Dean Baker on the stress test
The Stress Free Stress Tests
The NYT discussed the possibility that the Obama administration may seek to shore up the core capital of the major banks by converting its preferred shares that it purchased last fall into equity shares. The article does not discuss the very important issue of the rate of conversion.
At the time the government converted its preferred shares in Citigroup to common shares, the conversion ratio was far below the market value. By accepting a ratio below the market value, the government was essentially just giving money to Citigroup and its shareholders. It will be important to examine the price for any future conversions to determine if they are also government giveaways to the banks.
The article also refers to the stress tests that the government is imposing on the banks. The negative scenario in these tests is that the unemployment rate rises to 10 percent. At this point, it is virtually certain that the unemployment rate will rise above 10 percent by the end of 2009 and will likely still above 10 percent for most or all of 2010. This means that the economy is likely to impose far more stress on the banks that is assumed in these tests.
Dean Baker on Free Market Fundamentalism and bailouts
How Do Trillion Dollar Bank Bailouts Fit With "Free-Market Fundamentalism?"
The obvious answer is, they don't. If you are a free-market fundamentalists then you are absolutely opposed to bank bailouts. That one is really really simple. See, the free-market means you leave the market to run itself. Bank bailouts involve taking taxpayer dollars and handing them to banks that would go belly up if left to the market.
However simple this distinction might seem, it somehow escaped the NYT which discussed the policies promoted in recent decades as though they could be plausibly described as "free-market fundamentalism." It should be perfectly apparent to everyone at this point that the people designing economic policy in recent decades had no philosophical commitment to "free markets," they were trying to design policies that had the effect of redistributing income upwards.
In the case of the banks this meant giving them implicit government insurance, both through the FDIC and the "too big to fail" policy, without constraints on their behavior or making them pay for it. This approach has nothing to do with free markets, it is a story of wealthy people using their political power to get valuable benefits from the government. The NYT is insulting its readers by implying that these policies had anything to do with free market philosophy.
Dean Baker on China's "crawl" and Mexico's "fast growth"
Will Fast Growing Mexico's Economy Ever Accelerate to a "Crawl?"
The reason for the question is the Washington Post headline that told readers that the growth of China's economy had slowed to a "crawl" in the first quarter. The "crawl" in China was a 6.1 percent annual growth rate.
On a per capital basis this is a more rapid growth rate than Mexico has achieved in any year since NAFTA's passage. The Washington Post has repeated touted Mexico's fast growth in the post-NAFTA era, on one occasion even telling readers that Mexico's economy had quadrupled since 1988. Unfortunately, this growth figure was just a number that the Post's editorial board had invented to help make its case for NAFTA. The true growth figure was just 83 percent.
Anyhow, it is worth noting that the growth rate that is describing as a crawl in reference to China is much better than its poster child Mexico has even managed to attain since the passage of NAFTA.
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