global financial crash yay!

T

turtles

in the sea
Essentially then, this program sinks or swims on whether these assets are truly worthless or actually just undervalued?

Krugman's (and other's) retort is that the assets are worthless, they were valued based on an assumption of unlimited growth, on a housing boom that they themselves helped create. And now that the economy truly is in the shitter, the likelihood of further defaults and housing price decline is pretty high so yeah...I guess I agree, unless this plan can magically re-blow the housing bubble really quickly, it's probably doomed.

So what happens when the FDIC is left standing with the bulk of the defaulted debt? Does that basically equal instant inflation? Or would the Fed go in to debt or something? I've never really understood how the FDIC can just basically guarantee everything.
 
vimothy

vimothy

yurp
Geithner thinks that the financial crisis is a liquidity problem, while many economists think that the real problem is one of solvency. If the problem is liquidity, it's enough to buy up assets and hold them until the markets return to normal. The theory is that if secondary markets become more liquid, asset prices will rise, bank capital ratios will go back to normal and they can start lending again.

It seems that Geithner has constructed a cash flow CDO with private investors taking the equity tranche, which means that they take the first loss, which means that their incentives are such that they will not want to over-pay or take excessive risks with taxpayer money. Treasury funds will give them a lot of leverage ($1tn on top of $30bn capital), so they could potentially make a lot of money, if asset prices go back to normal. If there are $1tn in crappy assets at par value, say, trading for $300bn mark-to-market, firms won't sell to realise the loss. However, if this giant Treasury hedge fund, can buy them up for $750bn, kick start secondary markets, and realise a profit, everything will be gravy once again.

Looks to me like economists hate it (except DeLong), while the professionals are being extremely dismissive of the economists. Sample blog post:

When the broad outlines of the Geithner plan first leaked yesterday, I noted that "it's impossible to offer an informed opinion based on the extremely sketchy details in these articles." The descriptions of the Geithner plan in the WSJ and NYT are so broad and so vague that they can't serve as the basis for any remotely serious analysis. As someone who has practiced structured finance law for many years, the one thing I can tell you for sure is this: the details matter.

But that hasn't stopped a host of bloggers (who I normally agree with) from vocally condemning the plan. Yves Smith is calling on people to contact their Congressmen to express their opposition, and thinks she already has analysis that's "damning on its face," despite the fact that she hasn't even seen the plan yet. Yves is either being lazy or intellectually dishonest, and it'll be hard to take anything she says about the Geithner plan seriously.
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vimothy

vimothy

yurp
Whether this works depends what price is paid for the assets, what the assets are actually worth, and how markets respond. It could work. Nationalisation seems better because it puts a floor underneath losses, whereas Geithner's plan could have taxpayers over or underpaying for the assets, but you have to remember, the goal is not to punish wrongdoers, nor is the goal to make money for the taxpayers, the goal is to increase employment.

If the assets are worthless, then the taxpayer is on the hook. That doesn't necessarily mean inflation. It does mean higher taxes, but governments who print their own currency (like the US) can inflate their way out of debts denominated in that currency. But the budget deficit is pretty large anyway, and the real kicker in historical financial crisis terms is not the bail-out, but the fall in tax revenue due to the resultant economic contraction. If you can reduce the severity of the contraction with stimulus spending (bank bail-out or whatever), the stimulus could pay for itself.
 
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vimothy

vimothy

yurp
Too much noise on the internets today. Lots of otherwise smart pundits jumping in with both feet. In the interest of fairness, I was going to try to collect some posts that suggest that the Geithner plan (fact sheet/white paper/press release) could work, or at least that it isn't the end of the world. Instead, I am just going to link to John Hempton's excellent, longish and wonkish post (written before details of the plan had leaked), Bank Solvency and the "Geithner Plan", which asks the question, ok then, say that banks are insolvent -- what does "insolvent" that actually mean?
 
vimothy

vimothy

yurp
The AIG stuff is a bit off, I think -- disinformation, politics and rage.

Anyway, support for the plan from Chris Carroll:

Judging from preliminary details, the US Treasury’s plan to rescue the financial system is a lot savvier about the relationship between financial markets and the macroeconomy than are the usual-suspects: critics from both left and right who are already pouncing on the Geithner plan.

Unlike the critics, the Treasury has absorbed the main lesson from the past 30 years of academic finance research: asset price movements mainly reflect changes in investors’ collective attitude toward risk.

Perhaps the reason this insight has not penetrated, even among academic economists, much beyond the researchers responsible for documenting it, is that it has not been expressed in layman’s terms. Here’s a try: in the Wall Street contest between “fear” and “greed,” fear fluctuates much more than greed (in academic terms, movements in “risk tolerance” explain the bulk of movements in asset prices)....

...The second response to the market’s remarkable fluctuations in risk attitudes is more in tune with Warren Buffett’s view, following his mentor Benjamin Graham, that market prices move much more than can be justified by the sober judgment of someone with a long horizon and stable preferences. Buffett has arrived at his current perch more by skepticism about the market than by unblinking faith in its wisdom. As Mr. Buffett has shown, patient investors who buy low and wait for underpriced assets to recover can do very well indeed.
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J

josef k.

Dangerous Mystagogue
I still think that the way out of this crisis is to sell Texas to El Chapo...

Or - here would be a bold plan - legalize drugs and then tax them. A massive expenditure instantly turns into a massive source of revenue.

Of course, this is politically impossible.
 
J

josef k.

Dangerous Mystagogue
Perhaps so, but he is clearly a scapegoat for a much deeper denigration of responsibility.

This article is worth reading:

http://www.nybooks.com/articles/22490

As is Soros's comment:

"I find this the most shocking abdication of responsibility on the part of the regulators," Soros writes.

If they could not calculate the risk, they should not have allowed the institutions under their supervision to undertake them. The risk models of the banks were based on the assumption that the system is stable. But, contrary to market fundamentalist beliefs, the stability of financial markets is not assured; it has to be actively maintained by the authorities. By relying on the risk calculations of the market participants, the regulators pulled up the anchor and unleashed a period of uncontrolled credit expansion.

From here: http://www.nybooks.com/articles/21934
 
vimothy

vimothy

yurp
The protests happening this weekend are a pertinent example. What are the protesters protesting? "Capitalism" -- a non answer. What conclusions are the intended audience of the protest supposed to draw? Capitalism is bad, and stuff. What else are they doing while they're there? Smoke a bit of weed, see the city, get dressed up, maybe chuck some abuse at the police, maybe dance to a bit of samba, chat to friends, pick up leaflets...
 
J

josef k.

Dangerous Mystagogue
Reject!

tarjeta2.jpg
 
B

bob effect

somnambulist
Glenn Greenwald : US = Russia/ Argentina

Despite the limitless gorging on public funds by the very oligarchs (government owners) who caused the financial crisis in the first place, the predominant sentiment from our establishment media now is that Obama needs to force ordinary Americans to "sacrifice more." Back in 2006, Jonathan Schwarz wrote this very prescient post predicting that the U.S. would soon adopt the type of so-called "structural adjustments" which, through the IMF, we repeatedly forced upon other heavily indebted, defaulting nations: whereby we would demand that they pursue solutions that further enriched their economic elites while massively cutting the social spending that provided the barest of safety nets to their ordinary citizens. As Schwarz put it yesterday in citing highly revealing comments by Tim Geithner at a CFR conference this week:
There's been a common phenomenon in the third world over the past three decades or so. A country's financial sector, in collaboration with the larger financial world, would create some type of gigantic economic fuck up. The IMF would then (in collaboration with the local financial elites) step in and provide loans in return for what was called "structural adjustment." Structural adjustment involved getting rid of any kind of social spending that made life bearable for everyone else.

In other words, the country's financial elites would use the catastrophes they'd created themselves in order to do what they'd always wanted to but couldn't get away with in normal times. They took the profit, and then imposed all the costs on everyone else.
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Isn't that exactly what is now happening here?
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vimothy

vimothy

yurp
Looks like I was wrong about the PPIP -- the FDIC is guaranteeing the loans, and the FDIC gets its funding from the banks, so the taxpayer is only fronting -- I think -- 12% of the money.
 
vimothy

vimothy

yurp
The IMF would recommend that the USA nationalise the banks, if we weren't talking about the USA, and that is precisely what rich and powerful people don't woant to happen, which is why it probably won't. (That's not to say that nationalisation would be a good idea. I think it probably is, but the sheer size of the banking sector is quite scary).

And isn't Schwartz's argument just a slightly different version of "disaster capitalism"?
 
C

crackerjack

Well-known member
vimothy said:
The protests happening this weekend are a pertinent example. What are the protesters protesting? "Capitalism" -- a non answer. What conclusions are the intended audience of the protest supposed to draw? Capitalism is bad, and stuff. What else are they doing while they're there? Smoke a bit of weed, see the city, get dressed up, maybe chuck some abuse at the police, maybe dance to a bit of samba, chat to friends, pick up leaflets...
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Dude, it's easy to get smug about the financial illiteracy of 'anti-capitalist' protestors, and no doubt they'll be many in the city next week doing just that. It is hella coomplicated stuff.

Mass protest doesn't have to grasp the fine detail, that's not what it's there for. What do you propose instead: a mass movement of pepole sitting at home making wry comments about economics blogs?
 
vimothy

vimothy

yurp
I don't disagree with that, and would not want to dispute peoples' free right to protest even if I did, but what I wonder is, with so many different agendas represented at these protests (as there always is), how is it possible to make a coherent point? And, even if it is possible to make a coherent point, what could it be?

Not to sound dismissive -- I've been on protests, and they have always seemed to be as much about the event itself -- the day out, the music, the dressing up, the banners -- than any underlying political message. This is not necessarily a bad thing, IMO, but it is a thing. I guess that you could contrast a protest against the war in Iraq with a protest against globalisation, or neoliberal capitalist greed. I think there is a qualitative difference there -- one is quite concrete, the other, more nebulous.
 
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