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Posts Tagged ‘economic policy

Moving Liabilities off Balance Sheet Nothing New

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Via Greg Mankiw, The New Yorker looks at how LBJ moved Fannie and Freddie off the government’s balance sheet (making them public) in order to fund the Vietnam War. What’s interesting in this is twofold:

  1. During this housing crisis, mark-to-market rules have caused the iBanks to recognize securities that they have moved off the balance sheet.
  2. Issues with both LBJ’s decision and the more current mortgage security situation have come to light in the current market.

This just goes to show that a lot of bad policy can be covered up as markets expand. Maybe its a good thing that the housing bubble popped. Now we know about these problems and can make decisions with them in mind.

UPDATE @ 11:55a: I don’t know what happened with the title. It was missing the final word. Now it makes a little more sense than before.

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Written by walonline

July 23, 2008 at 9:08 am

The Economists’ Forum: A Debate On Moral Hazard

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The Financial Times has an interesting discussion on moral hazard, its part in the current economic conditions, and how to best maintain the economy (whether that is creating a moral hazard or otherwise). This discussion involves three economists: Ricardo Caballero, Charles Wyplosz, and Martin Wolf. They all present interesting ideas, but I believe I fall in with Wolf, who flatly states:

If we are talking about government rescues of shareholders in insolvent institutions (and surely that is what we are talking about here), we are not talking about capitalism at all. After all, these are already limited liability companies whose shareholders are, or should be, highly diversified. If they can’t lose their investment in the biggest housing bear market in US history, I really don’t understand what sort of economic systems we are discussing. But whatever it is it is not a market economy.

As stated before, the others provide valuable points, which all make for some interesting–if not mentally taxing–reading.

Written by walonline

July 22, 2008 at 9:46 am

So True

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Hahaha. How the tables have turned, Mr. Banker!

Now, what happens when the application goes through? Did we taxpayers realize that we’d be allowing our government to do things like this when we gave the ‘o.k.’ for our representative system? Maybe we should pay a little more attention to these folks we’re delegating our decisionmaking to…

Written by walonline

July 17, 2008 at 11:33 pm

Feds to Bail Out Fannie and Freddie

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The links to that news are everywhere. I’ll link to the Financial Times. Also, analysis from Matt Yglesias and Market Movers.

What a piece of work is a man, how noble in reason, how
infinite in faculties, in form and moving how express and
admirable, in action how like an angel, in apprehension how like
a god! – Hamlet, Act 2, Scene 2

Shakespeare provides an incredibly deep and accurate summation of the varying faces of man in my favorite of his tradgedies. After recent outcry following Bear Sterns move regarding moral hazard from talking heads, pundits and the such (me too!), the Feds have provided a great example of one of humanity’s many downfalls–our shortsightedness.

The “moral hazard” topic will start to appear even more cliche starting tomorrow morning, which is something that did not need to happen. People need to know that it is a real risk–not be suffering from message fatigue in its regard. Also, the markets will be off heavily pending that oil doesn’t tank overnight.

Where do we go from here? Let’s say that this was not unexpected. Not just last week, but with the constant–nare I sound like a liberal and call it criminal or treasonous–failings of our top leadership in government. In this case, specifically a number of Senators and Congressmen who have opened the door for this situation’s moral hazard. The Washington Post has a few particularly damning accounts of Senator Chuck Schumer, Congressman William Clay Jr. and others.

These folks, acting with political shortsightedness, corruption, or whatever, helped build these companies into their present states. Our capitalist system is supposed to work best with limited, active regulation. Nothing like right now with the rubbery-spined Congress we’ve been so willing to elect/accept.

UPDATE, July 14 @ 4:00p:

Via Digg, the Provocateur has an interesting take on the whole Fannie/Freddie/Moral Hazard mess:

By turning these two giants into the only game in town when it comes to mortgage securitization for loans for good borrowers, and making them an extension of the government, they created their own terrible moral hazard. These companies can’t fail, and thus, they take extra risks knowing this.

This bailout is no surprise, but furthermore, it is the equivalent of giving a crackhead more crack. These two engaged in terribly risky behavior. It was behavior they never would have engaged in if they didn’t know they would be bailed out if that behavior didn’t work out.

Certainly read the whole thing.

Written by walonline

July 13, 2008 at 11:04 pm

Ways the Next President Can Fix the Economy

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Many talking heads have said that the economy will be a major issue this election cycle. When electing a President–in my book–the economy should always be a big issue. James Pethokoukis, writing at his Capital Commerce blog, notes a Time magazine article prescribing what the next President should do to fix the economy. He summarized the Time article (by Justin Fox) saying:

Insecure Americans want higher taxes and more regulation. Government should spend more on infrastructure to combat income inequality. Get rid of the Bush tax cuts even if it weakens the economy. Raise energy taxes. Increase regulation on Wall Street. Nationalize healthcare, pretty much.

Then he adds five ideas of his own, which he thinks are more agreeable to the free-market liberals and conservatives:

  1. Eliminate corporate income taxes, especially if you are also going to hit companies with all these energy taxes.
  2. Get companies out of the business of providing healthcare benefits.
  3. Index Social Security benefits to inflation, and extend the retirement age, allowing a big cut in payroll taxes for the middle class.
  4. Create government-funded “innovation prizes” for key technology challenges.
  5. Give universities incentives to create more science geeks, and offer grad students free-floating fellowships to choose whatever field they see as the best market match for their skills.

The key thing that all free-market folk will agree with is maintaining American competitiveness. This idea is not new to this cycle and is well publicized through books such as Thomas Friedman’s The World Is Flat. As developed nations continue to move towards service-based economies, it is important that the U.S. government do whatever it can to foster the development of ideas, intelligence and technologies that are of high value in the global market. A government that impedes the development of those and fosters Americans’ satisfaction with their status quo will bring about the downfall of the country as a world market leader.

Do readers have any suggestions other than the ones given by Mr. Pethokoukis? I would support a fair tax, but in light of the current political situation, that is basically impossible. Some simplification of individual taxes would be helpful to all, though.

Written by walonline

May 19, 2008 at 12:13 pm

Best Reasons for Farm Bill Veto

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Greg Mankiw’s Blog details an email from a friend of his at the White House where the staffers speculate on the best reasons to veto the Farm Bill. These include:

  • Too much spending
  • New sugar program
  • Subsidies for rich farmers
  • Getting the best of both worlds
  • Using food aid dollars inefficiently

Read it all for the details.

Written by walonline

May 16, 2008 at 11:45 am

Richard Posner on the Farm Bill

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Richard Posner bills the new farm bill (which has passed both the House and Senate) as “Outlandish.” He also has an interesting take on our representatives in government and their relationship with rich farmers:

The President has expressed dissatisfaction with the proposed Farm Bill wending its way through Congress. He wants farmers whose annual incomes exceed $200,000 to be denied subsidies; the present cutoff is $2.6 million and Congress will not go below $950,000. The President’s concern with farm subsidies cannot be taken very seriously, since in 2002 the Republican Congress with Administration connivance greatly increased these subsidies and at the same time repealed some of the modest reforms that the Clinton Administration had introduced in 1996. The Administration’s current proposals would, if enacted, be a step in the right direction, but they will not be enacted, and, judging from the 2002 legislation, they are intended I suspect merely to embarrass the Democratic Congress.

This is obviously a smart move by the Bush Administration, but as simply a political one, is not meant to reform the situation. Also of interest is the unwillingness of those in power to move for that reform. Instead of attempting to buy votes, they could further put Bush in a box and move for true reform, with the Bush proposal at center.

There is no need for the government to be giving subsidies to farmers who are making $2.6m or even $950,000. Profitable farming takes some initial pretty heavy initial asset costs, but the dollars spent subsidizing these people–who don’t really need it–could be spent on funding R&D for a number of energy or farming technologies.

Written by walonline

May 16, 2008 at 10:43 am