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Posts Tagged ‘bailouts’

Small-government types have often debated whether the 17th Amendment to the U.S. Constitution, establishing direct election of senators, is in part responsible for the decline of federalism in the U.S. I have long been skeptical of the 17th Amendment repeal movement, because Germany has a system in which states (Länder) elect senators (members of the Bundesrat), and Germany has within a few decades moved from a stronger system of federalism than the U.S. enjoys to a much weaker federalism than the U.S. enjoys. I’ve recently been reading Fiscal Decentralization and the Challenge of Hard Budget Constraints, edited by Jonathan Rodden, Gunnar Eskeland, and Jennie Litvack, and it turns out this arrangement or something like it is more common than I realized — and with even worse consequences.
First, here is Rodden on Germany (p. 174): (more…)

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This working paper is already getting substantial attention, and it’s not hard to see why. They find that banks that lobbied more in the years leading up to the Troubled Asset Relief Program (TARP) of 2008 received more money through TARP. What’s particularly astounding is the rate of return, which they estimate at between $485 and $585 per dollar spent in lobbying.

I suppose there are two ways to look at this. One is to become outraged at the profitability of lobbying and the fact that money buys influence in Washington — but who is really surprised by that? The other way to look at it is that despite the flood of rents available, rent-seeking seems to be far less than theory would predict. Theory predicts that banks should spend up to about 1/2 the amount they could reasonably expect to receive, and that total expenditures on rent-seeking could even be greater than the rents available. Perhaps the reason standard rent-seeking models don’t apply in this case is that a program the size of TARP was unforeseeable until just days before it happened.

In any event, the findings certainly betray the common assertion from political leadership that the program was simply a practical response to the financial crisis aimed at preventing another Great Depression.

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Guido Fawkes makes the case for letting banks fail, comparing the trajectories of two economies massively damaged by the financial crisis: Iceland and Ireland. Iceland let its banks fail, while Ireland has bailed out its banks, to massive expense:

The Irish bail-out plan will cost €54,800 per Irish household. Ireland’s future thus looks a lot more bleak than Iceland’s path of debt default and a devaluation of 60% two years ago which has the country rebounding: exports and manufacturing are growing by 20%, tourism is back near all-time highs, real wages are rising, unemployment is declining sharply, interest rates fell from 18% to 5.5% and the stock market has rebounded 50% from its lows.

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Albert R. Hunt defends the administration against the charge made by Verizon chairman Ivan Seidenberg. (Part of the reason for Seidenberg’s charge is the FCC’s aggressive push to regulate the Internet without apparent statutory authority.) Hunt’s defenses of Obama are as follows:

President Barack Obama rejected calls last year to nationalize the big banks, opting instead for market-based stress tests and injecting more private capital; he disappointed liberals by turning down a government-run national health-care program, and assists the struggling U.S. automobile industry to survive as a private enterprise.

In the face of the worst economic crisis since the Depression, corporate profits since Obama took office have soared 40 percent, and the stock market, despite the recent slump, has risen more than 27 percent.

The U.S. corporate tax rate is the second-highest among major industrial countries, the Verizon CEO correctly noted. He neglected to point out that the effective marginal rate paid by corporations, according to a study by the administration of President George W. Bush, is within the average of these countries because of all the loopholes championed by business interests.

So almost all of Hunt’s defenses of Obama’s record have to do with the fact that his administration (and to be fair, the one before as well) is willing to use the power of the federal government to pick winners in the marketplace. That’s certainly “pro-particular businesses,” but one can see how those overlooked for special treatment might be miffed. The final point left is the rise in corporate profits. Given that Obama took office at the nadir of the worst postwar recession, I hardly think this trend can be credited to his account. Finally, we would do well to remember the distinction between being pro-business and pro-market. No, Obama’s not a socialist ideologue, but his administration is reintroducing old-fashioned industrial policy to the American political economy in a big way.

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According to this story from the Fortune blog, euro default insurance prices have risen so high that it now costs more to buy a credit default swap on German debt than on U.S. debt. And that’s Germany.

Now, Germany is not going to default. I think the real risk here is that now that the EU has broken the bailout seal, the euro will continue its decline and other countries will allow themselves to get into trouble. A spokesman for the Hungarian prime minister has already said that talk of default in that country is “not an exaggeration.” It may be that Hungary is now trying to shake some cash loose from the EU money tree, but creating market uncertainty is a risky way to do it.

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The transatlantic political class has taken up the cudgels on behalf of a Greek bailout. Even the Economist has joined the parade, warning of “contagion” to other European economies if a rescue package is not approved. Megan McArdle, while skeptical of a bailout, also resorts to the contagion meme and compares Greece’s current difficulties to the origins of the Great Depression.

The problem with the contagion forecast is that it implicitly assumes greater rationality and forethought among economic commentators than among international investors risking their own money. If contagion could be predicted, it wouldn’t happen.

The risk here isn’t contagion, but an entirely rational market response to poor fundamentals in highly indebted countries. Let’s take the three options available to the EU: allowing Greece to default, allowing Greece to leave the euro and default through inflation, and giving Greece a massive bailout. All of these options entail depreciation in the euro and a rise in the cost of sovereign borrowing for Eurozone governments. The putative advantage of bailout is that it redistributes these costs from the PIIGS governments teetering on the brink to relatively healthy states like Germany and France. The putative disadvantage is a long-term rise in moral hazard. Granted that the efficient-market hypothesis is wrong, we still cannot know whether any of these options might foreshadow or forestall widespread financial panic, but each has its costs and benefits.

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