I can’t leave the topic of the ongoing financial crisis without pointing out a couple of good posts on the subject. First, Steve Verdon at OTB comments on Robert Samuelson’s astute observation that what we’re witnessing is the collapse of Wall Street’s business model. We’ve been seeing a lot of venerable business models collapse over the last few years including those of broadcast TV and print journalism. I doubt that we’ve seen the last, indeed, I suspect that in the coming years we’ll see the rise and fall of whole industries and their business models as rapidly as the opening and closing of mom-and-pop businesses.
Also, don’t miss Noah Millman’s masterful summary of the statements of the presidential and vice-presidential candidates on the crisis.
Thomas Palley has a fine post on the situation and some advice that goes against the prevailing wisdom:
Bad debts will have to be written down, but it is better to write them down in orderly fashion rather than through panicked deleveraging that pulls down good assets too.
This suggests regulators should explore ways to relax capital standards and mark-to-market rules. One possibility is permitting temporary discretionary relaxations akin to stock market circuit breakers.
Later, regulators must tackle the underlying problem of price bubbles. Currently, central banks are only able to control bubbles by torpedoing the economy with higher interest rates. New flexible measures of control are needed. One proposal is asset based reserve requirements, which systematically applies adjustable margin requirements to the assets of financial firms.
He also mentions an auction mechanism for lending to troubled but qualified insurance and finance companies. I’ve thought of auction mechanisms for this and other aspects of the current regulatory mess but I suspect that part of the problem is that CEO’s of those qualified insurance and finance companies would rather tank their companies, buoyed by the confidence that they can’t be allowed to fail, than take responsibility for acting prudently to save them.
That’s one of the problems with professional management, i.e. managers who don’t feel that their own fates are bonded to the industries they’re working in but just to profit-making enterprises whatever industry they happen to be in. They have no loyalties; they won’t put everything on the line to save their companies.
Hat tip: Mark Thoma.
The Freakonomics guys answer questions about the crisis.