The NYT’s op-ed page is positively infested by econobloggers today: there’s not only myself, but also a certain Princeton economics professor whose blog you might have noticed. His column today echoes the big Simon Johnson essay in the Atlantic, bemoaning the decades-long rise in the power of the financial sector, which still seems to have US governments both red and blue entirely captive:
Here’s how Gerald Seib leads his WSJ column today:
In poker, there’s a maneuver called "all-in," in which a player pushes all his chips to the center of the table in one big bet.
By that standard, President Barack Obama is conducting an all-in presidency.
Consider three assets. Asset A is a basket of subprime mortgage-backed bonds, sitting on the balance sheet of JP Morgan Chase. Asset B is an identical basket of subprime mortgage-backed bonds, being traded in the secondary market. And Asset C is a credit default swap written on that basket of subprime mortgage-backed bonds.
The Geithner bank bailout plan is released. What would you expect to happen to the prices of Asset B and Asset C?
If you’re Krishna Guha of the Financial Times, you’d reason something along these lines: Thanks to the availability of cheap government funding to buy it, Asset A will rise in price. Since Asset B is identical to Asset A, then Asset B will rise in price too. And since the spreads on Assets A and B have both tightened, then the spreads on a CDS written on that asset must be tightening too, thanks to the CDS-cash arbitrage. So expect the CDS spread to narrow, just as the yield on Assets A and B has fallen.
Well, guess what. If you look at the market, Asset B has not risen in price, and the spread on Asset C has not tightened. And Krishna Guha is worried:
Steve Waldman puts his finger on the mission-creep problem at the FDIC:
It’s as if an insurance company that ordinarily refuses to cover homes in hurricane states suddenly offered policies only to purchasers looking to build homes on Gulf-coast barrier islands.