dagblog - Comments for "Fixing Finance"

It serves a valuable purpose

DF — Fri, 27 Feb 2009 19:44:41 +0000

In reply to Awesome. More great economic

It serves a valuable purpose as long as it's not an excuse for for avoiding pluralist solutions on a purely ideological basis. It's not as if anyone is actually entertaining the idea of government running the banking system. Hell, we don't even have a fully public central banking system. Private hands abound.

Health insurnance is a great example of how avoiding pluralist solutions on an ideological basis is screwing us over. Quite possibly the best example. I've got more on this that I'll be addressing soonly.

As far as the process goes right now, I really just wish that I could know more about the conversations taking place at high levels. I know this isn't a practical wish, but it would be nice to know that the level of awareness about these problems is higher than it looks on the face of it. I'm sure it is, but it would be nice nonetheless.

Awesome. More great economic

Michael Wolraich — Fri, 27 Feb 2009 19:34:06 +0000

In reply to Yep. I saw this, too. I

Awesome. More great economic news.

I think that the "ideological bias" against nationlization serves a valuable purpose. It helps the government to maintain a healthy separation from private enterprise, in contrast to Russia's gazprom or Japan's postal-service-cum-savings-bank. This mentality has helped us to enjoy the longest, largest period of growth of any nation in history.

The downside is that this bias keeps us from nationalizing industries that would be better off nationalized, like health insurance, and discourages us from taking over troubled banks.

I think that you're right that it needs to happen, that it will happen, and that we should do it sooner rather than later, but I do think that there is something inherently and importantly troubling about taking over banks. So even though it should happen, I don't find it odd that Obama is loathe to do it.

Yep. I saw this, too. I

DF — Fri, 27 Feb 2009 18:54:12 +0000

In reply to Did you see this? Under the

Yep. I saw this, too.

I suppose what I find most odd is the seemingly ideological preference for a private solution to this problem. Given where we are, this makes no sense to me. When you add that there's a pretty considerable consensus among mainstream economists that nationalization is probably inevitable because the banks are actually insolvent.. well, let's just hope that the upcoming stress tests move things along. Right now we don't have a functioning credit system, which we sorely need because the economy is contracting faster than was previously thought.

Did you see this? Under the

Michael Wolraich — Fri, 27 Feb 2009 18:36:28 +0000

In reply to I pondered offering a similar

Did you see this?

Under the deal, the Treasury Department agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock, giving taxpayers more risk, but more potential for profit if the company recovers. The Treasury will convert its stake to the extent that Citigroup can persuade private investors, including several foreign government investment funds, to go along. Treasury will match the private investors’ conversions dollar-for-dollar, and do so at the most favorable price and terms offered to any other private investor.

As for government officials being more stringent, I'm sure that it's happened before and could be happening now, but this is a statistics game for which there are no comparative statistics. There are examples of effective public management and ineffective private management. And there are examples of the converse. The examples of public mismanagement are egregious enough for me to be very cautious about employing it. Not that it isn't necessary, just that there are reasons to hesitate which aren't only political.

I pondered offering a similar

DF — Fri, 27 Feb 2009 18:02:43 +0000

In reply to Great post, DF. Three

I pondered offering a similar critique of Mankiw's proposal. I'm skeptical of whether this would get the credit markets moving again, but mostly because I don't see this as a means to clear the market. The impasse right now is that major banks don't want to admit how bad their assets are, yet everyone knows that it's a bad situation. So attracting new investment under these circumstances doesn't appear to be working. Mankiw seems to argue on the basis of multplying the number of Warren Buffets out there, but there aren't a lot of half-Buffets either.

There may appear to be little reason to think that government officials would be more stringent, except that in reality it gets done. It's happened before and it's happening right now with smaller banks. It may seem somehow counterintuitive that people with the skillset to clean up a bank and willingness to work in the public sector even exist, yet they do. The exception here seems to be reserved for the big boy banks and there's got to be a reason for this.

Thanks for this link. This

DF — Fri, 27 Feb 2009 17:52:40 +0000

In reply to Here is a link to a possible

Thanks for this link. This is definitely a potential reason for avoiding nationalization and one that the admin wouldn't necessarily go on television to discuss. It's also a fine example of how politics and economics overlap.

This makes sense.

acanuck — Fri, 27 Feb 2009 07:43:28 +0000

In reply to Here is a link to a possible

This makes sense. Nationalization may be the simplest, cleanest, most efficient and cheapest way to to go, but the foreign-policy cost may be unacceptable.

Great post, DF. Three

Michael Wolraich — Fri, 27 Feb 2009 05:28:00 +0000

In reply to Fixing Finance

Great post, DF. Three questions (at least) are suggested:

1) Would it work in the short term? That is to say, would a government match offer catalyze investment?

I don't buy it, no pun intended. I don't know the world that Mankiw describes, but it sounds much like the venture capital notion of a "lead investor." In private equity, the lead investor sets the price and negotiates the terms with the investment target. But most investors don't like to go it alone. They want to dilute the risk. I've known companies that get a lead investor but fail to get any other investors, so the lead backs out.

Mankiw' suggestion seems to be that the government let private investors take the lead. In the example I just mentioned--where there's a lead but no followers--that would be great. But this scenario is uncommon. Usually, if you can get a lead investor, the followers aren't tough to find. So this solution could lubricate deals by guaranteeing that the government will follow, but the real problem is finding leads. So the plan would help somewhat, but I doubt that it would help enough to thaw the frozen markets. It's like defrosting a turkey with a hair dryer.

2) Would it work in the long term? That is to say, would it reform company management?

I disagree with you in that there's little reason to think that government officials would be much more stringent than private investors. First, private investors might be easygoing when the money is good, but in this economy, I don't see them being very permissive about poor management. Second, just because someone works for the government, doesn't mean that they'll crack the whip that private investors avoid. Third, at least private investors have a bottom line. No government official will be fired for letting a zombie bank zombie on.

3) Why does Obama hesitate?

Nationalization is fraught with with risk, from bureaucratic red tape, to mismanagement by unaccountable and virtually unfirable government employees, to straight up corruption and scandal. It may be that we have no other option, but IMO, nationalization is a last resort. It may be projection, but I see Obama as looking at it the same way.

Here is a link to a possible

Bluesplashy — Fri, 27 Feb 2009 01:55:41 +0000

In reply to Thank you for the post, DF.

Here is a link to a possible reason.

http://blogs.cfr.org/setser/2009/02/25/unintened-irony/

Foreign investment meets foreign policy?

Thank you for the post, DF.

Bluesplashy — Fri, 27 Feb 2009 01:37:20 +0000

In reply to Fixing Finance

Thank you for the post, DF. I hope you can get some participation here because I think you asked the right question, Why won't O. admin dive in? This is not like Obama to avoid the hard thing. What has made this pragmatic president hesitate on this? What information is available to him that we don't have? Have the Goldman boys infected the whole administation? I am begining to think those big bank are sitting on something so scary even Obama needs to hide it from the public.