Cursory Update
It's been quiet around here, what with Dean being on the trail and me failing to keep things going.

We did get a GDP report a few weeks ago, indicating that GDP rose .6% in the first quarter (I'm pretty sure that's real, not nominal). I saw a comment that excluding inventories and exports, the number would have been negative. I didn't see this portrayed as "the falling dollar is working," but that was my thought.

I suggested to my brother last fall that I thought the Fed should raise interest rates. I've backed off of that theory somewhat - I definitely still believe the Fed's current policy is inflationary, but it may help the financial and housing sectors adjust to new realities; if the Fed can keep inflation relatively controlled and stable, which I think they can, the good it does to mitigate the economic downturn may outweigh the inherent costs of inflation. If my brother has the chance to chime in, though, I defer to him on monetary policy.

I did make the Berkshire Hathaway meeting last weekend. I took detailed notes a few years ago, but learned that someone else would put better notes on the web; CNBC's notes are here. If I had to pick one headline, I'd say it's that Buffett approves of the Fed's actions in facilitating an orderly shut-down of Bear Sterns. If I get a second headline, it's that Buffett is a better stage actor than Susan Lucci. Of course, it was his stage.
- posted by S @ 10:00 PM

 
Treasury on the JPM-BSC deal

The government sought a low sale price for Bear Stearns Cos. to send a message that taxpayers wouldn't bail out firms making risky bets, a top Treasury Department official testified, as regulators offered Congress the first detailed explanation of the unprecedented rescue.

So says the Wall Street Journal, subscription probably required, confirming my idle speculation.
- posted by S @ 7:53 PM

 
McTeer on the Dollar
Here's his take. The short version - we want the dollar to get stronger, but not yet.

I was going to add a comment of my own, but I think I'd rather go to sleep.
- posted by S @ 12:13 AM

 
Will the JPM-BSC deal stand?
Here's an interesting possibility:

Did Bear agree to the lowball offer only to buy time? Harte hypothesized about that prospect a report today: "We suspect that many BSC shareholders will be disappointed with the outcome, and while we believe an approval is the more likely outcome, we do not believe it is incomprehensible that this deal may have bought BSC additional time to assess its situation which may lead shareholders to reject the offer."

One other whimsical thought that occurred to me last night, to the extent that Paulson's and/or Bernanke's hands were in this, was that they may have wanted the sale price to be nominal specifically to send a message that they're not going to bail out investors.

It will be interesting to see what unfolds, but I think I'm done for tonight.
- posted by S @ 9:04 PM

 
Moral Hazard

Fed officials don't dispute that their decision carries "moral hazard" — the risk that any sort of bailout encourages more of the same risky behavior later. But they believe that compared with the alternative scenario, that cost is small. The funding is structured so that the greater benefit is to those who lent money to Bear Stearns in the "repo" market for secured, overnight loans, not to Bear Stearns itself. Moreover, they note it's unlikely any firm will consider the loss Bear Stearns's shareholders are likely to sustain as an acceptable price for taking the same risks in hopes of a bailout.

I think that's a fair assessment.

The equity holders sure weren't bailed out, but the counterparties and bondholders kind of arguably were (though, as I mentioned earlier, the reaction of JPM's stock price today suggests that Bear Sterns without liquidity issues is worth well over zero). This kind of bailout might make senior lenders less scrupulous in their vetting. But I think that's a much smaller consideration.

Megan McArdle makes the same point.

UPDATE: Drexel economist Joseph Mason thinks I shouldn't be so dismissive of moral hazard in counter-party risk. He's probably right. Though in this particular case, it was more of a liquidity thing than a long-run risk thing; if the federal reserve can reliably tell the difference (a big if, I grant), I have no objection to their routinely bailing out liquidity situations and letting fundamentally bad companies die.
- posted by S @ 8:47 PM

 
1907 Redux
Based on the performance of JPM shares today, the market isn't terribly concerned that J.P. Morgan is buying a pig in a poke. Here's BusinessWeek on the deal, if you care.
- posted by S @ 5:57 PM

 
Greenspan on Risk Management
Greenspan on risk management:

I do not say that the current systems of risk management or econometric forecasting are not in large measure soundly rooted in the real world. The exploration of the benefits of diversification in risk-management models is unquestionably sound and the use of an elaborate macroeconometric model does enforce forecasting discipline. It requires, for example, that saving equal investment, that the marginal propensity to consume be positive, and that inventories be non-negative. These restraints, among others, eliminated most of the distressing inconsistencies of the unsophisticated forecasting world of a half century ago.

But these models do not fully capture what I believe has been, to date, only a peripheral addendum to business-cycle and financial modelling – the innate human responses that result in swings between euphoria and fear that repeat themselves generation after generation with little evidence of a learning curve. Asset-price bubbles build and burst today as they have since the early 18th century, when modern competitive markets evolved. To be sure, we tend to label such behavioural responses as non-rational. But forecasters’ concerns should be not whether human response is rational or irrational, only that it is observable and systematic.

This, to me, is the large missing “explanatory variable” in both risk-management and macroeconometric models. Current practice is to introduce notions of “animal spirits”, as John Maynard Keynes put it, through “add factors”. That is, we arbitrarily change the outcome of our model’s equations. Add-factoring, however, is an implicit recognition that models, as we currently employ them, are structurally deficient; it does not sufficiently address the problem of the missing variable.

Labels: Greenspan, risk

- posted by S @ 5:55 PM

 
J P Morgan to Acquire Bear Sterns?
This just came across the wire:

Bear Stearns Cos. was closing in on a deal Sunday afternoon to sell itself to J.P. Morgan Chase & Co., as worries deepened that the financial crisis of confidence could spread if Bear failed to find a buyer by Monday morning.

People familiar with the discussions said all sides were pushing hard to complete an agreement before financial markets in Asia open for Monday trading. "None of these things is done until they're done," Treasury Department spokeswoman Michele Davis said Sunday afternoon. "But I think everyone's expectation is sometime in the early evening hopefully" the deal will be done.

While terms of the deal were still being hammered out Sunday afternoon, Bear Stearns could fetch roughly $2.2 billion, or slightly less than $20 a share, said people familiar with the talks. Reflecting the dire situation at Bear, that valuation is one-third lower than the company's stock price of $30 in New York Stock Exchange composite trading Friday at 4 p.m. Last year, the shares hit $170.

I don't know what Bear Sterns looks like internally right now, but I suspect this is more than their shareholders would get without an acquisition, and is either a very good or a very bad deal for JPM.

I suppose I'm not really adding value here.

UPDATE: It's interesting how price can color one's impression of the value (especially when it's about all one knows) - at $20/share, I figured it could be either a good deal or a bad deal. But at $2 per share, as recent reports suggest, I suspect Morgan is doing a favor for Hank Paulson, paying more than zero for something worth less than zero. Unless Morgan already has counter-party liability.

I should probably mention at some point that I own shares of JPM.

UPDATE 2: Greg Mankiw seems to know more than I do, low hurdle that that is.
- posted by S @ 4:01 PM

 
Honest to Goodness Tulips
The latest news from the Netherlands is that a lot of people have lost money speculating in tulip bulbs. Yes, really.

I don't speak Dutch, but I did verify that this isn't just a story that has been circulating the Internet for the last 370 years.
- posted by S @ 10:54 PM

 
mortgage crisis
Earlier today, I came across a post I made about subprime mortgages almost four years ago.

In case that was too subtle: I told you so.
- posted by dWj @ 10:36 PM

 
Dean's absence
A bit of a personal note here, on why my blogging is likely to be light for a while.

Friday I'm flying to Georgia; from the airport I will get a ride to near Springer Mountain, from where I will start walking north. I need to come back to civilization in late April for about a week and a half, and it's conceivable I'll check in then. In the next few days, I ought to be busy getting my apartment packed up and moved into storage and acquiring a couple last minute provisions; I shouldn't be spending time posting here, and certainly shouldn't be spending time reading all the other things I read that generally result in my posts here.

Only about 15% of people who set out to hike the Appalachian Trail actually complete it, so there's a reasonable chance you'll hear from me before late August. After that, I'm going to graduate school in economics.

The credit crisis, fed decisions, and economic data will roll on without me — whether they should or not.
- posted by dWj @ 1:36 PM