Matt Nolan

DOW 8500, BDI down 79%, WTF

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Or so says two of the blogs I often read for US economic information:

Market Movers (*)

The Big Picture (*)

I have to concur.

However, for New Zealand there is a big plus to this collapse in US economic activity – the huge capacity constraints on shipping have lifted (Market Movers).

Shipping costs have been restrictively high for our exporters for a long time. A fall off in import activity to the US has freed up ships, which leads to much lower shipping costs for our exporters. Add to this the lower exchange rate and our tradable sector is getting one hell of a boost moving forward.

Update:  Dow breaks 8,000 on the downside.

Matt Nolan

More evidence of asymmetric information?

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Over at Market Movers, Felix Salmon discusses “Lehman’s Lies“.

In the wake of the collapse, it was clear that if Lehman couldn’t be trusted, then it would be silly to trust any other troubled financial institution, either — AIG, WaMu, Wachovia, Fortis, Hypo Real Estate, you name it.

This breakdown in “trust” destroyed the delicate equilibrium we were in, and has sent us spinning towards a worse set of outcomes.

Fundamentally, this has happened because “trust” (the fact that we would be playing a “infinitely” repeated game, which then rewards people for collusive behaviour) had allowed us to bypass the asymmetric information problem inherent in the market. With that trust gone, no-one will lend or purchases assets, as they think that only the worst deals are available on the market.

In this light, the behaviour of Lehman appears to be a major factor behind the crisis we now find ourselves in – damned investment banks 😛

Matt Nolan

Does the credit crisis indicate the failure of the “free market”

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Matt McCarten was someone I enjoyed listening to when I was a young Alliance supporter many years ago – however, even in the heyday of teenage communist sympathies I would not have agreed with his conclusion that the recent credit crisis is undeniable evidence that voluntary trade does not work.

Now Kiwiblog and Anti-dismal have already gone to task explaining why they don’t believe this is a fair criticism of free trade, and good on them I think they are on the money (David Farrar focuses on why the criticism doesn’t sit well while Paul Walker paints the case for regulation being the cause of the problem – more here). The Hive also mentions dis-satisfaction with his choice of historical comparison. However, even after reading these posts you may still harbour some confusion surrounding the fact that I said voluntary trade instead of free markets.

Ultimately, his criticism of the “invisible hand” draws out something incredibly naive about the point of view that the free market is bad. Supporters of the free market are not so much saying that corporations should be allowed to manipulate information and “defraud” the public as they are saying that voluntary trade among groups is a good thing.

If two people choose to trade, it must be in their benefit and therefore giving people the freedom to trade is an important part of a society – this is what free trade represents.

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Matt Nolan

Was it the availability of credit that lead to the housing bubble?

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A popular explanation of the booming in house prices according to, well, everyone is that there was lots of “credit washing around” which convinced people that they should go and bid up house prices. An example of this logic is shown in this statement at the very good Big Picture blog:

The bubble in home prices, fueled by the ready availability of credit, resulted in an underestimate of the risks of residential real estate

Personally, I think this type of thinking has the causality all mixed up – if there was any error it was because people “underestimated the risks” associated with the price of residential real estate, and therefore given the “price” of credit the housing market appeared to be a better bet than it actually was. As a result, the entire blame for the bubble and associated crisis should lie with the fact that risk wasn’t being appropriately identified – not with some mystical belief that credit was springing up all over the place. If the risk problem was unsolvable, then we can blame central banks for leaving the price of credit (not its “availability) to low – however, this is a secondary issue to risk.

The whole concept of the “availability of credit” is somewhat of a misnomer.

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Matt Nolan

Is the US taxpayer being forced to surrender to Wall Street?

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I don’t like thinks that sound like conspiracy theories – and the title of this post does! However, I am starting to get the impression that this is one situation where it may actually be the case. Overall it stinks like socialism for the rich (good cartoon here, good article here)

Two articles from Bloomberg this morning have pushed me into this view:

Bernanke Signals U.S. Should Pay More for Bad Debt

Bernanke Says Normal Markets Needed or Growth to Halt

As Felix Salmon states here, Bernanke’s interest in paying the hold to maturity price for assets just doesn’t make sense when a good proportion of the assets aren’t going to mature – and even if they wish to take into account risk, the US Treasury does not have time to sufficiently evaluate the risks.

Surely the aim of the bailout should be to do as little as possible to ensure that credit markets start functioning again – in this sense, over paying for assets seems excessive.

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Matt Nolan

Currency situation US: One more point

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In an earlier post we mentioned that the US currency appears to appreciate in the face of bad news – a bad sign for economic stabilisation. After saying this, I noticed two articles up on bloomberg:

Dollar Falls on Speculation U.S. Bailout Plan to Increase Debt

Treasuries Prove Irresistible as Deflation Bet Trumps Paulson

Very interesting.

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