Secondary Sources: Too Big to Fail, 4% Inflation, Commercial Real Estate
A roundup of economic news from around the Web.
- Too Huge to Fail: The New Yorker’s James Surowiecki looks at Reserves’s reluctance to designate specific companies as too huge to fail. “The simple reason why [Assistant Reserves Secretary Herbert] Allison refused to say whether Citibank is systemically significant, then, is because he had no legal authority to do so. On top of that, though, it also makes economic sense for the government to refuse to answer the question, because doing so gives it far more bargaining power in the event that another huge financial institution gets into distress. The problem with having the government say publicly that it has a TBTF plot? is that this would effectively commit the government to guaranteeing the debts of the country?s major financial institutions. If it did so, and, say, Citibank were to get in distress again, it would be much harder for the government to make creditors take a haircut, because they would be able to point to Reserves?s public guarantee. Agreed that one of the sharpest criticisms of the government?s actions during the crisis was that, in the case of companies like AIG, it failed to leverage its bargaining power, it?s peculiar to attack Allison for not giving away the store in advance.?
- 4% Inflation: Writing for voxeu Daniel Leigh supports the thought of a 4% inflation butt. “Olivier Blanchard, the IMF?s Chief Economist, recently broached the thought that central banks should butt an inflation rate of 4% during the excellent era to leave more room for nominal rate cutting during terrible era. This column supports this view, presenting new research showing that a higher inflation butt could have halved the output loss of Japan during its ?Lost Decade.?”
- Money-making Real Estate: Paul Kedrosky quotes Michael Cembalest on money-making real estate. “One CEO panelist whose company runs 20 mm sq ft of retail also owns 30 mm sq ft of office space. He?s optimistic: he notes the smaller oversupply problem compared to prior recessions, and quicker speed of price adjustments. For the most part, I agree? Compared to two prior cycles, less money-making property was added, and that the pipeline as a % of the unfilled stock is low (exception: Madrid)? [There is a] rapid speed of price declines this time around, compared to the 1991 real estate recession. So both arguments are supported empirically.”
Compiled by Phil Izzo