What are the chances of muni doomsday?
– Meredith Whitney took her muni-doomsaying to 60 Minutes
this week: “There’s not a doubt in my mind that you will see a spate of municipal bond defaults,” Whitney predicted. “You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars’ worth of defaults.” …
Whitney’s appearance on the telly has prompted another round of rebuttals from those who think that the threat to the muni market is massively overblown. Cyrus Sanati
, for one, reckons that there’s “a myriad of safeguards” in place to prevent a big round of defaults. And first on the list is the standard logic that we’ve been getting from California, especially, for years: States are not people or corporations — they cannot declare bankruptcy. A large portion of California’s debt is in general obligation bonds, which are mandated to be paid first before anything else in the state – period.
This is true, but I don’t find it particularly reassuring. A bond is a promise to pay; the mandate that Cyrus is talking about is essentially a promise to keep that promise. If you can break your promise when you default, you can break your promise to privilege bonded debt over other obligations. The other big argument in Cyrus’s piece is that munis won’t default in the future because they haven’t defaulted in the past:
. Scott Sumner: "It’s complicated."
– My National Review
piece has led a number of very smart bloggers to mull over my ideas, including Brad DeLong
, Tyler Cowen and Ryan Avent. . I’ve noticed is that it’s easier to see flaws in others than to see one’s own flaws. For instance, I think I can see flaws in Paul Krugman’s analysis of China’s predatory trade policy, or his analysis of why Japan got stuck in a liquidity trap. But strangely enough, I have trouble find major flaws in my own arguments (although I certainly see some modest weaknesses.) If I try to crawl out of my own ego and look at things dispassionately, then I need to take seriously an issue raised by not one but two highly respected bloggers. I’m referring to a recent Ryan Avent post that favorably quoted a question Tyler Cowen recently asked me. Here’s Ryan Avent
, followed by the Tyler Cowen question:
Is there a bubble in the Chinese housing market?
– For many analysts, the Chinese economy is spurred by a bubble in the housing market, probably driven by the fiscal stimulus package and massive credit expansion, with pos-sible adverse effects to the real economy. To get insights into the size of the bubble, the house price evolution is investigated by panel cointegration techniques. Evidence is based on a dataset for 35 major cities. Cointegration is detected between real house prices and a set of macroeconomic determinants, implying that a bubble exhibits mean-reverting behaviour. The results indicate that the bubble is about 25 percent of the equi-librium value implied by the fundamentals at the end of 2009. The bubble is particularly huge in the cities in the southeast coastal areas and special economic zones. While the impact of real house prices on CPI inflation appears to be rather strong, GDP growth may not be heavily affected. Thus, a decline of the bubble will likely have only modest effects on the real economy.
Salvaging the Equation of Exchange
– Jim Hamilton is not a big fan of this equation: MV = PY,
This is the famous equation of exchange where M
is the money supply, V
is velocity, P
is the price level, and Y
is real GDP. Back in 2009 he questioned
Scott Sumner’s use of it in thinking about the economic crisis. I replied
that though it was just an accounting identity, it still shed some light on the economic crisis in its expanded form. Now he is questioning
its use as a way to measure velocity. He correctly notes that velocity is nothing more than a residual from this accounting identity, whose value can change based on what measure of the money supply one uses (i.e. V =[PY]/M). He further questions its usefulness by noting in several figures that M1’s growth rates seem to be almost perfectly offset by changes in velocity’s growth rate. Here is a figure that reproduces Hamilton’s M1 graphs for the 1980-2010 period
. Yes, it is rather striking in this figure that the growth rate of M1 and M1 velocity tend to move in almost perfectly opposite directions. But why should the growth rates of M1 and M1 velocity necessarily move in opposite directions?
– I’m late to seeing this, and Bruce has probably already covered it, but Doug Elmendorg at the CBO inadvertently gives away the game
on the Administration’s approach to—let alone opinion of—the Social Security "Trust Fund": The balances in trust funds have accrued because income associated with those programs has exceeded the expenses; when that happens, the surplus cash flow is used to finance the government’s ongoing activities, and the trust fund is credited with a corresponding amount of Treasury securities. Although trust funds have an important legal meaning, in that they may constrain the amount a program can spend, they are essentially an accounting mechanism and have little relevance in an economic or budgetary sense. The value of Treasury securities held by trust funds and other government accounts measures only some of the commitments the government has made, and it includes some amounts that may not represent future obligations at all
. Pay particular attention to that last; it’s the closest you’ll find to an acknowledgement from a government official that There is No Crisis.
More on the FDIC’s Fight Versus Other Bank Regulators on Servicer Abuses; Rep. Miller Backs More Aggressive Action – Yves Smith – We’ve mentioned that the FDIC has been pushing to reform the securitization process, including imposing standards on servicers. That has put it at odds with the bank-friendly Treasury and Office of the Comptroller of the Currency (the SEC has proposed securtization reforms but of a much more modest nature than the FDIC’s). This behind the scenes battle is heating up further because Dodd Frank calls on bank regulators to draft new rules to improve the operation of the mortgage securitization market. The FDIC intends to include mortgage servicer behavior in those provisions and want the rules ready in January. The pressure to take action has increased with a spate of hearings last month (two Senate Banking Committee, one House Financial Services, the Senate Judiciary Committee, HUD, plus the release of a blistering COP report and related chat with Geithner) and the FCIC report due out next month. The publication of a letter to banking regulators signed by 50 experts urging action was joined by a letter by Representative Brad Miller, which is apparently also garnering Congressional support. The trigger for both missives is the failure of the authorities to act on provisions in Dodd Frank related to securitizations: Representative Brad Miller 941 Letter
Hundreds of anti-BofA web sites registered – Hundreds of website addresses that disparage Bank of America executives and board members were registered in recent days in an apparent effort to protect the bank and its senior leaders, according to internet companies who track the buying and selling of such domain names. More than 300 addresses that disparage BofA officials using variations on “sucks” and “blows”, including BrianMoynihanBlows.com and BrianMoynihanSucks.com, referring to the bank’s chief executive, were registered on December 17.
The rich get richer
– America’s wealthiest households in 2009 had net worth that was 225 times greater than the median family net worth. As the Figure
shows, that ratio between those at the top and everyone else reached a record high in 2009. Wealth, or net worth, is a measure of a family’s total assets, including real estate, bank account balances, stock holdings, and retirement funds, minus all of their liabilities such as mortgages, student loans, and credit card debt. Although economic inequality is often described in terms of income inequality
, the distribution of wealth is actually more unequal than the distribution of wages and income. And, while wages and income provide some indication of a family’s ability to afford essentials like housing, food, and health care, accumulated assets, or wealth, can make it easier for them to invest in education and training, start a business, fund a retirement, and otherwise invest in their future. Since accumulated assets also provide a cushion against job loss and other financial emergencies, this growing wealth disparity shows why some households are more devastated by unemployment, illness, and other factors that cause a temporary loss of income.
What Are Ratings Agencies For?
– There’s no question that the credibility of the ratings agencies has been called into question by the performance of the enormous amount of toxic sludge that they rated AAA during the housing bubble. So I do understand the complaints that they’re still around, influencing markets by what they say, without having ever really explained very well how they got it so monstrously wrong in the first place. However, I don’t really understand this complaint: I think that’s basically a reference to the rating agencies — it’s not the most clearly written piece, though it makes up for that with passion. Anyway, he’s right: the rating agencies, and in general the poo-bahs of finance, brought this crisis on the world — and are now solemnly lecturing nations about the evils of the deficits incurred mainly to fight the crisis.
I don’t really read Moody’s, et al. as "lecturing" anyone about the evils of their deficits. Moody’s job is not to make countries into better, more fiscally responsible people. It’s to advise people about the risk of default of the bonds they might buy.
Incentives Matter: Bank Regulatory Edition –
Tyler Cowen explains
why he doesn’t think we are going to get the banking system that either left or right dream of: one where bankers and their creditors take a bath when there’s a crisis, and the incentives for risk-taking are properly aligned. Read the whole thing, but for me here’s the critical paragraph: Let’s say a no-bailout policy was credible, as indeed it was in the 19th century (there were no bailout facilities). What does the equilibrium look like? Is there less long-term lending to banks and more short-term lending? Would that make banks more or less stable? Few people think this is a positive development for countries. Would banks be more subject to "capital flight" risk? We also could expect greater mutualization of banks, as was the case before deposit insurance, and we could expect experimentation with corporate forms other than limited liability. My view is this is what would be required to limit excess bank risk-taking. Yet I believe that, for better or worse, it it is politically impossible. In a nutshell,big government needs big finance (or much higher taxes).