What I Read this Weekend
From the Wall Street Journal:
David Roche writes about the risks of deleveraging in Saturday's WSJ.
One of the risks is deflation and Yuka Hayashi writes about the worry in Japan about its return. Deflation is much worse than inflation in that deflation thrives on an pernicious feedback loop that is hard to break. With inflation consumers tend to buy now because they believe that prices will go up if they wait. This causes demand to rise and when it reaches the point where demand outstrips supply, prices rise. Inflation typically can be controlled by controlling the money supply - reduce the amount of money in the system and consumers cannot buy as much.
Deflation is the opposite. Consumers do not make purchases because they believe that prices will go down in the future. The problem is that simply by adding money to the system does not induce people to buy if they still believe that prices will continue to decline. The net effect is a shrinking economy, lower wages, etc.
Justin Lahart wrote about how the "free-market" thinkers of the Chicago School of Economics are becoming a bit more practical in their thinking.
From Businessweek:
And you thought Freddie and Fannie were the main mortgage oriented agencies in trouble - Peter Coy writes about The Federal Home Loan Bank, a federal institution that lends money to other banks for the purpose of issuing mortgages. It currently has $900 billion in outstanding loans.
From the New York Times:
Gretchen Morgenson (I wonder if she is enjoying being right about everything?) writes about the demise of Merrill Lynch. It's a great tutorial about how not to run a financial institution.
Finally, another article about the mess in Iceland with possibly the worst sentence published in the NY Times:
"Like the Vikings of 0ld, Icelandic bankers were roaming the world aggressively seizing business, pumping debt into the soufle of the system."
As far as I know, the Vikings were not from Iceland nor were they known for their soufles.
3 comments :
Your synopsis of the FHLBank article is even more inaccurate than the story itself. FHLBanks are far from risky in the model of Fannie and Freddie. They are self-capitalizing, solvent and profitable institutions. They are also not Federal institutions. They are private institutions - with a cooperative model - owned by their 8,000 members banks.
Their model is one that should be explored by others - it is a model of how to structure a GSE.
In response:
I should have stated a federally regulated institution. The FHL Bank(s) was established as a GSE (Government Sponsored Enterprise) in 1932. They are government regulated cooperatives and are subject to many of the same credit stresses in the market as Freddie, Fannie and other financial institutions. The treasury has obviously had some concern about FHLBank. In July 2008, the Housing and Economic Recovery Act of 2008 authorized the Secretary of the Treasury to purchase FHLBank debt securities in any amount through December 31, 2009. In September, this authorization was rolled into TARP.
Best,
David
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