A roundup of economic news from around the Web.

  • Valuing Toxic Assets: The Financial Times writes that some clarity for the pricing of toxic assets might spell bad news for hopes of valuing these instruments. “At long last, one shard of reality has just emerged to piece this gloom. In recent weeks, bankers at places such as JPMorgan Chase and Wachovia have been quietly sifting data trying to ascertain what has happened to those swathes of troubled CDO of ABS. The conclusions are stunning. From late 2005 to the middle of 2007, around $450bn of CDO of ABS were issued, of which about one third were created from risky mortgage-backed bonds (known as mezzanine CDO of ABS) and much of the rest from safer tranches (high grade CDO of ABS.) Out of that pile, around $305bn of the CDOs are now in a formal state of default, with the CDOs underwritten by Merrill Lynch accounting for the biggest pile of defaulted assets, followed by UBS and Citi. The real shocker, though, is what has happened after those defaults. JPMorgan estimates that $102bn of CDOs has already been liquidated. The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent.”
  • Budget: Peter Orszag has returned to the blogosphere in his new role as OMB director and makes the case for transparency in the budget. “You probably won’t agree with everything in the Budget. But at the very least, it’s honest, laying down a fair marker as to where we are now. And I sincerely believe that the first step in arriving at a plan to move forward is to reach agreement on the place from which we are starting. This Budget is not an end-point. It is a beginning. I invite you to return to this blog to read more about our continued efforts to return prosperity to the economy, discipline to the federal budget, and efficiency to our government.” Separately, Stan Collender says that under the metrics used by the Bush administration the budget deficit would have been about $1.3 trillion instead of $1.7 trillion.
  • Animal Spirits: Writing for the Financial Times, Samuel Brittan says that the emphasis on so-called animal spirits has been overdone. “Citizen A cuts down on his purchases of widgets. Company B that makes the widgets cuts down staff, who in turn reduce their spending. Sales collapse in the local supermarket, putting yet more people on to the dole. Thus we drive ourselves into a slump, which has little to do with what some economists call “creative destruction”. It is just a stupid downward spiral that is pushed even further down by media pronouncements about how people should cut their spending. A slump originating in the banking sector has this additional feature. Even if Company B can find another project for which there might be a market, it will not be able to obtain working capital, at other than moneylenders’ rates, because banks are unwilling to lend. As for long-term loans for new ventures, it can forget them. This stylized picture is instinctively grasped much better by the proverbial taxi drivers and barmen who inform many journalists of the popular mood than it is by many academics, senior officials and top politicians. The economist who first got the process right in a big way was, of course, Lord Keynes. Yet there is now a campaign by some who regard themselves as his followers to play down the British economist’s analysis of effective demand in favour of something they call “animal spirits”.”
  • Compiled by Phil Izzo"