Thursday, May 28, 2009

Hard to imagine a worse way to spend $40 billion

Read it and weep:

The filing also disclosed that GM will not repay the loans it has already received from the government or any additional federal aid it will get as part of the bankruptcy. When all is said and done, total assistance to GM is expected to reach nearly $40 billion.

Instead, the government will convert that debt into a 72.5% stake in the new company. This means that for taxpayers to make back any of the money loaned to GM, it will have to be because shares of the new GM increase in value following an exit from bankruptcy.

I would rather the government spend it on a national toilet paper reserve.  Why this is so much worse than similar bank deals is that GM is not likely to recover any time soon, and everyone knows that.  Banks suffered from a sudden lack of market confidence, which government replaced to some extent with its explicit backing.  GM suffered from a chronic quality problem, and there is no reason to think this will be fixed with government backing.  You can make the same kind of argument with banks, and I do think to so some extent it is a matter of degree.  But fundamentally, the government is good at providing liquidity but bad at providing quality.  Nevertheless, I'm not betting on GM or the banks. 

Wednesday, May 27, 2009

The next big thing

The VAT, i.e. value added tax, or what I call the start-looking-for-another-place-to-live-besides-the-US-or-Europe-tax:

And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent. A gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250, but the nation's debt would stabilize and everybody could see a doctor.

Burman, who helped House Democrats craft an unsuccessful 2007 plan to repeal the alternative minimum tax, said he's received a number of phone calls from lawmakers interested in his idea, though "they can't quite imagine how to make it happen politically." Burman said the 25 percent rate has caused some sticker shock, and he's trying to figure out how to bring it down.

Graetz's proposal drew an endorsement from Volcker, who last year called it "a sensible plan for reform." (Volcker did not respond to a request for comment.) It also has piqued the interest of Conrad, the Senate Budget Committee chairman who argues that it could be modified to accommodate Obama's pledge not to raise taxes on families who make less than $200,000 a year.

Seems inevitable.  I'm not opposed to substituting the VAT for the income tax, but we know that's not what will happen.

Saturday, May 23, 2009

Why does Newsweek exist?

Michael Kinsley on the magazine's makeover:

What, for example, is this graphic on the letters page? Why, for that matter, is there still a letters page? It's the first page of content you come to. Five one-paragraph comments on the issue published two weeks ago--room for little more than a thumbs up or down. On the Internet, thousands of people have their say immediately and at length. And then a self-parody: "Your thoughts on swine flu" -the cover story two weeks ago--"in six words." Hali McGrath of Berkeley, California, submitted, "Blah, blah, swine flu, blah blah." And Newsweek published it.

My mother has subscribed to Newsweek I think my entire life.  I don't recall ever reading anything enlightening, and the thumbs up thumbs down bull shit simply infuriated me.  I think Newsweek must exist on mom-inertia.

Too big to jail

While it's not the first best solution (get rid of federal deposit insurance and bailouts), I think we can call it a second best:

The agency [FDIC] traditionally collected a percentage of the deposits held by each bank, adjusted for the health of the institution. It now further adjusts to reflect the likely cost of a bank's failure, based on its business model.

The latest assessment goes one step further, moving away from the deposit model. Instead, the FDIC will collect 0.05 percent of each bank's assets, the amount of money loaned, invested or otherwise committed to customers. Smaller banks tend to have roughly the same amount of assets and deposits, because they lend to borrowers what they collect from depositors. But larger banks also lend money from other sources, such as borrowed money -- and as a result they now face larger assessments.

To limit the impact, the FDIC charged only the bare minimum required to keep the fund from dwindling to nothing, based on its projections of future bank failures. It backed away from a plan to collect a larger amount now, but officials said a second special assessment was likely at the end of the year.

I'm assuming, hoping, that the asset model involves adjusting for the health, i.e. risk, of the assets.

Monday, May 18, 2009

Gary Gorton on the shadow banking system

Tyler Cowen and Arnold Kling comment on Gary Gorton's new paper.  Here's the main idea:

Periodic banking panics have been the norm in U.S. history. But the panics appeared to end in the U.S. when deposit insurance was legislated in 1934. Combined with valuable bank charters and oversight by bank examiners, the Quiet Period was created. What changed? Bank charter values eroded under competition. Securitization is a more efficient way to finance loans. The growth of derivative securities caused an enormous demand for collateral. Over twenty-five years the shadow banking system evolved to meet the needs of this modern economy. Unfortunately, the vulnerability to panic was also produced.

Gary has an incredible knack for details and more than anyone else I've read he seems to be abreast of how the modern banking system is evolving.  But I don't get why he doesn't apply the same rigour to understanding the pre-Fed era.  Here's my comment on Tyler's post:

I don't understand how Gorton can honestly review the history of pre-Fed banking in the US and conclude that the frequent panics were all market failures and that federal deposit insurance finally saved the day in 1934. Does he know anything about the experience of free banking in Scotland or Canada or Australia? Panics occurred in the pre-Fed US precisely because of severe regulatory restrictions on branch and interstate banking and the bond-deposit requirement for bank note issuance. These regs didn't exist in Scotland, Canada, or Australia in the 19th century and things worked out great. Gorton's whole analysis stems from this assumption, so naturally he thinks federal deposit insurance should be extended to the shadow banking system. Instead, I think it's more likely that the shadow banking system, as the name implies, has evolved to avoid the regulations and the regulators and will continue to do so with each new regulation.

Wednesday, May 6, 2009

Interview with George Selgin

By the Richmond Fed.  It's an excellent overview of free banking.  This is my favorite part:

Freedom to issue notes is important too. When banks can’t issue their own notes, well, they need a lender of last resort to supply them with notes. If we told companies that manufacture shoes that henceforth they could only make shoes for left feet, lo and behold, there would be a need for an “emergency” source of shoes for right feet, which could be created by establishing a new government agency for the purpose. Eventually people would say, “Thank goodness for the Government Shoe Agency. How would anyone be able to walk otherwise?”

By the way, I have the privledge of working with George on my dissertation, which involves using laboratory methods to explore the macro and business cycle implications of free banking versus central banking.