Closing the Barn Door after the Horses Escape

Filed Under (Finance, Other Topics, U.S. Fiscal Policy) by Don Fullerton on Sep 2, 2011

The New York Times today says that the Federal Housing Finance Agency is set to sue major U.S. banks such as Bank of America, JPMorgan Chase, Goldman Sachs, and Deutsche Bank, among others.  The U.S. government argues that the banks sold packaged mortgages as securities to investors while ignoring evidence that the homeowners’ incomes were inflated or falsified.  That is, the banks failed to perform the due diligence required under securities law.  When many of those homeowners were unable to pay their mortgages, the securities backed by the mortgages tanked.  Housing and financial crises ensued.

Kinda late, isn’t it?  Well, certainly it’s too late this time, to prevent the housing and financial crises of the past few years.  What is the point of the suit, then?  Does the U.S. Federal government really need the money that they can get from these banks, as damages, and will they give it back to all of us who lost money during those years?  The U.S. might sue for around a billion dollars, which is peanuts these days.  Divided by 333 million Americans, that would be about three dollars each.  Why bother?

An important conceptual point here is the difference between ex post liability (after the fact) and ex ante incentives (beforehand).   The point of this suit is not to collect a billion dollars after the fact, although arguments are made about the fairness of those liable to pay for damages.  Rather, the point is to provide the proper incentives to private companies before the next time.  To a private company, a billion dollars really is a lot of money.  If they have to worry about the loss of a billion dollars, for ignoring their legal responsibilities, then maybe next time they’ll be more careful to follow the law.

Government regulation can take alternative forms.  One alternative is to send auditors and inspectors into every bank, every day, to check what they are doing.  That would be very expensive.  A cheaper alternative is to let the banks decide for themselves if they are exercising due diligence, but with the “threat” hanging over their head that they might get sued if they don’t.

Thoughts on the Current Economic Environment

Filed Under (Finance, U.S. Fiscal Policy) by Jeffrey Brown on Aug 16, 2011

Larry DeBrock and I were interviewed by News Bureau Business & Law Editor Phil Ciciora, on the chances of another recession, and what the government needs to do to avert another economic crisis.  Below are our responses.

Jeff Brown: The recent volatility in financial markets is one of several indications that we are operating in an environment marked by high levels of economic uncertainty. While I continue to believe that the most likely scenario going forward is that we will continue to experience a very slow recovery marked by a prolonged period of high unemployment, I also believe there is something on the order of a one-in-four chance that we will fall into a second recession.

It appears that markets are responding to three primary concerns. First, we have had a mixed set of economic indicators released in recent weeks suggesting that the recovery in the U.S. is still quite fragile. Second, the sovereign debt problems in Europe – Greece, Spain and Portugal, among others – are weighing heavily on the minds of many investors, as Europe is a major trading partner. Third, there is tremendous political and policy uncertainty about the willingness and ability of the U.S. to get its fiscal house in order.

The down-to-the-wire debt ceiling debate has clearly signaled to the world that our economic policy-making process is dysfunctional, thus casting some doubt on whether we have the political backbone to address the serious fiscal problems that lie before us. Also, the fact that Congress kicked the can down the road by leaving the hard choices in the hands of a Congressional “super-committee” creates tremendous policy uncertainty, leaving individuals and companies unsure what tax rates they will face in the future.

The current economic environment is extremely difficult to navigate. Many believe we need short-term stimulus, such as reducing payroll taxes or increasing government spending, in order to boost economic activity. From a longer-term perspective, the problem is that these are the wrong policies for reducing deficits. And many of the proposals for stimulus really do very little good over the long run because of their explicitly temporary nature.

The most important thing to understand is that the private sector, and not the government, is the real engine of job growth over the long run. So the best thing the government can do is to create a policy environment that is pro-growth.

How do we do this? First, quickly come up with a credible plan for reducing our long-term deficits, one that is more heavily focused on spending cuts than on revenue increases. Second, reform our tax system so that we promote, rather than penalize, business investment, entrepreneurial activity and work. In short, shift taxes away from work and investment (things we want more of) and onto consumption. Third, once we have placed the country on a sustainable fiscal path with reduced spending and pro-growth tax reform, make the tax regime as permanent as possible so that individuals and companies can make long-term decisions with some confidence that the rules won’t change in the middle of the game.

Larry DeBrock:  I am not sure of the true impact of the S&P downgrade. If you look at U.S. Treasuries, the yields have fallen steadily in the days since the announcement by S&P, which indicates that investors are still very much interested in purchasing U.S.-issued debt. Still, the downgrade did have a big impact on both consumer and investor psychology. The inability of Congress to show leadership in the recent debt limit spectacle combined with the formal announcement of a downgrade of the U.S. credit rating has certainly caused some unnerving volatility in the stock market.

Are we headed for another recession? Quite possibly. Americans are impatient and wish for a rapid return to full employment and strong growth in our country’s gross domestic product. But history indicates that the recovery from a deep recession such as we have just experienced is always a slow process. And, this “recovery” is different in that our government is responding in a manner we have not seen before. In other recessions, the government acted “counter-cyclically” in that it would increase its spending in the face of an economic slowdown. In the current climate, our 50 statehouses as well as our lawmakers in Washington are acting to decrease spending. This “pro-cyclical” response has undoubtedly contributed to the slow pace of job recovery and could contribute to factors that end in a double-dip recession.

The response of the Federal Reserve to announce a stable two-year plan to hold interest rates low is a movement in the right direction. However, interest rates have been low for quite some time. The flight away from risk, as indicated by the increase in prices of U.S. Treasuries despite the S&P pronouncement, is very real. The Fed may have to consider another round of quantitative easing, this time aimed at removing riskier assets from the market.

The most troubling economic news is really the debt crisis in Europe. Economists have long argued that having a single currency across multiple sovereign nations with independent fiscal policies was a recipe for disaster. As each week seems to highlight another example of this incompatibility, the Eurozone economies will continue to struggle. And if Europe experiences an economic slowdown, our economy will certainly share some of that pain.

Around the Web in Public Policy

Filed Under (Finance, Other Topics, U.S. Fiscal Policy) by CBPP Staff on Jul 19, 2011

Charter School in the Suburbs?

Charter schools, a concept originating from the United Kingdom and first popularized in the United States in Minnesota, have typically been viewed as the answer to failing schools in poor communities.  However, as this article examines, more and more charters are attempting to expand into suburban areas where stereotypically, people are content with the offerings and success of the local public schools.  As the article points out, suburban districts have felt the pinch in many ways as a result of the housing bubble bursting and charter schools will continue to compete for the public schools already tight resources by opening in these areas.  How suburban public schools respond to this competition will be both telling and eye-opening for the future of charter schools as they continue efforts to expand into restricted areas.

Will They or Won’t They?

With the countdown of August 2nd nearing when the United States will exceed the Congressionally approved debt limit, the question of how agencies such as Fitch Ratings will respond and rate the nation is quickly becoming more and more important.   Officials at Fitch have said that the downgrade could be temporary and will depend on their “assessment of the credit-worthiness of the U.S. government”.  The article goes on to discuss the impact such a downgrade could have on the economies of nations that that tie their currency to the American dollar.  Corporate ratings in the United States would likely be untouched, however.

Cordray Nominated to Head Consumer Financial Protection Bureau

President Obama has announced that Richard Cordray, the former Attorney General for the state of Ohio will be his nomination to lead the agency that came into being with the signing of the Dodd-Frank Act and was initially led by Elizabeth Warren.  Many consumer groups had their hopes on the President appointing Warren to the post for a full appointment, a proposition it was never clear she would even choose to accept.  Regardless, the politicking has already begun with many Senate Republicans refusing to vote for any nominee “without changes in the bureau’s structure.”

 

 

Trigger Term-Limits: Motivating Legislature Fiscal Accountability

Filed Under (Finance, U.S. Fiscal Policy) by Bob Gillespie on Jul 6, 2011

Balancing the budget is widely considered to be the foundation of state fiscal practices.” 

National Conference of State Legislatures Fiscal Brief: October 2010

By any measure the Illinois state legislature’s performance in managing the states fiscal affairs over the past years has be abysmal.  The state has run a budget deficit every year over the past ten years; it ranks 12th in debt per capita among the states; it has used state pension funding obligations and accounts payable to vendors as a “rainy day fund” to hide the deficits; and even after large tax increases in 2011 there is every likelihood the FY 2012 will have a deficit.  

Dissatisfaction with state legislatures is not a new phenomenon. Twenty years ago widespread dissatisfaction with the performance of legislators inspired the introduction of term-limits in many states in an effort to return to an earlier era of citizen legislators rather than career legislators.  This enthusiasm led to the adoption of term-limits by 21 states from 1990 to 2000.  Six states have subsequently abandoned term-limits either through the action of State Supreme Courts or state legislatures.

It has been over ten years since the last state adopted term-limits; obviously term-limits have not produced all the sought after benefits. Research attributes the disappointment with term-limits to: Loss of power of legislators to the information providers (agency staff, executive branch, lobbyist) and a decline in legislative experience among members of the legislature, which adversely affects the performance of the legislative bodies.

However, rather than abandon term-limits they should be used to reset legislator’s incentives from a focus on re-election to a focus on governing – why they were elected.  To accomplish this term-limits should be made contingent on the performance of the legislature in managing the state’s fiscal affairs.  A failure to meet the performance standard would trigger the imposition of term-limits.  The Trigger standard would be a function of the budget deficit. Deficit Trigger term-limit legislation would specify a maximum number of terms, lifetime or consecutive, and would be established by the legislature or referendum BUT the term-limits would be only triggered if the government budget deficit – averaged over the most recent four-year period – became negative.  Four years should include a full business cycle and give sufficient time to implement fiscal adjustments to cyclical shocks.  Term-limits would be held in abeyance so long as the average budget balance over the last four years was non-negative. 

For example, at the end of each fiscal year an independent government accounting agency would publish the average budget balance for the prior four years including the fiscal year just ended.  If this average were negative term-limits would immediately be triggered.  If the term-limit for an office had been set for four years, office holders would be barred from running for reelection if their service exceeded four years at the end of the current legislative term.   Once term-limits were triggered they would be rescinded only when the four-year average budget balance became non-negative.   But the trigger would then be reset.

Advantages of the Trigger Term-limits:

1)      The threat of trigger term-limits will motivate cooperation across party lines to correct a budget deficit.   If the trigger is tripped, no amount of media dollars or blame shifting rhetoric could save legislators of either party from the effects of term-limits — cooperation would be rewarded by longer tenure

2)      The annual announcement of the four-year average budget balance would focus media and public attention on legislative fiscal performance; a “Deficit Trigger” and its implications has dramatic appeal.

3)      The threat of term-limits should especially motivate legislative leaders to correct a deficit, as they are usually the most senior and consequently have careers most at risk from term-limits.

4)      Traditional term-limits eliminate groups of politicians at the end of their term limits whether their performance has been good and bad.  This is a waste of talent when the legislature has been performing in a professional manner.  Deficit Trigger Term-limits eliminate groups of politicians only when their performance has been unsatisfactory.  Group professionalism is rewarded.

5)      A Deficit Trigger threat is nonpartisan; it does not bias a solution to a budget deficit towards, either increasing taxes or decreasing government spending but it does preclude long-term borrowing as a budget deficit solution.

Design Details:

Since the Trigger Deficit measures the performance of the legislature an agency   independent of the legislature must be given the responsibility for measuring the deficit.   Measurement of the Trigger Deficit must be based on government accounting systems that meet modern profession standards such as those established by the Government Accounting Standards Board (GASB).  These standards would prohibit the use of bogus “rainy day funds”.  Shortfalls in public pension funding obligations or payments to vendors delayed over 90 days would count as part of the deficit.

Deficit Trigger Term-limits will gradually eliminate chronic state government indebtedness. However, some forms of long-term government debt serves a very useful purpose.  When critical infrastructure is needed issuing long-term government bonds, debt, can most quickly finance it.   Since most infrastructures, e.g. bridges, roads, schools, etc., last for longer than one generation it is appropriate that the financing costs also be shared across generations.  Long-term government bonds accomplishes this.  Consequently, Trigger Deficit coverage should be confined to budget deficits in expenditures for currently consumed public services, e.g., salaries, transfer payments, non-capital expenditures, pension costs etc.  If in a given year the budget for these services is in deficit, short-term borrowing can be used to temporarily fund the deficit, but the borrowing cannot be long-term if term-limits are to be avoided.  Debt is a tool, not a magic wand.

The continuing state debt and fiscal disarray throws a long shadow of economic uncertainty over the state.  This uncertainty focuses on future tax rates, which affects business decisions on whether to invest or disinvest in Illinois and on taxpayers decisions to relocate.  Introducing Deficit Trigger Term-limits would send a signal that the state is serious about correcting this disarray.  Implementing them in Illinois by legislation or initiative will be challenging but just making the effort would be a message.

Around the Web in Public Policy

Filed Under (Finance, U.S. Fiscal Policy) by CBPP Staff on Jul 2, 2011

Minnesota Government Shutdown

For the second time in six years, the state of Minnesota has shut down their government in an effort to more effectively balance their budget between what is affordable and necessary.  Among the services that have been discontinued in the midst of the shutdown include but are not limited to public services such as rest areas, the zoo and the Capitol.  More serious cuts include elimination of child care subsides, cuts at the Greater Twin Cities United Way and services for the blind.  Emergency services are continuing and a retired judge has been appointed to manage the appeals process.  The two sides stances in terms of solutions are predictable and may signal what is to come in other cash strapped states around the country.  The Republicans are seeking to cut programs and to reduce overall government spending and the governor is seeking to raise taxes on the rich.  Stay tuned for updates.

Debt Ceiling Negotiations Continue

In related news, the Federal government is nearing the deadline of August 2nd in terms of when they will begin to default on their loans.  What exactly will happen if the debt ceiling is reached is speculative to some degree but the politicking continues relentlessly.  Treasury Secretary Geithner has said publicly that were the ceiling reached it, “would likely push us into a double dip recession.”  Mirroring the debate in Minnesota, Republicans are refusing any option that includes raising taxes even in terms of closing loopholes while Democrats are insisting that it must be a balanced approach.

14th Amendment May be Invoked

In history classes around the country, the 14th Amendment is most often discussed within the context of section 1 which bestows citizenship to all persons born within the United States.  However, in regards to the debt ceiling, there is a growing argument within come circles of constitutional scholars that the whole thing may be moot.

Section Four of the Amendment which reads, “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”

The clause was written to provide the government the authority to pay off it’s debts while ignoring the debts incurred by the Confederacy following the Civil War.  However, in the current context, one could interpret the first sentence as a means of granting the White House power in terms of ignoring the debt ceiling.  Will Obama invoke the amendment is as up in the air as will both sides fail to reach an agreement.

Green Taxes: Potential Revenue for Illinois?

Filed Under (Environmental Policy, Finance, U.S. Fiscal Policy) by Don Fullerton on Jul 1, 2011

In early January 2011, the State of Illinois enacted legislation to raise the personal income tax rate from 3% to 5% and to increase the corporate income rate from 4.8% to 7%.  Along with a cap on spending growth, these tax increases reduce the state’s projected budget deficit in 2011 by $3.8 billion (from $10.9 to $7.1 billion), according to the University of Illinois and their Institute of Government and Public Affairs (IGPA Fiscal Fallout #5).  The governor justified the tax increases on the grounds that the State’s “fiscal house was burning” (Chicago Tribune, January 12, 2011).  Dan Karney and I wrote a recent piece for the IGPA Forum, but we don’t debate the reasons for the underlying fiscal crisis in the State of Illinois, nor argue the merits of cutting spending versus raising revenue to balance the budget.  Instead, we just stipulate that politicians decided to raise revenue as part of the solution to the State’s deficit.  Then we analyze the use of “green taxes” as an alternate means of raising revenue that could mitigate or eliminate the need for increasing income taxes.

In general, green taxes are taxes either directly on pollution emissions or on goods whose use causes pollution.  In the revenue-raising context however, the basic argument for green taxes can be summarized by the adage: “tax waste, not work”.  That is, taxes on labor income discourages workers from engaging in productive activities and thus hurts society, while taxing waste discourages harmful pollution and thus benefits society.  In addition, the revenue raised from these green taxes can help the State’s fiscal crisis. 

While many green taxes could be implemented, we focus on four specific examples that have the potential to raise large amounts of revenue: carbon pricing, gasoline taxes, trucking tolls, and garbage fees.  Indeed, as we show, a reasonable set of tax rates on these four items can generate as much revenue as the income tax increase.  That is, imposing green taxes can completely fill the $3.8 billion difference between the projected baseline deficit ($10.9 billion) and the post-tax deficit ($7.1 billion). 

Yet we omit many other potentially high-revenue green taxes.  For example, the State could tax nitrogen-based fertilizers that contribute to nitrogen run-off pollution in streams, rivers, and lakes.  These omissions do not imply that other green taxes could not be implemented.  Also, the simple analysis does not include behavioral responses by consumers and businesses.  Rather, we apply hypothetical green taxes directly to historical quantities of emissions (or polluting products) in order to obtain an approximate level of potential revenue generation.  

In a short series of blogs, one per week, we now discuss each of the four green taxes and their potential for revenue generation.  This week: Carbon Pricing.

In 2008, electricity generators in the State of Illinois emitted almost 100 million metric tons of carbon dioxide (CO2) according to the U.S. Department of Energy’s Energy Information Agency (EIA).  See the State Historical Tables of their Estimated Emissions by State (EIA-767 and EIA-906).  While the United States has no nationwide price on carbon – neither a tax nor a cap-and-trade (permit) policy – some jurisdictions within the United States have imposed their own carbon policies.  For instance, a coalition of Northeastern states implemented the Regional Greenhouse Gas Initiative (RGGI) to limit CO2 emissions using a permit policy.  To date, RGGI’s modest effort has already generated close to $1 billion in revenue for the coalition states.

If Illinois were to adopt its own carbon pricing policy, then even a modest tax rate or permit price could raise significant revenue.  For instance, a $5 per metric ton CO2 price on emissions from electricity producers generates about $500 million in revenue (or 14.4% of the $3.8 billion raised from the state’s income tax hike).  By way of comparison, if the extra $500 million in emission taxes were entirely passed on to consumers in the form of higher electricity bills, then the average consumer’s bill would increase by 3.75%  (where $13.3 billion is spent annually on electricity in Illinois).

Table 1 reports the possible “revenue enhancement” from the $5 per metric ton tax, along with three other pricing scenarios.  Both the $5 and $10 rates are hypothetical prices created by the authors for expositional purposes.  In contrast, the $20 per metric ton price is approximately the carbon price faced by electricity producers in Europe’s Emission Trading System (ETS).  At the $20 rate, a carbon tax in Illinois generates almost $2 billion – over half of the tax revenue from the income tax increases.  Finally, the $40 tax rate (or carbon price) is from Richard S. J. Tol (2009), “The Economic Effects of Climate Change,” Journal of Economic Perspectives, 23(2): 29-51.  It is an estimate of the optimal carbon price that accounts for all of the negative effects from carbon emissions.  At this “optimal” price, the revenue from pricing carbon in Illinois by itself could replace the needed tax revenue from the State’s income tax increase.

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Filed Under (Finance, U.S. Fiscal Policy) by CBPP Staff on Jun 19, 2011

How Many Calories Will a Dollar Buy?

An interesting graphic was put together by Lapham’s Quarterly indicating how many calories can be purchased for a dollar. The New York Times Economix picked up on this and has another interesting chart displaying these changes over time courtesy of the Bureau of Labor Statistics. The graph indicates that it takes $5 to get the recommend daily dose of 2000 calories whereas it would take $60 of lettuce to make it to the same point. However, what the chart doesn’t account for is the number of meals that can be produced from a single unit of the product. When considered through this lens, the lettuce is still cheaper and much healthier for you.

Repreive for Homeowners in Foreclosure?

In states where the courts have a role to play in the foreclosure process, they are seeing a backlog of cases that has given homeowners a bit of breathing room.  In New York for example, it would take an estimated 62 years  and 10 in the state of Illinois according to the New York Times to clear the current docket.  The slowdown has been a result of errors on the parts of factors such as robo-signers and foreclosure mill law firms both of which resulted in improper evictions and have resulted in judges being much more careful in how they analyze the documents.

Wage Gap Increase in America

The Washington Post examines the measures that have resulted in executives and CEO’s wages rising while workers wages remain stagnant.  The article makes the case that, “According to the CIA’s World Factbook, which uses the so-called “Gini coefficient,” a common economic indicator of inequality, the United States ranks as far more unequal than the European Union and the United Kingdom. The United States is in the company of developing countries — just behind Cameroon and Ivory Coast and just ahead of Uganda and Jamaica.”  The article highlights a meta-analysis conducted by economists Jon Bakija, Adam Cole and Bradley T. Heim in which they sought to determine just who the wealthiest Americans were and in what industry they were employed in.  Many would assume the list would be populated heavily by athletes and people like Bill Gates but in reality there are many more executives and CEO’s on the list than conventional wisdom had previously allowed for.

A Market-Based Approach to Improving Social Policy: Social Impact Bonds

Filed Under (Finance, U.S. Fiscal Policy) by Jeffrey Brown on Jun 13, 2011

Have you ever thought you had a better idea than your government for reducing recidivism than your state’s prison system?  Have you ever thought you could do far more for the education of low-income children than the government programs that exist to help them? As you look at government social programs, do you think “I could achieve far more with far less?”  How would you like to have an opportunity to try, and make money for you and your investors if you succeed?

Thanks to a recent conversation I had with my friend and former Harvard colleague Jeff Liebman, I am now fascinated by an idea that I think has the potential to change the way we think about the delivery of social services.  And there is something to like about it for liberals and conservatives.  At its core, it uses market incentives and mechanisms to encourage innovation and reward results.

The idea is captured by the somewhat wonkish name “Social Impact Bonds.”  What are they?

As Jeff Liebman explains clearly in a policy article he wrote on the subject earlier this year, “a government contracts with a private sector financing intermediary … to obtain social services. The government pays [this organization] entirely or almost entirely based upon achieving performance targets. If the bond-issuing organization fails to achieve the targets, the government does not pay. In some cases, the government payments may be calculated as a function of government cost-savings attributable to the program’s success.  The bond issuer obtains operating funds by issuing bonds to private investors who provide upfront capital in exchange for a share of the government payments that become available if the performance targets are met. The bond issuer uses these operating funds to contract with service providers to deliver the services necessary to meet the performance targets.”

What I love about the idea is that it can improve performance, lower costs, and encourage policy and service delivery innovation.  Just like in the marketplace, if an idea works, an organization makes money.  If it does not work, they don’t get paid.

The idea is brilliant in its simplicity.  And it is not just a pie-in-the-sky idea.  In the U.K., they are already testing the idea.  The Justice Ministry has contracted with a bond-issuing organization to find ways of reducing recidivism at a prison in Peterborough England.  If they can reduce the rate relative to other prisons operating under the traditional model, they get paid.  If they fail, they don’t.

Sounds like an idea with a lot of promise … I will keep you posted if I learn more.

Contaminated Vegetables and Toxic Assets

Filed Under (Finance, U.S. Fiscal Policy) by Charles Kahn on Jun 8, 2011

The e coli scare in Europe right now has thrown governments and their health services into crisis, devastated Spanish agriculture and changed a continent’s eating habits overnight. And yet, the risks, viewed in any objective sense, of eating a cucumber in Germany are minuscule: there are, in that country at this moment, thousands of intrepid cigarette smokers who are shying away from the salad course in the name of health safety. Not that I would behave any differently: the slight chance of a devastating outcome is enough to make me boil my vegetables as well.

But it is noteworthy how news of such a low probability event can cause such enormous economic dislocation. There are millions and millions of cucumbers out there; the odds of any particular cucumber being toxic are vanishingly small, and yet since we can’t know which is the lethal cucumber, we avoid them all. Result: localized disaster leading to economy wide disruption. The situation is familiar to all the souvenir salesmen in Cairo–reports of a dramatic incident of tourists’ deaths in a terrorist incident lead to decline in foreign visitors for months or years.

In both of these cases the fundamental problem is contamination: the inability to sort out the good apples from the bad apples means all must be regarded as tainted. The same situation arose in the recent financial crisis. Somewhere out there lurked toxic assets–mortgage backed securities where the underlying loans were badly supervised or fraudulently arranged or insufficiently diversified. While the pile of toxic assets was enormous, it was still a very small part of the entire financial sector. But for the average investor–even for the expert investor–the problem was that there was no way to tell which financial institution was actually contaminated–so all are tainted. (This phenomenon is not particular to the recent crisis: observers of earlier banking crises in the U.S., back into the nineteenth century, also noted similar problems.)

In the case of the financial crisis, there is a potential strategy, for those of strong constitution. After all you can tell the magnitude of the problem at the outside–calculate the number of troubled mortgages. The total fall in the value of the financial assets at the height of the crisis is much greater than this underlying amount of damage. So there are profits to be had if you can just figure out which financial assets to buy. But you don’t know which. The solution: you just buy a little of every one of them, hold on to them all, and hope your stomach is up to the challenge.

Around the Web in Public Policy

Filed Under (Finance, Other Topics, Retirement Policy) by CBPP Staff on Jun 4, 2011

State of Illinois Finances

State Treasurer announced on Monday that Illinois is “on the verge of financial disaster.”  The amount of debt owed by the state stands approximately at $45 bn.  The ballooning debt is attributed to a number of factors throughout the article ranging from unfunded pension liabilities and unpaid bills.  Other factors at play according to the article are the states lowered bond ratings resulting from the state’s tendency to borrow funds to make payments.  You can find the position paper on his Facebook page.

Effort to Cut Government Worker Pensions is Dropped

Two bills targeted towards retired state employees, one directed at their pensions and the other towards their health care benefits have been dropped.  However, there exists a bi-partisan effort to change the system as currently established for current employees in order to make it more sustainable in the long run.

Housing Index Continues to go Down

The article details the decline in homeownership and explores the continued phenomenon and change in what has long been considered a bedrock of the American way of life.  According to the piece, some experts predict that people will once again buy homes as the economy continues to rebound towards stability.  However, many renters are seeing an increase in demand to rent. Furthermore, a paper released by, “A senior economist at the Federal Reserve Bank of Kansas City found that the notion that homeownership builds more wealth than investing was true only about half the time.”