Tag Archives: Financial crisis

Change the culture, and pander to it---restructure the zombie banks

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President Obama, on why the new financial bailout/rescue plan doesn't temporarily "nationalize" the banks (as Sweden successfully did in its 1990s financial crisis):

"Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America's different. And we want to retain a strong sense of that private capital fulfilling the core -- core investment needs of this country.

And so, what we've tried to do is to apply some of the tough love that's going to be necessary, but do it in a way that's also recognizing we've got big private capital markets and ultimately that's going to be the key to getting credit flowing again."

Well, we voted for change, didn't we, so let's start changing the culture that says we can't even temporarily nationalize the largest banks with the worst balance-sheet issues, in an emergency that threatens the world economy and is in part attributable to these banks' irresponsibility.  Say, as many, including lefties like the former IMF chief economist Ken Rogoff, and lefty financial-history prof Niall Ferguson seem to believe, a belief perhaps even reflected in the stock market's fall on Geithner's press conference, we need to temporarily nationalize the banks.  Call it restructuring, make the call that the zombie banks are effectively bankrupt and an expedited, not court-supervised, receivership is needed, call it tough love, pander to our "culture" of responsibility.  Nationalization is a stupid word to use---it suggests an intention for long-term transfer of banking to the government, and few are seriously suggesting that.  We can do bank restructuring and still "retain a strong sense of that private capital fulfilling the core investment needs of this country." Maybe it can be done, in a stealthier way, through Geithner's plan---but it's apparently not clear to most what Geithner's "plan" will turn out to be, in practice.

Lessons from Japan on fiscal stimulus?

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Paul Krugman's thoughts on Japan from around a decade ago are quite interesting.  He wrote:

But it is quite a stretch to argue that Japan in the 90s is a parallel case [to the US from the Great Depression through World War II]. It might be; but an at least equally, if not more, plausible story is that Japan has a structural excess of saving over investment, even at a zero interest rate; in that case a temporary fiscal stimulus will produce only temporary results.

What continues to amaze me is this: Japan's current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do - even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy - the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance - are rejected as dangerously radical and unbecoming of a dignified economy.

The "exotic" multiple-equilibrium story must not really be that exotic, since just above this he entertains it as an explanation of the 1996 Asian financial crisis, and of the apparent success of WWII spending in lifting the US sustainably out of depression.

The current situation certainly differs from Japan's in the 90's in many ways, but it does raise the question which of those ways are likely to render fiscal policy more effective for us now, than for Japan then.  Of course, I think no-one would argue that we have a structural excess of savings over investment.  But it does appear that the propensity to save may have shifted up at least temporarily.  Do we face an S-shaped consumption-income relation?  If this slump drags on too long, will we need to target inflation?

At the time Krugman wrote these pieces, he felt the multiple-equilibrium possibility looked dubious because there had been prolonged fiscal stimulus, but it  hadn't rendered itself unnecessary.  Others (see the article linked below) think apparently think it just wasn't large enough, and intense enough over a short period of time, to succeed.  And there are those who think that Japan didn't clean up its banking problem effectively---that its banks still had the balance sheet problems that, Krugman argues, fiscal stimulus can provide breathing room to work out.

Greg Mankiw links to an interesting article on Japan, that largely confirms the continuance of the situation Krugman described in 1999---fiscal stimulus not having rendered itself unnecessary by producing a self-sustaining recovery.  Make sure and read past the first page.  It would be interesting to further investigate the content, and methodology, of the Institute for Local Government study that concluded:

every 1 trillion yen, or about $11.2 billion, spent on social services like care for the elderly and monthly pension payments added 1.64 trillion yen in growth. Financing for schools and education delivered an even bigger boost of 1.74 trillion yen, the report found. But every 1 trillion yen spent on infrastructure projects in the 1990s increased Japan’s gross domestic product, a measure of its overall economic size, by only 1.37 trillion yen, mainly by creating jobs and other improvements like reducing travel times.

Mankiw has his own suggestion for a stimulus plan, about which a bit more in the next post.

Niall's back with an extra dose of Keynes-bashing, but now Brad's on the case

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In an LA times editorial, Niall Ferguson augments his Feb. 2 Financial Times piece, which I commented on earlier, with much more explicit Keynes-bashing and fiscal-stimulus-dissing.  This time, Brad's on the case.

Long Treasury yields did rise a bit (roughly from just under 3, to just over 3.5, percent over the last few weeks), and there was similar if less pronounced movement across the longer end of the curve, so maybe we shouldn't count on financing the whole stimulus at todays low rates---though I couldn't tell you if this is a response to the clear likelihood of a stimulus package, which I would have thought would have been priced in for a while now.  But if we're getting output closer to potential, sooner, with the stimulus, we're increasing the overall stream of real output that the Treasury will have avaible to tax to pay these things back---increased indebtedness being met with increased debt-servicing capability.  Maybe not one-for-one, although that cuddly, big-eyed multiplier sure helps.  The cuddly reference:  "Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, they seem to be regressing to macroeconomic childhood, clutching the Keynesian "multiplier effect" -- which holds that a dollar spent by the government begets more than a dollar's worth of additional economic output -- like an old teddy bear."---Ferguson from the LA Times piece.)  Among the most multiplier-besotted economists would seem to be Paul Krugman;  here is a fairly random sample of him failing to anticipate the current crisis (you can go back much further with him on the dangers --- and let's not forget, the existence --- of the housing bubble).  As for regression to childhood, there seems to be a more serious epidemic among some (but far from all!) politically conservative economists, of regression to being macroeconomically unborn.  What's Ferguson's argument here: If they teach it in Econ 1 in every halfway respectable university in the country, there can't be anything to it?

Radicals asking for bank takeovers in left-wing rag: Reinhart and Rogoff on the WSJ op-ed page

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Carmen Reinhardt (Economics, U MD) and Kenneth Rogoff (Economics, Harvard), on the WSJ editorial page:

"For far too long, official estimates of the likely trajectory of U.S. growth have been absurdly rosy and always behind the curve, leading to a distinctly underpowered response, particularly in terms of forcing the necessary restructuring of the financial system. Instead, authorities should be prepared to allow financial institutions to be restructured through accelerated bankruptcy, if necessary placing them under temporary receivership, and only then recapitalizing and reprivatizing them."

But what would the former chief economist of the IMF know about such things?

This ain't no disco...

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NEW YORK (AP) -- Wall Street is now worrying about the companies usually seen as safe havens.

After an early rally Wednesday, investors succumbed to concerns about disappointing earnings and the market ended the day with a loss. Falling consumer stocks weighed most heavily on the Dow Jones industrial average, which slid 122 points.

...

Falling orders at Cisco Systems Inc. were adding to investors' anxiety. The world's largest maker of computer networking gear said after the end of trading that orders showed a sharp drop in January. Investors have been pumping money into tech stocks since the start of the year believing those companies would be less likely to see demand fall as businesses looked to cut costs with equipment upgrades.

Nasdaq 100 futures were down more than 1 percent after Cisco's report.

....

"There's so much uncertainty right now that investors are looking for any clues that the economy may be starting to stabilize and turn around," said Michael Sheldon, chief market strategist at RDM Financial Group.

"Safe havens?"  "...pumping money into tech stocks?"  "...looking for clues the economy may be stabilizing and starting to turn around?"

Stocks might be fairly or even a bit low-valued now on historical measures, but if people are really thinking in the terms these quotes suggest, they haven't factored in the next couple of years of the economy, or they are REALLY believers in the---admittedly existent, for a change---competence of the current administration to deal with a truly daunting situation, and its ability to lead the world in dealing with it.   In the words of the Talking Heads.... this ain't no party, this ain't no disco, this ain't no foolin' around!

So, buy some at this level if you're concerned about being left behind in a turnaround... but save some for Dow 6000.... and some more for 5000 if we get there...irrational despair, and plain old illiquidity and overleverage, of which there is likely some left, leading to rational despair, should make things overshoot on the downside at least once...