All (somewhat***) via Mark Thoma:
Thomas Frank in the WSJ tells me why I always disagree with Robert (and the Other Economists) on the role of rating agencies:
And who makes sure that Moody’s and its competitors downgrade what deserves to be downgraded? In 1999 the obvious answer would have been: the market, with its fantastic self-regulating powers.
If you look at the spreads of various debt products, you can see that the market was doing that type of job even in 2007. For instance, the debt market priced [“rated”] Bear Stearns’s five-year bond issue in August 2007 at 245 over: rather closer to “junk” status than its rating would have implied. If you compare the debt and stock markets, it’s easy to see which is closer to “rating.” Unfortunately, the area where information is more valuable* is not the one discussed and understood in the press, where BSC kept trading up for several more months.
If a market “regulates” but no one notices, does it make the WSJ?
Brad Setser finishes the destruction of Tyler Cowen’s LTCM “argument” begun by Buce, while revealing its underbelly:
The big banks called to the New York Fed were the creditors of LTCM and they were in some sense “bailed-in.” To avoid taking losses on the credit that they had extended to LTCM, they had to pony up and recapitalize LTCM. [footnoted exception for BSC]
It just so happened that the market recovered and it was possible for LTCM to exit many of its positions without taking large losses, or in some cases any losses. The banks that took control of LTCM when LTCM was on the ropes were able to unwind LTCM’s portfolio in a way that didn’t result in additional losses. But the result Cowen desired — large losses for the banks and broker-dealers who provided credit to LTCM – was quite possible if LTCM’s assets weren’t sufficient to cover all its liabilities. No creditor of LTCM was able to get rid of its exposure as a result of the Fed’s actions. [emphases mine]
It used to be a standard rule that if you wanted to bury something in a newspaper, you published it on a Friday, or the day before a holiday. This seems to be what the NYT is doing with Casey Mulligan (previously discussed here here), who dropped the other shoe yesterday and was, amazingly, worse than expected. PGL at Econospeak does the read and calls out the deed:
Mulligan is essentially saying that those poor saps who have lost their jobs actually quit so they can game the mortgage system. In other words, there is no such thing as involuntary unemployment or being forced to either lose one’s home versus enter into one of these mortgage modification programs.
As noted in the WaPo two weeks ago (via Stan Collender at Capital Gains and Games),** qualifying for the “mortgage modification” program (i.e., reducing the principal on your loan to not more than 90% of the current market value) is an onerous task:
He was hoping he could qualify for the federal government’s Hope for Homeowners program, which allows the Federal Housing Administration to insure a new mortgage if the lender voluntarily writes down the mortgage principal to 90 percent of the new value of the home. But when he asked his bank about that, he was told he would have to be on the brink of foreclosure or have an adjustable-rate mortgage.
So Mulligan is basically blaming (1) those whose ability to keep their home depended on keeping their job and (2) those who took Alan Greenspan’s venal advice to go into ARMs just at the point at which he started raising rates. Class act.
And, finally, lest you think I’m always bashing Tyler Cowen, he notes a phenomenon in chess and suggests a reasonable conclusion:
I also see a general principle operating: the more exact a “science” the game becomes, the smaller is the value of accumulated experience relative to sheer skill.
The sheer is dicey, but the identification of the shift in proportionality may be accurate, and probably has applications in economics as well.
*The debt market is less liquid and therefore considers information more valuable. This is effectively the corollary of the DeLong, Shliefer, Summers and Waldmann papers: if you can’t depend on momentum trading, you take more care not to be the “greater fool.”
**Yes, I saw the Collender-bashing in my previous post. I’ve said before that CG&G became significantly less readable after the election, and am foolishly optimistic enough to believe that they may be returning to rationality. Besides, he happened to be correct: any given from increased military spending is definitionally no better (and likely worse) than spending the same amount on public infrastructure.
***I read PGL’s piece before seeing it in the links, but they’re all there.