Untangling credit default swaps

An explanation from American Public Media: Marketplace Senior Editor Paddy Hirsch

New WordPress feature

Up to now, a Blogger advantage was the ability to have your own domain name as URL.
Today there’s a notice that WordPress is now offering the same thing, for $15/year.

Nationalization

Krugman: Banking on the Brink, Feb-22-09.  “… What Alan Greenspan, the former Federal Reserve chairman — and a staunch defender of free markets — actually said was, ‘It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.’ I agree.” …
     ” … long-term government ownership isn’t the goal: like the small banks seized by the F.D.I.C. every week, major banks would be returned to private control as soon as possible. The finance blog Calculated Risk suggests that instead of calling the process nationalization, we should call it “preprivatization.” The Obama administration … believes “that a privately held banking system is the correct way to go.” So do we all. But what we have now isn’t private enterprise, it’s lemon socialism: banks get the upside but taxpayers bear the risks. And it’s perpetuating zombie banks, blocking economic recovery. What we want is a system in which banks own the downs as well as the ups. And the road to that system runs through nationalization.

Baseline Scenario posts on nationalization.  Response to reader questions.

Geithner Public-Private Investment Program (PPIP)

In the NY Times 3/22/09: Financial Policy Despair. 
“Over the weekend The Times and other newspapers reported leaked details about the Obama administration’s bank rescue plan, which is to be officially released this week. If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson. This is more than disappointing. In fact, it fills me with a sense of despair.”
     “… And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing. … “It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.”

See a round-up of blogosphere comment at the Financial Times blog.
Reflecting a more widespread view, one FT comment says:  “But the plan assumes, like its predecessors, that the basic problem is one of liquidity. It aims to put a price on securities that are not trading. If the problem is really one of solvency – that current prices for these assets are accurate – the gains will not be durable.”

The Two Trillion Dollar Meltdown, Charles Morris

The first edition of this book was titled The Trillion Dollar Meltdown. One trillion was his early-2008 estimate of the losses to the banking and other investment sectors, assuming orderly deleveraging. With disorderly deleveraging going on in late 2008, the estimate was raised to two trillion. But never mind that.

The new edition has a foreward and a postscript (p105) about the Federal Reserve. The “Greenspan Put” is an assumption that “no matter what goes wrong, the Fed will rescue you by creating enough cheap money to buy you out of your troubles.” In the first edition, Morris had said, “The days of a universal put to the Federal Reserve are finally over.” Now he says, “I couldn’t have been more wrong. Ben Bernanke, in close cooperation with [Paulson] embarked on round after round of creative intervention unmatched in the entire history of the Fed.”

Starting in late 2007 Bernacke started to lend against (purchase?) shaky assets like sub-prime mortgage backed CDOs. The Fed’s 10/07 balance sheet  showed total Fed assets were $890 billion, mostly traditional. The Oct-08 number was $2 trillion, mostly “a melange of god-knows-what instruments vacuumed up from banks and investment banks.”

What’s wrong with this? “If the Fed balance sheet starts to look like those of the banks it’s bailing out, it could readily shake confidence in America’s economic soundness.” And the Fed balance sheet is the foundation stone for the American money supply.” … “A radical expansion of the Fed balance sheet raises fears that America may be attempting to simply inflate its way out of its problems, as it tried to do, so disastrously, in the 1970s.” The postscript ends, “Puring out ever more dollars in the hope of recovering the zing of the old bubble days is exactly the wrong prescription, and risks making eventual outcomes far worse than they need be.”

See the 6-page postscript at Google books.
See Econbrowser Dec-08  on the Federal Reserve Balance Sheet and
Econbrowser Jan-09 for Bernacke’s comments on it.