Archive for November 25th, 2008

Mostly Economics ranked 7th now!

November 25, 2008

Mostly Economics breaks into top 10 and is now ranked 7th! It was ranked 12 on November 12, 2008 and 30 on October 27, 2008

I don’t really like to point all this as it sound like some sort of weekly ranking countdown. However, have to keep updating the readers (esp the regular ones) of the new developments wrt Mostly Economics.

Thanks once again!

Why US yields continue to fall?

November 25, 2008

Carmen M. Reinhart and  Vincent Reinhart have written an excellent post in voxeu explaining why US Treasury yields are still in demand and as a result continue to fall. The summary says it all:

Why are investors rushing to purchase US government securities when the US is the epicentre of the financial crisis? This column attributes the paradox to key emerging market economies’ exchange practices, which require reserves most often invested in US government securities. America’s exorbitant privilege comes with a cost and a responsibility that US policy makers should bear in mind as they handle the crisis.

I had written a paper in Jan 2008 asking whether the crisis (it was sub-prime then) unwind the global imbalances? I don’t see it happening as demand for USD assets continue, despite a huge crisis and problems in US economy.

IMF explains the Iceland package of USD 2.1 billion

November 25, 2008

IMF hasapproved 1 USD 2.1 billion package for Iceland. Actually, IMF has agreed to pay $2.1 billion and Iceland would need about $5 billion to keep afloat. Where did this $ 5 billion come from?

In a conference call, IMF explains the details.

QUESTIONER: In Article 24 of the Icelandic Letter of Intent, it is commented that there’s a need for $24 billion until the year 2010. Can you explain this to us? What is this amount for and how does the IMF see this?

MR. THOMSEN: Yes, I can explain that to you. The $24 billion has three components. One component is the estimated cost of paying on the foreign deposits, which when this was drawn up it was estimated at close to $8 billion. With the information we have today, we think this is a significant overestimation. So probably it’s closer to $5 billion, $6 billion, something like that.

That part of the financing is already assured in the sense that the concerned countries and particularly the UK and the Dutch have agreed to provide financing earmarked for the payments of these foreign deposits. So, of the $24 billion, or if we have the more recent, more realistic number of probably $21 billion or $22 billion, $5 billion to $6 billion is already secured through the commitment of the UK, Dutch and any other countries that will get payments to provide financing earmarked for this.

Secondly, there is an estimated $10 billion in arrears to private creditors. These are payments. When we calculated the $24 billion, or the corrected $21 billion or $22 billion, we assumed that all payments are being made. Now we know that these payments, this $10 billion, are not being made. So we have a counter item below the line of $10 billion of arrears that will be subject to discussions between the banks and those that are administering the banks now and the foreign creditors. That’s also, so to speak, taken care of in the financing picture.

This leaves this residual financing gap, cash financing gap of about $5 billion. It’s another way of saying, in the jargon of economists, when we do the balance of payments, we do it on an accrual basis, what is due. What is due gives you a financing need of $24 billion, that is $21 billion or $22 billion, corrected.

If we did all of this on a cash basis, the $24 billion would only be $5 billion, and that’s the $5 billion we’ve been talking about.

I realize that this way of putting it sounds somewhat strange for somebody who is not in the IMF world, but this is the way we present it. We have to present the balance of payments on an accrual basis, what is actually due, not what are the actual payments taking place.

So actually Iceland needs $21-22 billion out of which around $15 bn to $ $16 bn have been worked out. Remaining is around $ 5-6 billion out of which $ 2.1 bn comes from IMF. What happens to the rest?

QUESTIONER: How sure are you that Iceland will get those $3 billion from other countries?

MR. THOMSEN (IMF): I’m confident that we will get the $3 billion. I’m very confident.

Talks are on with other Economies (like Russia) to provide the rest.

US Automakers: to be bailed out or not?

November 25, 2008

There is a lot of debate on whether US automakers should be bailed out?For the motion believe that these automakers employ a number of people and a collapse at this point would worsen the economic situation. Against the motion says these companies are not producing cars no one wants and should be left on their own.

Here are a few resources to understand the issue:

  • House Committee on Financial Services had a hearing where academicians and automakers presented their views.
  • Mankiw points to views from Gary Becker (no) and Jeff Sachs (yes)
  • Matt Slaughter (of Dartmouth) presents his views and is against bailout (He also testifies at the House Committee on Financial Services
  • Mankiw points to huge cost differences between US and Japan automakers
  • Luis Zingales and Joshua Rauh say Chapter 11 is the best way out

Assorted Links

November 25, 2008

1. Christina Romer to head CEA. MR has a profile. WSJ Blog chips in too with a profile. Mankiw says it is an excellent choice

2.  WSJ Blog on Obama’s dream team

3. Krugman on the UK fiscal stimulus. He also points to fin sector excesses

4. Macroblog analyzes the recent CPI inflation number and says deflation isn’t a worry. Econbrowser has different ideas and says deflation is a worry and time to take aim and fire

5. Mankiw on US fiscal stimulus

6. TTR points to directed bank lending

7. PSD Blog congratulates Slovakia for being a top reformer

8. CTB on super-bankruptcy

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