Free Republic

View this Outlook as a PDF In the January 2011 Economic Outlook, "Liftoff or Cold Shower? The Economy in 2011," I suggested that the extra fiscal stimulus from the federal tax cuts late in 2010 could, along with the Federal Reserve's second round of quantitative easing (QE2), produce 4 percent growth during the first half of 2011. I added, however, that if the stimulus measures enacted in 2010 failed to generate sustained growth, the US economy could face a cold shower in 2012. The stimulus measures did fail during the first half of 2011, stock markets have dropped sharply, and...

The greatest lesson of the still young 21st century is proving to be that governments are the primary source of systemic risk to the economy, our standard of living, and our liberty. The latest case in point is the European government debt crisis, with Greece once again running out of money and threatening to trigger yet another financial crisis. The government’s debt now totals more than 150% of its GDP, and continues to grow. Last year’s bailout by other European governments was supposed to give it the time needed to reduce its budget deficits so that next year Greece could...

Size doesn’t matter, says white paper on systemic risk Author: Mark Pengelly Source: Risk magazine | 26 Feb 2010 The idea of imposing a levy on large financial firms is a “flawed policy”, with economic costs outweighing any potential benefits, according to a recent white paper prepared by Washington, DC-based Nera Economic Consulting.! Such a process is not only subject to gaming by firms, but is conceptually flawed The white paper, which was prepared for the Property Casualty Insurers Association of America, is being distributed to members of the Senate Committee on Banking, Housing and Urban Affairs this week. Democrats...

February 26, 2010 How “Hot Money” is Wrecking the U.S. Banking System… [Editor's Note: The Federal Deposit Insurance Corp. insurance fund that protects your deposits is $20.9 billion in the red. One of every 11 U.S. banks is in trouble. And it's going to get worse. Neither the FDIC, the Federal Reserve nor the Treasury Department will 'fess up that what's fueling bank failures is a risky form of funding called "brokered deposits." Industry insiders refer to them as "hot money." Credit-crisis expert Shah Gilani spent months investigating the often-murky world of hot money. This story is excerpted from an...

As Congress lumbers toward creating a systemic-risk regulator, it's worth a look back—to 2002, when an economist named Stiglitz and a duo named Orszag wrote a paper with the droll title, "Implications of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard." We won't keep you in suspense. The paper, written the year after Joseph Stiglitz won the Nobel Prize for economics, concludes that "on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero." Their analysis has recently been making the rounds on the Web to a chorus...

One of the larger mistakes in the Obama financial regulatory reform package was its attempt to give the Federal Reserve additional powers so that it could in theory protect the economy from risks such as the housing bubble that could endanger the entire financial system. As we have argued in the past, the entire concept of minimizing systemic risk is a thankless task that is probably impossible. A key question is how much power such a regulator would have. As we said in June, “Congress could grant it such wide powers that the agency could intervene in just about any...

In last week’s Money and Markets column, I gave you a broad outline of the Obama administration’s regulatory reform scheme. This week, I want to zero in on one of its weakest links. I’m talking about the idea of making the Federal Reserve an “uber-regulator,” responsible for managing system-wide risk. First, what in the world is system-wide risk? Well, that’s the risk that interconnected-institutions will drag down the whole financial system when they gamble with other people’s money and then blow up! Think AIG, Citigroup and other disgraceful members of the notorious “Too Big to Fail” club. Obama’s plan calls...

Kabuki on the Potomac: Reforming Credit Default Swaps and OTC Derivatives May 18, 2009 /snip We gratefully acknowledge contributions for today's comment from members of the Herbert Gold Society, an informal group of current and former employees of the U.S. Treasury and the Federal Reserve System. Despite bringing the world economy to its knees and costing taxpayers hundreds of billions of dollars in bailouts for events such as Bear Stearns, Lehman Brothers and American International Group (NYSE:AIG), the Masters of the Universe who run the largest Wall Street firms of have learned not a thing when it comes to credit...

Congress debated a very important subject this past week: how to regulate the financial industry in order to reduce what is called “systemic risk.” Although the debate was overshadowed by the flap over bonus payments at AIG, the insurance industry is playing an important behind-the-scenes role. Senators Dodd and Shelby (respectively the Chairman and ranking minority member of the Finance Committee) are involved in the debate, but the key individual is Chairman Barney Frank of the House Financial Services Committee. Questions have been raised about the degree to which Dodd is even interested in the debate, and, as a Republican,...

<p>The U.S. government rescued giant insurer American International Group in part because its collapse would dramatically hurt European banks, a senior Democratic lawmaker said on Thursday.</p> <p>The U.S. government has bailed out AIG three times since Sept. 16 and committed about $180 billion to keep the insurer alive and doing business.</p>

A proposal to prevent wholesale financial failure By Lasse Pedersen and Nouriel Roubini Published: January 29 2009 19:35 | Last updated: January 29 2009 19:35 The worst financial crisis since the Great Depression has highlighted the risks from the collapse of systemically important financial institutions. Huge bail-outs were undertaken based on a fear that the collapse of such institutions would cause havoc, with collateral damage to the real economy. Examples include Bear Stearns, Fannie, Freddie, AIG, Citi­group, the insurance of money market funds and new US Federal Reserve programmes for banks and broker-dealers. Allowing Lehman Brothers to collapse had such...

Mortgage Lenders Stuck As Secondary Market Hesitates to Buy Risky Home Loan Securities SAN FRANCISCO (AP) -- The secondary market that supports a big part of the U.S. mortgage industry has ground to a halt in recent days, a development that dramatically could increase the cost of home loans in expensive regions, experts say. "Unlike past private secondary mortgage market disruptions, which have lasted a few weeks or so ... our industry and IndyMac have to be prudent and assume that this present disruption, which appears broader and more serious, might take longer to correct itself," said Mike Perry, chief...