But the whole premise behind those Aaa ratings-- that securitization could isolate a "safe" component of a pool of fundamentally risky loans-- was deeply flawed. It is impossible to diversify away aggregate or systemic risk. All that the device did was to mislead investors into thinking they were protected from those nondiversifiable risks and push those risks onto the taxpayers and the Fed. Before we decide that securitization is the road out of our present difficulties, I would like a detailed and convincing explanation of why the past mistakes are not going to be repeated again.RW: The Fed is playing with fire; and although I agree with its quantitative easing policies in order to preserve price stability, Prof. Hamilton, of course, raises some valid questions. The Bank of Japan has engaged in quantitative easing, and history measured the merits (lack of) of their policies (here's one paper); but the credit easing direction is a new monetary path, one to be written in future history books. The truth is: nobody know how this will play out.
But David Altig over at the Atlanta Fed has a slightly different view about the merits of Fed policies on the Macroblog.
Tim Manni at the HSH blog notes the following:
Yet, it’s puzzling how, and why, our lawmakers were so insulted by these contractually-promised bonuses, especially when just months earlier most of them rewarded their subordinates with a year-end “thank you” during one of the worst recession in decades.If given the choice between really bad news (i.e., the sky is falling) and just bad news (i.e., my basement was flooded), I take my basement any day. the WSJ Real Time Economics blog reports on the ISM manufacturing survey:
The Institute for Supply Management’s overall index edged up for the third straight month, the latest sign that the manufacturing sector is close to bottoming out. But the index is still indicative of shrinking factory activity. How long will the sector take to stop contracting and show growth?RW: When this index "edges up" to 36.3, it simply means that manufacturing is contracting less quickly. Look for a number above 50 to indicate expansion again.
And I have been making this point for quite some time (here and here) about real money balances in the U.S. Here's Lawrence Kudlow on Kudlow's Money Politic$:
Behind all these numbers is a very easy-money position from the Fed. Please note the following two charts, which foreshadow economic recovery in the second half of this year. First, the Milton Friedman M2 money supply adjusted for inflation is up 22 percent at an annual rate over the past six months.And Alice Cook at UK Bubble notices that oil prices are up:
The oil price has started to edge up. Prices are up 24 percent since they bottomed out in February. It doesn't look like much on this chart, but that is because the recent decline is overshadowed by the huge run up in prices during the first half of last year.RW: This will certainly hurt an already battered consumer.
Uh-oh, Macro Man suggests that March's equity rally was just noise on his Macro Man blog:
Macro Man's return forecasting model took another leg lower last month, and is now essentially forecasting zero returns for US equities over the next year. It's a scant compensation for 40% plus volatility! So while Macro Man reckons there may be some good tactical trading opportunities in stocks, he has difficulty buying into "hold-able" view.And Forbes tells us the 10 things to buy before the economy improves.
RW: Personally, I think that any durable good (i.e., a car) should dominate the top 10, but nevertheless, designer shoes is number 8. I must admit, I have indulged.
And a photo from the illustrious Kerry Hawkins at Kerry Hawkins Photography and Design
TTFN, Rebecca Wilder