Let's talk some econ/finance ****

[KrazyHorse]

What's the externality in Ireland? Iceland?

What happens when the world stops accepting US monopoly money?

1) The Icelanders didn't insure all their banks' debts. In fact, I believe they went ahead and let most of the debtholders rot. The exception was, IIRC, depositors.
2) I've already stated that I don't know the state of Irish banks. I do know that Irish banks aren't considered major players in the investment banking world. My limited knowledge suggests that they basically made a bunch of bad real estate loans, held the risk on their books, and lost their shirts. And as I've also previously stated, the government of Ireland is not in control of nominal aggregates (in other words, their monetary policy is run from Frankfurt, not Dublin).
3) As far as monopoly money, this is THE MOST PERNICIOUS THING YOU'VE SAID YET. Both core and headline CPI numbers, as well as other measures HAVE BEEN and ARE PROJECTED TO BE (by market instruments) well below trend. Sorry, but I don't consider 0-1% core inflation (over the last 2 years) or 1.5% forward inflation (over the next 5 years) to be indicative of monopoly money...

[Kuciwalker]

1) The Icelanders didn't insure all their banks' debts. In fact, I believe they went ahead and let most of the debtholders rot. The exception was, IIRC, depositors.

I don't think they actually insured depositors either. The UK bailed out their depositors in the Icelandic banks and then coerced (through the WTO, IIRC) Iceland into paying up.

[KrazyHorse]

Yeah, I simplified that part. I think it was the IMF, not the WTO

[Kuciwalker]

You're right.

[KrazyHorse]

Other than not understanding the difference between moral hazard problems and externalities, and apparently claiming without substantiation that moral hazard -> market failure -> government intervention -> government intervention at a level as detailed as employee compensation schemes, has drogue said anything interesting?

I've been on my phone, so I've been tactical in my responses.

[Drogue]

Other than not understanding the difference between moral hazard problems and externalities, and apparently claiming without substantiation that moral hazard -> market failure -> government intervention -> government intervention at a level as detailed as employee compensation schemes, has drogue said anything interesting?

I've been on my phone, so I've been tactical in my responses.

Way to miss what I've been saying. The MF -> gov't intervention was the bit I was suggesting, not claiming. If you'd responded to that bit, it might have actually been a discussion and someone might have said something interesting. The other bits are just true (well, not that externality = moral hazard, but that moral hazards cause difficulties if and only if they create externalities, as they do in this case), so aren't particularly interesting to discuss.

[Kuciwalker]

I can't imagine a moral hazard that wouldn't create Drogue-externalities.

[MrFun]

Shhh. I'm enjoying myself.

AH HA!

[Dauphin]

I don't have any problems with banks paying large bonuses to their employees. But I don't think the remuneration schemes were or are congruent with the goals of stakeholders, or even shareholders in some circumstances.

Some of the failures are also civil or criminal breaches - so regulation by itself wouldn't have stopped it.

[C0ckney]

jospeh stiglitz giving evidence to the TARP oversight committee

STIGLITZ: In these ultimate objectives, TARP has been a dismal failure. Four years after the bursting of the real estate bubble and three years after the onset of recession, unemployment remains unacceptably high, foreclosures continue almost unabated, and our economy is running far below its potential, a waste of resources (inaudible) trillions of dollars.

Lending, especially to small- and medium-size enterprises is still constrained. While the big banks were saved, large numbers of the smaller community and regional banks that are responsible for much of the lending to SMEs are in trouble. The mortgage market is still on life support.

So TARP has not just failed in its explicit objectives. I believe the way the program was managed has in fact contributed to the economy's problems. The normal laws of capitalism where investors must bear responsibility for their decisions were abrogated. A system that socializes losses and privatizes gains is neither fair nor efficient.

TARP has led to a banking system that is even less competitive, where the problem of too-big-to-fail institutions is even worse.

There were six critical failings of TARP. First, it did not demand anything in return for the provision of funds. It neither restrained the unconscionable bonuses or payouts and dividends. It put no demands that they lend the money that they were given to them. Didn't even restrain their predatory and speculative practices.

Secondly, in giving money to the banks, they should have demanded appropriate compensation for the risk borne. It is not good enough to say that we will repay, or we will be repaid, or we will be almost repaid. If we had demanded arms-length terms, terms such as those that Warren Buffet got when he provided funds to Goldman-Sachs, our national debt would be lower and our capacity to deal with the problems ahead would be stronger. The fairness of the terms is to be judged ex ante -- not ex post -- taking into account the risks at the time.

Thirdly, there was a lack of transparency. Fourthly, there was a lack of concern for what kind of financial sector should emerge after the financial crisis. There was no vision of what a financial sector should do, and not surprisingly, what has emerged has not been serving the economy well.

Fifthly, from the very beginning, TARP was based on a false premise: that the real estate markets were temporarily depressed. The reality was that there had been an enormous bubble, for which the financial sector was largely responsible. It was inevitable that the breaking of that bubble, especially given the kinds of mortgages that had been issued, would have enormous consequences that had to be dealt with. Many of the false starts, both in asset recovery and homeowner programs, have been the result of building on that false premise.

Particularly flawed was the PPIP, a joint public-private program designed to have the government bear a disproportionate share of the losses. The private sector, while putting up minimal money, would receive a disproportionate share of the gains. It was sold as helping the market reprice. But the prices that would emerge would be prices of options, not of underlying assets. The standard wisdom in such a situation is summarized in a single word:
"restructure."

But TARP, combined with accounting rules changes, made things worse.

The sixth critical failure of TARP was that some of the money went to restructure securitization under the TALF program, without an understanding of the deeper reasons for the failure of mortgage securitization.

These attempts to revive the market have failed, and to me this is not a surprise.

Banks won't focus on lending if they can continue to make more money by publicly underwritten (ph) specification and trading or by exploiting market power in the credit and debit card markets.

Moreover, too-big-to-fail institutions, whether they be mortgage companies, insurance houses or commercial investment banks, pose an ongoing risk to our economy and the solidness of government finances.

I want to conclude with two more general comments. First, we should not forget the process by which TARP and this oversight panel was created. That political process does not represent one of the country's finest moments.

At first, a short three-page bill was presented, giving enormous discretion to the Secretary of the Treasury and without congressional oversight and judicial review.

Given the lack of transparency and potential abuses to which I have already referred, which occurred even with full knowledge that there was to be oversight, one could only imagine what might have occurred had the original bill been passed.

Fortunately, Congress decided that such a delegation of responsibility was incompatible with democratic processes.

On the other hand, the political deals required to get TARP passed with an estimated 150 billion in largely unjustified and unjustifiable tax breaks, do not speak well for our democracy.

When we think of the cost of TARP, surely the price tag associated with those tax breaks should be included in the tally.

Nor should we underestimate the damage that the correct perception that those who were responsible for creating the crisis were the recipients of the government's munificence.

And the lack of transparency that permeated this and other government rescue efforts has only reinforced public perceptions that something untoward has occurred.

For these and the other failings of TARP, our economy and our society have paid and will continue to pay a very high price.

[Dauphin]

I've started reading Treasures Islands. It's an interesting read so far.

[C0ckney]

any thoughts (especially from our UK/euro posters) on the euro debt crisis and the EU response to it. in fact i'll put it into specific questions.

will ireland and greece have to restructure/default following the EU rescue?

how long before portugal has to go cap in hand to IMF/EU? (looking at ireland and greece, you can see why she does't want to...)

what does the expected rise in interest rates, in response to german economic growth and inflationary pressures, mean for the peripheral countries?

any thoughts on the ECB becoming the buyer of last resort of government debt, for the troubled nations and isn't this just another bank bailout?

some people have questioned the solvency of the ECB, what do people think about that?

can the euro itself survive in the medium to long term?

[Drogue]

There's a really good article in the FT today from Martin Wolf that discusses the Euro, Greece, Ireland and Portugal and the likely outcomes. I tend to agree with pretty much all of it.

will ireland and greece have to restructure/default following the EU rescue?

Have to? No. But I could see Greece choosing to, and possibly Ireland, for political reasons. Mainly to avoid politically expensive cuts and anger among the population.

how long before portugal has to go cap in hand to IMF/EU? (looking at ireland and greece, you can see why she does't want to...)

I doubt it will have to. If and when it does will be entirely down to a tipping point in the market, when the few jitters get loud enough to stop people lending en masse.

what does the expected rise in interest rates, in response to german economic growth and inflationary pressures, mean for the peripheral countries?

A potential debt-deflation spiral. Though I would be surprised if the EU Central Bank pushed peripheral countries that far, as they'd seriously consider exiting the Euro and Germany wouldn't want that. Even though Trichet seems to have his head in the sand on deflationary troubles, I can't see Euro interest rates rising much soon.

any thoughts on the ECB becoming the buyer of last resort of government debt, for the troubled nations and isn't this just another bank bailout?

Well, it's a country bailout, rather than a bank one, and yes I could see it, but bailout has the wrong connotations for some circumstances. Whether or not these bailouts cost the ECB anything depend on what rate they charge on them. The market is not perfectly efficient because of a co-ordination problem: countries may be solvent if they are able to roll over their debt, but may default if they cannot - effectively a confidence problem causing a liquidity one. In this situation, investors only want to offer funding if other investors will as well, or if they're so big that they can bankroll the country. So investors that are not that large shy away because they'd expect to lose money, but a single very large investor would expect to make a profit. The ECB could provide this role and make money on it. However telling the difference between a solely confidence/liquidity problem and a solvency one is very difficult, and if the ECB steps in to an insolvent country, it's likely to lose money and this would constitute a bailout in the colloquial sense of the term.

Clearly the default of a country in the Eurozone is a bad thing for the rest of the Eurozone, so even if they're liable to lose money, I would be surprised if the ECB or another country (ie. Germany) didn't step in if a Eurozone country got into difficulty. Which makes the power balance between the EU and the new Irish government interesting: you may expect that the Irish government has little power, they've agreed to pay a certain rate of interest and that their people want to pay a lower one shouldn't matter. But if the Irish default it has huge knock-on consequences for other Eurozone countries, so other countries will want to avoid this even if it means getting a lower return. It will be interesting to see how it unfolds. However it does I can see it hurting Ireland's future borrowing, as the market will be slow to forget being held to ransom in that way.

some people have questioned the solvency of the ECB, what do people think about that?

Unless the Eurozone (ie. Germany) is broke, the ECB will be solvent.

can the euro itself survive in the medium to long term?

Yes, if there's enough political will. Whether it should is a different matter, but it's possible for it to survive indefinitely if politicians want to remain members of it.

[DaShi]

I can't remember if I posed the question here or not, but is there any place where austerity measured actually worked to pull a country out of a recession or depression?

[notyoueither]

1) The Icelanders didn't insure all their banks' debts. In fact, I believe they went ahead and let most of the debtholders rot. The exception was, IIRC, depositors.
2) I've already stated that I don't know the state of Irish banks. I do know that Irish banks aren't considered major players in the investment banking world. My limited knowledge suggests that they basically made a bunch of bad real estate loans, held the risk on their books, and lost their shirts. And as I've also previously stated, the government of Ireland is not in control of nominal aggregates (in other words, their monetary policy is run from Frankfurt, not Dublin).
3) As far as monopoly money, this is THE MOST PERNICIOUS THING YOU'VE SAID YET. Both core and headline CPI numbers, as well as other measures HAVE BEEN and ARE PROJECTED TO BE (by market instruments) well below trend. Sorry, but I don't consider 0-1% core inflation (over the last 2 years) or 1.5% forward inflation (over the next 5 years) to be indicative of monopoly money...

Awesome!

I got a pernicious!

I really don't give a **** about bogus inflation numbers that are cooked for the evening news.

I care when the Chinese stop buying US bonds and treasuries because they are no longer willing to prop up the bankrupt.