Economy Experts

A New Solution For 'Too Big To Fail'?

Mon, 16 Nov 2009 13:30:00 GMT

Sen. Christopher Dodd's, D-Conn., bill on financial regulatory reform embraces a supposed solution to the "too big to fail" conundrum: contingent convertible bonds, or CoCos, which turn into equity once a bank's capital falls below a certain level. Read a good take on CoCos here (and click on the link therein to read Gillian Tett's discussion in the Financial Times, which might require registration). Is this a better approach than simple, transparent capital requirements for big banks? What advantages or disadvantages haven't been mentioned?

Jeffrey Frankel responded to A New Solution For 'Too Big To Fail'? on November 16, 2009 12:13 PM

Mon, 16 Nov 2009 13:30:00 GMT

Updated at 3:17 p.m. on Nov. 16. I do think that measures such as the Contingent Convertible Bonds would be a useful step. (I am pleased to agree with Charlie Calomiris on this one.) Some argue that it would be hard to know when to invoke the contingency clause. It strikes me that this argument largely vanishes when one realizes that the clause would of necessity be invoked by the time we got to the stage of a Bear Stearns or Lehman Brothers bankruptcy. CoCos would not go very far in themselves toward comprehensive reform of the financial system, if...

Ted Truman responded to A New Solution For 'Too Big To Fail'? on November 16, 2009 09:06 AM

Mon, 16 Nov 2009 13:30:00 GMT

There are no such silver bullets. How many Cocos should the regulators insist that Goldman Sachs, AIG, GE, Citigroup hold? ...

Charles Calomiris responded to A New Solution For 'Too Big To Fail'? on November 16, 2009 09:05 AM

Mon, 16 Nov 2009 13:30:00 GMT

I have authored or coauthored numerous articles and a short book on the topic of the merits of requiring some form of subordinated debt as part of a bank's capital structure, which I strongly favor. CCCs are a special kind of sub debt, and probably the best kind to require that banks issue. Because they automatically convert into equity when the bank becomes troubled, there is no hope of avoiding "haircuts" by holders. That is important because it means that the yields on these bonds during normal times will reflect true market perceptions of the underlying risk of the institution...

Creating Or 'Saving' More Jobs

Mon, 09 Nov 2009 12:27:00 GMT

Is the Obama administration's stimulus plan helping to create or "save" 650,000 jobs, as the president and his aides say? Is that an appropriate way to measure the stimulus' impact? Should Congress consider a new stimulus to create jobs and spur economic activity?

Gary Burtless responded to Creating Or 'Saving' More Jobs on November 9, 2009 12:19 PM

Mon, 09 Nov 2009 12:27:00 GMT

Normal 0 false false false MicrosoftInternetExplorer4 st1\:*{behavior:url(#ieooui) } /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} Data” is the plural of “anecdote.” Most of us are much more comfortable with anecdotes than we are with careful data analysis. It is therefore perfectly understandable when newspapers and television feature anecdotes rather than statistical analysis to describe the state or trend of the economy. Unfortunately, almost every anecdote is open to competing interpretations. This was obvious at the end of October when the...

John S. Irons responded to Creating Or 'Saving' More Jobs on November 9, 2009 11:46 AM

Mon, 09 Nov 2009 12:27:00 GMT

The 650,000 number of jobs created or saved is clearly not a good measure of the total jobs. In fact, it is entirely too low--the true number of jobs created is likely twice as large. The recovery.gov measure only includes one part of the recovery package, and does not measure, for example, jobs created from project suppliers, or consumer respending of recovery dollars. --Grant, contract, and loan data are only part of Recovery Act funding. The recipient-level data will include reports from recipients of contracts, grants, and loans, representing only part of the overall recovery package. For example, tax reductions, increased...

James Sherk responded to Creating Or 'Saving' More Jobs on November 9, 2009 11:46 AM

Mon, 09 Nov 2009 12:27:00 GMT

As Brian Riedl and J.D. Foster have observed, the Obama Administration's job creation estimates attempt to measure the number of jobs the stimulus bill has funded. They ignore the jobs lost because the money that would have funded them went to the stimulus. In economic terms, it ignores the opportunity cost of the stimulus. Consequently, the Administration can claim to have created jobs even as unemployment has hit a 26-year high. The numbers suggests that the opportunity cost of the stimulus bill has been high: private sector borrowing has fallen sharply in recent months. Absent the stimulus bill, private...

Desmond Lachman responded to Creating Or 'Saving' More Jobs on November 9, 2009 09:49 AM

Mon, 09 Nov 2009 12:27:00 GMT

One has to hope that the Obama Administration does not believe its own rhetoric about the supposed success of its fiscal stimulus program in generating new jobs. For while the Administration assures us that the fiscal stimulus is generating new jobs according to schedule, the US labor market continues to deteriorate at an alarming rate. Failure to arrest this deterioration, threatens to abort the incipient economic recovery and to aggravate an already bleak labor market situation. The Obama Administration would like us to forget how reassuring they were about the US employment outlook at the time that...

J.D. Foster responded to Creating Or 'Saving' More Jobs on November 9, 2009 09:48 AM

Mon, 09 Nov 2009 12:27:00 GMT

Normal 0 false false false MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} The Obama stimulus at best left total employment unchanged. Start with the fact that according to the proponents’ own theory the “stimulus” in 2009 was not the 1.2 percent of GDP reflected by the signed legislation, but the 6.7 percent jump in the deficit-to-GDP ratio from 2008 to 2009. Keynesians professing the benefits of automatic stabilizers somehow forget that Obama’s bill was less than a fifth of the...

Jeffrey Frankel responded to Creating Or 'Saving' More Jobs on November 9, 2009 09:46 AM

Mon, 09 Nov 2009 12:27:00 GMT

Updated at 9:59 a.m. on Nov. 9. I am astounded at the claim of my friend Charlie Calomiris that government spending under recession circumstances doesn’t create jobs. Does he think that the increase in demand doesn’t raise aggregate output, because the federal debt crowds out private production? That would be hard to believe, at a time when the Fed is keeping interest rates at zero, and long-term interest rates are also quite low. The lecturing to Democrats about the evils of the national debt takes real chutzpah, after Presidents Reagan, Bush I and Bush II increased it ten-fold during times...

Charles Calomiris responded to Creating Or 'Saving' More Jobs on November 9, 2009 08:36 AM

Mon, 09 Nov 2009 12:27:00 GMT

Washington thrives on phony numbers produced by political machines that need to make positive headlines (especially when the facts are so bad, as they are these days for the Democrat political machine). The 650,000 number is perhaps the phoniest number of all. As far as we know, the Administration's spending policies have had very little effect on the economy, and perhaps no effect. But economists can say with some certainty that we are suffering negative consequences from the President's pledges to raise taxes dramatically (in the form of higher marginal tax rates on income, and proposed taxation in support of healthcare and environmental initiatives),...

Brian Riedl responded to Creating Or 'Saving' More Jobs on November 9, 2009 07:28 AM

Mon, 09 Nov 2009 12:27:00 GMT

Those dissecting the White House claim that the $200 billion spent on the stimulus has created or saved 650,000 jobs have focused on the arithmetical errors in counting the hirings. They are ignoring a much more fundamental issue. Before Congress could inject $200 billion into the economy, they had to borrow $200 billion out of the economy. So the more central question is thus: ***If injecting $200 billion into the economy supported 650,000 jobs, then how many jobs were lost by first borrowing that $200 billion out of the economy?*** The White House says zero. Their job numbers assume all...

A BRAC For The Budget

Mon, 02 Nov 2009 13:30:00 GMT

The New York Times reports that a group of 10 senators (none of them Republican) has called for creation of a bipartisan commission on the budget, akin to the Base Realignment and Closure Commission, that would come up with a long-term plan to reduce budget deficits, including a solution to the impending funding shortfalls for Medicare and Social Security. House Speaker Nancy Pelosi, D-Calif., is opposed, and no prominent Republicans have endorsed the idea. Is there any hope for this idea, could it work, and what other approach might be more effective? Without a credible plan to reduce deficits, how soon would it affect economic growth?

James K. Galbraith responded to A BRAC For The Budget on November 6, 2009 06:37 PM

Mon, 02 Nov 2009 13:30:00 GMT

Of all the utterly half-baked ideas. We have here ten King Canutes, who think that a commission can achieve what the laws of economic accounting, under the circumstances facing the United States, plainly forbid. Let's go through the exercise. 1. We know that Y = C + I + G + X - M. This is an accounting statement. It says that total national income is the sum of consumption, investment, government spending and net exports. It's in every textbook, often on the first page. From this is follows that: 2. [S-I] = [G-T] + [X-M] . This...

James R. Horney responded to A BRAC For The Budget on November 3, 2009 10:11 AM

Mon, 02 Nov 2009 13:30:00 GMT

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Isabel Sawhill responded to A BRAC For The Budget on November 2, 2009 04:55 PM

Mon, 02 Nov 2009 13:30:00 GMT

I applaud the 10 Senators who are calling for a bipartisan commission on the budget. Too bad there are no Republicans in the group so far but perhaps that will change. And too bad some other Democrats, such as Pelosi, are also opposed. In both cases, they are ducking their responsibilities unless they come up with specific proposals to reduce long-term projected deficits – which is not happening and is not likely to happen any time soon. In the meantime, we are courting all kinds of trouble from slower growth, to an economic crisis, along with reduced flexibility to...

Charles Calomiris responded to A BRAC For The Budget on November 2, 2009 08:51 AM

Mon, 02 Nov 2009 13:30:00 GMT

Whether this is a good idea depends on who is pushing for it and why. I served on a Congressional commission (the Meltzer Commission in 1999-2000, on the reform of the IMF, World Bank and other multilateral financial and trade agencies), and I would say that it was one of the more effective commissions in recent years, but that isn't saying much. The work of such a group only has influence if the dominant party wants to (1) appoint real experts, and (2) follow their recommendations. Otherwise, the wisdom of a commission fades quickly no matter how good its analysis....

Limiting Compensation

Mon, 26 Oct 2009 12:00:46 GMT

What do you think of the Treasury and Federal Reserve actions to limit compensation for executives at large financial companies? The Treasury action would reduce compensation by 90 percent for the highest-paid 25 executives at each of the seven companies that received federal bailout aid, and soon extend this to the top 100 executives. The Fed plans to review compensation as part of its supervision of large banks (a duty it would lose according to Senate reform proposals.) Among other questions, the securities industry is wondering whether the new Fed rules would cover executives for bank-owned subsidiaries.

Is the Treasury plan mostly politics? A powerful incentive to pay back TARP funds and avoid the risk of future bailouts? Will it be possible to attract competent management at those companies? Can the Fed be trusted to curb compensation when it never recognized that as a problem before?

Grover Norquist responded to Limiting Compensation on October 26, 2009 11:47 AM

Mon, 26 Oct 2009 12:00:46 GMT

Wage and price controls are not a new idea. They are a very old idea with a consistent history of creating more problems than they solve. There has always been a stain of thinking among those men and women who consider themselves wiser than the market to believe that they know the value of a product or service. The only real value is what men and women freely choose to pay in a free market. Everything else is a power play by special interests and the government bureaucrats that serve them. The men and women who lost billions...

Charles Calomiris responded to Limiting Compensation on October 26, 2009 10:22 AM

Mon, 26 Oct 2009 12:00:46 GMT

The policies raise separate issues in my mind. One is horrible economic policy that demeans our democracy; the other is a reasonable and perhaps long-overdue step. The White House action to limit the amount of pay at the seven firms receiving government assistance, and to reverse pay decisions made only a few weeks ago, is transparently political, and that is the only thing transparent about it. The political objectives are to increase the President's popularity (everyone hates Wall Street these days) and to send Wall Street a message: "stop opposing 'change'". This policy will hobble the ability of these seven...

Douglas Elliott responded to Limiting Compensation on October 26, 2009 08:04 AM

Mon, 26 Oct 2009 12:00:46 GMT

“The government just announced two sets of actions to constrain the compensation that banks pay to their top executives. First, Kenneth Feinberg, the administration’s “special master” for compensation at the handful of companies that were most thoroughly bailed out by taxpayers, just announced the agreed compensation levels for the top 25 executives at each of those firms. Compensation levels were halved compared to the banks’ requests and a very high percentage was redirected into company stock instead of cash. Second, the Federal Reserve (Fed) announced draft guidelines to avoid compensation practices that might encourage banks to take excessive risks....

John Maggs responded to Limiting Compensation on October 26, 2009 08:02 AM

Mon, 26 Oct 2009 12:00:46 GMT

Scott Talbott, the top lobbyist for the Financial Services Roundtable has this assessment of the new compensation rules: “The Treasury executive compensation proposal focuses on compensation for top executives at 7 institutions that have accepted exceptional assistance from the federal government. For any institution that accepts taxpayer dollars, reasonable restrictions are part of the territory. It should be noted that Congress has imposed restrictions on TARP companies by limiting tax deductions and prohibiting any incentive compensation. The Treasury proposal correctly focus on reducing excessive risk-taking and eliminating those compensation programs that focus on the short-term, rather on the long-term risk...

TBTF: What Should Be Done About Bank Size?

Mon, 19 Oct 2009 11:41:27 GMT

Debate is heating up over whether the Obama plan for financial regulation goes far enough to curb institutions that become "too big to fail." Simon Johnson and Charles Calomiris discussed the issue here on NPR, and more attention came after Alan Greenspan made a strong statement on behalf of doing more to limit the size of financial institutions. What should be done through regulation, and is any regulation of "systemic risk" inevitably going to designate some banks as TBTF?

Martin Baily responded to TBTF: What Should Be Done About Bank Size? on October 19, 2009 04:32 PM

Mon, 19 Oct 2009 11:41:27 GMT

It is not a good idea to try and limit the size of US banks or other financial institutions, which are in many cases smaller than foreign owned banks. Size limits would encourage the industry to move offshore and would probably encourage institutions to make their portfolios more risky—if they have to cut out some of their assets they will cut out the ones making lower returns. New York is a financial hub for the world economy and needs large banks to sustain its position. Financial services have been one of our most successful export industries and we should not...

Charles Calomiris responded to TBTF: What Should Be Done About Bank Size? on October 19, 2009 09:52 AM

Mon, 19 Oct 2009 11:41:27 GMT

There are means other than draconian limits on size to credibly prevent government bailouts of large institutions. And there are large social gains from retaining large, complex, global financial institutions. As I argue more at length elsewhere, it is worth preserving large financial institutions four reasons. First and foremost, financial institutions need to be large to operate with global scope because their clients are large and global. Small, local banks simply could not provide global corporations the same physical capabilities for trade finance, foreign exchange contracting, and global capital access that large global financial institutions can. Second, there are production economies of scope that offer benefits...

Robert Litan responded to TBTF: What Should Be Done About Bank Size? on October 19, 2009 07:43 AM

Mon, 19 Oct 2009 11:41:27 GMT

Clearly, we have one big “too big to fail” problem, and thus it is tempting to go beyond the antitrust laws and begin breaking up the largest financial institutions to sizes a bit smaller than the TBTF threshold. While I have more confidence in defining where that threshold may be for purposes of stronger systemic oversight, I am less confidence in our collective ability to define that threshold purposes for actually breaking up existing enterprises. We don’t fully know, despite countless regressions, where economies of scale ends and diseconomies of size begin More importantly, the act of breaking up existing...

Alan Meltzer responded to TBTF: What Should Be Done About Bank Size? on October 19, 2009 07:42 AM

Mon, 19 Oct 2009 11:41:27 GMT

Yes. In Congressional testimony and elsewhere I proposed that the Congress should limit too big to fail, leaving the choice of size to the bank. The rule should require banks above moderate size to increase capital more than in proportion to their increase in asset size. That would shift risk from taxpayers to bank owners. As part of this change, Congress and the Federal Reserve should agree on a lender of last resort rule to encourage counterparties of failed banks to hold collateral that the Fed will accept for discounts....