Bankrupt(cy) Thoughts: Carillion’s Flaws Are Common to Many

by Edward Chancellor The collapsed UK construction firm’s problems may look idiosyncratic. But its problems with “onerous contracts” were exacerbated by a balance sheet stuffed with intangible assets and ultimately shaky assumptions. These issues are not peculiar to Carillion. Large corporate failures provide interesting insights into what’s been going on in the business world. Enron, … Continue reading Bankrupt(cy) Thoughts: Carillion’s Flaws Are Common to Many

Inflation Is Not Measured Correctly

by Gunther Schnabl* The European Central Bank (ECB) continues buying securities. By the end of 2017, the balance sheet is expected to have further grown by about 800 billion euros. This corresponds to a growth rate of 20 percent per year, while real growth of the euro area is expected to be only 1.5 percent. … Continue reading Inflation Is Not Measured Correctly

Bo as Emblem of State Capitalism

by Chidem Kurdas The fallen Chinese political chieftain Bo Xilai and his wife are starting to sound like a bizarre combination of Macbeth and his Lady, the US Department of Housing and Urban Development and Fannie Mae—yes, the government created and backed housing finance entity. Under the leadership of the Mao-admiring “new left” Mr. Bo, the … Continue reading Bo as Emblem of State Capitalism

Fannie, Dodd-Frank and Barney Frank

by Chidem Kurdas Barney Frank  won’t run for Congress after his present term expires.  This May there were news stories about his  ex-lover getting a high-paying job at mortgage finance giant Fannie Mae while he sat on the Congressional committee that oversaw the government-sponsored entity.  Regardless of what voters now think of Mr. Frank, Dodd-Frank, … Continue reading Fannie, Dodd-Frank and Barney Frank

Fannie Freddie Lawsuit and Risk Arbitrage

by Chidem Kurdas Last week the Federal Housing Finance Agency filed suits against 17 major banks and mortgage businesses for misleading Fannie Mae and Freddie Mac regarding the risks of mortgage securities sold to these government-sponsored enterprises.  Though it targets banks, the litigation shows the mode of operation of Fannie and Freddie. This development is … Continue reading Fannie Freddie Lawsuit and Risk Arbitrage

Resource Allocation Distortions in the Great Recession: Empirical Evidence

by Mario Rizzo The recent annual report of the Bank for International Settlements (BIS) has focused attention on the sectoral imbalances in the previous boom that resulted in the Great Recession. This is a refreshing change from the excessively aggregative analyses of the Keynesian-stimulus crowd.   It is well known that John Maynard Keynes himself was … Continue reading Resource Allocation Distortions in the Great Recession: Empirical Evidence

Policy Makers and Irrational Exuberance

by Chidem Kurdas Robert Shiller says the speculative bubble in real estate was driven by “a contagion of optimism” that pushed up prices and expectations in a feed-back loop. This epidemic apparently engulfed regulators as well.  “Government policy makers breathed in the same optimism, which no doubt encouraged them to be lax on regulatory restraint,” … Continue reading Policy Makers and Irrational Exuberance

Fannie, Freddie and Mortgage Addiction

By Chidem Kurdas In the first inning of what looks to be an intricate political game, the Obama administration and its financial industry allies suggested that the economy needs the federal government full force in the mortgage market. The case was pithily made  by bond honcho Bill Gross,  who oversees more than $1 trillion of … Continue reading Fannie, Freddie and Mortgage Addiction

Summer Reading III

by Jerry O’Driscoll According to Reinhart and Rogoff, “for the advanced economies during 1800-2008, the picture that emerges is one of serial banking crises.” In This Time is Different, the authors bring us up to the present by examining the history of banking crises. Banking crises are not only frequent , but often accompanied by … Continue reading Summer Reading III

Connecting Dots to Financial Crisis

By Chidem Kurdas There are enough books about the events of 2008-2009 to fill a library. Nevertheless, there is no coherent framework that integrates the various factors in the dramatic boom-and-bust cycle that goes back to the late 1990s and may still be with us yet.  Bruce Yandle offers a welcome synthesis in the Independent … Continue reading Connecting Dots to Financial Crisis

Understanding Efficient Markets

By Chidem Kurdas Headline topics like derivatives are part of the larger issue of how markets function.  About this big question there’s been profound confusion in the past two years.  Peter Boettke's article in the Winter 2010 issue of the Independent Review clarifies the muddle. A particular mathematical interpretation of what an efficient market is … Continue reading Understanding Efficient Markets

Goldman Sachs Hate Week

by Chidem Kurdas George Orwell’s classic novel, Nineteen Eighty-Four, describes a political ceremony called the Two Minute Hate, featuring Public Enemy Number One, a reprobate named Goldstein. People attend official rituals to work up a frenzy of hatred against Goldstein and love for their protector, Big Brother, or B-B. To quote Orwell, at the climax … Continue reading Goldman Sachs Hate Week

The Price You See is Not Always the Price that is Relevant: The Housing Bubble

by Mario Rizzo   To argue successfully that a low Fed interest rate policy was the fundamental cause of the housing boom-bubble is not a slam dunk. A relatively small reduction in the mortgage rates available at the time should not alone have a generated so much of a boom.   Casey Mulligan has a very interesting post … Continue reading The Price You See is Not Always the Price that is Relevant: The Housing Bubble

Just What We “Need”

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 … Continue reading Just What We “Need”

Pain in the Fannie

by Chidem Kurdas As Fannie Mae goes for its next withdrawal from the $200 billion kitty the US Treasury graciously made available to this government-created and -sustained mortgage financer, it may be useful to look beyond the current housing slump and consider what it augers for the future. Having made yet another loss, the government-sponsored … Continue reading Pain in the Fannie

Behold: The Recovery Is At Hand

by Mario Rizzo   The Gross Domestic Product (GDP) is growing again at an annual 3.5% rate for the third quarter of 2009. Some people say this means that the recession is over. Apart from the much-touted stubborn unemployment problem, does this make sense?  The government is spending and will be spending massively. Some of that … Continue reading Behold: The Recovery Is At Hand

Reflating the Bubble, Part II

by Mario Rizzo In a recent post I criticized the extension of the Fed's policy of buying mortgage-backed securities. Then I was told by a quite-knowledgeable economist that I may have misread the report in the Wall Street Journal. The first sentence states: The Federal Reserve, in a move aimed at keeping interest rates low … Continue reading Reflating the Bubble, Part II

Reflating the Bubble?

by Mario Rizzo   The Fed has decided to extend, at least through early next year, its program of purchasing mortgage-backed securities. The Wall Street Journal reports:   “The Fed's action signals its belief that the economy, while in recovery, remains fragile and that housing, which has seen some improvement in recent months, has only started to … Continue reading Reflating the Bubble?

Auction Markets and Optimally Sticky Prices

by Joseph T. Salerno Keynesian macroeconomists, old and new, have long criticized their classical and contemporary opponents for ignoring reality and treating the market economy as a giant auction in which prices are “perfectly flexible,” responding instantly to changes in supply and demand.  This charge is wrong on two counts.  First, all markets for outputs … Continue reading Auction Markets and Optimally Sticky Prices

Prices and Information

by Jerry O'Driscoll   In the recent discussion of Say's Law, the issue of "sticky" prices came up. The term is the source of much confusion. The opposite of "sticky" prices is not "flexible" prices, but infinitely flexible prices. No matter how flexible a price, short of infinite flexibility, there will be quantity responses. Quantity responses are … Continue reading Prices and Information

“Prices Must Be Free To Tell The Truth”

by Mario Rizzo I am not sure who first said this but I believe it was the economist Benjamin Anderson (although Arthur Marget has been credited). In any event, Henry Hazlitt promoted the statement. I think the very interesting opinion piece by our regular guest-blogger, Jerry O'Driscoll, in today's Wall Street Journal is in the … Continue reading “Prices Must Be Free To Tell The Truth”