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Words of wisdom from K. Harris
Money market trouble was the trigger, and it's back. The direct response was a $50 bln insurance fund, not in place yet. How about $200 bln in insurance, with a 15-minute turn-over for enrollment? Give the FDIC a green light - already backed by Treasury, so no legislation needed. Put everything in place that can be done without legislation and that directly addresses the issues that confront us, instead of issue that are behind other issues. Financial firms will need to worry about staying in business, but they won't have to worry about liquidity. Moral hazard is a lesser concern.
The big unfixable thing is that the government teased a hungry market and then jerked the bacon away. Can't fix that now, but there are other approaches to the problems we have.
He is a commentator over at calculatedrisk.blogspot.com. My personal, oversimplified rule of thumb is that as long as trading continues The End of the World has yet to come.
It's also worth considering the new equilibrium. If things do not totally tank right now, Paulson and Co. truly have zero credibility -- for better or worse -- the next time they claim that some particular policy action has to be done.
Posted by Tyler Cowen on September 29, 2008 at 04:20 PM in Economics | Permalink
Comments
What counts as totally tanking? Does an evaporation of $2-3 trillion in market capitalization, yields on Treasury around 0%, and credit markets seizing up not count as tanking? How bad does it have to get before we can say this is very bad?
Posted by: K. Williams at Sep 29, 2008 4:29:35 PM
If things do totally tank, will you and Alex resign your tenured positions, admitting that you have zero credibility?
Posted by: y81 at Sep 29, 2008 4:29:55 PM
If things do not totally tank right now, Paulson and Co. truly have zero credibility -- for better or worse -- the next time they claim that some particular policy action has to be done.
Next time? They've only got about 15 weeks before they're back to academia or the think-tanks (I don't believe Paulson has much future at Goldman), and will only matter for 8 of those.
On the bright side, the October war with Iraq everyone on the left predicted is fading in the rear view mirror.
Posted by: SSFC at Sep 29, 2008 4:45:31 PM
Paulson has about $500 million from his days at Goldman, so I'm not crying too much for him
Posted by: SJE at Sep 29, 2008 5:35:29 PM
Tyler, take a position. What do you think of Miron's approach:
http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html
? The worst part about this mess is that everyone who gave me a B- is having their day in the sun (Kotlikoff was the other one, when they were on the same faculty).
Posted by: Anthony at Sep 29, 2008 5:37:35 PM
Tyler,
From what I understand of the problem, it's that these financial packages of bundled mortgages are the problem. Banks lent to people who could ill afford the rate adjustments associated with 5 year ARMs, bundled everything together, sold them as AAA rated investment vehicles and ran away with the commissions. Add in the fact that nobody bothered to do the math on whether or not these bundled mortgages were actually worth anything and and the fact that other financial institutions decided that these 'safe' investments were worthy of being covered by insurance and all of a sudden, the financial sector is going to hell in a handbasket because nobody knows who has how much of who's money located where and nobody wants to loan money to any other entity for fear that the company they loan to may be trying to desperately cover themselves from impending collapse.
Why, then, isn't the answer to this issue to make these mortgaged backed securities actually worth something and change the terms on the loans that people are defaulting on so that people can stay in their houses?
If these MBS's are then worth their AA and AAA ratings, all the insurance tied up in covering them doesn't need to be paid out, keeping the banks from going under, the investors who bought the MBS's under the assumption that they were good risks don't lose their savings AND people who were trapped with hideous ARMs actually can stay in their houses.
Where am I going wrong? This seems too obvious to have been missed.
Posted by: Roger, FCD at Sep 29, 2008 5:47:33 PM
Bank are afraid to lend to each other because the don't know who has bad paper. How about finding someone else to lend to?
Posted by: aaron at Sep 29, 2008 5:48:32 PM
Banks take their losses and start issuing new debt with higher down payments and lower interest rates. How's that for a solution.
Posted by: aaron at Sep 29, 2008 5:51:54 PM
If things do not totally tank right now, Paulson and Co. truly have zero credibility -- for better or worse -- the next time they claim that some particular policy action has to be done.
I'm much more frightened about the opposite - if things totally tank right now, does that give Paulson & Co. full credibility - so the next thing they claim must happen will get passed with no oversight in lightning speed?
Posted by: TheFlamingoKing at Sep 29, 2008 6:06:07 PM
Incidentally, Bernanke's tenure in office does not coincide with Bush's, and he will be Fed chairman until January, 2010. Paulson presumably will return to the private sector in January 2009. Former Goldman CEOs do normally return to that firm, but their personal wealth normally permits them a wide choice of activities.
I'm still waiting for a single tenured academic to announce that he or she will resign if the economy doesn't go the way he or she predicts. It's hard to take seriously people who don't pay any price for their mistakes.
Posted by: y81 at Sep 29, 2008 7:00:47 PM
Posted by: aaron at Sep 29, 2008 8:31:07 PM
What is with "bln"?
What is wrong with the ISO standards of:
M
G
T
P
E
You know: 700 G$ or $700G (G = 10**9)
Scientific notation was invented for a reason and I would economists (who would like to think that they are scientists and not witch doctors) would want to use scientific notation.
Posted by: Dave Barnes at Sep 29, 2008 10:14:18 PM
Dave Barnes: I can vouch that physicists do talk that way. For example, they would express the marginal gain in magnetic field strength per extra dollar invested in T/M$ (Tesla per mega-dollar).
Posted by: David Wright at Sep 29, 2008 10:23:05 PM
I believe kharris is a she
Posted by: Andrew at Sep 30, 2008 12:19:27 AM
Tyler,
What are your thoughts on John Hussman's "Super-Bond" proposal as an alternative to the Paulson Plan?
Posted by: DaveinHackensack at Sep 30, 2008 12:30:52 AM
"If things do not totally tank right now, Paulson and Co. truly have zero credibility -- for better or worse -- the next time they claim that some particular policy action has to be done."
Wrong. They don't completely tank right now because the market's probability of a deal, any deal, being done this week must still be quite high - say 80-90%. Thus there is plenty of downside from here for the market and economy.
Posted by: Philip at Sep 30, 2008 1:24:22 AM
Secetaries of the Treasury are expendable. Paulson's credibility disappeared once we saw the three page text of his rescue plan. Even Bush can just name a new one.
Chairmen of the Fed matter more. I saw Ken B.'s credibility going down the pan with the same three pages of paper. We need the Fed and we need a deal to rescue confidence in the Fed; amongst other things.
Posted by: Diversity at Sep 30, 2008 7:09:39 AM
1. The recession should be embraced. The recession is what fixes the poor investment decisions which occurred in the boom. Giving money to those that made bad investment decisions delays the corrective process.
2. The bailout will not fix the fundamental problems in the economy. Houses are still overprices and need to come down. Consumers have too much debt and need to save more.
3. The bailout will add more debt onto the US. This means more taxes in the future and more interest payments. The value of the dollar will suffer and could collapse.
4. The government should not be involved in maintaining the stock market. This is unfair to those who were more careful and did not invest their money in the market.
Posted by: Jeffrey Knoll at Sep 30, 2008 7:17:50 AM
I had a typo above: I should have said, "Former Goldman CEOs do NOT normally return to the firm . . . ."
Posted by: y81 at Sep 30, 2008 7:33:22 AM
Wrong. They don't completely tank right now because the market's probability of a deal, any deal, being done this week must still be quite high - say 80-90%.
Ah, but the probability is only that high IF everything tanks between now and Thursday. If markets are calm until Thursday (in expectation of an eventual deal), then no deal will be forthcoming because opponents will take the calm as evidence the plan wasn't needed in the first place.
Posted by: Slocum at Sep 30, 2008 8:14:28 AM
Now, let's pray that those gays are either liars or idiots. When so much is at stake, kind words are hard to fine.
Posted by: Yan Li at Sep 30, 2008 9:02:26 AM
"If things do totally tank, will you and Alex resign your tenured positions, admitting that you have zero credibility?"
A bet is a bet. Leverage only reveals his risk preference. A economist is supposed to answer questions with objective theories. These few weeks reveal the sorry state of economics. It's still in the same hole as astrology.
The moronic thing is why do we have a Nobel Prize for astrology?
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