Economics and similar, for the sleep-deprived

A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?

Update: seemingly not

Update: Oh yeah!

Monday, March 13, 2023


 Call it what it is

It is understandable that the Federal Reserve and FDIC are reluctant to use the “b-word” to describe the operations announced at the weekend to respond to the crises at Silicon Valley Bank and Signature Bank of New York.  As bailouts go, they don’t look particularly expensive.  The FDIC has extended its guarantee to cover uninsured deposits at these two banks (which won’t cost anything if the assets are good).  And the Fed will use the Treasury’s Exchange Stabilisation Fund to backstop a funding program to allow any other banks with similar problems to trade out of their unrealised securities losses in a reasonably graceful way.

Neither of these programs will cost taxpayers’ money, as the press releases identify.  As long as we pretend that FDIC premiums aren’t taxes, that the ESF is costless unless it takes a loss and that credit from the Fed doesn’t count, then the economy is getting all the benefit of stabilising the system, for free.  It’s good policy.

But a bailout is what it is, and what it ought to be called.  The credit lines represent a subsidy to bad treasury management on the part of banks who should never have allowed themselves to get so badly overextended in terms borrowing short and lending long.  (They also, perhaps conveniently, avoid anyone having to ask impertinent questions about why the bank supervisors allowed these positions to develop in the first place).

The extension of the FDIC guarantee, though, is not just a bailout – it’s specifically a bailout for billionaires.  It undermines the whole point of limiting deposit insurance, and exposes the fund to risk.  And the benefit of this risk assumption mainly goes to the venture capital investment industry.

That industry has, frankly, done the exact opposite of having covered itself in glory over the last week.  We have discovered that major VCs put pressure on their portfolio companies to deposit at Silicon Valley Bank.  Then they encouraged those same companies to run on the bank.  And then some of them spent the weekend attempting to raise panic about the rest of the financial system, in order to put pressure on the government for a bailout.  All after having spent the previous decade talking about “moral hazard” with respect to student loan forgiveness, and praising themselves for “disrupting” the old fashioned financial system with cryptocurrency.

If there had been no bailout – if the FDIC had operated normally and not extended insurance to people who hadn’t paid the premium – then the bill would have arrived at the VCs’ door.  They are the owners of the tech startup companies, and they would have been the ones responsible for ensuring that those companies could make payroll if they had lost money in a bank failure through no fault of their own.  It might not have been pleasant for the VCs to put up more funding, or to admit that their contribution of management expertise and financial acumen had been so spectacularly negative, but they would still have done it. To let a good investment go bad in this way would, as Professor John Cochrane points out, a clear example of the sunk cost fallacy.  The venture funds were the source of the cash that was at risk in the SVB failure; it’s their loss that has been socialised.

And the fact that the VCs were able to use their portfolio companies as human shields in this way – a natural extension of the pretence that venture capitalists are in the tech industry rather than the financial industry – shows us what the real long-term cost of our current system of bailouts is, in terms of policy.  Because the Fed and FDIC will always find a way to stabilise the system, populist yahoos and libertarians can rail against “bailouts” and pass legislation to “protect the taxpayers”, all on the understanding that it is purely playtime; that when things get serious, someone will find a way to bail them out.

This is no way to run a financial system, particularly since there is the constant risk that one day the anti-bailout loudmouths will accidentally succeed. The Fed needs to say, loud and clear, that “Yes, this is a bailout, and that is good.  A bailout is often the best and cheapest way to prevent a catastrophe.  The people benefiting from it may be quite comically unattractive and undeserving, but finance is not a morality play.  Take your bailout and try to be less silly next time”.

4 comments this item posted by the management 3/13/2023 06:03:00 AM

Monday, October 05, 2015

Simply because it's the right thing to do

I find myself pondering the vast contorted pile of twisted knickers that have been piled up all over my media consumption over the last two days about the behaviour of protestors outside the Conservative conference.  And I find myself with one overpowering thought:

Someone is going to get killed if this sort of thing carries on

I've never been a fan of demonstrations at all - sensitive feet, low boredom threshold.  But one of the things that makes me even less of a fan, is that you tend to meet the kind of person who thinks that shouting loud aggressive slogans at passers-by is a cool thing to do.  And of course it isn't.  It's belligerent macho bullshit, of exactly the sort that people like me like to pretend doesn't happen on the political left[1].  It's also, pretty clearly, a more or less direct consequence of the way that every single disagreement over benefit policy these days gets blown up into "THE TORIES ARE QUITE LITERALLY MURDERING BABIES".  Owen Jones was, on the Twitter, apparently surprised to have been cussed as "Tory scum" because he was walking into the conference with his press credentials, but really, what might he have expected - if you spend five years telling people that a political party is intentionally hounding the disabled to death, then wouldn't it be surprising if a few people didn't think that this justified violent behaviour?

On the other hand, the British political media, one of whom got gobbed on apparently (which is why we're having this moral panic), might also use the rather nasty and overheated atmosphere currently prevailing in Manchester as an occasion to ponder their own behaviour, and whether they themselves have been as grown-up as they could be.  One of the nastiest bullying games in any school playground is that of picking on the weird kid, winding him up with progressively nastier and nastier insults, then finally getting him to freak out and hit somebody then shouting "LOOK WHAT HE DID!".  And that's pretty much been the response of the commenteriat to the Corbyn boom.

Yeah, Corbyn supporters, it was very clear from as long ago as July, tend to have a large element in them which is young, not overly blessed with common sense, and very passionate and aggressive in defending their beliefs.  Not all that clever an idea to wind them up then was it?  After a pretty solid 90 days of amazingly aggressive, amazingly bad faith insults, the press can hardly claim that what has been happening to them in Manchester has fallen out of a clear blue sky.

What!  Can he really be saying that?  Is that bastard Davies blaming the victim?  I bet he doesn't even own a "Je Suis Charlie" t-shirt [2]!  How dare he!  Finally We See The Left In Its True Fascist Colours , etc etc.

I don't understand why people have such a hard time understanding this point.  Surely professional, literate people who are willing to take enough time and trouble to write a blog post themselves, are also able to stretch their minds around two independent concepts simultaneously.

1.  It is not OK to spit at or harass people, still less to harm them.  This is still not OK even if they wind you up.

2.  It is not OK to fill your news coverage with bad faith bullshit.  This is not retrospectively justified if some supporters of the person you're insulting behave badly.

That might be a little too compressed.  Let me expand and provide a few corollaries:

If the Corbyn fan club were to calm down, turn down the emotional temperature and self-police the idiots in their midst better, would this mean that they got better press coverage?  Maybe, but probably not.  The British political media establishment know one thing about Corbyn - they know that they didn't see him coming, they don't understand him and he appears to have made the last twenty years' investment in intellectual and social capital with New Labour obsolete.  So their attitude to him is always going to be that of a Nottinghamshire weaver to them new steam looms.  There is basically no hope of getting a fair shake, and behaving better won't help.  Nonetheless, it is the right thing to do.

If the press were to start covering the Labour Party in a remotely fair or objective way, and to stop proliferating stupid gotchas, does this mean that they would get less gobbing and insults from protestors?  Again, probably not.  It only takes a few morons, and morons are extremely resistant to self-policing.  In any case, as with the Cybernats, the Corbynites have a large element who are entirely new to politics, very passionate, very paranoid and (as with anyone who takes up a political cause for the first time), outraged that what appears obvious to them is not also obvious to anyone else.  The British political media have chosen their side - technocratic centrism - and they are not likely to be able to get rid of the enemies that this choice has made for them.  Changing the style and slant of their journalism probably won't help.  Nonetheless, it is the right thing to do.

As I say, if stuff keeps going in this direction, somebody is probably going to get killed, either in a protestor riot or a police riot, and it will not be much consolation to anyone that the person who gets killed will be at least partly the author of his or her own misfortunes.  I am now officially old enough to say "grow the fuck up" as my main tool of political argument, and since I am suffering the aches and pains of middle age along with the psychic torment of knowing I will never play for Wales, I'm damned if I'm going to give up on the few compensations.  GTFU, the lot of you.

[1] By the way, plenty of the "I am a man of the left, oh yes I am, despite having spent the last ten years writing in praise of the Conservative Party" tendency have been trying to claim that Conservatives are much more friendly and less inclined to this kind of behaviour.  Nuh uh.  If you think that Tories don't spit on their political opponents and call them "scum", ask your mum about what used to happen when CND was a thing.  Or try wearing a white poppy.

[2] I do
7 comments this item posted by the management 10/05/2015 08:03:00 AM

Saturday, August 23, 2014

One door closes, another one slams in your face

Welcome new readers, also welcome old readers.  Up until now this has mainly been a politics and economics blog.  From now on in, it will also be a travel blog.  There may even be pictures!  But perhaps not.  In the meantime, the fact that I am no longer conflicted out because of my day job means I can do a few more things about newsworthy issues of the day and specific things to do with banking.

For example, our Felix's latest article on Silicon Valley deals and how they prove that banks are redundant and so on and so on. On the one hand, I agree with a lot of it, because I've always thought that M&A advisory was a really hinky part of the industry (occasional reader - not you! you were great mate! those other guys!). But on the other hand, I would read from the welter of Silicon Valley deals that have been consummated without Wall Street help, a simpler underlying truth - that there are a lot of very good companies which simply have no business being part of the public quoted capital market and that for the first time in about twenty years, a lot of these companies are not being part of the public quoted capital market. This seems like the system working, for anyone whose career started earlier than about 1997; it would be better if Wall Street had explicitly said that WhatsApp at $10bn was not a suitable investment for anyone's retirement savings, but if they Just Don't Get It and therefore Miss The Deal, then that works too. In my view, a decent next step would be to recognise that companies like Facebook (and even possibly Google) probably shouldn't be troubling the stock market either.

This isn't a slam on tech, far from it.  There are lots of really great industries that should never be quoted companies and should not have investment banking advisors talking them into and out of deals.  For example, investment banks.

6 comments this item posted by the management 8/23/2014 12:56:00 PM

Monday, April 21, 2014

Secular stagnation and such ...

I put this in the comments on Brad's site

I think the problem here is more of this gross substitutability stuff and marginal thinking that I am always going on about. The idea that people seem to be stuck with is that an increased weighting to equities and high-yield debt in some portfolios is an "increase in risk" and that this in some way increases the danger of another financial crisis. But a) the extent to which it's actually happened is hardly measurable, and b) it isn't, any more than a budgerigar might grow up into a tyrannosaurus rex. They're different things.

The credit bubble and house price crash weren't random outcomes selected from the underlying distribution of financial asset returns; they were specific events with their own causes, which is why they appeared to be Black Swans to people who weren't paying attention to those causes. That's not going to happen again, or at least not in that specific way, not for a while.

As far as I can see, Brad, you're more right than the people worrying about financial instability, because they're looking at this from a partial analysis - they're looking at either the (small) empirical evidence of people increasing holdings of credit-risk securities or the theoretical arguments to the effect that the private sector has an incentive to increase those holdings and saying - increase risk equals bad.

You, for your part, are looking at the system as a whole and saying that there's something close to a conservation law; that duration risk has gone down, while credit risk (and equity risk) has gone up, for the private sector. 

Stein's view seems to be that the total amount of "risk" can go up if the total amount of *activity* goes up (which is true, activity is risky), and that in so far as the QE channel works by encouraging the private sector to buy credit- and equity-risk securities and thereby ... (cough mumble) investment in real entrepreneurial projects, then it's possible that QE might encourage the kind of over-leveraged risky structures that lead to financial fragility.

My view is that, while your view and Stein's are clearly better than the partial view, this is all the sort of blackboard thinking you're going to get if you start off by making the mistake of drawing supply and demand diagrams denominated in generic "risk"! The attraction of cash isn't that it's "safe" - ten year floating rate government bonds would have zero duration risk, but they wouldn't be cash. The reason that people hoard cash in liquidity traps is that it's *liquid* - it preserves your optionality, and combines zero risk of being unable to meet nominal liabilities, with instant convertibility into consumption or investment goods. Cash is what you want to hold when you don't know what to do next.

And people's decision about what they want to do next are driven by animal spirits and expectations about an unknowable future. The kind of thing that makes people take non-ergodic, non-insurable, non-hedgable entrepreneutrial risk is really not very related to the kind of thing that makes people move the equity weighting of their portfolio from 40% to 45%. 

If, at some future date, activity picked up and we had a normal investment environment and yields were still at 2%, then this might be a problem, as it would mean that people would be able to finance very low-yielding projects, and as a result would be vulnerable to comparatively small real shocks to either their refinancing cost or their cash flows. But this is to assume that future massive mistakes would be made.

2 comments this item posted by the management 4/21/2014 10:50:00 PM

Wednesday, April 02, 2014

A minor squib about Ukraine


A few weeks ago: Europe and Russia were politicking over whether Ukraine should be considered to be Finlandized to the EU sphere of influence or to the Russian sphere of influence.

Now: Basically the same diplomatic and grand political struggle, over Eastern Ukraine.

Remind me again who looks weak and silly and has been humiliated?  It looks to me as if, in sheer territory-lost-versus-gained metrics, there's a clear winner and a clear loser among the two imperial powers on the European continent, to the tune of half of Ukraine.
3 comments this item posted by the management 4/02/2014 12:08:00 AM

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