July 2011

Moral Hazard in Congress

Fed to the Rescue?

The solvency of the U.S. government is not in any serious doubt.  The imminent S&P downgrade of Treasury debt is not about economics; it is about politics.   It is, at root, about the public display of political dysfunction in Congress.

One symptom of this dysfunction is the current brinkmanship over the debt ceiling.  Since there is no real solvency problem, the point seems to be to provoke a liquidity crisis, and to use that crisis to force the other guy to back down.   

On this point, impressively, bi-partisan agreement is the rule. Read more

When $3 trillion is not enough

I interviewed Victor Shih, political scientist at Northwestern, at INET's Bretton Woods conference earlier this year. The interview, his presentation, and the paper have since become one of my key reference points for understanding the state of China's financial system. Read more

Refinance Euro-style

Grand Bargain at last?

Big doings in Europe on the Greek debt crisis.  As I read it, the new plan has three essential elements. 

First, and essential, is a recognition of losses.  There is to be a bond swap, risky old Greek debt for riskfree new debt of the European Financial Stability Facility.  For debt holders, face values may stay the same, but maturities will be drastically extended (up to 30 years) and interest rates drastically reduced (3.5% is mentioned).   More or less these same terms will then be applied to a refinancing of Greece itself by the EFSF. Read more

Deficits and Money

Alchemy or Banking?

A recent post of Paul Krugman brings to my attention a few paragraphs near the end of Jamie Galbraith’s testimony to the Deficit Commission which call out for a money view explication.  To my mind, Krugman’s toy model does not really engage the issue, and Galbraith responds to that toy model rather than providing the needed explication.   Both men are really more interested in deficits than in money, but not me, so here goes. Read more

Wanted to buy: $2T in safe assets

Two FT pieces by Tracy Alloway caught my eye this week: this article from Tuesday's print edition, and this post on Alphaville today. The phrase "collateral upgrades" from the former caught my eye: this is the latest of several—quite diverse—variations on a theme that have played out in recent years.

The first variation comes from the global supply of savings. On this topic I think of Martin Wolf's Fixing Global Finance. For the issue at hand, Anton Brender and Florence Pisani's Globalised Finance and its Collapse (especially chapter 4) is even more relevant. Both note that the economic policies of developing countries, especially China, led them to generate a large supply of savings. Holders of these savings sought to minimize credit and liquidity risk, and as emphasized by Brender and Pisani, financial innovation allowed them to do so. Read more

Ron Paul's Modest Proposal

A Monetary Rorschach Test

Is it just an accounting gimmick, or something more?

Ron Paul proposes that the Fed should forgive the $1.6 trillion it is owed by the Treasury, thereby giving the Treasury an additional $1.6 trillion borrowing capacity so as to avoid the looming debt ceiling.  Dean Baker then endorses the proposal, Greg Mankiw comments, and the thing goes viral (see here, here, here).

Viewed as a solution to the debt ceiling problem, the proposal is definitely nothing more than an accounting gimmick.  The point is that the debt of the Fed, the $1.6 trillion of reserves that currently funds the Fed’s holding of Treasury securities, does not count toward the debt ceiling, while the $1.6 trillion that the Treasury owes to the Fed does.  (Fed Balance Sheet is here.) Read more