Archive for March 19th, 2009

All recessions end some day

March 19, 2009

This is one of the common messages of the speeches of both Obama team’s top members – Larry Summers and Christy Romer. Summers summarises the Obama plans and Romer compares the  crisis with guess what- Great Depression.

Summers says:

Our problems were not made in a day or a month or a year, and they will not be solved quickly. But there is one ineluctable lesson of the history of financial crises: they all end.

Romer says:

Finally, the last lesson that I want to draw from the 1930s is perhaps the most crucial, right? A key feature of the Great Depression is that it did eventually end. Despite the devastating loss of wealth, chaos in our financial markets, and a loss of confidence so great that it nearly destroyed Americans’ fundamental faith in capitalism, the economy came back. Indeed, the growth between 1933 and 1937 was the highest we have ever experienced outside of wartime.

:-) This is pretty obvious. All good and bad things come to an end someday.

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A good short note on deflation

March 19, 2009

Charlotta Growth of Bank of England has written an excellent short note on deflation:

 This article examines the different economic costs associated with deflation. It explains that it is important not to confuse the economic costs associated with the circumstances that caused prices to fall with the costs of deflation itself. The costs of deflation are most likely to be associated with debt deflation and downward nominal wage rigidities. But if policy responds sufficiently promptly and decisively then these costs are likely to be modest and short-lived. 

It also provides a neat description of previous deflation episodes (mainly occured because of gold standard). Nice crisp reading.

AIG hearing

March 19, 2009

Though, I agree with Prof Mankiwthat one should not waste time as much time on AIG. But the manner in which bonuses keep getting distributed in Wall Street despite all the crisis and govt help deserves a closer look.  It isn’t just about AIG, but similar news was seen when NY city in its report showed billions have been distributes in 2008. Obama is his speech has chided AIG and says the same:

But these bonuses, outrageous as they are, are a symptom of a much larger problem. And that is the system and culture that made them possible – a culture where people made enormous sums for taking irresponsible risks that have now put the whole economy at risk. So we are going to do everything we can to deal with these specific bonuses. But what’s just as important is that we make sure we don’t find ourselves in this situation again, where taxpayers are on the hook for losses in bad times and all the wealth generated in good times goes to those at the very top.

Moreover, the way AIG CEO has defended the bonuses and blogsindicating Obama team members Summers and Geithner not knowing how to deal with it. It just tells you how bad this entire thing is. As James Kwak puts in his blog :

However, this scandal may yet serve a purpose. One characteristic of both administrations’ responses to the crisis has been to devise subsidies for the financial sector that are too complicated for even conscientious readers to make out, such as the asset guarantees for Citigroup and Bank of America, or the preferred-to-common conversionfor Citigroup.

All the above allegations are further confimed by recent testimony by Fed  Vice Chairman Donald L. Kohn. First, it requires a lot to understand the various interventions by Fed/Treasury in AIG. Second, Kohn says they have been managing AIG incentives, compensation etc as part of the deal:

The Federal Reserve does not have statutory supervisory authority over AIG or its subsidiaries as we would over a bank holding company or state chartered bank that is a member of the Federal Reserve System.  Rather, the rights of the Federal Reserve are those typical of a creditor and are governed by the credit agreement for the Revolving Credit Facility.  Using these rights, the Federal Reserve works with management of AIG to develop and oversee the implementation of the company’s business strategy, its strategy for restructuring, and its new compensation policies, monitors the financial condition of AIG, and must approve certain major decisions that might reduce its ability to repay its loan.

The testimony was given on 5 March 2009, and in just a week’s time we have information that shows AIG collateral saved quite  a few banks and the bonus thing showed compensation was never really managed.

Now, House Committee on Financial Services has started a two part hearing. In first part AIG CEO talks and in second Bernanke and Geithner would present their views (25 March 2009). The first part hearings are available on the website. I haven’t read AIG CEO’s testimony. Have heard it is interesting. WSJ Blog has some live bloggeryof the event. NYT reportsthat he has asked employees that have received bonuses to give half the amount back!! I mean how ridiculous can things get in US??

Assorted Links

March 19, 2009

1. MR points AIG gave a total of $130,000 to Obama in 2008, while McCain accepted a total of $59,499. Pol eco at its best.

2. WSJ Blog has live blogging on AIG hearing

3. Mankiw points how his blog is helping his textbook stay updated

4. FCB points why Buffet is silent on credit rating agencies

5. Pestonblog points to new UK financial regulation reports


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