Monday, April 30, 2012

Paging Art Laffer

We can only hope Warren Buffett reads this NY Times article explaining how market forces redistribute tax burdens;
Luxembourg has just half a million residents. But when customers across Europe, Africa or the Middle East — and potentially elsewhere — download a song, television show or app, the sale is recorded in this small country, according to current and former executives. In 2011, iTunes S.à r.l.’s revenue exceeded $1 billion, according to an Apple executive, representing roughly 20 percent of iTunes’s worldwide sales.
The advantages of Luxembourg are simple, say Apple executives. The country has promised to tax the payments collected by Apple and numerous other tech corporations at low rates if they route transactions through Luxembourg. Taxes that would have otherwise gone to the governments of Britain, France, the United States and dozens of other nations go to Luxembourg instead, at discounted rates.
And it isn't only Luxembourg that offers such arbitrage.  Within the United States Apple and other companies headquarter some activities in Nevada to avoid paying state income taxes in California.  Competition is a wonderful way to keep other people's hands off your money.

Mayday, Mayday

Nor should we forget the country a little closer to our own shore that proves that worrying about living in a market society is a fool's errand;
[Alan] Gross, an American from suburban Washington, was arrested and accused of being a spy two years ago for bringing satellite phones, laptops and BlackBerry cellphones onto the island [Cuba]. Gross worked under the umbrella of a pro-democracy project of the State Department's U.S. Agency for International Development. He said he was bringing the equipment to the island's Jewish community, but he was accused of trying to subvert the government.
Subverting he probably was.  Cuba's elite fears, with good reason, that their people might have access to information that even Haitians do; through the internet.  Couldn't let people be free to actually buy at market prices what they want.  Where would that end?
Cuba, with its authoritarian communist government in control of the Web, has the lowest Internet-penetration rate in the Western Hemisphere, with just 16 percent of its population online. Even earthquake ravaged Haiti, the hemisphere's poorest country, has a higher percentage of its people on the Internet.
In Cuba, only government officials and foreigners can set up the Internet in their homes. Most Cubans can't afford the fees charged at tourist hotels, where an hour of Internet equals about a quarter of the average Cuban's monthly salary. 

Don't care too much for money

There was an informative juxtaposition of C-Span programs over the week-end, with  After Words featuring Michael Sandel's What Money Can't Buy; the Moral Limits of Markets and Brian Lamb's Q&A interviewing Seattle author Blaine Harden, who discussed his recent Escape From Camp 14.  From the transcript of the latter;

LAMB: How did he get inside this [prison] camp in the first place?
HARDEN: He was born there. His crime was to be born. And his parents were there for reasons that are almost as flimsy. His father was in the camp because his father’s brothers after the Korean War had fled to South Korea. And after the authorities heard about that, his father and his father’s many brothers and parents, were all rounded up and taken to Camp 14. And that’s where Shin was born. He doesn’t know why his mother was there. She never told him and he never asked. They didn’t have the kind of relationship where they would talk.
His parents, his mom and dad, conceived him because they were chosen by the guards for something called a reward marriage and Shin was bred like a farm animal in the camp and raised by his mother. And he was physically his mother gave birth to him but he was raised with the values and the rules of the guards, and was not close to his mother at all. He had to memorize 10 rules of the camp most of which end by saying if you don’t do this you will be shot immediately.
And the first rule of the camp, the most important rule, is if you try to escape you will be shot immediately and a corollary to that rule is if you hear about an escape and don’t report it, you will be shot immediately. And these, these were basically his 10 commandments, his ethical guideposts as a little guy growing up in that camp.
Unfortunately that's not the worst of the young Korean's experiences, as he eventually does inform on his own mother and brother who are planning an escape, and they end up both being executed in front of him.  A story that 'nightmare' doesn't even begin to describe.

Which makes the thesis of Mandel's book cruelly ironic, since North Korea is the one country left of the communist experiment in denying basic economic reality that cost so many tens of millions their lives.  Mandel tells the interviewer that he worries that we have become a 'market society' without any apparent awareness that there are (as the Harden book makes clear) far worse things to be.  The perfect is not only the enemy of the good, but striving for it has produced inhumane results almost everywhere the idea has been taken seriously.

It would be hilarious (if not for the tragedies having been inflicted on the people of North Korea and other totalitarian despotisms) to compare Sandel's worries that someone at an amusement park can avoid standing for hours in line to get on a ride by paying a higher price, to what the young Korean escapee endured, which included crawling over the corpse of his unfortunate companion to get safely over the electrified fence that North Korea's government needed to keep their people from living in a 'market society'.  That gives a different meaning to Sandel's 'paying to jump the queue'.

Sandel is also embarrassingly ignorant of over 200 years of economic scholarship.  He thinks that we need a debate on the morality of markets, yet seems unaware that going back to at least 1757 Adam Smith, in The Theory of Moral Sentiments, did just that.

Even when he does bow to Smith, he gets it wrong.  Telling the interviewer that Smith and the early economists didn't even use the word 'incentives'.  Maybe, they didn't use the word, but they clearly knew the thing.  One of the most famous passages in Wealth of Nations being;
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own neccessities but of their advantages.
Pretty clearly, he's talking about incentives.

Sunday, April 29, 2012

Send in the Marines

But hold the door open for them;

Commandant Gen. James Amos this week ordered that certain jobs previously meant for men now be opened to women as well. In some cases, the change is meant as a test to help Amos make recommendations about a possible permanent shift.
Along with outlining the billets and ranks involved, Amos included a warning in his message that he will not tolerate any foot-dragging in the ranks.
"I expect all leaders to be fully committed to providing every Marine the opportunity to compete and excel while sustaining unit effectiveness, readiness and cohesion, and maintaining good order and discipline," Amos said in his message to all Marines.
Amos' order comes as Defense Secretary Leon Panetta has ordered all the services to no longer restrict women from certain jobs because those jobs are "co-located" with ground combat units. Women will continue to be prohibited from direct involvement in combat units and special-operations units.
One wonders how well such an attitude would work coming from the Commissioner of the NFL or the NBA. 

Saturday, April 28, 2012

Never mind

Roseanne Roseannadanna of Saturday Night Live never imploded as quickly as this LA Times story on Lehman employees' compensation;
The 50 employees were awarded more than $1.6 billion in cash and stock in the three years preceding Lehman's demise in September 2008.
However, much later in the article we learn;
The Lehman employees did not collect all the compensation allotted to them because the firm tumbled into a record-setting bankruptcy that rendered its stock worthless. 
....The most money went to Stanley Rowe, who had joined Lehman as head of Latin American equities. He received $3.53 million worth of shares that were to vest over four years. Paul S. Schechner, hired as a managing director in the real estate investment banking group in 2007, was awarded the second-highest bonus: $2.7 million worth of stock vesting over three years. 
Shares of now worthless stock.

Friday, April 27, 2012

Full (of it) Disclosure

It is a favorite tactic of the Housing Cause Denialists to claim that the Community Reinvestment Act had nothing to do with causing the financial crisis because, for one, CRA lending by banks was too small to matter much.  But Peter Wallison and Ed Pinto are on the job;
...there are plentiful data on commitments by large banks to make CRA-type loans in connection with applications to the Fed for permission to merge with small and medium-sized institutions between 1997 and 2007. In a 2007 report, for example, the National Community Reinvestment Coalition (NCRC) reported that in this ten-year period its member organizations had induced banks that were seeking merger approvals from the Fed and other agencies to commit almost $4.5 trillion in CRA-type lending. Press releases at the time these mergers were approved (available online) backed up this claim. After this report received publicity, it was pulled from NCRC’s website, though it is now available elsewhere on the web.[13] These report loans totaling $1.3 trillion made to fulfill prior commitments,[14] but determining the delinquency rates on these loans is impossible; banks have generally refused to make these data available, and the Financial Crisis Inquiry Commission (FCIC)—established by Congress to investigate the causes of the 2008 financial crisis—did not seriously attempt to investigate this issue.
Though that hasn't stopped the chairman of that commission, Phil Angelides, from claiming that he knows the figure to be small.  Nor that it was really not government sponsored enterprises and agencies that were responsible for the bulk of the problem.  Again, Wallison and Pinto refute the baloney;

Between 2002 and 2006, the private market for PMBS ['private' mortgage backed securities] backed by subprime loans grew substantially. One myth about the this period—accepted and repeated by the FCIC and many others—is that private mortgage securitizations took a larger share of the market between 2004 and 2006 than Fannie and Freddie. However, this is true only if one ignores the purchases of private-label securities by Fannie and Freddie to meet their AH goals. Between 2004 and 2006, Fannie and Freddie bought about 20 percent, or $613 billion, of the private mortgage securitizations tracked by the FCIC. These securities should be attributed to Fannie and Freddie rather than the private sector because they were created to meet the GSEs’ demand. In that case, the GSEs’ own issuances, plus the PMBS they acquired, totaled $3.2 trillion, compared to $2.6 trillion in private issuances over the same period. Thus, the private-sector market share of securitizations never exceeded GSEs issuances between 2004 and 2006.[18]
....Underlying the giant housing bubble that drew them in was a government investment that in 2008 consisted of 20.4 million subprime and other risky loans—about three times the size of the PMBS market. If the government had not created a ten-year bubble by making massive investments in subprime and other low-quality mortgages, the private sector would never have been drawn into the subprime market in such a significant way. The weakening of financial institutions in the mortgage meltdown—and the resulting financial crisis—would never have occurred.
Even Nobel prize winning economist Paul Krugman fell for the sleight of hand described in the above.  Of course, Krugman, in July of 2008, also wrote in the NY Times that the GSEs couldn't have been responsible for the housing bubble that had burst because it was illegal for them to even deal in sub-prime mortgages.  At the time they held between one and two trillion dollars of such.

Housing; Unmitigated Disaster

Peter Wallison and Ed Pinto turn their big guns on the Federal government's role in creating the housing bubble and bust that is the 'wanting nail' in the tale of woe that became the Great Recession of 2008;

HUD’s [decade long] policy [of reducing standards for home loans] was successful. In 1989, only 1 in 230 homebuyers bought a home with a down payment of 3 percent or less, but by 2003, 1 in 7 buyers was providing a down payment at that level and by 2007, the number was less than 1 in 3.[10] The program’s contribution to the reduction in home equity and the subsequent increase in leverage is obvious.
HUD also used the FHA, a government mortgage insurance agency it controlled, to lead the way in reducing underwriting standards. 
One would think that they'd done enough, but the AEI scholars say they've kept up the bad work;
For a time, as the GSEs [Fannie Mae and Freddie Mac] expanded their loan purchases, the FHA became less important for assisting growth in homeownership. Recently, however, as their conservator has tightened the [bankrupt] GSEs’ lending standards and reduced the effect of the AH [affordable housing] goals, the FHA has increased its market share of home purchase loans, from 8 percent in 2007 to 43 percent in 2010.[11] In other words, the current administration is no different from the last two, which were willing to reduce the underlying equity in housing to spur home sales—an adverse trade-off between short-term objectives and long-term market health. 
 Meaning that the government is giving more of the medicine that nearly killed the patient.

Thursday, April 26, 2012

Bad Adharma

Does this sound familiar;
...we have not established public support for the basic principles of competition and free enterprise. Indeed, distrust of even the legitimate activities of the private sector has grown. Not surprisingly, the utopia promised by the extreme left is once again enjoying a resurgence of popularity. ....
....Growth is slowing, in part because of bottlenecks. At the same time, given public dissatisfaction, politicians are even more focused on subsidies and transfers to keep people happy, especially as general elections near. No one wants to be blamed for taking away the goodies, even as our ability to pay for them has plummeted. Politicians are loathe to act quickly to give up their rents, so reforms that might improve sentiment are stuck. And opposition to liberalization is gathering strength amongst the angry middle class – they have become more willing to listen to old discredited remedies once again because their trust in the private sector has been shattered. [our emphasis]
 No, not Rush Limbaugh lambasting Barack Obama, it's the University of Chicago's Raghu Rajan on his native India.  The post 'License Raj' India.  Seems that the fantastic economic growth that followed the reforms of then Finance Minister (now Prime Minister) Manmohan Singh in the 1990s has slowed, and is (in Rajan's opinion) at a fork in the road.
...even as the world becomes more competitive, India’s star has dimmed in the last few months, as our governance is besmirched by corruption scandals and our macroeconomic health has deteriorated. Alarm bells should sound when domestic industry no longer wants to invest in India, even while eagerly investing abroad.
Professor Rajan's advice is to, Yogi Berra-like, take it;
...we should not succumb to pessimism. There is no reason that India’s growth cannot regain double digits. Simply moving our millions from low productivity agriculture to rural industry or services will give us growth for years to come, provided we are willing to do the minimum necessary to collect the low hanging fruit. That requires completing the second generation of reforms. We need to liberalize sectors like education, retail, and the press, freeing entry and improving customer choice. We need to transform more government owned firms into well-managed publicly owned firms which are free from political influence or government support. 
And we need to evolve transparent means of pricing and allocating the bountiful natural resources in our country.   Clearly, we need to ensure that growth reaches more people. But there is no better way of inclusion than a decent job, no doubt augmented by better public services as well as targeted conditional cash transfers to the poor.
I am hopeful that our increasingly difficult situation will focus political minds.
Aren't we all.

Too small to count

For the Obama administration apparently, says the TARP watchdog.  The big banks have mostly repaid their loans, it's the auto industry and small banks that are problematic;

The Treasury Department did not project a profit for the entire TARP program. The administration estimated in February that lifetime losses from TARP would be $67.8 billion, largely because of the bailouts of General Motors and Chrysler, as well as mortgage assistance programs.
Last month, the Congressional Budget Office estimated that TARP would lose $32 billion.
Treasury officials have said the government has made a small profit on the TARP money invested in banks. Most large banks have repaid their money....
It cited Saigon National Bank in Westminster, Calif., which caters to Vietnamese immigrants, as one of the smallest banks that has yet to repay its TARP money. The bank has $59 million in assets and has missed 13 dividend payments totaling $265,328 on the $1.6 million it received in bailout money in late 2008.
"Despite the dramatic efforts to expedite the exit of the largest banks from TARP, there appears to be no corresponding plan for community banks' exit from TARP," the report said.
Tim Massad, assistant Treasury secretary for financial stability, predicted more banks would repay their bailout money.

Wednesday, April 25, 2012

In them thar hills

There was an old saying that to get rich in a gold rush, don't be a prospector, sell the necessary tools, equipment, and supplies to the gold miners.  Opportunity knocks in Seattle;

Instead of the Klondike, the big money now is in asteroids floating nearby, just waiting for adventurous miners who can get their hands on the right tools and transportation.
Planetary Resources — the space-mining venture that surfaced Tuesday — claims there are tens of billions of dollars' worth of precious material just waiting to be scooped up by swarms of robotic mining satellites it will assemble in Bellevue [Washington].
....That means that even if the prospectors return empty-handed — which they admit is a real possibility — this region still would be their outfitter and home port. It also builds on the cluster of bleeding-edge space ventures in Boeing's shadow funded by local tech billionaires.
Planetary Resources' president, former NASA Mars mission leader Chris Lewicki, said Seattle is turning into the "Silicon Valley of space."

Tuesday, April 24, 2012

Occupy This!

What used to be called the information super highway, but it's the intellectual equivalent of the 1% that is resisting;

Exasperated by rising subscription costs charged by academic publishers,Harvard University has encouraged its faculty members to make their research freely available through open access journals and to resign from publications that keep articles behind paywalls.
A memo from Harvard Library to the university's 2,100 teaching and research staff called for action after warning it could no longer afford the price hikes imposed by many large journal publishers, which bill the library around $3.5m a year.
....The memo from Harvard's faculty advisory council said major publishers had created an "untenable situation" at the university by making scholarly interaction "fiscally unsustainable" and "academically restrictive", while drawing profits of 35% or more. Prices for online access to articles from two major publishers have increased 145% over the past six years, with some journals costing as much as $40,000, the memo said.
More than 10,000 academics have already joined a boycott of Elsevier, the huge Dutch publisher, in protest at its journal pricing and access policies. Many university libraries pay more than half of their journal budgets to the publishers Elsevier, Springer and Wiley.
Robert Darnton, director of Harvard Library told the Guardian: "I hope that other universities will take similar action. We all face the same paradox. We faculty do the research, write the papers, referee papers by other researchers, serve on editorial boards, all of it for free … and then we buy back the results of our labour at outrageous prices.

Brave New Century

The Economist slaps some upside the face with the facts of economic life;
Consumers will have little difficulty adapting to the new age of better products, swiftly delivered. Governments, however, may find it harder. Their instinct is to protect industries and companies that already exist, not the upstarts that would destroy them. They shower old factories with subsidies and bully bosses who want to move production abroad. They spend billions backing the new technologies which they, in their wisdom, think will prevail. And they cling to a romantic belief that manufacturing is superior to services, let alone finance.
None of this makes sense. The lines between manufacturing and services are blurring. Rolls-Royce no longer sells jet engines; it sells the hours that each engine is actually thrusting an aeroplane through the sky. Governments have always been lousy at picking winners, and they are likely to become more so, as legions of entrepreneurs and tinkerers swap designs online, turn them into products at home and market them globally from a garage. As the revolution rages, governments should stick to the basics: better schools for a skilled workforce, clear rules and a level playing field for enterprises of all kinds. Leave the rest to the revolutionaries.

Of course, politicians like Barack Obama are not 'the revolutionaries' no matter how hard they try to convince voters otherwise.

Monday, April 23, 2012

Ship of Fools

Even for the checkered history of public transportation, the subsidy for this Puget Sound ferry has to raise eyebrows;

It's an enjoyable commute, but one that has attracted so few riders in its first 18 months of operation that taxpayers are subsidizing each passenger at a rate of about $35,000 a year.
After a quarterly review this month revealed the foot-ferry has drained more than $1 million in Port of Kingston reserves and is on track to burn $52,000 a month for the rest of 2012, the three-member Port Commission is considering shutting it down and selling off the two 149-passenger boats.
"It's bleeding money pretty bad," said commission Chairman Marc Bissonnette. "We were really hoping that we could get to a higher level of passengers before now."
....The Port of Kingston owns a marina and leases its ferry dock to the state ferry system. In 2007, after a privately run passenger ferry to Seattle failed, a group of commuters wrote a grant for the Port to get $3.5 million for a ferry that could make two daily trips to Seattle. They got the federal grant — and bought two boats.
On average this year, about 20 people have taken the boat from Kingston to Seattle in the morning, and between 30 and 35 ride it back in the evening. 
Maybe the Port should just buy each of them their own small boat and let them sail on their own schedules.

Calomiris puffs CoCos

Columbia's Charles Calomiris checks in with Gene Epstein, promoting a forthcoming book, and proves he knows his Glass-Steagall history.  Responding to a point blank question about whether the Gramm, Leach, Blilely Act of 1999 was the cause of the financial crisis, he says;
No, and the irony is that even the original of the Glass-Steagall Act, as passed in 1933, had nothing to do with the crisis it was supposed to address. ....
On Carter Glass's laundry list was the notion that mixing investment banking with commercial banking was a bad idea. There was no evidence for that, and all subsequent research has rejected Glass's view. It's not even a close call. The Bank of United States' failure here in New York in 1930 had nothing to do with securities markets; it was exposed to Manhattan real estate and suffered losses related to the New York real-estate crash in Manhattan in 1929. Most of the other U.S. banks that failed in the 1930s did so as a result of farm problems and especially farm real-estate problems.
....Remember some of the illustrious names that got into deep trouble during the crisis -- Bear Stearns, Lehman Brothers, Merrill Lynch. They were all stand-alone investment banks at the time, unaffected by the partial repeal of Glass-Steagall. And we can only wish that commercial banks had done more of the relatively low-risk underwriting of [corporate] securities that the repeal of Glass-Steagall permitted them to do, instead of accumulating toxic mortgages, which Glass-Steagall had not prevented them from doing. 
Calomiris goes on to quote FDR himself as believing,  in October 1932 that deposit insurance would "lead to laxity in bank management and carelessness on the part of both banker and depositor."  Which he clearly believes is what happened.

Finally, the Columbia economist offers a suggestion to improve the banking system;
 I would establish a minimum uninsured debt requirement for large banks in the form of subordinated debt, known as contingent capital certificates, or "CoCos." The CoCos would automatically convert to equity based on predetermined market triggers, which would be very dilutive to pre-existing shareholders. One banker who understood my proposal for CoCo's said, "You are putting an electric fence behind me. "
The potential for dilution of stockholder equity being the key incentive for management to work to prevent that from happening.

I, Geoduck

In his afterword to Leonard Read's famous story of the humble pencil, Milton Friedman said;
“It is even more astounding that the pencil was ever produced. No one sitting in a central office gave orders to these thousands of people. No military police enforced the orders that were not given. These people live in many lands, speak different languages, practice different religions, may even hate one another—yet none of these differences prevented them from cooperating to produce a pencil. How did it happen? Adam Smith gave us the answer two hundred years ago.”
Now comes the Seattle Times' Craig Welch to provide even more proof of the power of prices to coordinate economic activity to the mutual benefit of numerous people, just as Adam Smith told us 236 years ago;
By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
As the Welch piece demonstrates;
A single pair of these gleaming mollusks sold at a Puget Sound dock could pay for an upscale Seattle dinner for two. A half-dozen sold in a Hong Kong grocery could fetch nearly enough cash to make a four-figure mortgage payment. Three milk crates of these shellfish purchased at a Shanghai restaurant could pay for a year of undergraduate tuition at the University of Washington.
Washington geoducks (pronounced "gooey ducks"), the strange, long-necked clams prized in Asia for their crisp, briny sweetness, long have been Puget Sound's highest-value seafood. But a confluence of regional and global events recently has sent geoduck prices soaring far higher.
Where a perfect, pearly white, 2.5-pound geoduck once brought $20 at the dock, a similar clam in the past year sometimes sold for three times more. In a restaurant in China, where 95 percent of the region's geoducks land, top-grade clams are selling for $100 to $150 or more — per pound. 
Definitely something to think about the next time you hear someone--even someone with the education to know better--complain about the U.S.A. sending jobs overseas.  Chinese (and other foreigners) supply Americans with shoes, clothing, name it, because they have a demand for things Americans produce; Boeing aircraft, apples, bourbon, trips to Disneyland....

If you drink it, they will come

Giving new meaning to the term 'busman's holiday', a physician in Las Vegas has opened a mobile hangover treatment for revelers who want to stay in Las Vegas for more partying.

Doctor and board-certified anesthesiologist Jason Burke calls his fledgling business a medical practice on wheels, analogous to a physician with an RV offering X-rays, MRIs or mammograms, a mobile dentist, or a blood bank bus set up in an office building parking lot.
The idea, Burke said, is to bring relief to tourists with stomach-churning wooziness, headaches and body pains - symptoms that could ruin an entire day in Sin City.
"Many people come to Las Vegas with the intent to drink and have a good time," Burke said as he moved between patients seated on plush benches in the retrofitted, full-sized tour bus. The casino scenery passing outside the windows, the flat-screen TVs, the ceiling mirror and the aide in the suggestive nurse outfit? Hey, it's Vegas.
"I don't think that Hangover Heaven is promoting drinking. I'm not eliminating hangovers," Burke told The Associated Press. "The goal of the business is to get people back to their vacation. I'm decreasing the length of time they're going to be hung over."

Sunday, April 22, 2012

Cool Hand Scott (Sumner)

The inimitable Bentley economist identifies a failure to communicate at the Fed (though not as viciously as Strother Martin's prison warder in a famous movie scene).
I strongly believe that interest rates are the wrong [monetary] policy instrument.  But most people disagree with me.  Even when the Fed does QE [quantitative easing], they justify it as an action that will reduce long term rates.  They seem completely unable to communicate to the public in any non-Keynesian language.  OK, then why not keep talking Keynesian?
Here’s my suggestion:  If the Fed is committed to communicating in terms of the fed funds rate, why not continue to have the Fed set a “shadow fed funds target.”  The proposal would work as follows.  The FOMC would continue to meet every six weeks and vote on the fed funds [the interest rate banks charge each other for overnight loans] target that would be most effective in communicating their macro policy goals.  For instance, this might be the number that results from the Taylor Rule formula.  No consideration would be given to whether this was a positive or negative number.  Then the Fed would announce the target, and instruct the New York trading desk to get as close as possible (which would be zero, or perhaps the IOR [interest rate on excess reserves banks hold at the Fed] rate.)
....Under my plan the 2010 meeting that led to QE2 might have gone as follows:  The FOMC meets and sees that NGDP growth is slower than they’d like.  They vote to cut the shadow fed funds target by 1/2%, from negative 2.75% to negative 3.25%.  This sends a signal to the markets that the Fed will engage in future policy actions to raise NGDP slightly faster than the markets previously expected.  Interestingly, that’s exactly how monetary policy works in normal times, or at least that’s 99.9% of how it works. 
Which sounds like an, 'if you can't beat 'em, join 'em' tactic.  Maybe necessary because at least since (and likely far earlier) a famous debate in1968 between Chairman of the Council of Economic Advisers Walter Heller in the JFK administration and Milton Friedman at New York University, it should have been obvious that 'interest rates are the price of money' is a mistaken belief.

As Professor Sumner makes clear, that is one error that hasn't yet had a stake driven through its heart.

Saturday, April 21, 2012

Phil Gramm has spoken

Back in the earliest days of the Obama Administration at AEI.  One is merely a mouse click away from his expert explanation of what Gramm, Leach, Blilely did, and more importantly did not do.

Gramm points out that there is nothing in GLB that deregulates anything--any new affiliations between banks, investment houses and insurance companies were still subject to whatever regulators already in existence.  Also that Glass-Steagall's walls of separation had become like swiss cheese; filled with holes thanks to the march of technology and old fashioned Yankee ingenuity.  None of the investment houses that got into trouble were in violation of anything in Glass-Steagall, GLB or not.

As a bonus one also gets a great deal of information on the Commodity Futures Modernization Act of 2000 (another bi-partisan piece of legislation signed by Bill Clinton).  Again, contrary to today's myth makers, nothing was deregulated there either.  Interest rate, currency and credit default swaps (though almost no one had heard of them at the time) were declared to be 'not futures' by the law, but were still subject to regulation as banking or securities activity.

Gramm also says--in his famously self-deprecating way--that politicians have always been eager to be seen as supporting home ownership because it's good for their re-election campaigns.  That, in his 1990 race, his pollsters found that over 80% of homeowners would vote to re-elect him...and that was good enough for him to support expanding it.  No Housing Cause Denialist he.

Friday, April 20, 2012

The inmates are revolting

At J Bradford DeLong's blog there's no sympathy for the devil who challenges the sacred Glass-Steagall myth;
Well, if you're determined to be stupid and ignore economic history, the rest of us should assume there's no point trying to help you.
....if you don't believe Comparative Advantage exists, why would you teach economics?
That's no way to treat a scholar, but he has defenders (if he allows it);

Unaccustomed as I am to defending Prof. DeLong, he's clearly in the stronger position here.
First, Glass-Steagall has not been repealed--next time you're in a bank see if there isn't sign stating that its deposits are insured by the FDIC (created by...Glass-Steagall).  
Second, Gramm, Leach, Bliley (1999) only repealed two sections (of 34) of the 1933 act.  Those two (#20 and #32) had prohibited 'affiliations' between commercial and investment banks.  The provisions that keep commercial banks using their insured deposits from underwriting securities and investment banks from taking checking deposits are very much still law.
Third, one would need some connection between the repeal of G-S sections 20 and 32, and mortgage backed securities to even begin to blame it for the financial crisis that everyone agrees stems from the bursting of the housing bubble.  
There is no such connection.  Banks have been holding MBS since they were invented in the 1970s.  Nothing in GLB had anything to do with that.
Finally, there was one thing in GLB that might have had an effect had it not been ignored by The Fed.  That was a provision calling for them to study the idea of forcing banks to hold some of their capital in subordinated debentures that couldn't be guaranteed by any govt. agency (or anyone else).  That would have made them the 'canary in a coal mine' if they dropped in value indicating trouble in the offing.

Thursday, April 19, 2012

Go ahead, make his day

Repeal Glass-Steagall (the Banking Act of 1933).  Really.  Not the piddling two sections that Gramm, Leach, Bliley touched in 1999--which left some 30 sections of it in place, but the entire thing, especially the FDIC and the idea of too big to fail.

According to Rutgers economist Eugene White in his paper comparing the real estate bubble of the 1920s to that of the 1993-2007 period, the existence of deposit insurance and the disposition to rescue over-leveraged institutions today is why the more recent crisis turned out to be more severe.

Even though the dimensions of the residential housing “bubbles” were similar, the bust in the twenties did not undermine the banking system or derail the economy.  Many of the alleged causes of the recent disaster were also in evidence in the 1920s.  There appears to have been an easing of monetary policy by the Federal Reserve, an equivalent “Greenspan put,” and unresponsive and perhaps facilitating bank supervision at the  federal and the state levels.  Bank lending standards declined and the high risk in the booming securitized mortgage industry was undetected by the rating agencies or the public because of the opaque nature of the securitized instruments.  All of these factors certainly contributed to the boom, but they were not enough to undermine the banking system.    
What was absent in the 1920s and what, by comparison, seems to have been central to today’s far greater disaster, were policies that induced banks to take increased the twenties, bankers  were not tempted by moral hazard from deposit insurance or the “Too Big to Fail” policy to take more risk on or off their balance sheets.  In fact, the general imposition of double liability on bank stock may have induced bank managers, subjected to greater monitoring by shareholders, to reduce risk-taking.  
According to White, prior to the Banking Act of 1933, investors had 'double liability'; they not only could lose all of what they had invested if the bank failed, but the bank's receivers could go after whatever other assets the investors had, to satisfy depositors and creditors, up to twice the amount of their original investment!

Also, most banking officers had to post bonds of between one and three years salary that would be forfeit if the bank failed.

Deposit insurance--which had been tried and found wanting in several states--created by 'Glass-Steagall' eliminated those incentives for bank shareholders to closely monitor their banks' performance.  And also apparently eliminated the practice of requiring bank managers to post bonds.

Wednesday, April 18, 2012

Bad Day at the Housing Cause Denial Rock

When the University of Chicago's Anil Kashyap starts quoting the Maestro's 2004 testimony on the problems Shadow Banking Giants Fannie Mae and Freddie Mac posed for the economy (which unfortunately shortly thereafter became all too obvious);

The GSEs' special advantage arises because, despite the explicit statement on the prospectus to GSE debentures that they are not backed by the full faith and credit of the U.S. government, most investors have apparently concluded that during a crisis the federal government will prevent the GSEs from defaulting on their debt. An implicit guarantee is thus created not by the Congress but by the willingness of investors to accept a lower rate of interest on GSE debt than they would otherwise require in the absence of federal sponsorship.
Because Fannie and Freddie can borrow at a subsidized rate, they have been able to pay higher prices to originators for their mortgages than can potential competitors and to gradually but inexorably take over the market for conforming mortgages.2 This process has provided Fannie and Freddie with a powerful vehicle and incentive for achieving extremely rapid growth of their balance sheets. The resultant scale gives Fannie and Freddie additional advantages that potential private-sector competitors cannot overcome. Importantly, the scale itself has reinforced investors' perceptions that, in the event of a crisis involving Fannie and Freddie, policymakers would have little alternative than to have the taxpayers explicitly stand behind the GSE debt. This view is widespread in the marketplace despite the privatization of Fannie and Freddie and their control by private shareholders, because these institutions continue to have government missions, a line of credit with the Treasury, and other government benefits, which confer upon them a special status in the eyes of many investors.
Greenspan himself seemed unaware of the extent to which the FMs had weakened their own lending standards in response to the GSE Act of 1992, as he continually references, in his testimony, 'conforming mortgages' without recognizing that they were very different beasts in 2004 than they had been prior to congressional intervention in the early to mid 1990s.

That said, it seems very odd that this hardly secret testimony of Chairman Greenspan was missed by the Seattle Times's Jon Talton in his recent piece purporting to explain How shadow banking blew up the economy.

Tuesday, April 17, 2012

Freedom of Worship

U of VA social scientist Jonathan Haidt has a book out arguing that, It's the sacredness, stupid (our words, not his).  In the New York Times piece he says;

Despite what you might have learned in Economics 101, people aren’t always selfish. In politics, they’re more often groupish. When people feel that a group they value — be it racial, religious, regional or ideological — is under attack, they rally to its defense, even at some cost to themselves. We evolved to be tribal, and politics is a competition among coalitions of tribes.
The key to understanding tribal behavior is not money, it’s sacredness. The great trick that humans developed at some point in the last few hundred thousand years is the ability to circle around a tree, rock, ancestor, flag, book or god, and then treat that thing as sacred. People who worship the same idol can trust one another, work as a team and prevail over less cohesive groups. So if you want to understand politics, and especially our divisive culture wars, you must follow the sacredness.
Which has recently received some supporting evidence from a surprising place; the often sensible MIT economist Simon Johnson, who just posted this on his blog, Baseline Scenario;

The Buffett Rule is a tiny tax, of little consequence to the people who would pay it or to the country as a whole.  The idea that $30 billion of additional revenue would tip the balance in any way is simply ludicrous.
But this is precisely what gives the Buffett Rule its powerful symbolism.
Which isn't the first time Prof. Johnson has admitted he's for symbolism over substance.  In his conversation with Russell Roberts at EconTalk, Johnson, whose co-authored 13 Bankers has no shortage of appeals to Glass-Steagall fetishism, says, at about the 12 minute mark that that too is largely symbolic (readers are encouraged to listen to the entire thing, most will learn a lot);
The end of Glass-Steagall is a symbol, but at that point a lot of the restrictions on big banks have gone away. 
Though Johnson hasn't made a career out circling the sacred ground, the way some have.

Sympathy for the Federal (Reserve)

Everything you wanted to know about Shadow Banking...but were afraid you didn't have the time.  Thanks to four heretofore unknown (to us anyway) staffers of the New York Fed; Zoltan Pozsar, Tobias Adrian, Adam Ashcraft and Hayley Boesky.

Shadow banks are financial intermediaries that conduct maturity, credit, and liquidity transformation without explicit access to central bank liquidity or public sector credit guarantees. Examples of shadow banks include finance companies, asset-backed commercial paper (ABCP) conduits, structured investment vehicles (SIVs), credit hedge funds, money market mutual funds, securities lenders, limited-purpose finance companies (LPFCs), and the government-sponsored enterprises (GSEs). Our paper documents the institutional features of shadow banks, discusses their economic roles, and analyzes their relation to the traditional banking system. Our description and taxonomy of shadow bank entities and shadow bank activities are accompanied by “shadow banking maps” that schematically represent the funding flows of the shadow banking system.
And they aren't just whistling Dixie about those 'maps' (scroll down to the appendices to see them in living color).  They more resemble the blueprint for a nuclear submarine (hat tip to anonymous Northwestern economist) than a financial system flow-chart.

Monday, April 16, 2012

Rational Expectations

Robert Lucas and company can be forgiven an 'I told you so', for this from Washington state;

Voters chose to privatize liquor distribution and sales by passing Initiative 1183 last November, meaning the state distribution center and stores will close by June 1. The Liquor Control Board estimates that more than 900 of its employees will lose their jobs.
Some are already finding employment elsewhere. Between Jan. 1 and mid-March, about 75 employees left the agency. One of those was Steve Burnell, who gave up his marketing position with the liquor board to take a job with a private distributor in February.
"Rather than wait it out, I wanted to move over to a new position," Burnell said.
....Former state liquor workers are finding new jobs in the private sector and at other state agencies. Costco, which contributed more than $22 million to the initiative to create private liquor sales, is one of the companies interviewing state liquor employees.

Sunday, April 15, 2012

Make lemonade, of course

When life deals lemons, market forces (if left free to do so) provide the squeezing;
Waypoint, a private-equity real-estate fund with $150 million in assets, is pioneering a new approach to making money from the housing crash. Since 2007, investors have been trolling the cratered suburbs stretching from California to Florida for cheap houses to flip. And firms such as PennyMac Mortgage Investment Trust have sought value in subprime-mortgage-backed securities.
Waypoint, which owns 1,100 houses and is buying five more a day, is betting that converting foreclosures into rentals is a better way to make a profit. Other firms, such as Landsmith in San Francisco, are cropping up and pursuing the same strategy in Arizona, California and Nevada.
With many suburban homes selling for half their peak values and demand for rentals from prospective tenants climbing, Waypoint was earning an 8 to 9 percent return on its capital as of Dec. 31, according to a quarterly report it sends to clients. 
Pretty much what Adam Smith had in mind when he counseled, back in 1776, not to expect to get your needs filled by the benevolence of merchants but through their self-interest.  The real question is why this obvious response to the housing debacle took so long.  Maybe the much maligned financial services industry learned something new;

The home-rental market boasts a total property value of $3 trillion, according to Morgan Stanley housing analyst Oliver Chang. Yet institutions have long shunned it as too scattered and impractical to be profitable.
Wiel and Brien are using cloud computing, proprietary algorithms and iPads to create a virtual assembly line for buying, renovating and renting houses on a large scale. They're also betting that many former homeowners who have jobs but couldn't afford their mortgages will still want to live in the same communities as renters.

Saturday, April 14, 2012

Tragedy of the Common

Here's something for the Institute for New Economic Thinking to think about;

The city [of Wenatchee, Washington] annually receives complaints from business owners and others who try to navigate the mish-mash of chairs, benches, ropes, chains and other items used to hold seating areas for the two Apple Blossom Festival parades, primarily along Orondo Avenue.
Most years around this time the City Council brings up the subject of possibly regulating the practice. And every year the topic fades quickly after the parade is done. This year, city officials would like to put together a committee of city staff, downtown business owners and festival organizers to make a recommendation on whether to regulate them starting next year.
“It’s been kind of a contentious issue every year,” Councilman Bryan Campbell said, adding that it’s somewhat “nostalgic” to note the arrival of the first chairs each year and it gets earlier and earlier all the time.
But, he said. “It’s not very sightly, and it could be a liability if someone gets hurt.”
Besides, he added, “It gives the wrong message to people coming from out of town ... that you have to be here three months early to get a seat.”
To that, Councilman Mark Kulaas groaned and said, “I really don’t want to touch it.”
He recalled his mother asking him to take picnic benches down to the parade route in the 1970s. He acknowledged that the chairs can hinder people trying to get out of their cars.
“It’s a touchy subject,” he said.
He suggested possibly developing a list of parade chair etiquette.
Maybe they could hire a Nobel laureate to advise them;

Prize motivation: "for her analysis of economic governance, especially the commons"
Field: Economic governance
Contribution: Challenged the conventional wisdom by demonstrating how local property can be successfully managed by local commons without any regulation by central authorities or privatization.

Thursday, April 12, 2012

We insist, start without us

The economics, that is.  The one that just found out that when the price is zero demand outstrips supply;
...sometimes you don't even realize that there's a social revolution going on until you find yourself in the middle of one. That's what's happened to me.

I work for the Institute for New Economic Thinking, a research and education foundation in New York. Each year we hold an international conference that gathers major figures from the global economic community to discuss new ideas for addressing the critical challenges facing society.

Our conference this year starts Thursday in Berlin. Considering the location and timing, our focus naturally is on the financial crisis in Europe.

To incorporate some younger voices into the mix, we decided to invite a few students. So we put out word that we were accepting applications for 25 doctoral candidates from around the world to attend the conference, all expenses paid, and actively participate in our program and panel discussions. We figured that we'd receive from 100 to 150 responses. We got 563.

Obviously, we were caught off-guard by the level of enthusiasm. But in that heaping pile of applications we also could see a budding community of young scholars who don't want to pursue economics as it's traditionally been taught.
But, at least they recognize a freebie when it is offered.

Smart, very smart

Northwestern economist Lynne Kiesling shows that Adam Smith's Theory of Moral Sentiments was way ahead of its time;
Adam Smith asserts that humans have an innate interest in the fortunes of other people and desire for sympathy with others. In Smith’s theory, sympathy is an imperfectly reflected combination of emotion and judgment when one observes someone (the agent) in a particular situation, and imagines being that person in that situation. That imagination produces a degree of interconnectedness among individuals. Recent neuroscience research on mirror neurons provides evidence consistent with Smith’s assertion, suggesting that humans have an innate capability to understand the mental states of others at a neural level. A mirror neuron fires both when an agent acts and when an agent observes that action being performed by another; the name derives from the “mirroring” of the action in the brain of the observer. This neural network and the capabilities arising from it have three points of correspondence with important aspects of the Smithian sympathetic process: an agent’s situation as a stimulus or connection between two similar but separate agents, an external perspective on the actions of others, and an innate imaginative capacity that enables an observer to imagine herself as the agent, in the agent’s situation. Both this sympathetic process and the mirror neuron system predispose individuals toward coordination of the expression of their emotions and of their actions. In Smith’s model this decentralized coordination leads to the emergence of social order, bolstered and reinforced by the emergence and evolution of informal and formal institutions grounded in the sympathetic process. Social order grounded in this sympathetic process relies on a sense of interconnectedness and on shared meanings of actions, and the mirror neuron system predisposes humans toward such interconnection.
But then, Kiesling is a Chicago Cubs fan, so she would believe that.

Don't bike on me

A judge rules that the city of Seattle wasn't wrong to return to the halycon days of the 19th century (rails were originally put down on city streets because it made it easier for the horse to pull the streetcar);

A King County Superior Court judge has dismissed a lawsuit brought by six bicyclists who claimed the South Lake Union streetcar tracks caused them to crash and that the city of Seattle knowingly allowed unsafe conditions.
Judge Harry McCarthy last week agreed with the city that the cyclists hadn't proved the city fell short of any design or engineering standards when it placed the streetcar tracks on the right side of the roadway, where bikes were likely to travel, rather than in the center.
Another part of the lawsuit was dismissed last year when a different judge ruled the city was immune from liability in its decision to build a streetcar and align it in the right-hand lane.
"We never disputed the tracks were a hazard," said Rebecca Boatright, assistant city attorney who handled the case. "The legal question was whether we fell short of any engineering standard in designing a road with a streetcar. The judge concluded we did not."

Wednesday, April 11, 2012

She who fails to learn from history

Ends up writing for Associated Press, apparently.  

Donna Cassata, in a piece on Congressman Alan West's claim that many Democrats are members of the Communist Party USA--His Story is Bunk is agnostic about that--says;
During the Cold War, McCarthy, a Republican senator from Wisconsin, claimed that communists and Soviet spies had burrowed their way into the federal government. He never produced the documentation to back up his claims.
In fact, Senator McCarthy, produced in copious quantities, just such evidence on numerous members of the FDR and Truman Administrations, including John Stewart Service, Lauchlin Currie, Sol Adler, Frank Coe, Phillip Jessup, and numerous others (including supposed martyr, Annie Lee Moss, who even George Clooney had to admit McCarthy had the goods on).

Thanks to the Venona Decrypts, access to Soviet archives after the USSR's implosion, and no longer classified FBI files, there is simply no doubt at all that McCarthy knew exactly what he was talking about.  In 2006, Jung Chang's Mao the Unknown Story even confirmed McCarthy's charges about George C. Marshall's blundering into handing China over to the communists by stopping Chiang Kai Shek from defeating Mao's then rag-tag army in 1945.

It would be difficult to find any American politician in history who was more able to produce evidence to back up his assertions than Joseph McCarthy.  Does the truth matter at AP?

The evil that men do...

...lives on after they retire from Congress, if Peter Wallison is right.  As he argues, under the Dodd-Frank Act we have empowered the Treasury Sec'y to be too big to succeed (from the point of view of the majority of the economic participants, but not from that of politically powerful bankers):
Let’s start with the Financial Stability Oversight Council (FSOC). Ever heard of that? It’s a new agency made up of all the federal financial regulators—the SEC, the CFTC, the Comptroller of the Currency (regulator of national banks), the FDIC (regulator of most state-chartered banks and insurer of all banks), and of course the Federal Reserve (regulator of bank holding companies and soon-to-be regulator of the entire financial system)—to name just a few. 
The chairman of this body is the secretary of the Treasury. Right away, this should raise red flags. The secretary, a top officer of every administration, has now been given authority, through the FSOC, over all the financial regulators. To put this in perspective, before Dodd-Frank, Treasury and White House staffs were forbidden to contact the independent regulatory agencies about policy matters, except under special circumstances, for fear of political interference—or the appearance of political interference—in matters of regulatory policy. Under Dodd-Frank, the council is also exempt from the Federal Advisory Committee Act, so its meetings are not open to the press or public. 
As a practical matter that means, for a financial institution, capturing the Treasury Secretary's sympathies--and the current occupant has admitted he can't even understand his own income tax return--before any of your competitors do unto you what you'll being doing unto them if you get the power first.

Which could be the death sentence, as the FSOC, by designating any financial firm as 'systemically important' (SIFI) effectively turns it over to the government for whatever treatment is deemed necessary, including liquidation.
And, the firm doesn't really have any Fifth Amendment rights against such treatment.  Unless one thinks Star Chambers are such protections;
Nor is the Treasury secretary's power under the Dodd-Frank Act limited to control over SIFIs. Anyfinancial firm is subject to seizure by the secretary if he believes that it is in danger of failure and that its failure will cause financial instability. If the firm objects, it can request a court hearing, but the hearing is secret (it's even a crime to disclose it) and the court has a single day to make a decision. If the court does not act, the secretary can seize the firm and hand it over to the FDIC for liquidation. Needless to say, once that happens, the usefulness of further appeals is vitiated.
Wallison asks; 'Does this sound like America?'  Unfortunately, lately, it sure does.