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Secondary Sources: Bounceback, Policy Confusion, Housing Plan

Posted by Michael Stone in Economy on 03 5th, 2009 | no responses

A roundup of economic news from around the Web.

Bounceback: On Econbrowser, Menzie Chinn weighs in on a brewing debate in the blogosphere over whether recessions are followed by strong growth. â€œGiven that output is trending upwards (at about 3% per annum, in log terms) in a deterministic fashion, then the argument that big drops in output are accompanied by faster growth rates makes sense. That being said, I think that additional information is always useful. And in this case, I stressed (in my last discussion of this graph) that the overpredicted growth rates were for the recoveries associated with financial system problems, such as a credit crunch. This means (in my opinion) that it is essential to fix the banking system in order for the faster growth to be realized.â€

Policy Confusion: Simon Johnson on the Baseline Scenario warns about policy confusion. â€œPolicy confusion is rampant. Did the government effectively sort-of nationalize Citigroup last Thursday when it said Vikram Pandit will stay on as CEO? If that wasnâ€™t a nationalization moment (i.e., an assertion that the government is now the dominant shareholder), what legal authority does the Treasury have to decide who is and is not running a private company? Will debtholders be forced to take losses and, if so, how much and for whom? As part of last weekâ€™s Citigroup deal, preferred shareholders - whose claims had debt-like characteristics - were pressed into converting to common stock. You may or may not like forced debt-for-equity swaps, but be aware of what the prospect of these will do to the credit market. Junior subordinated Citigroup debt (securities underlying enhanced trust preferred shares) were yesterday yielding 26%â€¦ Confusion in policy breeds disorder in companies, and disorder leads to the loss of value. This is the reality of severe crises wherever they unfold; we have not yet reached the worst moment. And, of course, there are many more shocks heading our way - mostly from Europe, but also potentially from Asia.â€

Troubling Housing Proposal: On the naked capitalism blog, Yves Smith looks at some troublesome aspects in the Obama administrationâ€™s housing proposal. â€œSomething sensible, likely to work, but possibly damaging to the fragile banking establishment is to be avoided at all costs (Larry Summers apparently does not subscribe to the widely held economic precept that the highest and best use of a market is to set clearing prices, and in this case, letting prices drop to clearing levels is necessary and ultimately unavoidable. The goal of policy should be to prevent an overshoot on the downside, not to impede the correction). I have read the Treasury mortgage mod program, and itâ€™s a bit fuzzy on certain details, but there was enough that was troubling without being clear on all the program wrinkles. First, it appears the program is a five year payment reduction program. While the guidelines are silent here, reasonable people would infer that the payment relief will be added to principal (particularly since the monthly borrower incentive for keeping current, is paid the servicer on behalf of the borrower to reduce principal, which suggests it is to offset principal increases).â€

Compiled by Phil Izzo