Déjà vu all over again?

All the major stock indices were up over 4 percent today, on news that central bankers announced they would reduce costs for banks in foreign countries to borrow dollars.

The reaction among traders seemed to signal a belief the euro crisis is over. But perhaps a little history is in order:

Some noted sharp gains in equities in previous trading sessions have often failed to carry through, as European leaders had tried many times over the last two years to stave off a deterioration in the debt crisis. A recent attempt was on Oct. 27, when the broader market as measured by the Standard & Poor’s 500-stock index rallied 4 percent on the hope that a new European plan could solve its problems. But it failed to sustain its gains.

That rally was one of eight times that the S.& P. had spiked up at least 4 percent since the end of 2008, while in the same period it experienced 10 declines of that size.

Is this déjà vu all over again—and again and again and. . .?

Show us what a bailout looks like. . .

This is what a bailout looks like!

As Felix Salmon explains,

The black line is Morgan Stanley’s market capitalization, which tends to hover in the $40 billion range but which fell as low as $9.8 billion in November 2008. The orange line is the amount that Morgan Stanley owed to the Federal Reserve on any given day — an amount which peaked at $107 billion on September 29, 2008. And the red line is the ratio between the two: Morgan Stanley’s debt to the Federal Reserve, expressed as a percentage of its market value. That ratio, it turns out, peaked at some point in October, at somewhere north of 750%.

The problem, of course, is that Morgan Stanley got bailed out, and is back to business as usual. The rest of us, on the other hand, are still in the throes of the Second Great Depression—and waiting for the other shoe (in Europe) to drop.

Economist of the day

I teach financial markets, and it’s a little like teaching R.O.T.C. during the Vietnam War. You have this sense that something’s amiss.

Robert J. Shiller, Arthur M. Okun Professor of Economics, Yale University

Social safety net BS

There’s an awful lot of BS in the economic debate these days.

One example of BS is the idea that the bailout of the banks was not really a bailout.

Another is Casey Mulligan’s idea that unemployment remains high because the social safety net is too generous.

Of course, most people work hard despite a generous safety net, and 140 million people are still working today. But in a labor force as big as ours, it takes only a small fraction of people who react to a generous safety net by working less to create millions of unemployed. I suspect that employment cannot return to pre-recession levels until safety-net generosity does, too.

There are many ways to challenge the BS of such an argument. One is ethical: why should we make the economic circumstances of those who are unemployed even more miserable than they already are by cutting unemployment benefits and anti-poverty programs? Another is Keynesian: the social safety net props up aggregate consumption by allowing those who are unemployed to pay at least some of their bills and to purchase at least some of what they need. There’s even a neoclassical argument: with a social safety net, workers and employers can wait to find the appropriate match, thereby increasing productivity.

A fourth argument is factual: there simply aren’t enough job openings for all those workers who are currently searching for a job. According to the Bureau of Labor Statistics [pdf], and as can be seen in the chart above, even though the ratio of unemployed persons per job opening ratio trended downward since the end of the official recession, it was still at 4.2 in September 2011.

That’s 4.2 workers searching for a job for every available job in the U.S. economy. No cutback in the social safety net, no matter how savage, no matter how desperate it makes those workers, will succeed in finding them all jobs.

Mulligan’s argument, like so many other neoclassical proposals in the economic debate these days, is pure and simple BS.

Bailout BS

Steve Waldman explains why the idea that the bailout of the banks was not really a bailout is pure and simple BS.

Substantially all of the TARP funds advanced to banks have been paid back, with interest and sometimes even with a profit from sales of warrants. Most of the (much larger) extraordinary liquidity facilities advanced by the Fed have also been wound down without credit losses. So there really was no bailout, right? The banks took loans and paid them back.

Bullshit. . .

Cash is not king in financial markets. Risk is. The government bailed out major banks by assuming the downside risk of major banks when those risks were very large, for minimal compensation. In particular, the government 1) offered regulatory forbearance and tolerated generous valuations; 2) lent to financial institutions at or near risk-free interest rates against sketchy collateral (directly or via guarantee); 3) purchased preferred shares at modest dividend rates under TARP; 4) publicly certified the banks with stress tests and stated “no new Lehmans”. By these actions, the state assumed substantially all of the downside risk of the banking system. The market value of this risk-assumption by the government was more than the entire value of the major banks to their “private shareholders”. On commercial terms, the government paid for and ought to have owned several large banks lock, stock, and barrel. Instead, officials carefully engineered deals to avoid ownership and control.

But still. Everything worked out, right? It turns out that banks didn’t need to use the government’s giant insurance policy. It was just a panic after all!

Bullshit.

Map of the day

source [ht: db]

A low foreclosure rate signifies a county in which fewer than one in 150,000 properties has had a foreclosure action. A moderate rate is between one in 4000 and one in 700, while a high rate indicates more than 1 foreclosure action in 700 properties.

Public art of the day

source [ht: mfa]

Protest of the day

Mass strikes of public sector workers in the UK

Honorary Italian—Berlusconi edition

Here’s Alan Greenspan, extolling the virtues of the self-regulating financial sector, in a speech before the National Italian American Foundation, in 2005:

It is a pleasure once again to speak before the National Italian American Foundation. I have long since been awarded the status of honorary Italian, for which I am sincerely appreciative. . .

Historically, banks have been at the forefront of financial intermediation, in part because their ability to leverage offers an efficient source of funding. But in periods of severe financial stress, such leverage too often brought down banking institutions and, in some cases, precipitated financial crises that led to recession or worse. But recent regulatory reform, coupled with innovative technologies, has stimulated the development of financial products, such as asset-backed securities, collateral loan obligations, and credit default swaps, that facilitate the dispersion of risk.

Conceptual advances in pricing options and other complex financial products, along with improvements in computer and telecommunications technologies, have significantly lowered the costs of, and expanded the opportunities for, hedging risks that were not readily deflected in earlier decades. The new instruments of risk dispersal have enabled the largest and most sophisticated banks, in their credit-granting role, to divest themselves of much credit risk by passing it to institutions with far less leverage. Insurance companies, especially those in reinsurance, pension funds, and hedge funds continue to be willing, at a price, to supply credit protection.

These increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago. After the bursting of the stock market bubble in 2000, unlike previous periods following large financial shocks, no major financial institution defaulted, and the economy held up far better than many had anticipated. . .

Being able to rely on markets to do the heavy lifting of adjustment is an exceptionally valuable policy asset. The impressive performance of the U.S. economy over the past couple of decades, despite shocks that in the past would have surely produced marked economic contraction, offers the clearest evidence of the benefits of increased market flexibility.

In the name of Ferdinando Nicola Sacco and Bartolomeo Vanzetti, I hereby retract the honor bestowed upon Greenspan.

Cartoon of the day

Special mention