Category Archives: Financial Crisis

Economics, Finance, Financial Crisis, Health Care Reform, Politics

Assorted Links (11/4/2009)

Leave a comment

Here’s a list of articles that I have been reading today, accompanied in some cases with some of my own commentary (organized by topic):

The Economy

  • In the Battle for Stimulus Jobs, Shoe Store Owner Tells War Story, by Louise Radnofsky

Here’s a practical, step-by-step guide to “creating or saving” 9 jobs for only $889! Thanks to Greg Mankiw for the pointer! Professor Mankiw has previously written on “Create or Save“, where he notes, among other things, that while this “statistic” is politically clever, it is based upon counterfactual reasoning and not measurable in any meaningful sense.

The White House uses this created or saved “metric” regularly; e.g., last Friday, the White House claimed that the $787 billion economic stimulus plan approved early this year “…has generated or saved more than 1 million jobs” and that “…it is on track to create or save 3.5 million jobs by the end of next year.” (Source: “White House: 1 million jobs created or saved”).

Finance and the Financial Crisis

  • Is Market Efficiency the Culprit?, by Eugene Fama

“Justin Fox (“The Myth of the Rational Market”) and many other financial writers claim that much of the blame for the financial meltdown is attributable to a misguided faith in market efficiency that encouraged market participants to accept security prices as the best estimate of value rather than conduct their own investigation. Is this a fair assessment? If so, how should policymakers respond?”

Health Care Reform

Professor Mankiw points out an important unintended consequence associated with the House of Representatives’ version of health reform unveiled last Thursday by Speaker Nancy Pelosi.  Specifically, the House bill imposes very high implicit marginal tax rates on labor income.  For example, a family of four earning $54,000 would pay only about 1/3 of the actual cost for health insurance. However, if that same family earns additional income of $12,000, then the health insurance subsidy falls by $3,800, which translates into an implicit marginal tax rate of 3,800/12,000 = 32 percent.  This is an implicit tax that must be “paid” on top off of all the other explicit (income and payroll) taxes which normally apply to $66,000 of personal income.

Politics

  • Obama and the Liberal Paradigm, by John Stele Gordon

“The sheep are quite capable of looking out for themselves. Someone tell the Democrats.”

Economics, Financial Crisis, Public Policy

More on the economics of the Car Allowance Rebate System (CARS); AKA “Cash for Clunkers”

Leave a comment

Yesterday, I blogged concerning The economics of the Car Allowance Rebate System (CARS) and the First-Time-Home-Buyer Tax Credit (FTHBTC).  I brought up the topic of economic stimulus but didn’t follow through on it.  In what follows, I will try to make some assessment of stimulus possibilities based upon data reported in the article entitled “Cash for Clunkers Results Finally In: Taxpayers Paid $24,000 per Vehicle Sold, Reports Edmunds.com”.

If you read the Edmunds.com article referenced above a bit more closely, you’ll notice the following table which compares (annualized) Actual/Forecast sales with and without Cash for Clunkers:

Month Actual (or Forecast) If no Cash for Clunkers Difference
Jan ’09 9.59 9.59 0.00
Feb ’09 9.14 9.14 0.00
Mar ’09 9.69 9.69 0.00
April ’09 9.20 9.20 0.00
May ’09 9.85 9.85 0.00
Jun ’09 9.67 9.80 -0.13
Jul ’09 11.22 10.11 1.11
Aug ’09 14.06 10.45 3.61
Sep ’09 9.19 10.63 -1.44
Oct ’09 10.40 10.89 -0.49
Nov ’09 10.40 10.82 -0.42
Dec ’09 10.61 10.85 -0.24

The numbers in this table indicate annualized auto sales rates (actual or forecast) on a monthly basis during 2009 (the monthly unit sales is calculated by dividing the annualized data by 12, so this implies that in May 2009, 9.85 million/12 = 820,833 new cars were sold in the United States). 

This table clearly indicates that the primary effect of CARS was to change the timing of vehicle sales, and that it had a very limited effect on total volume; specifically, during the months in which CARS was in full swing (i.e., July and August, 2009), more sales were generated than would have been the case had the program not been implemented. The program stimulated temporarily higher sales rates last summer primarily by motivating people who would have bought cars anyway to simply act sooner.  The overall effect of CARS during 2009 is to increase new car sales in the United States by a total of 1.65%, which translates into an additional 170,000 unit sales (obviously, it will be interesting to see how long it takes for new car sales to revert back to the seasonally adjusted trend line).  After the program expired, the auto industry had marginally worse sales than they normally would have expected simply because some of the sales that “should” have occurred in September through December occurred instead during July-August.  Based upon this analysis, I stand by my earlier assertion; i.e., that as far as stimulus measures go, CARS most certainly had a very low (probably close to 0) multiplier effect upon the overall economy.

Economics, Financial Crisis, Public Policy

More on the economics of the Car Allowance Rebate System (CARS); AKA "Cash for Clunkers"

Leave a comment

Yesterday, I blogged concerning The economics of the Car Allowance Rebate System (CARS) and the First-Time-Home-Buyer Tax Credit (FTHBTC).  I brought up the topic of economic stimulus but didn’t follow through on it.  In what follows, I will try to make some assessment of stimulus possibilities based upon data reported in the article entitled “Cash for Clunkers Results Finally In: Taxpayers Paid $24,000 per Vehicle Sold, Reports Edmunds.com”.

If you read the Edmunds.com article referenced above a bit more closely, you’ll notice the following table which compares (annualized) Actual/Forecast sales with and without Cash for Clunkers:

Month Actual (or Forecast) If no Cash for Clunkers Difference
Jan ’09 9.59 9.59 0.00
Feb ’09 9.14 9.14 0.00
Mar ’09 9.69 9.69 0.00
April ’09 9.20 9.20 0.00
May ’09 9.85 9.85 0.00
Jun ’09 9.67 9.80 -0.13
Jul ’09 11.22 10.11 1.11
Aug ’09 14.06 10.45 3.61
Sep ’09 9.19 10.63 -1.44
Oct ’09 10.40 10.89 -0.49
Nov ’09 10.40 10.82 -0.42
Dec ’09 10.61 10.85 -0.24

The numbers in this table indicate annualized auto sales rates (actual or forecast) on a monthly basis during 2009 (the monthly unit sales is calculated by dividing the annualized data by 12, so this implies that in May 2009, 9.85 million/12 = 820,833 new cars were sold in the United States). 

This table clearly indicates that the primary effect of CARS was to change the timing of vehicle sales, and that it had a very limited effect on total volume; specifically, during the months in which CARS was in full swing (i.e., July and August, 2009), more sales were generated than would have been the case had the program not been implemented. The program stimulated temporarily higher sales rates last summer primarily by motivating people who would have bought cars anyway to simply act sooner.  The overall effect of CARS during 2009 is to increase new car sales in the United States by a total of 1.65%, which translates into an additional 170,000 unit sales (obviously, it will be interesting to see how long it takes for new car sales to revert back to the seasonally adjusted trend line).  After the program expired, the auto industry had marginally worse sales than they normally would have expected simply because some of the sales that “should” have occurred in September through December occurred instead during July-August.  Based upon this analysis, I stand by my earlier assertion; i.e., that as far as stimulus measures go, CARS most certainly had a very low (probably close to 0) multiplier effect upon the overall economy.

]]>

Economics, Finance, Financial Crisis, Public Policy

57th Annual Management Conference 2009 on “The Future of Markets” at University of Chicago

Leave a comment

I would like to call attention to the 57th Annual Management Conference 2009 on “The Future of Markets”, held at the University of Chicago Booth School of Business, May 29, 2009.  Of particular interest is the 2 hour, 7 minute long keynote panel webcast featuring the following six University of Chicago faculty panelists:

  • Gary Becker, University Professor of Economics and of Sociology and winner of the 1992 Nobel Prize in Economics
  • Kevin Murphy, George J. Stigler Distinguished Service Professor of Economics
  • Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance
  • Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance
  • Marianne Bertrand, Fred G. Steingraber/A. T. Kearney Professor of Economics
  • Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance

Click here for an executive summary of the keynote panel. For some context on the panel members, read the “Conference Pre-Reading“. Also, the discussion (roughly 1 hour long) featuring Ted Snyder and Gene Fama (from the same conference) on the question “Is the stock market an “efficient” market? is also very worthwhile (executive summary here). Ironically, even though the keynote panel and Fama webcasts took place nearly two months prior to the publication of the Economist cover article (dated 7/16/2009) entitled “What went wrong with economics (and how the discipline should change to avoid the mistakes of the past)”, these webcasts address many of the issues that were brought up in the Economist article.

Economics, Finance, Financial Crisis, Public Policy

57th Annual Management Conference 2009 on "The Future of Markets" at University of Chicago

Leave a comment

57th Annual Management Conference 2009 on “The Future of Markets”, held at the University of Chicago Booth School of Business, May 29, 2009.  Of particular interest is the 2 hour, 7 minute long keynote panel webcast featuring the following six University of Chicago faculty panelists:

  • Gary Becker, University Professor of Economics and of Sociology and winner of the 1992 Nobel Prize in Economics
  • Kevin Murphy, George J. Stigler Distinguished Service Professor of Economics
  • Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance
  • Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance
  • Marianne Bertrand, Fred G. Steingraber/A. T. Kearney Professor of Economics
  • Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance
Click here for an executive summary of the keynote panel. For some context on the panel members, read the “Conference Pre-Reading“. Also, the discussion (roughly 1 hour long) featuring Ted Snyder and Gene Fama (from the same conference) on the question “Is the stock market an “efficient” market? is also very worthwhile (executive summary here). Ironically, even though the keynote panel and Fama webcasts took place nearly two months prior to the publication of the Economist cover article (dated 7/16/2009) entitled “What went wrong with economics (and how the discipline should change to avoid the mistakes of the past)”, these webcasts address many of the issues that were brought up in the Economist article.]]>

Economics, Finance, Financial Crisis, Public Policy

Financial Times and Goldman Sachs Business Book of the Year Longlist

Leave a comment

Here’s the “longlist” for the 2009 Financial Times and Goldman Sachs Business Book of the Year Award. Apparently this list will get whittled down to a “shortlist” on September 17, and the “winner” will be announced at the end of October at a gala event in London.

  1. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A Akerlof, Robert J Shiller
  2. Clever: Leading Your Smartest, Most Creative People by Rob Goffee, Gareth Jones
  3. Free: The Future of a Radical Price by Chris Anderson
  4. Good Value: Reflections on Money, Morality and an Uncertain World by Stephen Green
  5. House of Cards: A Tale of Hubris and Wretched Excess on Wall Street By William D Cohan
  6. How the Mighty Fall: And Why Some Companies Never Give in by Jim Collins
  7. Imagining India: The Idea of a Renewed Nation by Nandan Nilekani
  8. In Fed We Trust: Ben Bernanke’s War on the Great Panic by David Wessel
  9. Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed
  10. The Match King: Ivar Kreuger, the Financial Genius Behind a Century of Wall Street Scandals by Frank Partnoy
  11. The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox
  12. Supercorp: How Vanguard Companies Create Innovation, Profits, Growth, and Social Good by Rosabeth Moss Kanter
  13. This Time Is Different: Eight Centuries of Financial Folly by Carmen M Reinhart, Kenneth Rogoff
  14. Waste: Uncovering the Global Food Scandal, by Tristram Stuart
  15. Why Your World Is about to Get a Whole Lot Smaller: Oil and the End of Globalization by Jeff Rubin

I have read only two of the books on the list (cf. items 5 and 11 below), so it looks like I have some catching up to do!

The ft.com article entitled “Reading into financial crises past, present and future” provides a useful synopsis of these books.

Financial Crisis

GM Seeks $16.6 Billion More in U.S. Aid

Leave a comment

Today’s page 1 story in the Wall Street Journal is entitled “GM Seeks $16.6 Billion More in U.S. Aid”. After reading the article, I was mostly surprised and disturbed by Rick Wagoner’s claim that “bankruptcy scenarios are ‘risky’ and ‘costly,’ and would only be pursued as a last resort” (Mr. Wagoner is GM’s chairman and chief executive officer). While it is certainly plausible that GM and Chrysler would need $100 billion and $24 billion respectively in order to go through the Chapter 11 bankruptcy, it seems like false accounting to me for these companies’ top executive officers to argue that bankruptcy would be more expensive for the U.S. taxpayer than bailout loans. This is a very self-serving argument which is motivated more by enlightened self-interest than concern for the public good.

If these companies were to go through Chapter 11 bankruptcy, there is no question that they would need so-called “Debtor-in-possession or DIP financing“. Given their impaired credit statuses, both companies would find it difficult, if not impossible, to obtain DIP financing from private investors. However, it does not therefore follow that the U.S. taxpayer should have to fund these loans. A better (and far less expensive) strategy for the government to follow would be to simply provide DIP financing guarantees to private investors. These investors would have compelling incentives to closely monitor the bankruptcy processes for both firms so as to maximize the likelihood that they emerge from Chapter 11 bankruptcy protection as viable organizations. Although insurance is never “free”, the ex ante cost of a contingent guarantee backstop for the DIP financing would be substantially less than the cost of a bailout loan, and such a strategy would have a far better chance (due to better incentives for monitoring by investors and for the companies themselves to work out sensible deals with their various stakeholders) at producing the policy outcome that the government wants; i.e., a viable U. S. automobile industry.

Financial Crisis

An Historical Perspective on Market Volatility

Leave a comment

On their new blog, Fama and French note the following concerning market volatility (see “Q&A: The Value of Historical Data”):

“Large declines in stock prices occur several times during the last 80 years. The nearby plot of the volatility of daily market returns shows that the current high volatility also has precedents in 1987 and in the 1930s, and to a lesser extent in 2000-2002. Periods of business uncertainty (for example, the onset of a recession) are typically associated with stock price declines and increases in volatility.”

Here’s the graph which goes along with their verbal description:

Intra-Month Daily Volatility, S&P 500, July 1926 to October 2008

One can obtain a rough estimate of annualized volatility from this graph by multiplying daily volatility by 19.1, which is the square root of the number of days (365) in a year. Thus the October 1929, October 1987, and October 2008 spikes correspond to annualized volatility of 86% to 95%. Putting this into perspective, the long run average annualized volatility for the S&P 500 since 1926 has been more like 20%.

See also my earlier posts on market volatility; specifically, “Frequency Diagram for the Implied Volatility Index, January 2, 1990 – October 10, 2008” and “Volatility“.