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Secondary Sources: Nationalize, Mortgage Deductions, Good/Bad Banks

Posted by Michael Stone in Economy on 02 24th, 2009 | no responses

A roundup of economic news from around the Web.

Privatize the Banks: Writing for the Baseline Scenario, Simon Johnson says itâ€™s time to privatize the banks, since they have been de facto nationalized already. â€œWhy have we de facto nationalized? Because the private credit system - particularly large banks - is weakened and not getting any better. Attempts to deal with the problem banks are apparently blocked by the political power of influential bankers. How then do we really privatize? By exercising leadership: take over insolvent banks and immediately reprivatize them. The new controlling owners can replace the boards of directors (tell me: why havenâ€™t they resigned already?), and these boards can decide who to keep and who to let go from existing management. The taxpayer retains a significant number of shares (or the option to buy common stock) as a way to ensure upside participation - the economy will one day recover, and that will be a very good day for owners of the remaining banks.â€ Separately, on Salonâ€™s How the World Works blog, Andrew Leonard looks at whoâ€™s against bank nationalization. â€œBarry Ritholtz has a list of who he thinks are for or against nationalization. The first five names on the anti-list are Barack Obama, Tim Geithner, Lawrence H. Summers, Barney Frank and Bernanke. What do those names all have in common? They are in the government, and their every utterance moves markets. Which means, according to David Kotok, the chairman of the money management advisory firm Cumberland Advisors, whose thoughts on the financial markets are frequently featured at Ritholtzâ€™s blog, The Big Picture, that they are almost by definition prohibited from forthrightly endorsing nationalization!â€œ

Home Mortgage Deductions: Writing for the New York Timesâ€™s Economix blog, Edward Glaeser suggests eliminating a sacred cow. â€œThe Great Depression provided an opportunity to rethink old policies in a major way. In the current morass, everything should, once again, be open for debate. One sacred cow that has long been in need of a good stockyard is the home mortgage interest deduction. So, in the spirit of libertarian progressivism, I suggest gradually reducing the upper limit on the deduction to loans of up to $300,000, and then refunding the tax revenues in a more productive manner. â€œ

Good and Bad Banks: On their blog, Susan Woodward and Robert Hall say that a key to having a good bank-bad bank scenario work is to give the bad bank ownership of the good bank. â€œMuch thinking about bank policy takes an old-fashioned point of view by assuming that a bank finances all of its assets through deposits. The good-bank/bad-bank separation has no advantage in that traditional setting. But for a bank that is mostly financed by non-deposit borrowing, moving the non-deposit liabilities to the bad bank has an advantage in dealing with insolvency.â€

Formula That Killed Wall Street: Writing for Wired, Felix Salmon looks at the model that helped bring down the market. â€œDavid X. Li, itâ€™s safe to say, wonâ€™t be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Liâ€™s Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees. How could one formula pack such a devastating punch? The answer lies in the bond market, the multitrillion-dollar system that allows pension funds, insurance companies, and hedge funds to lend trillions of dollars to companies, countries, and home buyersâ€

Compiled by Phil Izzo