tag:blogger.com,1999:blog-582368152716771238.post7605513928509016967..comments2024-03-29T04:41:56.077-05:00Comments on The Grumpy Economist: Kotlikoff on the Big ConJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger24125tag:blogger.com,1999:blog-582368152716771238.post-9652342820384223052018-12-13T07:39:33.998-06:002018-12-13T07:39:33.998-06:00the answer to end runs is to outlaw all financial ...the answer to end runs is to outlaw all financial maturity transformation so that long term assets must be backed by long term liabilities of the same or longer duration or equity. The side effect is the elimination of fractional reserve banking. <br />see http://natrights.blogspot.com/#loanslorenzo sleakeshttp://natrights.blogspot.comnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-45133137172494580912018-11-26T16:02:43.601-06:002018-11-26T16:02:43.601-06:00Killing the CDS market, and arbitrage desks at the...Killing the CDS market, and arbitrage desks at the major banks, is going to create a very wicked market collapse next recession.Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-72794440179174525692018-11-26T11:47:50.744-06:002018-11-26T11:47:50.744-06:00" Financial institutions have promised people..." Financial institutions have promised people they can have their money back in full, at any time, but they have invested that money in illiquid and risky assets"<br /><br />Easily solved. Banks should invest in assets that are payable within 60 days, then the banks should put 60-day suspension clauses in their deposit contracts, stating that in case of a run, the bank can delay redemption by 60 days.Mike Sproulhttps://www.blogger.com/profile/12949235460682126524noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-16058055870007526412018-11-16T18:37:53.385-06:002018-11-16T18:37:53.385-06:00Put me down as another person thinking the housing...Put me down as another person thinking the housing bubble was a big factor in triggering the financial crisis. Very surprised not to see a reference to Gjerstad and Smith's detailed work on this.<br /><br />As for the solution to liquidity panics, I am skeptical that there is any way to stop entities from levering up in vulnerable ways through all sorts of indirect contracts, given that in non-run periods levering up amplifies earnings. My tentative solution is to embed in common law the rule that during systemic crises (defined by some non-manipulable national rate spread between safe and risky assets) debt payments can be suspended without triggering default. That will make "crises" somewhat more frequent but vastly less consequential, more like a temporary circuit breaker. Run-vulnerable borrowers in such a regime would also be able to embed "don't-run" incentives into their contracts that rewarded people with higher returns if they went to the back of the line as the crisis eased.<br /><br />SRPhttps://www.blogger.com/profile/14905952909862780492noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-17752991737558043092018-11-13T17:38:06.184-06:002018-11-13T17:38:06.184-06:00We don't do equity banking because too many ba...We don't do equity banking because too many banksters think they'll be the ones getting $60 assets for $2 in a crises -- and in the meantime, they can speculate to get above average returns from investing the leveraged money.<br /><br />And the Big Banks want to be Too Big To Fail.<br />Tom Greyhttps://www.blogger.com/profile/15046612425809449502noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-6873776259639038482018-11-13T11:23:20.443-06:002018-11-13T11:23:20.443-06:00A great discussion. One minor typo down near the ...A great discussion. One minor typo down near the end where Cochrane writes:<br /><br />"<i>As Larry points out, really the FDIC and Treasury are the ones guaranteeing non-bank debts. The Treasury would have to borrow $12 <b>billion</b></i>"<br /><br />Should be "trillion"Yancey Wardhttps://www.blogger.com/profile/16427042729449397357noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-12500201398030577852018-11-12T11:11:38.637-06:002018-11-12T11:11:38.637-06:00I'm puzzled by #2. Using GDP as a measure of c...I'm puzzled by #2. Using GDP as a measure of comparison house prices were rising on the order of 5 times faster than normal, and he cites that as evidence that nothing was amiss? After reading that I'm *more* likely if anything to think house prices were a key ingredient.Jackson Monroehttps://www.blogger.com/profile/07852120575954185185noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-48906725034061748552018-11-07T09:32:47.708-06:002018-11-07T09:32:47.708-06:00Why?Why?Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-88974142284536050032018-11-07T01:25:15.737-06:002018-11-07T01:25:15.737-06:00Didn't I just read that the Fed was lowering c...Didn't I just read that the Fed was lowering capital requirements? Hello moral hazard!Animadvertisementhttps://www.blogger.com/profile/09110196634828780706noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-50932087289661863272018-11-06T15:20:20.341-06:002018-11-06T15:20:20.341-06:00Excellent point! I think there is a general idea t...Excellent point! I think there is a general idea that with multiple equilibria we jump from one to another, but that's another model altogether. Multiple equilibria, sunspot coordinated equilibria, off-equilibrium vs. alternatie-equilibrium behaviors... we need some equations here! John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-42587469722920485482018-11-06T11:32:16.972-06:002018-11-06T11:32:16.972-06:00Well...this is my semi-uneducated stab at it all.
...Well...this is my semi-uneducated stab at it all.<br /><br />To me, the Fed unfroze credit via unconventional monetary policy. 4.5T balance sheet doesn't lie.<br /><br />*Zero bound with QE for how long? <br />*Buying long term treasury bonds to keep the long term rates low, perhaps artificially. <br />*Sterilization to prevent inflation.<br />*Intervention to prevent asset deflation.<br /><br />So, these are reactive measures, and they were extraordinary. The issue of transparency is always a hot button after the fact. It's great to talk about, but, given the bad behavior of banks and using asymmetric information to their advantage (imagine how surprised AIG was), this whole business of transparency is kind of hollow. When the perception itself is enough to induce panic, doesn't matter what the facts are. <br /><br />Will capital requirements really be enough to prevent bad risk taking? If so, maybe we just do that with permanent sterilization so the Fed can capitalize banks until the end of time, mitigating risk through incentives from the Fed to have banks hold on to ER, instead of inventing reasons to do dumb things. Transparency can be substituted for better enforcement and incentives? More carrots and big sticks? Enforcement on transparency maybe? Tough sell. <br /><br />Maybe the reason the banking sector is considered unstable is because, oh, I don't know...people lie to gain an economic benefit and advantage? Sure, there's the eventual misallocation/overallocation that leads to debt bubbles, and some of that is just due to invisible hands thumb wrestling. No investment is ever a sure thing. Things can go sideways. Not sure how transparency can mitigate perceptions -- might even make them worse! <br /><br />Modeling this stuff has always been fascinating to me, as a side note. Trying to model what is essentially a chaotic system is a challenge. Mykel G. Larsonhttps://www.blogger.com/profile/17128735421035292909noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-46430159214877042332018-11-06T11:19:39.156-06:002018-11-06T11:19:39.156-06:00"Moreover, Larry really goes on to view reces..."Moreover, Larry really goes on to view recessions themselves as multiple equilibria, which is an interesting and provocative idea..."<br /><br />Can we NOT use the term multiple equilibria when we are describing a single observed realized path in a dynamic economy? :-) A model can have multiple equilibria, but you can only observe one of them on a path. Different equilibria live in isolation. If you want a dynamic model of expansions and recessions in which people sometimes coordinate on a good outcome (and we have an expansion) and sometimes on a bad outcome (and we have a recession), then it has to happen in one particular equilibrium (perhaps driven by a sunspot, which becomes part of the characterization). And such outcomes are even harder to generate than just multiple equilibria, because, as you point out ("If you think there will be a recession tomorrow, you fire workers and do not invest, and there is a recession today."), if agents understand that tomorrow, there is a chance we will coordinate on a bad outcome, they will start responding today and a lot of the interesting cycle-like dynamics are undone.pinushttps://www.blogger.com/profile/13417355034888415640noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-47800059546768020062018-11-05T21:15:28.472-06:002018-11-05T21:15:28.472-06:00The new link is
https://www.kotlikoff.net/sites/...The new link is <br /><br />https://www.kotlikoff.net/sites/default/files/The%20Big%20Con%20NBER%20Version.pdf<br /><br />John, Thanks for writing up my paper. We're on the same page except for a couple minor points. Really happy you liked the piece. All best, LarryAnonymoushttps://www.blogger.com/profile/09336940958069299931noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-40056387798007280112018-11-05T21:04:50.448-06:002018-11-05T21:04:50.448-06:00Two points:
I do not believe there is any real sy...Two points:<br /><br />I do not believe there is any real systemic risk in life insurance cash surrender values. They are not like checking or money market accounts. They are very slow money. Typically, the cycle to liquidate them is months not days. And, regulators can, and do, throw weak companies into receivership where things get even slower. Further, a large chunk of those values are pledged to the issuers to secure policy loans that were used to pay for the policies. The value numbers may or may not net those loans out. <br /><br />Second, the real Fed leverage is on the face of its balance sheet. The latest H.4.1 Report shows total assets of $4.1 Trillion being carried by capital of $39 Billion. This is a leverage ratio of 104. If the Fed were a commercial bank, the Fed would put it into receivership. 10 years after the crisis, there is no excuse for not unwinding this monstrosity. <br /><br />https://www.federalreserve.gov/releases/h41/current/<br /><br />Fat Manhttps://www.blogger.com/profile/09554029467445000453noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-6175162499339092352018-11-05T20:41:18.023-06:002018-11-05T20:41:18.023-06:00Your link to Koltikoff's paper didn't work...Your link to Koltikoff's paper didn't work. Try this one:<br /><br />https://www.kotlikoff.net/node/661Fat Manhttps://www.blogger.com/profile/09554029467445000453noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-16977551660026313222018-11-05T18:26:37.667-06:002018-11-05T18:26:37.667-06:00Fascinating post.
I agree all financial institut...Fascinating post.<br /><br /> I agree all financial institutions should probably have higher required levels of capital or a fat layer of convertible bonds.<br /><br /> Still, it is interesting that the financial institutions that failed are Bear Stearns, Lehman, and AIG. These are not commercial banks.<br /><br /> Indeed, if S&L's and banks sell off their portfolios of mortgages into the secondary market, they then go back to matching assets to liabilities. They sell off the risk of homeowner default on mortgages. <br /><br /> In mainland China there has been a policy of the People's Bank of China buying bonds that are in default, or recapitalizing banks basically by printing money. This has prevented the financial system from seizing up, and China today is below its inflation target. <br /><br /> Adding to the confusion, the Bank of Japan has purchased 45% of that nation's huge mountain of sovereigns. Japan is below its 2% inflation target, and may slip back into deflation.<br /><br /> The interesting thing about macroeconomics is that no one is ever wrong. <br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-38487899401713329442018-11-05T17:29:57.070-06:002018-11-05T17:29:57.070-06:00In Gennaioli and Shleifer's new book, A Crisis...In Gennaioli and Shleifer's new book, A Crisis of Beliefs, the bank run model is described as putting the cart before the horse (page 72).<br /><br />What's your comment on that, John?<br /><br /><br />Harry Chernoffhttps://www.blogger.com/profile/12034671239056869403noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-31508020504213644402018-11-05T15:13:18.935-06:002018-11-05T15:13:18.935-06:00The proposed remedy "Kotlikoff (2010)’s Limit...The proposed remedy "Kotlikoff (2010)’s Limited Purpose Banking (LPB)" would be worse than the disease it seeks to cure.Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-42263928826624776442018-11-05T15:08:08.022-06:002018-11-05T15:08:08.022-06:00The 2nd link works. It will take you to https://ww...The 2nd link works. It will take you to https://www.kotlikoff.net/sites/default/files/The%20Big%20Con%20NBER%20Version.pdf which is the NBER version of K's paper.Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37981163987685123542018-11-05T11:27:06.648-06:002018-11-05T11:27:06.648-06:00".between Q1 2003 and Q1 2007 ... real house ...".between Q1 2003 and Q1 2007 ... real house prices rose by 22 percent. But over this period real GDP rose by 14 percent. Hence, real house prices rose only 2 percent faster per year than did the economy during the period of “unsustainable” house price increases."<br /><br />""Sky-high bank leverage is another part of the standard GR explanation....Bank leverage actually fell over the period 1988 through 2008.16 Equity rose from 6 percent of bank assets in Q1 1988 to 10 percent in Q1 2008.""<br /><br />These sound like end point selection, Case-Shiller has housing prices peaking in 2006, and AIG (iirc) was raising captial in the summer of 2007. Q1 2008 is an odd time to use for demonstrating that there was sufficient capital as it came after several quarters of the market demanding that the investment banks raise more capital. Baconbaconhttps://www.blogger.com/profile/13511082564082971086noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-9993919292186663742018-11-05T11:24:27.354-06:002018-11-05T11:24:27.354-06:00Interesting article and post, but #7 is the weak l...Interesting article and post, but #7 is the weak link in LK's thesis - none of his metrics get to the reasons why big credit cycles correspond to big business cycles and small credit cycles correspond to small business cycles.<br /><br />Credit booms push up every measure of activity and wealth, so his ratios (he looks at consumption to GDP, debt to wealth, and debt service to income) tell us virtually nothing.<br /><br />He would need to explain away the GDP growth contributions from residential investment (-0.5% in 2006, -1.13% in 2007, -1.14% in 2008 and -0.74% in 2009) and the fact that res. investment still hasn't recovered halfway to its 2005 peak.<br /><br />The total res. investment drag on GDP from 2006-9 is the largest on record and it worked its way through the rest of the economy through all the usual pathways (construction and fin. sector employment, furniture & furnishings, appliances, ancillary services such as title and home insurance, etc.) - it was easily large enough on its own to explain a severe recession.<br /><br />And the fact that res. investment hasn't even approached its 2005 peak tells us that the mortgage boom (and lax lending standards) brought so much demand forward that it was always going to end in a recession once house prices peaked (with or without a banking crisis).<br /><br />So it's one thing to argue that different banking regs could have prevented the banking crisis, but LK goes way beyond that under #7 - he argues that the GR had little to do with the mortgage boom when the data seem to show that the GR had everything to do with the mortgage boom.Daniel Nevinshttp://nevinsresearch.com/blog/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37951571626206723602018-11-05T11:11:37.373-06:002018-11-05T11:11:37.373-06:00I tried to follow the first link and it went to &q...I tried to follow the first link and it went to "page not found"Baconbaconhttps://www.blogger.com/profile/13511082564082971086noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-34440530704614363252018-11-05T10:35:01.908-06:002018-11-05T10:35:01.908-06:00Not a fan of multiple equilibrium explanations/sto...Not a fan of multiple equilibrium explanations/stories. I could not link to Larry's paper. The multiple eq vs fundamentals comes down to : " A lotta people went broke so it was a crisis (fundamentals) vs it was a crisis so people went broke (ME)." Hard to distinguish w/o looking a lots and lots of balance. Maybe Larry did the work. I surely did not.Bob Floodhttps://www.blogger.com/profile/10755214976203287542noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-89599250566755089122018-11-05T09:20:10.698-06:002018-11-05T09:20:10.698-06:00Kotlikoff link is broken - but easy enough to find...Kotlikoff link is broken - but easy enough to find if one is curious.willnoreply@blogger.com