It’s time (a bit late again) for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.
Moving ?
I’m as tired as anyone of the poor performance of the site. I’m currently investigating a couple of options. One is to try to migrate to a different server with my existing host. This should improve things, but I can’t get much support with things like SQL databases, so I’m not sure if I’ll be able to do it. The second is to move the whole blog under the wing of Crikey. That would save a fair bit of effort for me, but I’m not sure how readers would feel about it. Any thoughts?
Martingales
The analogy between the strategies that have made the financial sector so profitable in recent years and the martingale strategy in betting (keep doubling down until you win) have occurred to quite a few people. Jordan Ellenberg has an excellent article in Slate on the topic, in which I get a brief mention.
Time to guarantee Oz bank deposits
Both Ireland and Greece have now moved to guarantee all bank deposits, while the US bailout bill increases the FDIC guarantee to $250 000 for individual accounts at any institution (meaning that anyone willing to hold accounts at four different banks can have $1m guaranteed).
I’ve never seen the merit in the RBA stance of refusing to give an explicit guarantee, while allowing everyone to think that bank deposits are unconditionally safe. I suspect an explicit guarantee will be needed before long, and that it would be better to announce it now, before it is needed.
The quid pro quo, necessary for a whole lot of other reasons in any case, ought to be a tightening of regulation on anything a bank might do that would increase the risk of default. That includes owning high-risk subsidiaries, participating in innovative derivative markets, and taking on off-balance sheet contingent liabilities, among the factors that have contributed to recent collapses overseas.
Updated In the spirit of laissez-faire, I’d be happy to allow for competing unregulated and unsupported deposit-taking institutions. To avoid the danger of moral hazard, I’d require the following
(i) There should be a legislative prohibition on any form of support for these institutions from the government or regulators
(ii) Publicly guaranteed banks should be prohibited from having any dealings (loans, shareholdings, bond purchases and so on) with unsupported institutions
(ii) Customers should be required to sign and regularly renew an agreement stating that they are aware that there is no possibility of a bailout of deposits with these institutions
Meanwhile, in the main game
I’ve been at the Australian Conference of Economists for the last couple of days, talking about climate change. As we all worry about the collapse of the global financial system, the final report of the Garnaut Review reminds us that we have much bigger concerns in the long run (not only climate change, but nuclear proliferation and global poverty to name a few).
Republican talking point whack-a-mole, yet again
The argument by talking point style that characterizes all sections of the political right in the US has been evident as usual in relation to the financial crisis, so I guess it’s time to play whack-a-mole yet again. The most prominent points I’ve seen are
* It’s all the fault of the Community Reinvestment Act, which forced banks to lend to low-income borrowers. Quite a few people have pointed out that many of the subprime loans weren’t required under CRA. More to the point, given that the market structures in the bubble made mortgages a fungible asset, the CRA was a nonbinding constraint. It’s clear that many more subprime loans were given out in the bubble years than were required under the Act and that the excess was greatest in the areas where the bubble was worst. The CRA had no effect at all under these conditions.
* If regulation were the problem, how come the hedge funds haven’t been affected? In fact, it was the failure of Bear Stearns hedge funds that signalled the spread of the crisis beyond the subprime mortgage market. And the main reason hedge funds haven’t yet been hit by the crisis of the past few weeks is that they don’t allow redemptions except at stated dates (for most of them it will be next Tuesday. Perhaps there won’t be a problem, but that’s not what the markets think. In any case, those making the claim seem to be unaware of the redemption restrictions.
Monday Message Board
It’s time once again for the Monday Message Board. Post your thoughts on any issue. Civilised discussion only. Please avoid snarks and trolling and strictly no coarse language.
Betting on yourself
Robert Waldmann of Angry Bear has a fascinating post exploring the possibility that sharp movements in the value of Lehman senior debt could be explained by the possibility that Lehman had sold Credit Default Swaps on itself. Since a CDS is insurance against the possibility of default on debt, this is a no-lose bet for Lehman. If the firm survives, they collect the premiums and pay nothing and, if it doesn’t the losses are borne by the creditors. And, as Waldmann points out, it’s not crazy to buy such a CDS, since it will retain some value in bankruptcy. If you’ve already sold a lot of Lehman CDS yourself, there’s a significant hedging benefit. So both parties benefit, and the losers are the existing bondholders. Waldmann has an interesting optimization exercise to show that optimal (for Lehman) use of the CDS option could explain the collapse in the value of Lehman bonds.
Thinking about this, I’m more and more convinced that Warren Buffett’s description of derivatives as financial weapons of mass destruction applies in spades to CDSs.
Weekend reflections
It’s time (a bit late) for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.
Neoliberalism defined
I’ve been arguing since the dotcom boom and bust that the poor performance of (particularly US) financial markets provides strong evidence against the claim that neoliberalism provides a coherent and effective alternative to social democracy. One objection that’s been made to this argument is that “neoliberalism” is a poorly-defined pejorative. It’s true all political terms are elastic and it’s hard to find any that are used, with more or less the same meaning, by both friends and foes. The only one I can think of is “social-democratic”, though you could perhaps make a case for “liberal” in the US sense. Words like “conservative”, “democratic” and “socialist” have become just about meaningless.
By contrast, I think “neoliberalism” is a comparatively well-defined term. It’s mostly, though not exclusively used in a pejorative sense, so perhaps something like “free-market liberalism” would be better. This post from 2002 gives my definition and some reasons why I thought then that neoliberalism was a failure. I don’t see much reason to revise my assessment in the light of events between now and then.
John Quiggin 