July 16, 2009
In the news
Russ Roberts, Mark Calabria, and I weigh in on the lessons from CIT at the NYT.
And the WSJ surveys economics blogs. I'll give away the plot: the one you're reading rates "five calculators" on the geekiness scale.
Posted by James Hamilton at July 16, 2009 08:06 PMdigg this | reddit
Only five? Time to up the ante. Just kidding.
Posted by: Steve Bannister at July 17, 2009 06:02 AM
Sorry Professor but Russ and Mark really made your answer seem wishy-washy at best.
Russ was the only one with the courage to touch on the crony capitalism involved destritubg Goldman Sachs competition while giving Goldman a windfall of interest on government money. In the private sector what the government did would have landed a lot of people in jail but in government it is SOP.
By far the best passage was by Mark Calabria.
In a highly leveraged institution, the only real discipline comes from the market. While imposing losses on creditors will raise the cost of debt, it is not only appropriate, but necessary. After all, artificially cheap debt contributed to our financial crisis.
We do not need to draw a line between the treatment of large, medium and small banks. We need to erase the existing political boundary that favors some while leaving others to fail. All institutions have to be open to failure — it is the reason why markets work.
Posted by: DickF at July 17, 2009 06:46 AM
And we appreciate all your efforts Jim. I hope you make a little more than Mankiw. Since I read you and not him maybe you get more hits.
Posted by: me at July 17, 2009 07:31 AM
Five lights bulbs! Only two sites with that. Congratulations!
And on the note of geekiness: I bookmarked the WSJ page.
Posted by: Steve Kopits at July 17, 2009 08:47 AM
The reason "too big to fail" became acceptable was because no one had an answer to what to do about all the debt and promises (contracts) these agencies had signed.
Should all their contracts be voided? Should none of the contracts be avoided? Are these two extremes the only options? Of course not.
Shift the focus from which companies should be rescued to which contracts should be rescued. That will provide a consistent way to treat all banks and financial companies, independent of size.
Those contracts that were developed within the regulated banking system, such as annuities, bonds, should be rescued and sustained. Those contracts that were developed outside the regulated system, such as credit default swaps, all contracts made legal by the Commodity Futures Modernization Act of 2000, should receive no money from the Federal government.
With this standard, the U.S. could wind down any size bank, guaranteeing all the "legitimate" contracts and ignoring all those that were created outside the system of regulation established for banks.
Of course, this assumes that the 2000 Act was a big mistake and that it should be repudiated. Limiting bailout monies is the best way to make this point.
This kind of action would show that the financial system does not control the U.S. government.
Posted by: ReformerRay at July 17, 2009 05:36 PM
IMHO this is one of the 3 best ecoblogs. The other two are Naked Capitalism and The Big Picture.
On a different topic, DickF's comment that "All institutions have to be open to failure" is dead on. Without actual bankruptcy of investment banks their behavior will never be regulated. Even during the Depression after the Great Crash and with the Pecora commission, legislative enactment of regulatory strictures was no foregone conclusion. The economic consequences of TBTF are, of course, increased looting and moral hazard. The consequences for political economy are even worse.
Posted by: d4winds at July 20, 2009 03:49 AM
Congratulations to Econbrowser. I think Econbrowser is certainly one of the best. And if they had a ranking for "signal to noise ratio", econbrowser, esp JDH, would have been at the top of the list.
Posted by: JE at July 20, 2009 09:52 AM
And geekiness is the one we all aspire to. I'm so jealous. Congratulations!
Posted by: James Kwak at July 21, 2009 09:20 PM