Monday, May 5, 2008
Interactive Inflation
Check out this interesting interactive inflation graphic in todays New York Times: All of Inflation's Little Parts.
Saturday, April 26, 2008
Tuesday, April 8, 2008
The Monty Hall Problem
Check out this article by John Tierney based on an economist's work that argues that previous studies on cognitive dissonance and how we rationalize our choices fail due to a statistical problem known as "The Monty Hall Problem".
Thursday, April 3, 2008
Visualizing Economics
I think that we have possibly shared the link to this site before (at least via email among the faculty) but I just ran across it again and find it to be very useful.
Check out Visualizing Economics: Making the Invisible Hand Visible.
Check out Visualizing Economics: Making the Invisible Hand Visible.
Saturday, March 29, 2008
Expanding Power
Here's an article about the proposed new powers of the Fed.
http://www.bloomberg.com/apps/news?pid=20601068&sid=aZ8kIhVPApw8&refer=home
The proposal includes combining the Office of the Comptroller of the Currency and the Office of Thrift Supervision, transferring state bank regulation to the FDIC, and expanding the Fed's legislated "lender of last resort" function.
It also includes the establishment of three new regulators: the prudential financial regulator, the business conduct regulator, and the corportate finance regulator.
Some would assert that a reason behind the current financial turmoil was the increased regulations on banks that created incentives to expand the use of these new financial derivatives. So regulation may have gotten us into this, but let's see if it can get us out of this.
Let me know what you think.
http://www.bloomberg.com/apps/news?pid=20601068&sid=aZ8kIhVPApw8&refer=home
The proposal includes combining the Office of the Comptroller of the Currency and the Office of Thrift Supervision, transferring state bank regulation to the FDIC, and expanding the Fed's legislated "lender of last resort" function.
It also includes the establishment of three new regulators: the prudential financial regulator, the business conduct regulator, and the corportate finance regulator.
Some would assert that a reason behind the current financial turmoil was the increased regulations on banks that created incentives to expand the use of these new financial derivatives. So regulation may have gotten us into this, but let's see if it can get us out of this.
Let me know what you think.
Monday, March 17, 2008
What happend to the Bear?
This latest worry for the Fed stems from the essential collapse of Bear Stearns, one of the largest U.S. investment banks.
Some of the trouble for Bear Stearns stemmed from the Global Legal Settlement of 2002 in which the 10 largest investment banks were barred from combining research and underwriting activities and required to pay substantial fines. Bear Stearns' original fines were approximately $80 million. The investment bank did have some insurance to help with the penalties except they management of Bear Stearns signed the Settlement agreement without talking to its insurers first as their contract stated. So there was $45 million of the penalty that Bear expected would come from insurers, but the insurers felt they hadn't been given sufficient notice. So, the two sides went to court.
Late last week, a NY appeals court ruled that the insurance companies were not responsible for that $45 million. So, Bear Stearns would now have to pay the $45 million penalty out of their own pockets. Worried that the investment bank would not be able to do so, shareholders got out fast. It was a fire sale on Bear Stearn shares dropping from a price of $68 per share on Tuesday, to under $30 per share on Friday to a buyout by JP Morgan on Sunday for $2 per share.
The problem for Bear Stearns is the same as all firms in today's securities markets - asymmetric information. Savers are having a hard time determining the risk of banks, investment banks, and publicly traded companies. With an increase in uncertainty comes an increase in the lemons problem. Without being able to tell stable investment banks from unstable, savers choose to pull back their lending.
The risk that this will spread is high. The increase in adverse selection problems after Bear Stearns has stopped most bank-to-bank lending. The interbank and federal funds markets are not functioning well. Those banks with reserves to lend are holding on to them for fear of getting a lemon.
Some of the trouble for Bear Stearns stemmed from the Global Legal Settlement of 2002 in which the 10 largest investment banks were barred from combining research and underwriting activities and required to pay substantial fines. Bear Stearns' original fines were approximately $80 million. The investment bank did have some insurance to help with the penalties except they management of Bear Stearns signed the Settlement agreement without talking to its insurers first as their contract stated. So there was $45 million of the penalty that Bear expected would come from insurers, but the insurers felt they hadn't been given sufficient notice. So, the two sides went to court.
Late last week, a NY appeals court ruled that the insurance companies were not responsible for that $45 million. So, Bear Stearns would now have to pay the $45 million penalty out of their own pockets. Worried that the investment bank would not be able to do so, shareholders got out fast. It was a fire sale on Bear Stearn shares dropping from a price of $68 per share on Tuesday, to under $30 per share on Friday to a buyout by JP Morgan on Sunday for $2 per share.
The problem for Bear Stearns is the same as all firms in today's securities markets - asymmetric information. Savers are having a hard time determining the risk of banks, investment banks, and publicly traded companies. With an increase in uncertainty comes an increase in the lemons problem. Without being able to tell stable investment banks from unstable, savers choose to pull back their lending.
The risk that this will spread is high. The increase in adverse selection problems after Bear Stearns has stopped most bank-to-bank lending. The interbank and federal funds markets are not functioning well. Those banks with reserves to lend are holding on to them for fear of getting a lemon.
Fighting a Financial Crisis
The Federal Reserve made the bold move this weekend to extend the discount window to investment banks. The Fed's lender-of-last-resort function is normally reserved for commercial banks and bank holding companies.
In an attempt to calm the financial markets after the essential collapse of Bear Stearns, the Fed has extended this safety net to investment banks as well. At the same time, the Fed lowered the discount rate to 3.25% only 25 basis points above the current federal funds target although the target is expected to be lowered at the meeting on Tuesday. It is not clear how long the Fed expects to maintain this reduction in the premium on discount loans.
Investment banks are large players in the smooth functioning of financial markets. Until this new lending facility from the Fed, these investment houses did not have a government safety net. I believe the Fed is hoping that the availability of support from the Fed will decrease the uncertainty plaguing these investment banks to the extent that the loans will not even be needed. After all, the last time the Fed took steps to extend the discount window was when the markets tumbled after September 11, 2001. The availability of support from the Fed was enough to calm the market and very few loans were actually extended.
The fundamental question: Will all this frantic activity by the Fed instill confidence or increase uncertainty?
Let me know what you think.
In an attempt to calm the financial markets after the essential collapse of Bear Stearns, the Fed has extended this safety net to investment banks as well. At the same time, the Fed lowered the discount rate to 3.25% only 25 basis points above the current federal funds target although the target is expected to be lowered at the meeting on Tuesday. It is not clear how long the Fed expects to maintain this reduction in the premium on discount loans.
Investment banks are large players in the smooth functioning of financial markets. Until this new lending facility from the Fed, these investment houses did not have a government safety net. I believe the Fed is hoping that the availability of support from the Fed will decrease the uncertainty plaguing these investment banks to the extent that the loans will not even be needed. After all, the last time the Fed took steps to extend the discount window was when the markets tumbled after September 11, 2001. The availability of support from the Fed was enough to calm the market and very few loans were actually extended.
The fundamental question: Will all this frantic activity by the Fed instill confidence or increase uncertainty?
Let me know what you think.
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