Comments on economics, mystery fiction, drama, and art.

Tuesday, September 30, 2008

Liquidate everything

Why, in a lot of blog comments on the bailout package, do I keep reading things that read a lot like this:

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.”


“It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”... (Andrew Mellon)

Seems to me we should be reading stuff like this:

Some austere and puritanical souls [like Mellon] regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again..." (J.M. Keynes)

(Stolen from Brad deLong.)

I got vision, and the rest of the world wears bifocals

"You just keep thinkin', Butch. That's what you're good at."

"I got vision, and the rest of the world wears bifocals."

(With a tip of the hat to William Goldman, who wrote those lines, and to Robert Redford and Paul Newman, who inhabited the characters, and delivered them.)

Monday, September 29, 2008

Commercial Paper

There's a lot of feeling that the current situation is not of much interest to anyone but big Wall Street players, that, generally, non-financial businesses will be unaffected, or only modestly affected, either by the bailout package (whatever it turns out to be) or by the failure of Congress to pass a bailout.

But ordinary businesses are already paying the price for the chaos in financial markets. All we have to do is look at what's happening in the markets for commercial paper.

On September 2 (according the the Federal Reserve Bank of St. Louis), the AA non-financial commercial paper (typically used to finance inventory purchases or to provide working capital for other purposes) rate was 2.35%, and was basically unchanged until September 12 (2.39%). On September 24, it was 3.35% (And on September 29, 3.14%; it's been fairly volatile in the last week or so.)

The weekly average amount (of daily issues) of commercial paper issued has declined from $8.144 billion during the week ending September 5, to $5.964 billion for the week ending September 26--a decline of about 26%. During the week ending on September 26, daily issue of commercial paper fell from $6.393 billion on Monday to $4.886 billion on Friday--a decline of almost 24%. (Also Federal Reserve data.)

So already non-financial firms have experienced a significant increase in interest rates and a significant cutback in the amount of short-term financing for commercial activities. This makes it harder--and significantly more costly--for businesses of all sorts to finance and manage their activities.

The financial crisis is not "Main Street" vs. "Wall Street." It's about providing consistent and sufficient credit for production, distribution, and sale of the goods and services our economy produces. A continued failure to deal with this crisis will not be confined--has not been confined--to the financial sector. It has already spread into the financing of day-to-day business activity. And unless we find a reasonable solution, things are likely to get worse.

Friday, September 26, 2008

The Republican plan--what gives?

I can't find all that much about the plan that the House Republicans tossed out yesterday, but, from the New York Times, these seem to be the main provisions:

1. Instead of buying frozen mortgage assets with government money, adopt a mortgage insurance approach to solve the problem. Insure all [emphasis mine] mortgage-backed securities (currently the federal government insures approximately half. Treasure Department can design a system to charge premiums to the holders of these assets to fully finance this insurance, instead of financing it with taxpayer dollars.

2. Draw private capital into the market by removing regulatory and tax barriers that are currently blocking private capital formation., instead of injecting taxpayer capital into the system to create liquidity. Too much private capital is sitting on the sidelines during this crisis.

4. Allow temporary tax relief to help companies free up capital to maintain operations, create jobs and lend to one another.

5. Allow for a temporary suspension of dividend payments by financial institutiona and other regulatory measures to address the problems surrounding private capital liquidity.

6. Increase transparency. Require participating firms to disclose to the Treasury the value of their mortgage assets on their books, the value of any private bids within the last year for such assets and their last audit report.

7. Limit federal exposure for high-risk loans. Require that the government-sponsored enterprices [Fannie Mae and Freddie Mac] no longer securitize unsound mortgages.

8. Call on the Securities and Exchange Commission to audit reports of failed companies and to review the performance of the credit rating agencies and their ability to accurately reflect the risks of these failed investment securities.

9. Prevent Wall Street executives from benefitting from taxpayer finaicing.

10. Create a blue-ribbon panel with representatives of the Treasury, the S.E.C. and the Federal Reserve to make recommendations to Congress for reforms of the financial sector by Jan. 1 2009.

I have to digest this. But it does not look very palatable.

UPDATE: Commentary on the Republican proposal (it is in no way a plan, by the way; it calls for the Treasury Department to develop a plan):

Justin Fox, at Time
Brad deLong
Paul Krugman

That should be enough to get started.

Thursday, September 25, 2008

Quoting Keynes

On why we may need large-scale, coordinated, public action to resolve the problems in our financial markets now:

"Markets can remain irrational for longer than you can remain solvent."

In context, this clearly applied to individual investors.

(Keynes wrote it, but I cannot find the source.)

Live by your share price, die by your share price

In the New Yorker, James Surowiecki raises an interesting question:

"But the impact of these mistakes was made worse by a seemingly harmless decision that these companies made many years ago: the decision to go public. Doing so put the firms at the mercy of the stock market, and last week that mercy evaporated."

Read it and think about the issues. It makes some sense to me.

Sunday, September 21, 2008

The Financial Meltdown

I'm not going to say much of anything about this, because other people are covering it far better and in far more detail than I possibly could. For more news and analysis than you probably want, I'd recommend the following:

Paul Krugman's blog (I'd also take a look at Krugman's columns in the New York Times, including--especially--his most recent one).
Economist's View (Mark Thoma's blog)
Econobrowser (Jim Hammilton and Menzie Chin)
Brad DeLong's blog
Calculated Risk

That should keep you busy for a long, long time.

Thursday, September 18, 2008

Time to Sell McCain Short?

So now, courtesy of ABC news, John McCain expresses his deep understanding of how financial markets work:

"McCain said the SEC has allowed trading practices such as short selling to stay in place that turned the "markets into a casino." "

A "short seller" borrows shares of stock from a third party, in order to sell them. (The short seller is "short"--does not currently own--the shares being sold.) The short seller then has to repay the shares of stock to the third party. If the share price falls, the short seller can buy the stock back for less than its selling price, and thereby makes a profit. If the share price rises, the short seller takes a loss, which can, conceiveably, be very large.

It's true that the short seller is, in a sense placing a bet that the share price will fall. But the buyer in this transaction is also placing a bet--that the share price will rise. Short sellers can in fact bring some discipline to markets, by expressing contrary opinions, and by putting their money on the line. (A put option is also a way of expressing your opinion that the share price will fall.) Short selling is already fairly heavily regulated (e.g., you can only short a stock when its price is rising; the broker through whom you are selling must confirm your ability to obtain the shares to settle the trade; etc.). Short sellers are also responsible for any dividends payable.

Short selling, you see, sounds bad--you're selling something you don't actually own. So it's easy to take an ill-considered shot at it. It's easy to allege that stock prices are being driven down by short sellers (and, yes, some short sellers do fabricate rumors designed to make their wishes come true). So short-selling must be predatory, or it must contain fraud.

But short selling is simply one of many ways of expressing--and backing--one's opinion about what's going to happen to share prices. So I think McCain's outrage is overdone, and I expect that his outrage is either faked, or a result of ignorance.

Rewriting a Bureau of Economic Analysis Press Release

Here's the Bureau of Economic Analysis press release on state personal income, in my email inbox this morning:

"The U.S. Bureau of Economic Analysis (BEA) has issued the following news release today:

"U.S. personal income grew 1.8 percent in the second quarter of 2008 with growth accelerating in all but five states. The second-quarter growth was the highest since the first quarter of 2007 and more than double the 0.8 percent pace of the first quarter of 2008. Almost all (0.9 percentage point) of the acceleration is accounted for by the cash rebates taxpayers received from the federal government this spring under the provisions of the Economic Stimulus Act of 2008."

But this does not adjust for price changes, or for population. So, here are my rewrites, first, adjusting for inflation:

"Between the second quarter of 2007 and the second quarter of 2008, real personal income in the US. grew by 0.89%. Among regions in the U.S., the most rapid growth occurred in the Southwest, where personal income rose by 2.89%. Real personal income grew by more than 1% in the Plains states, the Rocky Mountain states, and in New England. Growth was slowest (0.12%) in the mideast states.

"Among individual states, real personal income growth was fastest in North Dakota (8.95%). Real personal income fell in seven states, falling fastest (-0.8%) in Michigan."

And then adding in the adjustment for population:

"Between the second quarter of 2007 and the second quarter of 2008, real per capita personal income in the US. fell by 0.06%. Real per capita income grew fastest in the mideast region (+0.84%) and in the Southeast (+0.77%), but fell in most regions. The decline was greatest in the Rocky Mountain states (-0.93%) and the Far West (-0.72%).

"Among individual states, real per capita income grew in 26 states, most rapidly in North Dakota (+8.56%). Real per capita income fell by the greatest percentage in Idaho
(-2.66%), Arizona (-2.42%) and Utah (-2.35%). Connecticut had the highest real per capita income in both years (around $53,500), while Mississippi (around $28,300) ranked at the bottom in both years."

"...a by-product of the activities of a casino..."

One more time. Keynes on financial markets:

"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism…."

Wednesday, September 17, 2008

An Argument for Defined Benefit Pension Plans

If you're looking for an argument against creating a system of retirement savings with the following characteristics:

1. A defined-contribution system [401(k), 403(b), or, for those of us in academia, something like TIAA-CREF]

2. With the allocation choices made by individuals

3. And heavily weighted toward investments in equities (e.g., common stock)

which means, by implication, an argument for defined-benefit pension plans, the current financial meltdown is as powerful an argument as you could ask for.

Tuesday, September 09, 2008

Contracts, bonuses, and collective bargaining in Major League Baseball

The current controversy in Major League Baseball concerns whether the Commissioner's office unilaterally extended the signing deadline (mignight EST, August 15) for one or more of the clubs negotiating with players chosen in this year's amatuer player draft. Jerry Crasnick has written a lengthy summary of the events, which is well worth reading. I want to focus on two sentences of that piece:

"Any team that wants to shoot the moon on a Boras pick will never announce the signing in, say, early July, because it knows it will risk the ire of the commissioner's office by setting the bonus bar high for everybody else. The teams are instructed to wait as long as possible in such cases."

Any way one tries to interpret these sentences, if they are accurate, they reflect a clear case of collusion among teams in their negotiations with some of the players they have drafted. If this is true, and if I were working for the MLBPA, I'd be thinking abour filing another grievance, one alleging substantial monetary damages to the players inviolved.

Friday, September 05, 2008

The Employment Situation

Another month, another depressing employment report. The eighth straight month of payroll employment declines (job losses of 605,000 since December, seasonally adjusted). (The CPS employment data are down for only 4 straight months, but the job loss is larger--750,000). The highest unemployment rate (6.1%) since September 2003. The unemployment rate is up 1.7 percentage points from its cyclical low in March 2007. The lowest employment-population ratio (62.1%)since (again) September 2003, down 1.3 percentage points from its cyclical high in December 2006. This sure looks and feels like a recession.