Suppose that a systemically important financial institution (the official designation, now in true DC style the acronym SIFI) actually fails. Do we get a financial crisis? Are owners/creditors punished for endangering the economic system or partly/largely bailed out by loans/transfers from taxpayers? A few days ago here in Chicago, the acting chair of the FDIC, Martin Gruenberg, spoke to the Chicago Fed about how the FDIC would “systemic resolve” a failing SIFI without endangering the financial system while actually placing losses on those who own and are owned by the institution. Speech here.
I am glad the work is proceeding. If, . . oops I mean . . . when we end up in the next financial crisis, we will at least have a plan. And an ex ante plan may help reduce the frequency of crises. As Gruenberg said, “developing a credible capacity to place a systemically important financial institution into an orderly resolution process is essential to subjecting these companies to meaningful market discipline. “
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The first Obama Economic Report of the President has just been released and is available on-line. The focus of the Report is the “great recession” and the various policies designed to avoid depression. This focus if quite different from the usual ‘first report’ of a Presidency. In general, ERPs have a pretty standard format: a chapter on the state of the economy (“problems due to my predecessor, but the outlook is good”), followed by chapters devoted to explaining in different areas the good economics that lie behind the Administration’s policy proposals and new programs. These areas, rather than the economic arguments, tell you whether it is written by a Democrat or Republican. For example, Republican Administrations talk about the importance of capital accumulation and innovation for growth and push tax credits for business investment and R&D credits, while Democratic Administrations push investments in human capital and accessibility of education. The economics in either case are (generally) solid, and the disagreements are really ones of degree (which is why Krugman, Mankiw, Cochrane, Romer, Bernanke etc. could all get along well in academe and discuss and praise each others’ academic work). First ERP’s tend to lay out agendas and final ERP’s (one of which I helped to write when I was much younger), justify and rationalize and try to declare victory (“my” Reagan report was full of statements about the longest peacetime expansion and said very little about the deepest post-War recession). In any case, this report breaks these trends. It is significantly backward looking, discussing the crisis, recession, and policies to combat, focusing on ERRA 2009, but also discussing many of these policies pre-date the Administration. But very interesting reading.
As an aside, if there is a place where Obama has been amazingly apolitical and “crossed the aisle,” it is in the crisis response; the Administration could have relabeled programs and taken pot shots at the previous Administration’s efforts (think Bush on national security post-9/11 trying to shift the blame to Clinton). Of course, the ERP and the rhetoric in general spins the crisis/recession as evidence for the solutions that the Administration thinks are the right ones. But arguing for better policies in the future (right or wrong) is constructive where the blame game is destructive. This shows up in the ERP, in many places like:
On October 3, Congress passed and President Bush signed the Emergency Economic Stabilization Act of 2008. This Act provided up to $700 billion for the Troubled Asset Relief Program (TARP) for the purchase of distressed assets and for capital injections into financial institutions, . . . [It] was used mainly to purchase preferred equity shares in financial institutions, thereby providing the institutions with more capital to help them withstand the crisis.
Failure of the two troubled domestic automakers (GM and Chrysler) threatened economy-wide repercussions that would have been magnified by related problems at the automakers’ associated financial institutions (GMAC and Chrysler Financial). To avoid these consequences, the Bush Administration set up the Auto Industry Financing Program within the TARP.
That said, Obama will try to get re-elected and not every voter ignores mud and appreciates economic argument.
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In a blog entry almost six months ago, I suggested that prices for credit default swaps (CDS) would tell us when the financial crisis was winding down. Unfortunately, the data this week tell us that the end is not in sight. This is probably obvious to you given the news headlines of the last few days, but looking at credit default swaps can help us understand how bad things are. (more…)
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