ince 2005, field production of crude oil has increased very little worldwide, with U.S. shale oil production accounting for more than 100% of the increase—in the absence of these new sources of supply, global production today would be lower than it was in 2005.
Monthly Archives: July 2014
Securitization and Government Backing
Stephen G. Cecchetti and Kermit L. Schoenholtz write,
That is, only 18% of U.S. securitization – primarily auto loans and credit card debt – are free from government guarantees! Even at the peak of private-sector securitization in mid-2007 – before the financial crisis grew intense – the government-backed share exceeded 60%.
To put these numbers into perspective, we can look at another part of the U.S. financial system: insured bank deposits. You may be surprised to learn that (again, as of end-March 2014) only $6,094 billion out of $9,922 billion in bank deposits are insured. That is, 61% of bank deposits are government backed (see chart below) versus 82% of securitizations.
Pointer from Mark Thoma.
In my view, the political economy of banking works like this:
1. Financial intermediaries want to issue risk-free, short-term liabilities backed by long-term, risky assets.
2. Governments want to allocate credit, both to their own borrowing and to favored constituents.
To accomplish (2), governments guarantee the liabilities of particular financial intermediaries. This in turn allows those intermediaries to accomplish (1).
When government creates agencies, such as the Fed, the FDIC, it does so in the name of financial stability. But you should think of these agencies as tools for credit allocation, not as tools that actually stabilize the financial system.
The Incentive to Invest
The very slow rebound in investment isn’t obvious to explain.
Read the whole thing. He walks through such explanations as uncertainty, difficulty obtaining financing, low aggregate demand (what Keynesians used to call the Accelerator Effect), and investment that has become less capital-intensive. On the latter, he writes,
it’s often a form of investment that involves reorganizing their firm around new information and communications technology–whether in terms of design, business operation, or far-flung global production networks. As a result, this form of investment doesn’t involve enough demand to push the economy to full employment.
All of these explanations are from a conventional AS-AD perspective. From a PSST perspective, I would look for bottlenecks, particularly in the service sector, where growth is most likely to occur. In the Setting National Economic Priorities Project, the following are considered possible bottlenecks:
–labor-market distortions, including high implicit marginal tax rates embedded in means-tested benefit programs
–the research/FDA approval/patent regime in medicine, given the state of the art in genetics and biochemistry
–the FCC spectrum regime, given the state of the art in spectrum utilization possibilities
–occupational licensing
–regulation of medical practice
–regulation/accreditation barriers to education innovation
The WSJ adds another layer to the mystery.
corporations used almost $600 billion in cash to buy back their own shares in 2013 and the uptrend continues into 2014. While that’s a positive trend for household wealth, it raises questions about companies’ commitment to move ahead with capital spending projects.
Remember the Tobin’s q theory of investment? It says that when stock prices are high relative to the value of existing capital, firms will invest more. Instead, we are seeing firms buy back stock to try to raise q.
This deserves more thought and analysis.
The Incentive to Go Public
The number of public companies in the US has dropped dramatically. And then correspondingly, growth companies go public much later. Microsoft went out at under $1 billion, Facebook went out at $80 billion. Gains from the growth accrue to the private investor, not the public investor.
Pointer from Tyler Cowen.
When you need a lot of physical capital to expand (think of a steel company 100 years ago), you have to offer a high return to public investors. When you can expand by adding more web servers, you might as well keep the company private. Going public does not mean raising funds for expansion. Instead, it just means converting some of your future profits into present cash, courtesy of public investors.
My point is that for information-intensive companies, the balance of power has shifted away from public investors, including large mutual funds, and toward private investors. It may have less to do with Sarbanes-Oxley or other factors that Andreessen cites. The service sector, which is growing as a share of the economy, may be inherently less dependent on outside capital than the goods-producing sector.
By the way, I always thought that Microsoft went public as a political defense strategy. In the absence of political threats, their optimal approach would have been to remain private. But having lots of shareholders gave more people a stake in their success, which helped to reduce the incentive for government predation against them.
Andreessen points out that the stock market has been flat for 15 years. But that takes as your starting point the late stage of the Internet Bubble.
The Internet companies told investors that they were raising money in order to survive without profits while they built up market share. The theory was that network effects and path-dependency were so powerful that once you established your brand you could basically generate profits at will.
We now know that a money-losing online pet store is just a money-losing online pet store, not a future exploiter of network effects and path dependency. To exploit network effects and path dependency, you have to be more like Facebook. But private investors had enough confidence in Facebook to take a large share of its value.
Furthermore, we are now in a world where mobile phones are the leading-edge platform. Who needs to raise hundreds of millions of dollars to create an app?
A Solution to Biomedical Research Incentives?
In pharmaceuticals, the challenges with using the patent system are increasing. As Huber has pointed out, the nature of molecular medicine is changing. The system of rigid, blind clinical trials needs to be replaced by a regime of focused trials in which researchers learn and adapt as they go. Medical research may be valuable without producing a brand new molecule that cures a disease and thereby justifies a patent. It may instead focus on determining which combination of drugs will best treat a certain class of patients. A prize-grant would reward this sort of targeted research in a way that a patent cannot.