Simon Johnson on the Euro

Simon Johnson has a good blog post on the end of the euro. Digging in, the run is on, the end is near, and the chaos will be worse than you thought.T he ECB has also monetized a lot more than you thought.

Still, I do not understand why even Simon cannot imagine the idea of sovereign default while staying in -- and firmly committing to stay in -- the currency union. The picture Simon paints of the euro breakup is a catastrophe. So why not even talk about sovereign default (restructuring) without euro breakup?

It strikes me as really the only way out, and the longer Europe waits, the harder it will be. 

Texas Hedge

My first reaction to the JP Morgan loss was, if their "hedge operation" had become a "profit center" as reported, we know exactly what went wrong. (And, if they weren't playing with a government guarantee, who would care if they lost $2 billion and some hedge funds gained $ 2 billion?)

Andy Lo put it beautifully:

Why not thank the speculators?

 The price of oil. (Sent by a friend whose reputation I won't besmirch by name, but thanks.)

Remember how the oil price rise was the work of evil speculators who had to be stopped? (My post here) Well, now that the speculators are driving prices down even faster,  shouldn't they get a thank you? Ok, maybe not medal of honor, but a nice statue out on the Washington Mall would be thoughtful. Flowers are always nice.

Tongue in cheek of course, but the different treatment of price rises and declines by the usual economic and political pundits is interesting to note.

Good Comments

Reading through some of last weekend's commentary  got me thinking about what I look for most -- and try to emulate -- in good economic commentary.

One of the first lessons we learn in econ 1 is that economics has a lot to say about incentives, which are usually ignored by popular discussions, and economists have a lot less to say about fairness, morality, or distributional questions, which is what popular discussions focus on. I don't mean that fairness or distributional questions are unimportant, just that economists don't have any special insight into those questions.

Local Regulation

A nice short video describing some of the trials and tribulations of an excellent Hyde Park cafe trying to navigate our city's over-regulation:

A few things struck me about this story, which only scratches the surface of troubles small businesses have in Chicago.

airline seats

You know the drill. They try to board us by groups, but people are smashing on the plane like it's the New Delhi train station. When the plane is half full, the overhead bins fill up. Then people start dragging massive bags all the way upstream for gate checks. On and on it goes, tempers frazzling and  a few hundred million dollars of plane, costly crew, and my not so free time sitting idly on the ground.

So I have long wondered: why in the world do airlines charge $25 for checking bags, and not $25 for bringing huge bags on the plane? 

I finally found out the answer, here

Leaving the Euro again

Yesterday's coverage of the latest European summit seems designed to reinforce my view of basic confusion expressed yesterday pretty clearly.

For example, the Wall Street Journal's "Europe Girds for a Greek Exit" reports that the talk was all about eurobonds, stimulus, or bailout as a way to avoid Greek exit from the Eurozone, repeating the senseless mantra that sovereign default cannot occur in a currency union.

"We want Greece to remain in the euro zone," German Chancellor Angela Merkel told reporters after nearly eight hours of talks. "But the precondition is that Greece upholds the commitments it has made."

I salute Ms. Merkel for not giving in to the camp that wants endless wasted spending disguised as stimulus, to be followed by inflation. But really, why would Greece not "upholding its commitments" mean it has to "leave the eurozone?" Why is it impossible to turn off the bailout spigot, and let Greece default and stop running deficits, while it stays in the euro?

Leaving the Euro

I find all the reporting of the Greek (and following Spanish, Italian, etc.) debt crisis unbelievably frustrating.

Why does everyone equate Greece defaulting on its debt with Greece leaving or being kicked out of the euro? The two steps are completely separate. If Illinois defaults on its bonds, it does not have to leave the dollar zone -- and it would be an obvious disaster for it to do so. 

It is precisely the doublespeak confusion of sovereign default with breaking up a currency union which is causing a lot of the run.

Rajan on the world's troubles

My colleague Raghu Rajan wrote a very thoughtful essay in Foreign Affairs. Though titled "The True Lessons of the Recession" it's really more a grand view of the last 50 years and prospects for growth ahead. The subtitle "The West Can’t Borrow and Spend Its Way to Recovery" is worth repeating.

FDA for Financial Innovation?

Eric Posner and Glen Weyl are making a big splash with their proposal for An FDA for Financial Innovation. 

As you might guess, I think it's a terrible idea. But let me try not to be predictable. I do think there are financial products that need to be regulated if not banned. Interestingly, Posner and Weyl completely miss these elephants in the room. (What are the dangerous products? I'm going to make you wait so you'll read more of the post.) That observation alone seems like a good argument against their FDA as a structure for financial regulation. 

Slow recoveries after financial crises?

Are recoveries always slower for recessions that follow financial crises? This factoid has become sort of a mantra, or excuse, depending how you look at it.

Former President Bill Clinton chimed in, repeating the factoid thus: "If you go back 500 years, whenever a country’s financial system collapses, it takes between 5 and 10 years to get back to full employment."

I. Facts

Floating-rate debt update

As reported in the WSJ, the Treasury delayed it's decision on floating rate notes.

I was interested to note in the article that the Treasury seems to be struggling with the same issue that occupied my post on the subject yesterday -- just how will the "floating" rate be set?

The Treasury is searching for an index, and considering the overnight Federal Funds rate, Libor, the general collateral Repo rate, or an index based on treasury bill rates. All of these have various problems outlined in the article.

A second indication of the problem with any index shows up in the article: The unsettled debate whether to let floating rate debt auction at a price greater than face value. That means Treasury also envisions the security trading less than face value.


I'm interested that what's missing is the most obvious mechanism: The price is exactly $100 every single day, and an auction mechanism sets the rate daily at whatever it takes to maintain that price. Any other mechanism means the security is not protected from capital losses, which makes it much less useful as an asset.