Free Republic

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...

December 28, 2008 Economic View Bailout of Long-Term Capital: A Bad Precedent? By TYLER COWEN THE financial crisis is a result of many bad decisions, but one of them hasn’t received enough attention: the 1998 bailout of the Long-Term Capital Management hedge fund. If regulators had been less concerned with protecting the fund’s creditors, our current problems might not be quite so bad. Long-Term Capital was advised by finance quants, or quantitative analysts, who made a number of unsound, esoteric bets, including investments in interest rate derivatives. When Russia’s inability to pay its debts roiled global markets, the fund, saddled...

As the Treasury Department prepares a $40 billion program to help delinquent homeowners avoid foreclosure, it confronts a difficult challenge: not making the plan too tempting to people like Todd Lawrence. An airline pilot who lives outside Norwich, Conn., Mr. Lawrence has a traditional 30-year mortgage that he has no trouble paying every month. But, thanks to the plunging real estate market, he owes more on his house than it is worth, like millions of other people. If the banks, which frequently lent irresponsibly, and many homeowners, who often borrowed irresponsibly, are getting government assistance, Mr. Lawrence says he believes...

McCain faces conservative backlash over mortgage plan By Alexander Mooney CNN (CNN) -- John McCain is facing a fresh round of anger from members of his own party deeply opposed to the Arizona senator's proposal for the federal government to purchase troubled mortgage loans. John McCain first mentioned his mortgage relief plan during Tuesday's town-hall debate with Barack Obama. John McCain first mentioned his mortgage relief plan during Tuesday's town-hall debate with Barack Obama. The pointed backlash from several economic conservatives -- many of whom already distrust McCain's commitment to free-market principles -- couldn't come at a worse time for...

Definitions of "moral hazard" on the Web: Arises when people behave recklessly because they know they will be saved if things go wrong.enbv.narod.ru/text/Econom/ib/str/261.html (links to a Russian site of all things)

What's Behind the Financial Market Crisis? Daily Article by Antony Mueller | Posted on 9/18/2008 The financial crisis is not over. Neither tax rebates nor low interest rates nor higher or lower exchange rates can do the job of reviving an economy that is burdened by debt loads that are too high. On the contrary: the policy measures that the US authorities have been applying will prolong the agony. Be prepared for the challenges of extended financial turmoil and economic stagnation. Early this year, the US central bank decided to manage the debt crisis in the light-hearted belief that a...

/Begin Excerpt Now the myth that was floating around for many years was that the United States was going to go into its own abyss while the world somehow boomed on its own.  According to many of these people, the United States was contained.  Did Ben Bernanke give them his early 2007 speech about the subprime market being contained?  The recent turn of events are as follows:(a)  U.S. Dollar rally(b)  Commodities falling(c)  Inflation moderating(d)  Housing still decliningThese events are occurring because the world has not decoupled.  That is, we are still very much intertwined and when the larger economies sneeze,...

Wall Street is a financial Head-Smashed-In, where ego carries the hordes over the precipice Carl Mortished: World business briefing Head-Smashed-In is a buffalo jump in Alberta, Canada, a communal kill site where the Plains Indians drove herds of North American bison off the edge of a cliff. Over thousands of years, the Plains tribes developed the skill of goading buffalo towards a precipice. As the animals thundered towards the drop, those in front would try to stop but the sheer weight of the stampeding herd pressing from behind would force the buffalo over the edge. Unesco has designated the buffalo...

The bailout culture turns 10 Commentary: Today's bailouts find roots in the Fed's handling of LTCM By David Weidner, MarketWatch Last update: 12:01 a.m. EDT Sept. 11, 2008 NEW YORK (MarketWatch) -- In less than two weeks, Wall Street will pass a milestone that on the surface probably doesn't seem to have much relevance today: the 10th anniversary of the bailout of Long-Term Capital Management. But the LTCM near-collapse and rescue set in motion Wall Street's unchecked rush to risk during the decade by signaling to the market that the government would ultimately come to the rescue. Wall Street is...

Governments caused the credit crisis, but capitalism gets the blame By Ambrose Evans-Pritchard Last Updated: 5:42am BST 08/08/2008Page 1 of 3 Have your say Read comments State error led banks to ignore the lessons of history and overdose on too-cheap money, writes Ambrose Evans-Pritchard Three years ago, the world's top watchdog warned that the global economy was veering out of control. Defending orthodoxy against the easy debt policies of the Greenspan era, the Bank for International Settlements said interest rates were being held too low for safety in most of the mature economies. Credit crisis: Swept away by a tide...

They Still Don’t Get It By John Riley Chief Strategist 07/02/08 On June 29, in the prestigious Financial Times, Former Treasury Secretary and Harvard University President, Larry Summers wrote an article which shows that policy wonks don’t really understand the problems in our financial markets. His article, “What we can do in this dangerous moment” starts out great and I had hopes that maybe after years of toiling next to Greenspan, he rejected the Maestro's views and had seen the light. He hasn’t. (Dr. Summers quotes will be in blue italics.) “It is quite possible that we are now at...

The Downfall of America’s Economy by: Ben Giles, June 11, 2008 If Jörg Guido Hülsmann wrote a letter to U.S. Federal Reserve chairman Ben Bernanke, it might sound something like this: “Your entire monetary policy is going to crash and burn in the next 30 years.” In an article titled “What Causes Moral Hazard,” Hülsmann argues that the American economy is creating a financial bubble that could soon burst. It’s all thanks to moral hazard, the prospect of poor financial decisions being made in the economy due to negative incentives. “Moral hazard entails market failure,” Hülsmann wrote. “It brings about...

March 23, 2008 Banking crisis: it’s déjà vu all over again American Account: Irwin Stelzer THE assets making up the balance sheet of a leading bank are unmarketable. Other banks refuse to trade with it, and become so concerned about shoes yet to drop they refuse to lend to even creditworthy borrowers. Not to worry: JP Morgan rides to the rescue, and with some cash from the US Treasury thrown in, arranges a takeover of the troubled bank. And so the panic of 1907 ended. Almost exactly 100 years later, a similar scenario plays out. Bear Stearns becomes illiquid, and...

Why Washington’s rescue cannot end crisis story By Martin WolfPublished: February 26 2008 17:34 | Last updated: February 26 2008 17:34 Last week’s column on the views of New York University’s Nouriel Roubini (February 20) evoked sharply contrasting responses: optimists argued he was ludicrously pessimistic; pessimists insisted he was ridiculously optimistic. I am closer to the optimists: the analysis suggested a highly plausible worst case scenario, not the single most likely outcome. EDITOR’S CHOICE Economists’ forum - Nov-16 Every week, 50 of the world’s most influential economists discuss Martin Wolf’s articles on FT.com Those who believe even Prof Roubini’s...

Just thought you would like to see a project. Merle Hazard is a friend of mine, and he got the great Arthur Laffer to help him with this video. Merle and I hope you enjoy it. It was picked as Runner-Up for song of the year in the Economist.

Shiny new ‘cov-lites’ show signs of tarnish By Paul J Davies and Gillian Tett Published: May 16 2007 20:20 | Last updated: May 16 2007 20:20 Until this week, few outside of the esoteric world of leveraged finance had even heard the term “cov-lite”, but after star fund manager Anthony Bolton’s speech on leaving Fidelity, the words are in danger of becoming an iconic catchphase for the peak, or near-peak, of an over-exuberant buy-out boom. Mr Bolton said his private equity contacts could not believe some of the loan deals they are getting and he added that this phenomenon would...

WASHINGTON -- Billions more federal dollars will likely pour into Florida and other Southeastern states as they struggle to return to normal after a series of devastating hurricanes. In his third request to Congress for supplemental storm aid, President Bush asked lawmakers on Monday for an additional $7.1 billion. Congress has already approved Bush's first request of $2 billion and is considering his second, a $3.1 billion proposal - meaning the price tag for all three could exceed $12.2 billion. The government will have to borrow to pay for the packages, adding to already huge federal deficits. The latest request...

"Too big to fail" is the cancer of moral hazard in the US finance system. Many, including myself, have observed that the shrinking intermediary role of banks in funding the economy brought about by the rapid growth the non bank credit and capital markets has increased system risk in recent years. This risk manifests itself only in a bear market. This is now building up to a crisis. Banks have also compensated for their shrinking funding role by moving into equity investing and securitization and trading through their investment banking subsidiaries, not to mention drivative finance and trades. There is...