Blythe’s best of the blogs

By Scot Blythe | April 2, 2009 | Last updated on April 2, 2009
4 min read

This week: a little bit of humour mixed with the logic of quantitative easing.

Cover effect

Investment contrarians have long been intrigued by what goes on a magazine cover. Business Week’s Death of Equities cover in 1979 is one example, although it took another three years for a bull market to begin. Similarly, in the spring of 2006, many will remember that U.S. business magazines had cover lines such as “how to profit from real estate.” Now Nobel prize winner Paul Krugman weighs in, with a nod to his own exposure.

“I’ve long been a believer in the magazine cover indicator: when you see a corporate chieftain on the cover of a glossy magazine, short the stock. Or as I once put it (I’d actually forgotten I’d said that), ‘Whom the Gods would destroy, they first put on the cover of Business Week.’ ”

“There’s even empirical evidence supporting the proposition that celebrity ruins the performance of previously good chief executives.”

“Presumably the same effect applies to, say, economists.”

“You have been warned.”

Too big to fail

Paul Kedrosky at Infectious Greed mines a nugget from John Hempton at Bronte Capital about regulation and the banks. The ones that have survived the credit crunch were better, just dumber (and perhaps better regulated). Kedrosky suggests a choice for the future:

1. “Small and smart banks. This camp wants to create lots of small banking baskets, with none being big enough to cause systemic problems if one fails.”

2. “Big and dumb banks. This camp (which John is in) wants fewer banking baskets, but all of which are watched much more closely. This view is driven by the id.”

“The arguments for the former largely have to do with eliminating systemic risk from banks that are “too big to fail” while maintaining competition; the arguments for the latter have to do with easier banking oversight and lessened competition-driven incentives for banks to run amok and destroy the world. In the latter case we would end up with a few very large banks in the U.S., all of which would be too big to fail, for practical purposes.”

“Here is John using Australia to make his case (but he could equally have used Canada), one that is similar in some ways to Nassim Taleb’s call for banks as utilities.”

Over at Berkeley, economist and former Clinton official Brad DeLong delivers a concise account of quantitative easing: what happens when interest rates can’t be pushed any lower.

“Unemployment is currently rising like a rocket, because businesses that normally would be expanding and hiring are not, and those businesses that would normally be contracting and shedding workers are doing so very rapidly. Businesses that ought to be expanding and hiring cannot, because the depressed general level of financial asset prices prevents them from borrowing money or selling bonds on profitable terms.”

“In response, central banks should purchase government bonds for cash in as large a quantity as needed to push their prices up as high as possible. Expensive government bonds will shift demand to mortgage or corporate bonds, pushing up their prices.

Even after central banks have pushed government bond prices as high as they can go, they should keep buying government bonds for cash, in the hope that people whose pockets are full of cash will spend more of it, and that this will directly pull people out of joblessness and into employment.”

The success of failure

How would one know if quantitative easing was working? Nick Rowe at Worthwhile Canadian Initiative has a suggestion. Last week, the British government failed to sell out a bond auction for the first time in a number of years. And U.S. investors wanted slightly higher interest rates than analysts had expected in an auction later that week. Here’s what Rowe thinks:

“If people refused to buy more government bonds, this would mean that all private savings would henceforth have to be held in either money or private debt. Some people would continue to save, and choose to hold money. Some people would continue to save, and choose to hold private debt. And some people would stop saving, and would spend instead.”

“The first group, who switch from bonds to money, are not a problem. The central bank will accommodate their desire through an open market purchase of bonds. That’s neither good nor bad news, providing the central bank responds properly.”

“The second group, by switching from government bonds to private debt, will reduce the interest rates on private debt, and so encourage investment demand. That’s good news.”

“The third group, who stop saving, will increase consumption demand. That’s good news.”

The future of freebies (wink)

Finally, on April 1, Harvard economist and former Bush official Gregory Mankiw posted this (who sometimes debates DeLong and Krugman):

“My Last Free Post

…is coming soon.”

“With Harvard having lost so much of its endowment lately, the university has asked me to stop providing this blog free of charge. Starting shortly, therefore, this blog will be available only to Harvard students and alumni and to others who subscribe via the new Harvard-bloggers program. All revenue from this program will be split between building the new Allston campus and providing students hot fudge sundaes on alternate Thursdays and every day during exam periods.”


Scot Blythe