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Tue Oct 14

• Minyanville - Market Commentary, Investing Ideas, Global Finance, The Economy
• FT.com / Columnists / Martin Wolf - Governments have at last thrown the world a lifeline: Can governments afford the money they are about to spend? Yes, is my answer. Indeed, governments should be able to get all the money they are now laying out back from their banking industry. Assume the economies have a future. If so, core banking franchises will make money, as they have in the past. If banks can make money, they can repay. The task is merely one of designing the support to ensure they do. The question of affordability is, therefore, one of fiscal credibility: if markets became sufficiently worried about the outlays, particularly at a time of large fiscal deficits, the impact on interest and exchange rates might make a default ? either via inflation or even more directly ? conceivable. But?this?still seems extremely unlikely.
• Morgan Stanley - Global Economic Forum: In turn, the credit crunch seems to have unearthed pressure points, which might risk magnifying the downturn.
• FT.com / Lex / Financial services & property - Banks of USA: Those terms must have helped secure the Treasury?s united front. It is strange, perhaps, that the biggest (and strongest) four reportedly get a seventh of the total funds available to tackle this crisis ? yet have the least to gain from accepting official largesse. That is why investors in JPMorgan Chase were unimpressed on Tuesday. In reality though, the upper echelons of the US banking industry were necessarily cajoled into a gang of nine to attempt to bring a veneer of confidence to the entire industry. Now they have additional funds, handed over by the Treasury, the question is what they will do with them. Increased lending (but not too much, of course) is the official preference, although the Treasury has little control over that.
• FT.com / Lex / Financial services & property - UK bank capital: These are extraordinary actions for extraordinary times. But will they work? Two risks remain: first, worry may shift from the creditworthine ss of banks to that of governments; second, economies may weaken far more profoundly than policymakers believe. These risks are real, but containable. Can governments afford the money they are about to spend? Yes, is my answer. Indeed, governments should be able to get all the money they are now laying out back from their banking industry. Assume the economies have a future. If so, core banking franchises will make money, as they have in the past. If banks can make money, they can repay. The task is merely one of designing the support to ensure they do.
• Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong: There were three theories about what made the Great Depression great, and how it could have been avoided by better policy.* Milton Friedman: the Depression was Great because of a lack of liquidity, and if only the Federal Reserve had kept the money stock from falling everything would have been fine.* DeLong-Summers : the Depression was Great because expectations of continued deflation became entrenched, and when those expectations were broken--by Roosevelt' ;s New Deal--recovery began.* Ben Bernanke: the Depression was Great because of the collapse of the banking system, and the resulting credit channel failures that robbed businesses seeking to expand of capital. The past fifteen months have been a big strike against Friedman: The past fifteen months have been a strike against DeLong and Summers Bernanke' s theory of the Depression is the only one standing (which doesn't mean that it is right, only that it may be right).
• But What About The Next $750 Billion Of Writedowns?: we still have one big question: What about future writedowns? A key component of successful financial system bailouts in the past has been forced asset writedowns, in which the government makes banks reduce the carrying value of this assets to nuclear-winter levels before the government injects new equity. This move does several important things: * It removes the fear that banks and bank investors will be hammered by future writedowns * It turns the banks' attention 100% to putting the new equity to work * It attracts private capital (because investors won't worry about getting sandbagged) * It eliminates the death-by-a-tho usand-cuts scenario that killed Japan.
• Michelle Dennedy's Weblog : Weblog
• http://www.gua rdian.co.uk/te chnology/blog/ 2008/aug/06/wh engoogleownsyo uyourdata
• Stumbling and Mumbling: Taleb vs economists: It suggests that what we economists have to learn from Taleb has nothing to do with the nature of risk - we?ve all known that - but about others? rationality. We should ditch the assumption - which in a sense is mere courtesy - not only that others are rational but even the weaker assumption that they are nearly so. Perhaps we should indeed regard them merely as ?empty suits.? But this is a vastly greater departure from standard practice than anything Taleb has suggested about the nature of risk. All of which leaves me genuinely puzzled. Were banks risk managers really that bad? Are bosses an order of magnitude stupider than even I had thought? Or is something else happening? Help me.

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