Saturday, June 30, 2012

Except that time you stabbed me

'That', said Penelope to Javier.

Which is brought to mind by this claim by Berkeley's J. Bradford DeLong, former Deputy Asst. Treasury Secy;
I worked for the Clinton administration. Throughout the entire 8 years of the Clinton administration--without a single Republican vote to help us when the heavy lifting needed to be done--we reduced the share of federal government spending as a share of potential GDP from 22.2% to 19.3%--by 0.3625%/year.
Anyone remember the congressional elections of 1994?  Throughout the final six years of the Clinton Administration both legislative houses were in the hands of the Republicans.

Without Republican votes nothing could be accomplished back then.  Say, Welfare Reform in 1996.  Not to mention the shutdown of the federal government in late 1995 because Bill Clinton vetoed the Republican passed budget.

Clinton objected to that budget because it didn't spend enough money on programs such as Medicare, and moved the government toward a balanced budget by 2002 (too soon for DeLong's hero).

Friday, June 29, 2012

Yo Mama said there'd be days like this

That Girl warned us to be wary of the guy, when he was nominated;
...we don't know much about John Roberts. Stealth nominees have never turned out to be a pleasant surprise for conservatives. Never. Not ever. 
Since the announcement, court-watchers have been like the old Kremlinologists from Soviet days looking for clues as to what kind of justice Roberts will be. Will he let us vote? 
Does he live in a small, rough-hewn cabin in the woods of New Hampshire and avoid "womenfolk"? 
Does he trust democracy? Or will he make all the important decisions for us and call them "constitutional rights"? 
....Apparently, Roberts decided early on that he wanted to be on the Supreme Court and that the way to do that was not to express a personal opinion on anything to anybody ever. It's as if he is from some space alien sleeper cell. Maybe the space aliens are trying to help us, but I wish we knew that. 

Thursday, June 28, 2012

Great minds...

Berkeley's J. Bradford DeLong has noticed too;


To breathe, or not to breathe

That is the question, say the Supremes dissenters;

Whatever may be the conceptual limits upon the Commerce Clause and upon the power to tax and spend, they cannot be such as will enable the Federal Government to regulate all private conduct and to compel the States to function as administrators of federal programs.
That clear principle carries the day here.  The striking case of  Wickard v.  Filburn, 317 U. S. 111 (1942), which held that the economic activity of growing wheat, even for one’s own consumption, affected commerce sufficiently that it could be regulated, always has been regarded as the ne plus ultra of expansive Commerce Clause jurisprudence. To go beyond that, and to say the  failure to grow wheat (which is  not  an economic activity, or any activity at all) nonetheless affects commerce and therefore can be federally regulated, is to make mere breathing in and out the basis for federal prescription and to extend federal power to virtually all human activity.
But, what's with that, 'That clear principle carries the day here.'?  Because it clearly didn't carry the day.  The ACA was mostly upheld.

Also, why did the dissenters go on about the severability [V] of the minor provisions from the major;

The two pillars of the Act are the Individual Mandate and the expansion of coverage under Medicaid.  In our view, both these central provisions of the Act—the Individual Mandate and Medicaid Expansion—are invalid. 
It follows, as some of the parties urge, that all other provisions of the Act must fall as well. The following section explains the severability principles that require this conclusion.
If the Individual Mandate didn't fall, why talk about why, 'all other provisions' related to it must also fall?  Why the specificity here;

The Act was passed to enable affordable, “near-universal”health insurance coverage.  .... 
The resulting, complex statute consists of mandates and other requirements; comprehensive regulation and penalties; some undoubted taxes; and increases in some governmental expenditures, decreases in others.  Under the severability test set out above, it must be determined if those provisions function in a coherent way and as Congress would have intended, even when the major provisions establishing the Individual Mandate and Medicaid Expansion are themselves invalid.
'Themselves' ?  That sounds like something the majority would say, not dissenters.

Curious.  Very curious.

Now you don't see it

Cadabra Abra, says Chief Justice John Roberts, now you don't see the tax;
(a) The Affordable Care Act describes the “[s]hared responsibilitypayment” as a “penalty,” not a “tax.”  That label is fatal to the application of the Anti-Injunction Act.  
Which seems clear, but, on the other hand, you do see it;
It does not, however, control whether an exaction is within Congress’s power to tax.  In answering that constitutional question, this Court follows a functional approach, “[d]isregarding the designation of  the exaction, and viewing its substance and application.”  United States v. Constantine, 296 U. S. 287, 294.  Pp. 33–35. 
(b) Such an analysis suggests that the shared responsibilitypayment may for constitutional purposes be considered a tax.   
 We're from the government...and we are here to do whatever we want.

Wednesday, June 27, 2012

Having fought the last war

What will the Eurocrats do for an encore;
A European court on Wednesday upheld most of a massive fine levied against Microsoft by the European Commission's competition watchdog, closing a case against the software giant that began in 1998.
Ah, 1998...we remember it well.  Microsoft was an impregnable monopoly, immune to competition.  All progress would grind to a halt unless politicians protected us from Internet Explorer.

Tom Hazlett remembers too;

There is no guarantee that this enhanced vertical integration will improve products, or that Apple's rival platform will continue to print money. All business structures are a mix; there are no pure strategies. "Closed" Apple relies on thousands of suppliers; iTunes sells the artistic works of a diverse marketplace. The App Store thrives on software written by developers who couldn't find Cupertino even if they logged onto Google Maps or Apple 3-D.
The magic is not in a particular model but in the dynamics of platform competition. Shouting out "open" or "closed" as a prescription for categorical success is at best a mirage and at worst a predicate for anticonsumer public policy, like the government's long antitrust crusade against Microsoft.
The late Joseph A. Schumpeter put it well: Capitalism "never can be stationary. . . . The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates."
That relentless innovation process delivers the goods.

Tuesday, June 26, 2012

Save the Planet

Plant bamboo...then call a financier;
Kimberly-Clark recently announced an agreement to work with Mount Vernon [WA]-based Booshoot to develop a mass-market toilet paper using 20 percent bamboo fiber.
....After more than a decade of research, [CEO Jackie] Heinricher and her team of scientists have created an advanced tissue culture system to produce genetically identical bamboo plants at a commercial scale. This new technology has positioned them to infiltrate the forestry market.
"Even if bamboo penetrates just a small fraction of that, it is a multibillion-dollar opportunity," said Pettus Randall, chief operating officer of Booshoot.
The bamboo eats more carbon dioxide and produces more oxygen than the southern pine trees being used now, says the article, which is good for the planet.  But, now the company is adding venture capital specialists to its management team, presumably because the world doesn't beat a path to the door of lonely inventors.

Who wants to be the millionaire next door

Don't expect to be there for long says the Tax Foundation.  According to the latest data, most (65%) people with incomes of $1 million per year only do it once or twice;
During this nine year period [1999-2007], about 675,000 taxpayers earned over a $1 million for at least one year. ... of these taxpayers, 50 percent (about 338,000 taxpayers) were millionaires for only one year, while another 15 percent were millionaires for only two years. By contrast, just 6 percent (38,000 taxpayers) remained a millionaire in all nine years. Based on these results, it is clear that taxpayers move in and out of millionaire status with great frequency. The volatile nature of capital gains realizations and business income appears to be the leading factors for the transiency of millionaires.
And, expect to pay a lot of income tax if you're one of them;
Millionaires’ share of total AGI followed a similar path. In 2001, they earned 9 percent of total AGI and that share grew to 16 percent in 2007. By 2010, however, millionaires’ share of total AGI fell back to 10 percent—about the same level it had been ten years before.
Throughout the last ten years, the share of income taxes paid by millionaires has been roughly twice their share of total AGI. In 2001, millionaires paid 18 percent of all federal income taxes. This share grew to 28 percent by 2007 and now stands at 22 percent even though millionaires’ share of the nation’s income has fallen by a greater amount.
Despite claims that the tax code has become less progressive, the average effective tax rate of millionaires has remained fairly high throughout the period. Before the full implementation of the Bush-era tax cuts in 2003, the average tax rate paid by millionaires was 29 percent. By 2007, their effective tax rate had fallen to 23 percent, before rising to 25 percent by 2009 and 2010.  

Calling Art Laffer

And, Warren Buffet too.  Even the most left-wing Democrats are motivated to avoid paying taxes, as this, buried deep in Dan Keating's WaPo article shows;
Frank said he eventually was reimbursed by the campaign and reinvested in Massachusetts municipal bonds because bonds are safe and provide good tax benefits. 
Those good tax benefits being being exempt from federal income taxes entirely.

Friday, June 22, 2012

No wonder he was suspicious

Thanks to the invaluable Craig Newmark of NC State's economics department, we see there might be a reason to cut bankers some slack (but not their customers):

Four years after the crash, most financial institutions still aren’t equipped to find evidence of fraud in the toxic loans crippling their balance sheets. So they outsource the job to Digital Risk. The company’s CEO, Peter Kassabov, calls Digital Risk the “watchdog of the financial world.” .... Kassabov’s recruits tend to have underwriting experience; many are refugees of the housing bust. One such hire was George Zimmerman, the man who killed Trayvon Martin in February (Zimmerman says he acted in self-defense). At the time of the shooting, Zimmerman worked as an auditor at Digital Risk, and before that, he was a mortgage broker.
The company spends about $10,000 to train each new employee in the art of fraud prevention and detection. Credit reports are pulled; ex-spouses are contacted; Digital Risk’s proprietary software is deployed. Once problems are uncovered, clients can try to recover money. (Say Digital Risk finds evidence of fraud among mortgages that have since been sold to an investor. The investor can use that evidence to force the bank that issued the mortgages to buy them back.) The information that analysts dig up unsettles [Frank] Alpan. “There’s nothing you can hide,” he says. “This is why auditors are so paranoid.”
And fraud is in evidence in copious quantities, such as;
...the case of a grocery-store manager in New Jersey who paid $120,000 for a home whose value then jumped to $220,000. Over the course of a single day, the manager took out five home-equity lines of credit. A week later, with half a million dollars in his pocket, he walked. The scheme is called shotgunning, and Alpan sometimes wishes he was unscrupulous enough to have done it. “I could have been a millionaire,” he says, snapping his fingers, “just like that.” 
....Alpan scowls as he plows through the files. The infinite variety, as well as the sheer tonnage, of bad behavior has clearly affected him. Among the thousands of fraudulent loans he has audited, the only common denominator is deceit. “It’s not just lawyers and pastors and CEOs who lie and scheme. It’s nurses and schoolteachers, too,” he says. “Everybody’s guilty; no one’s up to any good.”
Like [George] Zimmerman, Alpan used to work on the other side of the industry, at a firm that sometimes handed out loans to the undeserving. Not that its loan officers were in any position to pass judgment: some had been fired from previous jobs for sexual misconduct; others were alcoholics struggling to pay child support. Most were skilled at bullying borrowers into signing. When one man didn’t have the gas money to come in and sign papers, an officer drove the papers to him. One Digital Risk employee came from a brokerage whose in-house motto was “Copy, paste, cut, delete. We’re not done until the loan’s complete!”
All of which was missed in the ratings of the mortgage backed securities by the tri-opoly of Moody's, Fitch, and Standard and Poors during the housing boom. After all, if you had a privilege bestowed on you by politicians, would you be in any hurry to rain on their parade's bandwagon (affordable housing)?

Moody's Blues

Looks as though financial markets have learned their lesson with at least one of the Big Three Ratings Oligopolists;
Moody's Investors Service has lowered the credit ratings on some of the world's biggest banks, including Bank of America, JPMorgan Chase and Goldman Sachs, reflecting concern over their exposure to the violent swings in global financial markets.
The verdict was quickly in;

In a sign that investors were taking the news in stride, stocks of major U.S. banks rose in afterhours trading. Moody's made its announcement after regular stock trading had closed.

Morgan Stanley rose the most, 3.2 percent, gaining 45 cents to $14.41. JPMorgan Chase & Co. rose 38 cents to $35.89 and Bank of America Corp. rose 6 cents to $7.88. 
Moody's may be most famous for doling out all those AAA ratings on subprime mortgage backed securities that enabled the (no longer) recent housing bubble in the U.S.  

Thursday, June 21, 2012

As in, Part-Time Actress

Necessity is the mother of invention, it is said.  Even in heavily unionized industries in NYC;

At a time when the earnings of some of the city’s top-netting public school PTAs is gaining notice, Ms. [Kelli] Holsopple, 35, represents a growing faction of New Yorkers who do not view ballooning school coffers through the prism of educational equality or public school politics. Rather, they see it as rent money.
That’s because Ms. Holsopple, 35, receives about $13,000 a year from the parents at the progressive school, which serves children in prekindergarten through grade five, to provide students a historical drama program in which they pretend to be wan-faced immigrants detained on Ellis Island, spindly Irish laborers laying track for the Transcontinental Railroad, and ecosensitive farmers on a make-believe “Peace Farm.”
Which is surely of more value to the PTA than what this guy does;
Ask Luiz Louie, a 38-year-old skateboarder from Chinatown, about the parents who run New York City’s PTAs and Mr. Louie, who in 1999 opened Louie’s Skateboarding School, is effusive. “I love New York City PTAs,” said Mr. Louie, who also goes by the name “Louie Louie.”
Mr. Louie teaches nearly 50 aspiring elementary school skateboarders how to ride quarter pipes and perform tic-tacs and ollies during popular after-school classes at schools like P.S. 11, the William T. Harris School in Chelsea, where he is paid close to $10,000 a semester by the school’s PTA.
“If the school stopped these classes, I would be home crying,” he said. 
While some might be rejoicing, we presume.

Wednesday, June 20, 2012

Yo, Adrian. Stanford here.

The politicians did it...created uncertainty, say two Stanford economists, Scott Baker and Nicholas Bloom, along with U of Chicago's Steven J. Davis;
...uncertainty leads firms to cut back or defer hiring and investment decisions. It also drives consumers to put off buying new goods. As a result, uncertainty stalls both the corporate and consumer sector drivers of a recovery. Indeed, the Federal Reserve Board’s recent Beige Book - the summary of their anecdotal evidence from business contacts around the US found here – highlights policy uncertainty as a key issue that businesses claim is stalling the recovery.
Looking ahead, there is more policy uncertainty on the near horizon for the US economy: Presidential and congressional elections, the fiscal cliff, potential for another partisan fight over the federal debt ceiling, and prospects for large-scale battles over taxation. In Europe, there is the spectre of an outright Greek default, fiscal collapse in several European countries, the intensification and spread of bank runs, and a possible dissolution of the Eurozone.
We fear the US recovery, like Rocky, will be down on canvas again, pummelled by another round of policy uncertainty. If that happens, will the US economy spring back again, like Rocky? Perhaps, but even the most resilient fighters suffer long-term damage from repeated heavy blows.
Which might be something for congress to think about before preening before C-Span cameras and shaking confidence further, looking for scapegoats

Tuesday, June 19, 2012

From Small Starts grows great avidity

Cato scholar Randal O'Toole isn't one to mince words when it comes to the Great Conspiracy to Restore the Streetcars.  Which is in contradistinction to former Yale Debate Team mate of (now) Senator John F. Kerry, Bradford Snell's conspiracy theory concocted in service of an Ahab-like pursuit of the Great White Whale, General Motors, that has become an albatross around the neck of Wikipedia.

O'Toole, following the money, finds that venal politicians, consultants, real estate developers, engineering firms and streetcar manufacturers can exploit taxpayers to the tune of billions of dollars, in the name of smart growth and 'liveability'.  Most conspicuously in Portland, Oregon.

There, the myth has been propagated of billions of dollars in development due to that city's wise construction of a 4 mile long streetcar system--at a cost of over $100 million dollars.  What is usually missing from the story is that the city also gave hundreds of millions of dollars in subsidies, infrastructure and tax breaks to the developers to build along that streetcar corridor.  All the building took place where there were subsidies to be enjoyed, none on portions of the corridor where such largesse was absent.

Several other cities have plans to do the same, and they won't even have to overlook the law to do so.  In this case a 2005 (Bush era) Federal Transit Administration grant program, Small Starts, that authorized up to $75 million for projects that were to be evaluated on the basis of the cost savings in travel time of streetcars (and other transport) versus improvements to bus service.

But, thanks to the 2009 Obama stimulus package, that requirement has been obliterated, due to the complaints of streetcar enthusiasts that the program discriminated against their pets; i.e. streetcars that did not save time for commuters.

So now, the evaluation is to be not streetcars versus buses on commuter time saving, but on the much vaguer; livability, environmental justice and 'multimodal connectivity'. Criteria almost sure to result in the highest cost alternatives being chosen, because they will bring the most money in grants.

Something like what happened in Portland, where the least edifying part of the tale would be the crony capitalism that O'Toole details as having happened with the Oregon Iron Works.

Portland originally purchased its streetcars from the Czech Republic at a cost of $1.9 million dollars each.  Thanks to its congressional delegation, and legislation requiring 'Made in America' vehicles, now Portland pays over $7 million each for those cars, because they are 'constructed' by Oregon Iron Works subsidiary United Streetcars.

Multimodal connectivity, indeed.

Meet Me in St. Louis, Bradford

It's mass transit week at HSIB, and the city of Seattle is discovering, yet again, that electric trolleys go Clang, clang, clang to the budget.  However, because of the not so great conspiracy to restore the streetcars--pace former Yale Debate Teammate of Senator John F. Kerry, Bradford Snell--there's a greater sucker around who might bail out the Evergreen City's politicians;

Just last week, Doug Campion, project manager for the Loop Trolley in St. Louis — a $43 million project that will run vintage streetcars, and is set to begin construction later this year — came to town to look them over.
Campion says about Seattle's elegant streetcars, constructed with beautiful Tasmanian mahogany and white ash, "They've taken very good care of them. They're certainly very nice."
Now he's back in St. Louis, putting together the numbers.
Metro says it'll listen to an offer.
Jim Jacobson, [Seattle] Metro's deputy general manager, says the classic trolleys "would be better served by serving people than having them parked."If the St. Louis group decides to make an offer, it wouldn't be for any huge dollars.
"There is no market for them. Some cars in decent condition have sold for $20,000. Some places are virtually giving them away. They can't afford to operate them anymore," says Campion.
So, why does St. Louis want them...nostalgia;
"It has to do with going back to 1904 and the St. Louis World's Fair.
Streetcars brought people to and from the fairground," says Campion.
Now, he says, the vintage trolleys are seen as part of revitalizing the city, and taking customers to and from restaurants, clubs and venues.
"The streetcars will be an attraction all by themselves," says Campion.
Which was the reasoning in Seattle back in the 1980s for buying them from Australia; they'd be part of Theme Park Seattle and attract tourists.  Now they sit in a warehouse gathering dust...awaiting the next dreamer.

Monday, June 18, 2012

Financier and the Good Subway II (Man o' War)

In his New York Times obituary in 1924, August Belmont, Jr. is quoted, from a speech he gave in 1907, defending his role in financing the construction of that city's original subway (which had opened for business only three years earlier, but was already recognized as a financial and engineering success):
...the abuse and censure which pursue every public man connected with the conduct of public service corporations are not calculated to make for the best interests of the public.
He goes on to say that such treatment is bound to discourage men from participating in those activities that are necessary to promote progress (in transportation systems and other public services) that, though they be a source of private gain, nonetheless really benefit the public much higher in the aggregate.

He illustrates his point by mentioning that he, as a boy, had to ride, as a 'straphanger',  the crude, uncomfortable, slow Omnibus available on the city streets in the 19th century, at a fare of ten cents.  Now (1907) the city's residents enjoyed much faster and enjoyable subway rides beneath the streets for a mere $.05.

In the 21st century, the Belmont name may be only hazily remembered because of a famous horse race (the most recent being won only a week ago by Union Rags) at Belmont Park outside NYC.  Probably few know that one of the greatest thoroughbreds ever, was originally named My Man o' War by Eleanor Belmont for her husband, who was at the time in Europe representing Woodrow Wilson's AEF in The Great War.

But, alive and well, in the 21st century is the inchoate anger for finance and its practitioners.  Nowhere so prominently than in the New York Times itself.  Where municipalities that had used interest rate swaps to protect themselves from potential rises in future rates are portrayed as victims of predators who sold them the protection.

In hindsight, the governments should have also protected themselves from declining interest rates, but that would have cost money that, for whatever reasons, was not thought to be worth it.  The reasoning being, (the interest rate) heads up we win, heads down; you're a predator for not protecting us with derivatives!

Saturday, June 16, 2012

Financier and the Good Subway, I

The HSIB Mass Transit Committee is ever vigilant for misleading stories such as this in Forbes: Infrastructure Socialism and the New York Subway;
At a minimum, government assistance was required to get permission to tunnel under thousands of peoples’ property and/or under city streets. But beyond that, significant government subsidies were evidently needed to induce private companies to enter the market.
The author, Timothy B. Lee believes that that significant subsidy was 35 million (1900) dollars, something like $3 billion today.  However, that is not the proper way to think about the arrangements that created NYC's first subway line.

While the city did float a bond issue to raise the funds to pay the construction costs, the contractor and his financiers were completely responsible for repaying the bondholders and the interest payments on the bonds.  Which they did, from fare box revenue.  The city's politicians who'd made the deal were at great pains to stress to their public that that was the case, as this NY Times story of the groundbreaking ceremonies makes clear; the expiration of a shorter period (fifty years [with an option to renew for another 25]) the city will own this tunnel railroad that will have cost $36,500,000, and which is the key to the rapid transit situation, without the expenditure of a single dollar for construction or interest, it having simply used its credit under carefully guarded guarantees for the time being to the advantage of the lessee, who meanwhile pays the interest as it falls due and provides for the liquidation of the bonds at the expiration of his lease."
That is, the contractor and the investors backing him would build the system for the city, but receive a lease allowing them to operate it for up to 75 years (and hopefully recoup their investment).  The 'carefully guarded guarantees' refer to the hefty sureties that had been put up by the private entrepreneurs; between $5 and $8 million of their own money.

It's easy to call that arrangement a subsidy from the private sector to the public, rather than the way Mr. Lee has it.  A subsidy, without which, there surely wouldn't have been any subway as early as 1904.

And, that's not considering that it was up to the businessmen to fund the equipment; cars, rails, electrical, ventilation, etc with their capital.  Some reports from the day, have that amount as high as another $35 million.

Who was that unmasked man who made it all happen?  His name was August Belmont, Jr (better known for his horse racing legacy), and we'll hear more about him in a later post.

Friday, June 15, 2012

Economists do it with models

And who can blame them, with figures like these;

Brazilian bombshell Gisele Bundchen has catwalked away with the crown of world's highest paid model, according to Forbes.
The annual list, released Thursday, covers models' earnings from May 2011 to May 2012 -- with the top 10 raking in just under $100 million combined.Bundchen easily topped the list, earning a stunning $45 million thanks to fat contracts with the likes of Versace, Esprit and Pantene.
The 31-year-old, who recently announced she is expecting a second child with husband New England Patriots quarterback Tom Brady, also earns a percentage of profits on products bearing her name, such as with Ipanema flip-flops.
Tall, tan, young, lovely, married to a football hero, wealthy...the inequality of it all must drive Paul Krugman nuts.

Thursday, June 14, 2012

Once more, 'Once more, with feeling'

Apparently attempting to show solidarity with his blogging and authoring partner James Kwak, MIT's Simon Johnson--unpaid consultant to the Elizabeth Warren for the Senate campaign?--is back to barking at the carnival for the head of Jamie Dimon;
[Tim Geithner] used the diplomatic language favored by finance ministers, but the message was loud and clear: Mr. Dimon should resign from the board of the New York Fed.
Which is a reference to an appearance by Mr. Geithner on a television program where he was invited, three times, to call for Jamie Dimon to resign from the NY Fed's board.  Three invitations that Geithner declined, as should be clear to anyone not professing to have a finance minister secret decoder ring;

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, that is old news.  What isn't, is that Mr. Johnson is now taking the opportunity to suggest that Mr. Dimon--among whose sins apparently is that his firm's charitable foundation donates money to MIT's competitor, Columbia University--be replaced on the Fed board with one of Professor Johnson's cronies;
An elegant solution to the current problem would be to replace Mr. Dimon with a distinguished former banker, for example John Reed – previously chief executive of Citigroup and more recently a critic of very large banks. (Mr. Reed and I are both on the new systemic risk council created by Sheila Bair, the former chairman of the Federal Deposit Insurance Corporation. This general idea, but not Mr. Reed’s name, was suggested to me by a leading financial journalist.)
Not that there's anything wrong with that.

Wednesday, June 13, 2012

Impulse control

Contrary to Mae West, too much of a good thing isn't wonderful if it's tied to An Impulse for Conventionality and Familiarity.  Which is the title of chapter 22, in Yale economist Robert Shiller's Finance and the Good Society.
According to Shiller, finance, being abstract, is difficult for most people to understand.  Thus, there is a human tendency to favor the familiar, time honored forms of financial arrangements.  Almost to sacralize them.  Which makes it difficult to abandon the old for the new when time and technology have moved on.

The economist gives several examples to illustrate.  Shares in corporations were used as far back as Imperial Rome, but disappeared for centuries, only to reappear in Holland in the 1600s.  Insurance was also known to ancients, but also only began to be marketed commercially in the 17th century.

The first known mention of derivatives is Aristotle's story of Thales, a sixth century BC Greek who bought a 'future' on the use of his countrymen's olive presses, in the expectation of a bumper crop that would be used to create oil.  Yet, even today, thousands of years later, most people have an negative impression of 'speculation'.

Modernization of finance is inhibited by this all too human trait, and today's Senate Banking Committee hearing is no exception.  Nor is the Seattle Times columnist Jon Talton's reaction to it;
Where are the old Southern lawmakers who would drawl something like, "Mister Die-mon, I'm just a simple country boy, but I didn't understand a thing you said, and considerin' you're basically gamblin' with taxpayer money, why the heck is your bid-ness so complicated? If I didn't know better, I'd think you were just tellin' stories like my ole buddy Scooter, and that ole boy is now in a federal penitentiary..."
We guess he slept through the question and answer period, where all that was missing was the Southern accents.

Nothing polite can be said about such analysis, Senator

J.P. Morgan Chase CEO Jamie Dimon, today, could have quoted George Stigler's retort (the title of this blogpost) of many decades ago when the Nobel prize winning economist had been forced to sit through a pandering politician's questioning.

There were several opportunities, most notably Oregon's senator, Jeff Merkley, who fallaciously suggested that Mr. Dimon's bank would have failed had it not been for a bailout by TARP in 2008.  Dimon politely, and truthfully,  replied that the senator was 'misinformed'.

That his bank did not need, nor request, any TARP loans, that that was the idea of the FDIC, Treasury and Fed officials who were worried that it might look bad if only banks that actually needed such help were to receive it.  Essentially, JPMC was forced to 'take some for the team', and did (under duress).

Senator Merkely could have learned that by reading one of several newspaper accounts of the famous meeting where the bankers had been corralled by Sec'y Hank Paulson.  Rather than graciously thanking Mr. Dimon for correcting his misinformation, the Oregon lawmaker took the tried and true route of interrupting the witness and admonishing him for actually answering his questions.  After all, the Oregonian only had five minutes to preen, and his time was being wasted with facts.

Equally at sea were senators Menendez of New Jersey, Kohl of Wisconsin--apparently alarmed at the strong capital structure of JPMC relative to its competitors, and Tester of Montana--who dragged his former senate colleague Jon Corzine's MF Global into the conversation, seemingly to assuage a few Montana ranchers who'd lost money, not at JPMC, but at that now bankrupt firm.

Will Rogers famously opined that we're all ignorant, just about different things.  Which makes politics such a delight to observe (thanks to C-Span).

Monday, June 11, 2012

This is a 'fine' mess you've gotten us into, Obama

The indispensable Keith Hennessey and his graphing software, show that the President of the United States can use statistics the way a drunk uses a lamppost, not for light, but for support;

This chart tells a very different story. We’re still down 4.6 M private sector jobs from the employment peak in January 2008, compared to down 407,000 government jobs.  For every net lost government job since employment peaked in January 2008, the U.S. economy has lost more than eleven private sector jobs.
That’s the opposite story from the one told by the President. While the U.S. economy has been slowly creating private sector jobs over the past 2 1/4 years, the hole left to fill is overwhelmingly one caused by the destruction of private sector jobs.
The President is right that the public sector is not creating net new jobs because of local layoffs.  But by focusing on recent trends and ignoring the nearly nine million private jobs lost before his measurement window began, he is leading us to the wrong conclusion. Even if government job growth were to resume, our economy needs to create millions more private sector jobs to be restored to full health.

Creepy is as creepy does

We suspect that Professor Deirdre (née Donald) McCloskey regrets the editor's choice of subtitle for her recent TNR article;

The creepy new economics of pleasure.
Not that there aren't many valid points there, that bear repeating, such as;
...if seen through history rather than through Hellenistic pastoralism or German Romanticism, the gemeinschaft of olden times looks not so nice. The murder rate in villages in thirteenth-century England was higher than the worst police districts now. Medieval English peasants were in fact mobile geographically, “fragmenting” their lives. The imagined extended family of “traditional” life never existed in England. The Russian mir was not egalitarian, and its ancientness was a figment of the German Romantic imagination. The once-idealized Vietnamese peasants of the ’60s did not live in tranquil, closed corporate communities. The sweet American family of “I Remember Mama” or “Father Knows Best” must have occurred from time to time. But most were more like Long Day’s Journey Into Night or Cat on a Hot Tin Roof.  

Saturday, June 9, 2012

More than you know

The trouble with tycoons is that they often just miss getting it right.  Even when their hearts are in the righteous place.
Concerns that the United States may not find alternative uses for its lesser skilled labor at comparable pay are overstated. If offshore labor were free, how much of it should the United States buy? All of it. At $1 an hour, it’s effectively free. Cheap offshore labor is no different than any other productivity improvement that lowers cost. It makes the United States richer and stronger by increasing the relative value of its alternative endeavors — both existing alternatives and new investments. When it competes with China for manufactured goods, the United States is attempting to make for $20 an hour what it can buy for $1 an hour. It should use the $19 of savings to employ additional nurses, school teachers, and waitresses — positions that cannot be outsourced.
Mr. Conard is right about the above--and Americans need to hear such, much more often than they do--but, this...not so much;
Supporters of the Obama administration and its economic policies have found some refuge amid the tide of dismal economic news in the fact that the U.S. manufacturing sector has grown slightly in the past year. But the truth remains that America’s future does not lie in making things — it lies in conceiving of things, much of which others will make for us. 
There is no way he can know if this true, and we currently make plenty of things right now, as even PBS documentarians know.  We manufacture cars, airplanes, computer chips, steel.  We just do it so much more efficiently than we did it in days gone by.

Whatever the future brings, stuff or ideas, it brings.  All that matters is how innovative we are.  If we are open to it, we'll prosper.  If we merely sit around and throw temper tantrums, like European socialists, we won't.  Ed Conard deserves a lot of credit for writing and promoting his book Unintended Consequences, but some of his missteps do grate.  Not everything we've been told about economics is wrong.

Straight talk expressed

Or perhaps cast before a Comedy Central audience which has no problems with a mere TV host making millions of dollars, while casting aspersions on the people who provide the finance to make it happen.

Edward Conard is a trooper, no doubt about it, but he missed a few opportunities on this Daily Show appearance.  Such as letting Jon Stewart know that while lonely inventors working in their garages may not be thinking about their future marginal tax brackets, the venture capitalists who he will need to finance getting his product out of his garage and into the marketplace--where the consuming public will render the only verdict that counts--definitely will being calculating their potential after tax profits, before deciding whether or not to move ahead.

Not to mention that those lonely inventors have a way of learning pretty quickly about taxes, as Facebook's Eduardo Saverin and Mark Zuckerberg have.

While there may be limits to what a supposedly hip television audience can sit still for, it isn't as though Mr. Conard's experiences lack academic support.  As Kevin Hassett and Steven J Davis show;
...the academic literature supports three conclusions about private equity firms. First, they provide attractive returns for their investors. Second, the effect of private equity buyouts on employment in target firms is, on average, quite small. The venture capital side of private equity almost certainly has a positive effect on employment. Third, private equity buyouts accelerate the process of creative destruction: old jobs disappear more rapidly, new jobs get created more rapidly, and productivity growth increases as a result. In this respect, private equity looks like a potent form of capitalism.

Friday, June 8, 2012

That Old Feeling

It's re-election year for Senator Maria Cantwell, so naturally she has a song in her heart;

West Coast oil refiners cut gasoline production this year after a fire at BP's Cherry Point plant in Whatcom County, creating a supply shortage that's left West Coast motorists paying inflated prices at a time when the rest of the nation is enjoying a windfall at the pump, according to Sen. Maria Cantwell and an energy analyst.
In a letter sent to regulators Thursday, the Washington Democrat calls on the Federal Trade Commission (FTC) to investigate refinery operators Alon, Chevron, ConocoPhillips, Shell, Tesoro and BP.
Which is par for the course in politics; scare up a scapegoat for the usual suspects; voters who haven't a clue how the laws of supply and demand work.

The Seattle Times buries this deep in their article;

The Western States Petroleum Association — a Sacramento, Calif.-based trade association for energy companies on the West Coast — denied the allegation.
"Sen. Cantwell has, in the past, made similar requests for investigations, and there have been literally dozens of investigations into pricing of petroleum products on the West Coast and elsewhere in the last dozen years. And all of those have found that market factors are the dominant explanation for changes in product prices," spokesman Tupper Hull said. "And none of those have found that manipulation of the market has occurred." 

Thursday, June 7, 2012

How does one say it in French

Pretty logically, if these two economists are any indication, cut out the middlemen;

Each year, an estimated 2,000 people drowned on their migrant’s journey from Africa to Europe (The Economist 2005) and many more on other routes.  Not only is crossing borders illegally a dangerous operation but it also entails very high financial costs. For border crossings such as from Mexico to the US, human smugglers can charge up to $4,000, while trans-pacific crossings of Chinese immigrants to the US cost above $35,000 in the mid-90s and have since increased sharply.
With estimated revenues of around $5 billion a year in the US and €4 billion in the EU (Padgett 2003), people smuggling is a lucrative business. 
Emmanuelle Auriol and Alice Mesnard's proposal is for destination countries to sell the right to immigrate to them on the open market. It's just basic economic reasoning;
Our idea is to use the funds raised through the sale of visas to finance reinforced repression. Under this scheme, visas will be sold at the price that pushes smugglers out of business. Moreover, by increasing repression, a government makes increases this price. Indeed the increase in migration that will follow this policy will crucially depend on the risk entailed by the illegal crossing and on the degree of discrimination against illegal versus legal migrants on the labour market. The higher is the risk of illegal migration and the lower its payoffs, the higher will be the equilibrium price of visas that pushes smugglers out of business. This scheme will thus allow the government to legalise migration while controlling the number of immigrants.
Pity they aren't advising M. Hollande.  It might be a way to replace all those new retirees he's just enabled.

Where are the customers' eats?

When you've got power, and no're probably some kind of government agency and don't have to concern yourself with what consumers want;
A McDonald's is coming to Seattle-Tacoma International Airport early next year after a reluctant Port of Seattle Commission voted 4-1 Tuesday to approve it.
.... McDonald's will make $2 million in improvements to a long-vacant space, plus pay $323,000 a year in rent.
But the commissioners had misgivings about McDonald's for all kinds of reasons — they were concerned about the timing of the proposal, the restaurant's wages and the effect on surrounding merchants. They even talked about one commissioner's own secret love of McNuggets.
Port staff spent the past two months trying to address their concerns. To make the process more competitive, Port staff asked similar restaurants if they wanted a shot at the location. They didn't.
Commissioner Rob Holland agreed to vote for the proposal when the Port agreed to address his biggest concern: making a minority- and women-owned business-recruitment program more robust.
Commission President Gael Tarleton voted "no." She said she thought the Port should have sought a more competitive process "so that everyone would have a shot at those jobs."

stop drivin' that Hot Rod Lincoln

Some know all the lyrics, but can't carry the tune;

Linda Pence, 50, in Spring Valley, Calif., buys everything organic, recycles, grows her own vegetables and doesn't turn her air conditioner on unless the oldest of her five cats starts to pant in the Southern California heat. Her highest priorities are buying environmentally friendly products, reducing the electricity she uses, saving money on energy and making her home more efficient. She wishes she could afford the up-front cost of solar panels.
Without serious conservation, she says, "the kids coming up are not going to have the resources they need. They are not going to have a planet to live on."
But in the driveway, she's got a Dodge Durango and a Lincoln Continental, neither squeezing out 20 miles to a gallon in combined city-highway driving, as well as a more economical Harley-Davidson motorcycle.

Wednesday, June 6, 2012

I don't know much about economics...

...but I know what I don't like...bankers.

The most amusing part of the recent Bloomberg piece on Harvard's failed attempt to protect itself against interest rate risk, surely was this;

Harvard’s woes stemmed from misunderstanding its role, said Leon Botstein, president of Bard College in Annandale-on-Hudson, New York.
“We shouldn’t be in the banking business, we should be in the education business,” Botstein said in a telephone interview.
In the middle of writing an article detailing an interest rate derivative investment that backfired, naturally you'd call a symphony conductor for his input. 
Maybe the trustees of Bard College might want to think about how capable a man who thinks educational institutions don't need to be bothered with interest rates, is to lead theirs.

Why Nations Really Fail

It's when their voters live in a fantasy land (aka, social justice) as France demonstrates;
France's new socialist government cut the country’s retirement age in the face of the eurozone’s deepening crisis, citing “social justice” to explain a move that goes against austerity efforts across the region.
Workers who entered employment aged 18 will be able to retire at 60 rather than 62, under the decree agreed at a cabinet meeting on Wednesday.
The decision follows pre-election promises from the new president Francois Hollande to reverse the rise in the retirement age introduced by his predecessor Nicolas Sarkozy in 2010.
Unlike voters in Wisconsin, who last night voted against the 'extractive institutions' known as public employee unions who'd staked almost everything on recalling Governor Scott Walker.

Tuesday, June 5, 2012

The Boston Whale[r]?

We hope that MIT's Simon Johnson is distressed by this;

As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps that Harvard had entered to finance expansion in Allston, across the Charles River from its main campus in Cambridge, Massachusetts.
The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them. Most of the wrong-way bets were made in 2004, when Lawrence Summers, now President Barack Obama’s economic adviser, led the university. ....
Borrowers use swaps to match the type of interest rates on their debt with the rates on their income, which can help reduce borrowing costs. Lenders and speculators use swaps to profit from changes in the direction of interest rates. A bet on higher rates, for example, means paying fixed rates and receiving variable. At Harvard, nobody anticipated some interest rates going to zero, making the university’s financing a speculative disaster.
....The financing plan using the swaps was developed by the university’s financial team and discussed with the Debt Asset Management Committee, an oversight group, according to James Rothenberg, a member of the President and Fellows of Harvard College, or Harvard Corp., and the school’s treasurer, a board position.
Off with his head! 

Monday, June 4, 2012

The earth moved...

...and said, according to Mark Steyn, No mas;
Just before last week's Eurovision [Song of the Year] finale in Azerbaijan, The Daily Mail in London reported that the Spanish entrant, Pastora Soler, had been told to throw the competition "because the cash-strapped country can't afford to host the lavish event next year," as the winning nation is obliged to do. In a land where the youth unemployment rate is over 50 percent, and two-thirds of the country's airports are under threat of closure and whose neighbors (Britain) are drawing up plans for military intervention to evacuate their nationals in the event of total civic collapse, the pressing need to avoid winning the Eurovision Song Contest is still a poignant symbol of how total is Spain's implosion. Ask not for whom "Ding-Ding-A-Dong" dings, it dings for thee.
That last being a reference to the 1975 winning song. Which was back in the bad old days when Spain operated on a Peseta standard.  And probably would still if the Europeans had listened to Tories Margaret Thatcher and  William Hague, according to the Telegraphs's Peter Osborn;

Hague made a series of speeches which, reread today, rival Margaret Thatcher’s in their prescience. He predicted that membership would “lead to huge booms and deep recessions”. Hague chillingly added that “the single currency is irreversible. One could find oneself trapped in the economic equivalent of a burning building with no exits.” He noted that euro membership could lead to a “full-blown banking and financial crisis.”
Nobody listened, many mocked, and Hague was accused of dragging the Tory party to the Right. The BBC, an integral part of the pro-European alliance, played its full role in marginalising critics such as Hague. The state-owned national broadcaster lumped the Tory leader in with cranks and xenophobes. By contrast, euro supporters were invariably presented as mainstream and sensible.
Fortunately for the people of Great Britain, Thatcher and Hague managed to keep their nation on the Pound Sterling and out of the worst of the still burgeoning European crisis.  Maybe the rest of Europe should take a hint.

Saturday, June 2, 2012

Driven from the poor house

Carnegie Endowment economists Shimelse Ali and Uri Dadush turn Will Rogers' Depression era joke on its head.  The middle class of the world are best measured, they say, by how many of them can afford to buy an automobile.

  • The most widely used measure of the middle class was proposed in 2002 by Branko Milanovic and Shlomo Yitzhaki, who counted people with daily incomes between roughly $10 and $50, after adjusted for purchasing-power parity (Milanovic and Yitzhaki 2002).
If one uses this definition, there are an estimated 369 million people in the developing G20 economies who qualify as "middle class."
There's a better way to measure the middle class. Cars are big-ticket items that indicate the ability and willingness to purchase many other nonessential goods. Indeed, while the vast majority of households own a car in advanced countries and many own more than one, in developing countries owning a car symbolises relative affluence. Critics may contend that measuring car ownership excludes households that can afford, say, a computer, TV set, or air-conditioner, but not a car. However, because cars in circulation in the developing world are often of very old vintage and correspondingly cheaper -- for example, the average passenger car in India is 20 years old, compared with 11 years in the US – this supposed omission is not nearly as large as it seems.
Cars in circulation can therefore provide a measure of the number of middle-class households. After correcting for household size2,  measuring car ownership suggests that the middle class in developing G20 countries is in the range of 550 million to 600 million people – about 50% larger than the number arrived at using the Milanovic-Yitzhaki definition.3 

Friday, June 1, 2012

Don't cotton to it

Over at Baseline Scenario, one of the usual suspects issues a cri de coeur;
Simon, thanks for your sane, sober and spot-on article which appropriately describes (in so many words) the position of Jamie Dimon as being emblematic of the very cultural illness which is moving toward wrecking the US. He would be the tip of the proverbial iceberg were it not that there are so many “tips” from which to choose. The fact is that in a plutocratic system of government, societies always suffer. In our case, as in innumerable others throughout world history, the majority of our citizens are either sufferinig, rightly paranoid and troubled by a seemingly bleak future, or simply terrified by the prospects of simply surviving their present lives, let alone distraught at the future which their children seemingly face. Jamie needs to go.
The, 'sane, sober and spot-on article', being the one claiming to draw a lesson from Acemoglu and Robinson's Why Nations Fail.  Is there such a lesson regarding J.P. Morgan-Chase CEO Jamie Dimon?

You can't even find his name in the index, unlike several others; Mubarrak, Mugabe, the Kims (Il-Sung and Jong-Il), and one not so well known to westerners, (but probably ought to be); Ismail Karimov President (for life?) of Uzbekistan.

Karimov was a power in Soviet Uzbekistan, who managed to land on his feet when the USSR imploded.  He quickly realized that that country's main export, cotton, would be key to his fortune.  But, not if a free market with truly private farms were allowed.

Landowners are forced to reserve 35% of their land for cotton growing.  Which the government confiscates, paying only a few pennies per ton to the farmers who produced it.  Since that rules out anyone being able to pay farm laborers to cultivate and harvest the crop, Karimov decided to enlist the nation's school children.

Public schools are closed in spring and fall, and children are forced into the fields to do the work that enriches the Karimov family.  Arbeit macht frei!

When private investors thought that they could grow tea at profit in the country (and succeeded) the Karimov's moved to destroy those firms and took over that industry too.  Nice work if you can extract it.

Does the above bear any similarity to the doings of Jamie Dimon?  Scapegoat of the Month at Baseline Scenario.