Sarah Palin on Saturday Night Live (SNL)
It is not Tina Fey, It is the real one (Tina Fey Meets Her Match )
Tuesday, October 28, 2008
Thursday, October 23, 2008
THE "ORACLE" FAILED
Greenspan Concedes Error on Regulation
"Facing a firing line of questions from Washington lawmakers, Alan Greenspan, the former Federal Reserve chairman once considered the infallible maestro of the financial system, admitted on Thursday that he “made a mistake” in trusting that free markets could regulate themselves without government oversight. "
Although he defended the use of derivatives in general, Mr. Greenspan, who left his post in 2006, told members of the House Committee on Oversight and Government Reform that he was “partially” wrong in not having tried to regulate the market for credit-default swaps."
So they forgot about Moral Hazard
“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said.
Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
In his prepared remarks, Mr. Greenspan said he was in “a state of shocked disbelief” about the breakdown in the ability of banks to regulate themselves. He also warned about the economic consequences of the crisis, saying that he “cannot see how we will avoid a significant rise in layoffs and unemployment.” Consumer spending will decline, too, he said, adding that a stabilization of home prices would be necessary to bring the crisis to its end.
In his prepared remarks, Mr. Greenspan said he saw “no choice” but to impose legal quality requirements for certain types of securities, and added that other regulatory changes would have to be made.
But he still gestured toward his faith in free markets, however shaky it may have become. “It is important to remember, however, that whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets,” he said. Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.
A little bit late, meanwhile, nobody can foresee the consequences of this financial turmoil
Tuesday, October 21, 2008
BAD MEMORY....
Argentina Makes Grab for Pensions Amid Crisis
BUENOS AIRES -- Hemmed in by the global financial and commodities bust, Argentina's leftist government found a novel way to scrape up the money to stay afloat: cracking open the piggybank of the country's private pension system.
President Cristina Kirchner proposed to nationalize the private pension system, which has about $30 billion in assets, a move that would provide the government with much of the cash it needs in the short term to avoid default for the second time this decade. But analysts said the plan reinforces Argentina's image as a renegade in financial circles and represents a repudiation of the system of private pensions that has been in vogue in developing countries.
What about consumers?
Budget Gaps
Economic turmoil of recent months has also dealt budget gaps to some other nations, notably oil-exporters Venezuela and Iran, but Argentina is doubly hurt. Because the Argentine government stiffed international creditors as recently as 2001, any attempt to return to the international credit markets in the coming year would be almost certain to fail especially now that banks and investors are allergic to anything that seems risky.
OPEC wanna cut the production
The government told Argentines its move to nationalize private pension funds was aimed at protecting investors from losses resulting from the global market turmoil. President Kirchner said in a speech: "The main member countries of the [Group of Eight] are adopting a policy of protection of the banks and, in our case, we are protecting the workers and retirees."
Protecting? but Is it not better to diversify? buying safe securities
Is this a good choice? What is behind of it?
But economists said the motive is to provide the government with about $5 billon in annual pension contributions that it needs to plug a gap in the financing next year and avert a second debt default. "They were in a tight situation and this was an accessible source of funds," said Buenos Aires economist Aldo Abram.
Ahh that's it
Opposition leaders vowed to contest it. Opposition leader Elisa Carrio vowed to resist, saying, "The government measures aren't designed to better the retirement system but rather to plunder the funds of the retirees." One pension-fund head suggested that contributors inundate the government with lawsuits. Even if they don't heed that call, the move also is expected to face legal challenges.
The same history
"With the [latest] announcement, the custom of violating the rules of the game has been repeated, which deepens the lack of confidence," political analyst Rosendo Fraga wrote in the Buenos Aires daily La Nacion.
Bye Bye Fully Funded?
The pension system in places like Argentina and Chile is much more free-market-oriented than in the U.S. The U.S. Social Security system is run by the government and is "pay as you go," meaning the government uses contributions from current workers to pay retirees. Latin American countries like Chile decided to give workers the option of creating individual retirement accounts run by private companies where workers would be forced to set aside money for their retirement - similar in some ways to a 401(k)-type account in the U.S.
Argentina Makes Grab for Pensions Amid Crisis
BUENOS AIRES -- Hemmed in by the global financial and commodities bust, Argentina's leftist government found a novel way to scrape up the money to stay afloat: cracking open the piggybank of the country's private pension system.
President Cristina Kirchner proposed to nationalize the private pension system, which has about $30 billion in assets, a move that would provide the government with much of the cash it needs in the short term to avoid default for the second time this decade. But analysts said the plan reinforces Argentina's image as a renegade in financial circles and represents a repudiation of the system of private pensions that has been in vogue in developing countries.
What about consumers?
Budget Gaps
Economic turmoil of recent months has also dealt budget gaps to some other nations, notably oil-exporters Venezuela and Iran, but Argentina is doubly hurt. Because the Argentine government stiffed international creditors as recently as 2001, any attempt to return to the international credit markets in the coming year would be almost certain to fail especially now that banks and investors are allergic to anything that seems risky.
OPEC wanna cut the production
The government told Argentines its move to nationalize private pension funds was aimed at protecting investors from losses resulting from the global market turmoil. President Kirchner said in a speech: "The main member countries of the [Group of Eight] are adopting a policy of protection of the banks and, in our case, we are protecting the workers and retirees."
Protecting? but Is it not better to diversify? buying safe securities
Is this a good choice? What is behind of it?
But economists said the motive is to provide the government with about $5 billon in annual pension contributions that it needs to plug a gap in the financing next year and avert a second debt default. "They were in a tight situation and this was an accessible source of funds," said Buenos Aires economist Aldo Abram.
Ahh that's it
Opposition leaders vowed to contest it. Opposition leader Elisa Carrio vowed to resist, saying, "The government measures aren't designed to better the retirement system but rather to plunder the funds of the retirees." One pension-fund head suggested that contributors inundate the government with lawsuits. Even if they don't heed that call, the move also is expected to face legal challenges.
The same history
"With the [latest] announcement, the custom of violating the rules of the game has been repeated, which deepens the lack of confidence," political analyst Rosendo Fraga wrote in the Buenos Aires daily La Nacion.
Bye Bye Fully Funded?
The pension system in places like Argentina and Chile is much more free-market-oriented than in the U.S. The U.S. Social Security system is run by the government and is "pay as you go," meaning the government uses contributions from current workers to pay retirees. Latin American countries like Chile decided to give workers the option of creating individual retirement accounts run by private companies where workers would be forced to set aside money for their retirement - similar in some ways to a 401(k)-type account in the U.S.
Sunday, October 19, 2008
Bernanke Is Fighting the Last War
"Everything works much better when wrong decisions are punished and good decisions make you rich."
By BRIAN M. CARNEY (Wall Street Journal)
Most people now living have never seen a credit crunch like the one we are currently enduring. Anna Schwartz, 92 years old, is one of the exceptions. She's not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, "A Monetary History of the United States" (1963). It's the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression.
Since 1941, Ms. Schwartz has reported for work at the National Bureau of Economic Research in New York, where we met Thursday morning for an interview. She is currently using a wheelchair after a recent fall and laments her "many infirmities," but those are all physical; her mind is as sharp as ever. She speaks with passion and just a hint of resignation about the current financial situation. And looking at how the authorities have handled it so far, she doesn't like what she sees.
Now, Alan Greenspan has issued an epilogue to his memoir, 'Time of Turbulence,' and it's about what's going on in the credit market," Ms. Schwartz says. "And he says, 'Well, it's true that monetary policy was expansive. But there was nothing that a central bank could do in those circumstances. The market would have been very much displeased, if the Fed had tightened and crushed the boom. They would have felt that it wasn't just the boom in the assets that was being terminated.'" In other words, Mr. Greenspan "absolves himself. There was no way you could really terminate the boom because you'd be doing collateral damage to areas of the economy that you don't really want to damage."
Ms Schwartz adds, gently, "I don't think that that's an adequate kind of response to those who argue that absent accommodative monetary policy, you would not have had this asset-price boom." Policies based on such thinking only lead to a more damaging bust when the mania ends, as they all do. "In general, it's easier for a central bank to be accommodative, to be loose, to be promoting conditions that make everybody feel that things are going well."
Fed Chairman Ben Bernanke, of all people, should understand this, Ms. Schwartz says. In 2002, Mr. Bernanke, then a Federal Reserve Board governor, said in a speech in honor of Mr. Friedman's 90th birthday, "I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
"This was [his] claim to be worthy of running the Fed," she says. He was "familiar with history. He knew what had been done." But perhaps this is actually Mr. Bernanke's biggest problem. Today's crisis isn't a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. "I don't see that they've achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job."
"Everything works much better when wrong decisions are punished and good decisions make you rich."
By BRIAN M. CARNEY (Wall Street Journal)
Most people now living have never seen a credit crunch like the one we are currently enduring. Anna Schwartz, 92 years old, is one of the exceptions. She's not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, "A Monetary History of the United States" (1963). It's the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression.
Since 1941, Ms. Schwartz has reported for work at the National Bureau of Economic Research in New York, where we met Thursday morning for an interview. She is currently using a wheelchair after a recent fall and laments her "many infirmities," but those are all physical; her mind is as sharp as ever. She speaks with passion and just a hint of resignation about the current financial situation. And looking at how the authorities have handled it so far, she doesn't like what she sees.
Now, Alan Greenspan has issued an epilogue to his memoir, 'Time of Turbulence,' and it's about what's going on in the credit market," Ms. Schwartz says. "And he says, 'Well, it's true that monetary policy was expansive. But there was nothing that a central bank could do in those circumstances. The market would have been very much displeased, if the Fed had tightened and crushed the boom. They would have felt that it wasn't just the boom in the assets that was being terminated.'" In other words, Mr. Greenspan "absolves himself. There was no way you could really terminate the boom because you'd be doing collateral damage to areas of the economy that you don't really want to damage."
Ms Schwartz adds, gently, "I don't think that that's an adequate kind of response to those who argue that absent accommodative monetary policy, you would not have had this asset-price boom." Policies based on such thinking only lead to a more damaging bust when the mania ends, as they all do. "In general, it's easier for a central bank to be accommodative, to be loose, to be promoting conditions that make everybody feel that things are going well."
Fed Chairman Ben Bernanke, of all people, should understand this, Ms. Schwartz says. In 2002, Mr. Bernanke, then a Federal Reserve Board governor, said in a speech in honor of Mr. Friedman's 90th birthday, "I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
"This was [his] claim to be worthy of running the Fed," she says. He was "familiar with history. He knew what had been done." But perhaps this is actually Mr. Bernanke's biggest problem. Today's crisis isn't a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. "I don't see that they've achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job."
Thursday, October 16, 2008
Latin America Can Weather the Storm
Every crisis is an opportunity.
According to Mary Anastasia O'Grady (Wall Street Journal), Latin american must take advantage of the global turmoil. Given 1990s economic reforms, most of Latin american countries are ready to face this financial crisis because they are showing high level of reserves and low inflation although exposed to commodity price volatility.
"A selling tsunami emanating from the U.S.-European panic has clobbered Latin currencies and stocks. The Mexican peso has lost more than 20% against the dollar since August and Mexico's Bolsa closed at a two-year low on Friday. Peru, Colombia and Chile are also getting slammed."
"Given the magnitude of the selloff, some observers may be surprised to learn that the banking systems of these countries are not infected with the financial bird flu spreading through the G-7. Rather, investors are piling out of Brazil, Mexico, Chile, Peru and Colombia in a flight to quality. They are also fleeing because of the credit squeeze, the end of the commodity boom, and a slowdown in rich-country growth that will reduce demand for the region's output. Growth is expected to slow in most of Latin America."
"Thanks to the reforms of the past two decades the most open Latin economies are in a much better position today than they were in the 1980s when Federal Reserve Chairman Paul Volcker tightened credit to attack inflation. They should not be allowed to backslide. This is the time to accelerate liberalization with an eye toward greater economic flexibility."
"There is not much Latin America can do about the leadership vacuum in the U.S. or Europe. But it can anchor its own ship. Serious Latin economies -- obviously we don't mean Argentina, Venezuela, Ecuador, Nicaragua, Honduras or Bolivia -- have spent the past two decades preparing for such a moment.'
"To that end, the region has much work left to do. Brazil's entrepreneurs are burdened with punishing tax rates and complex regulation. Mexico restricts investment in energy, telecommunications and air travel, and in recent years it has increased protectionism. Colombia and Chile still fiddle with capital controls. Peru has insecure property rights, which discourage investment. Labor markets throughout the region are inflexible."
"Every crisis offers opportunities and this one is no different. The region's reformers have already done much heavy lifting. Why not seize the moment and finish the job?"
Every crisis is an opportunity.
According to Mary Anastasia O'Grady (Wall Street Journal), Latin american must take advantage of the global turmoil. Given 1990s economic reforms, most of Latin american countries are ready to face this financial crisis because they are showing high level of reserves and low inflation although exposed to commodity price volatility.
"A selling tsunami emanating from the U.S.-European panic has clobbered Latin currencies and stocks. The Mexican peso has lost more than 20% against the dollar since August and Mexico's Bolsa closed at a two-year low on Friday. Peru, Colombia and Chile are also getting slammed."
"Given the magnitude of the selloff, some observers may be surprised to learn that the banking systems of these countries are not infected with the financial bird flu spreading through the G-7. Rather, investors are piling out of Brazil, Mexico, Chile, Peru and Colombia in a flight to quality. They are also fleeing because of the credit squeeze, the end of the commodity boom, and a slowdown in rich-country growth that will reduce demand for the region's output. Growth is expected to slow in most of Latin America."
"Thanks to the reforms of the past two decades the most open Latin economies are in a much better position today than they were in the 1980s when Federal Reserve Chairman Paul Volcker tightened credit to attack inflation. They should not be allowed to backslide. This is the time to accelerate liberalization with an eye toward greater economic flexibility."
"There is not much Latin America can do about the leadership vacuum in the U.S. or Europe. But it can anchor its own ship. Serious Latin economies -- obviously we don't mean Argentina, Venezuela, Ecuador, Nicaragua, Honduras or Bolivia -- have spent the past two decades preparing for such a moment.'
"To that end, the region has much work left to do. Brazil's entrepreneurs are burdened with punishing tax rates and complex regulation. Mexico restricts investment in energy, telecommunications and air travel, and in recent years it has increased protectionism. Colombia and Chile still fiddle with capital controls. Peru has insecure property rights, which discourage investment. Labor markets throughout the region are inflexible."
"Every crisis offers opportunities and this one is no different. The region's reformers have already done much heavy lifting. Why not seize the moment and finish the job?"
Monday, October 13, 2008
The Nobel Prize in Economics goes to...
Paul Krugman, a professor at Princeton University and an Op-Ed page columnist for The New York Times, was awarded the Nobel Memorial Prize in Economic Sciences on Monday.
...Mr. Krugman received the award for his work on international trade and economic geography. In particular, the prize committee lauded his work for “having shown the effects of economies of scale on trade patterns and on the location of economic activity.” ..
..He has developed models that explain observed patterns of trade between countries, as well as what goods are produced where and why. Traditional trade theory assumes that countries are different and will exchange different kinds of goods; Mr. Krugman’s theories have explained why worldwide trade is dominated by a few countries that are similar to each other, and why some countries might import the same kinds of goods that it exports..
..“There was something very beautiful about the old existing trade theory and its ability to capture the world in a surprisingly simple conceptual framework,” Mr. Krugman said. “And then I realized that some of the new insights coming through in industrial organization could be applied to international trade.”..
New York Times
The article mentioned is
Paul Krugman (1991) Increasing Returns and Economic Geography
Journal of Political Economy, Vol. 99, No. 3: pp. 483-499
Information for the Public
Scientific Background
Celebrations at Princeton
Paul Krugman and John Nash: Two Nobel Prizes
Paul Krugman, a professor at Princeton University and an Op-Ed page columnist for The New York Times, was awarded the Nobel Memorial Prize in Economic Sciences on Monday.
...Mr. Krugman received the award for his work on international trade and economic geography. In particular, the prize committee lauded his work for “having shown the effects of economies of scale on trade patterns and on the location of economic activity.” ..
..He has developed models that explain observed patterns of trade between countries, as well as what goods are produced where and why. Traditional trade theory assumes that countries are different and will exchange different kinds of goods; Mr. Krugman’s theories have explained why worldwide trade is dominated by a few countries that are similar to each other, and why some countries might import the same kinds of goods that it exports..
..“There was something very beautiful about the old existing trade theory and its ability to capture the world in a surprisingly simple conceptual framework,” Mr. Krugman said. “And then I realized that some of the new insights coming through in industrial organization could be applied to international trade.”..
New York Times
The article mentioned is
Paul Krugman (1991) Increasing Returns and Economic Geography
Journal of Political Economy, Vol. 99, No. 3: pp. 483-499
Information for the Public
Scientific Background
Celebrations at Princeton
Paul Krugman and John Nash: Two Nobel Prizes
Friday, October 10, 2008
Thursday, October 09, 2008
Peru’s cabinet in turmoil over scandal
By Naomi Mapstone in Lima
Published: October 10 2008 00:18 | Last updated: October 10 2008 00:18
Peru’s entire cabinet offered their resignations on Thursday following a scandal that has linked president Alan Garcia’s party with the granting of oil concessions to a favoured bidder.
Jorge del Castillo, prime minister, made the promise as he left Congress, after members of the opposition walked out in protest. Mr del Castillo said he felt it necessary to make the offer to defend ”the honour of this Cabinet, which has worked with honesty, austerity and dedication”.
Garcia’s approval rating had dropped to 19 per cent even before a local television station aired audio-taped conversations allegedly between Alberto Quimper, Petroperu(acute) director, and a member of the ruling APRA political party, Romulo Leon in which they agreed to favour Norwegian company Discover Petroleum in the granting of gas and oil lots.
The president immediately suspended the lots, and sacked Mr Quimper and Petroperu president Cesar Gutierrez, who denied involvement. Mr Quimper has since been arrested and police are looking for Mr Leon.
Mr Garcia also accepted the resignation of Juan Valdivia, energy and mining minister, although Mr Valdivia was not named in the tapes and denied he had anything to do, ”directly or indirectly” with the scandal.
Although the full cabinet offer to resign is unlikely to be taken up, Mr Garcia is under pressure to reshuffle his cabinet. Corruption is a hot-button issue in Peru, where the president has faced protests by workers who say they are not reaping the benefits of the country’s strong economic growth in recent years.
Transcriptions of the alleged conversation between Mr Quimper and Mr Leon have been splashed across the pages of local press, revealing a discussion about the tax implications of payments into Mr Leon’s account.
”… This year I have received … a quantity of money , and with it we have been paying many expenses. That money goes directly to my current account. What does that mean in terms of taxes,” Mr Leon is alleged to have said.
”How much has it been, $100,000? $200,000?,” Mr Quimper is alleged to have replied.
”More or less $100,000 a year, monthly,” Mr Leon said.
Discover Petroleum denied it had paid bribes. It said in a statement it had hired a local law firm to pre-qualify to bid for the lots, and Mr Quimper, who they were told was ”the best tax lawyer in Peru”, had been subcontracted by the firm. Mr Leon had been hired as a consultant to assist with pre-qualification.
The company said it had paid $60,000 between May and October to the law firm that hired Mr Quimper and $63,750 to Mr Leo for the licence application process.
Peru’s Congress has now voted to investigate all concessions granted since 2006. Discover Petroleum’s five lots were among 17 auctioned off in September.
By Naomi Mapstone in Lima
Published: October 10 2008 00:18 | Last updated: October 10 2008 00:18
Peru’s entire cabinet offered their resignations on Thursday following a scandal that has linked president Alan Garcia’s party with the granting of oil concessions to a favoured bidder.
Jorge del Castillo, prime minister, made the promise as he left Congress, after members of the opposition walked out in protest. Mr del Castillo said he felt it necessary to make the offer to defend ”the honour of this Cabinet, which has worked with honesty, austerity and dedication”.
Garcia’s approval rating had dropped to 19 per cent even before a local television station aired audio-taped conversations allegedly between Alberto Quimper, Petroperu(acute) director, and a member of the ruling APRA political party, Romulo Leon in which they agreed to favour Norwegian company Discover Petroleum in the granting of gas and oil lots.
The president immediately suspended the lots, and sacked Mr Quimper and Petroperu president Cesar Gutierrez, who denied involvement. Mr Quimper has since been arrested and police are looking for Mr Leon.
Mr Garcia also accepted the resignation of Juan Valdivia, energy and mining minister, although Mr Valdivia was not named in the tapes and denied he had anything to do, ”directly or indirectly” with the scandal.
Although the full cabinet offer to resign is unlikely to be taken up, Mr Garcia is under pressure to reshuffle his cabinet. Corruption is a hot-button issue in Peru, where the president has faced protests by workers who say they are not reaping the benefits of the country’s strong economic growth in recent years.
Transcriptions of the alleged conversation between Mr Quimper and Mr Leon have been splashed across the pages of local press, revealing a discussion about the tax implications of payments into Mr Leon’s account.
”… This year I have received … a quantity of money , and with it we have been paying many expenses. That money goes directly to my current account. What does that mean in terms of taxes,” Mr Leon is alleged to have said.
”How much has it been, $100,000? $200,000?,” Mr Quimper is alleged to have replied.
”More or less $100,000 a year, monthly,” Mr Leon said.
Discover Petroleum denied it had paid bribes. It said in a statement it had hired a local law firm to pre-qualify to bid for the lots, and Mr Quimper, who they were told was ”the best tax lawyer in Peru”, had been subcontracted by the firm. Mr Leon had been hired as a consultant to assist with pre-qualification.
The company said it had paid $60,000 between May and October to the law firm that hired Mr Quimper and $63,750 to Mr Leo for the licence application process.
Peru’s Congress has now voted to investigate all concessions granted since 2006. Discover Petroleum’s five lots were among 17 auctioned off in September.
Wednesday, October 08, 2008
Central Banks Cut Rates World-Wide
Esto debe ser historico. En una operacion coordinada el FED, ECB y el Bank of England han reducido sus tasas de interes de referencia. El "Federal Funds Rate" ya tenia una tendencia decreciente desde el año pasado ante las expectativas de recesion, causando la depreciacion del dolar. Desde entonces el FED habia optado por una politica mas flexible y/o mas discrecional, y abandonar la etiqueta de "implicit targeter". En cambio, el ECB y el Bank of England han abandonado la rigidez que da ser un "explicit targeter" para buscar mas flexibilidad.
Tambien China, Canada, Suiza y Suecia se unieron a este "global cut". Parece que los tres ultimos han abandonado tambien el "inflation targeting club"
Esto debe ser historico. En una operacion coordinada el FED, ECB y el Bank of England han reducido sus tasas de interes de referencia. El "Federal Funds Rate" ya tenia una tendencia decreciente desde el año pasado ante las expectativas de recesion, causando la depreciacion del dolar. Desde entonces el FED habia optado por una politica mas flexible y/o mas discrecional, y abandonar la etiqueta de "implicit targeter". En cambio, el ECB y el Bank of England han abandonado la rigidez que da ser un "explicit targeter" para buscar mas flexibilidad.
Tambien China, Canada, Suiza y Suecia se unieron a este "global cut". Parece que los tres ultimos han abandonado tambien el "inflation targeting club"
Thursday, October 02, 2008
Welcome to 'Moral Hazard'
Moral Hazard. It sounds like the name of a failed town in a Clint Eastwood western. We all live there now.
Until recently, "moral hazard" was heard only on the lips of insurance agents and over lunch in conservative think tanks. Both Fed Chairmen Alan Greenspan and Ben Bernanke have uttered the phrase "moral hazard" in front of congressional committees to warn against excessive financial risk. Senators and members nod, look down at their cheat sheets and think, "Mmm, right, moral hazard."
CorbisNow, with big banks dropping like flies and Wall Street vaporizing amid a mortgage meltdown, every corner bar and hair salon is filled with experts on the perils of moral hazard. Everyone gets it: Cut risk down to next to nothing and some people do crazy things.
Borrowers across America took a dive for low- or no-down-payment mortgages buoyed by the Federal Reserve's low-risk interest rates. Wall Street sliced the mortgages thinner than prosciutto ham, "spreading risk," and sold pieces all over the world, where, like magic, they seemed to fatten balance sheets. The deal was so win-win that Bear Stearns, Lehman, Merrill and the rest of the world's mega-banks engorged on their own product. It was as if foie gras geese forced corn and fat down their own throats. The risk of exploding seemed to be nil.
For behind it all sat Fannie Mae and Freddie Mac, running mortgage liquidity into the nation's neighborhoods like an open fire hydrant. Several years ago, when the Journal's editorial board met with Fannie Mae's top executives and pressed the issue of financial risks, we were told by way of ending the conversation that Fannie was merely fulfilling the "mandate of Congress" to spread home ownership across the land. Congress, of course, is a temple to moral hazard.
"Moral hazard" is an odd phrase. Its meaning isn't obvious though it does sound like something one ought to avoid. "Moral hazard" dates back hundreds of years in obscurity, but its use eventually settled inside the insurance business in the 19th century. The French call it risque moral.
Wonder Land columnist Daniel Henninger tells Kelsey Hubbard that discussions of responsibility and the financial crisis should be held in the context of the presidential debate. (Oct. 2)
Back then, it really was taken to mean that reducing risk too much exposed people to the hazard of poor moral judgments. If an insurer charged too little for a policy to replace farms in the English countryside, Farmer Brown might be less careful about cows knocking over oil lamps in the barn.
In time, the economists got their hands on "moral hazard," and the first thing they did was strip out the heavy moral freight to make the concept value-neutral. Now moral hazard became less about judgment and more about the economic "inefficiencies" that occur in riskless environments.
We're back to the original meaning. Losing tons of money for an institution is an economic inefficiency. Lose the nation's financial structure, however, and moral fingers get wagged.
John McCain and Barack Obama are ranting about greed. Congress is taking the air out of golden parachutes. Republicans in Congress are getting pushback from constituents on Main Street who object to "bailing out" banks and what's left of Wall Street.
With so much economic loss and ruin being booked on such a grand scale, it's normal to assign blame. Yes, politics ought to fight its way toward knowing how mortgage-backed securities led to this.
I'm wondering, though, if the U.S. hasn't arrived at a large Pogo Moment. With the greatest financial crisis since the Depression, have we finally met the enemy, and does it turn out that the enemy is us?
For all the wailing about the high price being paid now of ignoring manifest risk beneath the mortgage crisis, are we angry at bad decisions that must never be repeated, or just upset that it all blew up? Because if it's the latter, politicians will try to game the system again to get more risk-free benefits.
Even as it passes through the greatest moral-hazard demonstration in history, Congress this week approved, and President Bush signed into law, a $25 billion "loan" to the auto industry. Without a peep of objection from anyone.
Because no creditor will run the real risk of lending Detroit money, Washington will not only make another $25 billion liar loan but do it so the industry can somehow conjure up Congress's mandated alternative-fuel cars. Are we nuts? Absent the discipline of normal risk, why won't this blow up too?
This subject -- risk and political moral hazard -- should be at the center of our derailed presidential campaign and its debates. Liberals don't like to hear moral-hazard arguments raised against social-policy goals. The current mortgage nightmare, however, grew primarily from Congress's insistence on increasing home ownership by reducing its risks.
Barack Obama's core proposals on health insurance, trade policy and tax credits all seek to reduce an array of economic risks. John McCain's ideas on health, education and the tax code tilt toward "choice," or letting individuals make judgments about economic risk-taking.
Most of the time, moral hazard is simply academic. Not after this week. Our presidential candidates should have a talk about it.
Esto se les paso por la huacha a los funcionarios federales americanos. Obviamente este es una falla de mercado porque hay un problema de informacion, la informacion es asimetrica. En el "Principal-agent problem" hasta los mas dogmaticos saben que se tiene que regular, sobretodo en un mercado donde se juegan trillones de dolares.
El moral hazard tambien puede presentarse a nivel de paises como le paso a Argentina en el 2001. Despues de la farra fiscal, esperaba que el FMI lo salve, pero al final el FMI no lo salvo y cayo en una profunda crisis economica y politica
Moral Hazard. It sounds like the name of a failed town in a Clint Eastwood western. We all live there now.
Until recently, "moral hazard" was heard only on the lips of insurance agents and over lunch in conservative think tanks. Both Fed Chairmen Alan Greenspan and Ben Bernanke have uttered the phrase "moral hazard" in front of congressional committees to warn against excessive financial risk. Senators and members nod, look down at their cheat sheets and think, "Mmm, right, moral hazard."
CorbisNow, with big banks dropping like flies and Wall Street vaporizing amid a mortgage meltdown, every corner bar and hair salon is filled with experts on the perils of moral hazard. Everyone gets it: Cut risk down to next to nothing and some people do crazy things.
Borrowers across America took a dive for low- or no-down-payment mortgages buoyed by the Federal Reserve's low-risk interest rates. Wall Street sliced the mortgages thinner than prosciutto ham, "spreading risk," and sold pieces all over the world, where, like magic, they seemed to fatten balance sheets. The deal was so win-win that Bear Stearns, Lehman, Merrill and the rest of the world's mega-banks engorged on their own product. It was as if foie gras geese forced corn and fat down their own throats. The risk of exploding seemed to be nil.
For behind it all sat Fannie Mae and Freddie Mac, running mortgage liquidity into the nation's neighborhoods like an open fire hydrant. Several years ago, when the Journal's editorial board met with Fannie Mae's top executives and pressed the issue of financial risks, we were told by way of ending the conversation that Fannie was merely fulfilling the "mandate of Congress" to spread home ownership across the land. Congress, of course, is a temple to moral hazard.
"Moral hazard" is an odd phrase. Its meaning isn't obvious though it does sound like something one ought to avoid. "Moral hazard" dates back hundreds of years in obscurity, but its use eventually settled inside the insurance business in the 19th century. The French call it risque moral.
Wonder Land columnist Daniel Henninger tells Kelsey Hubbard that discussions of responsibility and the financial crisis should be held in the context of the presidential debate. (Oct. 2)
Back then, it really was taken to mean that reducing risk too much exposed people to the hazard of poor moral judgments. If an insurer charged too little for a policy to replace farms in the English countryside, Farmer Brown might be less careful about cows knocking over oil lamps in the barn.
In time, the economists got their hands on "moral hazard," and the first thing they did was strip out the heavy moral freight to make the concept value-neutral. Now moral hazard became less about judgment and more about the economic "inefficiencies" that occur in riskless environments.
We're back to the original meaning. Losing tons of money for an institution is an economic inefficiency. Lose the nation's financial structure, however, and moral fingers get wagged.
John McCain and Barack Obama are ranting about greed. Congress is taking the air out of golden parachutes. Republicans in Congress are getting pushback from constituents on Main Street who object to "bailing out" banks and what's left of Wall Street.
With so much economic loss and ruin being booked on such a grand scale, it's normal to assign blame. Yes, politics ought to fight its way toward knowing how mortgage-backed securities led to this.
I'm wondering, though, if the U.S. hasn't arrived at a large Pogo Moment. With the greatest financial crisis since the Depression, have we finally met the enemy, and does it turn out that the enemy is us?
For all the wailing about the high price being paid now of ignoring manifest risk beneath the mortgage crisis, are we angry at bad decisions that must never be repeated, or just upset that it all blew up? Because if it's the latter, politicians will try to game the system again to get more risk-free benefits.
Even as it passes through the greatest moral-hazard demonstration in history, Congress this week approved, and President Bush signed into law, a $25 billion "loan" to the auto industry. Without a peep of objection from anyone.
Because no creditor will run the real risk of lending Detroit money, Washington will not only make another $25 billion liar loan but do it so the industry can somehow conjure up Congress's mandated alternative-fuel cars. Are we nuts? Absent the discipline of normal risk, why won't this blow up too?
This subject -- risk and political moral hazard -- should be at the center of our derailed presidential campaign and its debates. Liberals don't like to hear moral-hazard arguments raised against social-policy goals. The current mortgage nightmare, however, grew primarily from Congress's insistence on increasing home ownership by reducing its risks.
Barack Obama's core proposals on health insurance, trade policy and tax credits all seek to reduce an array of economic risks. John McCain's ideas on health, education and the tax code tilt toward "choice," or letting individuals make judgments about economic risk-taking.
Most of the time, moral hazard is simply academic. Not after this week. Our presidential candidates should have a talk about it.
Esto se les paso por la huacha a los funcionarios federales americanos. Obviamente este es una falla de mercado porque hay un problema de informacion, la informacion es asimetrica. En el "Principal-agent problem" hasta los mas dogmaticos saben que se tiene que regular, sobretodo en un mercado donde se juegan trillones de dolares.
El moral hazard tambien puede presentarse a nivel de paises como le paso a Argentina en el 2001. Despues de la farra fiscal, esperaba que el FMI lo salve, pero al final el FMI no lo salvo y cayo en una profunda crisis economica y politica
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