Are Economists wrong or is Paulson deaf?

When the bailout plan first draft leaked to the media, a lot of economists are against it and most of them support an idea of purchasing equity stakes in the banking-financial firms. Here is what a group of five economists from the University of Chicago's Graduate School of Business (Diamond, Kaplan, Kashyap, Rajan and Thaler) have suggested back then:

"......The first could be accomplished by adopting much of the Treasury plan, perhaps with Mr. Dodd's proviso. The Treasury would buy assets through a reverse Dutch auction or some variant, but without any intent to overpay. The idea would be to jumpstart the market by establishing trading prices.

The second component, raising capital, could be achieved in other ways, for example through a mixture of a mandate and an offer of partial government support. The authorities could require all regulated financial institutions, no matter how well capitalized, to present plans to raise 2% of their assets in additional capital over the next quarter to preserve the stability of the financial system. This increased capital will not represent an increase in the permanent level of required capital for bank holding companies, but instead give institutions the extra capital that will allow them to lend. ......"

Notice that the economists never really completely rejected the idea of purchasing the troubled assets, which Paulson announced on November 12, 2008 that :

"Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending. But other strategies I will outline will help to alleviate the pressure of illiquid assets. "

The Dow (DJIA) fell over 400 points on that day and as the Detroit 3 failed to prove to congress that they are worth saving and Citigroup fell deeper into trouble, the Dow declined close to 7500 points.

Then, on Monday Nov. 24, 2008, the bailout plan on Citigroup involves some kind of insurance on the toxic assets, and on Tuesday, Nov. 24, 2008, Fed and the Treasury put together a 800 billion package to facilicate lending in the consumer credit market.

So, what's that claim of no TARP money for toxic asset all about?

As Chris Probyn put it: "The government has subtly reversed course. The original idea of the bailout was to remove toxic assets from the balance sheets of banks. That was subsequently abandoned but they are getting back to it. ......"

The systemic risk of the Detroit 3 going into bankruptcy

That risk is very close to the dangerous ramification of my failure to appear in the most recent episode of Ugly Betty. The strategy for the 3 auto makers to persuade the congress to give them a bailout money is to dress themselves up in the banking industry Halloween costume by arguing that if they fail, then their suppliers will fail as well thus unemployment will shoot up, which can drag the American economy into even deeper recession. In sum, their failure will pose a systemic risk for the economy.

I have to say I cannot buy this argument. The bankruptcy is really a overhaul of the current business model of the Detroit 3, which is a function of the recession: sweeping out the bad apples. The production lines or say, the physical capital of the auto industry will still have value and the production will resume once the reorganization of the auto industry is done. This is a necessary process for the US auto industry itself and let the economy do its job, please!

la Drama Obama

"No Drama" Obama created a lot of drama in picking his cabinet members these days. The final picks are rolling out day by day. I think the "rumor leak -> media discussion -> Obama pick" process actually gives Obama a lot of opportunity to gather opinions on the personnel choice for free.

Smarter Government and the Detroit 3

“Our aim should not be more government, It should be smarter government.”, said President Bush to world leaders. But is Obama's current push on the bailout of the Detroit 3 a smart move? If the Detroit 3 get exactly what they want, other industries will line-up in the front of Obama's White House for the next round of freelunch for their executives. The government can do a lot of things to help the auto-workers in trouble but bailing out the 3 falling companies as they want it will only reward stupidity, miopic business visions and encourage laziness.

Market place on the Economoy from NPR

An economist who saw it all coming.

Economy rebalancing China-US trade

Meltzer is on the demand side!

See his plan on Greg Mankiw's Blog: The Meltzer Plan.

I have previously suggested a little more policies on how to boost demand in the housing market.

Gas price and the energy crisis

The gas price in Columbus, OH last week could be as low as $1.74/gal on Sinclair and 161. With a price this low, I doubt the urge to implement a plan to develop alternative energy sources can sustain for long. The current financial crisis creates more needs for federal money than ever but on the other hand the federal government has very limited resources as borrowing money become harder when other countries start to their own stimulus efforts.

A down day without pain

The DOW went down 443.48 (4.85%) today to 8,695.79. But from Today show in the morning on NBC to Talk of the Nation on NPR in the evening, one topic attracted so much attention is what kind of puppy president-elect Obama will bring into the White House with the first family. This is a sign that people's worry is going back to the normal level, reversing to the belief that business cycle did not end on a way to collapse but an up-swing will follow the current recession, which is still possible to turn into a depression. But, hey, think about a new happy puppy and today's drop could have been bigger if the bad news comes before the election.

I will have to invent a leading indicator for recession based on the level of trivial news in the media, too much bull crap signaling a recession on its way.

President-Elect as Stimulus Package

From the party spirit in Chicago last night, I think the simple fact that Mr. Obama is elected as the 44th president of the U.S.A. can have a stimulative effect on the U.S. economy.

• His supporters are happy and they don't mind spend a little bit more. As long as the electoral votes and the popular votes are consistent with each other, this effect will be there. Even if McCain wins this election, the effect will be smaller than Obama's victory since the amount that old white people spend won't increase as much as the broader base of supporters that Obama has.
  
• Uncertainty resolved around the future directions of the U.S. policies. Due to both his personality and the race factor, I believe Obama's policy choice will not be as extreme as the second Bush presidency thus people, at least for now, can expect the future policies rolling out more in the direction that is acceptable to most people, not only in the U.S. but also around the world.
• As the tax policy of Obama may give more confidence in the US treasury, which is an important for financing the US Economy.

I am very glad that democracy worked again.

Is a Shining "O" bama good for the U.S.?

Kim II-sung of North Korea as a rising sun

Chairman Mao of PR China as a rising sun

A painting at Athens Ohio on Nov 4, 2008.

It is relatively easy to mobilize young people, but what you will do after they are mobilized?

Nobody can deny the fact that today's US economy and society are facing great challenges that deserve a charismatic leader to mobilize the nation to deal with them. Should Barack Obama be elected as the next president, the temptation to abuse his power is even greater than that for George W. Bush. It is not that he does not have good intentions but it is the fact that his power may be so great that it is out of his own control. Our only hope is that he is a wise enough man who fully understand the situation and has the courage to resist the temptation as George Washington did. On the other hand, will the young voters become angry should McCain be elected as the next president?