10/02/2008

New Analysis piece up at Fox News: Analysis: Economists Raise Concerns About Bailout Plan

The new analysis piece starts off this way:

While some politicians were reconsidering their opposition to the bailout this week, there is one group that still expresses a lot of concerns with the legislation: economists.


Interviews conducted with a dozen prominent academic economists, Obama supporters as well as McCain supporters, found little support for the bailout bill. Indeed, even the one economist who supported the proposal passed by the Senate Wednesday night had serious reservations.


Jonathan Berk, an award-winning finance professor at Stanford University and a strong opponent of the bailout plan, expressed the concerns of many: “I have never been so frustrated, I have never wanted to speak out publicly before on these political issues, but politicians don’t know what they are doing, they know nothing about these issues.”


The economists did not all emphasize the same reasons for the current financial crunch and they all did not agree how serious the problem is. But there are a number of similarities that can be seen in all their answers.


There is little agreement on how serious the current problems are. Take the statements from three of the economists. John Cochrane, a professor at the University of Chicago Business School, worried that the solution was out of all proportion to the problem.


The legislation is like this: some boats are sinking, so rather than bailing those boats out, you blow up the dam and drain the whole lake.

. . . .



Piece is at the top of the page on Fox News.


David Friedman has comments on the issues in my piece here and here.

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6 Comments:

Blogger Jim Lagnese said...

John, I have a question that may be you can help me with: I read that banks are holding on to and hoarding money, which is partially responsible for causing the crunch. If that is the case, why should we substitute our money for theirs? Should they show good faith and expose themselves to that risk? If they won't, why should we?

10/02/2008 3:07 PM  
Blogger John Lott said...

Thank you. Banks are not "hoarding" money. If they are keeping larger reserves, they must believe that they have a good reason to protect themselves from possible runs that could happen on them or that they face other problems that they want to protect themselves from.

10/02/2008 3:14 PM  
Blogger Jim Lagnese said...

I am not an economist, so I am trying to get a grip on this. So if that's the case, can they weather this latest storm by doing that or are they going to sink anyway? And if we bail them out, in the context of the former question, is it throwing good money after bad? Unless I am missing something, this crash seems more like a couple flat tires. I apologize in advance if I am being didactic and facile with this.

10/02/2008 3:29 PM  
Anonymous Anonymous said...

John, My wife wants to take $10K out of our savings account and put it in the "mattress" just in case the banking problems spread to ATM and credit cards. Your thoughts?

10/02/2008 4:19 PM  
Anonymous Patrick Moore said...

John,
I am a stock/investment broker and have been for 15 years.
I saw your article on Foxnews.com and contacted Paul Evans to share my solution. This is what he had to say about my simple idea:

"So perhaps your suggestion would be the silver bullet for the current crisis."

My idea is SIMPLE and will return TRILLIONS of dollars INSTANTLY. Please take 2 minutes to read it and understand what the real problem is and see if we can get some support for this thing.

http://www.PatricksPlan.Com

10/02/2008 5:02 PM  
Anonymous bornskeptic said...

Patrick, I don't doubt that forcing banks to mark to market securities in no-bid markets has led to bad things. But, I'm not sure about a couple of your cds assumptions. First, I think you're assuming that the whole cds market is tied to subprime. I'm seeing numbers thrown around from $45 billion to $54 billion of the cds market, but this encompasses much, much more than just subprime. I'd think you might be more interested in just the cds related to subprime (whatever that amount is).

Second, I don't get how you think the banks are all on the same money-losing side of those cds contracts. Sure, no doubt some were stupidly selling cds contracts at those incredibly low premiums that existed a few years ago (gotta believe AIG did a ton of that and is a big part of the reason they have gotten smashed), but I'm not sure I'd assume that, as a general proposition, banks who were long subprime mortgages and/or MBS would also be short the subprime cds. If anything, I'd think they'd want to be long the cds contracts, as a hedge, and a cheap hedge at that, given how low vols were when this stuff was all going up, unless they were so stupid they wanted to dramatically increase their leverage to subprime. If they were long the cds contracts (or short the ABX index contracts), then those positions would make money as subprime tanked.

So, I think anyone who's sold cds contracts a year or two ago has gotten hammered as cds levels have gone up dramatically. I'm just not sure how many of the banks were on that side of the trade (maybe a lot, but I'd like to see some evidence to that effect).

The whole discussion does though raise something I've wondered about from time to time. That is, how much of the terrible downward mark-to-market that has happened to subprime related securities on the balance sheet of banks has been generated by extreme price movements in the cds contracts and not the mortgage securities themselves? Or, even a further level removed, how much has been caused by moves in index prices of cds contracts, on mortgage securities, (with orders of magnitude less trading at each level in the chain). Perhaps some of this might explain how prices of these securities seem to have diverged so far from the underlying economics of the actual mortgage holders.

10/03/2008 2:35 AM  

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