Archive for January 16th, 2009

Global Great Depression was because of policy reverence to gold standard

January 16, 2009

With so much focus on Great Depression these days what comes as surprising is that Great Depression was a global event (read Romer’s excellent paper to understand where and when did it start; it impacted India as well). Bernanke in his speech and paper (also this excellent paper)also explains how the Depression became a global event. Much of the blame is on Gold Standard I don’t know whether economics textbooks have been updated as till 1990s we always associated Great Depression with US.

I came across this paperby Barry Eichengreen and Peter Temin who show how Great Depression became global because of the Gold Standard. They explore it from a political angle and show it was the reverence and sticking to the gold standard which led to the crisis becoming a full scale global depression. They also point to their analysis which looks at different policy scenarios  (for instance say if Germany had left Gold Standard earlier) and the economic outcome.

The best part of the paper is – it is quite short and is just about 14 pages. 🙂 It explains quite a lot in 14 pages.

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Fed/Treasury bailout for Bank of America

January 16, 2009

Baseline Scenario pointed that BoA is in dire straits and would get Fed/Treasury support after Obama swearing on 20 Jan 2009.

However, things have changed too quickly. Bank of America was given a bailout today itself. Fed/Treasury/FDIC have bailed out BoA. The press release says:

Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans, securities backed by residential and commercial real estate loans, and other such assets, all of which have been marked to current market value. The large majority of these assets were assumed by Bank of America as a result of its acquisition of Merrill Lynch. The assets will remain on Bank of America’s balance sheet. As a fee for this arrangement, Bank of America will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Bank of America from the Troubled Assets Relief Program in exchange for preferred stock with an 8 percent dividend to the Treasury. Bank of America will comply with enhanced executive compensation restrictions and implement a mortgage loan modification program.

For finance savvy people, the details are here. This is carbon copy of Citi bailout:

As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program.

It is just replacement of 2 things- Citigroup with Bank of America and $306 billion with $118 billion. Despite huge criticism that Treasury got a worse deal on Citi than Buffet did on Goldman, nothing seems to have changed. Why should both pay similar yields to Treasury on its 2 seperate investments? Shouldn’t those with higher risky assets pay higher yields? It beats me.

What is also shocking is this fixing business in US financial system. First ML goes in trouble and sells it to BoA saying problem is over.  Now BoA says it needs support as Merrill assets continue to bleed. Shouldn’t something have been done in the first step itself? Again, what is going on? US economists thrashed South East Asia and Japan for crony capitalism. This is a lot worse. On these lines, next could be Wells Fargo which took over Wachovia in October 2008.

Further FDIC says:

Separately, the FDIC board announced that it will soon propose rule changes to its Temporary Liquidity Guarantee Program to extend the maturity of the guarantee from three to up to 10 years where the debt is supported by collateral and the issuance supports new consumer lending.

The crisis keeps coming back. I am more concerned about the kind of policies being made. No one is walking the talk (see this as well) and now this musical chairs bailout.

Update:

I am shocked and amused to read this news from FT Alphaville:

Forget the culture clash that was expected in Bank of America’s acquisition of Merrill Lynch, which was completed at the start of this month. BofA executives are livid about the true depths of the problems at Merrill, which they feel were glossed over last fall in Merrill’s rush to find a saviour. BofA’s discovery last month of the staggeringly weak condition of Merrill’s balance sheet not only threatened to derail the landmark transaction before it closed, but raised hackles at BofA headquarters in North Carolina, where executives are wondering whether they were sold a pup.

Sirs/Ma’ms, Instead of getting angry please explain and resign.

Move over TARP, here is ARRA

January 16, 2009

ARRA is American Recovery and Reinvestment Act -2009 under which Obama’s much discussed fiscal stimulus would be provided.  It involves $ 275 bn of tax cuts and $ 500 billion of thoughtful government investments in the sector. Right now plan is proposed and Congress would be debating over it.

The bill and summary is prepared by Committee on Appropriations.

Summary of ARRA
Text of Bill

Report

Romer/Bernstein have tried to explain in detail what the plan tries to do. Read Krugman’s criticism of the R/B paper. Here is Obama’s earlier speech at GMU where he explains his plan.

I am still going through the details and is quite focused on infrastructure, green technologies and education. Here is some useful media coverage – WSJ, Reuters..

Update:

I had posted Association of Zoos and Aquariums requested Obama to include reconstruction and  building of zoos and aquariums as part of the fiscal stimulus (it had some economics logic and history backing it).

However, while searching for zoos in the Bill one gets:

SEC. 1109. PROHIBITED USES.

None of the funds appropriated or otherwise made available in this Act may be used for any casino or other gambling establishment, aquarium, zoo, golf course, or swimming pool.

It seems they haven’t lobbied enough.

Assorted Links

January 16, 2009

1. Urbanomics says RBI should slash rates further

2. WSJ Blog points to the new world financial order. It also points Fed’s total swap line  with other central banks amounts to USD 520 billion

3. CMB says Bernanke should focus on deflation now

4. IIEB on policy responses in Eurozone and India

5. Macroblog on what Fed is trying to do?

6. FinRounds onlevered ETFs.


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