Moral Hazard of increased IMF funding

Today, Im going to take a look at the issue of “moral hazard” and how it pertains to the current economic crisis.  Of particular importance is the issue of whether or not government guarantees encourage private investors to take excessive risks which might inturn increase the chance of future crises.  With profit privatized and risk […]

Moral Hazard of increased IMF funding

Today, Im going to take a look at the issue of “moral hazard” and how it pertains to the current economic crisis.  Of particular importance is the issue of whether or not government guarantees encourage private investors to take excessive risks which might inturn increase the chance of future crises.  With profit privatized and risk socialized, is it any wonder that investors are willing to take on more and more risk in search of higher returns?

While resisting the temptation to look back to the origins of this crisis, I prefer to look forward to wonder if we are laying the foundation for future moral hazard (while at the very same time attempting to regulate away the risks of future crises).

Focus on the problem today, not preventing the problems of tomorrow…

If I had one request for our leaders to consider during the G20 conference underway in London, it would be to concentrate on fixing the crisis of today, and spend less time talking about potential regulations intended to help us avoid doing the same crisis again in the future.

On one hand, its good to reflect back and try to assess what went wrong, and to figure out how we got into this mess.  But, enacting regulation to avert the same disaster in the future runs the risk of erecting barriers to recovery today.

The debate of Big vs Small-government (part 1)

A hotly debated topic these days is in regards to the proper role of government in stimulating the economy.  The worry on one side is that without government spending, the economy would fall into a deep recession.  The worry on the other side is that government would become overbearing and crowd-out private enterprise.  In my opinion, both arguments are compelling, and probably each are ½ right.

To defend the position of increased government spending, I previously argued that if private investors only wanted to give their money to the government (by pouring money into Treasuries, and shunning all forms of risky investments), then the government had a responsibility to recycle those funds and reinvest them back in the private sector.  I also argued (here) that if the credit markets were frozen and if the financial system was broken (as it was), then traditional monetary policy wouldn’t work, leaving only the only tools of fiscal policy to shock the economy out of a crisis.

Credit markets unfreeze…now, how about the economy?

An interesting trend recently has been the un-freezing of the credit markets.
As per Bloomberg, “Credit markets began to recover as the government started guaranteeing bonds sold by financial institutions, the Fed purchased commercial paper and the Obama administration introduced its fiscal stimulus package, said National Penn’s Barnes. The government has invested more than $250 billion in U.S. banks, insurers and credit-card companies.”

There’s a hole in the bucket…

This morning, I watched congress grilling US banking exec’s about the need to get money flowing again.  Watching this session run in circles, it reminded me of a simple song my mother used to sing about a “hole in a bucket”, and the cascading flow of suggested fixes, with each leading to another, but none of them fixing the original problem (see song here)

The “savings glut” that may be to blame…

The “savings glut” theory is one of the two main competing theories to explain some of the bigger mysteries of global finance in recent years (including the credit crisis of 2007 ).  The basis of this theory is that there are underlying fundamental “global imbalances” which are causing all of the trouble (and which need to be fixed in order for the crises to stop).  In this blog post, Im going to quickly outline “savings glut” theory…

Does borrowing money (to fund a recovery), make the recovery less likely?

The trouble with borrowing money to pay for stimulus is that interest rates rise, which is exactly the opposite of what the government wanted in the first place (to get credit markets functioning again).  In this blog post, we will look a how there is a limit to the amount of stimulus that will be effective, because after some point…the additional cost of borrowing will push rates back up

Are Asian currencies undervalued? maybe not (anymore)…

If someone tells you that “Asian countries artificially keep their currencies undervalued” (in order to boost exports to the US), you should probably challenge them… While that assertion might have been true in 2008, it may not be anymore.

All that you think you “know” about Asian currencies may be changing…

If you were like me, you probably assumed that  Asian currencies were undervalued (vs the dollar) and should rise (if only their central bankers would stop targeting a weak currency vs. the dollar).  But, is that still true?  Or, have the facts changed?…

Bill Gates and China…

China’s wealth of reserves is massive, impressive.  Some analysts estimate the value of China’s foreign reserves to be in near $2 trillion (with about a trillion of that in US treasuries).  Yes, China has way more wealth than Bill Gates ….so where is the connection?   Hang on, I’ll get there, but first…lets look at the data from Brad Setser blog:

In 2008, my best estimate  is that China bought $374.6 billion of the $1684.8 billion increase in the outstanding stock of marketable Treasuries not held by the Fed.

China currently has — in my judgment — about $900 billion of Treasuries.