The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.Sure sounds like blank check.
The price at which the illiquid assets will be acquired by the TAD will be crucial for its effect on future bank behaviour. Prices should be higher than what the banks that own these assets now can obtain in the market, but as far below their fundamental value as is consistent with the survival of these banks. This is both to protect the tax payer and to create the right incentives for future risk taking by the banks. Punitive pricing is therefore essential. If the banks and their shareholders don’t complain loudly about expropriation through under-pricing, then prices are too high.Since those managing the agency are unlikely to have much of a clue about the fundamental value of these illiquid assets, the TAD should arrange reverse auctions as price discovery mechanism. I recommend a reverse Dutch auction as a particularly effective mechanism to transfer value from the banks to the tax payers.
Paul Krugman, who has generally been a Bernanke-booster, is dubious:
Here’s the thing: historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.
The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.
Some are floating an alternative aproach, which would involve the government making equity investments in banks. The Washington Post's Sebastian Mallaby writes:
Within hours of the Treasury announcement Friday, economists had proposed preferable alternatives. Their core insight is that it is better to boost the banking system by increasing its capital than by reducing its loans. Given a fatter capital cushion, banks would have time to dispose of the bad loans in an orderly fashion. Taxpayers would be spared the experience of wandering into a bad-loan bazaar and being ripped off by every merchant.
Raghuram Rajan and Luigi Zingales of the University of Chicago suggest ways to force the banks to raise capital without tapping the taxpayers. First, the government should tell banks to cancel all dividend payments. Banks don't do that on their own because it would signal weakness; if everyone knows the dividend has been canceled because of a government rule, the signaling issue would be removed. Second, the government should tell all healthy banks to issue new equity. Again, banks resist doing this because they don't want to signal weakness and they don't want to dilute existing shareholders. A government order could cut through these obstacles.
Meanwhile, Charles Calomiris of Columbia University and Douglas Elmendorf of the Brookings Institution have offered versions of another idea. The government should help not by buying banks' bad loans but by buying equity stakes in the banks themselves. Whereas it's horribly complicated to value bad loans, banks have share prices you can look up in seconds, so government could inject capital into banks quickly and at a fair level. The share prices of banks that recovered would rise, compensating taxpayers for losses on their stakes in the banks that eventually went under.
Krugman comes to a similar conclusion. Here is Calomiris' FT piece.
Overall, 59 percent of our economists say Obama would be best for the economy long term, with 31 percent picking McCain, and 8 percent saying there would be no difference.That's according to Scott "Dilbert" Adams, who commissioned a survey of over 500 American Economic Association members. No word on who economists thought would be best for the economy short term (since in the long run, we're all dead, of course). Hat tip: Mankiw.
SQUINT hard, and textbook publishers can look a lot like drug makers. They both make money from doing obvious good — healing, educating — and they both have customers who may be willing to sacrifice their last pennies to buy what these companies are selling.It is that fact that can suddenly turn the good guys into bad guys, especially when the prices they charge are compared with generic drugs or ordinary books. A final similarity, in the words of R. Preston McAfee, an economics professor at Cal Tech, is that both textbook publishers and drug makers benefit from the problem of “moral hazards” — that is, the doctor who prescribes medication and the professor who requires a textbook don’t have to bear the cost and thus usually don’t think twice about it.
“The person who pays for the book, the parent or the student, doesn’t choose it,” he said. “There is this sort of creep. It’s always O.K. to add $5.”
In protest of what he says are textbooks’ intolerably high prices — and the dumbing down of their content to appeal to the widest possible market — Professor McAfee has put his introductory economics textbook online free. He says he most likely could have earned a $100,000 advance on the book had he gone the traditional publishing route, and it would have had a list price approaching $200.
“This market is not working very well — except for the shareholders in the textbook publishers,” he said. “We have lots of knowledge, but we are not getting it out.”
He's right. I have moved away from using a textbook for macro principles and I sometimes fantasize about ditching them altogether.
It is not clear what Prof. McAfee himself is maximizing; his behavior seems to be maximizing social rather than personal welfare... He is acting suspiciously like the "social planner" we periodically encounter in economic theory. And not for the first time - see this earlier post on his attempt to fix the academic publishing process.
Four people were arrested during a gathering that drew thousands Monday night to protest Miami University's decision to hold classes Tuesday.The protest outside of Miami President David Hodge's home drew an estimated 3,000 and agencies throughout Butler County — including nearly 70 officers — were called in to assist, according to the Oxford Police Department.
Fortunately, I am teaching graduate students this semester, so I did not have to deal with any complaints about having to work during the power outage. I would have been unsympathetic, particularly given the light provided by the star we orbit, and the availability of such non-electricity using technologies as the pencil (and the library was open!). Of course, such lack of sympathy would have killed my teaching evaluations, and that would be duly noted by the Dean and Provost, etc... Our incentives are to respond with indulgence, and this little disturbance (4 misdemeanor arrests) seems a logical consequence of the "customer satisfaction" mentality universities too easily slide into...
I never thought I'd agree with Sheriff Jones, but I do:
Butler County Sheriff Richard K. Jones said he was disappointed to hear about the protests Monday night "because there are people out there really suffering."
"I have a place for them to stay that does have electricity, and I will make room for them," Jones said referring to the Butler County Jail. "We don't have time right now to deal with spoiled little kids."
Update (9/17): To be fair, I should note that none of my colleagues who are teaching undergrads this semester have reported any power outage-related whining or excuse-making.
CBO estimates that the deficit for 2008 will be $407 billion, substantially higher than last year’s $161 billion. As a share of the economy, the deficit is projected to rise to 2.9 percent of GDP this year, up from 1.2 percent of GDP in 2007. That 1.7 percentage point increase as a share of GDP is roughly evenly split between a 0.9 percentage point decline in revenue relative to GDP (reflecting the impact of lower corporate tax revenue and the rebates enacted as part of stimulus legislation this year) and a 0.8 percentage point increase in spending relative to GDP.As a share of GDP, that is not as bad as the Reagan-era deficits (which peaked at 6% of GDP in 1983).
According to the CBPP, the total deterioration of the fiscal picture is $1.256 trillion; the chart is based on the parts due to tax and spending policy ($1 trillion), and doesn't include the $256 billion due to the economic slowdown. (Hat tip: Ezra Klein).The Justice Department laid out a broad policy on antitrust enforcement on Monday that drew an unusually sharp rebuke from three federal trade commissioners, who said it would protect monopolies from prosecution.A 215-page report from the Justice Department, coming after nearly a year of public hearings, was originally meant to lay out a governmentwide approach to combating anticompetitive business practices. Instead, it exposed a rift between the Justice Department and the Federal Trade Commission over whether the government was protecting consumers or big businesses.
In a quick response to the Justice Department report, three of the four commissioners on the F.T.C. issued a statement saying that the policy was “a blueprint for radically weakened enforcement” against anticompetitive practices. They said the Justice Department guidelines allowed monopolies to act “with impunity” and “would make it nearly impossible to prosecute a case.”
This is far outside my bailiwick, but it sure sounds like a good thing that the Justice Dept. does not have a monopoly on antitrust. Hm... I wonder would Cournot or Bertrand be more appropriate to model this duopoly? (And that's all the I.O. I know..)
But past recessions have also been clearly visible in data for output growth:
The "recovery" looks pretty anemic by historical standards, but there is not the sharp drop in output growth (yet?) that we've seen in past recessions. As Krugman puts it: [T]his is an odd slowdown, by historical norms: no clear decline in GDP, no months of 6-digit job losses. Instead, the economy is being slowly ground down.Among other things, rising output and falling employment implies that labor productivity is doing well (indeed, the BLS reported 4.2% growth in the second quarter). Usually, that's good news. Hm...What I suspect, however, is that this is what the 21st-century business cycle looks like. The sharp slumps of the past partly reflected an inflation-prone environment, in which the Fed occasionally had to slam on the brakes; it also reflected a mainly goods-producing economy, with lots of inventories, in which recessions had a lot to do with inventory adjustments.
While the G.D.P. has continued to rise, wages have stagnated, pensions have shrunk or disappeared and income inequality has increased. Other shortcomings have become apparent. The boom in prison construction, for example, has added greatly to the G.D.P., but the damage from the crimes that made the prisons necessary is not subtracted. Neither is environmental damage nor depleted forests, although lumbering shows up in government statistics as value added. So does health care, which is measured by the money spent, not by improvements in people’s health. Obesity is on the rise in America, undermining health, but that is not subtracted.Those are some of the bigger issues, but last week's upward revision of the second-quarter growth rate up to 3.3% (from 1.9%) illustrated the disconnect that sometimes exists between economic statistics and perceptions in the short run.
