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Mar 27 2009, 10:29 am by Megan McArdle

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Comments (37)

corey

OK, here's my question.
Policymakers are concerned about possibly deflation - but I'm confused as to why lower prices is a problem. It's been happening in technology for decades without mayhem? And after the oil price shocks of 2008, I'd expect prices of other goods to drop as the cost of maintaining the supply chain have come down. My question is how do we tell the good type of deflation (firms are learning how to be more efficient) from the bad type, and what exactly is the bad type?

ldelvalle (Replying to: corey)

Aggregate Deflation is bad. Productivity fights aggregate inflation. Companies that are efficient are more profitable because they cut costs not revenue. Companies with higher profits entail more employment. Conversely, if a company's cost remains the same, and revenue falls they will have less profits. Less profits less work staff.

ldelvalle (Replying to: corey)

Aggregate Deflation is bad. Productivity fights aggregate inflation. Companies that are efficient are more profitable because they cut costs not revenue. Companies with higher profits entail more employment. Conversely, if a company's cost remains the same, and revenue falls they will have less profits. Less profits less work staff.

Ken Magalnik

Question:
World reserve currency: What is it good for? Is the world reserve being dollar beneficial or harmful to us? Will changing it over to something else be beneficial or harmful to us? What are the chances of it actually switching over to another currency? What other currency might that be?

Ken Magalnik

Question2:

How do economies of scale apply to banks? How can one large bank operate more efficiently than many smaller banks? What is the banking equivalent to tool costs?

Kong

Price discrimination: good or bad?

TallDave

Can we put Glass-Steagal back together?

The notion of enterprises which are "too big to fail" seems irreconcilable with free markets. Can we break up these behemoths into manageable pieces that could fail without bringing the whole financial sector down?

Tim Fowler (Replying to: TallDave)


Do we want to put Glass-Steagal back together? I don't see a good reason to do so. Most people who argue to reinstate the restrictions that we had under Glass-Steagal, seem to assume its a good idea, without really saying why.

As for "too big to fail" is more a matter of politicians or their appointees deciding they don't want something to fail than it is an real issue, in most cases. Also even to the extent that the size becomes a real problem, you can have very large size without having one company own both investment banks and retail banks.

Kevin

Can you explain where alot of deficit spending comes from in simple terms. I understand that there generally a treasury auction of government bonds - but where can I find out who is buying them? Is there a public record of who has our bonds - I hear alot about China buying them - but who else buys them and what implications does that have for us in the long term. I'm no economist but I can buy into the idea of deficit spending in recessions or during "bad times" but I wish I could better understand how those deficits are actually financed. Thanks!

nl

In the next few years will there be a way to accuratley measure if the multiplier for the fiscal stimulus was over 1.0 or if there was any multiplier at all?

Diversity

On April Fool's Day, the international economic focus will be on the G20 meeting in Britain. What, if any, useful decisions might come out of that?

Stephen Smith

To what extent (if any) do you think that Clinton's 1997 tax break for home value appreciation created/fueled the real estate bubble?

Janice Doe

I asked this one last time and it didn't get answered, but I guess I'll try again...

(1) I keep reading liberal economists, policy analysts, etc, say that universal health care is the only way of controlling double-digit health care inflation. But then they don't say how or why. Is that because the answer is something they don't want to admit, i.e., the only way to control health care inflation is through rationing, and the only way to impose rationing is through universal health care (and rationing, of course, is the boogeyman that conservatives always raise in response to universal health care plans)?

(2) What is the conservative answer for how to control health care inflation? I don't buy health care savings accounts or getting rid of the middleman because my understanding is that something like 80% of health care costs is spent on only 15% of the population, i.e., most health care costs are spent on those with chronic conditions, rare diseases, etc. Since even health care savings accounts provide for catastrophic insurance (i.e., an individual will pay only so much per year, effectively having a high deductible), it won't be long into the year before high cost individuals reach those limits and then we're back to the current system (middleman paying for insurance). In fact, anyone who knows they'll hit the high deductible in the year (which most of those 15% would know) won't have an incentive to hold down spending. So, what legitimate conservative solutions are there as an alternative to universal health care?

Scott A

Clearly Obama believes, rightly I think, that you have to tame health care inflation to tame the federal budget - the rest is really just rounding in the long run. Even if TARP goes up another Trillion, not that it isn't a lot of money, but it is really a one-time cost and the NPV of medical care is far higher than the NPV of bailouts.

Unfortunately scouring the web it is hard to to find objective and empirical studies on health care. that is you will find much on the evils of socialized medicine or the evils of for-profit insurance or evils of trial lawyers raising malpractice premiums. Every piece of data I've seen supports the idea that the US spends more per capita yet we don't have significantly better outcomes. What should be a objective/economic analysis is very quickly overtaken by political issues.

I think in 25 years the banking system issues will be history book - maybe a long chapter but somehow we will have moved on. But, we will be dealing with massive health care problems absent some corrective measures.

So, the simple question thus - why is health care so expensive, why is it going to bankrupt the country and what can we do, politically feasibly, to address the issue short of adopting a variant of Logan's Run? in the US compared to the rest of the world and how are others able to provide substantially similar care at significantly lower cost?

Roger Tompkins

How do you respond to this article?
http://www.theatlantic.com/doc/200905/imf-advice

Nobody that I've heard is discussing the systemic weakness of the business model that has evolved from the weird term "finance industry"

Matt T

How much of the systemic risk to the financial system (CDS, mortgage securties, etc.) was caused by the big publicly traded banks and how much of it is a result of hedge funds/PE shops?

Matt T

This is more of a thought experiment than a serious question but if the government made if very clear from the beginning that they were not going to bail anyone out and AIG went under after Lehman, then how bad would the damage have been? I imagine that all lending would have come to a crashing halt and it would have been pretty bad, but how bad do you think it would have gotten and if the clear winners and losers were made apparent fairly quickly, how fast would the financial system taken to rebuild itself? And after coming out of the creative destruction process would we be better off in the long-run?

Dave

To what extent will Mandlebrot's (and Taleb's) insights into the non-normal distribution of asset returns be reflected in new risk assessment tools?

Or perhaps a better way to ask this question: to what extent are Washington's proposed regulatory reforms cognizant of the problems with value-at-risk models?

johnGalt

What's wrong with nationalization?

I have the impression that the people most opposed to it are not the middle/poor class but the business elite. I have 2 conjectures to explain that:

1) Nationalization would wipe out the stocks of the banks mainly detained by wealthy folks.

2) Some bank managers would lose their jobs.

Anything else?

Chris (In Philly)

In September, you wrote that the repeal of glass-steagall wasn't a contributing factor in the crisis:

http://meganmcardle.theatlantic.com/archives/2008/09/clear_as_glass_steagall.php

Do you still believe this? The article doesn't seem to address the primary argument made by most people that claim this was a factor: that it effectively created or massively expanded the mortgage-backed securities market by allowing commercial banks to create investment arms.

wGraves

Using the current crisis as causus belli, the administration is making mincemeat of our Constitution: supressing the role of our states, tearing up contracts made in good faith, trampling the separation of powers, and ignoring the enumerated powers clause. Congress is fully supportive of these actions. My question is: what can a citizen do which might strengthen and restore constitutional government?

Dac

The Fed is buying Treasuries. What sense does that make? It's all Federal money, right? Isn't that like me selling "Bonds" to my neighbors to fund my home renovation, then, when they don't buy them, I "buy" them myself?

Seems weird.

ldelvalle (Replying to: Dac)

Jesus

Nelson

China has a lot of dollars. What can we make that they would want to buy?

johnGalt (Replying to: Nelson)

This money that the Chinese have is in the form of bonds. Can they swap bonds for goods?

Nelson (Replying to: johnGalt)

Good point. They'd have to sell them first.

In theory, they should want some actual goods or services to make themselves better off "in fact" and not just "on paper." One of the hardest things to figure out in an economy is what we should produce. If we knew what they wanted, it would at least give us some clues on where we should get started.

johnGalt (Replying to: Nelson)

If they sell too much of their bonds the price could go down, which would be bad for the bulk of their holdings.

They'd probably be eager to buy high tech military equipment, which the US won't sell to them.

If I were the Chinese government I'd invest in health equipment such as CT, MR, PET scanners. They might already be manufactured there but the money would still go to GE, Philips, Siemens or Toshiba. I think GE has a branch that specializes in pollution reduction, a major concern in China.

But ordinary Chinese folks, what would they want? I guess the nano-car from Tata Motors would interest them. A solar panel for electricity, which I think they already produce themselves.

DaveinHackensack (Replying to: Nelson)

Natural resources: coal, iron ore, etc. China has also been buying stakes in natural resources companies, and would probably be interested in doing that here if it thought our government would let it.

Also, there was a recent article (in the FT?) about individual Chinese coming to the U.S. to shop for houses.

Jasper

I read today Geithner doesn't see any need to outlaw naked credit default swaps. I see no justification to allow for this kind of pure casino-ism. It just seems like an incredibly dangerous type of betting. Any response?

Peter

One way to deal with "too big to fail" at least for commerical banks seems to be via the FDIC. It's obvious that even undepleted, the FDIC couldn't handle the complete failure of one of the major US banks. Would it make sense to increase FDIC contribution requirements as insured deposits begin to exceed the total reserve which is supposed to be held by the FDIC?

Any other insurance policy would require such a clause it seems, no way could I take out a car insurance policy so large that payment would bankrupt the insurance company. They'd raise the premiums until it no longer would do so.

Michael

Why do we need to gift our banks with (further) taxpayer capital, i.e the recent Geithner plan? I can see why, in the case of Japan, which has/ had a largely closed system to have zombie banks was to have only zombie banks but Deutschebank loans in this country, Barclays bought Lehman in part to have connections here, etc. The Financial Times has given an analysis, linked by Instapundit, of how the Geithner plan is a gift of taxpayer capital.

johnGalt

Can you explain what a zombie bank is, how it can survive and for how long it can go on?

My conjecture is:
People, not knowing it's a zombie bank, will still deposit their paycheck there. They probably have a few old good loans that are paying back. That money is enough to pay bank employees but not to make new productive loans. That game can go on for a very long time.

johnGalt

Deflation is the problem now, but, in the future, is hyper-inflation a possibility?

DaveinHackensack

Let's assume the government is not going to require banks’ bond holders to eat some losses at some point, as John Hussman has been calling for, and let's assume that all the recapitalization money is going to continue coming from the government. Given that, Geithner's current “Son of TARP" plan raises a question I haven’t seen addressed in the media yet.

Let’s say XYZ bank has a mess of ‘legacy’ assets marked on its books at 85 cents on the dollar. Let’s say further, that the current market price for these assets is 30 cents, but, thanks to the government-provided financing, the new TARP auctions price them at 50 cents. Some might argue that the government will have overpaid for these assets at 50 cents, but here’s my question: assume the government has to provide additional capital to XYZ bank to make up for the write-down on its legacy assets from 85 cents to 50 cents. Would the combination of that additional capital plus the government outlays for TARP cost more or less than providing a bigger capital injection to offset a write-off from 85 cents to 30 cents without TARP?

Karen Hamilton

How can states and municipalies get out from under the obligation to pay outrageous pension and medical benefits to retirees?

Jon

It seems like the financial crisis and the recession are conflated in media reports. What exactly is the relationship between the two? And not to put you on the spot or anything, but what caused the financial crisis (beyond the real estate bubble bursting)?

DaveinHackensack

If it's not too late to ask another question, please read and comment on Dr. John Hussman's latest commentary on the financial crisis, "On the Urgency of Restructuring Bank and Mortgage Debt, and of Abandoning Toxic Asset Purchases".