“Margin Call,” ABX, and Timberwolf

So far, the crisis of 2007-2009 has inspired several films. One was the outstanding documentary Inside Job, which is unique for focusing on the culpability of academic economists. Another was Oliver Stone’s Wall Street: Money Never Sleeps, a sytlized but flawed retelling of the collapse of Bear Stearns and Lehman Brothers. Back in May, there was the HBO movie Too Big to Fail, which purported to tell the story of the TARP bailout.

Now there is Margin Call. It does not tell the story of what happened in 2008, when big firms failed and governments used taxpayer money to bail them out. Rather, it tells the story of 2007. That was when some of the savvier players, particularly Goldman Sachs, discovered that the assumptions governing their risk models for U.S. mortgages needed to be revised.

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EuroTARP or Euro-trip?

In the wee hours of Thursday morning, European leaders agreed on a plan to shore up the continent’s banking system and stem the contagion affecting sovereign borrowing costs in every country from Greece to France. The plan has three parts: the European Financial Stability Facility will be expanded to about 1 trillion euros, Greek bonds held by private banks will be “volunarily” exchanged for new bonds worth half as much, and the banks most affected will get about 100 billion euros to strengthen their capital positions.

It sounds impressive. Two indicators will show whether it is enough: the spread between Italian and German borrowing costs and the share prices of French banks. So far, neither has meaningfully improved—with good reason. The “plan” has not really been finalized. More worryingly, even if it is implemented in full it would fail to address the fundamental problems plaguing the financial system.

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Sorry James Livingston, you need investment to create wealth

In yesterday’s New York Times, Rutgers historian James Livingston argued that private investment is not necessary to create wealth:

AS an economic historian who has been studying American capitalism for 35 years, I’m going to let you in on the best-kept secret of the last century: private investment — that is, using business profits to increase productivity and output — doesn’t actually drive economic growth. Consumer debt and government spending do. Private investment isn’t even necessary to promote growth.

This is not merely wrong—it is staggeringly, destructively wrong.

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What are bond prices saying about future inflation?

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A few reactions to Occupy Wall Street

On Saturday, I was in New York City and had the opportunity to visit Zuccotti Park, where I was able to observe and interact with members of Occupy Wall Street.

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The Fed is out of ideas

Today’s Wall Street Journal has an article by Jon Hilsenrath about what the Fed is likely to consider in its upcoming meeting on November 1 and 2 in response to the stubborn weakness of the U.S. economy. This is significant because Hilsenrath is the journalist that the Fed trusts the most for conveying its views to the public. A close reading of what he wrote can tell us a great deal about what the members of the FOMC are thinking. Worryingly, it appears that they are out of good ideas.

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Some thoughts on Herman Cain’s 9-9-9 Plan

The existing U.S. federal tax code is a monstrosity. According to the IRS, Americans spend more than 3% of GDP on compliance costs each year. The deductions and exemptions in the existing code favor some industries over others and some behaviors over others. Why should Google and GE pay only a few percent of their profits in taxes when Wal-Mart has to pay nearly 40%? Why should a financier pay a lower tax rate than a doctor?

Unsurprisingly, many people have called for replacing the tax code with something simpler and more fair. One alternative that has recently been featured in the news is the 9-9-9 plan devised by Republican presidential candidate Herman Cain.

How does it compare to the current system? What are its assumptions? Are the criticisms justified? Would it accomplish its objectives?

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