Lunchtime Links 4-13

April 13, 2010

The Origins of the Next Crisis (Ed Harrison) Great post. Long, yes, but also wise. Understanding the distinction between stocks and flows is very helpful.

Crack shack or mansion? (ht Kedrosky) I scored a 14 out of 16….lucky guesses all.

Imagine the bailouts are working (Sorkin, NYT) Well said. I would add that the government could make as much money as it wants to the degree its willing to borrow/inflate to drive up the price of assets it has purchased. But it faces its own peculiar liquidity constraint. Eventually accumulated assets have to be sold back to the market. Theoretically anyway. The more it accumulates, the more it must unload, putting more downward pressure on prices when the unwind gets into gear.

Fed’s Tarullo: Consider regular bank stress tests (Kaiser, Reuters) Great idea. The Breakingviews team agrees!

Wherein Kerry Killinger “takes responsibility” for WaMu’s collapse and then totally absolves himself of responsibility (Congressional testimony) He perpetuates the canard that WaMu was seized prematurely. Bull. Depositors were running and the bank was insolvent. It is the law of the land that regulators seize such banks in order to protect the Deposit Insurance Fund. The fact that a $300 billion insolvent bank was seized, sold off and cost the DIF nothing is, without doubt, FDIC’s greatest accomplishment of the crisis.

FDIC wants to extend new deposit insurance program (FDIC) Sheila Bair may want to extend it even further, beyond the December expiration according to comments at a public meeting.

FDIC is pitching this as a way to protect small banks. They point to this chart (click here to enlarge):

Slide2

It shows how depositors in transaction accounts (which business use for things like meeting payroll) flew from small banks to protected TBTF banks in autumn ’08. The TAG deposit insurance program arrested that flight.

But expanding deposit insurance just deepens moral hazard. It would take an act of Congress to expand this program to 2013. Better that they put a tighter cap on the market share of deposits banks are allowed to hold.

Sheila Bair is well aware of the moral hazards created by TBTF banking. Yet she ignores the moral hazards created by her own agency…

Comments

You write:

“… the price of assets it has purchased. But it faces its own peculiar liquidity constraint.”

Couldn’t the Treasury issue $500 billion in extra
debt, get cash from the Fed, and buy up residential
properties on the cheap?

There’s already trillions in T-Bills worldwide,
plus US currency. And anyway, it seems US
cash should be accepted in many places, just
as long as the printing presses aren’t out of
control.

The strange thing here is that US trading
partners seem to like the idea of a strong
US dollar (China, for instance). I guess
issuing more US Gov debt might be helpful
for some, and unhelpful for others.

Mr. T.

Posted by MrTortoise | Report as abusive
 

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