"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Monday, February 22, 2010

Really great links - discount rate cut - contingent capital

John Hussman - "My impression is that the increase in the Discount Rate last week was largely posturing by a Fed that is eager to look prudent in the face of criticism, particularly since Thomas Hoenig, one of the FOMC's own governors, dissented on the most recent move to leave monetary policy unchanged. The good thing about the Discount Rate hike, from my perspective, is that it gives the Fed a costless way to respond to any fresh credit difficulty, at which point (as it did in 2007), it will now have the option of cutting the rate by 50 basis points some morning when the market appears prone to panic. Not that such a move is likely to have more than a psychological effect, but it does provide one more tool to use when responding to any fresh credit issues."

David R. Kotok on discount rate cut - "But the Fed has now added an uncertainty premium and markets are adjusting to it. That means somewhere, some mortgage will not get refinanced. And somewhere, some bond financing will cost more to accomplish. And somewhere, some US manufacturer who exports will face a headwind because the dollar is stronger and his foreign competitor can sell more cheaply than yesterday. And somewhere, some person is not going to get hired because this uncertainty has raised the risk of hiring to the employer."

Robert Shiller on financial engineering - "Contingent capital, a device that grew from financial engineering, is a major new idea that might fix the problem of banking instability, thereby stabilizing the economy – just as devices invented by mechanical engineers help stabilize the paths of automobiles and airplanes. If a contingent-capital proposal is adopted, this could be the last major worldwide banking crisis – at least until some new source of instability emerges and sends financial technicians back to work to invent our way of it."

Paul Krugman - A Globalization Puzzle - "But what becomes clear once you think about it is that what matters is technological progress in transport relative to other activities. Double productivity across the board — cloth and wine as well as transport — and trade remains not worth it. It’s not at all obvious, then, that over the long run technological progress should always lead to increased trade as a share of gross world product.
So, how do we make sense of long-run trends in globalization?
I have a story about 1870-1913: it’s all about steam. Steam engines were the big technological change of the era, and they were inherently biased toward transportation: steam power had lots of uses, but none so compelling as railroads and ships.
I also, sort of, have a story about the interwar period. That was, arguably, an era in which the big things were electricity and internal combustion. And while both of these mattered a lot for short-haul transportation, they didn’t do much for long-range shipping. Meanwhile, electrification of factories was producing big productivity gains, and so perhaps was motorized farm machinery. So technology had an anti-trade bias. (?)"

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