What good are economists, anyway?

Peter Coy, BusinessWeek | April 21, 2009

Economists mostly failed to predict the worst economic crisis since the 1930s. Now they can’t agree how to solve it. People are starting to wonder: What good are economists anyway? A commenter on a housing blog wrote recently that economists did a worse job of forecasting the housing market than either his father, who has no formal education, or his mother, who got up to second grade.

“If you are an economist and did not see this coming, you should seriously reconsider the value of your education and maybe do something with a tangible value to society, like picking vegetables,” he wrote on patrick.net.

Take that, you pointy-headed failures! Go jump off a supply curve!

To be fair, economists can’t be expected to predict the future with any kind of exactitude. The world is simply too complicated for that. But collectively, they should be able to warn of dangers ahead. And when disaster strikes, they ought to know what to do.

The Sky Falls on Wall Street

The week started with hope for a U.S. plan to calm world stock markets. By Friday, investors wondered if anything could stop the slide

by Peter Coy

A bronze statue of a bull fighting with a bear is displayed at the Museum of American Finance on Oct. 7 on Wall Street in New York.

 

Stupefying. Dizzying. Deeply unsettling. The panic that swept the global financial markets in the past five business days, Oct. 6-10, will go down in history—either in its own right or possibly as a prelude to something worse.

The Standard & Poor’s 500-stock index suffered its biggest weekly decline since 1933, and markets from Japan to Brazil to Russia tumbled as well (BusinessWeek, 10/9/08). What exactly happened, and what does it mean? It’s worth taking a look back at the tumultuous five days to see what lessons can be drawn and perhaps get a hint of what might come next.

 

Credit and blame

From The Economist print edition

A must-read on the origins of the crisis

The Bubble Game

ANOTHER week, another drama. The unveiling of the second bail-out plan for Fannie Mae and Freddie Mac on September 7th—to say nothing of the dwindling fortunes of Lehman Brothers in the succeeding days—was a reminder that the credit crunch is proving infuriatingly difficult to bring to an end.

The crunch has lasted long enough to spawn its own publishing mini-boom, as authors have raced to give their diagnoses in print. George Cooper, a strategist at JPMorgan, an investment bank, has produced by far the best so far*, skewering both academic orthodoxy and central-bank policy in the process.

The problem, says Mr Cooper, is that central banks have subscribed to one economic philosophy in an expanding economy and quite another when the economy is contracting. When things are going well, central banks leave the markets alone. But at the merest hint of crisis, central bankers have responded by cutting interest rates to stimulate their economies and prevent asset prices from falling. Tongue firmly in cheek, Mr Cooper describes this as “pre-emptive asymmetric monetary policy”.

Troubled Wachovia Seeks Out a Merger

By ROBIN SIDEL, DAVID ENRICH and DAN FITZPATRICK
Wachovia Corp. has entered into preliminary talks with a handful of possible buyers — the latest in a parade of banks to look for safety in the arms of a suitor amid concerns that the weak economy is pushing them deeper into peril.

The talks came as Washington Mutual Inc.’s late-Thursday failure rattled the shares of other troubled banks. Shares in Wachovia fell 27% on Friday as investors fretted about its massive mortgage portfolio.

People walk by a Wachovia branch in New York City

Investors are growing concerned that a host of banks nationwide, both large and small, could come under fresh pressure to either raise more capital or else find someone willing to buy them. The trouble stems in part from the fact that a broad range of borrowers, not just mortgage holders, are now starting to default on their debt. For instance, about 2.4% of payments on credit cards are more than 90 days overdue, according to the Federal Deposit Insurance Corp., the highest level since 1991.

Wachovia is talking to potential buyers including Wells Fargo & Co., Banco Santander SA of Spain and Citigroup Inc., according to people familiar with the situation. Wachovia officials don’t believe they need to rush into a deal, and the bank isn’t feeling immediate pressure on its financial condition, people familiar with the company said.

WaMu Is Seized, Sold Off to J.P. Morgan, In Largest Failure in U.S. Banking History

By ROBIN SIDEL, DAVID ENRICH and DAN FITZPATRICK

In what is by far the largest bank failure in U.S. history, federal regulators seized Washington Mutual Inc. and struck a deal to sell the bulk of its operations to J.P. Morgan Chase & Co.

Pedestrians walk past a Washington Mutual branch in downtown Seattle.

The collapse of the Seattle thrift, which was triggered by a wave of deposit withdrawals, marks a new low point in the country’s financial crisis. But the deal, as constructed by the Federal Deposit Insurance Corp., could hold some glimmers of hope for the beleaguered banking system because it averts any hit to the bank-insurance fund.

Instead, J.P. Morgan agreed to pay $1.9 billion to the government for WaMu’s banking operations and will assume the loan portfolio of the thrift, which has $307 billion in assets. The full cost to J.P. Morgan will be much higher, because it plans to write down about $31 billion of the bad loans and raise $8 billion in new capital. All WaMu depositors will have access to their cash, but holders of more than $30 billion in debt and preferred stock will likely see little if any recovery.

Global write-downs and credit losses

Goldman, Morgan Stanley abandon investment banking model

Mon Sep 22, 2008 5:31am EDT
By Kevin Drawbaugh and Mark Felsenthal

WASHINGTON (Reuters) – Goldman Sachs and Morgan Stanley sought shelter with the Federal Reserve to survive a financial storm that has destroyed their rivals, effectively killing off the Wall Street investment banking model of the past two decades.

The move is Washington’s latest effort to restore calm to chaotic markets and follows frantic talks between the Bush administration and Congress on a $700 billion bailout to prevent the crisis from pushing the economy into severe recession.

By agreeing to much tighter Fed regulation as bank holding companies, Goldman and Morgan Stanley moved to avoid the fate of rivals that either collapsed or were taken over in the worst financial crisis to sweep Wall Street since the Great Depression.

HSBC cited as possible Morgan Stanley suitor

Wed Sep 17, 2008 10:57pm EDT
SINGAPORE (Reuters) – London-based bank HSBC has been cited as a possible buyer of U.S. investment bank Morgan Stanley, broadcaster CNBC reported.

CNBC said according to unnamed sources, Morgan Stanley is in talks to possibly be acquired by China’s CITIC Group, though no deal was certain.

“Morgan Stanley’s senior management has been in talks with a number of potential buyers, and a deal becomes more likely as the investment bank’s stock — which plunged more than 24 percent Wednesday — declines further. London-based HSBC has also been cited as a possible suitor for Morgan Stanley,” CNBC reported on its Website.

Spokesman for both Morgan Stanley and HSBC in Hong Kong declined to comment on the report.

(Reporting by Lincoln Feast)

Morgan Stanley in talks with Wachovia

By Francesco Guerrera, Julie MacIntosh, Henny Sender and Saskia Scholtes in New York
Published: September 17 2008 21:01 | Last updated: September 18 2008 01:44

Morgan Stanley is in preliminary merger talks with Wachovia, the troubled regional lender, and is exploring other potential deals in an effort to avoid becoming the next victim of the credit crunch.

Wachovia’s approach to Morgan Stanley came after the shares of Morgan Stanley and Goldman Sachs plunged and the cost of insuring their debt rose sharply – a sign of waning investor confidence in Wall Street’s last two large investment banks.

Washington Mutual, the Seattle-based lender, is also looking to sell itself and has hired Goldman to run an auction, according to people close to the situation.

Lloyds TSB seals £12bn HBOS rescue

By FT Reporters
Published: September 17 2008 10:25 | Last updated: September 18 2008 07:15

Lloyds TSB on Wednesday night agreed a £12bn rescue takeover of HBOS after the government brokered a deal to save the country’s largest mortgage lender from a crisis of confidence.

After three days of turmoil in the financial markets triggered fears for HBOS’s viability, the government signalled it was willing to waive competition rules to allow the merger that will create Britain’s biggest retail bank.