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Secondary Sources: Bank-Rescue Complaints, Monetary Policy, Savings

Posted by Michael Stone in Economy on 02 11th, 2009 | no responses

A roundup of economic news from around the Web.

More Bailout Reactions: Writing for the Financial Times, Martin Wolf says the new financial-rescue plan wonâ€™t work. â€œAll along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency. Under the first view, the prices of a defined set of â€œtoxic assetsâ€ have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. This was the rationale for the original Tarp and the â€œsuper-SIV (special investment vehicle)â€ proposed by Henry (Hank) Paulson, the previous Treasury secretary, in 2007. Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilitiesâ€¦ Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so. But this is not the heart of the matter. That is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best. The answer is clear: rational policymakers must assume the worst. If this proved pessimistic, they would end up with an over-capitalized financial system. If the optimistic choice turned out to be wrong, they would have zombie banks and a discredited government. This choice is surely a â€œno brainerâ€. The new plan seems to make sense if and only if the principal problem is illiquidityâ€ Meanwhile, on RGE Monitor, Nouriel Roubini says itâ€™s time to nationalize the banks. And at the Baseline Scenario, Simon Johnson says that the government needs to be tougher on the bankers.

Monetary Policy: On his blog, David Beckworth wonders whether monetary policy really has reached its limits. â€œHow do we know that unconventional monetary policy is not working? On the credit crunch front there is evidence that the Fedâ€™s policies are working to some degree as pointed out at macroblog. Also, monetary policyâ€™s effect on the real economy typically occurs with a lag so it seems premature to pass judgment here. Second, are we even sure that unconventional monetary policy is being fully exploited? I say this because of the Fedâ€™s policy of paying interest on excess reserves. This policy seems highly counterproductive given the state of the economy. What would happen if the Fed dropped this policy and did not attempt to sterilize these reserves? I suspect we would not see [skyrocketing excess reserves]. For those who are concerned that such a move would let the inflation genie out of the bottle I would (1) point you to this troubling figure that suggests deflation is more of a threat and (2) ask you to read Nick Roweâ€™s discussions here and here. It is possible that banks would continue to hang on to the excess reserves in the absence of this policy, but given the improvements in credit markets it seems that at least some of these excess reserves would be put to good use. So I ask again is U.S. monetary policy really tapped out?â€

To Spend or Save: David Leonhardt of the New York Times looks at the paradoxical problem of the increased savings rate and finds some ways to increase spending to eventually boost savings. â€œMost people could save themselves a good bit of money by giving proper respect to their future self. They could spend a little now and save a lot later. McKinsey & Company recently analyzed household spending on energy, for example, and found enormous waste. People heat their homes when they are not there and, thanks to leaks in their walls and heating ducts, also heat the airspace above their roof. A programmable thermostat, which adjusts the temperature when people are out of the house or asleep, can cost as little as $50. For less than $1,000, people can buy the thermostat, as well as hire a contractor to fix leaks and replace their light bulbs with more efficient ones. In either case, the spending often pays for itself in just a year or two. â€œThere is a difference between consuming and investing,â€ says Ken Ostrowski of McKinsey. â€œAnd energy efficiency falls more into the category of investing.â€ I asked behavioral economists for some other examples, and they helped me come up with a nice little list. Parents of young children can join Costco and make up their membership fee with just a few months of diaper purchases. Drivers can inflate their tires, change their air and fuel filters and start getting better mileage. Frequent book buyers who donâ€™t mind screen reading can buy the new Kindle. It costs $359, but most new books then cost less than $10.â€

Compiled by Phil Izzo