Monthly Archives: January 2008

I ought to declare an interest. I am a part-time adviser to Goldman Sachs. Goldman Sachs are also advising the government on its financial strategy as regards Northern Rock. I am not involved in that activity and this blog represents my personal views only. 

A private sector ending to the Northern Rock saga is looking increasingly unlikely. For some reason, press and pundits alike appear to favour nationalisation as the least bad option. I favour cutting Northern Rock loose, that is, an end to any further lending to Northern Rock through the Liquidity Support Facility and no further rollover of the existing loans when they mature. I would maintain the deposit guarantee. 

It is possible that Northern Rock could survive on its own in the real world. Pigs may fly. It is also possible that a private sector rescue would be mounted once the government turns off the tap and it is clear that no further sweeteners can be squeezed out of the tax payer. The most likely outcome would be that Northern Rock would default on some of its obligations and would be put into administration. So the real choices are nationalisation or administration. 

This post is a slightly expanded version of a comment of mine on Larry Summers’ op-ed article in the FT on January 6, 2008 "Why America Must Have a Fiscal Stimulus".

Larry Summers wants a tax cut for the US of between $50 billion and $ 75billion. Robert Rubin, the former US Treasury Secretary, wants a fiscal stimulus worth $100 billion.  Who bids more?  And on top of this, the chairman of the Federal Reserve Board has declared (using either the royal ‘we’ or speaking for the FOMC): “We stand ready to take substantive additional action as needed to support growth and to provide additional insurance against downside risks.”

I consider further policies to stimulate demand in the US economy undesirable.  The US needs a fall in domestic absorption (the sum of private consumption, private investment and government spending on goods and services, or ‘exhaustive’ public spending) to support a lasting depreciation of the US real exchange rate.  Such an increase in the relative price of traded to non-traded goods is in turn required to reduce the US trade deficit to sustainable levels, say by a permanent three percentage points of GDP.

The following items appeared on the Reuters screen earlier today (January 8, 2008): • 12:09 08Jan2008 RTRS-UK’S BROWN SAYS BY THE END OF THE YEAR BELIEVES INFLATION WILL BE AROUND 2 PCT • 12:31 08Jan2008 RTRS-UK’S DARLING SAYS WILL DECIDE ON REAPPOINTMENT OF BOE GOVERNOR IN NEXT FEW WEEKS • 12:35 08Jan2008 RTRS-UK’S DARLING SAYS POSITION OF STABILITY IN ECONOMY HAS GIVEN BOE MPC ROOM FOR MANOEUVRE I could not believe my eyes. Are they mad or are the Prime Minister and the Chancellor of the Exchequer really trying to nobble the Monetary Policy Committee of the Bank of England through coordinated messages at a joint press conference, two days before a rate setting meeting of the MPC?.

Corporate Insolvency 101

Corporate bankruptcy or insolvency (I will use the two interchangeably – pace the lawyers) occurs when a borrower cannot meet his contractual debt obligations. Without a legal and regulatory framework for bankruptcy law, a creditor has two main legal remedies in the north Atlantic area: when the loan is secured, or the debt collateralised, the creditor can seize the assets that serve as collateral. With unsecured debt, a creditor can request the courts to sell some of the debtor’s assets.

Much of what follows is cribbed from the work of Oliver Hart, now at Harvard, who together with John Hardman Moore, of the LSE and the University of Edinburgh, has done much to rescue thinking about and designing insolvency regimes from the lawyers by focusing on efficiency issues See e.g. Oliver D. Hart “Different approaches to bankruptcy”, in Governance, Equity and Global Markets, Proceedings of the Annual Bank Conference on Development Economics in Europe, June 21-23, 1999 (Paris: La Documentation Française, 2000), also available as National Bureau of Economic Research Working Paper No. W7921, September 2000).

There is a need for legal/regulatory insolvency regimes because the alternative, having complete debt contracts that specify exactly what is to be done in every conceivable and inconceivable contingency is not feasible. With inherently incomplete debt contracts, when there are many creditors who cannot coordinate their actions perfectly, and the debtor’s liabilities exceed the value of his assets, there will be a ‘run on the debtor’; individually rational attempts by creditors to recover their debts as swiftly as possible may lead to a fire sale of the firm’s assets, and possibly to a premature or unnecessary break-up of the firm as a going concern, with a loss of value for all creditors and shareholders. It is therefore in the collective interest of creditors to realise the debtor’s assets in an orderly manner, via a bankruptcy procedure.

Economic approaches to bankruptcy stress three key desirable properties of bankruptcy regimes.

Mental illness can be a terrible affliction. It can drive those suffering from it to despair – even to suicide. I can also drive those affected by it, as loved ones of the afflicted person or as carers for yo, to despair – even to suicide. Because it can be such a terrible disease, it is important that it does not get trivialised by over-egging the problem. Because it can be such as terrible affliction, it is important that the treatment offered be the best one available, and that that such treatment be available regardless of ability to pay. The notion that a quick, cheap and easy fix is available is, well, madness.

Mental illness can be hidden or faked
Many varieties of mental illness, especially depression and manic-depressive illness are not easily diagnosed, even by professionals. This means that it is often possible for those truly ill to hide their condition, if it is advantageous to do so for professional, reputational or other reasons, such as being engaged in an adoption process. It is also possible for persons who are not mentally ill to fake it. There is enough information readily available on the web for anyone with an IQ in triple digits to put together an appropriate package of symptoms that will suitably impress a GP, psychiatrist, psychiatric social worker, psychologist, analyst or other therapist. Lower back pain is the only other medical condition that can be faked as easily.


The brief answer is `yes’.

I will illustrate the point with the example of Mike Huckabee, the candidate for the Republication presidential nomination who came first in the Iowa caucuses. There are many other examples of obnoxious and dangerous fundamentalism, much but not all of it religious, that I could have put in the stocks, but for now Mike Huckabee will do. Before entering politics, Huckabee was a pastor at two Baptist churches.

Sexist fundamentalism

Mike Huckabee, when he was governor of Arkansas, signed in 1998, alongside 129 other evangelical leaders, a full-page ad in USA Today in support of the new statement of faith adopted in June 1998 by the Southern Baptist convention. This statement declared that "a wife is to submit graciously to the servant leadership of her husband." Thanks to my Calvinist upbringing, I know the source of this statement well. It’s Paul’s letter to the Ephesians 5:22-33. My parents used to read it to us when we were children, to impress us with the need to engage our brains when reading the Bible, and specifically to filter out the all-too-human dross that so often obscures its divine message. What made perfect sense for those recording the Hebrew Scriptures (Old Testament) – the religious traditions, doctrines, dogmas, myths, parables, metaphors, legends and history first of a collection of Middle-Eastern nomadic tribes from around 2100 BCE, and then of one or two small Middle-Eastern kingdoms from about 1050 BCE, and what may have seemed self-evident to the Judeo-Greco-Roman first-century CE authors of the the New Testament, can easily become a bizarre abomination in a different age. The passage is worth quoting in its entirety (I am using the New International Version).

Sterling is sharply weaker not only relative to the euro but even relative to the US dollar. Why is this, what are its consequences and is there more to come? The questions are clear. The answers will be less so.

Economists are rubbish at predicting or understanding exchange rate movements. As an external member of the Bank of England’s monetary policy committee during its infancy and toddler years, 1997-2000, I first tried to predict exchange rate movements based on the received academic orthodoxy of intertemporal multi-currency asset pricing models and their pedestrian counterparts, uncovered interest parity, with or without time-varying currency risk premiums. These ap­proaches were useless. I “progressed” to ad hoc exchange rate models based on assorted portfolio balance considerations, carry trade add-ons and error-correction fixes. They too turned out to be useless. I ended up reverting to the practical man’s version of Meese-Rogoff (“the best predictor of tomorrow’s exchange rate is today’s exchange rate”), assuming the exchange rate would be constant. Basically, I ended up treating sterling’s exchange rate like a rogue elephant: I recognised its power and unpredictability, respected it, even feared it, but did not treat it as something amenable to guidance and direction by the BoE.

How stretched is the UK housing market? Given how long UK house prices, especially those in London, have defied both gravity and conventional models of valuation, a confident answer to that question is hardly possible. A look at a couple of the conventional “affordability” measures suggests, however, that – in MPC speak – “the balance of risk to house prices is skewed to the downside”. In English, house prices are more likely to fall sharply than to rise steeply. 

Exhibit 1 is a measure of average UK house prices to average earnings. The specific measure is Nationwide’s ‘First time buyer gross house price to (annual) earnings ratio’. As shown in Chart 1, the current value of this ratio, 5.3, is the highest since 1983 (in fact since records began), easily exceeding the 3.9 reached during the previous housing bubble in Q2 1989. The average value over the period shown in the Chart 1 is 3.2. If we fit a simple linear trend over the period, the most recent value of the (rising) trend line would be just under 4.0.

                                                                               Chart 1                                                               


          Source: Nationwide

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website