Sen. Sanders Again Targets Regional Fed Boards http://t.co/2TBiwYvPhD
15 minutes ago
Global Macro Channel: Latest Posts
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Finance & Markets
The Subprime Mortgage Crisis: Could We Have Seen It Coming?
I take a close look at the history of subprime mortgage loans between 2001 and 2007 to see if there was any pattern evident that could have led people to foresee, and thus forestall, the crisis that occurred in 2007. Sadly, using standard econometric tools I find that by as early as 2005 it was possible to detect a serious deterioration of subprime loan quality.
This finding is detailed in joint work with Yuliya Demyanyk from the FRB St. Louis, which was presented at the Fed, IMF, SEC, FDIC, S&P, Lehman Brothers, among many other places, and can be downloaded at http://ssrn.com/abstract=1020396. Below I provide an executive summary.
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Finance & Markets
Foreclosure Vouchers?
David Colander has a Trickle Up plan to reduce foreclosures:
Trickle-Up Plan Aims to Stem Foreclosures, Real-time Economics: Now that the easy part — temporarily propping up the banking system — is done, it’s time to start thinking about … how to save millions of Americans from losing their homes in a way that will be politically acceptable but will also stop the economy from falling into a severe recession.
Sen. John McCain’s plan of a $300 billion dollar bailout is a non-starter. It subsidizes people who made lousy decisions about borrowing …without giving anything to those who made the better decision to live within their means. Politically, it goes against what Americans are clamoring for — accountability… As was the case with the rescue of the banking system, however, some bailout for distressed homeowners will be needed to prevent continuing economic and social fallout from the housing debacle. For the U.S. economy even to start to think about recovery, the housing market has to stabilize…
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Finance & Markets
The dollar in pictures
I promised myself when I started this blog that I would stay away from any charts, equations and all the “scary” stuff that compels readers to click their way out. Yet, when it comes to what’s going on with the dollar these days, I can’t resist… a picture says it all. But let’s go back to the beginning.
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Global Macro
Post-Meltdown Mythologies (I): Americans Have Been Living Beyond Their Means
What brought on the economic meltdown of 2008? Besides the bursting of the housing bubble, Wall Street’s malfeasance and non-feasance, and Washington’s massive failure to oversee Wall Street, fingers are also being pointed at average Americans. Some of them took on mortgages they couldn’t afford, of course, but we’re also hearing a more basic theme that goes something like this: For too long, Americans have been living beyond our means. We went too deeply into debt. And now we’re paying the inevitable price.
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Global Macro
Making the World Safe for Sovereign Wealth Funds
Although the weekend gathering of finance ministers and central bankers in Washington was, until Monday, filled with doom and gloom, one event was very encouraging. The International Working Group (IWG) of sovereign wealth funds (SWFs) unveiled their voluntary Generally Accepted Principles and Practices (GAPP)—the Santiago Principles. The GAPP is a solid piece of work that should help to dispel some of the mystery and suspicion surrounding SWFs. The International Monetary Fund deserves substantial praise for facilitating an agreement in the IWG in a remarkably short period of time.
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Dan Alpert's Two Cents
The Freedom Recovery Plan for Distressed Borrowers and Impaired Lenders
Overview
With the passage of the Emergency Economic Stabilization Act of 2008 (“EESA”), the twin housing and mortgage crises have now forced the government to directly battle, with massive financial intervention, the systemic implications for our banking (and shadow-banking) institutions. Notwithstanding the magnitude of government support that EESA will bring to the resolution of the credit and banking crises, the financial and social implications arising from the housing bubble, for homeowners and the broader economy, require the consideration of additional unconventional solutions that are not inconsistent with the rubric of our system of laws and property rights. Such solutions must also place less reliance on direct intervention from a heavily extended government (and its taxpayers). The Freedom Recovery Plan (the “Plan”) is a structured package of government and private-sector measures that amount to a national “workout” of the residential real estate elements of the overall crisis in the capital markets. The housing sector’s ongoing meltdown presents unique challenges that were not front and center in prior boom and bust cycles. Accordingly, special actions are necessary to limit the damage to vast population segments and the knock-on effects of such damage to our normally resilient financial sector and economy. That such actions should endeavor to maximize the role of the private sector should be self-evident to those with lingering concerns about the total costs to which the government has already committed.
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Finance & Markets
Stormy Weather in the Credit Default Swap Market
Credit default swaps (CDSs) – bilateral insurance contracts against bond default – are now in the eye of the storm. Worries about counterparty risk are mounting among market players and is multiplied by the lack of global netting. This column discusses lessons from the 2005 crisis in CDSs.
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Finance & Markets
How to Manage The Banks
The Treasury plans to invest up to $250 billion in individual banks and has already allotted half that amount to nine leading banks. For now, the key questions are: Will the plan work? And what consequences will it have for our financial system and our economy? Several issues bear examination.
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Finance & Markets
The Future Of The Financial Industry
In 2006 (long before the crisis started), I was working on a project to understand the evolution of the U.S. financial industry. I concluded that its growth seemed to reflect fundamental economic needs up to 2001, but that it was not clear (at least to me) why it kept growing so quickly after 2002.
Based on my simple model, I thought the financial sector was about one percentage point of GDP too large (on the virtues on simple models, see Krugman). In April 2008, in an interview with Justin Lahart of the WSJ, my idea was translated in the following way: “Mr. Philippon argues that the surge of financial activity that began in 2002 created an employment bubble that is now bursting. His model suggests total employment in finance and insurance has to fall to 6.3 million to get back to historical norms, and that means losing an additional 700,000 jobs in the sector.” In truth, my model is not about the number of jobs but about the GDP share, so it would be more accurate to say that the annual wage bill of the financial sector needs to shrink by approximately $100 billion.
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Global Macro
The Big Fade on Spending Rolls on
This morning’s retail sales report will surprise no one who’s been watching the economy this year, but the trend is still disturbing.
Estimated monthly sales for retail and food services on a seasonally adjusted basis slumped 1.2% last month, the biggest monthly percentage decline in more than three years, the U.S. Census Bureau reports. On a 12-month basis, retail sales are 1% below the year-ago figures. As our chart below reminds, the trend looks ugly, and it’s virtually certain that there’s more of the same and worse on tap for the coming months.
