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Economics
Credit-default swaps
The case for the prosecution
Jan 8th 2013, 0:59 by A.P. | LONDON
AMONG the welter of papers presented at the AEA meetings in San Diego this past weekend was one to make opponents of financial innovation cheer. The paper, by Marti Subrahmanyan of New York University, Dragon Yongjun Tang of the University of Hong Kong and Sarah Qian Wang of the University of Warwick, looks at the effects of credit-default swaps (CDSs) on the companies these instruments were written on.
The authors used a database of North American CDS transaction records that ran from 1997 to 2009, and found that the odds of bankruptcy rose steeply for firms after CDSs started being traded, and decreased when the CDSs expired.
Recommended economics writing
Link exchange
Jan 7th 2013, 23:18 by M.C.K. | WASHINGTON
TODAY'S recommended economics writing:
• Regulators ease key bank rule to spur credit (Reuters)
• Breaking up banks is easy when they aren't failing (Red Jahncke)
• The zombie credit mispricing (FT Alphaville)
• Banks to need more money for their recapitalization (Ekathimerini)
• Surprise, surprise: The Banks Win (Gretchen Morgenson)
• Why new Basel rules won't make safer banks (John Carney)
• How much financial inequality is due to financial illiteracy? (Freakonomics)
• Why we won't mint a platinum coin (Felix Salmon)
• SEC gives JP Morgan and other big banks license to manipulate commodities (Yves Smith)
• Besides gold, economists don't agree on much (Businessweek)
Kludges
America going platinum
Jan 7th 2013, 18:37 by R.A. | WASHINGTON
AMERICA'S government is full of oddities, and here's one: it is possible for the government to pass spending and tax bills which lead to an illegal amount of accumulated debt. The government's borrowing results from all the tax and spending choices made by past and present elected officials and leads to annual deficits that add to a stock of public debt. Once the tax and spending choices are made, the resulting debt load is a fait accompli, a residual. Yet said elected officials have also seen fit to pass a law declaring that debt must fall below a specific limit.
Business cycles
Running out of time
Jan 7th 2013, 3:05 by R.A. | WASHINGTON
WITH another month of jobs data in hand, economics writers can't help but note the remarkably stable pattern in employment growth. Payrolls rose by 155,000 jobs in December of 2012, according to figures released by the Bureau of Labour Statistics on Friday. Average monthly employment growth for all of 2012 was 153,000—the same as in 2011. This coincidence could be down to shortcomings in data gathering; new revisions may well nudge up the rate of employment growth in 2012. We had better hope so.
America's December jobs report
Cliff? What cliff?
Jan 4th 2013, 14:26 by G.I. | WASHINGTON, D.C.
IT HAS been a month of high drama on America's economic-policy front, as leaders in Washington grappled with the fiscal cliff. But not many people out in the real world seemed to care, and the economy has done just fine. Non-farm employment advanced 155,000, or 0.1%, in December from November, the federal government reported today.
That was right on expectations, as was the unemployment rate, which remained at 7.8%, unchanged from November. (The November figure was revised from 7.7%, as the Bureau of Labour Statistics conducted its annual revamp of seasonal factors.) Job growth was also better than last year's average monthly trend of 130,500.
There were no obvious black marks in the report.
Business lending
Credit crunch 6.0
Jan 3rd 2013, 17:51 by R.D. | LONDON
Enlarge WILL 2013 be the year that British firms—already in their sixth year of credit crunch—start to see easier lending conditions? A long run of British lending data shows two things. First, business lending tends to be volatile. There are peaks of 40% growth (the early 1970s) and troughs of -10% (recently). Moreover, the dips can be lengthy, as in the early 1990s. Second, the biggest peaks and troughs are associated with recessions (I’ve shaded the chart to show important downturns, there is a more detailed version in a Bank of England Trends in Lending publication, here).
After the initial sub-prime shock, the credit crunch was slow to hit British firms.
The markets and the cliff
Just another day in Beirut
Jan 2nd 2013, 23:39 by G.I. | WASHINGTON, D.C.
STOCKS shot higher today on news of a tax deal that averts part of the fiscal cliff. Veterans of Washington and on Wall Street shook their heads in disbelief. Yes, they note, the deal prevented a sudden and damaging increase in taxes. But other than that, it’s an abomination. It leaves in place severe near-term austerity, does nothing about the long-term deficit, and leaves a series of minefields over the next two months: the $110 billion sequester, and the debt ceiling (see the nearby chart).
Worse, the chaotic, combative process left Republicans and Democrats at each others’ throats.
Innovation
The illusion of stasis
Jan 2nd 2013, 21:05 by R.A. | WASHINGTON
I WILL have a lot to say about the current discussion on techno-pessimism in coming weeks. For now, I want to address one aspect of the phenomenon that strikes me as curious. In recent weeks, I've seen Tyler Cowen* comment on the potential of 3D printing by writing:
Maybe I’m blind, but I don’t yet see this as a technological game-changer. It seems more like a way of saving on transportation costs. To put it another way, what’s the huge gain of making everyone a manufacturing locavore? Perhaps there will be some new flurry of home-based innovation, based on tinkering from what these printers can drum up, but that seems to me quite speculative.
Entitlement reform
Cuts on the sly
Jan 2nd 2013, 19:56 by A.C.S. | NEW YORK
TO THOSE on fixed incomes, including many retirees, inflation is the enemy. Workers can generally expect their wages to rise with inflation (if not in one-for-one lockstep). But after retirement income is set, and erodes in real terms as prices increase. Some retirees are protected; their pension benefits increase with inflation each year. That protection may now be vulnerable. A smaller cost-of-living increase is a sneaky, and sometimes only barely legal, way to cut benefits when a pension is under-funded.
Indexing benefits to inflation is expensive, but it’s not always appreciated.
Government debt
How much is too much?
Jan 2nd 2013, 16:40 by M.C.K. | CHICAGO
THE popularity of austerity policies has waned over the past several years thanks to evidence that it may have been counterproductive. But many are still worried by the fact that, relative to national income, government debt is now larger in many countries than at any point since WWII. Moreover, for most nations, government debt is projected to grow relative to income for years to come. This is why policymakers across the rich world have been scrambling to slow the growth of public spending while simultaneously increasing tax revenues. (America’s budget fights should be understood in this context.) Does their urgency make sense?
Monetary policy
What's moving Japanese markets?
Jan 1st 2013, 20:44 by R.A. | WASHINGTON
POLITICAL change in Japan is spurring hope among many economic writers that a dramatic change in Japanese monetary policy might put many old theories to the test, and bring the Japanese economy out of stagnation at last. But Tim Duy reckons that western journalists are missing the real story of the Japanese monetary rethink:
In my opinion, a higher inflation target by the Bank of Japan is not particularly interesting. After all, the Bank of Japan can't hit the current "goal" of 1 percent inflation. I don't have much faith that renaming the "goal" a "target" and increasing it to 2 percent will be like waving a magic wand.
Governance
Navigating the fiscal badlands
Jan 1st 2013, 18:55 by R.A. | WASHINGTON
WE HAVE a deal, for now at any rate. But what does it all mean? What should we come away thinking about this fiscal cliff mess? I enjoyed Matt Yglesias' take on deficit scoldery that motivates so much of Washington policy:
You can imagine a kind of cult in the ancient Middle East in which the villagers are expected to make regular sacrifices to the gods in order to stave off their wrath. Well one year the proper sacrifices aren't made and yet no suffering seems to be imminent. The priestly caste now has a problem, since their livelihoods depend on the perpetuation of the cult.
The fiscal cliff deal
Short-term relief, and little else
Jan 1st 2013, 1:56 by G.I. | WASHINGTON, D.C.
AMERICA, it appears, will go over the fiscal cliff after all, but only for a few days. If all goes as planned, the worst of the cliff, a withering combination of tax increases and spending cuts, will be avoided, while the ugly fiscal arithmetic and political dysfunction that produced the cliff in the first place will remain.
A deal nearing completion in the Senate would make permanent the tax cuts first enacted by George Bush in 2001 and 2003 and due to expire on December 31st, except for the wealthy.
Stocking stuffers
Our holiday gift guide
Dec 21st 2012, 22:15 by M.C.K. | WASHINGTON
LOOKING for some last-minute stocking stuffers? We at Free exchange have a few suggestions for books on economics and finance that are both readable and informative:
Lords of Finance by Liaquat Ahamed
This magisterial history of the interwar financial system is required reading for anyone who wants to understand the euro crisis, or central banking more generally. Mr Ahamed brilliantly describes the key issues of war reparations, currency manipulation, and the bubbles of the 1920s. He also recreates the people and debates of the time with vivid descriptions, even if they only appear for a few paragraphs.
Holidays
Programming note
Dec 20th 2012, 18:46 by R.A. | WASHINGTON
OVER the next ten days or so, our economics team will be taking some time off to rest, reflect, and think up new crisis metaphors. Posting will be correspondingly light as a result. Happy holidays to all our readers; we'll see you back here in 2013.
Our economics correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts
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