Finance & Markets Channel: Latest Posts
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Emerging Markets
Do Ratings Matter?
The role of Credit Rating Agencies has come to the forefront of the policy debate in recent months. The sudden collapse of complex structured financial instruments that were once categorized as safe “investment grade” products has cast doubts on the way rating agencies do their business, the structure of incentives they face, and the appropriateness of the existing regulatory framework and surveillance mechanisms.
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Finance & Markets
The core problem of this financial crisis, which also explains how we got in this mess
Summary: we have a bad case of debt deflation. Although well-described by economists since the 1930’s, this malady was not taken seriously by the mainstream of the profession. Now we have it. This post describes this macroeconomic illness (which will help you better understand events), and possible cures. The diagnosis is simple; the cures less so.
A preamble
Before we begin this depressing discussion of our current ills, let us remember the dismal odds accepted and surmounted by the Founding Fathers. We can hope to earn similar praise from our descendants as John Hancock gave to George Washington in his letter of 9 October 1777, in which Hamilton stated his satisfaction that Washington had done everything possible at the battle of Germantown:
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Finance & Markets
Free markets ain’t perfect!
The one thing President Bush undoubtedly delivered was his vision of an ownership society: We are all about to become the owners of a bunch of ailing banks and a few hundred billion worth of toxic assets. A bit “off” perhaps from our original vision of “ownership” but hey..
Now, before I go any further, understand that you’re dealing with someone who spends hours of brunchtime defending free markets; who vows in the name of “small government”; and who’d bow to kiss Adam Smith’s invisible hand if I could actually see it. You might well think, then, that mine is a world where “ownership” (as in taking control of your life, savings, health, education and bedroom wallpaper) is a revered ideal—the most obvious of human prerogatives.
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Finance & Markets
After the Wreckage: What’s Next for Universal Banks?
The dramatic actions in the last few days of the European and American central banks and treasuries suggest the beginning of the end of the global debt crisis. Some of them, especially the partial nationalization of national banking systems and the unlimited government guarantees of financial contracts, are unprecedented in modern finance. More surprises are probably still to come. But it is not too early to think about what kind of global financial architecture will emerge after the dust settles – and what impact this may have on some of the key banks and financial centers. The basic functions of global banking and finance will continue, or course, but they are unlikely to return to business as usual anytime soon.
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Finance & Markets
If They’re Too Big To Fail, They’re Too Big Period
According to Treasury Secretary Hank Paulson, the biggest Wall Street banks now getting money from the government are just “too big to fail.” Fed Chairman Ben Bernanke uses a different euphemism – he calls them “systemically critical.” The point is that if any of them goes down, it could take the whole financial system with it. So we taxpayers have to keep them up.
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Finance & Markets
Can the Fed Pop Bubbles (And If So, How)?
In October 1925, Walter W. Stewart, the Director of Research at the Federal Reserve Board, proposed reducing speculation by member banks pressuring credit to banks lending to brokerage firms. Benjamin Strong, the President of the NY Fed, opposed the idea.
Several years later (1928), Adolph Miller, then the Fed Board’s economist, suggested a meeting of NY Banks, for the purpose of commanding an end to their financing of speculation. Ben Strong’s successor at the NY Fed, George Harrison, also told the Board in February 1929 that growth of credit in the banking system was far too great relative to total business activity.
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Finance & Markets
Spreading Skyward
The biggest challenge in strategic-minded investing lies within. The high-yield bond market of late offers a telling example. Trailing yields on junk bonds have soared recently, as our chart below shows. The risk premium on junk over 10-year Treasury Notes exploded skyward to close yesterday at nearly 15%. That’s the highest since the early 1990s [...]
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Finance & Markets
Another Great Depression?
What’s the difference between a financial crisis and a Depression? At least initially, the symptoms appear similar. Banks won’t lend to one another, even overnight. Strong and respected businesses cannot borrow short-term money in the commercial paper market even though their default rates are negligible.
The banking systems in many countries have ceased functioning and required major government intervention. It is like a patient experiencing multiple organ failure because the basic circulatory system has gone kaput. Despite urgent measures, the patient appears unresponsive.
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Finance & Markets
Can Volatility History Teach us Anything?
There are no short cuts to easy profits, but sometimes Mr. Market throws us a bone (or two) in our quest for strategic insight. Two examples, though hardly the only ones, come by way of reviewing correlation and volatility histories. We surveyed correlations last week, and today we revisit volatility, as per our chart below, which graphs rolling three-year volatilities of monthly total returns back to September 1994.
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Finance & Markets
More unhappy numbers
Updates on some of the series we regularly follow, and they’re not good.
On Thursday the Federal Reserve Board announced that its index of industrial production fell by 2.8% in the month of September (yes, as in 33.6% at an annual rate). That’s the biggest monthly decline in the index since January 1975. To put it in perspective, UCLA Professor Ed Leamer suggested last August that a 6-month decline of more than 3% should be characterized as a recession. That had been the one holdout among Leamer’s four indicators in suggesting that the economic situation was still not so bad. But according to Leamer’s criterion, the September drop in industrial production almost counts as a recession all by itself.
