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Where do we go from here?

October 2, 2009 1 comment

Last week I had the opportunity to opine on this question at a lively conference on the financial crisis sponsored by the Federal Reserve Bank of Chicago and the World Bank.  Since I spoke about things I’ve been meaning to blog about for some time, I decided to post the transcript here.  Apologies that the tone is more Fed-esque than the usual posting, but here goes…

Where do we go from here?

“You never want a serious crisis to go to waste.  And what I mean by that is an opportunity to do things you think you could not do before.”  Rahm Emanuel, Feb. 2009

I would like to touch briefly on two issues in answer to the question posed for this session:  first, the integration of housing finance into the financial and regulatory mainstream; and second, the need to modernize budgetary and regulatory accounting.   I chose these topics for several reasons: they are important; they get less attention than is deserved; and I have thought quite a bit about them from both an academic and policy perspective. Read more…

There’s Just No Accounting For Federal Bailouts

October 27, 2008 3 comments

In the last few months, the federal government has intervened in financial markets to an extent unparalleled in U.S. history. A partial tally includes the $29 billion, no-recourse loan from the Fed to rescue Bear Stearns; the federal takeover of Fannie Mae and Freddie Mac and their exposure to the credit risk on $5 trillion of residential mortgages; loans in excess of $100 billion to insurance giant AIG, and of course, open-ended Congressional authority for U.S. Treasury Secretary Henry Paulson to purchase up to $700 billion in troubled assets from financial institutions, part of which has already financed the purchase of over $250 billion of preferred bank stock.

Whatever you think about the wisdom of these interventions, one fact is indisputable: The government is not saying how much it expects all of this to cost us. The dearth of official estimates has, on one hand, led to Pollyannaish claims like “taxpayers could actually make money on this.”. On the other hand, it has stoked fears that taxpayers may be on the hook for trillions of dollars in losses. Read more…

Categories: bailout, financial crisis

The Noble Ostrich and Other Investment Myths

October 6, 2008 5 comments

While sophisticated bankers and their wealthiest clients continue to take a pass on investments with even the slightest hint of risk, it seems strange that many investment advisers continue to sing the same soothing lullaby to individual investors:  “No need to panic, remember, you’re investing for the long run.  And that is what stocks are for!  If you get out now, you will miss the ups as well as the downs.”

Now I am certainly not advising you to panic (in fact, I am not advising you at all, because I am a mere finance professor, not a certified investment advisor).  But it does seem like a good time to revisit what we know (and don’t know) about personal investments and asset allocation, and to try to reassure you that there is no dishonor in prudence. Read more…

Categories: investment

In Paulson We Trust?

September 23, 2008 3 comments

The root cause of the liquidity freeze on Wall Street is clear:  Financial institutions, for various bad reasons that have been discussed at length elsewhere and are beside the point here, made huge bets that house prices would continue to defy gravity.  They didn’t.  Now the losses from those failed bets keep on popping up in unexpected places; no one knows who can be trusted.  For a bailout to solve the trust problem, it has to reveal who just got singed by the housing fallout, and who is still hiding third degree burns.  Until that uncertainty is resolved, investors are going to be justifiably cautious about putting their capital at risk. Read more…

Categories: financial crisis, Treasury

Putting a Price Tag on Bailouts: It’s Time to Make the Fed Accountable Too

August 4, 2008 1 comment

As the debate continues over the wisdom or lack thereof of Congress having given Treasury Secretary Paulson a blank check to keep Fannie and Freddie afloat over the next 18 months, a point that seems largely overlooked is that there was only one realistic alternative. Either Congress could explicitly provide a financial backstop such as the one just enacted, or the Federal Reserve could later ride to the rescue a la Bear Stearns should the need arise. After all, there is widespread agreement that Fannie and Freddie are too big, and at the moment too important, to fail, and that taxpayers are ultimately on the hook. Read more…

Gambling for Salvation: Why PBGC Should Just Say “No”

March 3, 2008 3 comments

The Pension Benefit Guaranty Corporation (PBGC) has just announced its intention to double its investment in equities to 45 percent of its $67 billion portfolio.  This decision flies in the face of responsible financial management, which in this case calls for avoiding equities entirely, or even better, taking a short position in the stock market.

PBGC’s decision to gamble for solvency is such a bad idea, and is motivated by such perverse institutional incentives, that I’d like to commemorate it by making it the topic of this first blog entry. Read more…

Categories: pensions