Friday, October 17, 2014

Some Interesting Items on the Web (October 17, 2014)


Since I have not done this for a while, there are a lot of items, some of which I hope are of interest to readers of this blog.
Climate:

“Errors and Emissions: Could Fighting Global Warming Be Cheap and Free?” Paul Krguman article in The New York Times.

“Florida Goes Down the Drain: The Politics of Climate Change.” Gail Collins of The New York Times.

“Climate Science Is Settled Enough: The Wall Street Journal’s fresh face of climate inaction.” Raymond T. Pierrehumbert writing for Slate.

“Are walrus at risk from climate change?” Karl Mathiesen writing for The Guardian.  
Economic Policy:

“Stuck on Inflation.”  Jeff Madrick writing for The New York Review of Books blog.

“Why inequality is such a drag on economies.” Martin Wolf of the Financial Times.
“How the Jobless Rate Underestimates the Economy’s Problems.” Jared Bernstein writing for The New York Times.

“Securing Social Security.” Gail Collins of The New York Times.
When Trade Treaties Pose a Sovereign Threat.” Jared Bernstein blog post.

“The trade clause that overrules governments.” Harold Meyerson writing for The Washington Post.
“Why Weren’t Alarm Bells Ringing?” Paul Krugman reviews a new book by Martin Wolf for The New York Review of Books.

“Labour must expose the fallacy of George Osborne’s ‘recovery’.” Robert Skidelsky writing for The Guardian.

“Secret Deficit Lovers.” Paul Krugman New York Times column.
“Dam breaks in Europe as deflation fears wash over ECB rhetoric.” Ambrose Evans-Pritchard of The Telegraph.

“Germany on defensive as criticism of economic course mounts.” Reuters article in The Globe and Mail. I attended some of the IMF events. There was an amazing consensus that most countries should spend more on infrastructure and that Germany, in particular, should do more to stimulate its economy. The Germans are resisting, though some think that the German slowdown along with international pressure may cause Angela Merkel's government to reconsider. In answer to a question about how to get Germany to arrive at a political consensus that its government needs to spend more, Larry Summers answered that he had enough trouble with American politics to get into advising about German politics. Then he went on to say that, if German Finance Minister Wolfgang Schaeuble, who was on the same panel, could manage to convince himself of the need to spend more, the finance minister could figure out how to accomplish this politically.

“Germany's Austerity Obsession Could Take Down the Global Economy.” Mark Gongloff writing for The Huffington Post.
“Fed’s Evans: Biggest Risk to U.S. Now is Premature Rate Hikes.” Article on The Wall Street Journal website. At an IMF event last week, Fed Vice Chair Stanley Fischer was asked for the definition of “a considerable time.” To my surprise, he answered with some specificity, saying that it was anywhere between 2 months and one year. However, Fischer said at this particular event and others (he appeared at many IMF events) that the decision would be dictated by the data. If the economy grows slower than the Fed expects, a rate rise would take place later. In other words, the Fed reserves the right to reevaluate its policies at any time in reaction to economic data. That is appropriate.

 “E.U. and France on Collision Course Over Budget.” New York Times article.

“Eurozone woes boost anti-austerity camp.” Article posted on the Deutsche Welle website.
“Summers, Schäuble go head to head on ailing Europe.” Video of and article on this IMF event at the CNBC website.

“Monetary policy: When will they learn?” Ryan Avent of The Economist.
“Economically, Germany is a threat to itself.” Harold Meyerson op-ed in The Washington Post. He writes:

“But I’m no fan of Germany’s macroeconomics, which are more destructive and dangerous than those of any other nation. By using its power as the dominant nation in the European Union to impose austerity on the struggling economies of Southern Europe, Germany has condemned young people in Spain and Greece to unemployment rates in excess of 50 percent, shaken the social fabric of every nation on the Mediterranean and contributed to the rise of such far-right parties as France’s National Front and Greece’s neo-Nazi Golden Dawn. Unlike other nations, Germany hasn’t offshored its best industrial jobs, but it has relentlessly offshored to its Southern neighbors conditions conducive to the rise of a xenophobic extremism that one would think Germany, of all nations, wouldn’t wish to nourish.”
“What Markets Will.” Paul Krugman column. He writes:

“I’m not mainly talking about plunging stock prices, although that’s surely telling us something (but as the late Paul Samuelson famously pointed out, stocks are not a reliable indicator of economic prospects: ‘Wall Street indexes predicted nine out of the last five recessions!’) Instead, I’m talking about interest rates, which are flashing warnings, not of fiscal crisis and inflation, but of depression and deflation.
“Most obviously, interest rates on long-term U.S. government debt — the rates that the usual suspects keep telling us will shoot up any day now unless we slash spending — have fallen sharply. This tells us that markets aren’t worried about default, but that they are worried about persistent economic weakness, which will keep the Fed from raising the short-term interest rates it controls…

“It’s also instructive to look at interest rates on ‘inflation-protected’ or ‘index’ bonds, which are telling us two things. First, markets are practically begging governments to borrow and spend, say on infrastructure; interest rates on index bonds are barely above zero, so that financing for roads, bridges, and sewers would be almost free. Second, the difference between interest rates on index and ordinary bonds tells us how much inflation the market expects, and it turns out that expected inflation has fallen sharply over the past few months, so that it’s now far below the Fed’s target. In effect, the market is saying that the Fed isn’t printing nearly enough money.”
Financial Regulation and Related Issues:

“The Secret Recordings of Carmen Segarra.” This American Life (audio).

“The Secret Goldman Sachs Tapes.” Michael Lewis writing for BloombergView.

“Finally, the Truth About the A.I.G. Bailout.” Noam Scheiber op-ed for The New York Times.

“A.I.G. Trial Witnesses Will Be Central Cast From 2008 Crisis.” New York Times article.

“The A.I.G. Trial is a Comedy.” John Cassidy of The New Yorker.
“Now as Provocateur, Summers Says Treasury Undermined Fed.” Binyamin Appelbaum of The New York Times. Also, see my comments on this.

“N.Y. Fed Lawyer Says AIG Got Billions Without Paperwork.” Bloomberg article.

“Hank Paulson’s Telling Admission.” John Cassidy of The New Yorker.

Miscellaneous

“Nobody Could Have Predicted, Bill Gross Edition.” Paul Krugman blog post.

“Depression Denial Syndrome.” Paul Krugman.

“Golden Rule: Why Beijing Is Buying.” Alan Greenspan writing for Foreign Affairs. Greenspan has long been attracted to the idea of returning to the gold standard. In fact, at the beginning of the Reagan Administration, he wrote a WSJ op-ed and submitted a comment to the government gold commission that the Treasury should issue gold-backed or linked debt securities. He not only made an unconvincing argument that this would save the government money but also made an argument that it would be the first step to a gold standard, which he favored. (I was tasked with reviewing the gold securities idea as a Treasury employee at the time.) He became quiet on this subject as Fed Chairman, though I remember reading once that he thought he might be the only person at the Fed who thought a gold standard would be a good idea.  
In this article is that Greenspan can't seem to limit it to China and gold. At the end of the article, he makes an unrelated comment about China's political system and the possible effects of that going forward. What he has to say about this is sensible, but there is no clear link between these comments and gold policy.

“After a Dreary Summer, Autumn Chill in France.” Mira Kamdar writing for The New York Times.
“In Defense of Obama.” Paul Krugman article for Rolling Stone.

“The Unhealthy Politics of Ebola.” Brendan Nyhan writing for The New York Times.
“The Nightmarish Politics of Ebola.” John Cassidy of The New Yorker.

“Calculating the Grim Economic Costs of Ebola Outbreak.” Andrew Ross Sorkin writing for The New York Times.

“No, budget cuts aren't the reason we don't have an Ebola vaccine.” Sarah Kliff writing for Vox. She writes:

“NIH funding definitely matters. “It’s fair to say that, without the budget cuts, we would be closer to a cure than we are right now,’ says Benjamin Corb at the American Society for Biochemistry and Molecular Biology. ‘We would have understood the virus and perhaps understood how to counteract the virus if we didn't have budget cuts.’
“But as Corb pointed out to me, there's a long space between being closer to a vaccine — and ‘probably’ having one (which is what [NIH director Francis] Collins claimed).”

“The Nightmarish Politics of Ebola, Part 2.” John Cassidy of The New Yorker.
“Here’s What to Say When You Don’t Know Why the Stock Market Fell.” Josh Barro writing for The New York Times.

Wednesday, October 8, 2014

Debt Management Discussion at Brookings with a Combative Larry Summers and Others


Many of the events I have attended at Brookings are sober, serious-minded affairs, and it helps to be really interested in the topic being discussed. On September 30, a discussion about debt management started off that way, but then Larry Summers got a chance to defend a policy proposal in the paper he wrote with others, “Government Debt Management at the Zero Lower Bound,” and the event became rather lively, interesting, thought-provoking, and entertaining. That is not to say that I agreed with everything that Summers said, and, combative as he was, he did admit that the discussants had given him and his coauthors issues to think about.
Despite the paper’s title, it really is a compendium of observations and analyses about debt management, some of which have no apparent link to the zero lower bound. For example, of particular interest to me because of work I did at Treasury, there is a discussion of the liquidity premium on Treasury Inflation-Protected Securities, but why this discussion is included in this paper is unclear.
The controversial issue that the paper addresses is the coordination of Treasury debt management policy with Federal Reserve open market operations. This, of course, is not just an issue when the Federal Reserve’s policies are constrained by the zero lower bound. For example, the paper makes reference to the 1961 Operation Twist policy of the U.S. government. This was an attempt to lower long-term rates and to increase short-term rates. The rationale was that short-term rates needed to be higher to protect the value of the dollar under the Bretton Woods system and long-term rates needed to be lower to encourage investment and stimulate the economy. The current paper states:
“Operation Twist is perhaps the best example of the potential for Fed and Treasury cooperation, because the circumstance was, much like the zero lower bound today, that the Fed was constrained in its use of the short rate as a policy instrument. However, unlike in the more recent period, during Operation Twist the Fed was able to complement its own actions with the secured cooperation of the Treasury to alter the maturity structure of new debt issuance.”
In fact, though the Fed and the Treasury were not cooperating, as the paper notes in footnote to its discussion of Operation Twist:

“Long-term interest rates fell on most dates in early 1962 when the initial information about Treasury and Fed policies was released. The only exception was when the Treasury surprised both the White House and the Fed by issuing longer-term bonds on March 15, 1961. This made James Tobin (then a member of Kennedy’s CEA) ‘furious.’ Treasury continued to extend its maturity thereafter and within a year the average maturity had increased by 3.5 months. Thus, Treasury began working at cross-purposes with the Fed, just in as [sic] the current episode.”  
In other words, Operation Twist is not informative about the supply effects of Treasury securities on the yield curve, nor is it an example of cooperation between the Treasury and the Fed. The authors need to revisit this issue if they revise the current paper.

The main contention of the paper is that the Treasury and the Federal Reserve are currently working at cross purposes. The Treasury is extending the maturity of the public debt by selling more long-term securities, while the Fed is taking long-term securities off the market through its open market operations. The authors believe that this selling and buying should stop. Moreover, the authors write that, even in more normal interest rate environments, “because of the importance of debt management for the functioning of financial markets and because of its relation to financial stability, the Federal Reserve should have a more significant advisory role than it does currently.”
Interestingly, the discussants argued that this recommendation could result in an erosion of Federal Reserve independence, though on its face, it would seem to give the Fed greater ability to influence the Treasury. In this connection, one should note that the authors believe that Treasury’s debt management policy is currently in error, not the Fed’s quantitative easing policies.

Nevertheless, I think the discussants are right to have this concern, though I would add that Treasury’s independence from the Fed is also a concern. The authors suggest that the Fed and the Treasury “annually release a joint statement for managing the U.S. government’s consolidated debt,” by which they mean debt held by the public not including the Federal Reserve Banks. One can only imagine the lengthy and likely unpleasant and stressful meetings at various levels as the Treasury and the Fed negotiate this statement.
Whose voice would be controlling would depend on circumstances and personalities. The Fed often has a strong hand in discussions about debt management, partly because they have more staff and other resources to draw upon than Treasury. But a strong-minded and strong-willed Secretary, think John Connally or William Simon, could conceivably bring strong pressure to bear on the Fed if there were a strong disagreement between the two institutions.

This brings me to a final comment about the paper. It reads as if the Treasury and the Fed make policy as independent actors without referencing who might be in charge of those institutions at any particular time. Political appointees to the Treasury and Federal Reserve governors and bank presidents make decisions. Sure, they receive input from staff and other sources, but ultimately they make decisions as individuals.
As way of example, with regard to debt management, the decision in 2001 to stop selling 30-year bonds was made by then Under Secretary Peter Fisher. The argument that various Treasury officials made at the time in support of this decision is that, since the yield curve usually has a positive slope, a shorter maturity structure would “over time” lead to lower cost financing. Of course, the time frame was left ambiguous, and the argument only worked, if it worked at all, if Treasury could maintain this policy over time. As it turns out, it could not. Thirty-year bond issuances resumed in the same administration as Peter Fisher served (George W. Bush) after he had left, though not immediately. The Obama Administration subsequently reversed course from the shortening strategies of both the Clinton and Bush Administrations and decided to lengthen the average maturity of the public debt. In other words, particular individuals do matter, independent of what one might model as in a particular institution’s interest.  

Tuesday, September 16, 2014

Some Interesting Articles (and one video) on the Web (September 16, 2014)


Argentina:
“Singer recruits former Secretary of State Albright for its dispute with Argentina.” MercoPress article.

“A Sensible Step to Mitigate Sovereign Bond Dysfunction.” Anna Gelpern writing for the Peterson Institute for International Economics.
“Holdouts give vultures a bad name.” Martin Wolf writing for the Financial Times.

“Contract Exuberance.” Anna Gelpern blog post at Credit Slips.
“Argentina passes new debt bill with eye on next payment.” Reuters article.

Ukraine and Related Issues:

“War in Europe: Putin has invaded Ukraine. Is it hysterical to prepare for total war with Russia? Or is it naive not to?” Anne Applebaum article in Slate. She is an American journalist who is married to Radosław Sikorski, Poland's Minister of Foreign Affairs. Her article conveys the nervousness and fear in Eastern Europe about Russia.
“Russia's army is so brazen they painted this tank with the name of its Ukrainian target.” Max Fisher writing for Vox.

“Putin Has Done NATO a Big Favor.” John Cassidy of The New Yorker.
“Finland’s Lesson for Ukraine.” René Nyberg op-ed for The New York Times.

“Arm Ukraine or Surrender.” Ben Judah op-ed for The New York Times.
“Ukraine: A Catastrophic Defeat.” Blog post by Tim Judah for The New York Review of Books. (Note: Tim Judah is Ben Judah’s father and my cousin.)

“Why #RussiaInvadedUkraine Matters.” New York Times op-ed by Chrystia Freeland.
“Russia’s Next Land Grab.” New York Times op-ed by Brenda Shaffer.

“Why the Ukraine Crisis Is the West’s Fault: The Liberal Delusions That Provoked Putin.” Article by John J. Mearsheimer in Foreign Affairs. Note the rebuttals below.

“Is the West to Blame for Russia’s Aggression in Ukraine? Of Course Not!” Anders Aslund writing for the Peterson Institute for International Economics.

“Time to end the bloody Ukraine conflict.” Katrina vanden Heuvel, writing for The Washington Post, agrees with John J. Mearsheimer. She is the editor and publisher of The Nation.
Miscellaneous:

“What’s The Matter With France?” Paul Krugman blog post.

“Austerity, France and Memories” Simon Wren-Lewis blog post.
“The Greater Depression.” Brad DeLong writing for Project Syndicate.

“Tragedy or Triumph.” Linda Greenhouse writing for The New York Times about the recess appointment decision of the U.S. Supreme Court.
“The Obamacare train keeps not wrecking.” Ezra Klein writing for Vox.

“Where Prices Don’t Want to Rise.” Floyd Norris writing for The New York Times.

“Foreign Powers Buy Influence at Think Tanks.” New York Times article by Eric Lipton, Brooke Williams, and Nicholas Confessore.
“You Missed $1 Trillion Return Agreeing With Fed Naysayers.” Bloomberg article by Cordell Eddings.

“Apple Pay and the CFPB.” Adam Levitin at Credit Slips argues that Apple may be subject to financial regulation because of Apple Pay.
“Steve Jobs Was a Low-Tech Parent.” Nick Bilton writing for The New York Times.

“New sparks fly between CIA, Senate Intelligence Committee.” Ali Watkins writing for the McClatchy newspapers.
“Last Week Tonight with John Oliver: Scottish Independence.” Video  from the HBO program.

Wednesday, August 27, 2014

House of Debt by Atif Mian and Amir Sufi – Book Review


Many causes have been cited for the financial crisis and the ensuing “Great Recession.” In a new and important book, two economists, Atif Mian and Amir Sufi, make a convincing argument that the major cause was a pull-back in consumption by highly-indebted households when the housing market tanked. The authors marshal data to make their case about credit scores, indebtedness, and economic fallout for different types of neighborhoods.
The argument the authors make is for the most part impressive and persuasive. That mortgage lenders were making imprudent loans and did not care because of the insatiable appetite of Wall Street for product to package into collateralized mortgage obligations (“CMOs”), some of whose tranches were ridiculously rated AAA, is beyond dispute. It also stands to reason that, when the housing market crashed and joblessness increased, the most affected households would have relatively high marginal propensities to consume. Consequently, the effect of the bursting of the housing bubble was direr for aggregate demand and the economy than the previous bursting of the tech stock bubble. Stock market investors, in general, had lower marginal propensities to consume than over-indebted homeowners faced with possible foreclosure.

The policy implications and conclusions that the authors draw from their work are somewhat more controversial. Lawrence Summers, in his generally quite positive Financial Times review of the book, is somewhat defensive concerning the authors’ arguments about what the Obama Administration should have done. The authors argue that more should have been done to help struggling homeowners and that the banks got off too lightly. Summers, while admitting that the Administration should have done more in this respect, argues that the authors ignore the political realities faced by the Administration. For example, it would have been difficult, probably impossible, for the Administration to have gotten the Congress to pass legislation to give bankruptcy judges “cram-down” authority with respect to mortgage debt, that is, the ability to force creditors to accept a reduction in principal or interest rate on the debt rather than proceeding to foreclosure. Summers, does, though agree that would have been good policy if it could have been achieved.     
Summers also argues that during the crisis that policymakers had to be concerned about the stability of the financial system and could not just drain funds from banks in order to help homeowners. Obviously, it is easier to identify a limited number of banks and other financial intermediaries and stabilize them than to set up a program on the fly to help out millions of homeowners. The authors, though, do have a point. The banks and other financial intermediaries and much of their management weathered this crisis too well with government help and forbearance. If the objective was to get the economy moving again and reduce unemployment, doing more to help those with a high marginal propensity to consume would have been better policy. We can argue, though, endlessly, about fairness and who was most at fault.
                           
As far as one of the book’s main point is concerned, a housing bubble fueled by excessive debt is the primary cause of the financial crisis and the Great Recession when the bubble burst. The debt exacerbated the problem of getting the economy growing at a desirable rate. What the authors’ do not discuss, though, is that there were failures leading up to the crisis at multiple levels.

The financial regulators, for one, could have been tougher. The regulators were not blind to the fact that inappropriate and risky mortgage loans were being made. They had authority, even before Dodd-Frank, to do something about this. For example, they could have ordered certain banks to stop engaging in certain activities because they were unsafe and unsound banking practices. The SEC could have required better disclosures and sales practices in connection with CMOs. Why did they not do this?
The banking regulators and the SEC should also have been able to see, if they had looked, that an enormous amount of risk was being laid off by their regulatees and was concentrated at AIG in the form of credit default swaps. The regulators should have been awake to the dangers this posed and put a stop to it continuing.

The rating agencies, as is well known, failed in properly accessing the risk of CMOs. They put a priority in their short-term business interests at the expense of their reputations, as did the sellers of CMOs.
In other words, if there had been more proactive and responsible behavior prior to the crisis erupting, the housing bubble and its aftermath would have been less severe. The authors do not discuss these multiple failures of financial institutions and their regulators.

I have some other quibbles with the book. First, it would have been helpful to discuss more thoroughly the motivations of the mortgage borrowers rather than just the lenders. For example, the stagnation of incomes and growing income inequality could have been more explored. A likely explanation for why homeowners (as the commonplace jargon of the day termed it) took equity out of their homes through borrowing is that in many cases the motivation was an attempt to maintain or improve living standards when that could not be accomplished via the job market. Growing inequality, of course, has been analyzed in the recent, very long book by Thomas Piketty, Capital in the Twenty-First Century, but discussing it more specifically in relation to the housing bubble fueled by excessive debt would have been helpful.
Second, if the authors want to bring in actors such as the central bank of Thailand into the story, they should have explained more their role. For example, how were central banks in Asia able to pile up dollar reserves after that region’s financial crisis and what does the data, if available, show about their investments in securities other than Treasuries? Were they reaching for yield in buying supposedly AAA mortgage related securities, if that is what they did? What were they hearing from the investment banks advising them and selling them product? Was the Federal Reserve concerned?

Third, while the recommendation for a different kind of mortgage products for which borrowers give up a small portion of their potential capital gains in order to get an automatic principal reduction when housing prices fall makes sense, there is no discussion of how to make this a reality. Unless faced with the necessity for creative financial products because of economic conditions, Americans can often be quite conservative. This is not easy to overcome.
As an aside, I had experience while working at Treasury, to research this conservatism. Inflation-indexed bonds were a hot topic that it was my job to research. One of the reasons proponents of Treasury issuing inflation-indexed bonds was that these securities could act as a catalyst for other inflation-indexed products, such as inflation-indexed annuities and mortgages. In fact, inflation-indexed mortgages had been attempted prior to Treasury issuing inflation-indexed bonds. They were called price-level adjusted mortgages (“PLAMs”). PLAMs made a lot of sense, since it is an answer to the problem that the inflation component of interest rates in a conventional mortgage is front-loaded. For young people buying their first house, it makes sense to take out a mortgage with lower initial nominal payments which then grow with the rate of inflation. Their nominal incomes presumably will increase with the rate of inflation, if not more as they progress in their careers. However, the product was not successful and now, I assume, there is still no interest in an environment where inflation is currently relatively low.

Finally, a certain sloppiness appears in a few places. At one point, for example, the authors write: “When the banking system is under severe threat, the price for commercial paper may be much higher than the price for Treasury bills.” They actually mean “yield” rather than price. At another point, they oversimplify the way stocks are priced in a discussion of an experiment conducted by Vernon Smith. They state, and give a numerical example without any caveat, that “at any point in time, [the stock price] should equal the expected future dividends from the stock.” They should have mentioned somewhere that these expected future dividends should be discounted by an appropriate interest rate in order to determine their present value. Finally, in a discussion of money market mutual funds, the authors argue that investors know because of government actions in 2008 that there is an implicit government guarantee of these funds that makes them attractive. While this is true, it is a little behind market developments. Money market mutual funds currently have very low yields and it is easy to find bank deposits, which carry an explicit government insurance for up to $250,000, that yield more than money market mutual funds.
The authors are convincing that excessive mortgage debt was at the root of the problem and that the failure of the federal government to take significant actions to ameliorate this lengthened the recession and contributed to the slow growth we continue to experience. The authors are also correct about the limits of monetary policy action, when substantial increases in the monetary base do not lead to substantial increases in the money supply. They are somewhat less convincing in their criticism of fiscal stimulus, especially since the government could, if there were the political will, spend money in areas likely to increase employment, such as infrastructure spending. That does not appear likely at the moment though, but their preferred solution of giving mortgage relief to distressed homeowners is even less likely.

The book is well worth reading, because it gives a different perspective on what happened and why we are continuing to feel the aftermath of the 2008 financial crisis and Great Recession. It is an important book. One hopes, though, that the authors take a broader perspective on economic problems and policy recommendations in their next book.

Tuesday, August 26, 2014

Some Interesting Articles on the Web (August 26, 2014)


Argentina:
“Citibank fears losing local banking licence.” Buenos Aires Herald article.

“Argentina aims to skirt U.S. court, bring debt under national law.” Reuters article.

“Escalating to Nowhere?” Anna Gelpern post on Credit Slips.

“Argentina's debt saga: The local loop.” Article on The Economist website by H.C.
“Argentina and the Swap Puzzle.” Anna Gelpern post on Credit Slips.

“Hedge Funds Sue to Get Argentine Bond Payment in London.” New York Times Deal Book article.

“Argentine Default Bad Test Case for Sovereign Debt Negotiations.” Article on Foreign Policy website by Jamila Trindle.
“Argentina's Last Bond Exchange Went So Well It's Doing Another.” Matt Levine article for Bloomberg View.

“ISDA sets Argentina CDS auction date after yen bond inclusion.” Reuters article.

“Sovereign Chicken.” Mark Weidemaier post on Credit Slips.
Europe:

“Europe’s Greater Depression is worse than the 1930s.” Article by Matt O'Brien for the Washington Post Wonkblog.”
“Worse than the 1930s: Europe’s recession is really a depression.” Another article by Matt O’Brien for Wonkblog.

“Enough Hate for Everyone: Muslims and Jews Are Targets of Bigotry in Europe.” New York Times op-ed by Kenan Malik.

“Balanced-budget fundamentalism.” Simon Wren-Lewis blog post.

“The Euro Catastrophe.” Paul Krugman blog post.
“An Interesting Ad-Lib from ECB Head Mario Draghi’s Jackson Hole Speech: Morning Comment.” Brad DeLong blog post.

“What France Needs From Europe.” Bloomberg View editorial.

Miscellaneous:
“By Any Means Necessary.” Linda Greenhouse on the legal attacks on the Affordable Care Act.

Thursday, August 21, 2014

Argentina Debt Crisis: Some Observations


The spectacle of the fight between the government of Argentina and the bond holdouts, led by Paul Singer of Elliot Management has been fascinating to watch. It does, however, point out weaknesses in the international financial system, is detrimental to the economy and, therefore, the people of Argentina, and highlights a problem with credit default swaps.
Some observations:

·       The Obama Administration should not have effectively blocked the IMF from submitting briefs to U.S. courts, including the Supreme Court, outlining its views of the dangers Judge Griesa rulings pose to future needed restructurings of sovereign debt. The Administration submitted an amicus brief to the Supreme Court; it is a mystery why it did not permit the IMF to submit its views. 

·       The failure of Argentina and the holdouts to reach an agreement and their subsequent actions indicates that this is about more than just money. Argentina is investigating Elliot Management for insider trading in connection with credit default swaps on Argentine government debt; Elliot Management has court permission to investigate certain entities incorporated in Nevada. The amount of money that could possibly belong to Argentina located in Nevada appears to be quite small in relation to the amount in dispute, if it exists at all. The real purpose seems to be to find financial fraud committed by high-level Argentine government officials, perhaps including that of President Cristina Fernandez de Kirchner. I do not know whether there is any potentially illegal activity for either side to discover, but that they are investigating shows how difficult it will be to reach a compromise. Each side seems to want humiliation and capitulation of the other side. Ego, pride, politics, and contempt for and antipathy towards the other side are playing a large role. 

·       Argentina’s recent announcement that it plans to offer existing bond holders the ability to swap their bonds for ones issued under Argentine law with a different trustee than the Bank of New York Mellon has caused lawyers watching this to question the government’s tactics. (For example, see Anna Gelpern’s posts on this, here and here.) This does not bode well, though, for a compromise. The next President of Argentina may be handed this mess. 

·       There needs to be serious consideration given to finding a different way to settle credit default swaps. Elliot Management is a member of the ISDA Determinations Committee for the Americas, and, even though it has a clear conflict of interest whether or not any funds it manages hold credit default swaps on Argentine government debt, it has not recused itself from voting on issues pertaining to Argentina. I wrote about this in a previous post.

Sunday, August 17, 2014

Some Interesting Articles on the Web (August 17, 2014)


Argentina:
“Acceleration threatens to make Argentina holdout crisis messier.” Reuters article by David Scigliuzzo.

“Last Tango in Buenos Aires.” Article by Rana Foroohar of Time Magazine.

“Hedge Fund Targets Nevada Firms in Argentine Debt Dispute.” Wall Street Journal article by Taos Turner and Santiago Pérez.
“Argentina Defaulted on Bonds No One Can Even Find.” Bloomberg View article by Matt Levine.

“Holders of Argentina eurobonds plan to appeal U.S. court ruling.” Reuters article by Joseph Ax and Daniel Bases.
“Paul Singer's Next Trick Could Make the Argentine Government Way Angrier than the Time He Took its Boat.” Linette Lopez writing for Business Insider website.

“Yen bonds create Argentina CDS auction uncertainty.” Reuters article by  Helen Bartholomew.
“Argentina says will use anti-terror law against U.S. printing firm.” Reuters article.

“The Argentina Rescue Mission Has Failed.” Linette Lopez writing for Business Insider website.
Social Security:

“The case of the missing Social Security data.” A blog post for Market Watch by Alicia Munnell. She criticizes the Social Security trustees’ latest annual report for eliminating a table showing income replacement rates. Currently the director of the Center for Retirement Research at Boston College, Ms. Munnell worked as an Assistant Secretary for Economic Policy at Treasury during the Clinton Administration. The Clinton Administration considered her for a position on the Federal Reserve Board. It was widely thought at the time by those following these sorts of developments that Chairman Greenspan opposed her being on the Board and was successful in keeping her off.
“Turning the tables.” The Buttonwood columnist for The Economist discusses Alicia Munnell’s criticism of the Social Security trustees’ annual report.

“Social Security Could Decide Who Controls Congress.” Amy Weiss-Meyer writing for the New Republic.
Miscellaneous:

“When She Talks, Banks Shudder.” Binyamin Appelbaum article in The New York Times about Anat R. Admati, who teaches finance at Stanford.
“Krugman lunches with Obama.” Dylan Byers writing for Politico. “Others in attendance: Anat Admati of Stanford University, Alan Blinder of Princeton University, Erik Brynjolfsson of the Massachusetts Institute of Technology, and Roland Fryer and Claudia Goldin of Harvard University.”

“Why the Public Library Beats Amazon—for Now.” Wall Street Journal article by Geoffrey A. Fowler.
“The Global Lawyer: Cleary's Litigation Slump.” Michael D. Goldhaber writing for The American Lawyer website.

“Cops Should Be Cops—Not Combat Troops.” John Cassidy article for The New Yorker website.