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

Saturday, April 3, 2010

Really great links - Bernanke and Bear Stearns - Sovereign defaults - Uncertainty about the plans of the Obama administration - Elinor Ostrom - Counterfeiting

Robert Barro - Bernanke and Bear Stearns - "Well Bernanke was thinking that way in April 2008. I remember talking to him at the time, just after the Bear Stearns initial intervention. I got a chance to ask him a question about why they were so aggressive at that time when things didn’t look so bad. And his response was that basically he was worrying about a Depression-type scenario – and trying to act early to nip that in the bud.
I think they made a big mistake by not bailing out Lehman Brothers – I think they recognized that two days later. That was Paulson’s individual fault and responsibility from what I can gather. "

Economist - "Greece cannot afford to be sanguine. The Argentine example shows that the averages mask considerable variation. And there are several reasons to think that Greece’s experience in the event of a default would be worse than the norm. The academic research focuses on emerging markets because that is where all recent defaults have been. The impact of a Greek default, which would be the first by a rich country since the second world war, may be greater. If Greece defaulted, it would do so when the global economy is still weak, credit is scarce and other sovereign borrowers are raising lots of money. So markets may be less welcoming than other recent defaulters have found them. Greece’s use of the euro also means that it cannot devalue: that implies it would have to impose fairly high haircuts on creditors and might face a higher-than-average increase in its cost of borrowing.
Another element to the costs of default may also alarm Greek policymakers. Messrs Borensztein and Panizza find that political leadership changed in the year of default or the year after in half of the 22 cases they study. That is twice the usual probability of such change. These political costs, at least, are unlikely to vary.
Sovereign defaults do not just affect the governments of countries that fail to honour their promises. Another IMF study finds that defaults lead to a 40% decline in external credit to private companies in the defaulting country. Even countries that do not default are sometimes affected by the fallout. In the aftermath of the 1980s debt crisis, for instance, credit to developing countries as a whole (including non-defaulters) dried up. Other rich countries with strained public finances may also have lots to worry about if Greece defaults."

Tyler Cowen - "One point I made is that the slow aspects of the recovery do not, contrary to some accounts, seem to stem from uncertainty about the plans of the Obama administration. I see at least two reasons for this doubting this account:
1. Output has recovered much more rapidly than the labor market; last quarter gdp growth exceeded five percent yet employment is essentially flat. The labor market is one of the least regulated sectors of the American economy, so it would be odd if regulation were causing the slow aspects of the bounceback. Many of the extant government-blaming hypotheses predict slow output growth, not rapid output growth and slow labor market participation.
2. Arguably health care and finance have been subject to the most regulatory uncertainty. Yet the health care sector has held up OK and banks have made a very strong comeback in terms of profits."

Interview with Elinor Ostrom - "FRAN: So public shaming and public honoring are one key to managing the commons?
ELINOR: Shaming and honoring are very important. We don’t have as much of an understanding of that. There are scholars who understand that, but that’s not been part of our accepted way of thinking about collective action.
ELINOR: One that I read early on that just unglued me—because I wasn’t expecting it—was the work of Robert Netting, an anthropologist who had been studying the alpine commons for a very long time. He studied Swiss peasants and then studied in Africa too. He was quite disturbed that people were saying that Africans were primitive because they used common property so frequently and they didn’t know about the benefits of private property. The implication was we’ve got to impose private property rules on them. Netting said, “Are the Swiss peasants stupid? They use common property also.”
Let’s think about this a bit. In the valleys, they use private property, while up in the alpine areas, they use common property. So the same people know about private property and common property, but they choose to use common property for the alpine areas. Why? Well, the alpine areas are what Netting calls “spotty.” The rainfall is high in one section one year, and the snow is great, and it’s rich. But the other parts of the area are dry. Now if you put fences up for private property, then Smith’s got great grass one year—he can’t even use it all—and Brown doesn’t have any. So, Netting argued, there are places where it makes sense to have an open pasture rather than a closed one. Then he gives you a very good idea of the wide diversity of the particular rules that people have used for managing that common land."

Steve Landsburg - "Is it okay for me to counterfeit if the central bank is not being sufficiently expansionary?"

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