An old NYT article and the current situation

From the Freakonomics blog, this article from the New York Times in 1999.

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

I may be going out on a limb here, but could this have something to do with the current mess?

Quote for the day from Buffet

"You should get greedy when others are fearful and fearful when others are greedy"

Further opinions from economists

For more great insights into the current mess check out Greg Mankiw's blog...

Campbell Harvey's proposal

Campbell Harvey, current editor of the Journal of Finance, has put forward what he calls a "proactive" solution to the current financial crisis. You can read it here. He makes a lot of excellent points. Whether or not our leaders in congress pay any attention to them is another matter.

Essential Reading on the current mess

My colleague Craig Newmark, has put together an excellent listing of articles discussing the current situation. Many are written by some of the brightest and smartest names in economics. This really is a fantastic resource and makes excellent reading.

The first post is here. The second is here .

Zero interest for a limited time

The yield on T Bills actually touched zero percent today.



This is consistent with institutions looking for any place to park money while things sort themselves out. Getting a return is probably a secondary issue. This is generally referred to as a flight to quality.

Graph from finance.yahoo.com. The current quote is here.

HT: My colleague Bart.

Charlotte NC

Charlotte NC (the other big city in NC - I'm in Raleigh) could be an unexpected beneficiary from the financial fall out. We've already heard of Bank of America buying Merrill. Now there is talk of Morgan Stanley trying to hook up with Wachovia.

Both BofA (which used to be North Carolina National Bank - NCNB) and Wachovia are headquartered in Charlotte.

Of course, its very unlikely that Merrill or MS would move the brokerage or investment banking business to the queen city.

Worst crisis since 1930

The (newly designed and very nice looking) Wall Street Journal website has a great article about the current financial problems. This is not a discussion of how we got here, but more specifically of why it is hard to correct the problems. The key is an orderly de-leveraging of financial firms. Firms have to unwind their debt and build up capital. Unfortunately, as they sell assets to reduce positions, the value of these assets decline, worsening their capital position. We're in a sort of death spiral. It is looking more a more likely that more government intervention will be needed to help these firms get out of their debt positions. This obviously brings with it unpleasant questions about who gets bailed out and who doesn't.

What is clear is that going forward, credit will not be as easily available. Particularly to more marginal borrowers, and those who want to borrow at very high leverage rates.

From a personal finance side, I take the view that first you want to remain very well diversified, and second, when the recovery comes, which it will, you want to be in the market. Therefore, I am staying the course.

Buffet was right....

The oracle of Omaha correctly foretells the future, yet again. (He previously predicted the collapse of the tech market).

HT Newmark's Door

Not a happy day for stocks

The market was down today by over 4%, making this the worst trading day in 7 years. It is surprising that it didn't fall further. The bankruptcy of Lehman, the takeover of Merrill and the continuing problems at AIG and WAMU all point to massive weakness in the financial sector. Top it all off with more weak numbers about the economy and surprisingly better news about oil prices (which hurt oil stocks) and you are in for a bad day.

My MBA students manage a real money portfolio and we took big hits on energy stocks - with Constellation Energy and Frontier Oil both down over 15%. Citigroup was also off 15%. On the bright side, consumer non-durables did relatively well - showing their general recession proof qualities. Overall the portfolio was off about 3.7%, which at least wasn't as bad the market overall.

Cap and trade

I recently posted about Pigovian taxes - i.e. a Carbon tax. One of the advantages to this tax is that it would reduce carbon emissions and the tax revenue could be used to reduce other types of tax - such as payroll tax. In essence, it could be tax neutral.

An alternative to a carbon tax is a cap and trade system. This works fine if you auction a limited number of carbon credits and collect the revenue from the auction and then use the proceeds to reduce the economic burden of the higher energy costs on consumers. But if you just give them away then you achieve nothing. In fact giving too many away basically results in a subsidy to polluting firms who can then sell them at a profit. These firms collect all the excess from the cap and trade system. Case in point: the experience in the EU.

The following quote from the article pretty much sums it up.

One of the largest over-allocation of permits is to Castle Cement, which makes a quarter of all British cement at three works in Lancashire, north Wales and Rutland. The figures show carbon dioxide emissions from the three plants have fallen from 2.3m tonnes in 2005 to 2.1m tonnes in 2007. Yet, under the ETS, the firm has been handed enough permits to produce 2.9m tonnes CO2 for each of the next five years - an annual surplus of 829,000 permits.

A spokesman for Castle Cement said: "Castle Cement will not require all its allocated permits to cover CO2 emissions in 2008 as we continue to reduce our impact on the environment in line with our sustainability strategy.

"Total CO2 emissions from our three works are likely to be less than in 2007 due to further improvements in efficiency, increased use of low-carbon fuels and a weakening demand for cement caused by the general economic downturn. Surplus credits will be traded."

At the current price of £21, the company could sell its surplus permits for £83.5m over the five years.

Prediction markets

Not getting enough of politics on TV, in the news and everywhere else? Well you can play the prediction market as well..here.

You can bet on either McCain or Obama winning the election. Or you can take a hedge position to offset your post election misery. Your choice.

Finance and Econ researchers have written on these markets. Here are a couple of links. 1. 2.

HT: Freakonomics.

UAL share price drop

Thanks to Craig Newmark for this interesting story.

On Monday (sept 8), UAL (United Airlines) stock dropped 75% amid a story that it had filed for bankruptcy. Turns out the story was from 2002. The original story was on the Florida Sun Sentinel's website. It was on the front page because people had clicked on the old story and made it the most popular news story. (This happens on the BBC news site a lot also).

A google search bot found the story, but as it had no date, assigned the date from the masthead of the paper. Then an analyst (who didn't read the story) uploaded it to Bloomberg. Program trading took over and the "news" triggered a massive sell off of the stock.

The SEC is investigating. The question is: Was this an innocent mistake or was their evidence of a deliberate manipulation of the stock?

Pigovian Taxes

Greg Mankiw has an excellent article on why gas taxes should be higher. I'm inclined to agree with him. In fact the majority of economists support the notion of Pigovian taxes on gasoline. These are taxes that are used to correct some externality generated by consumption. In the case of gasoline, the externalities are pollution, congestion, climate change etc.

Mankiw also explains why cap and trade policies are inferior to a simple carbon tax. The primary reason being that the revenue from the carbon tax can be used to offset the tax burden - for example - it can be used to reduce payroll taxes.

Primary opposition for carbon taxes come from politicians - but as Mankiw points out; just because they oppose a carbon tax - doesn't mean that carbon taxes are a bad idea.

Anyhow, it is an excellent read for both economists and non-economists alike.

Hat tip goes to the Freakonomics blog where I saw this posted.

Arca ECN

It's not often that you can see a financial market in action in real time. Check out the Arca ECN. (Be sure to click on the java book version).

For the uninitiated, an ECN is an electronic market that matches buy and sell orders...