Michael Kevane

The first witness called by Boies, Scott Alvarez, the general counsel of the Federal Reserve Board of Governors, testified about the credit terms extended by the government to financial institutions earlier in 2008 and about the terms offered to AIG.Under questioning by Boies, Alvarez insisted that when the bailout began on Sept. 16, 2008, the government had not decided that its equity interest in AIG would take the form of warrants for common stock.Boies argued in his opening that the government imposed a demand for warrants and then changed the deal, insisting on preferred stock to avoid shareholder challenges to its control.He pointed to Sept. 21, 2008, AIG board minutes stating that a bailout involving warrants was “now proposed to be convertible preferred stock.” Alvarez’s hand-written meeting notes from Sept. 18 said “there may be issues with warrants at AIG.”

via AIG Bailout by U.S. Was ‘Extortion,’ Greenberg Lawyer Says – Bloomberg.

The Fed has sought to stimulate the economy by purchasing large quantities of long-term Treasury securities. The campaign, which is scheduled to end in October, aims to force investors to buy other kinds of debt and, in the face of increased competition, to accept lower interest rates from the borrowers.During the same period, the Treasury has greatly increased its issuance of long-term debt. Mary John Miller, until recently the Treasury official responsible for debt issuance, said the average duration of government debt, historically about 58 months, fell to 48 months during the crisis and has risen to 68 months.Mr. Summers and his co-authors calculate that the Fed’s campaign reduced long-term rates by 1.37 percentage points, but that the Treasury’s debt policies put back 0.48 of those points.

via Now as Provocateur, Summers Says Treasury Undermined Fed – NYTimes.com.

The first is The Jewel, an Italian movie based on the 2003 $20 billion Parmalat bankruptcy, still apparently Europe’s biggest bankruptcy.

The second in Capital, a French movie by Costa-Gavras, loosely based on the shenanigans leading up to the 2008 financial crisis.

Capital is the more moralizing of the two, and also has a major plot hole, and an idiotic love angle involving a supermodel, that is just plain idiotic.  The Jewel is more ruminative, and the love affair less ridiculous.  Neither teaches much about the economics of the whole phenomenon.  The Jewel at least plausibly suggests that those responsible had a variety of motives, from pure greed to over-zealous commitment to the company’s survival, as an end in and of itself, regardless of cost.  Still they kept my attention, and were much better than the Richard Gere film Arbitrage which was truly awful.

The Starr case is starting tomorrow, and hopefully will extract and make public important testimony and evidence.

Former Treasury Secretary Timothy F. Geithner, who orchestrated the bailout from his previous perch as New York Fed president, insists that extracting these “haircuts” would have shattered the market’s confidence and undermined the A.I.G. bailout.But this explanation is both counterintuitive — the haircuts would have helped save A.I.G. and stabilize the financial system — and ahistoric. The Fed has long used its leverage over banks in similar situations, to great effect. During the Asian financial crisis of the late 1990s, an episode Mr. Geithner observed up close as a senior Treasury official, the New York Fed president, William J. McDonough, leaned on Korea’s creditors to roll over and lengthen their loans and prevent that country’s financial collapse. Which leaves only two possible explanations for the overly solicitous treatment of Goldman and the others. The first is that their own financial position was so precarious that accepting anything less than the billions they expected from A.I.G. would have destabilized them, too. Which is to say, it really was a backdoor bailout of the banks — many of which, like Goldman, claimed they didn’t need one. Alternatively, maybe Mr. Geithner simply felt that Goldman and the like had a more legitimate claim to billions of dollars in funds than the taxpayers who were footing the bill.

via Finally, the Truth About the A.I.G. Bailout – NYTimes.com.

People dislike inflation.  Shiller[1996] provides survey evidence that the public are greatly concerned about inflation and feel strong antipathy towards it. Inflation distresses people because they fear that rising prices will outpace wages. It also angers people because they feel cheated by rising prices. Eighty-five percent of survey respondents report that when they “go to the store and see that prices are higher… [they] sometimes feel a little angry at someone”, the most commonly perceived culprits being the government, manufacturers, store owners, and businesses, and the most commonly identified cause being “greed”.  Kahneman, Knetsch and Thaler [1986] provide survey evidence that consumers find it unfair for prices to increase without underlying increases in marginal costs, for instance in response to higher demand.Campbell [1999] provides additional evidence that consumers’ inferences about the motives behind price increases influence how fair they judge the increase.

In this paper, we incorporate people’s anger about high prices into the standard macroeconomic model of monopolistic competition by Blanchard and Kiyotaki {1987]. To do so, we assume that consumers dislike paying a price that exceeds some fair markup on firms’ marginal costs; fixing a good’s price in real terms, the higher its markup in real terms, the less consumers demand.  When consumers know firms’ marginal costs—and, hence, markups—their distaste for markups makes the economy more competitive but does not change any of its qualitative features. In particular, the supply of money does not affect any real variables. In the more plausible case where consumers do not know marginal costs, their inferences about marginal costs from prices play a pivotal role. We follow a recent literature in behavioral economics by making the extreme yet analytically tractable assumption that consumers infer nothing about marginal costs from prices. Under this assumption, money is no longer neutral. Higher money supply induces lower real markups but higher perceived real markups. Although money supply is expansionary, firms earn lower profits and consumers become angry. Our model also predicts price and real-wage rigidity in response to both supply and demand shocks.

via The Curse of Inflation by Erik Eyster, Kristof Madarasz, and Pascal Michaillati.

This does not surprise me at all.  Too many institutions develop cultures of “do not ask embarrassing questions in public” and then define every opportunity to ask a question as a public occasion, and so no questions are ever asked.

It’s an extraordinary document. There is not space here to do it justice, but the gist is this: The Fed failed to regulate the banks because it did not encourage its employees to ask questions, to speak their minds or to point out problems.Just the opposite: The Fed encourages its employees to keep their heads down, to obey their managers and to appease the banks. That is, bank regulators failed to do their jobs properly not because they lacked the tools but because they were discouraged from using them.The report quotes Fed employees saying things like, “until I know what my boss thinks I don’t want to tell you,” and “no one feels individually accountable for financial crisis mistakes because management is through consensus.” Beim was himself surprised that what he thought was going to be an investigation of financial failure was actually a story of cultural failure.

via The Secret Goldman Sachs Tapes – Bloomberg View.

Some of the dollar’s recent strength has come against the euro, following a series of statements made by the European Central Bank’s president, Mario Draghi, that were interpreted by currency traders to be supportive of a weak euro. Many European economists say that, in light of the E.C.B.’s institutional restraints, a weak euro that would jump-start exports is the easiest way to spur growth in the eurozone.Since Mr. Draghi touched on some of these issues during his speech in Jackson Hole, Wyo., in late August, the euro has lost significant ground against the dollar, a move that has taken many traders and analysts by surprise.Traders have subsequently added to their bets that the euro will continue to fall, pointing to such long-term problems as anemic growth and persistent unease over Europe’s banks. Data from the United States Commodity Futures Trading Commission shows that the short positions on the euro are the most popular currency trades.But it is against the Japanese yen that the dollar’s move has been most pronounced: up about 7.4 percent since mid-July. Traders are betting that a weak yen will support the aggressive policies put in place by Japan’s prime minister, Shinzo Abe, who has promised to revive the country’s slumbering economy.With Japan carrying the largest debt load in the world — 227 percent of its economic output — and with the country’s growth rate at barely 1 percent, the yen would seem to be ripe for the type of precipitous fall experienced by many emerging markets in recent years.Many traders point to the structural problems in Japan to bolster their prediction that the dollar will strengthen against the yen. More than ever though, underpinning their bullishness is the fact that the United States’ economy — younger, more flexible and with a better handle on its finances — is doing so much better than Japan’s.

via Buoyant Dollar Underlines Resurgence in U.S. Economy – NYTimes.com.