A blog of the NYU Colloquium on Market Institutions and Economic Processes
by Roger Koppl
At the Cobden Centre’s website (and here), Steve Baker discusses recent Fed signals in the context of Big Players theory. The more active the Fed (or other central bank), the greater the fraction of entrepreneurial attention devoted to Fed watching rather than productive activity. As Baker says, “traders must pay attention to the Big Player and not the fundamentals.” Read the rest of this entry »
by Chidem Kurdas
The financial regulation bill approved last week by the House of Representatives does not, of course, refer to James Madison. But it might as well be an exhibit specifically created to demonstrate, by contrast, the advantage of limited and transparent government.
“It will be of little avail to the people that the laws are made by men of their own choice,” wrote Madison in Federalist Paper no. 62. “if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood …”
The 1,279 page “Financial Stability Improvement Act of 2009” – to use its official short title – gives new meaning to the words “voluminous” and “incoherent”. It is like the preceding 1,502 page healthcare legislation, which is virtually unreadable, as Mario Rizzo pointed out.
Because I wanted to know what’s coming and was intrigued by Jerry O’Driscoll’s post on the topic, I plowed through Subtitles A and B about establishing the Financial Services Oversight Council and mitigating systemic risk. By the time I got to Subtitle C, having taken several hours to read less than one-tenth of the whole, my attention was wondering.
But on p. 151 there was something that seemed out of place—a heading that says dental, vision or life insurance. The next page is on long term care insurance. Had some of the medical entitlement legislation made its way into financial legislation? Have the two monstrous bills got crossed? Are they breeding? Read the rest of this entry »
by Jerry O’Driscoll
On Friday, the House of Representatives passed a bill to alter the regulation of financial services. The Senate has yet to act. Still, the House passage advances President Obama’s agenda to change how financial services are regulated.
How to regulate large, complex financial institutions remains a sticking point between the two houses. On the big issue, however, no radical change is being proposed. Major institutions continue to face various subsidies to risk taking and the government proposes to offset these incentives through regulation. The doctrine that some institutions are so large and complex — and interconnected — that they are deemed too big to fail remains in place (if not enhanced). Read the rest of this entry »
by Chidem Kurdas
This October, prosecutors announced a case of hedge fund insider trading with multiple arrests and perp walks amid great media fanfare. Revelations from court documents have become curiouser and curiouser.
The government’s key witness, Roomy Khan, comes across as a determined practitioner of insider trading going back more than a decade. She pleaded guilty to the crime in 2001. At that time or earlier, she became an informant for the FBI.
Subsequently she went on a brazen run, obtaining and trading on private information about company after company, acting as if she were protected from legal consequences. Her bizarre career highlights the ambiguity surrounding this issue. Legal scholar Richard Epstein has pointed out that enforcing insider trading law involves heavy costs and intrusion—see his Simple Rules for a Complex World. He argues that insider trading should be generally regarded as legal.
Consider the implications of the broad case based on Ms. Khan as informant and witness. Read the rest of this entry »
by Sandy Ikeda
A full-page article in today’s Wall Street Jounal begins:
At the Heavenly Models home for deceased economists, an award is being presented to the resident whose work best explains financial crises, global warming, and other pressing issues of today.
The winner, according to author John Cassidy, is A.C. Pigou, the new flavor of the day.
The article implies that Pigou was the first to articulate the concepts of externalities and market failure. I’m not sure that’s right, though I haven’t gotten around to reading The Economics of Welfare, but I believe we do have to credit him with the Pigou tax. So in some ways he’s been almost as dangerous as his “smarter colleague,” although I’ve always felt sympathy for someone who was so much in Keynes’s shadow.
The article also has a sidebar quoting Mises (as well as Friedman, Kindleberger, and of course Keynes) apparently calling last year’s economic crisis.
by Mario Rizzo
Investors’ eagerness to invest in mortgage debt helped drive mortgage rates to all-time lows this week, Freddie Mac said.
The average rate on 30-year fixed-rate mortgages was 4.78%, the agency said Wednesday, matching a record low set in April. That was down from 4.83% from the previous week and 5.97% a year ago
I am amazed that aggregate-demand economists can look at the housing market and simply wonder how to bring it back to normalcy. Today the Wall Street Journal reports that investors are flocking to invest in mortgage-backed securities now that the Fed has been buying them. Freddie and Fannie are too big to fail, and so forth. The risk premium relative to Treasuries has fallen to the narrowest point this year.
From the investor’s perspective these are relatively safe problem-free investments. On the other hand, from the social perspective these investments delay the necessary adjustment of resources out of housing — remember: the over-expanded bubble sector?
Our aggregate-demanders (aka “Keynesians”) do not need to worry because during recessions the allocation of resources is not important. All that matters is propping up spending and restoring “confidence” in something called “the economy.”
UPDATE: A New York Times editorial argues that the housing stimulus is not working. What is their standard of “working”? It is hard to tell precisely. The complaints are that new housing construction has fallen, prices of houses are expected to fall still further and that more homeowners have negative equity. So presumably a policy that “worked” would have increased housing construction, propped up prices, and prevented the spread of negative equity. No readjustment in their play book! What is more disturbing, but predictable, is that the drumbeat for reconsidering the Fed’s plan to begin exiting the housing market has begun:
And the Federal Reserve, whose interventions have sustained the housing market over the past year, must show flexibility. The Fed has made it clear that it would prefer to begin withdrawing support for the market in the months ahead. But without other strong and successful fiscal measures in place, that could do more harm than good.
Stay tuned.
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by Jerry O’Driscoll
Thursday at the Cato Monetary Conference, Dallas Fed President Richard Fisher called for the end of of the too-big-to-fail doctirine. He identiifed the largest financial institutions as the source of excessive risk taking. He also repeated his claim that these institutions interefere with the conduct of monetary policy.
Fisher offered a middle ground between two strategies discussed on ThinkMarkets: steeper capital requirements or beaking them up. He advocated forcing the largest banks to give up some of their riskiest operations. In effect, that is forcible downsizing.
This is a noteworthy call coming from within the Fed itself.
by Chidem Kurdas
A surprising new Small-Is-Beautiful movement is afoot. Mario Rizzo, Jerry O’Driscoll, Harry Kaufman and others make a case for breaking up too-big-to-fail financial institutions. As Mr. Kaufman puts it, otherwise those companies will become financial public utilities backstopped by the government.
It’s not likely that the 2008 crisis would have been prevented had top investment banks like Goldman Sachs been smaller. Traditional little banks are going down in droves. They fail because real estate loans are going bad. So many depository banks have gone under that the FDIC, the federal agency that insures deposits, itself ran out of money and asked to be bailed out by prepayment of bank premiums.
The same real estate bubble-and-bust hit larger banks through mortgage-backed securities. That’s regardless of size. Moreover, the government does not just bail out big investment banks. It bailed plenty of small savings & loan associations in the 1980s. The concept of “too-big-to-fail” is remarkably elastic. Consider that GM and Chrysler both received federal aid. Chrysler is a lot smaller, but the political preference is to treat it as too-big-to-fail. Keeping banks relatively small will not stop such bailouts.
That said, there is a serious quandary. Read the rest of this entry »
by Roger Koppl
Two recent posts on this blog (here and here) raise the issue of animal spirits and where macro is headed. I’ve recently completed a draft manuscript saying we are headed for “BRACE” economics. I say the “New Interventionist Economics” will be characterized by five features:
Bubbles
Radical Uncertainty
Animal Spirits
Complexity Dynamics
Extra-Market Control
(giving the BRACE acronym). Read the rest of this entry »
