Issuu on Google+

The Atlantic Monthly Crashes and Burns...

6/21/09 9:54 AM

Grasping Reality with Both Hands The Semi-Daily Journal of Economist Brad DeLong: A Fair, Balanced, Reality-Based, and More than Two-Handed Look at the World J. Bradford DeLong, Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.

About This Website | About Brad DeLong | This Weblog | Weblog RSS feed | Brad DeLong's Egregious Moderation | Order of the Shrill | Office Hours: Evans 601, W10-12, 2-3, and by appointment, email delong@econ.berkeley.edu | Macroeconomic Policy Lectures | Economic History Lectures | Academic C.V. | John Yoo and the Torture Memo | Audio and Video Read the comment policy: no drive-bys, and if you bring information and humor you will be fine... Bernanke's Debt Solution

Central Banks To Change Value Of Money - What It Means For You. UncommonWisdomDaily.com/Banking

FDIC Watch List

252 Banks On This FDIC List. Is Your Bank? Read Our Free Report. SovereignSociety.com/Market_Crisis

Weblog Home Page Weblog Archives Subscribe to RSS Brad DeLong's Home Page Berkeley Economics Department NBER Brad DeLong's Egregious Moderation June 15, 2009

The Atlantic Monthly Crashes and Burns... More lack of quality control at the Atlantic Monthly. Not as bad as highlighting Gregg Easterbrook's bizarre claim that the chances of a catastrophic mammoth meteor impact over the next five and a half centuries "could be" 50%, but still... NOBODY SHOULD READ DR. MANHATTAN IN THE ATLANTIC MONTHLY AND BELIEVE HIM WHEN HE CLAIMS THAT THE FINANCIAL MARKETS DO NOT NEED MORE AND BETTER GOVERNMENT REGULATION: Dr. Manhattan: Sentences That Don't Compute - The Atlantic Business Channel: Today's entry comes from Mark Thoma, who writes in a guest-blog at the Washington Post: http://delong.typepad.com/sdj/2009/06/the-atlantic-monthly-crashes-and-burns.html

Page 1 of 7


The Atlantic Monthly Crashes and Burns...

6/21/09 9:54 AM

Thoma, who writes in a guest-blog at the Washington Post: The development of the shadow banking system is important because the troubles we are seeing today are not the result of problems in the traditional, regulated sector of the financial industry. The problems began in the unregulated shadow banking system. Which entities' failures and near-failures required TARP and other system-saving emergency programs again? I don't want to be too hard on Prof. Thoma: his second sentence is correct, assuming the definition of "shadow banking system" encompasses Subprime Mortgage-To-Go (which offers drive-thru!). But unlike Long-Term Capital Management's meltdown in 1998, the systemic breakdowns we have been experiencing over the past 18 months have been caused by problems at the major banks (even the former investment-only banks which weren't regulated by the Fed or FDIC cannot be called part of the "shadow banking system"), AIG (regulated by the state insurance commissioners, even if they'd rather you didn't remember) and let's not forget Fannie and Freddie, which had their own regulator. (And the most acute phase of the crisis was touched off by the Reserve Primary Fund's "breaking the buck," even though money market funds are among the most stringently regulated entities on earth.) Only when the products of Subprime Mortgage-To-Go were thoroughly integrated into the activities of these heavily regulated institutions (and sometimes even acquired in full by them; just ask Wachovia and Merrill) was the stage set for the financial crisis. By contrast, though numerous hedge funds have failed, some people are beginning to look longingly at the sector as one in which even major players can fail without touching off a systemic meltdown. This isn't necessarily an argument against extending regulation to the "shadow banking sector," but we should be on guard against any tendency to assume that the job has been done when a previously unregulated activity now has a regulation applied to it. In reality, that is when the work begins. It is hard to know whether being kept in ignorance of the world for decades as part of a secret government program has deprived Dr. Manhattan of his ability to understand the world in which we live, or whether the eldritch nuclear mishap that gave him his eight-foot stature, total lack of body hair, and blue skin tone also scrambled his brain. But i would advise all readers--and editors of the Atlantic Monthly as well--to take care: only one of the two pictured below is an economist worth listening to on the financial crisis:

Yes, it is the one on the right. Listen to University of Oregon Professor of Economics Mark Thoma. Do not listen to the weirdo on the left with his cheap imitation copy of the Fortress of Solitude on Mars, his irregular private life, and his propensity to murder long-time acquaintances and comrades to help billionaires cover up genocidal crimes. http://delong.typepad.com/sdj/2009/06/the-atlantic-monthly-crashes-and-burns.html

Page 2 of 7


The Atlantic Monthly Crashes and Burns...

6/21/09 9:54 AM

Let's go through it slowly. The commercial banks were regulated. The government guaranteed their deposits. Savers who wanted to not have to worry about making sure that their money wasn't going to vanish and who were inertial in their behavior put their money into commercial banks. Regulators watched the leverage of commercial banks. And commercial banks--with their massive retail savings deposits--have for the most part come through this all right. In fact, the possession of lots of inertial commercial savings and checking deposits that they did not have to worry might flee provided JPMorgan (with the retail banking assets of Chase) and the bank formerly known as NationsBank (with the retail banking assets of Bank of America) with competitive advantages that allowed them to pick up the assets of Bear Stearns and Merrill Lynch at what they thought were bargain prices. The non-commercial banks--those that did not have large retail banking deposits, did not have government guarantees, and were left less tightly regulated--have, by contrast, flamed out almost to an entity newly reincorporated as a bank holding company. Countrywide. Bear Stearns. Other hot money-financed mortgage lenders too numerous to name. Fannie Mae. Freddie Mac. Lehman. Merrill Lynch. AIG. All are now gone. Only Goldman Sachs and Morgan Stanley remain--and directors of both tell me that they really wish that they had some large retail banking businesses in their portfolio so that the entire liability side of their balance sheet was not hot money. I think that Dr. Manhattan is just too ignorant of the world outside Area 51 to understand the point Mark Thoma was making--which is, after all, a commonplace. I hope it isn't that the high energy neutrons have permanently scrambled his brain. But given his irrational actions in the Veidt affair, you have to wonder. UPDATE: Mark Thoma defends himself: Sentences That Don't Compute - The Atlantic Business Channel: Nice try, but the problems did begin just where I said they did, in the shadow banking sector: Geithner: The shadow banking system has been implicated as significantly contributing to the financial crisis of 2007– 2009. In a June 2008 speech, U.S. Treasury Secretary Timothy Geithner, then President and CEO of the NY Federal Reserve Bank, placed significant blame for the freezing of credit markets on a "run" on the entities in the shadow banking system by their couterparties... Nouriel Roubini: Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders.... A generalised run on these shadow banks started when the deleveraging after the asset bubble bust led to uncertainty about which institutions were solvent. The first stage was the collapse of the entire SIVs/conduits system once investors realised the toxicity of its investments and its very short-term funding seized up. The next step was the run on the big US broker-dealers: first Bear Stearns lost its liquidity in days. "... [these are his five steps top the crisis - step one is, drum roll please, problems in the shadow banking system]... Bill Gross: What we are witnessing is essentially the breakdown of our modern-day banking system... My Pimco colleague Paul McCulley has labeled it the "shadow banking system" because it has lain hidden for years, untouched by regulation, yet free to magically and mystically create and then package subprime loans into a host of three-letter conduits that only Wall Street wizards could explain. Krugman: As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible--and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank. It goes on and on - I'm comfortable with the assertion - most analyses say the same thing, it was the shadow banking system (with only a few exceptions). So it's the title of the post and your argument that doesn't compute. http://delong.typepad.com/sdj/2009/06/the-atlantic-monthly-crashes-and-burns.html

Page 3 of 7


The Atlantic Monthly Crashes and Burns...

6/21/09 9:54 AM

system (with only a few exceptions). So it's the title of the post and your argument that doesn't compute. On the one hand, strange blue guy who insists that "Fannie, Freddie, Lehman, AIG" are part of the "traditional, regulated [financial] sector." On the other side, Thoma, Geithner, Roubini, Gross, Krugman, and many others. Something is very wrong here. You can do better guys. A lot better. RECOMMENDED (5.0) by 3 people like you [How? ] You might like:

DeLong: A Wall Street Fairy Tale (@this site) More on the Romer Symposium at the Economist (@this site) 2 more recommended posts Âť Brad DeLong on June 15, 2009 at 06:52 PM in Economics, Economics: Finance, Information: Better Press Corps/Journamalism | Permalink TrackBack TrackBack URL for this entry: http://www.typepad.com/services/trackback/6a00e551f08003883401157117c1a2970b Listed below are links to weblogs that reference The Atlantic Monthly Crashes and Burns...:

Comments I kina like "Black Hole Banking System". The world financial system touched its event horizon and got sucked in and disappeared. Is there some limiting speed, like light, for the velocity of money? Posted by: dilbert dogbert | June 15, 2009 at 08:26 PM It's a time reversal causality effect. Dr. Manhattan is traveling backwards in time. Posted by: Lord | June 15, 2009 at 08:51 PM "More lack of quality control at the Atlantic Monthly." But is it profit maximizing to spend more on quality control, not just for the Atlantic, but for all of the major media organizations from ABC to the New York Times? Of course the positive externalities of more quality control, more and better serious investigation and monitoring, hiring of on-staff experts in economics and science, etc. are enormous. But if these enormous positive externalities are not subsidized, is it really a surprise that they are grossly underspent on? Why oh why can't we have a better press corps? One reason is these enormous positive externalities to good serious investigative journalism. But other than the minute percentage of GDP spent on public broadcasting, I don't know of any subsidizing of them. What about something like a tax deduction for serious investigative journalism expenses, for fact checkers, for on-staff experts in economics and the sciences, etc.? I know there are serious costs and problems to this, but could the enormous benefits outweigh them? Has this been seriously and depthfully thought about in economics? I just did a JSTOR search of economics journals for media and externalities in abstract -- I found one article, and it wasn't on media externalities. Journalism and externalities in abstract yielded 0, and I've never seen this discussed in the econ blogosphere except when I've brought it up. This certainly can't be because externalities in the journalism business aren't socially significant, and the pros and cons of addressing them are not large, not of much social value. It can't be that this subject is seemingly never analyzed in economics because it has little potential impact on societal utility. http://delong.typepad.com/sdj/2009/06/the-atlantic-monthly-crashes-and-burns.html

Page 4 of 7


The Atlantic Monthly Crashes and Burns...

6/21/09 9:54 AM

So why can I not find it analyzed and discussed in either the economics journals or blogosphere? Is it just somehow clear that given the benefits and costs and problems, the optimal amount and way to subsidize good serious investigative journalism is with the small amount spent on public broadcasting? It seems like this is something which should be thought about and seriously studied by at least some economists. Posted by: Richard H. Serlin | June 15, 2009 at 09:19 PM A coupla points. First, the AIG insurance subs were regulated, and generally regulated fairly well, apart from the life insurers that the Texas regulators allowed to play with securities lending. The problem with AIG was in the unregulated pieces. The insurance subs are doing badly now mostly because they are infected by the AIG name. Bank retail deposits are far less hot than most other short-term liabilities. But that didn't stop a ginormous retail run ($14 bn, IIRC) from developing at WaMu. Posted by: Joe S. | June 16, 2009 at 03:25 AM As a member of the shadow banking community, I agree with Geithner's statement that a run on the sbc by its counterparties did help precipitate the crisis. However, the counterparties that precipitated/participated in the run were, in many cases, THE MAJOR BANKS-- our lenders-- who, in my opinion, saw portfolios of money good loans marked in the low 80's (last fall) as a can't miss proposition, so they adjusted marks based on extraordinary standards (worse than the broad conception of mark-to-market as provided in contracts but never before utilized) and demanded collateral until funds could no longer pay. As all banks rushed to feed on the shadow banking system--if we weren't buying more securitized loans, they were going to make money some way-- the well ran dry, all of the loan buyers either defaulted or froze, and, suddenly, the banks had no secondary buyers for their paper in the 80's... the prices then dropped precipitously (a tragedy of the commons, of sorts). The Banks got greedy and started a run on the shadow financial system. They were the counterparties. They tried to make a quick buck. And they cost everyone A LOT of money. The fact that, among other policy responses, we have allowed the same banks who precipitated the crisis via predatory and, ultimately, self-destructive practices to then shirk the mark-to-market rules they waved like banners when destroying the system seems particularly unfair. Consequently, I think pundits are missing one critical point in debating the future of securitization-- what will the market be for securitized loans? I have continued to pick over the crisis' wreckage, but the probability that I consider any new issuance in this area or, frankly, borrow from any of the same counterparties in the future is very low. Also, implicit is the point that I survived (and without government assistance), unlike many of the BIG BANK counterparties who participated in the "run" on the shadow banking system. The problem with our financial system was not as much the risk or leverage it carried but, more, the dispersion of those weights. To allow a handful of idiots who could not get better-paying jobs in the "shadow" banking system to effectively act as the axis around which the entire financial world functions is idiotic and demands either a major reduction in risk and leverage or a shattering of the system into a more flexible matrix of smaller parts...like...for instance... the shadow banking system...Hey-- as a whole, we made it through with NO HELP FROM THE TAXPAYERS, and those of us who managed risk poorly FAILED, AND RIGHTLY SO. Of course, investors who put their own money at risk and wish to remain private rather than constantly pimping their crack cocaine on CNBC and, more importantly, shovelling money into presidential/congressional coffers are much safer, politically, to scapegoat. So the system will receive a Maaco paint job rather than a reasonable overhaul, and I will be raising as much capital as possible to short the next bubble to hell and then pluck value from the carnage. And all the while I will be sad for our country, the communities and pensions who will invest in the next pile of garbage the resume mill on wall street creates, and the sad line of completely blameless individuals who only wanted to work hard to support their families that will form outside the unemployment office (depending upon whether they get re-employed before the next bubble bursts). The banks and their lap monkeys in government did this to you-- not the "shadow banking system," which is actually just groups of people--private partnerships and companies, like the banks used to be-- who pool their money to make smart investments and, if they fail, disappear, rather than spending your tax dollars on aston martins and palm beach estates like those who are "too big too fail." Don't let a stupid talking point fool you. Posted by: ethan | June 16, 2009 at 03:56 AM http://delong.typepad.com/sdj/2009/06/the-atlantic-monthly-crashes-and-burns.html

Page 5 of 7


The Atlantic Monthly Crashes and Burns...

6/21/09 9:54 AM

Not sure how showing that Dr. Manhattan is actually ass covering instead of being foolish does anything. Just like ethan up above. The idea they made it through without tax payer help is laughable. But apparently those stupid bankers were able to rip off those super smart geniuses who are totally worth their salaries! Posted by: Rob | June 16, 2009 at 07:46 AM I had never heard of Dr. Manhattan before, so I clicked on it and found it was the pseudonym of an anonymous blogger. Now there's nothing wrong with people blogging anonymously on their own if they choose, but I object to a mainstream press organization publishing an anonymous blogger under its own masthead. Anyone they publish should at least be someone willing to identify him(her)self, someone whose credentials and expertise can be evaluated. That's what I find objectionable, independently of the content of his opinions. Posted by: Phil P | June 16, 2009 at 09:13 AM Best blog post ever. Posted by: Alex Tabarrok | June 16, 2009 at 09:44 AM It's a rare and glorious day: Alex T. and I =almost completely= agree. It's your optimism at the end ("You can do better guys. A lot better.")--what have you been doing, reading early Stephen King novels? --in the face of all reality that prevents perfection. If you really believe that the Atlantic Business blog can do better, show us some evidence. The piece cited looks more like a McMegan Special. And, while you're at it, ask ethan what his cohorts were doing in the late Summer and early Fall of 2006, going into the Hallowe'en Collapse. Posted by: Ken Houghton | June 16, 2009 at 12:29 PM I'm looking at the list of bank writedowns/chargeoffs on Bloomberg, and it says (number to the left is rank, writedowns in billions of USD since start): (1) Wachovia 97.9 (2) Citi 85.4 (3) Merrill 55.9 (4) UBS 48.6 (5) WaMu 45.6 (6) BoA 40.2 Of these 6, 4 have very large, traditional retail bank operations (i.e., they all have or had lots branches in my necks of the woods). Of those 4, one nearly died (Citi), one would have been healthy had it not acquired Merrill (BoA), and 2 did die (WaMu and Wachovia). I will admit that a huge number of Wachovia's writedowns came from its acquisition of that bay area mortgage originator whose name I'm forgetting, but the bank still completely failed. I know it's been several months since we've seen some of those names have been in the news, but I hardly think it's fair to say that commercial banks have come out alright. Posted by: Jon | June 18, 2009 at 07:46 AM

Verify your Comment Previewing your Comment Posted by: | This is only a preview. Your comment has not yet been posted. Post

Edit

Your comment could not be posted. Error type: Your comment has been posted. Post another comment The letters and numbers you entered did not match the image. Please try again. http://delong.typepad.com/sdj/2009/06/the-atlantic-monthly-crashes-and-burns.html

Page 6 of 7


The Atlantic Monthly Crashes and Burns...

6/21/09 9:54 AM

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments. Having trouble reading this image? View an alternate. Continue

Me:

Economists: Paul Krugman Mark Thoma Cowen and Tabarrok Chinn and Hamilton

Juicebox Mafia: Moral Ezra Klein Philosophers: Matthew Yglesias Hilzoy and Spencer Friends Ackerman Crooked Timber Dana Goldstein of Humanity Mark Kleiman and Friends Eric Rauchway and Friends

http://delong.typepad.com/sdj/2009/06/the-atlantic-monthly-crashes-and-burns.html

Page 7 of 7


The Atlantic Monthly Crashes and Burns... (Dr. Manhattan on Regulation) (June 15, 2009)