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ANNOUNCEMENTS

Next Meeting Monday April 27 at Mt. Holyoke 7:30 PM.  Topic of discussion: TBD.

Please note that Professor Gabriel is unable to attend the 27 April meeting.  Please contact Caleb for details.

Let's try to keep this things relatively organized. Before every post, include the following label: Full name (MM.DD.YY).  Remember everyone is responsible for at least one discussion post each week (250 words - due on Mondays) in addition to any news articles you find interesting.   

Discussion: Tim Thornton (4.27.09):

In relation to the article Mike posted below, the IMF is going to face increasing pressure from the world economy to keep struggling countries afloat as this crisis reaches to the far corners of the world. I have posted two articles from the Wall Street Journal below, one of them being directly related to Mike's article about the BRIC's offering to lend the IMF money by buying debt. These emerging countries want more voting power in return, and it is interesting to see how politics is absolutely unavoidable even in times of crisis.  It will be interesting to discuss how these countries are using this crisis to not only gain potential monetary gains, but also political standing as well. The second article describes some of the IMF's increasing responsibility with the increase in funds they were given after the G-20 summit.  Anyway, here are the articles.

online.wsj.com/article/SB124078041608357051.html

and the BRICs online.wsj.com/article/SB124070499662656469.html#mod=todays_us_page_one

Mike Hinckley (4.27.09):
One interesting development in the crisis is the growing role of the IMF to stimulate emerging markets and to prevent their collapse. Recently, the G20 agreed to bolster the funds available to the IMF for lending to emerging economies by $750 billion. The peculiar aspect of this development is the de facto delineation between the “winners” and “losers” among emerging economies. That is, the WSJ article below explains that some of the large emerging countries (i.e. the BRIC’s) will actually serve as lenders, rather than borrowers for the IMF. These economies have apparently learned from past mistakes, including their lack of preparedness in the Asian financial crises, and have accumulated astounding levels of foreign reserves to cushion against adverse economic conditions.

Another interesting aspect of this news is the fact that these BRIC economies, though relatively less affected by the current crisis, are at least partially responsible for its onset. Some of these economies, such as China, habitually buying US government and corporate bonds, thereby contributing to dangerously low interest rates that fueled the so-called “credit bubble” of the last several years. While BRIC countries have clearly been damaged by the economic slowdown, they have suffered less than others, which is ironic, given their complicit, albeit indirect, role in creating the crisis.

http://online.wsj.com/article/SB124067299074156277.html?mod=googlenews_wsj

Matt Himler (4.25.09)<u>

"The credit crisis is shaping up as a once-in-a-lifetime chance to buy troubled real estate assets on the cheap."  The other day dealbook posted a piece about the appetite for distressed bank loans backed by collateral like homes, land and commercial properties.  “The whole art to all this is figuring out which one is an opportunity and which one’s a trap,” said Chris Moench, who manages a distressed-debt investment fund in St. Petersburg, Fla. “If you don’t buy the thing right, you’re never going to make any money.”  Nonetheless, the interest in distressed loans is surging. This February, nearly 2,700 investors registered to bid on DebtX’s auction Web site, more than 10 times the number of registrants from the same month last year. The company sold notes worth more than $1 billion in the fourth quarter of 2008, triple its sales from the same period in 2007.  As per our previous conversations, a way for the public to get involved and hopefully make a profit off this debacle.  Article below.

http://dealbook.blogs.nytimes.com/2009/04/24/auctions-for-troubled-loans-jump-to-the-web/
APRIL 13TH DISCUSSION - (Caleb Rozwenc and Chris Valentine)

Topic: Repaying The Debt/Bailout; Where do we find the funds? Subtopic/questions about tax changes and implications of new federal aid programs.

Article on FDIC changes/implications: http://dealbook.blogs.nytimes.com/2009/04/07/the-taxpayer-takes-the-risk-in-fdics-no-risk-insurance/

Short history on past US response to past economic crisis: http://www.nytimes.com/interactive/2009/01/26/business/economy/20090126-recessions-graphic.html?ref=economy

Short read on gains a gas tax could make (had found a better article but lost the link): http://blogs.motortrend.com/6399562/editorial/is-a-gas-tax-now-in-the-national-interest/index.html

Current plummeting tax profits, counterintuitive to US "go out and spend" plan?: http://online.wsj.com/article/SB123923448796803135.html

Brad Corbin (4.13.09)

Caleb,

Interesting article on the possibility of implementing a gas tax. While the blogger makes some good points, I strongly disagree with a gas tax for two major reasons:

1) The reason why gas prices have fallen below $2.00 is because the economy is the worst it has been since the 1930's. If the economy were to recover fully we could potentially reach summer 2007 gas prices. A gas tax on top of that would hinder economic growth.

2) A gas tax would seriously hinder the shipping/logistical area of the U.S. economy. So many businesses depend on shipping companies to produce and sell their goods to consumers. Surely the prices these businesses would have pay would significantly increase.

Anyways, I'm curious as to what everyone else thinks. See you tonight.

Matt Himler (4.12.09)

Happy Easter for those celebrating. Chris, I agree with you and Mike, that although many draw similarities it seems that even the most cogent arguments comparing the two can be refuted. After reading you piece I did some research on my own and noticed the following:

DJIA lost 89% during great Great Depression—now only about 40% (not ruling out that it can go lower). One reform that took place in the ’30s was in relation to margin trading. Today, investors can only borrow 50% of their asset value for margin trading, and not 90%.

There have only been 19 bank failures in 2008. In the first 10 months of 1930 there were 744 bank failures. Creation of FDIC?

Economic protectionism backfires, while free trade brings about prosperity and helps alleviate recessionary factors. Don’t think Obama is even considering a protectionist economy.

Although highly unlikely there is still the possibility of a natural disaster (see 9/11 or Katrina), however unlikely to be on same scale as Dust Bowl.

I think that we can agree that rather than calling it the Great Depression II, maybe the Great Recession is more fitting, as it is the biggest recession since 1929.

Chris Valentine (4.11.09)

So I was finally able to get in touch with my brother and pick his mind for a little bit.  He started off by pointing out that his area of expertise is more micro oriented than macro so take this with a grain of salt. The key causes of the great depression are both hotly contested and heavily researched to this day but for brevity sake I'll split it into 5 key factors:

1. the Stock Market Crash of 1929

2. Bank Failures

3. Reduction of purchases accross the board that helped lead to high unemployment

4. American protectionist policies (Smoot-Hawley Tariff Act of 1930) that caused foreign flight of capital

5. Drought Conditions

We can ignore number five since it was due to now extinct farming practices and unfortunate timing of weather conditions that have no correlation to today.  When my brother mentioned similarities between our current situation and the 30's he was specifically talking about #4.  Number 1 is seen in the housing bubble, 2 is on a different scale today but the government has taken a more preemptive role in forgoing the closing of those few banks "too-big-to-fail."  There has been a hit to consumer confidence and spending but unemployment has yet to even halve depression levels.  For starters my brother is worried about the punitive repercussions that come with increased taxes on the upper class.  I think he would say that it is the upper class who spur the true investments that help the economy grow and prosper and by punishing, or threatening to, good returns you can only restrict growth.  Why would those with the money to invest put their money back into a market where the government has made such regulations as taxing 90% of wage/bonuses over a certain level?  It isn't that these individuals are directly effected by such regulations but the realization that their government is willing to take such measures can only be upsetting.  Mike then mentioned the problems of protectionist mantras (only buy american, saving GM, support our workers...etc) and that they often can result in retaliation from foreign investment who would be left at a disadvantage.  The withdrawal of such investments would only cripple our recovery.

On a positive note he did mention that the money supply is at a much better level than during the 30's.  This led him to mention the repayment of the TARP money by Goldman which not only removes capital the goverment wanted invested but also brings along the threat of banks who trully need the money being forced to return it or risk being seen as weaker than their competitors.

Mike then proceeded to generally complain about goverment involvment in the market and about how their approach is usually economically ignorant and misguided.  He gave the example of fuel costs.  If the government sees a need to protect the future of our youth from smog, or global warming, then with a compelling argument the nation should have no issue falling in line.  The key is how the government approaches solving the problem.  Rather than have some middle of nowhere congressman propose a bill to support ethanol (because it helps his state)when he has no true understanding of its future the government need simply tax gasoline to a level where the market is able to do what it does best.  If gas is too expensive then private wealth will be forced to find a solution, whether that be ethanol or some other form of energy it doesn't matter.  Mike mentioned in short as another example that the reason everything is made of corn syrup these days is due to the governments long time subsidization of it.  This is the wrong approach and detrimental to the country as a whole.  We have cut farm works some 90% over the last 100 years, where would we be today had we protected farmers (subsidized them) like we are doing in Detroit. 

He also mentioned just before he had to run that the government messed up by allowing negative real rates to exist.  The government was in short encouraging the nation to go into debt.  Basically our problems to today can be traced back to a mistake the government has made somewhere along our past.

So if anyone wants please feel free to take one of these issues he brought up and dig deeper for our discussion Monday.

--Fourth Post (Week 4/6-4/13)--

Mike Hinckley (4.11.09)

<span class="Apple-style-span" style="font-weight: bold;" />Paul Krugman, the habitually angry economist and NYT columnist, wants to make banking boring again. In his op-ed from Friday’s NYT, he argues that periods of relative prosperity and low regulation in the banking industry have usually preceded or coincided with periods of US economic stagnation over the past century. In discussing the need for greater regulation on today’s banks, he writes, “Despite everything that has happened [in the current crisis], most people in positions of power still associate fancy finance with economic progress.” While irresponsible financial decisions played a role in this crisis, I would wish that the Nobel Laureate might take a more nuanced view, distinguishing “fancy finance” from “imprudent finance.” Certainly, there were some disastrously bad business decisions made, which contributed to this crisis, but does that mean that securitization and other forms of “fancy finance” are all bad? Also, Krugman seems only to blame bankers, sparing other parties who contributed in putting the economy at risk—most notably, ratings agencies, risk managers, policymakers, and American consumers and homeowners. Early in his article, he blames bankers for the high accumulation of household debt in post-WWI period, which he says contributed to later economic woes. Certainly there are two sides to every transaction. Just like in the current crisis, homeowners were not forced take the terms of their mortgage, just as lenders were not forced to give them. Banks share much of the blame for the current economic woes, but in my opinion, Krugman does not make a compelling case that there is a causal relationship between boring banking and economic growth, or conversely, “fancy finance” and economic decline.

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MARCH 30TH DISCUSSION - The Toxic Asset Plan (Mike Hinckley)

U.S. Expands Plan to Buy Banks’ Troubled Assets

http://www.nytimes.com/2009/03/24/business/economy/24bailout.html?_r=1&dbk

Nobel Prize Winners Clash on Geithner Plan Prospects

http://www.bloomberg.com/apps/news?pid=20601068&sid=aKIxFGeuTXG8&refer=home

BlackRock’s Fink: Why the Treasury Plan Could Work

http://dealbook.blogs.nytimes.com/2009/03/24/blackrocks-fink-why-the-treasury-plan-could-work/

Paul Krugman: Financial Policy Despair

http://krugman.blogs.nytimes.com/2009/03/21/despair-over-financial-policy/

Optional: Transcript of Timothy Geithner’s Press Briefing

http://www.nytimes.com/2009/03/23/us/politics/23geithner-text.html?ref=economy

--Third Post Week (Week of 3/23-3-30)--

Matt Himler (3.30.09)

Fitz I just wrote a whole piece explaining it, however, due to computer technicalities just see here for an explanation:

http://www.nytimes.com/imagepages/2009/03/24/business/24bailout.graphix.ready.html

Caleb Rozwenc (3.30.09)

One of the big boosts of the new toxic asset plan is the possibilities of subsidies for investors in low-rate loans - hopefully pushing them to become more confident and thus expend more resources (and increase cash flow) in the current market place. Combining this knowledge with the hope (as Matt wrote) that Goldman's move might put pressure on other banks to quickly repay the TARP investment, private investors should become less wary about investing in the financials - which in truth is the main goal of this project. Re-creating a source of liquidity will highly increase the chances of a successful market where the "true value" of these assets can be found and bought/sold once there is money available to exchange hands.

Chris Fitzpatrick (3.30.2009):

Apparently the financial world (and those that understand it) are quite happy with Geithner's plan, and that makes me happy. What I don't understand, and someone please correct me if I'm missing something, is how the issue of price was resolved (or will be resolved). In the first article, it references the deal between Lone Star and Merrill where Lone Star paid 22 cents on the dollar for the "toxic" assets. Was the percentage of the original price of these much depreciated assets to be paid by the investors decided on yet? If so, how? If not, when will that be decided? Is this for some reason not an issue? Maybe someone can shed some light on this for me. Thanks.

Matt Himler (3.27.2009):

On March 24 the New York Times reported that Goldman intends to repay its TARP investment to the Treasury within the next month.  By repaying the TARP capital, Goldman and other banks would also escape compensation caps and other burdens that came with the investment.  If Goldman is successful in paying back TARP it could put pressure on other banks to give their money back, even if they are not in such a great position to return the money. Following Goldman's alleged remarks, one day later, Bank of America CEO, Ken Lewis, said the company is gearing up to pay the government back its $45 billion investment in the firm, possibly by the end of the year.  “As soon as we think the markets normalize, we would very seriously like to pay it all back,” Mr. Lewis told The Los Angeles Times in an article published March 26. “That could occur as early as the fourth quarter of this year.”  While Goldman may be able to part with the $10 billion it received from the government under TARP — the firm has $100 billion in cash on its books — some banking analysts don’t put Bank of America in that same enviable position.  It will be interesting to see if other "bulge bracket" follow Ken Lewis' remarks about paying TARP back. I wouldn't be surprised if Jamie Dimon of JPMorgan, who has been outspoken during this credit crisis, would be next to follow with comments.  Coincidently Lloyd Blankfein, James Dimon, Kenneth Lewis and Vikram Pandit of Citigroup are among the banking chiefs expected to head to Washington on March 27, where they will meet with President Barack Obama and discuss the government's plans.  This meeting follows Obama's proposed various public-private partnerships that sent the markets soaring after the plan was announced.  I would be astounded if repaying TARP wasn't on the agenda for Friday's meeting.

Clint Marchese (3.26.09)

Not exactly the cleanest material, but very funny: http://stixblog.com/wp-content/uploads/2009/02/bailoutmascot.jpg

It's worth taking one minute to check it out.

Mike Hinckley (3.26.2009):

On Monday, Treasury Secretary Tim Geithner unveiled his plan to deal with so-called “toxic” assets owned by banks and other financial institutions. While the plan received broad-based support from market participants (see the massive jump in the DJIA and other equity indices after the announcement), there were still some skeptics. For example, in one of the required articles above, economist Paul Krugman argues that administration believes “there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank.” Instead of fixing “fundamental problems” in the structure of our economy and banking system, Krugman believes the plan will simply restore confidence and pricing to the murky assets that plague it. While Krugman’s argument may have some merit, he seems to underestimate the ancillary benefits to the broader economy’s performance with the restoration of a functioning market in these asset classes. That is, if buyers reemerge for these assets, the banks may finally sell them at adequate prices, so as to avoid taking larger writedowns. Underwriters would have pricing benchmarks for new issuances in the future. New issuance and securitization will create downward pressure on mortgage rates so as to help establish a “floor” in the housing market. In conclusion, I believe Krugman’s priorities are off. I’m not disputing that there are structural problems to be fixed in the economy—to be sure, there are. These problems, however, should be fixed in the form of a comprehensive regulatory overhaul, which should follow more immediate policy measures to refuel the economy. Such a regulatory regime should not be rushed, nor should policies of financial and economic stimulus be delayed.

MARCH 9TH Discussion- The Nationalization of Banks

Overview: Just Some Background Reading

What Bank Nationalization Means for you
http://blogs.wsj.com/deals/2009/01/21/crisis-qa-what-bank-nationalization-means-for-you/

Pros and Cons
http://www.rgemonitor.com/roubini-monitor/255740/the_case_for_and_against_bank_nationalization

List of economists, politicians and other interested parties who have come out for or against temporary bank nationalization:

http://economix.blogs.nytimes.com/2009/02/23/bank-nationalization-pro-or-con/

Pro Bank Nationalization: Brad Corbin, Christopher Valentine, Michael Hinckley, Chris Fitzpatrick
A pro-nationalization article by noted economist Paul Krugman.
http://www.nybooks.com/articles/22151
A great article about how Sweden saved its banking system in the nineties with nationalization.
http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?em

Against Bank Nationalization: Matt Himler, Tim Thornton, Caleb Rozwenc, Nicholas Gilligan, Clint Marchese

Bernanke: Bernanke Rejects Nationalization, Defends Actions

http://www.bankinvestmentconsultant.com/news/Bernanke_Rejects_Nationalization_Defends_Actions-2661065-1.html

PIMCO’s Bill Gross: Outlook

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Investment+Outlook+Bill+Gross+March+2009+Hairy+Lips+Sink+Ships.htm

George Soros: Outlook

http://online.wsj.com/article/SB123371182830346215.html

-- Second Post (Week of 2.30.09) --

Caleb Rozwenc (3.9.09)

In considering the topic of discussion this week being focused on the possibility of bank nationalization, I thought the recent news dealing with possible changes the U.S. House financial services subcommittee could make on the regulation and rules regarding mark-to-market could possibly have a huge impact on the decisions made. If the rules are suddenly changed so that current banks do not need to continue their present fire-sale activities and are able to maintain their "toxic" assets that are currently assessed as severely depreciated in value, this could be a huge boom in the books for them as far as accounting procedures are concerned. The possibility of waking up over night and being able to "take back" several billion dollars in write downs could have a huge impact not only on the current structure of the financial market, but the public's perception of it as well.

Clint Marchese (3.9.09)

As discussed in our previous meeting, political thought and affairs often triumph over sound economic theory.  As the country (and world for that matter) carefully examines the government's response to the crisis, the political bipartisan gap may widen, causing future turmoil and delay in government action.  Rumblings in Congress claim that Obama "spent too much" and "taxed too much," and that people want to "see the Government tightening its belt."  Sound economists are claiming the Republican thought process to cut spending and cut taxes is absolutely absurd.  Another major point of contention will be over the $410 billion appropriations top-up bill, which includes almost 9,000 earmarks (special funding requests for projects inserted by politicians).  Republicans, who hold the numbers in the Senate, can block this bill, forcing the Government to face a shutdown because it will not have funds to pay federal employees.  Republicans are demanding the President to make good on his promise to ban earmarks and cut back the spending in the bill.  Meanwhile, White House budget director Peter Orszas is urging the Republicans to support the appropriations bill, promising that the Administration will handle the earmark reform next budget cycle.  My main concern in the upcoming months is that political grudges may get in the way of simple economic theory. 

Matt Himler (3.9.09) FYI

"Goldman Sachs' chief executive said he opposed the full nationalization of banks, but thought government stakes could be sensible in extreme situations, in an interview with German weekly Welt am Sonntag. "I don't think that nationalization is a good solution. It is decisive that the financial system is being stabilised and governments have to act in a pragmatic manner," Lloyd Blankfein was quoted as saying. "In extreme situations, it can be meaningful when the government takes a stake. However, full control should be avoided," he added.  You can read article below.

Nick Gilligan (3.8.09)

I came across an interesting article (posted below) by economist Alan Blinder that raises many key questions regarding this idea of bank nationalization. It sure seems like a great plan to nationalize the troubled banks, fix their balance sheets, and eventually sell back healthy banks into private hands, but is this really a realistic option?  Blinder admits that this worked well for Sweden, but points out that “the Swedish government had to deal with only a handful of banks [while] we have more than 8,300.”  One important question that the article raises is if the government were to begin to nationalize banks, where is the line drawn in terms of how many banks become nationalized? If the government chooses to nationalize four major banks, for example, bank number five is immediately at a “sever disadvantage in competing for funds with the government-backed quartet,” and profitability would clearly suffer. Does bank five then become nationalized as well?

Chris Valentine (3.8.09)

When reading through articles from any major news source the fear of "nationalization" is rampant.  However, few mention the distinction between national takeover of banks and government investment.  The US is far from actually owning and running the banks that it has been increasing its stake in.  What happened in Iceland's case, collapse followed by complete government takeover, is indeed something to fear but not within our realistic future.  In extreme circumstances in order to curb the downside inherent in a free market the government is forced to step in and in an a situation like this the government can even position itself to turn a profit when the economy recovers.

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Matt Himler (3.4.09)

On January 16 one of the biggest US financial supermarkets, Citigroup, announced that it is splitting into two operating units in what is known as a "good bank/bad bank" strategy.  Critics of the bank, who argue it had become too big and complex to manage, have demanded a break-up for some time.  After reading a couple articles posted above, many famous economists, professors and investors have blasted the idea of a good/bad bank.  George Soros in "We Can Do Better Than a 'Bad Bank,'" argues that this scenario could serve as a useful interim measure, however, "it will make it more difficult to obtain the necessary fudning for a proper recap in the future."  His suggestion is not to remove the toxic assets from the banks' blance sheets but instead put them into a "side pocket" as hedge funds are doing with their illiquid assets.  My question is what is the difference between putting it in a side pocket vs. making it its own entity as Citi did.  Eventually these "bad assets" will have to be addressed.  My guess is that Soro is stating: rather than selling these risky assets at a severe premium to private investors and booking the losses, maybe by putting them in this side pocket they will gain value over the next couple years and they could be either transferred back into the good bank or sold at a higher price, adding value to the stockholders.  Please correct if I read this article incorrectly?

Mike Hinckley (2.27.09)

During our class discussion last week, we talked about, among other things, how to fix the market for toxic assets, and I was reminded of an article from a few weeks ago, which I found extremely interesting (See “How Wall Street wants to solve the credit crisis” – 2.27.09). This article, which appeared in Fortune in early February, describes a proposal crafted by executives at top financial firms (Citigroup, Fortress Group, and Starwood Capital) to help unlock the market for so-called toxic assets. The plan, which made the rounds on Wall Street and Capitol Hill, proposed that rather than insuring or purchasing toxic assets itself, the government instead provide long-term financing for private firms interested in buying these assets. The authors of the plan liken the market for toxic assets to that of the battered real estate market; that is, private firms and individuals would be willing to take the risk of buying a house whose price has fallen 50% in the last year, but only if they can get reasonable long-term financing (i.e. a mortgage at reasonable rate). They claim that the same is true of the market for CDO’s, MBS’s, and the like, but that financing has evaporated in the current market. Private firms would surely be willing to take a risk and buy these securities, but banks and “shadow banks” (i.e. hedge funds, money managers, etc) are unwilling to lend. Additionally, investors are not only concerned with locking in decent returns, they are also worried about their own cash levels (i.e. sudden investor redemptions, margin calls, etc). Investors can neither afford to deploy their own cash nor can they find adequate financing from outside sources. The plan supposes that if the government were able to set up a long-term lending facility designed to help purchase these securities, perhaps much of the private capital, which had been on the sideline, might once again return to the market. I was really intrigued by this plan, which seemed very different from all the tired and well-worn ideas of the past (insurance, stop-loss guarantees, capital infusions, troubled asset purchases, etc). To this end, when Treasury Secretary Geithner unveiled his Financial Stability plan to combat the crisis, I watched as many in the press panned it for lack of specifics. While this charge may have merit, I was heartened and relieved that one aspect of his proposal seems to include the plan described above. That is, Geithner proposed a so-called, “Public-Private Investment Fund,” which “will provide government capital and government financing to help leverage private capital to help get private markets working again.” (For more details, see “Treasury’s Financial Stability Plan” – 2.27.09)

-- First Post (Week of 2.23.09) --

Mike Hinckley (2.23.09)

Over the weekend, rumors surfaced about the possibility of Citigroup taking more in state capital infusions (See “US eyes large stake in Citi” – 2.23.09). This news regarding Citi reveals an important shift in the banking rescue effort. That is, previously the government had been focusing on the Tier-1 capital levels of banks, which measures all equity except common shares, as the most important indicator of a bank’s health. As a result, prior capital infusions generally involved preferred shares so as to improve the Tier-1 ratio while diluting common shareholders as little as possible. In what may become a trend in future capital infusions, the government is currently discussing converting some of its Citi preferred shares to common and/or purchasing newly issued common shares so as to improve Citi’s tangible common equity, or “TCE”—a measurement of how much common shareholders would get in the event of liquidation. Importantly, the previous sales of preferred shares to the government, while helpful for Tier-1 levels, do not have any effect on the TCE. While Citi has a Tier-1 capital ratio of 11.8%, well above the level most investors regard as “safe,” its TCE ratio as percent of assets was only 1.5% as of December 31st, well below the 3% level for which most investors look. Reports indicate that the Treasury will weight more heavily the TCE in its recently announced “stress tests” of banks. Interestingly, some analysts calculates that if the government takes a 40% stake in Citi’s common shares as reported, the TCE ratio will only increase to 2.16%, thus fueling speculation that the market would react unfavorably to such a transaction. (See “Would a 40% Government Stake in Citi Be Enough?” – 2.23.09) As my esteemed colleague below concluded so eloquently, "We shall see."

Chris Fitzpatrick (2.23.09)

After reviewing some of the other posts, Tim's drew my attention. Aiding Americans making $85,000 a year with $200 spread out over the course of the year makes little sense to me. Wouldn't those receiving an extra $4 a week hardly notice it, therefore NOT change their spending habits, therefore making it wasteful government spending? Just a thought.

In other news, in a USA Today wire report written by Carolyn Pesce today, Obama outlined his state stimulus package to governors. Most of the $15 billion would go toward funding state Medicaid programs for the poor, an area that has suffered greatly as state budgets have dwindled. A few interesting points came out of this meeting. First, Obama used this announcement of increased spending and stimulus to also pledge to cut the deficit in half by 2012, harping again on his dedication to going through the budget "line by line" and instituting "pay as you go programs." Also, several GOP governors said they may not accept the funding because "it will require a tax increase on employers once the stimulus money runs out." Taking this point and applying it to the comments Obama made on the deficit, he is at the very least taking steps towards tapering off spending and paying down the deficit. Every state wants funding for their programs, but no one is willing to pay for them. If that is the case, how will Obama pay down the debt and increase his spending? We shall see. http://www.usatoday.com/news/washington/2009-02-23-obama-governors_N.htm

Caleb Rozwenc (2.22.09)

As has been seen over the most recent year, the economic downturn in the United States was obviously not limited in its impact of scope or scale in branching out into the international economy. While at the initial outset of the wall street/investment bank failures the dollar plummeted and foreign currencies (especially the euro) skyrocketed, this imbalance has slowly been reset. The currency markets have swung back in favor of the dollar for the classic sole reason that we continue to be the largest consumers in the world (while China had been rapidly catching up, the current crises has somewhat slowed their ascent), and simply just have more money to blow. What this means is that - similar to how Argentina’s government and fiscal policy was directly tied to and dependent on U.S. policy changes during their dollarization in the 1980s - the rest of the world is waiting to see not only how this bailout plays out, but how it will in turn effect them. As mentioned in the article I posted, international forces are highly concerned with the inordinate amount of debt that will be issued in short order, and how that will affect future FDI and investment crowding-out for international investors. The final sentence of the article says, "(The world) sees the huge deficit, the huge spending, and wonder what comes next." Unfortunately for our globalized capitalist system, the current U.S. administration cannot yet know what that ‘next’ will be.

Chris Valentine (2.21.09)

While looking around I found this from the CBO or Congressional Budget Office.

www.cbo.gov/ftpdocs/96xx/doc9619/Gregg.pdf

In short it concludes that direct purchases of goods and services by the government tend to have relatively large effects on GDP.  Due to lag in results the improvements will be mostly felt between 2010 and 2012.  Also they hold that a dollar's worth of temporary tax cut would have a smaller effect on GDP than a dollar's worth of government spending.  This is dependent on how much of the tax cut is saved, or in other words who receives the tax cut and how perminent it is.  Most households would likely save the money to keep spending smooth over time however low income households who already spend all income will likely do the same with their tax cuts.  Perhaps more importantly it is noted that the effect of the provision on business spending would probably be small since it would affect the firms' after-tax income rather than their marginal incentives for new investment.  The CBO estimates that each dollar of additional debt crowds out about a third of a dollar's worth of private domestic capital ( offset by increases in private saving and inflows of foreign capital).  The main concern seems to be whether the gains will be worth the long run effect of the debt. 

Matt Himler (2.20.09)

While the stock market continues to fall (lowest in 12 years I believe) I found some humor in the NY Times Dealbook post (below).  Wall Street’s fears about a government takeover of major banks eased somewhat on Friday afternoon after the White House reaffirmed its belief in a privately owned banking system.  “This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government,” a spokesman for President Obama, Robert Gibbs, said. “That’s been our belief for quite some time, and we continue to have that.” Is this just delaying the inevitable or is this Citi shareholder (argh) holding a government entity.  The question that comes to the forefront is are the major banks insolvent, meaning the liabilities exceed the assets?  I'm not financial balance sheet expert, but from what I have read it seems this is true, leading me to believe that the government is just trying to quell the panic of investors until they can come up with a viable solution for the nationalization of the major US banks.

Clint Marchese (2.18.09)

For my social policy class, I recently read numerous articles by Martin Feldstein, a staunch conservative economist, former chief economic advisor to President Ronald Reagan, and current Harvard professor. Today, serving as one of President Obama’s advisors on the President’s Economic Recovery Advisory Board, it is important to examine his uncharacteristic support for a stimulus package and his warning to the one currently in play. Even this ultra conservative realized the economy needed a boost, and quickly. In response to President Obama’s tax cuts (as discussed previously by Tim), Feldstein states these cuts will do little to increase consumer spending. In fact, only 15% of last year’s rebates led to additional spending. These tax cuts will mostly be used to pay down existing debt and will not succeed in their original intent. Feldstein proposes that the tax changes provide incentives to businesses and households to increase current spending. He suggests a temporary refundable tax credit to households that purchase major consumer durables (such as cars), or tax credits for home improvements. Although in favor of a large portion of the stimulus plan being used for infrastructure projects, Feldstein believes these projects will not spend money quickly enough to help the economy’s dire situation. The Congressional Budget Office estimated that of the $50 billion to be spent on energy and water, less than one-fifth will be spent by the end of 2010. I believe it is important to examine the position held by a leading conservative economist, and while in favor of a stimulus package, he believes the current package does too little to raise national spending and employment.

Note: Martin Feldstein also has a very interesting proposal to stop the mortgage crisis. The full article can be viewed at http://www.nber.org/feldstein/wsj11182008.html . Briefly, he proposes replacing 20% of the homeowner’s existing mortgage with a separate full recourse loan from the government. This low interest loan ideally allows the value of homes to exceed their mortgage debts, reduce defaults, and stop the decline in housing prices.

Matt Himler(2.17.09):

So Al Gore claimed to invent the World Wide Web, however, neither his administration, nor Bush's, really used the internet to it's full potential.  It seems as if part of President Barack Obama’s pledge to make government more transparent is using the internt to do so.  After weeks of touting a Web site initiative which lets the public track how the $787 billion economic stimulus package is being spent, the White House went live today with www.recovery.gov.  “Recovery.gov is a website that lets you, the taxpayer, figure out where the money from the American Recovery and Reinvestment Act is going,” the site states. “The money is being distributed by Federal agencies, and soon you’ll be able to see where it’s going — to which states, to which congressional districts, even to which Federal contractors. As soon as we are able to, we’ll display that information visually in maps, charts, and graphics.”  If only the investment banks, Citi, BofA, Goldman, Morgan, etc., were this transparent with where their money was going!

Tim Thornton (2.17.09):

While how the government finances this debt is a huge question that will certainly have to be resolved, how the package is going to be used and distributed is also in question. Sudeep Reddy recently wrote an article in the Wall Street Journal called, "Plan Tries Slow, Steady Stimulus to Revive Spending." It outlines and discusses part of the Obama administration's plan to distribute a tax break to stimulate the economy. Instead of 1 large check from the government, like during the Bush administration, of $300 to $1,200, Obama wants to increase the American public's income by around $8 a week.&nbsp; This smaller increase on citizens' paychecks is interesting for a couple reasons:

First, the administration is distributing these tax breaks a very different way than Bush. They are going to distribute from the bottom up, in a sense. For example, someone making $40,000 will get the full $400 over the course of a year, while someone who makes $85,000 would receive $200 over the course of the year, and so on.&nbsp; This also fits into Obama's promise to have tax cuts for the lower and middle classes, instead of the "trickle-down" economic platform of previous presidents.&nbsp; What is interesting is how the President is doling out this tax break.&nbsp; A single sum tax break, like in 2001, would probably be used to pay off built up debt or put into savings, especially for lower and middle classes.&nbsp; This will not do, as Obama is trying to aim this tax break to strengthen weak consumer spending. Obviously, by providing around $8 dollars a week, it makes consumers more likely to spend that $8 in the open market instead of save it. This would hopefully help the struggling economy and perhaps create the demand for more jobs, but what would the effect on the savings rate be? Does it even matter? While an influx in the money supply seems to be the major reason we got out of the Great Depression, but the Fed lowering the funds rate doesn't seem to have an adequate effect because of everyone's worries about credit ratings. Will they get their loans paid back in full? This uncertainty might make the money supply tactic unreliable and makes this recession unique. While the tax breaks should help in the short-term, what are the long-term effects?

Brad Corbin (2.17.09):
This is a little off topic but I read an interesting article today on Dealbook regarding the future of M&A activity. The article is entitled, "The Return of Merger Equals" by Steven Davidoff.

The article focuses on the merger of Ticketmaster Entertainment and Live Nation. Neither company will be designated "acquirer" or "target." The companies proclaim that this will be a strategic combination, which will help them weather the current economic downturn. The success from this kind of merger will come from synergies and cost-saving measures. A potential negative outcome could come from management in-fighting when the two management teams combine.

At least in the near-term, I believe that several "merger of equals" transactions will take place enabling similar companies to consolidate and lay low until the economy picks up again. Also, deals like Liberty Media's acquisition of Sirius should become more prevalent. Stronger companies will be able to acquire companies severely affected by the economic downturn. Assuming Sirius becomes profitable when the economy heats up, Liberty will realize its investment.

Matt Himler (2.16.09):

Mike raises a very important point.  Everyone is so consumed with rolling out this stimulus package that most Americans and media outlets have blatantly ignored the consequences.  Biggest Concern: Inflation, or possible stagflation.

I found another piece by George Melloan from WSJ (below) that outlines some of the same topics Hutchinson addressed in Mike's post.  To elaborate Mr. Melloan wrote: "there is a very real danger of a return of stagflation. I wonder why no one in Congress or the Obama administration has thought of that as a potential consequence of their stimulus package."  I am sure that the administration has thought about inflation, however, it's just not in their interests to do anything to prevent inflation.  We are supposed to have an INDEPENDENT central bank that refuses to print money for the politicians in order to maintain price stabilitiy, yet, this stimulus package brings us back to the concept of "buy now, pay later."  Most people in America would prefer "free" money from the federal government and a higher rate of inflation.  This may be stretching things, but is the Treasury turning into a credit company?

It’s worth remembering an old statement from Henry Morgenthau Jr., the famous Treasury Secretary under President Franklin D. Roosevelt during the Great Depression, who confessed, “We have tried spending money. We are spending more than we have ever spent before, and it does not work.”

Mike Hinckley (2.16.09):

Another issue that I think deserves discussion is the question of financing the national debt that will result from the pending stimulus package. The media either doesn’t seem interested in discussing it or realizes it is not competent or financially literate enough to do so. The latter can also be said of Republicans, whose central reason for voting against Obama’s bill revolves around this very question. When discussing it, most Republicans have not been able to articulate cogently to Americans why financing the deficit will be difficult and why that is important. On this point, see the article I’ve posted below by Martin Hutchinson (Who will buy all those Treasurys? - 02.16.09). Hutchinson describes how Chinese authorities, ordinarily a large buyer of US treasuries, are becoming more skeptical of the US and its ability to repay its debts. Last year, the US ran a deficit of $459 billion; for reference, foreigners, including China, have traditionally bought a little over $200 billion in treasuries annually. With the new stimulus and other economic rescue measures, experts predict the US deficit will average at least $1.35 trillion in the next two years. As Hutchinson explains, even if Americans started saving again (which would help finance the deficit), the US will still have to count on foreigners to lend the difference. This means that to lure these foreign investors, interests rates will probably have to rise significantly, which would hurt American businesses and create a whole new round of problems for the economy. This is not to say that the potential positive implications of the stimulus package do not outweigh the negative ones outlined above. I don’t believe anyone can answer that right now. Rather, the point is that now we know the bill will be signed into law on Tuesday, we should all acknowledge and be aware of the stimulus’ potential effects in their entirety, so as to help us better define the appropriate aims of other policy measures to be taken in the future.

Matt Himler (2.13.09):

Check out the highlight on Cramer in Newsweek piece found below titled, "In Defense of Bankers."  "We should hound them in the supermarket. We should hound them in the ballpark. We should hound them everywhere they are. We should make fun of them and we should point fingers at them and we should tell them that you have no shame." Referring to AIG Employees. Crazy? Also see meltdown clip on Youtube.com:http://www.youtube.com/watch?v=SWksEJQEYVU Poor Erin Burnett (As mentioned last night, Williams Grad)

ARTICLES<u</u>

Caleb Rozwenc 3.30.09

Toxic Asset Plan Foresees Big Subsidies for Investors

http://www.nytimes.com/2009/03/21/business/21bank.html

Caleb Rozwenc 3.9.09 CNBC reporting possible response to U.S. House Financial Services subcommittee hearing on mark-to-market accounting rules as soon as March 12

http://www.cnbc.com/id/29510966

Older article on what's wrong with the current system

http://www.forbes.com/2008/09/29/mark-to-market-oped-cx_ng_0929gingrich.html

Reason behind changing market to market procedures in the first place - Article on Enron

http://www.journalofaccountancy.com/Issues/2002/Apr/TheRiseAndFallOfEnron.htm

Clint Marchese (3.9.09)

Budget Wides U.S. Partisan Divide

http://business.theage.com.au/business/budget-widens-the-us-partisan-divide-20090309-8tam.html

Matt Himler (3.9.09)<u</u>

Blankfein's thoughts.

http://www.cnbc.com/id/29581279

Nick Gilligan (3.8.09)

Additional article for the "Against Bank Nationalization" Team

http://www.nytimes.com/2009/03/08/business/08view.html?em

Mike Hinckley (2.27.09)

How Wall Street wants to solve the credit crisis

http://money.cnn.com/2009/02/06/news/economy/cohan_wallstreetbailout.fortune/index.htm?postversion=2009020611

Treasury's Financial Stability Plan

http://www.treas.gov/press/releases/tg18.htm

Caleb Rozwenc (2.25.09)

Article on how plummeting dividends means the market still has much to fall.

http://www.bloomberg.com/apps/news?pid=20601213&sid=aEZlqEfkKhbk&refer=home

<u</u>Chris Valentine (2.23.09)

CBO posts.  Take a look at the Macroeconomic impact in the third link:

http://www.cbo.gov/publications/collections/collections.cfm?collect=12<u</u>

Mike Hinckley (2.23.09)

US eyes large stake in Citi (subscription required; search for article on google if you don't have one)

http://online.wsj.com/article/SB123535148618845005.html?mod=testMod&nbsp;

Would a 40% government stake in Citi be enough?

http://dealbook.blogs.nytimes.com/2009/02/23/would-a-40-government-stake-in-citi-be-enough/

Nick Gilligan (2.23.09)

Will President Obama's stimulus package work?

http://www.dailystar.com.lb/article.asp?edition_id=10&categ_id=3&article_id=99492#

Caleb Rozwenc (2.21.09)

Article on international concerns about the U.S. stimulus package

http://www.iht.com/articles/2009/01/29/business/borrow.4-419037.php?page=2

Chris Valentine (2.21.09)

Some insights into the different types of spending in the stimulus bill:

http://www.usatoday.com/money/economy/2009-02-12-stimulus-package-effects_N.htm

Matt Himler (2.20.09)

http://dealbook.blogs.nytimes.com/2009/02/20/friday-humor-the-tarp-illustrated/

Clint Marhcese (2.18.09)

An $800 Billion Mistake

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/28/AR2009012802938.html&nbsp;

How to Help People Whose Home Values Are Underwater

http://www.nber.org/feldstein/wsj11182008.html

Mike Hinckley (2.18.09):

Obama, an economic unilateralist

http://www.atimes.com/atimes/Global_Economy/KB18Dj05.html

Tim Thornton (2.17.09):

http://online.wsj.com/article/SB123482899369695367.html?mod=article-outset-box

Brad Corbin (2.17.09):
"The Return of the Merger of Equals"

http://dealbook.blogs.nytimes.com/2009/02/17/the-return-of-the-merger-of-equals/

Matt Himler (2.16.09):

Why 'Stimulus' Will Mean Inflation?

http://online.wsj.com/article/SB123388703203755361.html?mod=todays_us_opinion

Mike Hinckley (2.16.09):

Who will buy all those Treasurys?

http://money.cnn.com/2009/02/13/news/economy/breaking_views.breakingviews/index.htm?postversion=2009021311

S. J. Gabriel (2.16.09):

What's So Bad About a Banker Brain Drain?

http://www.truthout.org/021509A

S. J. Gabriel (2.13.09): 

Why Obama's TARP Plan Will Fail to Rescue the Banks

http://www.ft.com/cms/s/0/9ebea1b8-f794-11dd-81f7-000077b07658.html?nclick_check=1

Matt Himler (2.7.09): 

In Defense of Bankers

http://www.newsweek.com/id/183680

Matt Himler (2.7.09):

Roy Smith (NYU Professor and Goldman Partner): Greed is Good

http://online.wsj.com/article/SB123396915233059229.html

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