Tracking error: Blythe’s best of the blogs

Sometimes it takes a crisis to capture just how much things have changed. A few years ago, most blogs were highly personal, often very political, takes on the world. Many were written by well-known journalists; many more were written by anonymous axe-grinders.

But as the financial crisis has accelerated, so has the proliferation of financial blogs — and their readers. Some are written by academics, some by fund managers and some by former financial industry insiders. Sometimes they consist of analysis of market moves, sometimes commentary on government policy. (And of course, sometimes they wander off to pet peeves or favourite music).

Whatever else they may be, these blogs offer a welcome opportunity to probe deeper into market movements and economic policy, a probe that supplements conventional media accounts. They round out what is offered in the limited space of newspapers. Helpfully, they also link to other bloggers they pay attention to, as well as news articles.

And now comes the moment that demonstrates that financial blogging has come of age — indeed, that it is a force to be reckoned with. Earlier this week, some prominent bloggers were invited to a conference call on the U.S. Treasury’s toxic asset plan. Here’s what well-regarded blogger Felix Salmon, who wasn’t invited to participate, wrote:

“It’s the invite everybody wants to have gotten: were you invited to join Treasury’s econoblogger conference call? Clusterstock, Dealbreaker, and Paul Kedrosky found the golden ticket in their inboxes, and Brad DeLong asked a question — although one would hope that Treasury would be talking to him informally anyway.

“As for the list of people who didn’t get an invite, they include John Hempton, Yves Smith, and me; rumour has it that obvious names like Mark Thoma,* Nouriel Roubini, Tyler Cowen, and “Calculated Risk” weren’t invited either, but I haven’t checked. Certainly the call seems to have been very short; if many econobloggers did get the invites, they quite possibly — like Kedrosky — didn’t get them in time.”

Remember those names. They will show up frequently in this blog of blogs. Here’s a sampling of this week’s best items.

Bailout or recapitalization

Of course, the big news was the U.S. Treasury’s plans to buy up toxic assets from troubled banks, and thus solve a liquidity trap, a situation where private investors are too frightened to invest in risky assets and thus opt for cash. As investors withdraw, price discovery is impaired. No one is willing to set a floor and a ceiling on the uncertain yield of an asset. This is the source of the financial crisis, and many think the U.S. banks should be nationalized to get bad assets off the balance sheets. Others think they should be allowed to fail, and the market will readjust to new realities.

Many bloggers have had something to say, but perhaps the best place to start is with a New York Times blog that featured four economists: Nobel laureate Paul Krugman, Berkeley professor Brad DeLong, MIT professor Simon Johnson and University of Oregon professor Mark Thoma — all active bloggers in their own right.

Krugman, who opts for nationalization, is the most critical, writing: “In essence, the Geithner plan is the same as the Paulson plan from six months ago: buy up the toxic assets, and hope that this unfreezes the markets. Don’t be fooled by the apparent role of private enterprise: more than 90% of the funds will come from taxpayers. And the way the funds are structured provides a strong incentive for investors to overpay for assets (see my explanation on my blog).”

Johnson also doesn’t think it goes far enough: “Secretary Geithner’s plan might work, in the sense of facilitating the removal of some ‘toxic’ assets from the balance sheets of major banks. But it is unlikely to work in the sense of restoring the banking system to health.”

DeLong, who like Krugman, has favoured bank nationalization, surprisingly thinks it’s a worthwhile start, though far from perfect, to get price discovery restarted: “The sudden appearance of an extra $500 billion in demand for risky assets will reduce the quantity of risky assets other private investors will have to hold. And the sudden appearance of between five and 10 different government-sponsored funds that make public bids for assets will convey information to the markets about what models other people are using to try to value assets in this environment. That sharing of information will reduce risk — somewhat.”

Thoma also holds out hope, but attaches conditions for measuring the success of the plan: “A bailout plan must do two things to be effective. It must remove toxic assets from bank balance sheets, and it must recapitalize banks in a politically acceptable manner. I believe the Geithner plan has a chance of doing both of these things, but it’s by no means a sure bet that it will.”

Stock market: up, up and away!

Data-savvy “Calculated Risk” normally posts takes on the latest, usually government statistics. He was all over the real estate crisis before it became news. This week’s pick is a chart that he regularly links to, which is put together by a U.S. financial planner. It tracks the depth of this current downturn against three other bear markets.

Firefighting or fire-lighting

At the Big Picture, money manager and frequent TV guest Barry Ritholtz frequently comments on Wall Street and the Fed, often quite caustically. He has a wicked sense of humour, too. Last week, a friend mailed him the following joke:

“When a fireman sees a house on fire, he sounds an alarm, dons his turnout gear, bravely rescues the occupants and puts out the fire.

“When an investment banker sees a house on fire, he quietly sells the burning house short, uses the proceeds to buy a larger house for himself and, when someone suggests that his taxes be raised to help the homeless, he rails against the dangers of socialism.”

Don’t bank on it

Less humorously, he stumbles across a clear-sighted warning from 1998, arguing that no bank should be allowed to become “too big to fail.”

“In researching the Citigroup section of Bailout Nation, I came across this improbable 1998 William Safire essay on the Citicorp-Travelers merger. Surprisingly, Safire makes a strong case against the merger, making several points (below).

“It is most likely the most prescient thing he ever wrote:

‘No private enterprise should be allowed to think of itself as ‘too big to fail.’

‘Federal deposit insurance, protecting a bank’s depositors, should not become a subsidy protecting the risks taken by non-banking affiliates. If a huge ‘group’ runs into trouble, it should take the bank down with it; no taxpayer bailouts should allow executives or stockholders to relax.’ ”

Two questions; no answers

Let’s leave the last word, and a very pertinent one, to a Canadian blogger, Nick Rowe, at Worthwhile Canadian Initiative. He wonders whether we’re starting to get there yet:

“Are we seeing the first signs of recovery, or just a temporary bear-market rally?

“What caused it? Fiscal policy? Monetary Policy? Financial policy? Or did it just happen by itself?

“As I said, I don’t have the answers, but while the rest of the economics blogosphere seems to be concentrating on AIG bonuses and the Treasury Plan, I thought I would at least raise these questions.”

(03/27/09)