Meager environmental benefits of a hefty carbon tax in Norway

Norway adopted in about 1990 carbon taxes that range from $16 to $65 per ton, and gasoline costs $9-10 per gallon (including a carbon tax of about $0.60). The $65 tax did induce natural gas producers to inject produced CO2 under the seabed instead of venting it to the atmosphere, but the lower tax rate on paper mills did not substantially affect how they operate. Significant reductions in the metals industry were achieved by "voluntary" agreements, not taxes. Despite these efforts, CO2 emissions have risen substantially in Norway, according to this Wall Street Journal blog post and the linked WSJ article. (The article does not make clear whether the tax rates are per ton or tonne or for C or CO2.)

So, how much will CO2 emissions have to cost in order to save the planet? I'm guessing the number is considerably higher than the carbon taxers and the cap-and-traders think reasonable and politically tolerable.

Update on Monday, October 6, 2008 at 10:15PM by Skeptic

And the CBO agrees that carbon emissions charges of up to $191 per ton would not significantly reduce US gasoline consumption, in the short term or the long term, in a report released today. 

That comparison suggests that gasoline prices might have to rise above $6.50 per gallon--for example, from a CO2 price that added $2.00 or $2.50 per gallon to gasoline prices--for the average fuel economy of new vehicles in the United States to approach the 35 mpg that the new CAFE standards will require.  But the CO2 prices contemplated in current U.S. climate legislation and in prominent international policy analyses would add much less than $2.00 to the price of gasoline.  Thus, such pricing, by itself, would probably not increase average fuel economy beyond what the CAFE standards will require.

CBO has estimated that under S. 2191, the America’s Climate Security Act of 2007, the price of a CO2 emissions permit would rise from about $23 per metric ton in 2009 to about $44 in 2018 as the stringency of the bill’s cap on greenhouse-gas emissions was gradually increased. Such permit prices would raise gasoline prices by about 20 cents per gallon in 2009 and 40 cents per gallon in 2018. A recent report by the Intergovernmental Panel on Climate Change (IPCC) suggests that a permit price of as much as $80 per ton of CO2 might be necessary by 2030 to reduce emissions enough to achieve a stabilized climate by 2100. That pricing policy would add about 70 cents per gallon to the price of gasoline in 2030. Even the much greater and much earlier reductions called for in the Stern Review on the Economics of Climate Change (requiring a current estimated permit price of $95 per ton of CO2, rising to $191 per ton by 2050 and higher after that) would not cause gasoline prices in the United States to be as high as they already are in Europe. The permit prices in the Stern report would add roughly $0.85 to $1.70 per gallon to gasoline prices over the next four decades.

Thanks to Mark Thoma's blog for bringing this to my attention. 

Lessons from the Great Depression and what “we” forgot

Robert Kuttner puts the current financial crisis into a 1929 perspective. Here's an excerpt.

Supposedly, 1929 could not happen again because of "what we learned." We learned that in a financial panic, the Federal Reserve needs to pour in heaps of "liquidity" -- money -- as the Fed failed to do after October 1929. One of the world's reigning experts on the Fed's failures of the early 1930s is one Ben Bernanke, and he certainly hasn't been stingy with the Fed's billions.

But the other lesson was the one "we" forgot -- not to let banks and other financial institutions turn themselves into casinos. It is helpful, in the spirit of Tonto's historic interrogatory to the Lone Ranger -- "What you mean, we?" -- to unpack that "we." The "we" who forgot the lessons included first and foremost Republican ideology -- deregulate everything and let markets run wild; secondly Bush administration regulatory officials who disdained even the regulations on the books; and third, the Wall Street Democrats who were de-regulation's willing enablers.

Terms of TARP

The CBO analysis of TARP is here. Hold your nose and say OK.

The dark side of financial innovation

How they explained it:

Mortgage backed securities reduce risk by spreading it throughout the financial system.

How they built it:

Highly integrated systems are more subject to catastrophic failure than are compartmentalized systems. The total risk was not reduced. It was increased and partially externalized. Congress is expected to continue socializing the costs tomorrow. 

Update on Wednesday, October 1, 2008 at 11:29AM by Skeptic

This is how a theoretical physicist says it in NYT, with lots and lots of words criticizing mainstream academic economists for not using computational tools to study systemic risk and other ideas that challenge their core belief that markets tend toward equilibrium.  I suspect George Soros, author and promoter of the theory of "reflexivity," would heartily agree. 

The other “i” word in the financial crisis

It is likely that some holders of large amounts of mortgage backed securities ("MBS") are not only illiquid, but will also be insolvent if (as they are required to do) they mark their MBS holdings down to "market value" in their quarterly financial statements. No doubt there is a great deal of anxiety about how to value illiquid assets, especially because, under Section 302 of Sarbanes-Oxley, CEOs and CFOs have to sign personal certifications of quarterly financial statements.

Many financial institutions have quarters ending September 30, but investment banks (and others?) traditionally have fiscal years ending in November and for them the third quarter ended August 31. Reports to the SEC are due 40-45 days after the end of a quarter and many companies have a track record of announcing earnings sooner. Thus, early October and early November are critical periods in the financial crisis.

Incidentally, when I Googled "Paulson Plan insolven" all of the top hits were in foreign media and blogs, for example this hard-hitting piece in Rupert Murdoch's The Australian. Two US economists frankly call it a "solvency crisis" and propose a solution that addresses insolvency as well as liquidity, but their excellent piece appeared in the Financial Times blog, not mainstream media.

Update on Friday, September 26, 2008 at 09:31PM by Skeptic

I guess this doesn't really count because it's a blog post, but Bruce McF reports that the EVP of the New York Fed called it an insolvency crisis in May.  However, neither he nor anybody else could bear to discuss it as other than a liquidity problem.  The Fed EVP called it "balance sheet pressure."  Naming the problem of course tends to constrain how you think about solutions.  Bruce's post is quite good at explaining the difference between liquidity and solvency problems and the different solution types that are required for each.  I recommend it. 

Update on Tuesday, September 30, 2008 at 10:50AM by Skeptic

Paul Krugman illustrates a typical bank balance sheet here and shows why buying "troubled assets" at "market value" under TARP does not cure an insolvency problem or make a solvent bank stronger. 

Unbelievable!

The Republican Study Committee solution to the financial crisis: A 2-year moratorium on capital gains taxes to encourage the sale of toxic assets on which the holders would recognize capital LOSSES. You can't make this stuff up.

Is $700 billion spit in the ocean?

The essence of the Paulson Plan is that Treasury, using $700 billion of taxpayer money, will become just another investor in a $7.4 trillion market for mortgage backed securities, as Andrew Jakabovics of the Center for American Progress points out here. If that's a fair characterization of the problem, as it seems to be, it's hard to believe injecting 10% new cash will solve it, especially since the revised Paulson Plan would also allow purchase of some toxic assets that are not MBS.

As Jakabovics points out, MBS are not the problem per se. The problem is that many underlying mortgages are in default, and even the middle tiers of MBS can't be evaluated without reliable estimates of how the mortgages themselves will perform.

Jakobovics suggests Treasury buy up all the tranches of MBS and the servicing rights for particular groups of mortgages and then renegotiate mortgages that can be saved. This is similar to the Paisley (also at Center for American Progress) proposal I mentioned here. I can't imagine how real people in the real world with finite budgets and finite schedules could do that. It seems to me much more practical to revise the bankruptcy code to allow judges to cram down revised mortgage terms. This way, the only mortgages that would have to be looked at would be those of folks willing to file bankruptcy and able to show the ability to pay a renegotiated debt larger than the estimated realization from foreclosure. The financial industry should welcome this, but it turns out they hate it. I don't know why.

Update on Thursday, October 30, 2008 at 08:53AM by Skeptic

Two professors explain here why so few packaged loans are being reworked.  It's because if anyone has the power to rework these loans it's the loan servicers, and the servicers have powerful incentives to do nothing.  The professors propose a non-bankruptcy solution--federal legislation to create a federal trustee to evaluate mortgages and rework those for which a rework would maximize recovery.  The trustee would hire experienced local bankers to do the evaluations and renegotiations, and the federal government would pay the administrative costs. 

Update on Thursday, January 8, 2009 at 01:51PM by Skeptic

The financial industry is withdrawing its opposition to giving bankruptcy judges authority to cram down adjustments in home mortgages.  UPDATE 1/9/09 at 9:40 a.m.:  The Los Angeles Times reports this as a critical breakthrough in removing effective financial industry opposition to the change.  The New York Times doesn't see it as that signficant, but it does report unnamed officials as saying "financial institutions were coming to the conclusion that it might be better to get a reduced loan payment through bankruptcy or voluntary negotiations than to get no money at all."  And it took these geniuses how many months to do that calculation?!

Update on Saturday, January 24, 2009 at 01:42PM by Skeptic

Here's another explanation for lender resistance to giving bankruptcy judges the power to modify loans on primary residences:  A court order would instantly trigger the lender's obligation to write down the value of the asset, an action that the lender may be delaying for as long as possible in order to avoid disclosing how weak its balance sheet is.

If the taxpayers give better terms to troubled financial institutions than Warren Buffett would, things will get worse instead of better.

Warren Buffett's Berkshire Hathaway will invest $5 billion into Goldman Sachs in exchange for cumulative preferred stock paying a 10% dividend and 5-year warrants that would allow Berkshire to buy $5 billion of common shares at $115 per share (which is $10 below the current market price), according to this story. Goldman is pretty healthy, as evidenced by its share price, but even so it had to pay a pretty high price for this new capital.

If the taxpayer bailout plan being negotiated in Washington offers better terms to troubled financial institutions than Berkshire or other cash-rich firms and funds will offer, the flow of private money into these firms will stop. Instead, all of the troubled firms, and many that are not troubled, will run to Uncle Generous for an injection of cheap capital. In other words, any taxpayer bailout plan would be in competition with private investors, and if the taxpayer plan is too generous it will completely displace private investment. Not what we should want.

Bruce McF has a detailed plan and useful analysis of the financial crisis here. In essence, Bruce proposes creation of a permanent public trust to purchase toxic assets and pass through all dividends and gains to the citizens. Pricing discipline would be imposed by the requirement that the Trust buy $1 of preferred stock for every $1 of toxic assets purchased. Preferred stock issues typically provide that if the dividend is not paid on time the holders can step in and assert a lot of control. For example, Bruce would provide that a default would invalidate all executive severance packages. In principle, other prudential triggers and other remedies could also be included. I like the concept, better than the others I have linked here, but I fear any federal bailout may prevent private capital from solving the problem.

Update on Thursday, September 25, 2008 at 10:36AM by Skeptic

James K. Galbraith says here we can address the whole banking problem with more extensive deposit insurance, audits, and case-by-case bridge loans and preferred stock puchases.  He makes the excellent point that nobody should worry that banks are holding "illiquid assets," because banks hold illiquid assets all the time--they're called "loans."  Galbraith would require hedge funds to fend for themselves. 

Update on Saturday, October 25, 2008 at 06:00PM by Skeptic

There's a rush to get the new federal bailout money, and they want the same very favorable terms that Treasury "forced" on the first beneficiaries.  And, yes, the initial recipients are going to hoard the money or use it to acquire smaller banks and not increase lending although Treasury intends to "urge" them to increase lending. 

George Soros says Treasury should buy equity instead of toxic assets

George Soros, writing in Financial Times today, says $700 billion taxpayer dollars spent on preferred stock with warrants in financial institutions is more likely to solve the problem than using the same amount of taxpayer money to buy the worst of $11 trillion of mortgage backed securities. 

Outstanding forum on financial system bailout going on right now

There is a really good discussion going on here at Mark Thoma's blog. He has aggregated recent blog posts from Krugman and the WSJ blog, and has added his own good analysis.  This is greatly augmented by many comments reflecting a lot of practical knowledge and insight as well as economic theory. Really basic issues are being intelligently discussed, although no issue quite as basic as this one I raised:

Just reading some of the comments here provides a basis for estimating that the problem could be bigger than the US government can handle. Potentially $5 trillion in bad real estate loans, for starters. Then there is the whole hedge fund black box of unknown huge size and risk. Since these shadow banks undoubtedly have counterparties in the visible financial system, their failures cannot be contained and ignored. Isn't it possible that Paulson is not just trying to protect the wealth and status of his peers (for whom I have no sympathy), and is not prevented by a laissez faire ideology from officially nationalizing failing financial institutions, but that he is actually and reasonably scared to death?

If the Tarp Team [refers to Bernanke, Paulson, and other officials working on "troubled asset relief program"] were motivated but such a fear, what actions would it be proposing now? Wouldn't it try to slow down the rate of asset value deterioration enough to allow time for capital infusions from private wealth and sovereign wealth funds. For example, (i) stop short sales to partially disarm the bears, (ii) arrange for transactions that substantiate higher valuations for troubled assets (maybe you could do this with only $700 billion) or in some other way circumvent the mark-to-market rules so that troubled institutions can carry trash at higher values, (iii) by whatever means are available get cash or cash equivalents into firms that can be saved, and (iv) keep interest rates low to try to guide housing prices into a soft landing. Is this why Bernanke's eyes were loose in his head [as reported by some observers of today's testimony]?

Update on Wednesday, September 24, 2008 at 11:12PM by Skeptic

Paul Krugman suggests Paulson and Bernanke agreed they needed to throw an impressive amount of money at the problem, but didn't come up with any reasoning as to why that might work until after the Congressional hearings started.  Sounds more like fear than rationality at work. 

Update on Thursday, April 30, 2009 at 10:19AM by Skeptic

Here's what 3 Assistant Secretaries in Paulson's Treasury said yesterday about the development and implementation of TARP, the bankruptcy of Lehman, and related events.  They were scared and always in reactive mode.

John McCain is sorta right about the SEC, but what about the hedge funds?

In 2004, the SEC adopted rule changes that allowed 5 investment banks to increase their leverage from 12:1 to 30 or 40 to 1. Details here. McCain has angrily said he would fire Chairman Chris Cox (which the President has no authority to do), but, so far as I know, Cox had nothing to do with this—he took his seat on the Commission August 2, 2005.

Why did the SEC made that imprudent rule change? My guess is that the investment banks were in direct competition with unregulated hedge funds, that the hedge funds were using leverage at 30:1 and 40:1, and that the banks begged to be allowed the same imprudent freedom. It's amazing to me that we're not hearing more about collapsing hedge funds—or indeed anything about what they are doing and having done to them by the financial crisis. Hedge funds are the core of the huge "shadow banking system."

Oh, you wanted the names of the 5 investment banks that were the exclusive beneficiaries of the SEC rule change? Bear, Lehman, Merrill, Goldman, and Morgan. Yesterday the Fed agreed Goldman and Morgan could convert to bank holding companies which, I guess, means they will have to revert to commercial bank reserve ratios. Sic transit "financial innovation."

Update on Friday, October 3, 2008 at 05:21PM by Skeptic

Today's NYT has a pretty complete story on what happened.  The 5 investment banks achieved 2 goals with one rule change.  First, they got relief from 7 years old reserve requirement on their broker/dealer subsidiaries, enabling them to move cash to the parent companies and participate in the fast-growing market for mortgage backed securities and other derivatives.  Second, they avoided regulation of their European subsidiaries by agreeing to have the parent companies regulated by the SEC. 

According to a graphic in the print edition of the NYT, only Merrill's leverage greatly increased, from about 17:1 before the rule change to about 32:1 recently.  The Goldman ratio moved from a range of 16 to 20 to a high of about 24:1.  Bear, which was already at 27 to 29, increased to high as 33:1.  Lehman, like Bear, was already high (range 22-27) and increased to 33:1 after the rule change.  Morgan Stanley, which so far has survived, also had high leverage that went higher, 22-25 before to 33:1 after.  So, apparently, leverage is not the whole story behind the varying degrees of health of these 5 banks. 

On the regulatory front, they successfully avoided regulation in Europe, and the SEC never effectively regulated, or even monitored, the parent companies.  Perhaps that's why McCain wants to hold Cox accountable.  The NYT piece says the SEC's neglect is consistent with the laissez faire philosophy of the Bush Administration that also affected what happened at CPSC, EPA, OSHA and other agencies. 

A better way to bail out Wall Street

Here is an interesting alternative to yesterday's proposal by the Administration to authorize Treasury to buy up toxic debt from troubled financial institutions. Treasury could be authorized instead to buy stock in troubled financial institutions. Instead of being the buyer of last resort for all of the most toxic debt of unascertainable, but low, value, Treasury would be the investor of last resort at share prices that have been established by the market. The entity would get the same amount of cash infusion either way.

Update on Saturday, September 20, 2008 at 10:00PM by Skeptic

Washington Post columnist Sebastian Mallaby makes the same proposal here, and refers to other experts for support. 

Update on Sunday, September 21, 2008 at 11:14AM by Skeptic

Paul Krugman analyzes the problem in cogent 1, 2, 3 style and reaches the same conclusion here.  Just a few days ago the official solution to the problem was for troubled financial institutions to raise more equity capital, in other words, to issue stock at current low prices even though that would seriously dilute the existing shareholders.  Well, the sovereign wealth funds and other big piles of uncontaminated cash didn't want to buy. 

It's making more and more sense to me that if the government is going to inject massive cash into the financial system, it would be better to buy equity (which may be crap) instead of buying mortgage backed securities which have been specially selected and offered for sale precisely because they are 100% percent guaranteed toxic crap. This would punish the shareholders, which of course include you and me, but we don't deserve a taxpayer bailout. 

Update on Sunday, September 21, 2008 at 11:54AM by Skeptic

Robert Reich wants equity too.  His plan here also includes some punitive and extraneous provisions.

Update on Sunday, September 21, 2008 at 12:05PM by Skeptic

Obama has issued a "statement of principles" about Treasury's bailout proposal, which Brad DeLong has posted here.  It appears that Obama is going along with the basic structure of giving troubled institutions good cash for toxic debt. 

Incidentally, did you notice that Treasury is calling its proposal "troubled asset relief program?"  This big blue TARP is going to be spread over Wall Street, making it look like New Orleans after Katrina. 

Update on Sunday, September 21, 2008 at 04:33PM by Skeptic

Mark Thoma says taxpayers must be compensated for taking risky stuff off the hands of financial institutions, but he's not fussy about how that's done.  It could be equity, a contract for a share of profits for a certain number of years, or something else.  Mark also re-posts some proposals by others, and goes on to say that if this turns out to be a money loser for the government, the loss should be covered by a tax on high earners because only they have benefitted from the financial bubbles.  Ordinary middle class workers in the real economy have instead fallen behind. 

Update on Sunday, September 21, 2008 at 10:23PM by Skeptic

Politico summarizes criticism from many experts here.  Maybe there are some expert proponents somewhere, but they are not making much noise.  As of this hour on Sunday evening, worldwide equities markets are down and the TED spread is still over 2.  It looks like the TARP is not a done deal.

Update on Tuesday, September 23, 2008 at 06:46AM by Skeptic

Ed Paisley of Center for American Progress has a plan here.  It's the only plan I've seen illustrated with cartoons.  It's also the only plan that limits Treasury to purchasing only complete mortgages (Step 2), which may not address a large part of the problem.  I understand that most of the problem mortgages are backing several different securities--some highly rated that are entitled to the first payments from the whole mortgage pool and some low rated that will feel the effects of the first defaults.  The CAP plan seems to require that Humpty Dumpty be re-assembled before Treasury can buy. The purpose of this seemingly impractical task is to allow Treasury to re-write the individual mortgages (Step 4) so borrowers with adequate finances and credit can keep their homes--and keep their homes off the market where they will help force prices down more.  News reports yesterday indicate that others are approaching this problem by expanding authority of bankruptcy judges to restructure home mortgages. 

Update on Tuesday, September 23, 2008 at 10:03AM by Skeptic

The same fellow who writes me from Nigeria with business proposals has rewritten Paulson's proposal and sent it to Ezra Klein.  Maybe the rest of us will be lucky enough to get this same offer. 

$56 trillion—Remember this number.

The aggregate net worth of all US families and non-profit organizations was about $56 trillion on June 30, 2008, according to the Federal Reserve Board flow of funds report. That number is a useful frame of reference in which to consider the financial system bailout, the Iraq war, the federal budget deficit, the trade deficit, and other big government and economic numbers.

The June 30 estimate of $56 trillion is $2.7 trillion dollars less than just 9 months earlier, according to the flow of funds report, and takes us back to where we were at the end of 2006. About 70% of the 9-months' decline was in the value of securities and most of the rest was decline in real estate values. There seems to be a consensus that substantially more declines in real estate values are coming.

The financial system bailout announced yesterday has been presented as a $700 billion event but of course nobody really knows. The same Washington Post article reports that the annual Pentagon budget is about $600 billion. In addition, about $650 billion has been specially appropriated for Mr. Bush's War, but Joseph Stiglitz and Linda Bilmes have estimated that when the future and hidden costs are included the war will cost $3 trillion.

The latest projection from the Congressional Budget Office is that the federal budget deficit will be $407 billion for the fiscal year ending September 30, 2008. Altogether, the federal government owed $9.7 trillion on September 18, 2008, $4.0 trillion more than it did the day George W. Bush was inaugurated. To the extent this debt is owed to American families or entities owned by American families, this does not diminish aggregate wealth. But increasingly US government and corporate securities are owned by foreigners as a result of chronic trade deficits, and that should be considered a diminution of national wealth.

The negative "balance of payments" (technically, the "current account" deficit), which the US has had every year but one since 1982, was $811 billion in 2006 and $739 billion in 2007, according to the IMF. Imports of crude oil alone (about 5 billion barrels per year at $100 per barrel) are now transferring $500 billion dollars a year to oil producing nations. Between 1982 and 2007, the US has accumulated current account deficits totaling $6.7 trillion, with $4.3 trillion added in the 7 years of the George W. Bush Administration.

Update on Monday, September 22, 2008 at 09:24AM by Skeptic

More interesting numbers from Paul Krugman are here.  The Fed's balance sheet is about $800 billion, which PK says is looking puny in relation to the size of the problem.  Besides, if the flight to safety keeps short term T-bills close to zero percent interest, we're in the "liquidity trap" where the Fed can't goose the money supply by buying T-bills for cash. 

The total amount of debt owed by US citizens and entities is about $50 trillion.  Actually, the Fed source linked by PK says $51 tillion as of 30 June 2008, and there is a lot of potentially interesting detail in the Fed report, including this one:  Domestic households increased their total debt from $8.5 trillion at the end of 2002 to $14.0 trillion 5.5 years later.  (The fact that total debt is close to total net worth is a coincidence, because debt has already been subtracted in computing net worth, but it would be interesing to compare net worth to total debt in prior years to see how much we have levered up.)   

Update on Saturday, November 1, 2008 at 04:45PM by Skeptic

To get later or earlier Fed Funds Flow reports go here.  The next scheduled release date is December 11, 2008

Update on Thursday, March 19, 2009 at 09:11AM by Skeptic

Net worth shrank to $51.5 trillion at the end of December 2008.  Next release, June 11, 2009.

Expert recommendations for a new financial system regulatory regime

Dean Baker, professional economist and co-director of the Center for Economic and Policy Research, has laid out here his ideas for financial system regulations in the future.  As I find the contributions of others, I intend to add links to this post. 

Brad DeLong, professor of economics at UC Berkeley, has a good post here.  I strongly suggest skipping all the "economic science" stuff with crossing lines and reverse S curves and just read the "political economy" arguments that constitute the latter part of the post (starting just after the last graph).  Of course, if you think it would make sense for your doctor to draw crossing lines on a piece of paper and say, "This is how your body works," dig into the wonkish stuff too. 

Prof. Mark Thoma, University of Oregon, focuses attention here on the need to regulate the "shadow banking system."  His post is followed by some good comments. 

Bob Kuttner, co-founder and co-editor of The American Prospect and former columnist for Business Week, weighs in here. 

Of course, I summarized Stiglitz's views in this earlier post. 

Obama rounds up the usual suspects

Obama met yesterday morning with his "banking brain trust" to come up with a response to the ongoing financial meltdown. Politico has their names here. In the room were the most senior members of the Clinton Administration economic team, plus Paul Volker. A few others participated by telephone. On the list, I see exactly one person, Joseph Stiglitz, who might be expected to question the conventional economic wisdom that has guided both parties for 2 decades.

Nobody from left-leaning think tanks like Center for Economic and Policy Research, Economic Policy Institute, or Demos. No Robert Reich (even though he has been speaking as Obama's surrogate on economics), who has a different plan, or other labor-oriented economist. No George Soros (who probably knows more about the financial markets than all of those who did participate). In fact, nobody who would be uncomfortable at the University of Chicago.

If Obama becomes President, he'll be facing the most challenging economy in nearly 80 years, and it looks like he'll be relying on the most in-a-rut, helped-to-get-us-here group of advisors it is possible to imagine. Experience means you know how to do what you've done, but if what needs doing next is different, experience is likely disabling.

Update on Sunday, July 19, 2009 at 09:14AM by Skeptic

Paul Krugman seems to agree here.

Update on Friday, December 11, 2009 at 10:43AM by Skeptic

One year on, Matt Taibbi writes a lengthy, scathing, and fair indictment of Obama for selling out to Wall Street and excluding economic advisors who dissent from basic Rubinomics. 

The significance of all of these appointments isn't that the Wall Street types are now in a position to provide direct favors to their former employers. It's that, with one or two exceptions, they collectively offer a microcosm of what the Democratic Party has come to stand for in the 21st century. Virtually all of the Rubinites brought in to manage the economy under Obama share the same fundamental political philosophy carefully articulated for years by the Hamilton Project: Expand the safety net to protect the poor, but let Wall Street do whatever it wants. "Bob Rubin, these guys, they're classic limousine liberals," says David Sirota, a former Democratic strategist. "These are basically people who have made shitloads of money in the speculative economy, but they want to call themselves good Democrats because they're willing to give a little more to the poor. That's the model for this Democratic Party: Let the rich do their thing, but give a fraction more to everyone else."

See Rubinomics in Crisis for an explanation of the Democratic Party's internal wrangle about economic philosophy.  It seems the Rubinistas may never have doubted their doctrine; they were just concerned they might not get back into power to keep implementing it.  Now that they're back in power in the Obama White House, the crisis is over and the doctrine is unchanged.

Thanks to Christine for the link.

Stiglitz on the causes of the financial crisis and how to prevent the next one

Nobel laureate Joseph Stiglitz succinctly addresses the causes of the financial crisis and makes recommendations for preventing a recurrence here. He does not propose solutions to the current mess. 

Stiglitz says the Fed created a "flood of liquidity" and failed in its duty to impose and enforce prudential regulations on those involved in mortgage lending. This led to excessive leverage and a "pyramid scheme." The so-called "innovations" implemented by the financial industry were essentially just obfuscation of leverage and risk (as I had written here). He follows with additional criticisms of the financial industry and recommends 6 reforms:

1. Realign incentives in executive compensation systems at financial institutions.

2. Create a "financial product safety commission."

3. Create a "financial systems stability commission."

4. Impose other "speed bump" regulations to prevent too-rapid growth of borrowing.

5. Adopt better consumer lending laws, including laws that prevent predatory lending.

6. Enact better competition laws.

Thanks to Christine for the heads up.

The relationship between the financial economy and the real economy needs serious attention.

Not only has capital been sucked out of the real economy by the increasing craziness in the financial economy over 3 decades or so, but talent has also been diverted away from the real economy, as Matt Yglesias points out here. Well over 80% of Americans owe their livings to the real economy, and this diversion of important resources into the financial economy surely has contributed to the middle class income crisis. I don't have any answers, but we need to think about this.

A modest proposal for a new standard term in golden parachutes

Again this month we're exposed to disgusting scenes of CEOs and other senior executives getting big severance packages after steering their companies over the cliff and, in the case of Lehman Brothers, into bankruptcy. A typical senior executive contract provides that if the executive is fired for any reason other than commission of a felony all his benefits are immediately vested and he gets a multi-million dollar payment or series of payments. Would it be asking too much of boards of directors to insist that these contracts provide they can also fire a CEO, COO or CFO without any vesting or severance payments if the stock price declines below 50% of what it was when the agreement was signed? Other than the likely lack of spine, what's the argument against that?

Carly Fiorina says Sarah Palin unqualified to run a major organization.

Well somebody, had the wit to ask if Sarah Palin is qualified to be president of HP. Answer from the discharged president of HP, "No." I had hoped Ezra Klein, who was covering the Republican convention when I sent this email on September 3 would get a chance to ask this question.

Ezra,

The GOP elites are all enthusiastically assuring us that Palin is qualified to be President. I wonder what, in their minds, the minimum qualifications are. For example, is she qualified to be Secretary of State? Or Sec'y of Treasury or Defense? Is she qualified to be CEO of Ebay or HP. What about CEO of Wal-Mart or Bank of America? Maybe you'll get a chance to ask.

Roger

It is reported that when Carly Fiorina clarified her assessment by saying that John McCain also was not qualified to run HP she was angrily relieved of duties of speaking for the McCain campaign.

Banks don’t trust banks.

The TED spread—the difference between the interest rate on 3-month US Treasuries and what banks charge each other for 3-month loans—is at stratospheric levels. The conventional wisdom is that the spread is high now because banks perceive a high risk of not being repaid. In normal times, the TED spread is about 0.5 percentage point. Today, it rose to 2.76 points from just over 2 points yesterday. It hasn't been over 2.5 since 1987 (just before the stock market crashed in the fall). If banks are this worried about the financial mess, why should I be calm?

Update on Wednesday, September 17, 2008 at 05:49PM by Skeptic

T-bills have been bid down to 0.06% interest.  When I looked earlier today LIBOR was 3.01, making the TED spread 2.95 points.  And let's notice that when "real" (inflation-adjusted) interest rates go negative, as they apparently have, the Fed can't do much to stimulate the economy with further interest rate reductions.  That is the "liquidity trap" that plagued Japan for more than a decade starting in 1989. Added 9/22/08:  Paul Krugman has a good description of the "liquidity trap" here.