The Atlantic Business Channel: October 18, 2009

Oct 23 2009, 4:20PM

Electric Car Will Increase Power Costs

Bloomberg has an article today that explains why California will likely face higher power costs as a result of a boom in plug-in electric cars. Although this is kind of obvious if you think about it for more than 15 seconds, it's still worth noting, because some people might find it initially counterintuitive. Even though electric cars will certainly lower gasoline costs, they will increase electric costs. The point extends well beyond just California as plug-ins become more broadly popular.

Oct 22 2009, 11:15AM

Evidence that the Jobless Recovery is Here

by Derek Thompson

With unemployment likely to hit 10 percent before the end of the year, I've been brainstorming some ideas for jump-starting the job market. To highlight exactly why an employment stimulus is critical, the Atlanta Fed's research director has a blog post counting all the reasons why this is going to be the worst. Recovery. Ever.

How many bad records are being set in this recession?

Oct 20 2009, 2:32PM

What Does It Mean to Be Too Big to Fail?

by Megan McArdle

Economics of Contempt has an almost undescribably good post up on the problem of "To Big to Fail" resolution proposals. I was having dinner with a friend from business school last night, and we talked about this quite a bit--and the more we talked, the more complications we found.

The problem is that "too big to fail" isn't about the size of a bank's balance sheet; it's about how tightly coupled that balance sheet is with other institutions. The FDIC can resolve even a huge conventional commercial bank, because as long as the loans are sold and the depositors paid off, that failure doesn't suddenly and massively impair other peoples' balance sheets.

(It may, down the road, if for example a huge portfolio of real estate loans is written down, which casts doubt on the value of the collateral securing the loan books of other banks. But that's different from triggering a bank run.)

It is pretty clear to me that the Fed and Treasury decided to let Lehman (or whatever bank tottered next, rather) fail, pour encourager les autres--and that despite months of preparation, they didn't foresee the meltdown in the money markets that this failure touched off. Hence all the subsequent bailouts: no one could be quite sure what the fallout from further failures might be.

But the degree to which a financial institution is tightly coupled with other parts of the financial markets is a lot harder to measure than its leverage ratio, its balance sheet, or any of the other metrics that we'd like to use to wrap these institutions up into a nice, tidy, too-small-to-fail package. As Economics of Contempt points out, the weakest part of the administration's plan is its reliance on crude metrics like capital levels:

I think the administration focuses too much on capital levels as the relevant measure of a Tier 1 FHC's health. The biggest problem with the PCA regime applicable to commercial banks is that too often commercial banks can go from "well capitalized" to insolvent without ever triggering the PCA requirements. This problem is even worse for Tier 1 FHCs. Lehman had a Tier 1 capital ratio of 11% as of August 31, 2008 -- just two weeks before it filed for bankruptcy. Had Lehman been a commercial bank, it wouldn't have triggered the PCA requirements until it was far too late. The administration's proposal requires that the PCA triggers (which it calls "capital standards") include a risk-based capital requirement and a leverage ratio.

I would make the PCA triggers less focused on capital levels, and more focused on the conditions that make Tier 1 FHCs susceptible to modern-day bank runs. For example, I would make one of the PCA triggers contingent on the tenor of the Tier 1 FHC's overall liabilities. As of August 31, 2008, over half of Lehman's $211 billion tri-party repo book had a tenor of less than one week, which made it remarkably susceptible to a run in the repo markets -- which, of course, is exactly what happened. Lehman was also relying on roughly $12 billion (at least) of collateral from its prime brokerage clients to fund its day-to-day operating business. These conditions had persisted for several quarters before Lehman's bankruptcy.

The Fed should be required to take prompt corrective action once a Tier 1 FHC allows the tenor of, say, 20% of its overall liabilities, or 50% of its daily funding requirements, to drop below one week. (I just pulled those numbers out of the air; the Fed is in a much better position than I am to set then appropriate tenors and percentage of liabilities.) These are the kinds of PCA triggers that would be the most effective. A PCA regime focused on capital levels is unlikely to make much of an impact.

I'd add that overreliance on any metric is likely to cause problems, as well as solve them--I've heard fairly convincing arguments that the Value at Risk regulatory monoculture helped set the system up for catastrophic collapse. One is wary of giving regulators too much discretion, of course, but at some level, at least at the margins, making good decisions about which institutions are in trouble is always going to require a degree of art as well as science.

Oct 19 2009, 12:22PM

Fake "Chamber" Press Release Dupes Reuters

by Marc Ambinder

The headline, if true, would be a news story indeed: the U.S. Chamber of Commerce, according to a press release e-mailed to journalists this morning, had decided to reverse its opposition to strong climate change legislation. But that's false. Some unknown group decided to punk the Chamber. And in the process, at least one news organization, Reuters, fell for it.

The news release, e-mailed about 11:00 a.m., linked to a "Chamber" webpage -- a fake -- which, in turn, featured links to official Chamber sites. The spoof page features a short National Press Club speech, purportedly by Chamber President "Tom Donahue" -- his name is misspelled -- where he acknowledged that "[t]oday's momentous decision indeed comes after a difficult period - a very long one."

Then comes the comment from the Chamber spokesperson, one "Hingo Sembra."

"We believe that strong climate legislation is the best way to ensure American innovation, create jobs, and make sure the U.S. and the world are on track to reduce global carbon emissions, and to provide for the needs of the American business community for generations to come."

The rest of the speech is clearly fictional, although it borrows from "Donahue's" repertoire of colorful metaphors. "Donahue" said that Lehman Brothers "scuttled a century. They ate lamb, but were left without wool when the cold, hard winter set in."

"Climatologists tell us that if we don't enact dramatic reductions in carbon emissions today, within 5 years we could begin facing the propagating feedback loops of runaway climate change. That would mean a disruption of food and water supplies worldwide, with the result of mass migrations, famines, and death on a scale never witnessed before.

"Needless to say, that would be bad for business," the fake "Donahue" says.

"We at the Chamber have tried to keep climate science from interfering with business. But without a stable climate, there will be no business. We need business more than we need relentlessly higher returns."

Whatever soul-searching the Chamber might be engaging in following the high-profile departure of several companies, a wholesale reversal of this sort isn't in the cards.

The fake domain name, chamber-of-commerce.us, is registered to "Support and Committment," Inc. of Malden Street in Manhattan. An e-mail to the contact listed has yet to be returned.

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