Archive for August, 2009

links for 2009-08-28

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links for 2009-08-27

  • Menzie Chinn and Jeffry Frieden on How We Got Here. "[W]e view the current episode as a replay of past debt crises, driven by profligate fiscal policies, but made much more virulent by a combination of high leverage, financial innovation, and regulatory disarmament. In this environment, speculation and outright criminal activities thrived; but those are exacerbating, rather than causal, factors." I'm not convinced that innovation, speculation, deregulation, and criminality aren't causal, but there's plenty of blame to go around.

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links for 2009-08-26

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links for 2009-08-24

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links for 2009-08-21

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Back in 2005, I argued at Old Marginal Utility that “Greenspan exceptionalism” was not very well founded in that observers rarely engaged in a proper counterfactual analysis of how well Alan Greenspan performed relative to the next best monetary policy technocrat.  That’s a fairly stringent evaluation criterion, and even Brad DeLong’s glass-half-full response revealed what could be considered major errors in Greenspan’s judgment.  2009 hindsight of course shows that there was another major error in inflating the housing bubble, failing to recognize it, and allowing his Rand discipleship to overcome common sense in using Fed powers even to skim the froth.

Now some elite opinion favors Ben Bernanke’s reappointment, but politicians are irritated over Fed stonewalling of bailout oversight and others (e.g. Dean Baker) point out that Ben Bernanke who put the Fed throttles to the firewall to save the world is also the Ben Bernanke who carried over Greenspan policy until it was too late among other things.

So what should the counterfactual-based evaluation of Bernanke say?  What would the hypothetical panel of smart graduate students have done?  It seems even harder to suggest that Bernanke was essential than Greenspan — in this case, because well-read economists should have had it from Ben Bernanke the academician that in a depression-level crisis you don’t skimp on the monetary policy intervention.  Meanwhile, Bernanke gets no points for prescient instincts as the save-the-world interventions have seemed to be firmly of the close-the-barn-doors-after-the-horses-have-bolted variety.

Meanwhile, significant elements like the opaque lending programs have the appearance if not reality of being in part the predator state (a la Jamie Galbraith) in action.  There’s a line of ‘b-b-but Bernanke and Paulson saved the world’ opinion along the lines of this bit of fail from the often incisive Joe Nocera:

So why the anger? Why the suggestions of “cover-up” and “lies”? On Thursday, as I watched Mr. Paulson being castigated, it dawned on me. Seven months later, with the palpable fear of a financial collapse largely subsided, it really all boils down to how you view what happened last year. Was it, as Mr. Towns believes, a bailout of a handful of unworthy but too-big-to-fail institutions? Or was it, in the eyes of Mr. Paulson, a rescue of a teetering financial system? My vote is for the latter.

To which the obvious response is, duh, who says it has to be one or the other?  A reality-based critique of the bailouts allows them to be both effective at saving the world and unconscionable screw-jobs that kept an array of bad actors from paying for their greed and incompetence.  (The latter clearly feeds a lot of the underlying sentiment of the tea partiers, even if it’s ultimately the greedy and incompetent who are marshalling it.)  However, considering Team Obama’s political tone-deafness, it’ll be a pleasant but major surprise if they let Bernanke go back to Princeton for some R&R.

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links for 2009-08-20

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links for 2009-08-19

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Felix Salmon has been following the photographer Annie Liebovitz’s personal-finance train wreck, and here he gets to a root of a financial-products regulation problem:

[There’s] a particularly American mindset: call it the Wealth Corollary of the Efficient Market Hypothesis. In a nutshell, it says that if you’ve made lots of money, you must be pretty smart.

I think there’s a pretty good case to be made that the EMH(WC) is responsible for a lot of the rules surrounding the limitations on who is and who is not allowed to invest in hedge funds, and also for many of the obsequious interviews with rich individuals frequently featured in the financial media.

I do feel a little sorry for the EMH here, as American worship of the rich is more a religion unto itself.  In a casual rendition, after all, the EMH suggests that if you’re making lots of money in the market, you’re some combination of lucky, patient, in possession of information that isn’t generally available, exploiting market power, and/or crooked.  On the human-capital front, brains are neither necessary nor sufficient for making lots of money.  The elevation of select nerds to the ranks of the super-rich via hedge-fund management in no way violates the conditions of my ‘folk EMH.’

Felix also makes an obvious but seemingly not widely recognized point (despite debacles like Bernard Madoff’s Ponzi scheme) that exploiting the financially-unsophisticated rich is profitable, since that’s where the money is:

The annals of finance are full of people taking advantage of the financially-illiterate, and while it’s certainly possible to take advantage of the financially-illiterate poor (lotteries, numbers games, payday lending, overdraft fees, etc) it’s equally lucrative to take advantage of the financially-illiterate rich, both through outright fraud and through hidden and/or excessive money-management fees.

A few years ago, I was shocked to see the statement of the time from the financial advisory business now known as Ameriprise; it looked like it was designed to conceal what they were charging, especially compared to the relatively transparent material I’m used to from Vanguard.  Some disclosure-oriented reforms would help to some extent, though they wouldn’t obviously do much for the other problem I saw in this case, which was the financial illiteracy of the CFP responsible for the set of investments in question.  Other seemingly excessive fees (as in, why hasn’t massive entry competed them away), such as the standard 2-and-20 hedge fund fee structure, are not hidden at all.

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