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Preview: Market Movers Market Movers

Financial blogger Ryan Avent follows the egos and power struggles that collectively drive the markets.

Published: Wed, 12 Aug 2009 13:19:12 GMT2009-08-12T13:19:12Z

Copyright: © 2008 Condé Nast Inc. All rights reserved.

The Times' Rorshach Geithner Story

Mon, 27 Apr 2009 13:26:58 GMT2009-04-27T13:26:58Z

The New York Times has provided a handy blogging point for today in the form of a long piece on the relationships Tim Geithner formed while head of the New York Fed. The story is based in part on the results of a Times FOIA request, for the contents of Geithner's daily calendar while at the bank, and bloggers have primarily approached the story as a search for potentially nefarious activities. As examples, we see Paul Kedrosky concluding that there's no real "smoking gun," and Yves Smith writing that the story is far too kind, as it mysteriously excises all the times Geithner was scheduled to dine on babies and puppies in the company of Satan and AIG executives. For the life of me, I don't know why we're not spending at least a little more time on the opening anecdote:Last June, with a financial hurricane gathering force, Treasury Secretary Henry M. Paulson Jr. convened the nation's economic stewards for a brainstorming session. What emergency powers might the government want at its disposal to confront the crisis? he asked.Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation's most powerful financial institutions, stunned the group with the audacity of his answer. He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.Smith notes the line and proceeds to throw of a line constituting one of the most epic examples of point missing in recent memory:The story fails to note this was almost assuredly the most bank friendly program possible.To begin with, that's not even true. The most bank friendly program possible is handing the banks a lot of money with no strings attached. But how does Smith miss that this would not only have been a very smart and prescient move, but it might also have laid the groundwork for a much tougher bank policy? Guaranteeing all the bank debt was, of course, one of the key ingredients of the Swedish bank rescue so beloved by fans of nationalization. Smith just assumes Geithner is looking to help his Wall Street buddies, but he might just as easily have been reading directly from the Swedes' playbook. Moreover, this move would have entirely changed the calculus in September. It would have made the government much more reluctant to let Lehman fail, which I believe we can agree would have been a good thing. Had they nonetheless decided that Lehman should be allowed to go down, in the knowledge that the government would have to make the debtholders whole, then we would have avoided most of the negative effects of the actual Lehman collapse. No money market fund would break the buck. No freeze in commercial paper markets would have resulted. And no emergency rush to TARP would have followed. Correspondingly, no intense fear of bank failures or nationalizations would have cast its shadow over all subsequent decisions. This should be getting more attention, and it should also be causing Geithner-haters to rethink what they think they know about the man -- about his timidity, subservience, and allegiances. But it's already clear that it won't.Related LinksGeithner's Brave New Regulatory World: An IMterviewFinally, Drama! A Geithner vs. Bair Clash?Harder Times Presented By: You Need the Speed of Norton 2009 Introducing the revolutionary Norton Internet Security 2009. With a one-click, one-minute install, under 7MB of memory usage and fewer, shorter scans, it’s the fastest security suite anywhere. Get your FREE trial today!Click to Learn More   Ads by Pheedo [...]

Sinking Animal Spirits

Mon, 27 Apr 2009 12:45:40 GMT2009-04-27T12:45:40Z

There are many more pandemic threats than there are pandemics, and so I hope and expect that swine flu will run its course fairly quickly and without too much damage being done. Still, it's difficult to overstate how bad the timing is here. Not that there's ever a good time for a pandemic threat, but this particular point in the worst recession since the Great Depression is an especially bad time, for a couple of reasons. One is that people are certain to overreact, in ways that will be almost uniformly bad for the economy. Mexico City has become like a ghost town, it seems, with people staying indoors, and gathering places -- shops, restaurants, and bars -- closing their doors. It's unfortunate that the things which facilitate economic activity -- namely, the bringing of people together, are also the things that feed pandemics.

The other problem is that the appropriate government reaction is immediate overkill. Tyler Cowen quotes a study of the Spanish influenza epidemic, which reads:

Cities that instituted quarantine, school closings, bans on public gatherings and other such procedures early in the epidemic had peak death rates 30 percent to 50 percent lower than those that did not.

But these activities are in direct conflict with the goal of boosting the global economy. We want people to travel, gather, and spend. It's no wonder that markets seem a little nervous about the prospect of an outbreak. The human cost of a pandemic would be significant, but the economic costs of even the threat of pandemic could be nasty. So I really, really, really, hope this passes quickly.Related Links
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Counter-cyclical Urban Policy

Sun, 26 Apr 2009 14:00:35 GMT2009-04-26T14:00:35Z

Matt Yglesias contrasts the fates of the Flint, Michigan and Baltimore, Maryland and the respective policies those fates imply. Where Flint is a declining city in a declining region, which needs help managing its decline, Baltimore is a struggling city in a prosperous region, which needs a little boost to help it take better advantage of the prosperity around it. Yglesias writes:To me, those different circumstances imply very different policies. Flint needs help executing a plan of managed shrinkage to turn it from a city of 200,000 to a city of 100,000 thousand without being full of rotting, vacant structures. Baltimore needs help executing a plan to build better transportation links between Baltimore neighborhoods and the rest of the region, and to improving policing and schools, so as to rebuild its population to something closer to its historical levels.I think he's right that different circumstances call for different interventions, but I think there's more in common in these two cases than it may seem. Both Flint and Baltimore found themselves falling victim to the negative feedback loops of places in decline -- vicious spirals that afflicted practically every central city in the nation during the great era of suburbanization. You have municipalities with fixed infrastructure and service expenses who then find their tax base eroding. This leads to a decline in the quality of city services, which encourages further migration. Cities are increasingly occupied by those who can't afford to leave, and those who can't afford to leave also can't afford to invest in the upkeep of private property or generate new economic growth. You then have center cities that are deteriorating from disinvestment in public and private property, and that suffer from failing schools and crime. It's much harder to rehabilitate such a place than it is a city which has suffered economic loss but hasn't seen a deterioration in services and private investment. Just as it's difficult for states with tight budget constraints to provide their own fiscal stimulus, it's difficult for cities with tight budget constraints to borrow sufficiently through the bust times to keep themselves going into new boom times. For cities in declining regional economies, it's basically impossible. It's a serious problem for the country that despite having struggled with urban decline for decades, the government has no clear view on how to address the problem, or on whether it ought to have a comprehensive plan for city support and rehabilitation. This is an embarrassingly large omission. There should be established procedures for understanding cities in decline and providing support to them. It's damaging to the local and national economy to allow schools, public safety and health services, and infrastructure to decline in such a fashion. I actually think it would be helpful to have a process of economic health reviews in place, which could then lead to temporary federal government receivership of failing cities, in which institutional barriers to reform are addressed and budgets supported while the broader economic potential of the place was considered.Related LinksInauguration Tech Through the YearsWhy Bulk Mortgage Modifications are a Bad IdeaDemographic Transition [...]

Be Your Own Counterfeiter

Sun, 26 Apr 2009 13:36:15 GMT2009-04-26T13:36:15Z

One of the stories that was circulating through CNN's news coverage this weekend (but which may have now been crowded out by swine flu, on which more later), was a major bust of counterfeit goods in Brooklyn, New York. Authorities had discovered a storage center with room after room full of the fake items you see on city sidewalks, including "Air Obamas" -- Nike Airs with the image of the president on them. These, in particular, seemed to irk the Brooklyn DA.

In speaking to the assembled reporters he made the point that the public continued to be outraged by this business. My astute wife responded by saying that of course the public was not at all outraged by it, but enjoyed buying knock off Marc Jacobs bags, and that the people who were actually upset were the producers of the real products.

Which made me wonder why they would be upset about this. For many of these products, the overlap between consumers of real products and fake is quite small. Knock offs are significantly cheaper than the real deal; a designer bag that sells for $800 in a department store might have a sidewalk fake counterpart that goes for $50. It's hard to imagine that these products cost them sales (and they may indirectly create sales for the designers, by improving brand awareness and creating aspirational buyers).

This looks to me like a missed opportunity for price discrimination. To put it another way, why don't designers sell their own knock offs? Even if they couldn't put other counterfeiters out of business, they'd at least capture some share of the revenue. And while perhaps the designers aren't all that interested in investing in such a low margin business, one would think they'd at least consider licensing someone to legally produce knock offs. That looks to me like big bills left on the sidewalk.

The trick, I think, would be to produce authentic knock offs. They couldn't be too good, or the value of the originals would be risked. Firms would have to aim to replicate real counterfeiter craftsmanship, which might be harder than you'd expect.

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Being Tim Geithner

Sat, 25 Apr 2009 16:37:52 GMT2009-04-25T16:37:52Z

Justin Fox takes a crack at listing all the possible reasons that the administration might be following its current banking strategy (and offers me a kind welcome; thanks Justin!). He says he's leaning toward the following two explanations:- It's the proper course of action, because most banks will be able to earn their way out of their problems if given some time and forbearance by regulators. This is what people within the banking industry seem to think, and non-banker John Hempton has done a good job of articulating this view on his blog.- Geithner and his pals in the White House would love to follow Johnson and Krugman's advice, but it would require hundreds of billions, maybe trillions of dollars more in up-front appropriations to keep the banking system solvent. And Congress is too "skeptical, angry, and often stupid" to approve anything like that.I agree with him, and I also suspect that knowledge of the Congressional limitations on available funding is probably leading the administration to convince itself that the first explanation really is the right one -- that the banks will be fine if given time. I have a feeling that if budget constraints were suddenly eased, the administration's view on recapitalization might begin to shift. Along those lines, here's an interesting idea from Felix:Just as the original TARP was designed to buy up toxic assets and then got repurposed to inject capital directly into the banks, might the same thing happen with the PPIP? Might it be the case that investors who are wary of buying up hard-to-value toxic assets might be more keen on leveraging FDIC guarantees to buy common stock in public banks? And if Timmy asks her nicely, is there any way that Sheila Bair could say no to such a plan?As he says, this wouldn't be the easiest tweak to the program to make. But the administration needs to find a way to get potential investors more interested in the program, and the stress tests are likely to lead to some uncomfortably large looking capital holes, at least at a few banks. I wouldn't be surprised if team Geithner was looking for ways to make this happen.Related LinksHarder TimesGeithner's Brave New Regulatory World: An IMterviewGeithner's Doomed Bailout Plan [...]

Notes From a Press Conference Naif

Sat, 25 Apr 2009 13:41:24 GMT2009-04-25T13:41:24Z

I was in attendance at Tim Geithner's press conference yesterday, at which he spoke briefly about the G7 Ministers meeting and answered a few questions. I hope it isn't too damaging to my credibility as an economics writer to say it was the first time I saw the secretary in person. He deviated pretty significantly from the text we'd been given beforehand -- a friend said you could almost see him reading ahead of himself and editing out any potentially newsworthy word or phrase -- but it didn't much affect his delivery, which I found both choppy and deliberative, but quite confident. I didn't expect him to make news, and in fact he didn't. A few of his statements particularly interested me. He repeatedly reiterated his understanding that a banking fix is crucial to recovery, and that time and again countries have suffered unnecessarily from acting too tentatively to fix their banks. He's clearly not ignorant of the arguments being made by his challengers in the economics and finance press, but he seems to think that Treasury's policy trajectory is sufficient. Along those lines, when asked whether he was at all concerned about Barney Frank's decision to go slow on a regulatory reform bill that would have included new powers for the government to take complex financial institutions into receivership, Geithner gave a resounding no. Whatever the Treasury's plans for the banking system in the wake of the stress tests, it would not seem to include the possibility of a "traditional" nationalization for a firm like Citigroup. As a newcomer to such proceedings, it was very difficult for me not to stand up and demand of the secretary, "Look, just tell us what you actually think you'll have to do about Citi and Bank of America. Get real with us for a second. What's the plan! You must have something more than PPIP in the works." But I was able to restrain myself. I was momentarily struck a little woozy contemplating the weight of the responsibility on the secretary, however. The man is at the fulcrum of history, with the fates of hundreds of millions of lives hanging on his decisions. The pressure was almost visible; I could imagine it crumpling him up like a scrap piece of paper. But it didn't. He bore it remarkably well, speaking and occasionally smiling, and parrying questions from the gathered reporters. After the show, the consensus among the press was pretty clear -- he's a real slick talker. Made me wonder for a minute if Geithner feels the weight of the job at all, or believes himself to be in control of it. I suppose that to function in the face of so daunting a task as his, you have to forget its magnitude and convince yourself you can manage it. Unjustifed overconfidence is the only way to do the job; to be constantly in tune with the scope of the disaster is to be paralyzed by fear. Forget humility. The humble never dare to take the reins.Related LinksHarder TimesThe Stress Test Blind AlleyCitigroup Questions [...]

What Good is the News?

Sat, 25 Apr 2009 12:32:39 GMT2009-04-25T12:32:39Z

No doubt you've heard from or about Amity Shlaes in recent months. She's been in demand; her revisionist views on the impact of the New Deal on the economy of the Depression have made her the darling of conservatives seeking to stand in the way of expansionary economic policies. The symbiotic relationship between Shlaes and Republicans has set up an interesting dynamic. She has a book called The Forgotten Man which calls into question the value of expansionary policy in the 1930s. Republicans really need some research to that effect, so they all start carrying around her book. Well, this is news, and so the press writes up the story of the academic behind the GOP's economic ideas. Of course, they need to present the other side, so they find an economist or two (usually) to say that Shlaes ideas are utter dreck. But it doesn't matter to readers; academics disagree about things all the time. So you have the papers paying attention to Shlaes, which suggests she's worth paying attention to, and noting that academics disagree with her, suggesting that this is an area of academic debate. Suddenly she seems very authoritative! Which is good for Republicans and for Shlaes and for the papers, which get eyeballs from writing a story about a contrarian view of economic policy. Things even go a step further when Shlaes joins the council on Foreign Relations. CFR lends her an air of credibility, while Shlaes' omnipresence means that CFR is always in the news, and getting lots of traffic at its website. The problem, of course, is that Shlaes views are bunk. Eric Rauchway, who has labored to explain to folks why Shlaes should be ignored, writes:The problem with Politico reporting of Amity Shlaes's Forgotten not that it's "they-said, she-said" journalism, but that it's an inadequate representation of the truth. It's not just Shlaes versus a famously shrill Nobelist and some dude at an ag university; it's Shlaes versus the accepted academic consensus.As previously noted, if you were a sufficiently honest and competent researcher located like Amity Shlaes near any number of world-class reference libraries simply out to find out the unemployment rate in the 1930s, you would not find the data Shlaes cites; you would find, in the authoritative reference work, an explanation of why it's not best to cite the data Shlaes cites. Shlaes has to go out of her way to find other data. Rauchway notes the obvious parallels -- press coverage long ago of the health effects of smoking, and press coverage now of the science of climate change. The way in which reporters write about the latter drives climate scientists insane; peer-reviewed, well-accepted scientific findings are routinely placed alongside the drivel published by think tanks funded by fossil fuel interests to protect fossil fuel interests. Andy Revkin at the New York Times had a blockbuster story to this effect just yesterday. Industry groups were told by their scientists over a decade ago that their climate change denialism wasn't supported by the facts, and yet they continued to fund organizations claiming the opposite. Revkin writes:By questioning the science on global warming, these environmentalists say, groups like the Global Climate Coalition [which was financed by fossil fuel industries] were able to sow enough doubt to blunt public concern about a consequential issue and delay government action.George Monbiot, a British environmental activist and writer, said that by promoting doubt, industry had taken advantage of news media norms requiring neutral coverage of issues, just as the tobacco industry once had."They didn't have to win the argument to succeed," Mr. Monbiot said, "only to cause as much confusion as possible."The ironic thing is that Revkin himself has deployed false equivalency in print in damaging ways. Not long ago he warned of the "pitfall" of exaggeration, comparing a slide used by Al Gore in pr[...]

Stressful Enough

Fri, 24 Apr 2009 18:29:42 GMT2009-04-24T18:29:42Z

The outline (PDF) of the methodology used to stress test the banks is out, and I already see some people arguing that it's not nearly stressful enough. And they have a point; the adverse scenario only has unemployment heading a little north of 10%. Is that a problem? I don't actually think so. For one thing, it's likely to be damning enough as it is. It has to be, or markets will roll their eyes and move on. Tim Geithner can't help but give us all some useful information at this point, which is the point, after all.

And secondly, I actually don't know that there's much point in pushing for a more adverse adverse scenario. Things don't have to get much worse than the one they chose before every bank is once again in serious trouble, and before things get unpredictable in any case. What would the banking system look like if the United States hits 13% unemployment? Maybe there are models to figure this out, but I suspect no one can say much more than "awful, and with a lot more government intervention, of immediate necessity."

I'll feel silly for having written this if everyone walks out of the Treasury building with gold stars on their test papers, but I really don't think this is indicative of the administration trying to give banks a free pass.

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Not Regretting the Pound

Fri, 24 Apr 2009 17:09:19 GMT2009-04-24T17:09:19Z

It has been interesting to watch the pendulum of opinion on the benefits of eurozone membership swing back and forth during the financial crisis and recession. For every country who ends up wishing they were on the euro (Iceland), there are a few who probably wish they weren't. For a time, it looked like the crisis might push Britain toward adoption of the euro, but now that outcome isn't at all clear. As Paul Krugman writes today, the 1.9% quarter-on-quarter decline in British output in the first quarter of 2009 is bad, especially since the government seems to have determined that it's done all the fiscal stimulating it can do. Luckily, Britain still has an independent monetary policy:Britain has, despite worries about its budget, managed to cut rates significantly vis-a-vis the core eurozone countries (0.6 percent on long term rates is fairly big.) In addition, the fall in the pound has made British products a lot more competitive.I think the Spanish comparison is instructive. Like Britain, it's had a major housing bust. But Spain has basically had nothing happen to offset that shock.So I'm actually fairly hopeful about Britain; right now, the fact that it's not on the euro is serving it well.Unfortunately for Spain, Jean-Claude Trichet has his finger on the monetary policy trigger, and he's a well behind Britain, America, and indeed most everyone else on the monetary expansion curve. But at least his decisions are appropriate for the state of the German economy, right?Germany's economy will shrink by 6% this year and continue to contract in 2010 according to a forecast from the country's leading economic think tanks.The estimates, compiled by eight institutes for the German Economy Ministry, also predicts that the rate of unemployment will hit 10% next year. And of course, Germany has the budget room to do more in the way of fiscal stimulus, but has proven extremely reluctant to follow such a course. If only there were a German econoblogosphere to apply pressure on policymakers!Related LinksSign of a Bottom?Worst of TimesWhen Monetary Policy Is Fiscal Policy [...]

Introducing the New Ford Squeeze

Fri, 24 Apr 2009 13:47:37 GMT2009-04-24T13:47:37Z

The most fascinating thing to me about the coverage of the fate of Chrysler and General Motors is the extent to which the language has changed since earlier this year and late last year. In 2008, the automakers were all hanging together, and aid was cast as critical for the continued functioning of the economy -- without it, bankruptcy would result, leading to the collapse of suppliers and the loss of millions of jobs. The government played along, extending loans to Chrysler and GM and a line of credit to Ford. But the tune now being played is a little different. Chrysler will almost certainly file for bankruptcy, whether or not it reaches an agreement with creditors or Fiat, and in fact, liquidation is not out of the question. GM's position on bankruptcy has also changed significantly; the company acknowledges that it may be unavoidable, though it seems certain that the government would take the necessary steps to ensure that restructuring, rather than liquidation, would be the order of the day for GM. What explains the shift? To begin with, Detroit's woes are now placed in a new context. The loss of all of Chrysler's 66,000 American jobs would be painful, but it no longer seems apocalyptic given the employment picture everywhere in the economy. The weak economy has also meant that employment losses are assured in any case; downsizing will continue for GM and Chrysler whether they manage to avoid bankruptcy or not. But one can't ignore Ford as a significant factor influencing the policy environment. The firm has proven itself to be stronger than the competition at every turn in the process turning down government loans citing its stronger cash position, and now indicating that it sees a profitable way forward. In the first quarter of 2009, Ford reported a smaller loss than expected and reduced the rate of cash burn (which it said would continue to decline through the year). It also announced production increases to come, even as GM said it would be idling many of its plants this year. This is hugely important. It means that no matter what happens to GM and Chrysler, there will still be an American car industry. It means that supply chains are less threatened by the complete collapse of the domestic producers. And it means that GM and Chrysler can rely less on broader conditions as the scapegoat for their troubles, as opposed to internal problems. It also means that Ford is actively undermining its rivals. It has clearly decided that now is the time to eat up market share and prepare for a post-recession world. Given widespread agreement that the global car market is oversupplied and in need of serious consolidation and contraction, a production increase can't be interpreted as anything but Ford sucking up the oxygen in the room. This, of course, is exactly how an economy is supposed to function -- the weak go down, and the strong take their place in the market. Ford has provided everyone with the chance to feel like a good capitalist again. It has also give the administration an argument against the inevitable complaint that will arise when Chrysler, and potentially GM, enter bankruptcy -- that failure is for blue collar workers, but not white collar workers. At this point, a strong defense of GM and Chrysler would clearly undermine the progress made by the one actually successful (ish) American car company. But just because the administration has a counterargument, doesn't mean the complaint won't be made. More interesting yet, some American banks seem to be leaning toward a Ford approach -- leaving the solidarity of bank-brothers-in-failure behind. The move is trickier in the financial sphere; unlike Ford, every financial institution is heavily reliant on government guarantees, explicit and implicit, to survive in the current climate. As the relative health and needs of [...]