This is the third part of 1000 Alitalia in one shot ... I have a "new" coauthor and we have managed to find some data that leave us rather puzzled about the whole thing. In fact, we are still working on the more controversial (really controversial) data and their implications, so stay tuned as it may be more "fun" than we would like it to be. Because everyone is busy making urgent proposals (while Bush, Paulson, Bernanke and Congress are busy ignoring them and playing politics or serving vested interests) we also throw in our two cents on the topic "urgent measures". The only one we really advocate being "stay calm, think, do not panic, do not rush ... talk softly but carry a big stick ...". Apparently no one is staying calm, so disaster may really fall upon us.
Questa sarebbe la terza parte di 1000 Alitalia in one shot... Ho un coautore di lusso e, visto l'evolversi degli eventi, abbiamoprovato a fare due conti a mano. I dati più interessanti, ma anche più controversi, continuiamo a guardarli e riguardarli per essere sicuri di quanto andremo dicendo. Non c'è fretta, arriverà anche quell'articolo e temo che qualcuno concluderà che siamo diventati decisamente e per sempre "pazzi" ... amen, ci abbiamo fatto il callo. Poiché tutti si affannano a dire la loro sul da farsi immediato (mentre Bush, Paulson, Bernanke ed il Congresso li ignorano olimpicamente) diciamo anche noi la nostra, per quel che vale, sulle "misure urgenti". Come con l'articolo precedente, non ho trovato il tempo per tradurlo in italiano. Mi scuso.
... e altri 27 articoli
Collegamenti: banche (21) banchecentrali (4) economia dell'orrore (3) finanza (4) mutui (3)
Everyone knows that the United States faces a serious financial crisis
and that the Administration is asking for an astoundingly large sum of
money to fix the problem. Fewer may know what economists think about
the crisis. Most academic economists - the economists who do not work
for companies likely to benefit from the bailout, nor for the President
- are opposed to this plan.
This large group of experts has wide ranging political opinions, and
includes democrats, republicans, and most likely some libertarians. So:
why is there a crisis, what is this plan, and why are a large number of
academic economists opposed to it?
We might start by asking how we got where we are today. The basic fact
is that the housing market boomed and has now gone bust. As a
consequence, a vast amount of financial securities, written on the
expectations that the bust would never come, are now worth little. Was
this a bubble, the natural working of the market, or was it a creation
of government policy? Or, more probably, all three? Certainly there is
a great deal of evidence that both the boom and the bust in the housing
market were encouraged by government policy. The chart below shows an
index of housing prices (the Case-Shiller Composite-10), and the short
term nominal interest rate, the Fed Funds rate (multiplied by 10),
which is set primarily by the Federal Reserve. Beginning right after
9-11-2001, the Fed Funds rate was very low in comparison to the earlier
period. These low interest rates meant that money could be lent cheaply
in the short-term, helping to fuel a lending boom in the mortgage
market through the use of Adjustable Rate Mortgages (ARMs). The boom
was also encouraged by lax supervision of the two government sponsored
secondary mortgage lenders, Fannie Mae and Freddie Mac. These large
Government Sponsored Enterprises (GSEs) bought nearly half the
mortgages in the country from the banks that originated them, and
resold them to investors as Mortgage Backed Securities (MBSs). Other,
private, investment banks performed similar functions by creating,
issuing and trading similar, unregulated, securities, such as
Collateralized Debt Obbligations (CDOs), Collateralized Mortgage
Obbligations (CMOs), Real Estate Mortgage Investment Conduits (REMICs) and so on.
The total outstanding value, as of the end of 2007, of these kinds of
securities is in the order of $6 trillion
(http://www.sifma.org/research/statistics/statistics.html).
While
not the only culprits, Fannie Mae and Freddie Mac were certainly, and
by far, the two largest players in this market. With support from
Congress they encouraged banks to make high risk loans with low teaser
interest rates and little or no down payment. The Bush administration,
repeatedly proposed greater oversight of the two GSEs, and was
continually rebuffed by both Republican and Democratic Congresses.
Private investment banks, and banks of any kind, also played an
important role in the financing of the housing bubble and in the
creation of MBSs of various kinds. The favorable lending rates on the
short term market (at least until well into 2005) allowed banks to
borrow cheap and lend, at a substantially higher rates, in the form of
(long term) house mortgages that would, right after, be securitized and
distributed through the financial system. Then, after several years of
the housing boom, the Federal Reserve concluded that it had made a
mistake setting interest rates so low and started to raise them. This
suddenly took the fuel out of a car that was going full speed, sending
an increasing number of borrowers into default and leading to the
rapidly falling housing prices seen in the graph.
Yes: there can be cascading bank failures and that is a bad thing. But it does not happen instantly, not tomorrow, not next week, not next month. Here is a graph of bank failures during the Great Depression which we supposedly face again if we don't approve the bailout plan immediately.
| 2005 |
$14,024.26 |
| 2004 |
$14,161.54 |
| 2003 |
$14,298.07 |
| 2002 |
$14,435.93 |
| 2001 |
$14,578.37 |
| 2000 |
$14,728.00 |
| 1999 |
$14,885.85 |
All told, real gross domestic product is likely to expand at a pace appreciably below its potential rate in the second half of this year and then to gradually pick up as financial markets return to more-normal functioning and the housing contraction runs its course. Given the extraordinary circumstances, greater-than-normal uncertainty surrounds any forecast of the pace of activity. In particular, the intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant further drag on growth. The downside risks to the outlook thus remain a significant concern [...] Over time, a number of factors should promote the return of our economy to higher levels of employment and sustainable growth with price stability, including the stimulus being provided by monetary policy, lower oil and commodity prices, increasing stability in the mortgage and housing markets, and the natural recuperative powers of our economy. However, stabilization of our financial system is an essential precondition for economic recovery. I urge the Congress to act quickly to address the grave threats to financial stability that we currently face. For its part, the Federal Open Market Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
Roughly speaking he said "things are not too bad, but gradually getting worse, and you better act quickly to give us $700 billion to fix it." The conclusion does not seem to follow. It is not surprising that people imagine that there is far more catastrophic information that he is not telling us. If the Federal Reserve Bank and Treasury in fact have information that things are worse than Bernanke reported they should tell us what it is. Otherwise they should stand up and make it clear that doomsday is not around the corner.
Days like the day of St. Michele of 2008 are not good for anyone and a certain degree of transparency from the Federal Reserve could spare us, at least, part of it.
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Dagospia cita Libero Mercato:
La mina derivati negli enti locali sta per esplodere e il ministro dell'Economia, Giulio Tremonti, si affida alla Ragioneria dello Stato. Gli sceriffi dei conti pubblici, guidati da Manlio Canzio, hanno passato al setaccio una valanga di contratti di swap sottoscritti dai comuni con le banche nel 2007, quando ai city manager era ancora possibile "giocare" con la finanza spericolata.
Una indagine assai accurata, al termine della quale il Dipartimento di via Venti Settembre ha rilevato una raffica di irregolarità nelle operazioni finanziarie degli enti. Di qui la decisione di mettere nell'angolo le banche - spesso accusate di speculare sulle difficoltà finanziarie di comuni, province e regioni - costringendole ad annullare le operazioni più pericolose....
È stata messa in piedi, perciò, una task force dalla Ragioneria e dal Tesoro (direzione debito pubblico). Il gruppo di esperti ha messo sotto la lente di ingrandimento accordi e operazioni realizzate lo scorso anno e ha avviato un confronto con le principali banche attive nel campo della finanza locale.
«Dalle prime risposte pervenute è emersa la disponibilità da parte delle società che hanno proposto le operazioni di swap a modificare quelle cosiddette illegittime» si legge nel dossier di 178 pagine della Ragioneria. Le correzioni riguarderanno, in sostanza, le condizioni e opazioni più pericolose infilate dalle banche nei contratti , ma in violazione del giro di vite messo sul piatto dall'ex ministro dell'Economia, Tommaso Padoa-Schioppa.
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If federal taxpayer money must be spent now, due to the theory that urgent action is needed to avert the fear that the government is ignoring the matter, we recommend using it to buy the foreclosed on houses, at the face value of the loans impending on them.
I don't think this is going to be as easy as it may seem, for several reasons: the US governement would suddenly become the biggest real estate agency in the world, without having any infrastructure on its support. They would have to evaluate, mantain, advertise and rent thousands of houses across all states and once they'd manage to rent them out they would have to mantain them when needed (as all landlords do). I see how that can be costly. Add to it the fact that many of the houses in foreclosure are simply bad properties in bad neighborhood (remember the profile of the people who bought them on the first place) so much that newspaper are rich of stories of diffuse house-squatting. Now, I am not saying that all houses are being squatted of course but I fear that most foreclosing houses are not just good enough to recover their market price, having being bought in a bubble or even not good enough to be rented at a fair (for the taxpayer) price.
So, I think it is wise to go to the root, as you said, but I am afraid this solution does not guarantee any better investment and it is going to be very costly on the long run, possibly much more than 700 billions.
What about moving just one step above and buy the bad loans, instead. Better than buying their corresponding derivatives for the same principle, but physically easier to deal with.
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Agreed, but is there any evidence the federal government has any comparative advantage at managing all kinds of complicated securities? Because THAT is the alternative.
As for housing management, there are indeed, across the US and also in Madison, both Federal, State and local housing management agencies that could get involved in the process. Their track record is far from perfect, agree. But the track record of our financial overseers and regulators is not better!
I should insist that this is a proposal made under the strong assumption that we MUST spend federal money NOW, assumption I do not share. Forcing recapitalization and forcing the un-doing of the outstanding derivative positions, while beginning to debate the whole regulation issue, would, our view, be enough.
Finally, the data do NOT, currently, suggest that this would cost more than the financial bailout. They suggest it would cost less. How do you reach the conclusion it would cost more, I have no idea.
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Finally, the data do NOT, currently, suggest that this would cost more than the financial bailout. They suggest it would cost less. How do you reach the conclusion it would cost more, I have no idea.
I came with those predictions with a quick back-of-the-napkin sum assuming the financial bailout would bring some profit but, well, you are right on this. When it comes to costs, as of now, nothing really can be said about anything. Those 700b may turn out to be more or to be less, we simply don't know. They may have some return, they may actually bring a lot gain: all in the air. Buying the houses or the loan would have at least two advantages: economically, it might be slightly easier to actually forecast the income; politically, it is going to be a measure WAY preferred by the people. It is clear that the american people simply don't want to give money to WS, no matter what the alternative would turn out to be.This is actually interesting from my point of view because it is a clear sign of a class conflict. It seems, after all, that although US americans are really familiar with and favorable to the concept of free market, still cannot stand some of the basic principles behind it (namely, someone is going to be way richer than you without, apparently, deserving so).
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It is clear that the american people simply don't want to give money to WS, no matter what the alternative would turn out to be. This is actually interesting from my point of view because it is a clear sign of a class conflict. It seems, after all, that although US americans are really familiar with and favorable to the concept of free market, still cannot stand some of the basic principles behind it (namely, someone is going to be way richer than you without, apparently, deserving so).
I agree, but I would not speak of "class conflict", more of "despise" (or even "hatred", if you like, but that's a strong word around here) for a certain interest group, lobby, circle of privilegied people or whatever you want to call it. The American people do not seem to have any problem with, say, software venture capitalists or other entrepreneurs making lots of money.
The American people may resent, for example, that while the Fed Funds Rate was, in the middle 2000s, a lot lower than the ECB reference rate, mortgage rates offered here, even to the best borrowers, were a good 200 basis points higher than those offered in Europe to similar clients ... not a sign of great banking sector's efficiency, in spite of salaries that are substantially higher than in Europe.
In other words - for reasons that should not be too hard to understand in the light of the last two asset bubbles and of whatever happened from 1997 onward - the voters do resent and reject the idea of giving money, without conditions attached, to people on Wall Street.
Now, the unfortunate part is that - because of the panic situation bad policies and even poorer management of the crisis have now created - they will end up doing it nevertheless sometime soon. The one today was a Phyrric victory, if there ever was one.
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I found the following statement both a stimulating and frustrating one :
either, contrary to what the news reports suggest, the losses are not due to derivative contracts but to something else (what, we cannot imagine though) or the actual losses in the value of outstanding mortgages are substantially larger than those revealed by the official data. There is no evidence whatsoever that either of these two hypotheses correspond to the facts
Being not an economist, I venture to ask: is there any chance that, due to some kind of smart multiplicative mechanism, the actual value of mortgages has been used as a basis to produce a larger amount of "value"?
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Me too, really. It is frustrating not to be able to find the data, because the banks do nor reveal them, and the Fed neither.
Yes, I believe that is what happened and I believe the "value" so created was used to skim off the fat, leaving only a castle of paper behind. But the complete opaque information available allows one to only conjecture, and keep investigating.
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Yes, I believe that is what happened and I believe the "value" so created was used to skim off the fat, leaving only a castle of paper behind. But the complete opaque information available allows one to only conjecture, and keep investigating.
There's been much talk about the "shadow banking system", expression coined last year by Pimco's Paul McCulley in this article to indicate the complex of SIV's and similar unregulated entities. This was indeed the liquidity-equivalent of "dark matter" in astrophysics: something that can't be seen directly, but is sensed through effects equivalent to ordinary matter's. In our case, those effects were mass creation of cheap credit, which added a massive amount of extra liquidity to the financial system (also because, being those entities unregulated, they were not subject to reserve requirements and capital adequacy ratios), in times when conventional credit was already expanded by the FED's low interest rates policy.
According to this article of Novemeber 2007 by Pimco's Bill Gross, the FED initially was not exactly on the ball:
What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.
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I cannot comment on the core of the article, and some of you know why. But there is one point that I can comment upon: the role of monetary policy in generating the house price boom. in this and other article in nfa it is taken as a given that "there is a great deal of evidence that both the boom and bust in the stock market were encouraged by government [that is, monetary: my comment] policy". To me, the plot shown in the article does not amount to much evidence: both house prices and the fed funds rate are endougenous variable (the fed responds to inflation, output, and other stuff), so the fact that we experienced a boom in house prices and low interest rates at the same time is no evidence of causation. In a paper with Chris Otrok at UVA (JME 2008, http://www.newyorkfed.org/research/economists/delnegro/wp0524.pdf, and I am embarassed to quote my own research) we looked at whether the exogenous component of policy -- that is, deviation from the "usual" (or historical) policy rule -- is responsible for the house price boom. Our answer is by and large no (btw, we wrote this in the spring 2005). Now, you may not like the methodology, and perhaps for good reasons. You may say that the problem lies precisely in the policy rule followed by the fed. In general the issue is by no means settled: I look forward to more work on this topic, which is obviously important to central banks. But to my knowledge there are not many other pieces of empirical work addressing the issue (at least until recencently -- pls let me know if I am wrong). The bottom line is that I am not aware of this "overwhelming evidence" that the fed caused the house price boom.
(scusate la mancanza di traduzione)
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Hmm, a VAR, yeah.
Small question: how do you define a "usual - or historical - policy rule" if the sample under consideration has no less than two or three such rules?
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Non sono sicuro di capire come funzioni, in pratica, il vostro controfattuale. A me viene molto più immediato ragionare come fa Taylor, qui:
http://www.stanford.edu/~johntayl/Housing%20and%20Monetary%20Policy--Taylor--Jackson%20Hole%202007.pdf
Hai modo di vedere cosa succede nel vostro modello, seguendo un approccio simile? Più in generale: pensi che abbia senso?
Grazie
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Easy, easy. Ed un po' di, come dire, non so, non mi viene la parola giusta ... senso della misura? Ecco, qualcosa del genere.
In ogni caso, here are a few papers "proving" exactly the opposite of what you claim to have proved. Plenty more are easily available by searching the web ...
As for what you have actually computed (modulo the methodology) you forgot a few things:
(1) the data set you use ends in early 2004, half way through the bubble;
(2) your impulse-response function (fig 9) and your own words (p 14) state the opposite of "no", i.e. there is an effect of monetary policy on the price of houses.
(3) You then qualify the "effect" as "small" (a very personal evaluation, at a minimum) through a particular counterfactual exercise that is highly debatable and, especially, does not address the MAIN issue raised here, and elsewhere, which is the appropriateness of the monetary policy rule adopted by the Fed. Given that you yourself recognize this fact in your paper and even in the comment, I wonder what the overall purpose of this comment was. Mentioning a paper that does NOT address the issue we are discussing here?
We can then discuss methodology, and why the methodology you use is neither appropriate to measure what you claim to measure nor, in particular, should allow you to draw the conclusions you like to draw from it. But this requires time I do not have in this moment.
Moral, mostly for other commentators: read the paper before deciding it convinced you to change your mind. Otherwise you run the risk of pontificating without any factual basis to support the pontification.
P.S. Methodology: vedo che alcuni lettori hanno già individuato le basic issues finché io prendevo il caffé con mia moglie ... grande posto nFA!
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Michele, Ja, Luigi, thank you for the comments. Just to set the language right: I never claimed to have "proven" anything. First, the small potatoes: from a methodological point of view Taylor and our paper run the same ("debatable") counterfactual as far as I see. The differences are in the details: Taylor uses house starts, Chris and I use OFHEO house prices. More important, Taylor takes "his" rule literally from an empirical point of view. Plenty of papers show that that that rule may work as a rough characterization of policy, but not so well in practice: the result is that Taylor gets a deviations from the rule (what's called a policy shock) that is somewhat bigger than what we get. (btw, Ja refererred to two or three rules. our paper's sample pretty much starts and ends with Greenspan. if that's the cunning methodogical comment Michele was referring to, good luck!) As to points (1) and (2) of Michele: (1) the published paper has one more year of sample, and (2) mon. policy shocks (deviations from the rule) seem to have an effect on house prices, but is just not large enough to explain the bulk of the house price boom -- but i guess people can interpret the results as they see fit.
Now to the big potato: The rule itself. Is there a paper providing evidence that the policy rule followed by the fed caused (or did not cause) the house price boom and bust? I look forward to such paper (seriously) but I have not seen it yet.
In conclusion, the evidence in terms of deviations from the rule is not, in my view, "overwhelming". The evidence in terms of the rule itself is just not there. I don't know ... where is the "overwhelming evidence"? If you find it/provide it, I'll be the first to say that I've learned something.
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Non capisco cosa hai in testa quando parli di "rule itself", a questo punto.
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Luigi
Lo stesso di cui parla Michele al punto (3) della sua risposta. c'e' una "rule" che il policy maker segue, e ci sono "deviazioni" dalla rule (policy shocks), quando, che ne so, si alza con la luna storta o piu' generalmente prende in considerazione informazione non considerata dall'econometrico. quella proposta da Taylor e' una di queste rules.
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How do you engineer a perfect financial storm? We just witnessed how.
First: the Fed Chairman, the Secretary of the Treasury and the President (BPB, from now on) all go on TV stating that a great disgrace will fall upon the country should Congress not do X. X is, strangely, something that, prima facie, looks very advantageous for people and firms that one would not err too much by characterizing as "close" to BPB.
Second: neither BPB nor their associates, nor anyone supporting the plan X (in particular, not the "friends" that should receive advantages from it) explain what the danger is, how it works, what will cause what and how did we get to this. They insist on the matter being super urgent and dramatic, no discussion please, there is no time. Just to make things look even more dramatic, the future .5(President) suggests to suspe
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From what I understand, the most immediate fear is the freezing of the money markets: as banks don't trust each other, they tend to decline requests of temporary credit positions (hence the escalating interbank rates, which, separately, also worsen the predicament of variable-rate mortgage owners, making the real estate prices drop faster etc.). That alone can bring the whole financial system to a standstill, even without anybody actually losing money. Consider that the interbank money flows (credit aside) are staggering: in 2005 only Fedwire processed payments for USD 2.1 trillion a day, and flows through CHIPS (used mostly for international payments) are probably of the same order of magnitude. Perhaps some sort of government guarantee against risks of counterparty default could help here, although it's hard to engineer it in a way that can't be misused by cunning financial institutions... For example, recently the ECB had to clampdown on abuses of its collateralized credit facility by banks who were allegedly taking advantage from it as a magic converter of newly-produced lemons into cash...