tag:blogger.com,1999:blog-5154389358831836369.post1365639798006047335..comments2024-03-19T00:53:30.388-04:00Comments on The Slack Wire: In Which I Dare to Correct Felix SalmonJW Masonhttp://www.blogger.com/profile/10664452827447313845noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-5154389358831836369.post-47798555411418799432012-10-18T05:30:45.860-04:002012-10-18T05:30:45.860-04:00The Flow of Funds shows clearly that commercial bo...The Flow of Funds shows clearly that commercial borrowing by nonfinancial borrowers has held up reasonably well; the fall in commercial paper lending is limited to financial borrowers.The idea in this blog good.<br /><br /><a href="http://www.slideshare.net/rockymountain01/rocky-mountain-wealth-concepts-improvement-with-t-coleman-andrews-iii" rel="nofollow">Rocky Mountain Wealth Concepts</a>Anonymoushttps://www.blogger.com/profile/10707525101292915158noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-56481577354059524792012-08-10T12:41:37.006-04:002012-08-10T12:41:37.006-04:00Very good points you wrote here..Great stuff...I t...Very good points you wrote here..Great stuff...I think you've made some truly interesting points.Keep up the good work. <br /><a href="http://phoenixduilawfirm.net/" rel="nofollow">phoenix dui law firm</a>Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-60053518016026031992012-07-07T20:10:38.487-04:002012-07-07T20:10:38.487-04:00Yeah, no.Yeah, no.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-77023050277679080422012-07-05T18:56:05.539-04:002012-07-05T18:56:05.539-04:00Hey there is a question about UMass on EJMR maybe ...Hey there is a question about UMass on EJMR maybe you can answer it. http://www.econjobrumors.com/topic/i-dont-get-the-umass-departmentAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-4255943194230681552012-06-30T21:52:11.812-04:002012-06-30T21:52:11.812-04:00Hey thanks.
The point about ratings should get m...Hey thanks. <br /><br />The point about ratings should get more attention. I remember around the time of the financial crisis there was some attention to the inconsistent standards applied to different kinds of issuers. I was working for the NYC Independent Budget Office then and there was some talk of trying quantify the costs to the city of the inconsistent scale for ratings. You'd think someone would do this -- it;s a very straightforward empirical question -- the default experience over the next N years of different classes of borrowers with the same bond rating. Someone must have done this, right?JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-58739738608690062742012-06-30T21:48:11.257-04:002012-06-30T21:48:11.257-04:00This is a very good question. I wish I had a good ...This is a very good question. I wish I had a good answer.<br /><br />Let's at least distinguish two sets of questions. First, (how much) did credit constraints cause (or contribute to) the initial downturn in business investment, vs. (how much) are credit constraints responsible for the continued depressed level of business investment. And second, vs. those, would the outcome for the real economy have been (or will be) much worse in the absence of interventions to prevent the failure of major banks? In general, most people (e.g. Dean Baker) who think that the financial crisis was not a major cause of the downturn in real activity, also think that the bailouts were not needed; but in principle the two questions are logically independent.<br /><br />The thing I am most confident about, personally, is that lack of credit is not *today* a major factor holding back business investment. This is not an especially radical view -- Paul Krugman would agree -- but it's perhaps not quite a mainstream one either, at least in policy circles. In any case that's the view this post is supporting. I'm pointing out that the failure of the financial commercial paper market to recover post-crisis cannot be taken as a sign that there is a continued credit shortage facing nonfinancial businesses. In that sense Felix Salmon has been snookered.<br /><br />On the policy side the conclusion is obvious -- and again a liberal as well as radical one -- that interventions to improve the balance sheets of financial institutions are insufficient. To raise output and employment -- assuming that's the goal; I've argued it's not, necessarily, in Europe at least -- interventions will need to directly raise final demand, i.e. be fiscal. Implications for economic theory too.<br /><br />I appreciate the value of a clear story. I'll come back to this in another post soon, I hope.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-73492626684062673252012-06-30T21:37:13.091-04:002012-06-30T21:37:13.091-04:00Yes, financial includes asset-backed.Yes, financial includes asset-backed.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-86331503247478260682012-06-30T14:45:18.982-04:002012-06-30T14:45:18.982-04:00Excellent analysis! The short term borrowing is pr...Excellent analysis! The short term borrowing is primarily by the financial sector. Occasionally non-financial firms may tap this market for inventory financing, but it is rare. Generally non-financial firms and households participate as lenders to financial firms, because they cannot borrow on the same terms that financial firms can borrow. <br /><br />Take a non-financial firm with the same level of leverage, debt to equity ratios, and stability of earnings. It would have a junk bond rating. The financial firm has a AAA. Why? Implicit government guarantees as well as institutional guarantees. <br /><br />Tiny little Primus Guarantee had a AAA (before the crisis, when it was still listed), which was a an outfit based in Bermudas with what, 10 employees, selling huge amount of credit default swaps. <br /><br />On the other hand, General Mills does not have a AAA. Neither does the U.S. There is a massive institutional bias against all non-financial borrowers (and particularly government borrowers) and in favor of financial borrowers. This bias allows the borrowers lend at high rates and borrow at low rates, making themselves more profitable than the non-financial borrower with a similar balance sheet, which validates the institutional bias ex-post.rsjhttps://www.blogger.com/profile/05489955485750918419noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-47068470121994867722012-06-28T23:34:34.849-04:002012-06-28T23:34:34.849-04:00As to whether the financial system should have bee...As to whether the financial system should have been allowed to collapse rather than being bailed out, well, beneath the system of credit is a payments system, which couldn't be allowed to collapse else it would have been the formal analog to an electricity black-out and everyone would be left to move about in the dark. So the payments system being held hostage by the credit system was used as an excuse for bailing out the financial sector. But there was a third alternative between allowing a collapse, (which due to the excessive inter-connectivity of the system and its high degree of embedded leverage, would have been total), and bailing it out without exacting any quid pro quo. Namely, insolvent mega-banks and hi-fi outfits should have been put into public receivership, i.e. nationalized. The incumbent boards and management would have been thrown out and replaced, the bad assets taken off the books and put into a bad bank, bondholders would be converted into equity holders and given ownership of the bad bank (and whatever share of the good bank remains after recoveries), and the banks would be recapitalized with public funds, (and re-regulated, broken up and down-sized). The only issue amongst us subaltern blog commenters was whether the government should just bypass the banks or take them over, and my view was the personnel, outlets, administration was already in place with the take-over, whereas it would have to have been generated from scratch otherwise. Amongst the "pros" the debate was over whether bondholders should have to bear some of the cost or whether they should be guaranteed to prevent further contagion, as DeLong argued. (Obviously not, only new issues should have been guaranteed, though with the gov. in charge that would be largely superfluous.) There then would have to have been secondary bailouts of pension and insurance funds. But there is little doubt in abstract economic theory, (cf. Ken Rogoff), that that would have been the most efficient cost-effective way of dealing with the crisis and mitigating its damage to the "real" economy. The only problem is that the obstacles to such a course of action would not just have been ideological, but legal, logistical and administrative: i.e. the regulatory authorities and policy makers would have to have been prepared in advance, whereas obviously for the prior 2 decades they had been just sniffing glue. And the upfront cost in swelling the fiscal deficit would have been enormous, though the long-run cost, both in ensuring orderly write-downs of bad "assets" and mitigating economic damage and fostering recovery/restructuring, would have been vastly less than what we got.<br /><br />In the event, we got $14 trillion in loans to provide "liquidity", +$2 trillion in qE to prop up financial "asset" prices fictitiously together with ZIRP and "regulatory forbearance". The interesting bit was that TARP funds were allowed to be repaid quickly to avoid regulatory interference with bonuses, which suggests not just official collusion, but that such excess capital injections were unneeded in the light of all that excess "liquidity", (so the monetarists must have gotten something right). But we'll be paying for the result for years, if not decades to come.<br /><br />"And there are plenty of people on the left who would say that a tendency, which I confess to, to let the conflict between Wall Street and the real economy displace the conflict between labor and capital in our political language, is a symptom -- a kind of reaction-formation -- of the same intellectual capture."<br /><br />No, not me at least. But the inter-linkages between the two complexes require a more complex account.john c. halaszhttps://www.blogger.com/profile/17176419625607679150noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-52107174449648876892012-06-28T23:33:24.799-04:002012-06-28T23:33:24.799-04:00Banking is a sheer cash-flow business, borrowing s...Banking is a sheer cash-flow business, borrowing short and lending long and making the vig from the interest spread, so it's not surprising that most of the CP market is financial, (not to mention, along with tom m, that it was funding much of the non-bank banking activity and off-balance-sheet vehicles comprising the "shadow banking system"). For non-financial businesses CP is just trade credit for managing cash-flow and other short-run contingencies. On the other hand, it's mostly the SME's that depend on bank credit, not the oligopolies, and that's where the credit crunch effects hit the economy most of all.<br /><br />As to the proximate causes of the crisis and the severity of the recession,- (actually a semi-depression, which is still going on),- it wasn't the excessive borrowing or over-investment of the corporate sector at fault, since they had been dis-investing for a while and were flush with excess cash, but rather the excessive debt in the household sector, partly due to the housing bubble and the huge amount of embedded leverage that had built up in the financial sector, rendering it ever more fragile, to the point that there were immense losses to be realized, which Mr. Market gradually, then suddenly, came to recognize. The damage to the real economy came not from a shortage of investment demand, (which, as per above, wasn't new), but from a collapse of financial wealth effects and ordinary consumption demand, (which had previously been debt financed). Not so hard to figure. Collapsing investment follows in suit as a consequence, not because of the collapse in credit. But the collapse in credit disrupted much ordinary trade credit and payments,- (e.g. letters-of-credit for international shipping, which in some form must be centuries old and long taken for granted),- thus the rapid free-fall.john c. halaszhttps://www.blogger.com/profile/17176419625607679150noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-266571932135701722012-06-28T16:27:48.528-04:002012-06-28T16:27:48.528-04:00Are you including Asset Backed CP in Financial CP?...Are you including Asset Backed CP in Financial CP? This grew enormously pre-Lehman, and then of course was the first to collapse in Fall 2007. You are right that financial CP has collapsed, as the crisis has mainly taken the form of collapse of the wholesale funded shadow banking system, ABCP in particular.tom mhttps://www.blogger.com/profile/06218456457883749242noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-48229633305140056262012-06-28T02:06:00.506-04:002012-06-28T02:06:00.506-04:00that banks' problems' are everyone's p...<em>that banks' problems' are everyone's problems is taken for granted, or at most justified with a pious handwave about the importance of credit to the real economy.</em><br /><br />The virtue of the standard/finance point of view, at least for a layman like me, has been its handy way of explaining how the financial crisis became the recession: the CDO implosion caused the credit crunch that slowed the economy. Put it another way, the banks' intermediation function was the vector by means of which the financial crisis became an economic crisis. <br /><br />But if, as you suggest, the banks were only ever superfluous to the functioning of the real economy, then what's your explanation for how the contagion spread? Or is it your view that that question presumes too much about the causes of the recession? (E.g., maybe you think the recession would have hit with or without the financial crisis?)bbhttp://twitter.com/bobbybairdnoreply@blogger.com