Credit crunch?

As we look at how to define the history of this crisis (read the Stiglitz piece in Vanity Fair, Capitalist Fools), we must question all our assumptions. An interesting question to answer is, was there a credit crunch?

I guess one could argue that credit is there for the taking and, beyond the original *confidence* crisis (where companies didn't trust each other's balance sheets), there is not broader credit crunch. Part of me says that banks must have retrenched to protect their balance sheets, but the other part says that if banks need to increase profitability, they need to take more risks and lend more. The evidence here suggests that there is credit available, and thus credit cannot be blamed for the crisis. The financial aspects of the crisis looks more and more like a bunch of bad acts by poorly regulated actors which have exploded in all our faces.

Pheonix rising (eventually)

A quick thought: as I read more and more of the continuous flow of bad news at the company level and of some investment funds, I keep thinking of how much better the system will be after the crisis is over. One hopes that the fraudulent investment funds, the poorly run companies, and the weaker business plans will all fall by the wayside. This crisis could see strong companies emerge, as a pheonix does, from the ashes of the current inferno. Of course, many bad companies will simply be bailed out, but I don't think that the government will save investment funds.

Who defines whether the recession is "mental"?

Does Phil Gram get to officially say if the US is a nation of whiners and that this recession, while official, is just mental?

Recession

As expected, the US recession started in December 2007.

The NBER's Business Cycle Dating Committee has announced that the US economic cycle has entered into what they define as a recession. I had posted about this before ("You know this but do you feel it?"). The data from end-2007 all pointed to a recession.

Please now that the "traditional definition" is no such thing. 2 consecutive quarters of decline are not the definition of a recession, at least not in the US economy. The NBER defines it as:

“a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators”

Talking about the elephant...

Krugman, again, provides sane and measured advice. Here is what I think is key (see previous posts):

What we're going to have to do, clearly, is relearn the lessons our grandfathers were taught by the Great Depression. I won't try to lay out the details of a new regulatory regime, but the basic principle should be clear: anything that has to be rescued during a financial crisis, because it plays an essential role in the financial mechanism, should be regulated when there isn't a crisis so that it doesn't take excessive risks.

(my emphasis)

Succeed in doing this and you can greatly mitigate the public cost of the crisis. The problem is that regulating the companies that are big (and too big to fail) during prosperous times is difficult politically. It goes to the heart of the small government versus big government debate. Republicans would take chainsaws to the regulations, and democrats have a hard time winning elections on a platform of more regulation, particularly as the memory of the previous bubble fades.

FT.com / Comment / Opinion - Ways to avoid another stampede

The Financial Times has a few tips on how to regulate the financial markets to counteract the more perverse incentives that exist.
FT.com / Comment / Opinion - Ways to avoid another stampede

These are welcomed, particularly the variable leverage ratio. But "financial innovation" is precisely learning how to get around these, and creating new rules are often only effective until the next GOP admnistration takes a chainsaw to them.

Consider the press conference held on June 3, 2003 — just about the time subprime lending was starting to go wild — to announce a new initiative aimed at reducing the regulatory burden on banks. Representatives of four of the five government agencies responsible for financial supervision used tree shears to attack a stack of paper representing bank regulations. The fifth representative, James Gilleran of the Office of Thrift Supervision, wielded a chainsaw.

There needs to be a breakthrough in the issue of moral hazard.

Reviews of "The Bottom Billion"

Easterly has written a couple of good pieces on Foreign Affairs and on the New York Review of Books (pdf link).

someone else’s fault

The End of Wall Street's Boom

Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

What to do about this?

Liar's Poker...4Evar!!!11!1

In a fascinating piece about Wall Street, Michael Lewis points to the elephant in the room. Wall Street is built upon a perverse set of incentives. No, greed isn't bad. It is the lack of accountability.

Trouble in paradise?

A New York Times report talks about the troubles brewing in China's export industries. What struck me about the piece was that this is the kind of crisis (and opportunity) that opens doors for the future giants. I suspect that in aftermath of the crisis, there will be a consolidation of the Chinese export sector and a flourish of M&A activity.