Merit-based gifts

Merit-based gifts

Most gifts are for “occasions," such as birthdays and Christmas. The value of the gift may be correlated with how the giver perceives the merit of the recipient, but rarely is merit the pretext for the gift. Perhaps a general practice of explicit merit-based gift-giving would create... perceived slights. In contrast, when a holiday is the pretext and the value of the gift is (possibly) linked to merit, we can self-deceive and believe that a small-valued gift simply represents a cheap gift-giver, or a friendship of uncertain strength, rather than our own lack of merit. is important to stand up to social convention and do what is right.

- Tyler Cowen

Fasten your seat belts

So much for upward momentum returning to the US markets. Worries about subprime mortgage troubles in Europe are spilling into futures trading and it’s got investors wondering whether the markets are in for another bout of what afflicted stock exchanges in recent weeks.

There are so many moving parts to this machine, it’s tempting to try to draw a diagram, but in sum, a handful of money market funds run by BNP Paribas are closing in Europe due to a lack of liquidity, and that’s woken up the European Central Bank (ECB), which injected $130 billion in overnight funds to banks in an effort to calm investors in those markets.

“It’s certainly distressing to discover that supposedly low-risk investments such as money market funds could be hit," writes Edward Hadas of, in a morning commentary. “Until investors know a good bit more, they are likely to keep on alternating between fear and calm."

The move by ECB, meanwhile, has more people wondering whether the Fed might follow suit in providing extra liquidity to markets. “We are not suggesting the Fed will step in in the near-term, but we will certainly keep a watchful eye on any speculation of potential comments/guidance from the Fed," says David Ader, credit strategist at RBS Greenwich Capital. The Fed is expected to set an overnight and 14-day repo agreement —a tool it uses to add to bank reserves—of some $12 billion, slightly higher than in recent days.

As for stocks, if anything survives today, it’s likely to be large-cap names. In a commentary on, Kevin Depew notes an increase in bullishness in S&P 500 stocks—the idea being that big-cap, liquid stocks are less risky than some of what resides in the broader markets.

- David Gaffen

Subprime overkill

Policy responses to the subprime crisis could on the one hand feed “moral hazard", and on the other possibly accentuate the slump, a study from the International Monetary Fund says.

The study, by John Kiff and Paul Mills includes a synopsis of how the market developed and how it works. It warns that having the Federal Housing Authority allow minimal or zero-down payments for loans it guarantees or refinancing distressed subprime loans “risks guaranteeing speculative loans and bailing out irresponsible or fraudulent borrowers at the general taxpayers’ expense". The study (which doesn’t represent official IMF policy) says the move from bank-based lending to capital-markets-based lending created incentives for sloppy and reckless lending that hurts borrowers and lenders alike.

That’s being undone as regulators Fannie Mae and Freddie Mac and the rating agencies clamp down on the riskiest practices, it says. “If anything, with a high level of loan resets and refinancing demand in 2007-08, the danger to subprime borrowers and dependent housing markets is that lending standards are being tightened too much, not too little."

- Greg Ip