Thursday, May 31, 2012

Simon sez...

...that James Robinson and Daron Acemoglu's latest book, Why Nations Fail, is a warning against...Jamie Dimon's sitting on the board of the NY Fed;

Jamie Dimon And The Fall Of Nations
Funny that Acemoglu didn't bother to mention Dimon (nor any other banker) when he visited Russ Roberts a short while ago to talk about his book.  His concerns seemed mainly to be about extractive politicians, of the kind found in North Korea, Zimbabwe, and Syria today, and history's tyrannies such as the Spanish conquistadors, and Communist thugs like Stalin and Mao.

One might even be led to believe that Acemoglu thinks things are going pretty well here in the USA, as one of his comparisons is the contrast between the bad outcomes in Mexico and the good ones in Arizona, even though the two are side by side.

But, then when one only has a hammer, everything looks like a nail;
The governance issue of the season is Jamie Dimon’s seat on the board of the Federal Reserve Bank of New York. Mr. Dimon is the chief executive of JPMorgan Chase, currently the largest bank in the United States. This bank is “too big to fail” – meaning that if it were to get into difficulties, substantial financial support would be provided by the Federal Reserve System (and perhaps other parts of government) to prevent it from collapsing.
Which ignores that when actual financial institutions, Bear Stearns and WAMU did fail in 2008, it was the Fed that came hat in hand to Mr. Dimon begging him to intervene.  Which he did.  His reward for that is now to be labeled a pariah for something that might happen (if we have active imaginations);
Since I wrote about this issue here last week, a great deal of support has been expressed for the recommendation that Jamie Dimon should step down from the board of the New York Fed – including by over 32,000 people who signed the petition I drafted. (The petition is addressed to the Board of Governors of the Federal Reserve, as only they have the power to remove a director of a Federal Reserve Bank.
Otherwise known as inciting the mob.

Wednesday, May 30, 2012

More of what one can learn from Wiki

But not from the Columbia Journalism review.  From a GAO report (cited in the Wikipedia article linked to in the previous post) to congressman Edward Markey (D-Mass) in 1988;
In recent years, commercial banks have found ways to overcome some of the Glass-Steagall restrictions and, similarly, nonbanking firms have found ways to undertake some, but not all, banking activities.  ....
Coming to grips with the question of Glass-Steagall repeal represents an opportunity to systematically address changes in legal and regulatory structures that are needed to better reflect the realities of the financial marketplace.
....Over the past several years, some banks have acquired substantially expanded powers.  The expansion of activities has been the result of these banks (1) undertaking activities that were not explicitly prohibited or were sustained as legal by the courts, (2) introducing new products closely resembling securities, and (3) being given new powers by the regulators.  In addition some states have granted significant securities powers to state-chartered banks that are not Federal Reserve members.
...not all banks shared equally the opportunity to become involved.  Adopting ways to avoid the Glass-Steagall restrictions was often expensive, so only a limited number of non-banking firms had been able to enter the banking or thrift industries by establishing separate companies such as the nonbank bank or unitary thrift holding company.  Moreover, the determining factor that has enabled banks and securities firms to expand into each others' activities has been their ability to spot and take advantage of technical exceptions to the generally strict separation of commercial and investment banking activity required under the Glass-Steagall Act.
....As indicated, the Glass-Steagall laws have already been eroded and erosion is likely to continue in the future.
That's over a decade before Gramm, Leach Bliley was passed in to law and signed by Bill Clinton in 1999. 

When Wiki Wins

At the Columbia Journalism Review, Ryan Chittum knows something for sure (or so he thinks);
Sorkin’s Glass-Steagall straw man
Of course its repeal contributed, directly and indirectly, to the financial crisis
By Ryan Chittum
That's a reference to Andrew Ross Sorkin's  takedown of Senate candidate Elizabeth Warren, in which Sorkin actually gets Warren to admit that what she's been claiming about the 1999 Gramm, Leach, Bliley Act is not really true;
When I called Ms. Warren and pressed her about whether she thought the financial crisis or JPMorgan’s losses could have been avoided if Glass-Steagall were in place, she conceded: “The answer is probably ‘No’ to both.”
Chittum apparently is of the school that the best way to deal with things that just ain't so is to talk them to death;
The demise of Glass-Steagall is part and parcel with the Commodity Futures Modernization Act, Gramm-Leach-Bliley, Riegle-Neal, the preemption doctrine, therevolving door, the Christopher Cox-style regulators, the death by a thousand cuts, and all the laws that were needed but never passed to update the regulatory system over the last three or four decades, like, say, changes to the tax code to eliminate the perverse tax incentives that favor loading up with debt over building equity.
We love that, all the laws that were needed but never passed.  Yes, that does pretty much insulate one from whatever one says.

Putting aside that, according to Ms. Warren, the demise of Glass-Steagall and Gramm-Leach-Bliley are the same thing, it is interesting that the editor of the business blog, The Audit,  appears to be far less informed than anyone who has bothered to read the Wikipedia article on Glass-Steagall. 

And Wiki, comes with voluminous footnotes!  One of which cites Princeton economist Alan Blinder;
First, a personal confession: When I was Vice Chairman of the Federal Reserve Board, I was always lukewarm toward repeal of Glass-Steagall. I supported the Board’s pro-repeal position for two main reasons: because markets had torn huge holes in the alleged walls anyway, and because the government should not ban activities unless it has good reasons to do so (which I did not see in this case). 
 That said, I think the GrammLeach-Bliley (GLB) Act of 1999 has gotten a bad rap in this episode. I have often posed the following question to critics who claim that repealing GlassSteagall was a major cause of the financial crisis: What bad practices would have been prevented if Glass-Steagall was still on the books? I’ve yet to hear a good answer.
Mortgage underwriting standards were disgraceful, but they were promulgated by banks and mortgage finance companies and did not rely on any new GLB powers. The dodgy MBS were put together and marketed mainly by free-standing investment banks, not by newly-created banking-securities conglomerates. All five of the giant investment banks (Goldman, Merrill, Morgan Stanley, Lehman, and Bear) got themselves into severe trouble without help from banking subsidiaries,and their problems certainly did not stem from conventional investment banking activities (the target of Glass-Steagall). 
Similarly, Wachovia and Washington Mutual died (and Bank of America and Citigroup nearly did) of banking diseases, not from entanglements with or losses imposed on them by related investment banks. In short, I don’t see how this crisis would have been any milder if GLB had never passed. 
Well, we're sure that once Blinder hears from Mr. Chittum, he'll see the light. 

Tuesday, May 29, 2012

Where the network effects

A little more from the Time article makes clear how important being connected is, for those in the business of politics;

  1. ...the diversity of the Washington [DC] economy is an illusion, for each of its business sectors is to some degree a creature of the region’s single great industry—the federal government. According to a 2007 report by the Tax Foundation, for every dollar in taxes Washington sends to the federal government, it receives five in return. Fuller says that over the past 30 years, the federal government has spent $860 billion in the D.C. region, two-thirds of that since 9/11.
  3. Why the boom? The size of the nonmilitary, nonpostal federal workforce has stayed relatively stable since the 1960s. What has changed is not the government payroll but the number of government contractors. It’s estimated that, thanks to massive outsourcing over the past 20 years by the Clinton and Bush administrations, there are two government contractors for every worker directly employed by the government. Federal contracting is the region’s great growth industry. A government contractor can even hire contractors for help in getting more government contracts. You could call those guys ­government-contract contractors.
  5. Which means government hasn’t shrunk; it’s just changed clothes (and pretty nice clothes they are). The contractors are famous for secrecy; many have job titles that are designed to bewilder. What is it, after all, that an analyst, a facilitator, a consultant, an adviser, a strategist actually does to earn his or her paycheck? Champions of the capital’s Shangri-la economy like to brag of ­Washington’s knowledge workers.

You say you want network effects?

In their 2010 paper How the Lock-In Movement Went off the Tracks, Steve Margolis and Stan Liebowitz had a prescient warning;
...for those still seeking harmful lock-in, we offer this. You‘ve been looking in the wrong places. You‘ve been looking at markets. Look elsewhere. Look where competition is not particularly effective, where there is no possibility of bankruptcy, where there are no investors who can pull the plug on losing battles. Look where the rewards for successful innovation are unspectacular or nonexistent. Look where concentrated interests face off against unconcentrated counterparts. Look at government. Cultivate that garden.
Thanks to Time Magazine we don't have to look very far;

  1. “God save the district.” The sentiment is easy to understand, for these are good times in Washington and the seven counties that surround it. Even as the nation struggles, the capital has prospered, making it a magnet for young hipsters but leaving its residents with only a tentative understanding of how the rest of the country lives. “It’s nice,” goes the old joke about Miami, “because it’s so close to the United States.” Well, Washington is very nice these days.

    Every week brings fresh evidence of continuing prosperity: a new restaurant, a new nightclub, another restored 19th century townhouse in a previously dodgy neighborhood selling for $1 million or more. Start-ups are hiring through Craigs­list, and just opened lobbying firms have no trouble collaring clients. Storefronts that stood abandoned five years ago fill with pricey gourmet-food shops like Cowgirl Creamery, a cheese­monger that has opened its only store outside Northern California on F Street downtown. Its Mt. Tam cheese goes for more than $25 per pound. It’s organic.

Saturday, May 26, 2012

The Trill of it all

Finance and the Good Society author, Robert Shiller (click on the 'Watch this Program' icon at the right) has an idea whose time may have already come.  A new security tied to the growth of nominal gross domestic product (NGDP), called The Trill (for a trillionth of NGDP).

Essentially an equity in NGDP, it allows investors to share not only in corporate profits, but non-corporate business and labor productivity too;
Standard financial analysis suggests that Trills would provide the issuer, the U.S. government , with a budget-stabilizing, moderate cost debt instrument, and  investors with an asset that cannot be replicated with existing assets, allowing investors new portfolio diversification strategies that preserve high returns and lower volatility. Indeed the current financial crisis can be, at least in part, tied back to a shortage of counterparty-risk-free assets and fund manager’s thirst for high yield investments. The existence of a large float of Trills issued by the U.S. government could help ensure that this coincidence of factors is unlikely to ever appear again. The issuer and the investors in Trills would both stand to gain from Trills, another case of win-win through financial innovation and diversification. 
It would also be an answer to the unfunded liabilities of Social Security along the lines of a suggestion the late Milton Friedman made for replacing that program with government bonds given to current participants for their past Social Security taxes paid in.

Better still, it's practically a done deal;
There is a possibility that trills could be privately issued. Index-linked bonds, called MacroShares, have been issued under the auspices of the US company MacroMarkets LLC that could be a model for the private issuance of GDP-linked securities. The securities, whose structure is patented in the United States, are issued by a special entity whose charter dictates that it does nothing else, and invests their underlying assets according to specific rules. The rules state that shares are automatically issued and redeemed upon public demand in creation units only in pairs, one long the index, the other short the index, and the assets underlying the shares are invested in U.S. Treasury bills, so that the issuer cannot fail to index effectively. The long and short securities, when issued, trade separately on a stock exchange. MacroShares indexed to the S&P/Case-Shiller 10-City Home Price Index, with the ticker symbols UMM and DMM, are now traded on the New York Stock Exchange Arca. Such a structure could be applied to the issuance of trills in the United States, by substituting U.S. GDP for real estate price in the structure

Friday, May 25, 2012

Eddie the Educator

That's Conard, Edward Conard who has been ubiquitous on cable television talk shows promoting his new book, Unintended Consequences.

Arnold Kling now points to an interview Conard has done with Nick Schulz, in which there is more straight talk than has been heard since Danny DeVito laid out the facts of business life to the shareholders of New England Wire and Cable.  A small sample;
It is near impossible to predict which sectors will grow and decline. If we knew that, we would all be rich! And we wouldn’t need to pay successful entrepreneurs to take the risk necessary to find new growth opportunities for us. Instead, the economy must run millions of experiments. These business experiments compete fiercely with each other for customers and capital. Competition prunes away all but the most valuable—by my estimate, companies that probably produce 20 times more value for customers than the cost of their products. Before the fact, entrepreneurs face near certain failure. After the fact, they only earn a dollar more than the next-best alternative—a small and uncertain share of the value they create for us. If there is a better way to find growth, no one has found it.
Amen. Amen. Amen.

Shout! Shout out his name!

Dimon!  Dimon! Enemy of the People!

His two minutes of infamy are not up yet.

Thursday, May 24, 2012

Somebody get a rope

The lynch mob is forming at the MIT Corral, with the usual yahoos yahooing the loudest;
If we had an independent and functioning justice system, I think people like Mr. Dimon would have been indicted and convicted long ago.
For being America's most capable banker, who kept his bank from the worst of the sub-prime mortgage debacle?  For having a risk-management team that caught the corporate bond hedge traders from doing any significant damage to JP Morgan-Chase shareholders?  For not being even a remote threat of a drain on FDIC insurance funds?

California est omnis divisa in partes tres

We don't profess to know who Bill Whalen is, but clearly, a man who could quit his day job and make it as a joke writer for Jay Leno;
Amidst a typically gentle yet breezy twilight in the San Francisco Bay area, President Obama did something also typical for this moneyed region: he held a pair of fundraisers, with scant attention paid to the Golden State’s ailing economy – an economy Mitt Romney sees asa scourge of the nation.
Think of it as a modern-day Caesar visiting a conquered land. Only, the goal is to collect a multitude of healthy tributes – with no promises of new roads or aqueducts.
Veni, vidi . . . we take Visa.

Wednesday, May 23, 2012


Or so Paul David and Brian Arthur might think after the results of this experiment in Hong Kong become better known.  The researchers are Tanjim Hossain and John Morgan, who set out to test the QWERTY theory; that an inferior product or technology can lock out a superior one due to network effects.

It's has been known for over 20 years that the story of the supposed inferiority of the standard typewriter keyboard has absolutely no basis in fact (history does matter), and no other examples have been demonstrated to be valid either, thanks to intrepid UCLA PhDs Stan Liebowitz and Steve Margolis.  Now we can add that there isn't any controlled laboratory experiment supporting it either.

Hossain and Morgan report on their 'platform competitions';

When pooled, [experimental] sessions 1–4 constitute 60 iterations of dynamic platform competition. In every instance, the market tipped to a single platform, but in none of these instances was that platform the inferior one. This was true despite giving the inferior platform an initial monopoly advantage that persisted with a full 33 percent of the lifespan of the market. It was true regardless of whether the inferior platform had the higher or lower access fee. It was also true when the inferior platform enjoyed the possibility of a novelty effect from being introduced later. In short, the quest for QWERTY in the lab proved utterly fruitless.
It’s been almost 25 years since the economics of QWERTY first appeared in the American Economic Review. The intellectual impact of David’s observation is undeniable. His seminal article has been cited over 788 times. The risk of QWERTY-type outcomes in platform competition is now accepted as conventional wisdom rather than something counterintuitive. While the QWERTY effect is certainly an interesting theoretical possibility, the dearth of examples of the phenomenon, both in the field and now in the lab, leads us to conclude that the danger lies more in the minds of theorists than in the reality of the marketplace.
Yes, you've read that correctly, one of the most cited journal articles in economics is almost certainly full of it.  Bunk.

One more nail for the coffin

Barry Eichengreen and company should make Stan Liebowitz and Steve Margolis smile (but not Paul David and Brian Arthur) with this take down of  'lock-in' for international currencies;

First, while network externalities, first-mover advantages and inertia matter, they do not lock in international currency status to the extent previously thought. Abstracting from the Commonwealth countries, whose allegiance to sterling was special, we show that the dollar overtook sterling already in 1929, at least 15 years prior to the date cited in previous accounts (see Figure 1).
And even when the Commonwealth countries are included, we find that the dollar was already within hailing distance of sterling as a currency of denomination for international bonds by the late 1920s.
Second, our evidence challenges the presumption that monetary leadership once lost is gone forever. Although sterling lost its leadership in the 1920s, it recovered after 1933 and was again running neck and neck with the dollar at the end of the decade.
Third, our findings challenge the presumption that there is room for only one dominant international currency due to strong network externalities and economies of scope. This is true even if one takes into account the Commonwealth countries, which were heavily oriented towards sterling for institutional and political reasons.
History may matter, but markets definitely do.

They also serve

Who only stand and punch;

A Washington state man fed up with a group of noisy moviegoers behind him stepped over the seat and punched a 10-year-old boy in the face.
The man, who told police he thought the person he hit was a grown man, was watching "Titanic" in 3-D with his girlfriend and had asked the people sitting behind to quiet down and stop throwing popcorn, but they laughed at him, he said.
"I got so mad that it just happened," Yong Hyun Kim, 21, told police who arrested him the night of April 11 at the AMC Kent Station 14, in Kent, a south Seattle suburb.
In an interesting bit of juxtaposition the same newspaper, says, They shoot tigers don't they, why not the tiger poachers;

But the threat could act as a significant deterrent to wildlife criminals, conservationists said. A similar measure allowing guards to fire on poachers in Assam has helped the northeast state's population of endangered one-horned rhinos recover.
"These poachers have lost all fear. They just go in and poach what they want because they know the risks are low," said Divyabhanusinh Chavda, who heads the World Wildlife Fund in India and is a key member of the National Wildlife Board, which advises the prime minister.

Pot, Kettle, Black Award winner

Client #9 is shocked!  Shocked, to find bad judgment in a human being;
True, in the context of Chase’s balance sheet, a $2 billion loss can be absorbed. But it shows once again the impossibility of trusting the banks in the absence of structural reform and regulation to control their willingness to take almost unmitigated risk.
It almost is irrelevant that Jamie Dimon's bank was engaged in hedging (mitigating) risk with the trades in question (and that JPMC's risk managment system did catch that risk before any real damage was done to the bank), when measured against the truly unmitigated risk of New York state's chief executive in dallying with prostitutes.

Though it has to be admitted, when it comes to resigning in disgrace, there's almost no one better positioned to comment.

Tuesday, May 22, 2012

Monetary policy is like wine with dinner

Says Bloomberg's Kathleen Hays; when you've had too much it's too late to take it back.  That observation is made (back in 2011) to Carnegie Mellon's Marvin Goodfriend after he lays out the three degrees of inflation path dependence and how they are all dangerous;

1.  Willingness to risk higher inflation to stimulate employment
2.  Tolerance of higher inflation to increase employment
3.  Actually targeting higher inflation for the same purpose

Dangerous, he says, because we learned from the high inflation 1970s that that is the route to higher unemployment too.  That economists have no good idea how to lower  the unemployment rate safely.  He thinks it too easy to overdo the cure.

Then he is joined on the podcast by Columbia's Charlie Calomiris and Boston College's Peter Ireland.  Calomiris first speaks of the institutional weakness of the Fed never talking about medium to long term inflation, which is what they can control, instead most of the talk is about short term results which they can't.

Ireland's contribution is an analogy about contracting to have your lawn mowed by one young man only to have his younger brother show up to do the actual job.  Designed to show that monetary and fiscal policy aren't so neatly separated as textbooks teach.

At about 18 minutes in, the 800 lb gorilla appears in the Japanese garden; nominal GDP targeting as the focus of monetary policy.  Calomiris is for it, but cautiously. He thinks it better than the 'fairly complicated' Taylor (interest rate) Rule for offering stable, long term growth.

Where Calomiris seems to differ with Market Monetarists (like Scott Sumner) is about 'level targeting'.  Calomiris being a let bygones be bygones macro economist who thinks we can't return to the previous path, but can find our way from where we are now (at least in 2011), via NGDP targeting.

The Mouse That Roared

In 2007, we noted the passing of one of the giants of the culture, and apologized for not getting up.  Today the other shoe drops;

Chicago native [Eugene] Polley and fellow Zenith engineer Robert Adler were honored in 1997 with an Emmy for their work in pioneering TV remotes. In 2009, he received the Masaru Ibuka Consumer Electronics Award from the Institute of Electronic and Electrical Engineers.
Beyond keeping TV viewers pinned to their chairs, Polley's invention unchained technology from mechanical knobs and levers, opening vast possibilities, said Richard Doherty, CEO of suburban New York-based technology assessment and market research company Envisioneering.
"Without his idea you might not have gotten to the Internet," Doherty said. "It allowed you to go beyond the physical dial. It set the pace for dozens for follow-on inventions that go beyond the physical."

Next; a Ronald Coase bio-pic?

George Lucas would be the perfect film maker for a project about the man who won a Nobel prize in economics for telling us that a world without transaction costs can't exist;

His proposal has pitted neighbor against neighbor, who, after failed peacemaking efforts over local artisanal cheese and wine, traded accusations in the local newspaper.
The staunchest opponents of Lucasfilm’s expansion are now being accused of driving away the filmmaker and opening the door to a low-income housing development. That has created an atmosphere that one opponent, who asked not to be identified, saying she feared for her safety, described as “sheer terror” and likened to “Syria.”
Carl Fricke, a board member of the Lucas Valley Estates Homeowners Association, which represents houses nearest to the Lucas property, said: “We got letters saying, ‘You guys are going to get what you deserve. You’re going to bring drug dealers, all this crime and lowlife in here.’ ”

Milton Friedman smiles

Validation of his famous dictum that the two greatest opponents of free enterprise are intellectuals--who want freedom for themselves, but not for others--and businessmen--who want competition for others, but not for themselves.  The latter prefer something like this, in the state of Washington where the government is now out of the liquor business, thanks to the voters;
[Grocery chain] QFC is enforcing contracts at some of its locations that prohibit private liquor stores from operating in the same shopping centers, according to real-estate brokers involved in two local deals, one in Issaquah and the other in Kirkland.
The restrictions, which are legal, are causing some people to scramble for new locations after they won rights in an auction to operate one of the state's 167 existing liquor stores.
"Big-box stores funded the initiative for privatization and a free market, but they want to monopolize the situation," said Jeffrey Roh, a Kirkland orthopedic surgeon who won the right to sell spirits at three of the state's current locations. "They don't even want to let small businesses compete against them in this free market."
QFC spokesman Ken Banks declined to comment.
Roh does not have leases on any of the three locations he won and is losing hope. His broker tells him QFC is preventing one of the leases, and he suspects the grocery chain is holding up a second.
It's not clear whether other grocers have similar contracts that could exclude competition.

Monday, May 21, 2012

She had us at, 'Ciao'

Always open to economist's models, we are.

No one goes there anymore

Apparently because it's no longer lonely at the top;

Three climbers died and two others were missing while descending from the summit of Mount Everest - a toll that raised concerns about overcrowding in the "death zone" at the top of the world's tallest peak.
The deadly weekend unfolded as an estimated 150 climbers tried to reach the top Friday and Saturday as they rushed to use a brief window of good weather in an otherwise troubled climbing season. Many had been waiting at a staging camp for several days for their chance to head to the summit.

Thou shall bear false witness

The standards for scholarly discourse at MIT are verrrry troubling if this from Simon Johnson is any indication;
At the end of last week, Treasury Secretary Tim Geithner called for Mr. Dimon to step down from the board of the New York Fed. 
Actually, Mr. Geithner did no such thing.  He was asked three questions on the Lehrer NewsHour, which are worth reading in their entirety;
JEFFREY BROWN: Elizabeth Warren, who helped set up the Consumer Protection Agency for the administration, now running for the Senate in Massachusetts - she said that Jamie Dimon, head of JPMorgan, should not be sitting on the board of the New York Fed, that that just - it isn't right, because they help regulate those banks.]
TIMOTHY GEITHNER: That's not a new observation, not a new concern. It's been made by many people over the last several years.
JEFFREY BROWN: Do you think it's right?
TIMOTHY GEITHNER: I think it is true. And I think it's a problem that that - the structure of the Fed, established 90 years ago, and it's true for Federal Reserve banks across the country, creates that basic perception. And I think that's something worth trying to change. But the American people should understand that although the Fed was set up that way, those banks and the members of the board play no role in supervision. They have no role in the writing of the rules, and they play no role in decisions the Fed makes about how to respond to a financial crisis. Their role is a much more limited role, and the role is to help provide a perspective on what's happening in the economy as a whole. But I agree with you that the, that perception is a problem. And it's worth trying to figure out how to fix that.
JEFFREY BROWN: Do you think Jamie Dimon should be off the board?
TIMOTHY GEITHNER: Well, that's a question he'll have to make and the Fed will have to make. But again, on the basic point, which is it is very important, particularly given the damage caused by the crisis, that our system of oversight and safeguards and the enforcement authorities have not just the resources they need, but they are perceived to be above any political influence and have the independence and the ability to make sure these reforms are tough and effective so we protect the American people, again, from a crisis like this. And we're going to, we're going to do that. 
So, invited three times to ask Mr. Dimon to resign from the board, Geithner declines to take the bait.  Yet, Simon Johnson (checking his secret decoder ring?) tells us;
Mr. Geithner spoke in the usual Treasury Department diplomatic code – he suggested there is a “perception” problem that must be addressed.  To officials, this is as clear a statement as is needed.  As chairman of the Financial Stability Oversight Council, Mr. Geithner is ultimately responsible for the health of the financial system and its systemically important components.  He is telling Mr. Dimon to go.
Or is English not Simon Johnson's native tongue?

Sunday, May 20, 2012

Simon, meet Bob

Shiller, who is stirred, not shaken by finance...and the good life.  Clearly not a man to make the perfect the enemy of the good.  Especially when the good, in modern capitalist societies, is very good indeed.

Saturday, May 19, 2012

And don't forget to bring Elke Sommer

Calling Inspector Clouseau;
JPMorgan Chase is too big to fail. As the largest bank-holding company in the United States, with assets approaching $2.5 trillion as reported under standard American accounting principles, it is inconceivable that JPMorgan Chase would be allowed to collapse now or in the near future. The damage to the American economy and to the world would be too great.
The company’s recent trading losses therefore call for greater public scrutiny than would be case for most private enterprise – and demand an independent investigation into exactly what happened.
The loss is a mere $3 billion, and only on paper at this point.  Perhaps if we are going to go to the expense of 'an independent investigation' we should start on something a little less ambitious; Is it possible for a $3 billion loss to bring down a firm with $2.5 TRILLION in assets?

An e-mail from a friend recently reminded us of Richard Feynman's famous Cargo Cult Science speech in which he explains what is good science;
It's a kind of scientific integrity, a principle of scientific thought that corresponds to a kind of utter honesty--a kind of leaning over backwards. For example, if you're doing an experiment, you should report everything that you think might make it invalid--not only what you think is right about it: other causes that could possibly explain your results; and things you thought of that you've eliminated by some other experiment, and how they worked--to make sure the other fellow can tell they have been eliminated.
Details that could throw doubt on your interpretation must be given, if you know them. You must do the best you can--if you know anything at all wrong, or possibly wrong--to explain it. If you make a theory, for example, and advertise it, or put it out, then you must also put down all the facts that disagree with it, as well as those that agree with it. There is also a more subtle problem.
When you have put a lot of ideas together to make an elaborate theory, you want to make sure, when explaining what it fits, that those things it fits are not just the things that gave you the idea for the theory; but that the finished theory makes something else come out right, in addition.
In summary, the idea is to try to give all of the information to help others to judge the value of your contribution; not just the information that leads to judgment in one particular direction or another.
Not likely to be the case in the kind of investigation being called for by someone who also thinks:
In the end, we may well come to the same conclusion as Elizabeth Warren – who has brilliantly seized the political moment and put her opponent for the Massachusetts senate seat, the Republican incumbent Scott Brown, on the defensive.
Ms. Warren is calling for the re-imposition of Glass-Steagall – separating commercial from investment banking. Mr. Fine is already pushing in the same direction. This position should be appealing across the political spectrum. 
Let's have a scientific investigation of whether or not Glass-Steagall has ever been repealed.

Mirror, mirror, on the wall...

If everyone was as reasonable as Paul;
I don’t regard anyone who disagrees with me as necessarily a mendacious idiot.
Just most people.
...all too many players in this game, very much including economists and public officials, very obviously haven’t been making that good faith effort. They’ve seized on dubious arguments, touted obviously weak evidence as definitive, looked for excuses either not to act themselves or for their friends not to act. And invariably the thrust of these bad arguments is to comfort the comfortable and give them license to afflict the afflicted. 
....I like to think that I have enough integrity to change my views when it becomes clear that they were wrong. 
Such as, oh, picking at random;
...regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income. 
Oh, it would be nice to be able to display Krugman's finessing of the above in his blog, but that is behind the Times pay wall.  Needless to say, he didn't admit to being in outright error.  I.e. had enough integrity to admit that the two FMs were holding between $1 and $2 TRILLION in subprime (or other dodgy) mortgages that they were supposedly prohibited by law from holding.

Friday, May 18, 2012

If you prick me...

Or, if you're just adamant about being one'
Keep in mind that Mr. Dimon himself decided to transform the relevant part of JP Morgan Chase into a risk-taking operation – and it is the people he chose and the systems he put in place that have now blown up.
JP Morgan Chase is, by its very nature, a risk-taking operation.  All business ventures are, certainly all banks are.  Banks can't simply take in depositors money, put it into vaults and wait for them to ask for it back.  That would be a sure road to bankruptcy, as they would have no revenues to pay their rents, phone and electric bills, and their employees.  Nor would any investor put any money into such a bank.

Somehow banks have to put those funds at risk--it's only a question of which risks--and no bank has a better track record of prudence and profitability than Jamie Dimon's firm.  Which might be why Tim Geithner and Hank Paulson came to Dimon in March of 2008--not the other way around--when there was a major problem with Bear Stearns.

Now, the problem has become political, and people like Simon Johnson are pouring gasoline onto it.  As Jason Rosiak seems to recognize in this Bloomberg video.  If the result of the anti-JPMC hysteria results in more draconian regulation (via a stricter application of the Volcker rule) the markets will have less liquidity and more volatility.  Who is better off if that happens?

Thursday, May 17, 2012

Karl Rove's Brain

Curses!  Foiled again.  At least it took an MIT economist's blog post to out me;
I’ve done some extensive digging on Patrick R. Sullivan on the Internet – and it turns out he is a GOP operative that has been active in the blogosphere since 2004, and might be employed by American Crossroads (a GOP Super PAC). Here is the whale of them all: Patrick R. Sullivan is possibly directly affiliated with, or might even be, Karl Rove. Wow! Who would have thought someone like that would be trolling
Ever heard of Gitmo, guy?

Play Misty for Me

Rank may have its privileges, but ring side seats for Olympic beach volleyball won't be one of them;

Tanned and toned athletes in eye-popping outfits will compete for Olympic medals outside the British prime minister's famous Downing Street home, but it's government workers, not the U.K. leader, who will get the VIP view.
Who doesn't want to see beach volleyball, which is bringing sand, bikinis and gold medals to the heart of London?
Competitors known for their skimpy shorts and bikinis will battle it out in Horse Guards Parade, a storied square in Britain's capital better known for hosting a lavish annual military parade featuring hundreds of troops in scarlet jackets and bearskin hats.
The parade ground is flanked by the Downing Street residences of both Prime Minister David Cameron and Treasury chief George Osborne, and Admiralty House, the office of Britain's Deputy Prime Minister Nick Clegg. Yet a temporary arena to seat 15,000 spectators will obscure most views from their departments.

I went to Harvard so I must be smart

Though if you sleep through the econ and finance classes, maybe not so much;

When he graduated from the Harvard Business School three years ago this month, the economy was a wreck. Nearly one in four of his classmates didn't have a job at graduation in May 2009. Yet, Joe Mihalic, then 26, was able to land a job with Dell (DELL) in Austin, Texas, at twice as much as the $52,000 a year he made before earning his MBA.
But there was some overhang from his experience in Boston: roughly $101,000 in loans that he had to borrow to get the degree....
He borrowed $101,000 to land a job that pays $104,000 per year to start. So just what rate of return is that?

Ignoring the opportunity costs of the years out of the work force, it's about 50% per year--he doubled his salary--for however long he stays employed.  We should all complain about such a bonanza.

Obviously that return is complicated by the interest rate he was obligated to pay on the loans, and by the pay raises he'd be in line for as he accumulated more knowledge and became more valuable to an employer (though that may be a dubious supposition in his case when we assess his skills as a logician);

But what allows Mihalic to maintain this entertaining and often addictive narrative of what he calls "the walk to debt freedom" was his extreme goal. The challenge resulted in sacrifices that few of his classmates could ever endure. He gave up all dinner dates and didn't go to a single movie. He stopped contributing to his 401k plan, decided against going home for Christmas, and missed his friends' parties and weddings. When he went to bars with friends, he carried a flask with booze to mix with his purchased Coke (KO). He shared a NetFlix (NFLX) account and refused to buy a single article of clothing.
To earn extra money, he sold his second car and a motorcycle, rented his spare bedrooms to strangers through Craiglist, and started a side business doing landscaping work. Quickly, he chipped away at his debt. To start, he liquidated his IRA account for $8,000, sold stock worth $14,000, and used about $3,000 of available cash to wipe out one loan.
He liquidated his IRA!  He gave up the tax free income within it, plus paid a penalty of 10% for the privilege.  At least he's learning a valuable skill--landscaping--that he just might have to fall back on. 

Got yer Mo Do workin'

Proving that math class is hard, the NY Times perennial junior high gal shows she's one of the in crowd;
New York City's chief audit officer is urging [JP Morgan Chase CEO Jamie] Dimon to "claw back" salary and bonuses paid to the top executives who dragged the bank into the excessive risk. That would be a first for Wall Street. Dimon says he is "likely" to do it, but is loathe to "act like a judge and jury" with Ina Drew, the head of the investment office who resigned on Monday, given that she lost $2 billion on that deal while she was making $9 billion on others.
Uh huh, people who produce a net $7 billion for you should have their bonuses 'clawed back', because....

The perfect should always be the enemy of the good, that's the best way to incentive-ize your work force?

Wednesday, May 16, 2012

Et tu, WSJ?

Apparently short of fact checkers, the Wall Street Journal turns to an elderly Texas banker for yet another iteration of Glass-Steagall, We Hardly Knew Ye;

We need a real and impregnable firewall that keeps one part of the banking system—and the economy—from being consumed when the other goes into flames.
The combination of both banking cultures in a single institution—which had been separated for decades by the Glass-Steagall Act of 1933 until the 1990s—brought us to the doorstep of global financial-system collapse a few years ago. If the nation stays on its current path, we could see another crisis.
We are approaching a state of affairs in which an oligopoly of a few major institutions dominates our entire banking system. There's little evidence those institutions will share the concerns and dedication of my Uncle Joe—and many like-minded bankers in his time and since. If we truly separate the cultures of commercial and investment banking, the clients of both will prosper.
Sisyphus didn't suffer this much.

Thinking Man's Robber Baron

That would be former Bain Capital-ist Edward Conard, busily promoting his new book, Unintended Consequences.  Something Steve Leavitt didn't consider about Roe  v. Wade; it helped cement a coalition between social conservatives and libertarian economists (and other pro-tax cutters);
Richard Nixon was the last Republican president before voters contested Roe. Without the 15 percent bloc of evangelical Christian voters in his back pocket, he had to accept a 70 percent marginal tax rate to capture 51 percent of the vote. Even then, he only won the election because of the unpopularity of the Vietnam War. Dwight Eisenhower only won by accepting a 90 percent marginal tax rate. Bill Clinton was the first Democratic president to win office after voters contested Roe. With only 85 percent of the vote available to him, and with 40 percent of that vote backing tax reduction, Clinton could only support marginal tax rates as high as 39 percent and still capture 51 percent of the vote. With this 15 percent bloc of evangelical Christian voters in his pocket, Reagan was able to lower marginal rates to 29 percent and still capture the election.

Yeah, yeah, that's the ticket

This young man should not be running around with his tongue firmly planted in his cheek, he might hurt someone (like Paul Krugman);
Josh Strodtbeck ·  Top Commenter · University of KentuckyI don't understand why government regulators don't just figure out which investments will make money, then tell investors to invest in them, while forbidding them to invest in things that will lose money. It's so simple, I'm surprised no one's thought of it yet.

I've got a notion to...

The newest Scary Movie has a plot something like;

Bank of America’s holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives....
Notional, as in made-up by counting the same reference number 10 or 20 times over.  That JP Morgan Chase's balance sheet shows only about $2 trillion in assets ought to be a clue that there's something fishy about 'notional value'.

Which there is, as this piece makes clear, Take note of;

Summary of the U.S. Derivatives Market
  • U.S. commercial banks currently hold a notional value of $244 trillion in derivatives.
  • Trading exposure, which is measured by VaR (Value at Risk), is $677 million.
  • Net Current Credit Exposure of commercial banks to derivatives is $353 billion, due to bilateral netting.
 A little grade school math should be all that is needed to show that the actual exposures of U.S. banks is but a tiny fraction of the notional amount.  But, $353 billion isn't very scary, and $677 million even less so.