Cochrane and Rogoff on the PBS News Hour
I’ll try liveblogging. Here is a transcript. For what Rogoff was thinking the other day, see this op-ed. (We exchanged emails briefly on Saturday. He mentioned he was writing
something, and it sounds like he’s shifted a bit between then and
tonight on PBS) Thanks to reader John Alcorn for the PBS tip and to Mark Thoma for the pointer to the op-ed.
(Update: More Cochrane here)
Cochrane: latest legislation “a pinata full of ridiculousness”
Rogoff: better than the one Friday, “I wouldn’t have written it, but we’ve gotta do it.” If Congress says “drop dead,” there will be chaos. Likes the increase in deposit insurance limits.
I’ve moved the rest below the fold.
Rogoff is saying that we have a widespread run in financial markets, and we have to do something to stop it. Cochrane is saying that this won’t work.
I think Cochrane is right in terms of logic. But if market were being logical, we wouldn’t be seeing institutions refusing to lend to one another and everybody going into Treasuries. The case for the plan is that it will restore confidence by magic, as Cochrane puts it.
Rogoff says that no matter what there are a lot of insolvent banks. It’s interesting that no policymaker has come right out and said that. If he’s right, then the taxpayers will end up owning a lot of bad assets regardless. But is he right?
If a lot of banks are in trouble because they loaded up on mortgage securities, then it is important to understand why. Capital regulations punish a bank that does mortgage lending the old-fashioned way. That is, if a bank gives you a mortgage loan and keeps the loan, waiting for you to make your payments, that is considered risky. On the other hand, if the bank buys some agency-rated security backed by mortgages that were originated by completely different lenders using totally unknown underwriting methodology, that is considered safer for capital purposes.
This is what I mean when I say that the secondary mortgage market is a cesspool of rent-seeking and regulatory arbitrage. It is what I mean when I say that the problem of suits not understanding geeks is an issue. A rational, apolitical regulator who understood mortgage credit risk pricing would never have set up capital requirements that induced banks to prefer exotic mortgage securities to old-fashioned mortgage lending. If Rogoff is right, and lots of banks are insolvent because of their mortgage security portfolios, then we’re all victims of a swindle perpetrated by Wall Street on bank regulators.
I hope that he is wrong. I hope that the banks are actually sound, and that the financial crisis is just a panic taking place at the institutional level, being fed largely part by fear-mongering and incompetence of public officials. Anyway, lots to chew on….
Cochrane: lots of things we can do instead. how is the bill going to restore confidence? the bill is supposed to be “magic.”
Prof. Rehman (from George Washington University): middle america will
be hit if this bill does not pass; need restore confidence, bail these
companies out “rightly or wrongly.”
Rogoff “It is not going to work.” Eventually we will have to inject
capital into the banks. We have to close a lot of the banks. This is
not the last word. It will eventually cost a lot more. We’ve go to
close the insolvent banks. We cannot just rain money on everyone.
We’ve go to show we’re moving. We can’t debate what might be a better
Cochrane: the plan is try to raise the value of all mortgages in the
country. At the same time, the Senate said we’re not going to make
people pay back mortgages.
Rehman: it has to get done. The Treasury Secretary has confidence in the experts around him.
Rogoff: a lot banks have to get closed. There just isn’t a pretty way
to do it. “an epic crisis” we’ve done a good job of getting a lot
banks closed. We’ve been tough, not like Japan. But we need to step
in and stop the run. Somebody has to put a stop.
Cochrane–this plan will end up doing nothing, costing a lot of money,
and down the road we’ll just end up doing the things Ken’s talking
Rehman. hard part is sussing out the assets–banks could slip some really bad stuff onto the taxpayers