Opinion

Felix Salmon

Live Bank Bailout Discussion

Reuters Staff
Mar 24, 2009 13:27 UTC

I’m discussing Treasury’s bank bailout plan with Brad DeLong, Mark Thoma, and James Kwak over at Seeking Alpha right now; I’d embed the discussion here, but the column width makes it uncomfortably cramped. So come on over and join in!

Reprinted from Portfolio.com

Treasury Bleg

Reuters Staff
Mar 24, 2009 13:19 UTC

Ezra Klein quotes a distraught commenter, in the wake of the news about Treasury’s latest nominations:

There’s no one in the top tier of Treasury who’s ever spent a day working on Wall Street. That’s amazing.

How rare is this, really? Obviously there was Wall Street experience in the Rubin and Paulson years. But in the Summers and O’Neill and Snow years, how many of the top-tier technocrats had Wall Street experience? Robert Steel doesn’t count: he only ever worked for Paulson.

Remember, pace Wolin, the soon-to-be deputy Treasury secretary, that working at a Wall Street law firm or a big insurance company doesn’t count: the commenter clearly thinks that it’s experience at a bank which really matters. (And not the Federal Reserve, either, or Geithner himself would count.)

Reprinted from Portfolio.com

Remember Bear Stearns?

Reuters Staff
Mar 24, 2009 11:41 UTC

I have a bloggingheads diavlog with William Cohan, who’s out plugging his new book on the collapse of Bear Stearns. Of course we talk about subsequent collapses too, like Lehman and AIG, and what caused them, and whether it’s possible to prevent them. At least we know from Lehman and AIG that the Bear collapse wasn’t entirely a function of the fact that Jimmy Cayne spent too much time playing bridge.

Reprinted from Portfolio.com

Africa Savings Datapoint of the Day

Reuters Staff
Mar 24, 2009 08:53 UTC

Tyler Cowen singles out this datapoint from Paul Collier’s new book:

Anke and I have estimated the proportion of Africa’s private wealth that is held outside the region. By 2004 it had reached the astounding figure of 36 percent: more than a third of Africa’s own wealth is outside the region.

If I’m astounded by the 36% figure, that’s because it’s so low, not because it’s so high. It makes sense for anybody with wealth to diversify geographically; it makes much more sense for Africans, where domestic wealth can be arbitrarily frozen or confiscated at any time. Indeed, an entire industry of Nigerian 419 scammers has arisen on the back of the existence of precisely such policies.

Alan Stanford, too, made his billions largely thanks to the risk of confiscatory domestic policies: the plurality of his deposits came from Venezuelans fearful that Hugo Chávez would freeze or repurpose any of their wealth held domestically, and in general the customers of Stanford International Bank were people who thought that its offshore status was a feature, not a bug.

The middle classes in developing nations often face enormous practical difficulties — not to mention foreign-exchange risk — if they want to diversify internationally. It’s not easy for the average Brazilian to open a brokerage account in Miami, although it’s commonplace for the Brazilian elite. But in Africa, of course, the middle class is tiny: the overwhelming majority of the country’s investable wealth is held by a very small elite class of individuals. Those individuals have every incentive to park their money abroad, especially in no-questions-asked jurisdictions.

None of this is good for African development — high domestic savings rates are a key driver of domestic growth, and sending one’s money off to Switzerland or Cyprus isn’t going to help the development of the Ivory Coast. It’s a tragedy of the commons: it makes sense for any given individual to keep his money abroad, but when everybody does that, it harms the country enormously. So color me cautiously upbeat about the fact that 64% of Africa’s private wealth is still invested inside the region. One can hope that number will grow, of course, but I don’t think it’s at present devastatingly low.

Reprinted from Portfolio.com

The Geithner Plan: How the Public Can Gain

Reuters Staff
Mar 24, 2009 08:34 UTC

One further thought about the Geithner bailout plan: a lot of relatively small and new public-private investment partnerships are going to be issuing debt with an FDIC wrap. In pratice, that’s likely to mean bonds with no credit risk but with a large illiquidity premium. If you’re a risk-averse retail investor who doesn’t want to take credit risk but who’s also scared of the Treasury bubble, this could be a sensible investment. You get none of the upside, none of the downside, and a large part of the implicit subsidy. It’s just a pity that it’s so hard for retail investors to buy bonds in the US.

Reprinted from Portfolio.com

How to Look at the Dow

Reuters Staff
Mar 24, 2009 08:21 UTC

I had a brief discussion with Jesse Eisinger yesterday about the stock market reaction to the Geithner plan. The central question: do you look at the level of the index, or do you look at the amount that it moved over the course of the day? Geithner’s first attempt at introducing the plan resulted in the Dow falling 382 points to 7,889; Geithner’s second attempt saw a 497-point rise to 7,776.

If you ignore the direction and just focus on the Dow as a snapshot of how the market feels about the prospects for the economy, you could make a case for investors being more optimistic the first time round than than they were yesterday. That’s true even if you look at a sensible index like the S&P 500, which closed yesterday at 823, down a smidgen from its February 10 close of 827, rather than looking at the silly but ubiquitous Dow average.

There are good reasons to look at the day-to-day movements. If the stock market simply priced in this public-private buy-up-the-toxic-assets plan on February 10, it wouldn’t have rallied so much on February 23. But the technicals matter too: yesterday’s rally had more than a whiff of short-covering to it, while in hindsight the fall on February 10 is barely noticeable when looked at in the context of the massive drop between September and March.

In general, I think it’s ill-advised to use day-to-day movements in the stock market as much of a barometer of anything; and if you are going to look to the Dow in order to gauge market sentiment, make sure to round it off to the nearest thousand points first. Anything more than that will give you a false impression of specificity. All the same, by that criterion we managed to rise from 7,000 to 8,000 yesterday. Which is worth at least a little smile.

Update: Yves Smith makes the very good point that although stocks rose sharply, there was little movement in the bond market, which tends to be a much better barometer of such things.

Reprinted from Portfolio.com

Extra Credit, Monday Edition

Reuters Staff
Mar 23, 2009 23:47 UTC

Inside Obama’s Economic Brain Trust: How Geithner got his job, and other stories from inside the White House.

The Big Takeover: You know you want to read Matt Taibbi’s take on the financial crisis.

Why Advertising Is Failing On The Internet

AIG starts makeover, changes sign at NY office: A large part of AIG will now be known as AIU.

Cuomo Says Half of AIG’s Bonus Money May Be Returned

Finally, posting at this blog will be light for most of tomorrow, but there will be a live discussion of the Geithner plan at 2:30pm, with James Kwak of the Baseline Scenario and hopefully a couple of other boldface names. Hope you can join in!

Reprinted from Portfolio.com

Is Nationalization Still an Option?

Reuters Staff
Mar 23, 2009 23:30 UTC

John Hempton says that I’m misrepresenting his views. He doesn’t think that the banks should just be allowed to muddle along indefinitely: they should be subjected to price discovery (eg the Geithner plan) and then nationalized if they’re found to be insolvent:

I never advocated that muddle through is the right policy. I just happen to think that muddle through will work for most banks because most banks are not that insolvent.

I’m not convinced that the Geithner plan will be particularly great when it comes to price discovery, because correlation is at 1 right now, meaning that differences between good and bad assets get elided, and also because the plan is structured so that you can make a profit even when you overpay. I’m also not convinced that the biggest banks are as solvent as John thinks they are, but he and I have been back and forth on this already, and there’s no point in repeating all that.

On the other hand, Ezra Klein has five excellent reasons why it’s a good idea to bring in private investors all the same, including this one:

Getting private investors to buy-in to this stage of the recovery plan might make it easier to ensure their cooperation with later stages. It may effectively co-opt the participants. Nationalization is one example. If TIAA-CREF vouches for insolvency, the market is likelier to think nationalization an act economic necessity than political capriciousness.

Brad DeLong says something similar:

I suspect that at least one of the reasons the Obama administration is not nationalizing the banks right now is named "Voinovich": getting 60 votes in the Senate for bank nationalization is no easy task with this Senate until the administration can demonstrate that it has gone the extra mile.

I’m not sure I buy it: this plan is not a necessary precursor to nationalization, and the government has given no indication whatsoever that nationalization is its last resort. Yes, it might be a tiny bit easier if this plan fails. But that can’t possibly be a good way of getting there from here.

Reprinted from Portfolio.com

The New Econoblogger A-List

Reuters Staff
Mar 23, 2009 23:12 UTC

It’s the invite everybody wants to have gotten: were you invited to join Treasury’s econoblogger conference call? Clusterstock, Dealbreaker, and Paul Kedrosky found the golden ticket in their inboxes, and Brad DeLong asked a question — although one would hope that Treasury would be talking to him informally anyway.

As for the list of people who didn’t get an invite, they include John Hempton, Yves Smith, and me; rumor has it that obvious names like Mark Thoma,* Nouriel Roubini, Tyler Cowen, and Calculated Risk weren’t invited either, but I haven’t checked. Certainly the call seems to have been very short; if many econobloggers did get the invites, they quite possibly — like Kedrosky — didn’t get them in time.

Still, a golden star goes to Brad DeLong: going by Dealbreaker’s timing, he received the email at 5:19am his time, and was on the call at 7am his time. There’s the kind of conscientious econoblogging which gets you the coveted invitations!

*Update: Mark emails to say he got an invite. Abnormal Returns got one too. As did Steve Waldman.

Reprinted from Portfolio.com

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