Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • Four Issues with Miles Kimball's “Federal Lines of Credit” Policy Proposal

    Jul 18, 2012Mike Konczal

    Economics professor Miles Kimball has a new blog, Confessions of a Supply-Side Liberal. In one of his first posts, he outlines a plan for stimulus that he calls “Federal Lines of Credit” (FLOC).

    Economics professor Miles Kimball has a new blog, Confessions of a Supply-Side Liberal. In one of his first posts, he outlines a plan for stimulus that he calls “Federal Lines of Credit” (FLOC). It's presented in a longer policy paper, “Getting the Biggest Bang for the Buck in Fiscal Policy." This has gotten interest across the political spectrum. Bill Greider has written about it in The Nation, as has Reihan Salam in the National Review.

    What's the idea? Under normal fiscal stimulus policy in a recession, we often send people checks so that they'll spend money and boost aggregate demand. Let's say we are going to, as a result of this current recession, send everyone $200. Kimball writes, "What if instead of giving each taxpayer a $200 tax rebate, each taxpayer is mailed a government-issued credit card with a $2,000 line of credit?" What's the advantage here, especially over, say, giving people $2,000? "[B]ecause taxpayers have to pay back whatever they borrow in their monthly withholding taxes, the cost to the government in the end—and therefore the ultimate addition to the national debt—should be smaller. Since the main thing holding back the size of fiscal stimulus in our current situation has been concerns about adding to the national debt, getting more stimulus per dollar added to the national debt is getting more bang for the buck."

    Let's kick the tires of this policy. There's a lot to like about the proposal, particularly how it could be used after a recession is over to provide high-quality government services to the under-banked or those who find financial services yet another way in which it is expensive to be poor (modified, it turns right into Steve Waldman's Treasury Express idea). It's not clear whether this is meant to supplement or replace normal demand-based fiscal policy - at one point he proposes it could balance out a "relatively-quickly-phased-in austerity program."

    As a supplement it has promise, but I think there are some major problems with this proposal, which can be grouped under four categories.

    I: Isn't deleveraging the issue? Is this a solution looking for a problem? From the policy description, you'd think that a big is credit access holding the economy in check.

    But taking a look at the latest Federal Reserve credit market growth by sector, you can see that credit demand has collapsed in this recession. Consumer credit drops throughout the beginning of the recession, particularly in 2009. This is true even for consumer credit by itself, which rebounds in 2011. It's not clear that these lines of credit would be used to expand demand at the macro-level; likely, given what we see, it would be used to replace other, higher-interest forms of debt (see III), a giant transfer of credit risk from credit card companies to taxpayers. But certainly some people will benefit, so let's examine why this policy is supposed to work.

    II: This policy is like giving a Rorschach test to a vigilante. No, not that vigilante. I mean the bond vigilantes. Because to assume this plan would work, you need to make some curious assumptions about how bond vigilantes think, as it increases the debt by a significant amount.

    Let's say our country has a balanced budget with a debt-to-GDP ratio of 50 percent and we hit a recession while at the zero-bound. As a result of less tax revenue coming in and more automatic stabilizers going out, debt-to-GDP will be 60 percent at the end of the year. We want to stimulate the economy further using fiscal stimulus.

    Let's say our default is that we take three percent of GDP, divide it among the population, and mail it out. At the end of the year, the debt-to-GDP ratio will be 63 percent (I am ignoring that fiscal stimulus at the zero-bound can be largely self-financing for this example).

    In Kimball's FLOC, we instead take 9 percent of GDP, divide it evenly among the population, and mail out lines of credit that add up to that 9 percent of GDP. Let's also say that perfect forecasting tells us that within the year, 6 percent of it will be utilized as a loan not yet paid back, and 3 percent is still available as credit.

    What's the government's debt-to-GDP ratio at the end of the year in Kimball's example? I'm not sure how he'd account for it. I imagine it should be 69 percent (60 + 9). Perhaps it is 66 percent (60 + 6)? Either way, it is more than the 63 percent of just giving people money. His plan requires a larger debt-to-GDP ratio. If his accounting ends up with just 60 percent, I'm not sure I understand how he is doing it.

    Now Kimball will say that bond vigilantes will be happy with this. Why? Because there's a built-in plan for repaying it. "[T]he fact that much of the money would ultimately be repaid would dramatically reduce the ultimate addition to the national debt...(though at a relatively attractive ratio of additional aggregate demand to addition to national debt)."

    If we are guessing as to what the bond vigilantes want, it is clear they want more U.S. government debt. Ten-year Treasuries are selling at 1.5 percent, while real interest rates are negative! But for the purposes of the FOLC, we need a few assumptions about what the bond vigilantes think, which aren't clear.

    First (i) it assumes that the bond market will only care about the government's long-run debt ratio instead of the short-term. I think that's correct. But much of the bond vigilante argument is predicated on the opposite, that no matter what the long-term is, the capital markets will freak on short-term deficits.

    It also assumes (ii) that the repayments of these FOLC will be made easier through debt collection than just collecting the equivalent amount of money through taxation. I see no reason why that's the case, and many reasons to believe the opposite.

    III: This policy will involve trying to get blood from a turnip. I very much distrust it when economists waive away bankruptcy protection. Especially for experimental, controversial debts that have never been tried in known human history.

    As the paper admits, this is a machine for generating adverse selection, as the people most likely to use it are people whose credit access is cut due to the recession. High-risk users will likely transfer their balances from higher rate credit cards to their FOLC (either explicitly or implicitly over time if barred) - transferring a nice chunk of credit risk from the financial industry to taxpayers.

    It's also not clear what happens a few years later when consumers start to pay off the FOLC. Could that trigger another recession, especially if the creditor (the United States) doesn't increase spending to compensate?

    The issue isn't whether or not the government will be able to collect these debts at some point. It has a long time-horizon, the ability to jail debtors and use bail to pay debts, the ability to seize income, old-age pensions and a wide variety of income, and the more general ability to deploy its monopoly on violence. The question is whether this will be smoother, easier, and more predictable than just collecting the money in taxes. We have a really smooth system for collecting taxes, one at least as good as whatever debt collection agencies are out there. If that is the case, there's no reason to believe that this will satisfy the bond vigilantes or bring down our debt-to-GDP ratio in a more satisfactory way.

    IV: Since we've very quickly gotten to the idea that we'll need to jettison legal protections under bankruptcy for this plan to work, it is important to emphasize that this policy is the opposite of social insurance.

    I don't see a macroeconomic difference between the government borrowing 3 percent of GDP and giving it away and collecting it through taxes later versus the government borrowing 3 percent of GDP, loaning it to individuals, and collecting it later through debt collectors except in the efficiency and the distribution.

    The distributional consequences of this proposal aren't addressed, but they are quite radical. Normally taxes in this country are progressive. Some people call for a flat tax. This proposal would be the equivalent of the most regressive taxation, a head tax. And it also undermines the whole idea of social insurance.

    Let's assume the poorest would be the people most likely to use this to boost or maintain their spending. I think that's largely fair - certainly the top 10 percent are less likely to use this (they'll prefer to use high-end credit cards that give them money back). This means that as the bottom 50 percent of Americans borrow and pay it off themselves, they would bear all the burden for macroeconomic stability through fiscal policy. Given that the top 1 percent captured 93 percent of the income growth in the first year of this recovery, that's a pretty major transfer of wealth. One nice thing about tax policy, especially progressive tax policy, is that those who benefit the most from the economy provide more of the resources. This would be the opposite of that, especially in the context of a ""relatively-quickly-phased-in austerity program."

    Efficiency is also relevant - as the economy grows, the debt-to-GDP ratio declines, making the debt easier to bear. The most likely borrowers under FOLC, the bottom 50 percent, have seen stagnant or declining wages overall, especially in recessions. A growing economy would keep their wages from falling in the medium term, but this is still a problematic issue - their income is not more likely to grow to balance out the payment burdens than if we did this at a national level, like normal tax policy.

    The policy also ignores social insurance's role in macroeconomic stability, and that's insurance against low incomes. Making sure incomes don't fall below a certain threshold when times are tough makes good macroeconomic sense and also happens to be quite humane. This is not that. As friend-of-the-blog JW Mason said, when discussing this proposal, the FOLC is like "if your fire insurance simply consisted of a right to borrow money to rebuild your house if it burned down."

    What else am I missing about this proposal?

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  • Washington Monthly on the Future of Savings

    Jul 18, 2012Mike Konczal

    The latest issue of Washington Monthly has several fascinating pieces on the future of savings. John Gravois has a piece on where the Consumer Financial Protection Bureau currently stands. Barry C.

    The latest issue of Washington Monthly has several fascinating pieces on the future of savings. John Gravois has a piece on where the Consumer Financial Protection Bureau currently stands. Barry C. Lynn and Lina Khan have a piece on the collapse on American business start-ups. My colleague Mark Schmitt has a piece on the idea of government savings accounts, a piece which is also fascinating as a history of a policy idea. Reid Cramer of the New America Foundation has a great list summarizing some of the policies at the forefront of the movement to build savings and assets, which include universal childhood savings accounts, autoIRAs, addressing the unbanked and, a favorite around here, the Save to Win program that puts a lottery in a savings account.

    For those interested in more, New America had a series of panels on the events which you can find here. The previous paradigm of an "Ownership Society" has collapsed. It seems unlikely that, with 401(k) programs looking insufficient to cover retirements, that we are going to privatize Social Security in the near future. And using housing equity in a bubble as a quick source of savings has turned out to be both a giant problem and no longer available. Given that the current recession is a crisis of over-leveraged households, having more stable and sufficient ways of saving and buiding wealth isn't just a matter that impacts individuals, but one that impacts the country as a whole. This needs to be at the front of the policy agenda and this issue will catch you up to the debate.

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  • The Opposite of Obama's "You Didn't Build That" Comment: Mythological Job Creators

    Jul 18, 2012Mike Konczal

    Conservatives are in a rage after Obama suggested we add value to the economy together. In their version, only the rich do.

    Conservatives are in a rage after Obama suggested we add value to the economy together. In their version, only the rich do.

    "If you’ve been successful, you didn’t get there on your own... If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive... If you’ve got a business -- you didn’t build that... The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together."

    - President Barack Obama, Roanoke Fire Station #1, Roanoke, Virginia, July 13th, 2012

    "The man at the top of the intellectual pyramid contributes the most to all those below him, but gets nothing except his material payment, receiving no intellectual bonus from others to add to the value of his time. The man at the bottom who, left to himself, would starve in his hopeless ineptitude, contribute nothing to those above him, but receives the bonus of all their brains.”

    - Ayn Rand, Atlas Shrugged, required reading for Representative Paul Ryan's (R-WI) staff.

    "The Zambrellis scoffed at attempts by the Democrats...to wage class warfare... 'It's not helping the economy to pit the people who are the engine of the economy against the people who rely on that engine.'"

    - Michael Zambrelli, Mitt Romney fundraiser, East Hampton, New York, July 8th, 2012, Quoted in the LA Times

    What's the opposite of President Obama's view that the rich have become rich thanks to the American system that we've created together? President Obama's speech has sent the right into a furor, with Rush Limbaugh telling his audience, "I think it can now be said, without equivocation—without equivocation—that this man hates this country." But if expressing the opinion that the value of the economy is something that is created together is enough to hate America, what would it mean to have a vision of wealth creation that loves America?

    Some political commentators have treated this comment and its reaction either as part of the presidential noise machine or as the dreamscape projections of the conservative id. Will Wilkinson at Democracy in America has written a post, "Taxes and the rich," addressing this. There are some problematic issues with the post [1] [2], but he describes Rush Limbaugh's reaction as being bound up in an absurd myth. He says, "Mr Obama's in-it-together point is mildly offensive in context because it is used to imply that top-earners who resist paying an even larger portion of America's tab do so only because they are in the grip of an absurd myth of self-reliance."

    I'd argue that instead of self-reliance, the real idea the right is appealing to here is the idea of the "job creator." It goes beyond the person who gets by on his own without any help from the government or the public at large. It's the idea that the rich create all the value of the economy. They are, as John Paul Rollert put it in a great post wondering what Adam Smith would think of "job creators," the visible hand of the economy. The rich are, as people at the Mitt Romney fundraiser put it, "the engine of the economy" who all the other people "rely" on for their survival. (I'm assuming. I would have meant it the other way around, but I wasn't at that fundraiser.) The economy isn't something we create together. It is something the rich create for everyone else.

    And, crucially, rather than being a myth or a fairy tale conservatives tell themselves, this idea of the "job creator" is the basis for current policy-making on the right. As Texas Governor Rick Perry put it during the primary, “America is not going to move forward until we remove restrictions of over-taxation, over-regulation and over-litigation on the job creators and free them so the jobs can be created.” Charles Krauthammer argues on TV that we have a capital strike that's holding back the economy. John Boehner gives speeches where he argues "private-sector job creators in particular — are rattled by what they’ve seen out of this town over the last few years. My worry is that for American job creators, all the uncertainty is turning to fear that this toxic environment for job creation is a permanent state. Job creators in America are essentially on strike."

    Speeches like these diagnose the problem, and then it turns into policy. Presidential candidate Mitt Romney's policy plans for job creation operate under the assumption that those at the top of the economic pyramid are being held in check. His Day One proposals include “the elimination of Obama-era regulations that unduly burden the economy or job creation," “revers[ing] the executive orders issued by President Obama that tilt the playing field in favor of organized labor," cutting corporate taxes, eliminating the estate tax, and a variety of other policy designed to give the "job creators" a firmer hand in controlling the economy. His education policy includes putting private actors in charge of everything, especially putting commercial banks back into the sweet spot of collecting government-insured money and expanding how easy it is for for-profit colleges to qualify for federal money. Presumably he does this because the private is always superior to the public, regardless of how much the business model appears to be a vacuum for subsidies. His tax and social safety net policy focus on boosting the earnings of those at the top of the pyramid on the backs of those at the bottom.

    These policies include no hint that the economy is stuck due to inadequate demand or the weak purchasing power of the middle and working classes and the delinking of wages and productivity. There's no mention of the need to expand education and infrastructure to create the economy of the 21st century. There's absolutely no sense that the economy encourages the most innovative or entrepreneurial when there is full employment and a portable social safety net that provides economic security. And it is light-years away from the observation that society is a system of cooperation in which the value in the economy is created together.

     

    [1] Wilkinson doesn't say it outright, but it seems that he is in favor of a flat, proportional tax on fairness grounds: "the facts about the portion of tax revenue contributed by the rich plausibly suggest that they pay more than their fair share for the infrastructure of capitalism..the class of people Mr Obama wants to 'give back' has already paid most of the tab, and continues to pay most of the tab, for the tax-financed public goods upon which they, and the rest of us, so crucially depend."

    Why do we assume that a flat tax is fair? Given that Wilkinson's theory is about how public goods benefit society, presumably he thinks taxes should be the shadow price of purchasing those goods if they were available in a market. A flat tax would be the philosophically coherent answer for how to raise funds to pay for these benefits if and only if benefits consumed rise proportionately to income. If someone is 10^4 times as rich as I am, they need 10^4 times more garbage collected, breathe 10^4 times more clean air, require 10^4 more police protection and functioning courts, etc. That strikes me as dubious.

    The best Milton Friedman could do was "proportional flat-rate-tax would involve higher absolute payments by persons with higher incomes for governmental services, which is not clearly inappropriate on grounds of benefit conferred." Not clearly inappropriate indeed. Taxes should be highly regressive in Wilkinsons' view, converging to a head tax, unless we are talking about utility gained from society, or unless we believe tax policy is a function of making the basic structures of society serve goals like benefitting the worse off, under which the progressive taxation case makes much more sense. See Barbara Fried's fantastic "The Puzzling Case for Proportionate Taxation" for more.

    [2] Wilkinson: "[I]n 2008...[t]he top 5 percent earned 31.7 percent of the nation's adjusted gross income, but paid approximately 58.7 percent of federal individual income taxes. If that's not giving something back, what is?" These numbers are juked in part due to the Earned Income Tax Credit (EITC), which is kind of like a negative tax with a work requirement. Given that all the rage in Bleeding Heart Libertarian circles is a universal basic income (UBI) delivered through a negative tax, wouldn't that number be significantly higher under such a system? This is why some people think that libertarians wouldn't really pull the trigger on a UBI...

    Mike Konczal is a Fellow at the Roosevelt Institute.

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  • Why That Great Interview Didn't Land You a Job: Recruitment Intensity Rates and Mass Unemployment

    Jul 9, 2012Mike Konczal

    The problem with the labor market isn't that the unemployed aren't looking for work -- it's that employers aren't looking very hard for workers.

    The problem with the labor market isn't that the unemployed aren't looking for work -- it's that employers aren't looking very hard for workers.

    Have you, or someone you know, had a great job interview and wound up wondering why, months and months later, there's been no offer and the job remains open? The job opening is on the firm's web page, you are perfect for the spot, but you aren't getting any responses, either for an interview or for post-interview interest. I know many people this has happened to -- so many that I've been wondering if it is quantifiable and generalizable.

    We have a lot of ways to observe how the unemployed behave. We have detailed information on the duration of unemployment, lots of economists fretting over whether unemployment insurance keeps people from taking jobs, sophisticated models trying to understand their search behaviors, etc. But none of that mental framework exists for employers and job openings. (A cynic might note that economics, as practiced, is a machine for observing and disciplining labor.)

    Luckily, a group of economists has put something together that adds significantly to the debates over structural unemployment. Jason Faberman and Bhash Mazumder at the Federal Reserve Bank of Chicago put out a report last month asking "Is There a Skills Mismatch in the Labor Market?" Their answer: "we find limited evidence of skills mismatch." In other words, not really.

    They reference work that looks fascinating by Steven Davis of the University of Chicago, R. Jason Faberman of the Federal Reserve Bank of Chicago, and John Haltiwanger of the University of Maryland. Those researchers "find that employers were able to fill jobs relatively easily during the recession, but that their measure of recruiting intensity per vacancy, which captures a variety of efforts employers put into recruiting, remained low well after the end of the recession. One can interpret this as employers imposing relatively high hiring standards despite the abundance of available workers."

    This comes out of two previous papers they've put out, "Establishment-Level Behavior of Vacancies and Hiring" and "Recruiting Intensity during and after the Great Recession: National and Industry Evidence." These papers go into micro data from JOLTS and other soruces to create an elasticity measure of how much firms fill job vacancies in respect to the hiring rate.

    Recruitment intensity hovers around the 1.0 index through the 2000s, until the recession starts in 2007. In the Great Recession, the recruitment intensity collapses and never recovers going into the end of 2011. What does it mean for recruitment intensity to fall? This recruitment intensity, according to the research, "is shorthand for the other instruments employers use to influence the pace of new hires – e.g., advertising expenditures, screening methods, hiring standards, and the attractiveness of compensation packages. These instruments affect the number and quality of applicants per vacancy, the speed of applicant processing, and the acceptance rate of job offers." This margin for trying to fill jobs is ignored, or assumed away, in most of the major economic models of unemployment and hiring.

    The collapse of recruitment intensity helps us understand several things. First, the issue of how job openings are increasing while wages aren't. The research notes that "[i]ncorporating a role for the recruiting intensity index also improves the stability of the Beveridge Curve and yields a better fit to data on the job-finding rate for unemployed workers." This helps us understand some small movements in job openings in the Beveridge Curve while other measures of supply-constraints in the labor market aren't going off.

    The second issue it helps us understand is a common media story we see -- the story of the boss who complains about the workforce but doesn't want to raise wages. Dean Baker likes to point out these stories as lacking economic sense. This shows that employers not trying very hard to fill empty jobs, even on non-wage margins, is a general phenomenon.

    Finally, it explains why you or your friends and loved ones are having such a hard time finding a job even when you see advertisements for a perfect job that never seems to be filled. It is probably not much comfort to understand that this is a national phenomenon, one we have the tools to fix but that Republicans in Congress, bank regulators, and the FOMC are not willing to address.

    Mike Konczal is a Fellow at the Roosevelt Institute.

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  • How LIBOR Impacts Financial Models and Why the Scandal Matters

    Jul 9, 2012Mike Konczal

    If we can't rely on the accuracy of basic measurements used to set loan prices, we can't respond effectively to brewing financial crises.

    If we can't rely on the accuracy of basic measurements used to set loan prices, we can't respond effectively to brewing financial crises.

    Matt Taibbi asks why nobody is freaking out about the LIBOR scandal, Robert Reich calls it the scandal of all scandals, and Dylan Matthews has a great explainer of the whole thing here. Abigail Field has more at Reality Check.

    This can be confusing stuff, so I want to go through a very simple example of how this impacts the markets. Here's a basic equation for the price of a loan:

    The rate of a loan consists of adding the "risk-free" rate to a risk-premium. If either the risk-free rate or risk-premium goes up, then the price of a loan goes up. If you are a particularly risky borrower, you will pay more for a loan. This is because your risk-premium, compared to other borrowers, is higher, and that is added into your loan rate. If the risk-free rate is 3 percent and your risk of not paying back a mortgage requires a 2 percent premium, then your mortgage rate is 5 percent. If your risk of not paying back unsecured debt on a credit card requires an 8 percent premium, then your interest rate on your credit card is 11 percent.

    More complicated models include more types of risk-premia and other things, but this basic approach is how financial markets work. They all need a measure of what money costs independent of the risks associated with any specific loan. As a result, all the most complicated models have this "risk-free" rate at their core.

    Now think of some of the scandals and controversies over recent loan pricing. Here's a great Washington Post piece by Ylan Mui on African American homeowners scarred by the subprime implosion. There are cases where people with the same risk profiles were given different interest rates. Here's a report from EPI by Algernon Austin arguing that African Americans and Latinos with the same credit risks as whites were charged a higher total interest rate for mortgages even though the risk-free rate and their risk-premium rate should have been the same. The data implies that an additional, illegitimate "+ race" was added to the equation above.

    There's also debates about what is appropriate to add to the risk-premium equation. The FTC alleged that credit card companies were using charges for marriage counseling or massage parlors to increase the risk-premium, and thus the total rate. Some would argue that, from the credit risk modeling point-of-view, these are appropriate measures to hedge against divorce; others would say that it looks like a cheap excuse to jack up the total rate using the risk-premium part of the equation as an excuse.

    But those issues focus on how to price risk and what the total rate should look like. Running underneath all of these loans is what the "risk-free" rate should be. And by manipulating that rate, which forms the core of any financial model of how to price a loan, you manipulate every loan. Digging through some old financial engineering textbooks, it's amusing how many mathematical cartwheels are done to try and get an edge on the movement of LIBOR. Sadly. one can't model the dynamic of making an internal phone call and asking to please manipulate the numbers.

    Now let's build out from a very simple model of a financial instrument to one of the more complicated ones -- the Black-Scholes PDE for pricing options and derivatives:

    There's a lot of stuff going on in this equation which you can learn about here. But there's one variable you should catch. That "r" in the equation is the risk-free rate, which is usually LIBOR. One of the things Black-Scholes does is create a framework for understanding options and derivatives as owning pieces of the underlying object along with some cash, and getting the price of a derivative by understanding what it would mean to manipulate those two items. The cash in this framework, a crucial part, has its value determined by LIBOR. Which, as many are pointing out, implicates the gigantic derivatives market in this scandal.

    Implicating the derivatives market makes it clear why this matters to the market. But what about the role this scandal played in the financial crisis? This brings me to part of Karl Smith's argument for why this scandal doesn't matter much. On Up with Chris Hayes he argued that both parts of the allegations shouldn't get us too upset, and in particular that the second allegation, that Barclays systemically manipulated its LIBOR rates downward (perhaps with the approval of regulators) to make it seem like it was healthier than it was, is a good thing. Why? Because it made the financial system seem healthier than it was, which was important to prevent a collapse.

    In two follow-up posts (I, II) Smith clarifies his response. Smith argues that since the central banks were facing a financial crisis of epic proportions, one that would hurt many people, banks manipulating LIBOR helped keep that crisis at bay, which is a great thing. I think Smith has a theory I'm not following in which the only problem the banks had in 2008 was insufficient monetary policy, and not the fact that these banks were sitting on hundreds of billions of dollars in toxic loans that were causing a repo market bank run combined with an opaque over-the-counter derivatives system designed to induce counterparty risk in a crisis.

    But the reason it matters is because that tactic can't work forever. You can manipulate prices and juke government stress tests and otherwise lie to make people believe your bank's balance-sheet is healthier than it is, but eventually that system is going to collapse. And, crucially, if the primary objective is "delay," then when the crisis actually hits, it hits in an overwhelming way with no plausible way to fairly allocate losses or take other actions.

    As a side-note, if Smith agrees with manipulating LIBOR to look healthier, then he must really support the actions the Federal Reserve Bank of New York was taking in March 2008 to juke Lehman Brother's stress tests: "The FRBNY developed two new stress scenarios: 'Bear Stearns' and 'Bear Stearns Light.' Lehman failed both tests. The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed. However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed." Thank god that prevented an out-of-nowhere collapse that totally surprised the entire market!

    The "TED Spread" is the difference between LIBOR and U.S. Government debt, and many used it in 2008 to track the financial crisis in real time (here's Krugman with "My Friend TED" from the time). Pushing LIBOR down makes the TED Spread look better. This looking healthier than it should meant that there was less pressure by regulators and legislators to find ways to allow these firms to fail, and that the most obvious way of dealing with the crisis was with a mass bailout. If you really want to deal with the crisis, you should affect either end of it that the price is reflecting, by either making the banks healthier or making sure we can deal with the failure.

    The possibility that the regulators were in on it further clarifies the "protect the health of the largest banks at all costs" approach, one that squeezes every last bit of blood out of our turnip housing market and creates mass unemployment through a balance-sheet recession. And even if they weren't, that means that future measures to adeqately monitor the health of the banks through disclosures and market information might also be manipulated without (or even with) serious jail time or penalties.

    This, by Smith, is wrong: "To my knowledge no one takes out an adjustable rate mortgage saying, 'what I really want is for my mortgage rate to reflect the level of panic in the global financial system should there by a once in 75 year crisis.' No, what everyone thinks is that they are getting the rate set by Federal Reserve and the Bank of England."

    No, if that was the case there would be no use for LIBOR, and people would just use those rates. As Nemo summarizes in a great post on LIBOR from his bond series from years ago, the people pricing any loans at LIBOR want the pricing of a systemic credit crisis in their model. As Nemo says, "It is impossible to overstate how fundamental LIBOR is to the bond market." These prices are supposed to mean something, and the ability to add that information is a crucial reason it has shown up in so many pricing models. It would be a better world if those numbers weren't being manipulated to the advantage of inside traders.

    Mike Konczal is a Fellow at the Roosevelt Institute.

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    Interest rate image via Shutterstock.com.

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