trouble and why.
If it matters to you, the economists I've talked to say it's good news for the dollar if Europe takes a hit. The idea is that any downturn for the Euro makes the greenback more attractive.
In 2004, the current chairman of the U.S. Federal Reserve, Ben Bernanke, gave a now famous speech suggesting that over the last few decades, many regulators around the world have become more adept at manipulating key economic levers such as an economy's supply of money. He said the result, which he called "The Great Moderation," has been smoother business cycles and recessions that are smaller and less frequent than in the past.
Here's a link to the speech, which starts off: "One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility."
Take a read and see if you think it's time for Bernanke to update his talk.
Often referred to by investors as Wall Street's fear index, the Chicago Board Options Exchange Volatility Index -- or VIX index -- is considered one of the best barometers of investor sentiment. A low VIX indicates trader confidence. A high one means the opposite.
How's the VIX lately? It hasn't been pretty. It jumped almost 40 percent yesterday to a worrisomely high 46.72 and has eased only a bit this morning.
The failure of the bailout bill came as a surprise.
Today we are focusing on asking a few key questions that will be part of our This American Life story on Friday.
I really have one question:
- Will normal banks stop lending money to people and companies that deserve it?
During the past few years, we had what is known as a credit bubble. So much money was floating around that banks and investors would give some to just about anybody or any business that had any hope of paying that money back along with a tiny bit of interest.
As is generally the case, the credit bubble is followed by a credit crunch. Even good investments don't get loans.
That is bad.
The single biggest selling point of the US economy--the thing I say to anybody who says China is going to take us over or that the Euro will overtake the dollar--is that this is the easiest place for a good idea to get funding.
You don't need to be the nephew of some party boss. You don't need to bribe a petty official. If you've got a good idea, you get funding.
That is why we have the most dynamic economy in the world.
John Cochrane reveals his gut -- and other -- reactions.
This week, a group of economists signed a petition citing pitfalls in Treasury Sec. Henry Paulson's Wall Street bailout plan. Finance professor John Cochrane of the University of Chicago helped organize the petition drive. Cochrane talked with David Kestenbaum about alternatives to the bailout this week.
-- David Kestenbaum uncovers a computer model of the economy made in the 1980s by ... drumroll, please ... Ben Bernanke. Let's just say it calls for fast action now.
-- Daniel Costello talks to libertarian Thomas Firey about common assumptions in the crisis, including that more regulation is needed and that banks can grow so big that governments can't let them fail.
-- Alex Blumberg and Adam Davidson take a frighteningly close look at the economy's near-death experience. Mark it down, kids: Sept. 17, 2008.
Europe has been taunting the U.S. for years that the second smallest continent eclipsed America years ago as the epicenter of wealth, buzz, nightlife and all other sorts of cool.
But there is reason to think London and Berlin's spectacular economic boom in recent years was built on even more of a financial house of cards than our own economic sham across the pond.
Years before Ben Bernanke became Fed chairman, he worked on an elaborate computer model of the economy. You can ask it useful questions like "How bad will things get if there isn't a bailout?" Find out what it has to say in a story from this morning. I talked with both of Bernanke's collaborators.
It appears the White House will get the discretion it wanted in bailing out Wall Street, at least for the first half of the proposed $700 billion. A first peek at principles in the agreement, from Politico:
Those principles will include improved oversight of the program, as well as a plan to phase in the $700 billion investment in stages, while still assuring the administration a virtual free hand for at least the first $350 billion.
There is a greater emphasis on efforts not just to relieve Wall Street firms of their bad debts but also to help homeowners threatened by foreclosure. Companies that benefit from the plan would be expected to limit pay and severance packages for their executives, and community banks are expected to benefit from a new $3 billion tax break as a result of their stock losses in the government takeover of the two mortgage finance giants, Fannie Mae and Freddie Mac.
Of all the counter-proposals for government action, the one that caught my eye the most was Alex Tabarrok's idea to dramatically transform the amount of savings in the U.S. economy.
I suggest that for the next 12 months contributions to an IRA account will never be taxed. We can modify this in various ways to cap contributions at a certain level etc. We can even make the proposal progressive -- for the next 12 months contributions to an IRA account will never be taxed and the government will match $1 for every $10 saved for anyone with income below a certain threshold. The main idea is to increase savings.
It seems to appeal to the left: give the money to everyone, especially the poor, and not to Wall Street.
It should appeal to the right: it is government intervention, but is more market-based (if the world's most massive financial bailout can be called market-based in any way).
It would likely ensure ample credit for people and companies and would encourage growth in parts of the economy not directly connected to housing.
it would allow the banks that made bad decisions to bear the full weight of their risk taking and to suffer the consequences of owning toxic assets. But it would sure up the system to prevent systemic failure.
The Economist has a good online article about what the demise of the storied bulge-bracket brokerage model means for Wall Street and the global economy.
Early this week - and what feels like a hundred news cycles ago - the last two big independent investment banks, Goldman Sachs and Morgan Stanley, agreed to be regulated as bank holding companies.
What does that mean? Most of the storied invesment banks that have ruled Wall Street for decades are gone. So say goodbye to many of the financial innovations and celestial paychecks of the last few years. On the plus side, it may curtail some unncessary risk.
A friend of mine who signed a lease for a fancy apartment in a new building in New York's Flatiron district this past weekend said the leasing company told him there was only one thing that could kill his application: if he worked in finance.
"It's the first time in my life I was happy to say I'm a lawyer," says Roberto Grande, who moves into his posh new digs next week. (FYI Roberto: Whatever day you choose to move, I'm out of town...)
Gulp. If landlords don't want finance hotshots who just a year ago were taking in record bonuses in their apartments anymore, you know things are bad.
A beleaguered Wall Street titan got a much needed infusion of cash and a huge vote of confidence from Warren Buffett. But it's not like the cash came cheap.
Goldman Sachs, a bank based in New York, structured the deal in two parts. First, Buffett's Berkshire Hathaway Inc. is getting warrants -- essentially the option to buy shares at a future date -- worth $5 billion of common stock for $115 a share at any time in the next five years. Based on yesterday's closing price, Buffett reaped an instant paper profit of $437 million on the warrants.
More eye-opening is that Buffett is buying $5 billion of "perpetual preferred stock" that pays a 10 percent dividend unless the company buys them back at a premium. The highly unusual arrangement gives permanently gives him TEN times the divided payment investors would get on the common stock today.
Twitter listener @jakerome sends his own visual message against the White House bailout plan.
He may be on to something. Mother Jones quotes an anonymous staffer on Capitol Hill as e-mailing, "[T]hings are ugly, the rank and file - there's just no way they are going to vote for this crap. It just seems to me the bailout is in deep, deep trouble."
For those who just can't get their heads around the debate about what's a fair value for taxpayers to pay for all these distressed financial assets, Economist's View has a pretty condensed breakdown on the topic.
The issue boils down to this: how do we simultaneously value these assets fairly so taxpayers don't pay too much, while also ensuring banks aren't forced to sell them at fire-sale prices that will impede their long-term recoveries?
Or course, taxpayers want the best deal possible. Advocates say it's in everybody's interest to get the credit markets stabilized soon. Otherwise, all of us will feel even more pain.
Critics want to know why we are bailing out Wall Street rather than homeowners and why the price tag has to be so big.
In June, New York Attorney General Andrew Cuomo got the big credit rating agencies to agree to new ways of doing business.
Richard Drew/AP Photo
Much has been written about how much blame credit agencies deserve for the current financial crises. But the Wall Street Journal's editorial page goes one step farther today and proposes abolishing credit rating giants such as Standard & Poor's and Moody's altogether.
Their take is the agencies have done such a bad job judging the health of the financial system, why not let average investors decide which investment funds are best for them all by themselves. Hmmm....interesting idea. Could investors do worse?
Maria Godoy posts a great roundup on why Congress objects to the Bush administration's bailout plan:
In private meetings on the Hill, Paulson and Bernanke have warned lawmakers about the dire consequences of not acting -- but these economic Doomsday scenarios have not been spelled out to the public.
Lawmakers no doubt took some political cover today by giving Paulson and Bernanke a drubbing for the cameras. But that doesn't mean all of that indignation was necessarily faked.
Several senators cursed PaulNanke for not reacting sooner to the mortgage mess. Our friends at seekingalpha.com appear to agree.
Putting together tape for today's Planet Money podcast, I came across this bit from our interview with China specialist Brad Setser yesterday. We asked Setser whether this $700 billion bailout amounts to real money.
Keep in mind that to economists, $1 million or even $100 million is not an especially large sum. But $700 billion? That's a different deal, Setser says:
:"$700 billion is a very large sum. It's more than the U.S. oil-import bill for a year, significantly more. It's equal to the amount that we borrow from the rest of the world in every given year, which is a very large sum. It's about five percent of U.S. GDP -- it's real money."
President Bush has conceded to several changes to its rescue plan for the troubled banking industry, including agreeing to compensation limits for bank executives taking part in the plan and need for more help for homeowners facing foreclosure, according to Democrats.
Chairman of the House Financial Services Committee Rep. Barney Frank said the Treasury also agreed to Democrats' idea that the federal government should receive warrants to take an equity stake in financial firms in exchange for the government purchasing toxic assets from them.
The House released its draft plan for the bailout late this afternoon.
Fed chairman Bernanke, President Bush, Treasury Secretary Henry Paulson and SEC chairman Christopher Cox.
Chip Somodevilla/Getty Images
Just press play.
The Bush administration has asked Congress to pass a $700 billion bailout of Wall Street.
Jon Macey, deputy dean of Yale Law School, says it's clear that the economy seriously hit the skids last week and that something had to be done. What's got him worried is the sweeping power the administration wants Congress to hand over.
Sen. Chris Dodd (left) wants to limit executive pay. The bank lobbyists, not so much.
Lauren Victoria Burke/AP
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Scott Talbott, chief lobbyist for the Financial Services Roundtable, will spend this week trying to get the best possible deal for his clients -- the bankers and investors whose miserable balance sheets almost brought down the global economy last week.
Now those bankers stand to get a bailout from the federal government. Congress and the U.S. Treasury are working out a bill that would allow the Treasury secretary to buy up $700 billion in bad debts.
Talbott says the banking industry does bear some responsibility for things going so wrong, though not sole responsibility. Among his concerns this week: erasing a proposed provision to limit executive pay.
In Sunday's New York Times, Yale professor Robert J. Shiller gives more ink to one of his idea for helping prevent future housing crisis -- a pitch he also spells out his new book, The Subprime Solution.
Shiller famously called the market top in 2000 in his earlier book Irrational Exuberance. His other claim to fame is co-founding the Case/Shiller Index, which tracks home prices in major U.S. cities.
Now, he's proposing borrowers be able to take their own financial situation into account when they pay off their mortgages.
As envisioned by Shiller, a "continuous-workout mortgage" would adjust the loan terms on a monthly basis based on a borrower's ability to pay. The concept was tried briefly in the late 1970s and '80s, when skyrocketing inflation was pushing mortgage payments higher.
A lot of you are asking whether the current financial crisis is an outgrowth of the subprime housing mess. We'll be circling back to this in the podcast, but for now, we'll go ahead and say yes.
Investors bundled and sliced mortgages, some of them very risky, into mortgage-backed securities. As homeowners began defaulting on those mortgages, banks and other investors found themselves in a pinch. The housing bubble burst, dragging down the value of the collateral.
The New York Times gave a cool keyhole look into that in a feature on Sunday about Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. For them, it's all about the housing:
"Going back a long time, maybe a year ago, Ben, as a world-class economist, said to me, 'When you look at the housing bubble and the correction, if the price decline was significant enough,' " the only solution might be a large-scale government intervention, Mr. Paulson said.
OK, I'm not actually going to read all of these books this weekend. I'll be reading the various bailout proposals. But I will thumb through many of them:
- The Great Contraction, by Milton Friedman and Anna Jacobson Schwartz (First chapter is available for free.)
Love him or hate him, Milton Friedman's analysis of the Great Depression and all the things the Fed got wrong is the touchstone against which all other views are measured.
- The Trillion Dollar Meltdown, by Charles Morris.
I keep mentioning it because it helped me so much in understanding the crisis. It's short, it's readable. You will be able to show off to all your friends how much you know.
- Essays on the Great Depression, by Ben Bernanke. (Chapter one.)
A confession: this has been sitting on my shelf for months, making me feel guilty for not reading it. Even if Bernanke were not Chairman of the Fed, this would be must reading now. He is THE living scholar of the Great Depression. And, since he's running the show, it is even more important to understand his thinking.
The discussion of the RTC (Resolution Trust Corporation) concept is useful as a signal of bipartisanship. Until now, there's been the sense that each party thought it might benefit from financial chaos. So it is good to have Congress realize all at once that the chaos was hurting incumbents in their reelections and therefore had to be stopped.
That's from economist David Malpass, formerly of Bear Stearns. Now on his own.
He's saying this week's sudden promise of bipartisan cooperation is not a sign of politicians putting the safety of the nation above their petty partisan bickering. It's far uglier. It's people with power--from both parties--agreeing that they want to keep power.
There will be a day--maybe several years from now--when we'll be able to read some fabulous book about the behind-the-scenes maneuvers of this tumultuous week. I truly have no idea what that book will tell us. But I'm sure there will be some heroes and there will be some villains. It will be fascinating.
Many economists seem to, generally, support the radical proposals of the past 24 hours. They all hate the idea of a bailout, but say something along the lines of, "he had no choice."
Luigi Zingales, of University of Chicago, though, says there is another, better way.
Maybe that big: Treasury Sec. Henry Paulson explains the bailout.
Chris Kleponis/AFP/Getty Images
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It's an unsettling notion, but economist Raghuram G. Rajan says the government appears to be acting out of panic in its move to bail out Wall Street. What's more, Rajan, former chief economist at the International Monetary Fund and current professor at the University of Chicago, says it looks to him like a case of politicians piling on to a quick solution in an election year.
Seriously, that's what he said. You'll find all that, plus his proposal for solving the financial crisis, in today's podcast.
If you were holding out for an answer about what the crisis means for the price of milk, it's toward the end of this edition.
OK, go ahead and worry. The government's idea for saving Wall Street could work out well for you, or ... not. I say that after talking to Raghuram G. Rajan, former chief economist for the International Monetary Fund and current University of Chicago professor.
Rajan talked to us for our Planet Money podcast -- I'll post it later today -- and he described the Wall Street situation this way:
In the midst of the ongoing financial crisis, news has tended to fall into two camps. First, there's the question of what's happening -- who's winning, who's losing, and what's going to happen to my 401(k).
The latest is that Congress and federal officials are moving toward a super-bailout of the financial industry. The idea is to stop the piecemeal rescuing of troubled lenders with a new plan, one that would have the government buy up billions in bad loans. By some estimates, the plan could require $1 trillion.
It's an old question, but one being asked a lot these days. How much of the collapse is just fear?
"Stop the insanity," wrote Glenn Schorr a UBS analyst. "It's all confidence, it's not reality"
And here where I live in Baltimore, the Fortune 500 company Constellation Energy's stock plummeted after what the rating agency Standard & Poor's called an "acute crisis of confidence." (Warren Buffett is now buying it.)
I asked Jeff Frankel at Harvard about all this yesterday. He said sometimes running makes a kind of perverse sense.
"If you're in a stampede, you look pretty foolish" standing still, he said. Plus, "you get killed.
"So it's not exactly irrational from the individual viewpoint."
I thought about this later. People talk about the wisdom of the markets.
Sometimes it's the wisdom of the herd.
Maybe we need one brave cow. Or cow herder, I guess.
Adam Davidson makes a guest appearance at Slate's new site, The Big Money. He's on about credit default swaps, which you need to understand because they make it so that:
Commenter Robert digs up this op-ed from the Washington Post. It's by former New York Gov. Eliot Spitzer (who knows a thing or two about market economies), and it dates back to Feb. 14, 2008.
In "Predatory Lenders' Partner in Crime: How the Bush Administration Stopped the States From Stepping In to Help Consumers," Spitzer trumpets his efforts to shield consumers from unsavory mortgage brokers. He writes:
What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.
Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.
So I spent yesterday calling around to ask people about whether the government was totally insane to loan AIG up to $85 billion. I only got one YES (that's the "can't run the postal system" line). Everyone else felt the government was going to make money on the deal.
So why doesn't the government play white knight more often -- as a way of raising money?
"That would be socialism," Bob McTeer said. He ran the Dallas Fed for 14 years.
Bob's right. And by that measure, we're a little more socialist today. The Fed now owns zillions of mortgages and pieces of companies it never used to.
Remember, this is the agency that was supposed to just be focused on balancing inflation and growth.
Good stories in the NYT about the strange new role for the Fed. Here and here.
It seems like this is a ripe opportunity to do one of those Daily Show kind of things where you do a little research and show the titans of finance bellowing for release from the hand of government, singing the praises of the market and its perfect mechanism, and then grabbing at the public purse when they've made a mess of things and don't want the market to clean it up.
There's only one problem here: I don't see any hypocrisy.
Wait, wait, you're saying, isn't it true that they call for free market when they're doing well and then for a bailout when things go bad.
Yes. It's true. But they're not hypocrites. They're businesspeople. Not idealists.
They want money. They want profit.
When they make money on the free market, they call for the free market. When they make money through regulation, they call for regulation. When they make money through government bailouts, they call for bailouts.
They are entirely consistent.
The only consistent free market idealists I've heard of are economics professors, a small group of activists and, possibly, John Mackey, CEO, of Whole Foods.
BTW, business is not always anti-regulation. They are often big boosters of regulation for, again, selfish reasons. Bruce Yandle explainshowthis works.
