Megan McArdle
Recently by Megan McArdle
Sep 15 2009, 12:23PM
The Cost of Health Care Reform
CBO estimates the "effects on the deficit of insurance coverage provisions" in the House bill, H.R. 3200, to be $1,042 billion over a ten year period. (See page 2 of the estimate.) The $800B - $900B figure cited by the President may be his expectation of the still-private Baucus bill.
Sep 15 2009, 11:23AM
Bankruptcy: Comparing Ourselves With Our Neighbor to the North
Sep 15 2009, 10:42AM
ObamaCare v. Prescription Drugs, Part II
The Medicare prescription drug entitlement almost immediately was projected to cost $1.2 trillion over ten years - more than Obama's cost-projections. The CBO's estimate of long-term spending in the program is $8.2 trillion. Unlike Obama's healthcare plan, which focuses on the younger uninsured working and middle class, Bush's massive bribe was directed at seniors, a demographic set to grow very fast in the near future.
Now Megan is right that we do not know the final cost of the current proposal or what the future will bring. But when the CBO scores the final version, let's contrast and compare, shall we? And one more thing: the more immediately expensive one was rammed through by Republicans, the allegedly small government party. I still, for some reason, expect a little more fiscal responsibility from the right than the left. But we now know, of course, the both are dreadful but the GOP is worse.
These are not quite the right comparisons to make.
Sep 14 2009, 3:33PM
Do We Need Consumer Protection Reform?
First, we're proposing new rules to protect consumers and a new Consumer Financial Protection Agency to enforce those rules. This crisis was not just the result of decisions made by the mightiest of financial firms. It was also the result of decisions made by ordinary Americans to open credit cards and take on mortgages. And while there were many who took out loans they knew they couldn't afford, there were also millions of Americans who signed contracts they didn't fully understand offered by lenders who didn't always tell the truth.
Sep 11 2009, 2:48PM
Partisan Politics in Healthcare, Social Security Reform
Sep 11 2009, 12:10PM
Why is Medicine Different From All Other Markets?
At a town-hall meeting in Portsmouth, N.H., last month, our uninformed lawyer in chief suggested that we physicians would rather chop off a foot than manage diabetes since we would make more money doing surgery. Then President Obama compounded his attack by claiming a doctor's reimbursement is between "$30,000" and "$50,000" for such amputations! (Actually, such surgery costs only about $1,500.)
Sep 10 2009, 1:12PM
Is Medicare Full of Waste and Fraud?
Orszagism: Still there, but gets an image makeover. In it's new, airbrushed form, we're told that "our health care problem is our deficit problem" (which it is) but not that Obama's reforms are necessarily the solution to the deficit problem (which they aren't, even if they'll work--you could also raise taxes or cut spending elsewhere). The content of those long-term structural reforms is redefined along free-lunch, no-grandiose lines: only "waste and abuse" that does "nothing to improve your care" will be targeted. That's a relief! Only "common sense best practices" will be encouraged by the new cost-cutting panel. All building up to the central iffy policy pitch
Sep 8 2009, 10:34AM
All Health Care Politics is Local
Unfortunately for New Yorkers, their state already had the same idea. Those excise taxes, enacted to cover New York's massive budget gap, have been passed along to consumers not as taxes, but as rate increases. As a result, the New York Post reported a few months ago that virtually every health insurance plan offered in New York City busts the $21,000 cap for a family plan. Most of them by quite a bit:
Sep 5 2009, 8:17AM
Asymmetrical information
I had a heated online discussion a few weeks back with a friend who is a liberal Democrat; eventually I realized that he was reacting strangely to my comments because he assumed that the federal government was going to give everyone in the country 100% free health care paid for out of taxes. So I quoted him the relevant passage from the House of Representative summary of their proposal; and then I had to quote him another passage to get him to believe that they actually meant to charge people a penalty for not getting insurance because it cost too much. He was quite shocked, and is now among the liberals who oppose the Democratic Party proposals. And he's an intelligent, educated man with a strong interest in politics. He just had not read the actual proposals, and had assumed that what Congress was delivering was what he had hoped for a year ago. I'm sure he's not the only one.
Sep 4 2009, 6:07PM
What's the Price of an Acceptable Health Care Bill?
Sep 3 2009, 2:45PM
The Government's Role in R&D
We'll get to the shortages in a minute. But first, assuming McArdle is right about the r&d shortfall, I would prescribe: r&d. The government should fund it (if, ex hypothesi, no private party will). I expect that if the single payer system is otherwise performing tolerably the taxpayers will be willing to pay and consider it a fair deal overall. Presumably they want medical innovation. (If they aren't willing to pay, then maybe things have advanced to the point where everyone is happy with the existing level of medicine. But I would be surprised if that ever happens.) The fact that we have moved to a 'planned health care economy' would be no structural barrier to ramping r&d back up. We don't need private insurance companies to signal where to look for that bold new cancer treatment. (I'm not saying the private market is useless for signaling worthy goals, or working out good systems of provision; but it isn't indispensable, so far as I can tell, not like the generic economic growth/free markets case.) It isn't that hard for government to spend money on big programs (I'm sure McArdle agrees with that.) Doing so helps get politicians re-elected. The people like it. So, if there really were a sort of upset, in the wake of a shift to single payer, with r&d sinking, I would expect it to recover when people noticed this had happened.
Sep 3 2009, 1:20PM
The Price of Life
Sep 3 2009, 8:08AM
Rail: It's Not Just For Passengers
The discussion of "High Speed Rail" is not correct! The correct name for the discussion should be "High Speed Passenger Rail". As a former regional freight railroad employee, yes the extra word will make a difference.
The citizens, taxpayers, and voters of the USA need to understand 3 very important concepts:
Sep 2 2009, 5:00PM
Abolish Express Lanes for First Class Flyers!
Sep 2 2009, 11:43AM
The Third Dimension Is Coming
Yipee! 3D television is coming! As longtime readers know, I'm a big fan of 3D movies. If we can get the technology broadly adopted, I don't see why it couldn't replace flat movies in a couple of decades.
Sep 1 2009, 6:20PM
Philosophy and Health Care Reform
In all seriousness: I realize I have been arguing, for several posts now, at an unsatisfactorily high level of abstraction. (I have seized on the strange case of McArdle because she started it, insisting on talking only at the philosophical level, thereby giving me an excuse to continue in that vein.) But there is a point. Philosophically, there just isn't a case to be made against reform unless it's this simple one: if you don't have any money, you shouldn't be entitled to any medicine. McArdle is very indignant when people accuse her of indifference to the fate of the poor, but - honestly - if it isn't that, then it's nothing. At the philosophical level.This echoes his earlier post. John Holbo, who is, I believe, a professor of philosophy, seems to believe that you can develop a philosophical opinion on a policy issue without reference to particulars.
Imagine a universe consisting entirely of two identical blue spheres. Is there a right to national health care in that universe? Please show your work.
Sep 1 2009, 11:52AM
Does High Speed Rail Have a Future?
As libertarians go, I'm a big fan of high-speed rail. I think it would be very nice if we had some in the Northeastern United States, where it might actually work, rather than the pathetic Acela that shaves a whole fifteen minutes off the trip between DC and New York. Unfortunately, that is apparently never going to happen, because in the United States, acquiring new rail rights-of-way seems to be virtually impossible. That means that the Acela has to run on existing track, which is not very good for high speed rail because, first, it was not designed for a train that accelerates to hundreds of mph, and second, there are other trains on it that don't go hundreds of mph, which slows everything down.
Aug 31 2009, 2:46PM
In Defense of Financial Innovation
The point being that Economics of Contempt has some very, very interesting things to say about financial innovation, and why it doesn't make any more sense to be against financial innovation than any other sort:
Aug 28 2009, 11:38AM
Confronting Rationing
One way or another, we are going to ration care, if you use "ration" to mean "allocate inherently scarce goods". But neither side of the health care debate likes to talk about this. They prefer to minimize the problem--the opponents by saying "they can go to the emergency room!", the proponents by discussing all the speculative ways that we might be able to save money by cutting treatments that don't do any good, or the infamous "waste, fraud, and abuse" that politicians always promise they are going to use to save money. Somehow, that money never makes its way to the budget's bottom line in any significant amount. And reading about how salt guidelines came to be, or any of the various histories of bygone treatments from lobotomies to prophylactic tonsillectomies, illustrates how dramatically the establishment of real-world treatment guidelines can diverge from the sober, white-coated Solons of the technocratic ideal.
Aug 28 2009, 10:52AM
Lies, Damned Lies, and Health Care Polls
Now I am going to tell you more about the health care plan that President Obama supports and please tell me whether you would favor or oppose it.
Aug 27 2009, 8:04AM
How Would Milton Friedman Solve a Bank Crisis?
That's because this idea seems fairly silly.
Aug 27 2009, 7:30AM
Will Transaction Taxes Reduce Leverage?
As for the transaction tax, I don't know how practical that is. But if it can be made to work, it's a good idea. Not only would it raise some money, but it would put a crimp in some of the most highly leveraged investment schemes, which fundamentally depend on tiny returns multiplied by billions of dollars. A transaction tax would make a lot of them unprofitable. So it's a twofer.I'm not precisely clear on what Lord Turner means by a Tobin Tax, which is technically a tax on currency transactions. Once you get beyond there, it's sort of vague as to how and where you would apply such a tax.
Aug 26 2009, 8:39AM
Are Guns at Protests Really Dangerous?
I think carrying guns to protests is entirely counterproductive. Indeed, I'm not sold on the general virtues of protesting, which worked for Gandhi and the civil rights marcher, but has a dismal track record on other concerns. But I think people have a perfect right to do it, including with guns, though I also think the secret service is within its rights to ensure that they don't have a sight line on the president.
Aug 26 2009, 6:59AM
What If the Bank Bailouts Never Happened?
This sounds an awful lot like the old debate trick I've previously referred to as the fiat shuffle.
Aug 25 2009, 3:34PM
Bernanke Did the Best He Could
Aug 25 2009, 7:52AM
Should Libertarians Defend the Bank Bailouts?
All these concerns are correct. The bailouts have probably substantially increased moral hazard, and perversely, arguably undermined the political will for regulation that might reign in that moral hazard. Top investment bankers really do seem to have a worrying about of influence over Treasury and the Fed. The tax burden is large, and should worry you whether you wish that money had been spent on food stamps, or returned to taxpayers.
Aug 24 2009, 3:13PM
The Business of Me-Too Drugs
Aug 24 2009, 2:45PM
What's So Great About Europe?
Bryan gives some good reasons why America is better for 37-year-olds with young children, namely lots of living space and easy shopping. But I view much of Western Europe as better for the elderly, if only because it requires less driving and they are more likely to live close to their children and perhaps also they receive more respect. Western Europe is probably better for children too, for reasons related to safety and health care.My alternative view is that Americans rate European life so highly (in part) because the buildings from previous eras are so striking and attractive. If all of the U.S. looked like U.S. postwar construction, the country would still impress more or less as it does. If all of Europe looked like its postwar construction, Americans would be less likely to admire European policies and political institutions. Yes I know about Lille, and contemporary Spanish architecture, but in reality most Americans would think of Europe as some kind of dump.
Tyler is spot on, I'd say. Without the pretty buildings, what would often most strike Americans is the cramped space and a succession of petty inconveniences.
Aug 21 2009, 12:12PM
Good News/Bad News on the Budget
The good news is, we've spent considerably less on bailouts than we expected to, and slightly less on other programs. The bad news is, revenue was $83 billion less than expected. The revenue declines tend to lag the recession, so we'll be in that boat for a while. The bailout money, on the other hand, is a one-year savings.
Still, it's hard to be unhappy about a $200 billion decline in the government. $1.6 trillion to go . . .
Aug 21 2009, 7:18AM
The Canadian Quandary
Kevin Drum is puzzled:
Well, here's today's [chart]: day trips to Canada are down. Way down. It's not clear why, either. The accompanying story blames it mostly on new passport rules, along with "other factors, including the recession and the higher Canadian dollar." But that doesn't really hold water. The downward spike from May to June might be due to new passport rules, but the chart makes clear that travel has been steadily decreasing ever since it recovered from 9/11 in early 2002. Obviously passport rules have nothing to do with this 7-year trend, and neither does the recession or the strength of the Canadian dollar.
Aug 20 2009, 1:55PM
A Strategic Split for Healthcare Reform
Aug 20 2009, 11:26AM
Death Comes As The End
There's been a lot of talk about end-of-life counseling, but what does it mean? Helping people to write a living will, or doing something a little blunter, like highlighting the downsides of aggressive treatment? This New York Times article follows a palliative care doctor. It's good, but also troubling. It's not clear to me that the patient is better informed about their disease; indeed, the main patient the article follows is never informed that she's dying. The palliative care doctors listens to what the patient is "really" saying, which sounds uncomfortably like old-style 1950s paternalism.
Aug 19 2009, 4:30PM
The Liberal Boycott Won't Take Down Whole Foods
Aug 19 2009, 3:20PM
The Price Of Obesity
I am, as noted before, very skeptical that public health attempts to lower the obesity rate will do much good. Previous public health campaigns to reduce drinking and smoking failed miserably. What worked? Banning smoking in public places, raising cigarette taxes sky-high, raising alcohol taxes, and making it increasingly painful to be caught driving while intoxicated. When these activities became too expensive and difficult, people stopped.
Aug 19 2009, 11:42AM
Why Not Try Health Care Reinsurance?
So here's an idea that was floating around a great deal during the 2004, but seems to have lost its luster in 2009: health care reinsurance. (for the ultra-wonky version, go here) The idea is that the government pools the high-risk patients and assesses the cost across the pool, making cherry picking much less attractive, and underwriting the marginal high risk patient less expensive. As ideas go, I'm still troubled by the potential implications for future government action. On the other hand, if we're going to have health care reform, I'd certainly support this over almost all the alternatives.
Aug 19 2009, 11:05AM
First Person Medical
I'm not sure I'm in any of the four groups of uninsured people you identify. I'm 59 years old, self-employed, and uninsured . . . because I can't afford to pay for even catastrophic coverage. I have a touchy gall bladder; I haven't had an attack in several years, but it's a pre-existing condition, so it raises my premiums, which are painfully high anyway for a man my age. I've been self-employed since 2002, when my former corporate job was outsourced. Does that fit any of your categories?
If the House of Representatives proposal passes, I expect that my premiums will be right at the legal maximum of 12% where subsidies kick in . . . assuming that my income doesn't rise past the threshold where a single man is ineligible for help! It averages around $40K, so 12% is $400 a month. I know I can't afford to pay that; I used to pay that much for Blue Cross, and it left me under chronic financial stress. So I'm planning to pay the penalties; 2.5% is $1K a year, which will hurt me, but it won't completely wipe me out. On the other hand, I can't see how it's supposed to help me maintain my health.
Aug 18 2009, 5:40PM
Walking Away From Secured Debt
So I'm working on a piece on consumer borrowing, which will be out, on the Atlantic's somewhat lengthy production cycle, right around the new year. For that content, you'll have to wait for the print edition. But here's an observation that I'm not going to use: a lot of people seem to think that they can walk away from their secured debt nearly for free.
Aug 18 2009, 5:23PM
What's Happening in the Housing Market?
Aug 18 2009, 8:29AM
Car Culture
Aug 17 2009, 12:42PM
What's Happening at the FDIC?
We've seen fewer bank failures than we had during the S&L crisis. But as this piece from the Wall Street Journal notes, the failures are worse. Three of the five banks that failed on Friday had to tap the FDIC fund to cover more than 50% of their assets.
Aug 17 2009, 10:49AM
Is What's Good for Pharma Good for America?
Aug 17 2009, 10:03AM
Boycotting Whole Foods is a Dumb Idea
Whole Foods is everything leftists talk about when they talk about "corporate responsibility."And yet lefties want to boycott the company because CEO John Mackey wrote an op-ed that suggests alternatives to single payer health care? It wasn't even a nasty or mean-spirited op-ed. Mackey didn't spread misinformation about death panels, call anyone names, or use ad hominem attacks. He put forth actual ideas and policy proposals, many of them tested and proven during his own experience running a large company. Is this really the state of debate on the left, now? "Agree with us, or we'll crush you?"
These people don't want a dicussion. They don't want to hear ideas. They want you to shut up and do what they say, or they're going to punish you.
The CEO of Whole Foods is not allowed to have a different opinion from you on a national domestic policy issue? Rilly?
Aug 14 2009, 5:40PM
Health Care: A Lesson In Practical Philosophy
John Holbo writes a long post asking me to clarify whether I'm against national health care as a matter of principal, or against national health care as a matter of pragmatics. To some extent, this is a meaningless question. Whatever practical objections I have must be judged on some principal. There's a fairly difficult philisophical question involved in whether we should permit a system that serves some current people badly in tangible ways, merely because it will probably save the lives of other unknown people in some unspecified way in the future.
Aug 14 2009, 2:43PM
Is Pharma A Victim Of Its Own Hype?
Consider the public face that our industry projects. Look at the press releases and the advertisements - what's the impression that you get? That there is a defined process for discovering drugs, for one thing, and what's more, that we are the master of it. Now, I know that we don't always send out that message. There are attempts to tell people about how many compounds have to be made, how many projects end up failing. But for the most part, we don't press-release that stuff.
Aug 12 2009, 2:20PM
Private Sector Welfare
Perhaps surprisingly, I'm pretty skeptical of a lot of the efforts to outsource social services. "Competition" for providing a lot of welfare services is kind of meaningless, and the feedback mechanism is pretty weak. Trash collection is easy to monitor--is there garbage on the streets?--an in consequence, privatization goes well. But the people experiencing any decline in the quality of social services are usually poor people who mostly don't vote. So the competition is merely to find a bidder who can cut services to the barest bone. For some conservatives, obviously, this is a feature rather than a bug. But when children or the developmentally disabled are involved, I don't think price should be our primary consideration in deciding how to provide services.
Aug 11 2009, 4:12PM
Did Big Government Prevent a Second Great Depression?
The question remains, what kind of Big Government? It wasn't the stimulus, which has barely started. Rather, we did three things differently than we did in 1932:
Aug 11 2009, 3:46PM
Government Official: It's Clunkers for Clunkers
"What we ended up with," said one senior Obama administration official, who would not speak on the record because he was being critical of his own administration's environmental bona fides, "is a program in which you trade in old clunkers for new clunkers."
Aug 11 2009, 12:38PM
More Reasons Why I Oppose National Health Care
Aug 10 2009, 6:03PM
Rationing By Any Other Name
"We already ration food; we just let the market do the rationing."
"We already ration gasoline; we just let the market do the rationing."
"We already ration cigarettes; we just let the market do the rationing."
Aug 10 2009, 4:22PM
Big Bonuses and the Future of the Financial Sector
Aug 10 2009, 10:31AM
The Politics of Cost Control
Is it fair to worry that the Democrats included an end-of-life counseling provision in the health care bill because they're planning to push Grannie off the ice floe as soon as they can get naional health care passed? No, and yes. No, because I don't believe that they want to bamboozle people into ending their lives before they should. It's quite clear from what Obama has been saying that he thinks there is a great deal of unnecessary care, particularly late in peoples' lives, that makes them worse off, or at least, no better off.
Aug 7 2009, 1:59PM
Hey Mister, Write My Online Dating Profile!
Highly verbal people with great writing skills tend to think so. But I know a lot of great people who can't write at all, people who are worth dating. (And a few of them, I have.)
Aug 7 2009, 1:13PM
Jobless Numbers: Good, Bad, or Indifferent?
The unemployment rate dropped 200 basis points, from 9.6% to 9.4%. That's great news. Except that labor force participation also dropped 200 basis points, which is what's propping up those figures. People basically gave up looking for work, and therefore aren't counted as unemployed.
Aug 6 2009, 7:10PM
Correction: Community Rating Is Even Worse
John Cole takes me to task for not knowing that health insurance premia have tripled in New York State. Indeed, he's right--I should have checked.
But this is not the "gotcha" the left believes. I erred so low because I was trying to be charitable to the cause of national health care. You see, the reason that insurance premia are so high in New York State is that New York State enjoys community rating, guaranteed issue, and a very generous bevy of mandatory services. The result is that the cost of insurance is very, very high. What I failed to realize was just how radically out of line New York's rules had pushed its health care costs. The average premium across the United States has increased about 25% since 2004. In New York, the rate of inflation has apparently been about 16 times that. I wasn't "aware" that insurance premiums have doubled and tripled over the last seven years, because for the country as a whole, this isn't true.
Aug 6 2009, 4:47PM
The Price of Innovation
Dean Kamen has some lengthy thoughts on innovation that are well worth reading. As the article notes, besides the Segway and the world's first stair-climbing wheelchair, "His innovations include the first wearable infusion pump, a portable kidney dialysis machine, a more flexible stent, one of the world's most advanced prosthetic arms, and many other devices used in the treatment of diabetes, heart disease, cancer and other conditions". Kamen's core point is that innovation is expensive. You can't stop rewarding innovators and expect to have as much of it.
Aug 6 2009, 10:53AM
A Disease By Any Other Name Would Still Be Really Impairing
Why is restless leg syndrome always the poster child for people who hate pharma advertising? Both my fiance and I clearly have it, and you know what? It's really not very much fun not being able to sleep, nor are the cramp-like sensations that accompany the uncontrollable urge to kick your legs.
Aug 6 2009, 10:05AM
Needle Exchange and the Politics of Ick
This restriction might make sense if needle-exchange programs increased the number of addicts. But they don't. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases at the National Institutes of Health, has comprehensively reviewed the scientific studies on needle exchange. "It does not," he says, "result in an increase in drug abuse, and it does decrease the incidence of HIV. . . . The idea that kids are going to walk out of school and start using drugs because clean needles are available is ridiculous." My experience in Washington was consistent with Fauci's view. Addicts who came for needles were generally in their 40s and 50s. The availability of clean needles no more caused their addiction than the provision of clean shot glasses would cause alcoholism," - Michael Gerson,I am sure this is correct, and I (of course!) favor needle exchange, insofar as I can be said to favor anything that makes me squeamishly clutch my arms to my chest.
Aug 5 2009, 4:38PM
The Abolition of Medicare
Mark Kleiman suggests that Democrats start implying that Republicans want to abolish Medicare. This is a rather common trope among Democrats. But in this case, I don't think it will work.
Aug 5 2009, 10:07AM
Congress Bans Books
Aug 5 2009, 9:16AM
Jobs Data Worse Than Expected
Aug 4 2009, 7:45PM
Just Say No to . . . Drug Companies?
Speaking of Ezra Klein's obsession with experts, I'd like to suggest another class of experts he may not have considered: people who run companies. I know, I know--it feels too much like conceding to the kind of annoying right wing ideologues who think that the market is so perfect that if anything good is possible, a company will do it--indeed, will already have done it. Believe it or not, those people annoy me too.
Aug 4 2009, 5:50PM
A Rambling Response On Obesity
Last week, Ezra Klein accused me of not having talked to more than a handful of obesity experts. Alas, had he done a little googling, he could easily have discovered that I was interviewing public health experts about obesity back when he was, by my count, finishing up Freshman comp. I've paid quite a bit of attention to the subject over the years, and over the years I've changed my mind about it quite a bit, in part because some of the science has changed, and in part because I've looked at different science. I don't agree with Paul Campos about everything, but I do agree with some of his core propositions:
Aug 4 2009, 9:57AM
How Not to Save Billions From Medicaid
First, Ezra's assertion that the reconciliation rules ban health care reform is at best unproven and contrary to the plain language of the law. Those rules bar putting things in a reconciliation bill that have only an "incidental" effect on the budget. But, say, prohibiting discrimination against pre-existing conditions would have more than an incidental effect. Such a move, for example, could save billions from Medicaid, because it would allow people to get insurance in the private market who might otherwise have to go to Medicaid.
Aug 4 2009, 8:59AM
You Can't Inflate Your Way Out of Debt
Clusterstock notes that it doesn't quite work this way:
Jul 31 2009, 1:11PM
Drug Wars
Jul 31 2009, 10:37AM
GDP Falls Less Than Expected
Jul 31 2009, 9:55AM
Why the Government Cannot Solve Obesity
It still remains to figure what the environmental change in America is that has caused this: whether the government is largely responsible, and regardless of that, whether the government can stop it.
Jul 30 2009, 5:24PM
More on Obesity: Is the Government to Blame?
McArdle approaches obesity as if it were a Foucauldian construct: a category invented by the government to justify an exercise of power. The government has no business intervening on the level of individual choice and it shouldn't get into the business of behavioral suasion because it always fails. She's right to note that information about health risks associated with overconsuming fat and sugar and salt are saturated throughout society, even supersaturated. Everyone knows how bad this stuff can be. For her, that's the end of the argument. Government can help to provide information about how to make better choices, but it cannot and should not try to persuade people to make better choices. Indeed, the push for people to make better choices produces the stigma that makes the bad thing bad in the first place.
Jul 30 2009, 12:17PM
Why We Can't Stop Obesity
Expert: We don't have any known way to make obese people thin except gastric bypass surgery, which has a 2% mortality rate by itself.
Thin person: But I am very thin!
Jul 29 2009, 6:26PM
America's Moral Panic Over Obesity
Jul 29 2009, 10:41AM
Department of Awful Statistics
Last night on the O'Reilly Factor, Bill turned to the audience letters. From Peter in Canada: "Has anyone noted that life expectancy in Canada under our health system is higher than the USA?" Bill wasn't phased, but he did use some creative math to answer. "Well Peter, that's to be expected," he said, "we have ten times as many people as you do!"
There is actually an interesting point here: up to a certain point, population density decreases your life expectancy quite dramatically. But I'm pretty sure that Bill O'Reilly was not making that interesting point. I'm pretty sure he was saying something incredibly innumerate.
Jul 28 2009, 3:03PM
Why I Oppose National Health Care
Basically, for me, it all boils down to public choice theory. Once we've got a comprehensive national health care plan, what are the government's incentives? I think they're bad, for the same reason the TSA is bad. I'm afraid that instead of Security Theater, we'll get Health Care Theater, where the government goes to elaborate lengths to convince us that we're getting the best possible health care, without actually providing it.
Jul 28 2009, 10:21AM
When to Kick the Homeless Out of Shelters
Jul 27 2009, 3:54PM
Does Adverse Selection Really Apply To Healthcare?
I'm afraid we're all just going to have to adjust to the fact that it's going to be All Healthcare, All the Time until the August recess.
So: onto adverse selection.
Adverse selection is the idea that information asymmetries in markets can lead to sub-optimal outcomes. Say 30% of all used cars are lemons that will cost you a fortune to repair. A new car is worth $10,000 while a good used car is worth $5,000, but a lemon is only worth $1,000, because of the repairs.
Jul 24 2009, 5:32PM
The Value of Transparency
I know I said I wasn't going to blog about wedding planning. It turns out that this was a lie. The economics of the thing are just fascinating.
First rule: there are no awesome bargains, particularly in DC. If you want to save money on the catering, you have to rent a venue . . . and the venues price accordingly. No one in DC has a back yard which serves as reasonable competition for a wedding, and hello, price inflation!
Jul 24 2009, 11:17AM
Is Organ Selling a Moral Quandary?
Jul 23 2009, 1:57PM
Is Health Care Reform Falling Apart?
Jul 23 2009, 11:16AM
Look at These Green Shoots . . . From 1930
Market opened at about the previous low levels with some further decline; increasing resistance to bear efforts as the morning progressed; rallies developed in recent trading favorites. Good news on steel encouraged bulls, as well as rumors of important operators "lining up their forces for another bullish demonstration;" rally broadened in the afternoon. Good rebounds from Monday lows in many majors. Banks and trusts higher.
Administration members reported telling Wall Street that business has turned corner, and should curve slowly upward until winter, becoming clearest in October. No forecast beyond that ventured. However, administration strenuously denies rumors of using "its influence to bring about organized support for the stock market."
Jul 23 2009, 7:58AM
So How'd That Obama Presser Go?
Jul 22 2009, 12:11PM
The Duty of the Wonk
I was arguably too hard on progressive pundits yesterday when I said that they've led their ideological compatriots to unrealistic expectations of the process. After all, we need wonks to get their wonk on: advocating what's a good idea, rather than what is politically feasible. That's how you move broad political sentiment towards better policy.
Jul 22 2009, 11:19AM
The ACLU to Religious Minorities: Cut It Out!
Jul 21 2009, 5:01PM
Why the Democrats Can't Cut Costs
Hrm. Didn't work out as planned. Arguably, in fact, it made things worse: by assenting to budget deficits, Republicans took a price tag off new spending.
On health care, it seems to me that many Democrats want to do the same thing in reverse. Pass programs now, and figure out how to control costs later.
Jul 21 2009, 2:41PM
The Sheds, Ye Shall Always Have With Ye
Jul 21 2009, 9:16AM
Why Health Care Reform Is So Troubled
Jul 20 2009, 6:26PM
How Much Does Central Bank Independence Matter?
Why are more independent central banks better at fighting inflation than less independent central banks? There is nothing magical about independence that makes for low-inflation. Suppose we pick someone at random and give them complete power over monetary policy. Such a central banker would be very independent but I wouldn't count on this policy resulting in much in the way of systematically lower inflation.The primary reason that independent central banks are better at controlling inflation is that absent direct political control the default selection mechanism favors bankers, i.e. lenders, people whose interests make them more favorable towards lower inflation.
Thus, independence is a political decision that favors lenders in the decisions of monetary policy. Now, depending on the alternatives, there may be good reasons for making this choice but we should not fool ourselves into thinking that we have depoliticized money. We should not be surprised, for example, that "independent" central banks tend to make lender of last resort decisions that protect banks and bankers.
I don't think this is quite right.
Jul 20 2009, 1:11PM
Waiting for the Mid-Session Budget Review
The White House is putting off issuing its mid-session budget review until after Congress goes on its August recess. The mid-session review is the update to Congress that outlines how actual revenue and spending are matching up to the projections. It's almost always issued in mid-to-late July. Delaying it until the recess raises suspsicions, as the AP puts it, that Obama is expecting bad news, and wants Congress as committed as possible to new spending before he unleashes it.
Jul 17 2009, 3:07PM
What Did the American Taxpayer Get for its Billions?
Hard to say. On the one hand, as
What benefit might we get from all these record profits? A more liquid, better capitalized banking system. On the other hand, if the bankers simply ship the profits back out the door as dividends and paychecks, what we'll get is a big fat pile of nothing.
Which will happen? We don't know yet, for all of our dark suspicions. A lot has to do with the regulators--and also with the next few quarters. It wasn't totally surprising that the banks posted substantial profits as the capital markets recovered from total meltdown. Probably things won't look quite so outlandish in the future.
* I was not trying to deny Brad his rightful due; rather, I try not to quote people by name if the conversation wasn't clearly on the record, because sometimes people get upset. Now that he has outed himself, I gladly attribute it to its wise source.
Jul 17 2009, 11:48AM
The Dark Side of Leverage
It was bizarre sort of pop quiz; he had come out of private equity, while I had been building servers for the last four years. I floundered.
Jul 17 2009, 10:52AM
Is the ACU "Pay-to-Play" Racket Real?
Jul 16 2009, 3:21PM
The Economics of Blogging
Jul 16 2009, 2:40PM
Is the Apple iTunes-iPod-iPhone Trio a Monopoly?
What monopoly, you may ask, and indeed, I did. Apple has a monopoly over these things only in the trivial sense that P&G has a monopoly over Charmin, and I have a monopoly over the chocolate cake I baked last night.
Jul 16 2009, 12:29PM
On Income and Consumption Inequality
Will Wilkinson has a new paper out on inequality, which I will be blogging about later. But Ezra Klein has an interesting response, which focuses on the difference between income inequality and consumption inequality.
I broadly agree with Will that consumption inequality, not income inequality, is what matters. If the rich have access to broad classes of goods that the poor can't have, I find this worrying. On the other hand, if the problem is that Bill Gates has a really awesome 80 inch flat panel television, while the poor have to be content with a 32 inch CRT, well, I can't say my heartstrings are plucked very tight by this injustice. So it's important to know what the real differences are.
Jul 16 2009, 11:08AM
CIT RIP
Jul 15 2009, 4:11PM
More Thoughts on the Health Care Surtax
Jul 15 2009, 3:29PM
How Do We Solve Obesity?
Jul 14 2009, 3:55PM
Republicanism and Its Discontents
Jul 14 2009, 12:25PM
Organ Donation and the Gift of Life
Jul 14 2009, 11:50AM
Why Antibiotics Regulation Is Good for Us
But Megan, you will say, government regulation! Nanny state! Ecofreaks!
Jul 14 2009, 11:28AM
Goldman Sachs' Fabulous Quarter
Still, the populists are bound to make hay out of this, and it's hard to blame them.
Jul 14 2009, 11:00AM
Financial Suckers Making Financial Policy
So should we be worried that Alan Grayson of the House Financial Services Committee, got taken in by a ponzi scheme? Does this render him unfit for the position, as I've seen some conservative commentators claim?
Jul 13 2009, 4:50PM
Villains of the Piece
A woman gets into her car, and waves at her husband, who is crossing in front of the car. Pressing the pedal to the ground, she puts it into gear . . . and steams forward at full speed, crushing him against the wall of the garage.
Is she a villain? It rather depends, doesn't it?
Jul 13 2009, 3:52PM
Innovations, Pets, and Health Care Reform
President Obama talks about the importance of prevention in a way that suggests that when people have heart attacks it's their own fault. But my wife, a longtime vegetarian and marathon runner, had a freak heart attack at the age of 37.
Jul 10 2009, 3:14PM
Matt Taibbi Gets His Sarah Palin On
Jul 10 2009, 12:06PM
Funding Health Care With a Surtax
Jul 9 2009, 4:37PM
Extreme Health Care
Boy, I'd sure like to see some backup for that. If by "extraordinary" Megan means the most extreme 0.001% of procedures, then maybe she's right. Maybe. But nothing I've read about Western European healthcare systems makes me believe that there's any substantial difference between the way they treat severe illnesses and the way we do it. And no systematic difference in success rates for such treatment either. Nor should this come as a surprise, since most extreme medicine is practiced on older patients, who are covered by a public plan both here and in Europe.
Jul 9 2009, 11:23AM
Are the Rich Getting Worried About Taxes?
This is true, I agreed. And just what, I wondered, had he thought was going to happen if he elected Obama? Not clear.
Jul 9 2009, 10:39AM
Reports of the Death of Obamanomics are Greatly Exaggerated
Jul 8 2009, 10:38AM
A Second Stimulus Or Health Care?
Paul Krugman asks why favoring a second stimulus, like opposing the Iraq War, has been written out of the public argument. Now, I seem to remember a very robust and lengthy public argument about the war, which couldn't have persisted without opponents. But leaving that aside, what about the stimulus?
Jul 8 2009, 9:57AM
A Public Plan and the Law of Unintended Consequences
Jul 8 2009, 9:30AM
Are Democrats Really Good for the Economy?
Jul 8 2009, 8:27AM
In Defense of "Off-the-Record"
But this Jack Shafer article is just silly. Off the record conversations allow journalists to get much deeper understanding of what's going on. That's why journalists talking to their friends about their jobs at companies of interest to the journalist talk off the record. I'm sure that Jack Shafer has done this, or else he doesn't have any friends in the media.
Jul 7 2009, 2:41PM
Medicare's Mythical Administrative Cost Savings
The title of this post is going to make some of my readers very angry. Medicare has lots of administrative cost savings, they will say. This may be so. But I mean mythical in another sense: there's ultimately no way to prove or disprove these amazing savings. The problem is indeterminate.
Jul 7 2009, 11:21AM
Why Retraining Isn't the Answer
It was not my cup of tea. On the other hand, I did like to eat regularly, and there were surprisingly few more lucrative opportunities for recently minted English majors.
Thus did I make one of the best and worst decisions in my life:
Jul 6 2009, 5:31PM
Why Politics are Killing Cap-and-Trade
Jul 6 2009, 5:05PM
City Slickers Meet Farmhands
I read this article on urban farming this weekend, and thought "heartwarming, but uselss." So far it's required subsidies of $1 million to produce a small amount of food--the Times glowingly says that it "provide(s) healthful food to 10,000 urbanites", but of course, all that means is that 10,000 people, give or take, have received at least one vegetable apiece. It's not providing anything like the majority of their food intake. And that's in a rust-belt city with a lot of spare land and spare labor.
Jul 6 2009, 12:57PM
Is Our Stimulus Working?
Bruce Bartlett has written that the Obama administration underestimated how quickly the stimulus would affect the economy, reducing unemployment almost immediately. Krugman calls this "totally false":
Jul 2 2009, 11:44AM
When Blogs Were Young
Jul 1 2009, 6:33PM
Wal-Mart and Health Insurance: The Theories of the Case
I find it hard to believe that none of the liberal commentators breathlessly celebrating Wal-Mart's "capitulation" on national health care have even entertained the most parsimonious explanation: that Wal-Mart is in favor of this because it raises the barriers to entry in the retail market, and hammers Wal-Mart's competition. Yet somehow, this appears nowhere in any of the analysis. These are the explanations that they found more plausible:
Jul 1 2009, 5:41PM
Old Media Blues
Let me say it another way: The barriers of entry into the journalism business have been battered down, making it easier than ever to enter the profession. That will read as small consolation to the journalists who have had their publications shot out from under them--the Rocky Mountain News, the Seattle Post-Intelligencer, the Ann Arbor News (come July 23), and magazines too numerous to tally. But please notice that I'm not saying there has never been a more lucrative or prestigious time to become a journalist. The cash and status associated with the profession are fairly recent. Until the early 1970s or thereabouts, the average journalist made an average salary (if that), and his societal standing was modest.
If the downside of the battered-down barriers to entry is less pay and lower status, the potential upside is that a flood of new entrants into the field could portend a journalistic renaissance. No, I'm not saying that every junior blogger and pint-size videographer will immediately stand as tall as Barton Gellman and Errol Morris and that the Washington Post and NBC News should be flushed. But journalism has generally benefited by increases in the number of competitors, the entry of new and once-marginalized players, and the creation of new approaches to cracking stories. Just because the journalism business is going to hell and it may no longer make economic sense to maintain mega-news bureaus at the center of war zones doesn't mean that journalism isn't thriving.
From where I drink, the champagne is still dry, cold, and fizzy.
Jul 1 2009, 12:06PM
Aspen Bulletin: Austan Goolsbee Explains It All
I haven't gotten to attend many panels this year, because I've been on too many. But of the ones I have gone to, the Austan Goolsbee Q&A is by far the liveliest. People who attend Aspen are very successful, and the questions he's being asked hit close to home for them: marginal income tax rates, taxation of worldwide corporate profits, H1B visas for foreign graduate students educated in America.
Jun 26 2009, 2:53PM
Rethinking the Community Reinvestment Act
Jun 25 2009, 11:13AM
Ben Bernanke Faces Congress
Jun 25 2009, 10:28AM
Is Unemployment Getting Worse Slower, or Just Worse?
Then, of course, how are you supposed to feel when the initial jobless claims figures start going back up, as they did this week?
Jun 23 2009, 4:05PM
The Magic of Veterans Affairs Health Care
Walter Reed is an army hospital, not a veteran's hospital. The two systems have nothing to do with one another. That's why the problems at Walter Reed led to the resignation of the Secretary of the Army and not the Secretary of Veterans Affairs.Ezra wins on points. But here's the thing:
Jun 23 2009, 3:52PM
"Green Shoots" Lessons from the 1930s
Now you can experience some of the magic of cognitive dissonance yourself, through a blog that simply summarizes the daily newspaper from 1930. A sample of yesterday's entry:
Jun 23 2009, 10:30AM
Healthcare Economics: Standing Athwart History, Shouting "Stop!"
Jun 23 2009, 8:15AM
Department of Regulatory Risk
Jun 22 2009, 4:32PM
Rethinking the Kindle
Jun 22 2009, 3:56PM
Steve Jobs Is Very, Very Sick
Orac has some extended explanation. Key points:
1) Steve Jobs' wealth and power let him jump the queue for organ transplants in a way that even I am uncomfortable with--and I am in favor of paying organ donors.
Jun 22 2009, 12:48PM
Marking Up Waxman-Markey
But the real question, I think, is whether the low cost is a feature or a bug. The only way a bill is going to have an impact is if it causes real financial pain to American households--enough to get them to change their behavior. Waxman-Markey obviously is not going to do that. And indeed, the projections of its effect on global warming are entirely negligible.
Jun 22 2009, 9:34AM
Another Casualty of the House Bubble: Labor Mobility
Many Americans are mired in a housing gridlock: They can't afford to sell their homes because property values have fallen, causing millions of people to owe more on their homes than they are worth. And, many can't move to take new jobs until they sell their homes.
Jun 22 2009, 7:14AM
Rogue Cancer Unit at the Veterans Administration
Jun 19 2009, 3:58PM
Fear of Failure
On the other hand, something niggles me about the end:
Jun 19 2009, 2:40PM
Fail-Proof Systemic Risk Regulator? Not Possible.
It's true that the Fed is the agency with the brute force to make things happen in an emergency. But I'm not sure that's the relevant thing to think about. What we want is some kind of body that works to prevent emergencies. That requires credibility and influence, but it doesn't necessarily require a trillion dollar balance sheet.
I guess the model I have in mind here is the Congressional Budget Office. The CBO is unknown to most people, but despite its small size and low public profile it has a remarkable amount of power. This power comes from two sources. First, it has institutional credibility. I honestly don't know how it's managed to keep this credibility in the face of what must be enormous partisan pressure, but it has. It's widely considered an honest broker and its budget estimates are taken seriously by everyone.
Jun 19 2009, 10:30AM
Can GM Become Competitive?
Jun 18 2009, 1:50PM
Who Will Regulate the Regulators?
Jun 18 2009, 1:24PM
Is Comprehensive Health Care Reform Dead?
Jun 17 2009, 5:53PM
The Laffer Curve and the Cost of Taxation
Jun 17 2009, 1:34PM
A New Era for Financial Regulation
Jun 17 2009, 7:32AM
Heightened Contradictions Over Health Care
It's also certainly not a foregone conclusion that the US will get a medical system "more like those medical systems that get better health outcomes for less money."
My theory is that we'll get a system just like Medicare expanded to cover more people. But Medicare doesn't get health outcomes for less money. The primary evidence about 30% inefficiency that people keep quoting are studies showing that in some places Medicare spends 30% more for equal outcomes.
I completely fail to grasp this magical argument whereby Medicare is unreformable now, but adding even more patients to the rolls will create the incentive for exactly the sort of cost-cutting reforms that people hated when the HMOs were doing them in the early '90s, and got laws passed to prevent.
Jun 16 2009, 12:29PM
The Laffer Curve of the Left
Jun 15 2009, 5:31PM
A Bearish Day
Maybe the lesson is that the markets need a steady stream of good news to keep from sliding backwards. Or maybe everyone was just crabby and hungover. I'm wary of too many generalizations from one bearish day.
Jun 15 2009, 9:49AM
Atlantic Business Grows 50% In a Single Day!
Dan comes with a wealth of real-world experience as a consultant and investment banking analyst, as well as a recent stint at Forbes. We're very excited to have him, and hope you'll join Derek and I in welcoming the third member of the Atlantic Business team.
Jun 15 2009, 9:12AM
Where is the MSM Iran Coverage?
I haven't commented on it because other than the obvious--elections should result in the election of the person who got the most votes--I don't have anything to add. I know nothing about Iran, and I don't blog much about foreign policy because I don't know much about foreign policy.
But I think Andrew's reader's question is ultimately a business story.
Jun 15 2009, 8:21AM
Why Doesn't the Market Produce Non-Smoking Bars?
Jun 15 2009, 7:58AM
Delphi Deal Undone by Bankruptcy Judge
Jun 12 2009, 11:57AM
Nominal Versus Real Friendship
Jun 12 2009, 8:51AM
Why Nobody Cares About the Budget Deficit
Maybe that "about" saves Megan from total surrealism. But is she actually saying that any president would have cut taxes heavily and also increased domestic spending heavily and added a new (unfunded) crippling healthcare entitlement - as he launched a $3 trillion war on two countries? Is she saying that Al Gore was proposing this in 2000? That any president would have put two open-ended, enormously expensive wars off-budget? Is she also saying that the massive deficits projected under current plans have nothing to do with Medicare D? Or that Bush's lax regulation of the banking industry had no role in the depression that has devastated government finance?
No you cannot blame Bush for the deeper issues of Medicare A-C, or social security, although you could argue that his failure to restrain them before the boomers retired was an act of omission no real fiscal conservative would have countenanced. But really: this faux world-weary, pox-on-both-your-houses excuse-making for one of the most fiscally reckless presidencies in history won't play.
No, I didn't say that any president would have spent on the specific, often stupid things that Bush did. They would have found their own specific, often stupid things to spend on, and maybe, hopefully, even some non-stupid things.
Jun 11 2009, 5:04PM
What Does the Steep Yield Curve Mean?
Jun 11 2009, 4:37PM
Initial Jobless Claims Could Have Been Way More Horrifying Than They Actually Were!
Jun 11 2009, 2:37PM
How Much Should We Worry About Interest Rates?
Jun 11 2009, 2:01PM
Can We Really Bail Out California?
Jun 10 2009, 6:45PM
The Deficit Blame Game
Jun 10 2009, 2:04PM
Why I Think the Housing Bubble Has Not Yet Bottomed
Jun 9 2009, 4:45PM
Coup in Albany: What Does It All Mean?
Jun 9 2009, 1:01PM
The Benefits of a Public Health Plan Alternative
Jun 8 2009, 9:17AM
Will the Government Enact Compensation Limits on Non-TARP Banks?
Jun 8 2009, 8:18AM
Should Bush have Finished off the Automakers?
Jun 5 2009, 1:25PM
Will GM Rewards Points Survive Bankruptcy?
Jun 5 2009, 9:31AM
Why Elizabeth Warren's New Bankruptcy Study is So Bad
Er, no. The world is full of studies that do this. I get mad at only a minority of their authors. I am mad, first of all, because Elizabeth Warren is not a third-year statistically illiterate policy analyst at a health care advocacy group. She's a professor at Harvard, and the head of the Congressional TARP oversight panel. This conveys a certain responsibility to present data in the most illuminating way, not in the way that will induce journalists to say things that aren't true.
Jun 4 2009, 7:15PM
Elizabeth Warren and the Terrible, Horrible, No Good, Very Bad, Utterly Misleading Bankruptcy Study
Now, it is possible that this is true. The fact that it seems to disagree with every other study I've ever read that is not authored by Elizabeth Warren, and also, the self-reports of the people in her study (only about a third of whom attribute their bankruptcy to a health problem) could just be a fluke. It doesn't necessarily mean that it's wrong.
Yet upon closer examination, it turns out that it is not just wrong, but actively, aggressively wrong. Warren and her co-authors have obscured important and obvious facts that call the integrity of the work into serious question.
Jun 4 2009, 11:35AM
Is It Evidence? Is it Medicine?
Jun 4 2009, 10:53AM
Is 3D the Future of Film?
My feelings mirror Peter's about the movie: it was by far the best thing I've seen all year. Pixar movies are usually brilliant, and this was no exception--indeed, it may be my favorite of their films.
Unlike Roger Ebert, we saw it in 3D. And this triggered something of a disagreement as to whether 3D is the future of movies. Peter sort of endorsed Ebert's indictment of 3D:
Jun 3 2009, 1:16PM
The Rich Really Are Different
Jun 3 2009, 12:55PM
Time To Shorten Patent Terms
Nominally, copyrights in the United States are for a limited duration. But the corporations that own valuable, decades-old copyrights--think Mickey Mouse and Batman--don't want to see those copyrights expire. So they've gotten good at lobbying congress to retroactively lengthen copyright terms in order to ensure that Mickey and Bruce Wayne will continue to be valuable commodities forever.
Jun 3 2009, 9:30AM
Is Obama Roosevelt, or Reagan? Neither.
Jun 3 2009, 9:00AM
A Tiny Slice of Credit History
Jun 2 2009, 9:19AM
Poverty and the Problem of Scale
Jun 1 2009, 11:35AM
Is America's Incarceration Rate a Labor Market Outcome?
Jun 1 2009, 10:10AM
What's Good for GM Isn't What's Good For America
May 28 2009, 8:37AM
Closing Chrysler Dealers: Cui Bono?
May 27 2009, 11:10AM
Obama's Deficit Should Scare Us
But I do want to point to two articles that point to a growing problem that the Obama administration has failed to address in any serious way: the exploding deficits, and the resulting need to borrow heavily. USA Today points out that tax revenues are plummeting at the same time as spending is exploding:
May 22 2009, 3:41PM
Should Defaulters Feel Bad?
May 21 2009, 1:07PM
The Road to Bankruptcy
But en route to that moral, it turns out the story has been tidied up a little. Patty Barreiro, Andrews' wife, has declared bankruptcy twice. The second time was while they were married, a detail that didn't make it into either the book or the excerpt that ran in last Sunday's New York Times Magazine.
May 21 2009, 11:26AM
Department of Awful Statistics
May 21 2009, 9:22AM
Credit Report
May 20 2009, 5:27PM
Will the Urban Renaissance Outlast the Bubble?
May 20 2009, 4:44PM
Comparative Effectiveness Redux
Maybe you should elaborate for some of your readers on the difficulty of arguing for null effects. In my experience, when people trying to get peer-reviewed science pubs arguing for null effects they do multiple experiments or the strongest test possible (which seems most relevant here). This study seems to have done neither and instead subjected all inhaler patients to crappier inhalers by showing that the mildest sufferers of asthma did not show a statistically significant difference in their relatively insensitive test.
May 20 2009, 12:22PM
The Moral Hazard of a State Bailout
May 19 2009, 6:05PM
Is California Too Big to Fail?
May 19 2009, 4:08PM
The High Price of Poverty
May 19 2009, 2:52PM
Those Were the Days My Friend
May 19 2009, 12:05PM
High Standards
1) It will raise the prices of cars, and make them less safe...
May 18 2009, 2:59PM
Busted
May 18 2009, 1:58PM
Maureen Dowd's Astonishing Feats of Verbal Memory
May 18 2009, 1:27PM
Empty Desks at Treasury
May 18 2009, 9:58AM
Economy Ends; Women and Minorities Affected Most
May 15 2009, 5:55PM
Putting the "Trade" in Cap and Trade
May 15 2009, 1:29PM
Debt: A Writer's Life
May 15 2009, 11:01AM
Dealers: What Are They Good For?
May 14 2009, 2:24PM
Chrysler to Dealers: You're Fired!
May 14 2009, 2:09PM
Sign of the Times
May 14 2009, 11:32AM
The Perils of Parking in DC
May 13 2009, 2:33PM
Medicare is Going to Bankrupt Us, Which is Why We Need Universal Health Care
May 13 2009, 11:30AM
Green? Shoot.
May 13 2009, 8:59AM
Gains from trade
May 12 2009, 5:34PM
The Big Problems with Social Security
May 12 2009, 3:20PM
The Better Bankruptcy Bureau
May 12 2009, 8:17AM
The Risk of Debt
May 11 2009, 3:17PM
Obama's Magical Mystery Tour of Health Care Savings
I think we found out today: magic!
May 11 2009, 10:42AM
Will Private Borrowing Crowd Out Uncle Sam?
May 8 2009, 4:13PM
Bankruptcy: Cui Bono?
May 8 2009, 9:47AM
Canadian Exceptionalism
May 7 2009, 4:58PM
Facing Foreclosure
May 7 2009, 2:28PM
DX Dreams
May 7 2009, 12:10PM
Innovation Pressure
May 6 2009, 4:32PM
How Do I Know That the Chrysler Bailouts are About the Unions?
May 6 2009, 3:12PM
The Price of the King's Shilling
May 6 2009, 10:57AM
Bank of America needs $35 billion
I'm sure I'm about the only one who feels sorry for Ken Lewis, but really. He bought Merrill under the twin prods of Paulson's appeals to his patriotism, and the implied threat that banks who made the Treasury secretary unhappy would have a very hard time of things going forward. Realistically, Ken Lewis didn't have much choice. Now it turns out that in that one moment, he steered his bank from powerhouse to poorhouse.
Paulson may have been right that this was necessary to save the system. If that's true, Bank of America shareholders are undoubtedly better off than they would have been in a more catastrophic collapse. On the other hand, we can't see that other, terrible world, and in this one, the BofA shareholders have been handed an unfair share of the bill for averting an apocalypse that didn't quite happen. I expect Ken Lewis will soon decide he needs to retire so he can spend more time with his family . . . complaining about getting fired.
May 5 2009, 5:46PM
The Dangers of Playing with Credit Markets
May 5 2009, 4:05PM
Unrated
May 5 2009, 10:56AM
Why is This Bubble Different From All Other Bubbles?
May 4 2009, 1:01PM
Should I Worry About Chrysler?
May 4 2009, 1:00PM
Secondary Markets are Real Markets
May 4 2009, 11:52AM
Falling Personal Savings: All Bill Clinton's Fault?
May 4 2009, 11:34AM
Boston Globe, We Hardly Knew Ye
May 2 2009, 4:08PM
Berkshire Hathaway Liveblogging: The Perils of Executive Compensation
May 2 2009, 2:12PM
Berkshire Hathaway Liveblogging: "Unending Losses" for Newspapers
May 2 2009, 12:23PM
Berkshire Hathaway Liveblogging: Coming Cram Downs?
May 2 2009, 11:40AM
Berkshire Hathaway Liveblogging: Life After Buffett
May 2 2009, 11:15AM
Union Power
May 1 2009, 1:16PM
What's the Point of a Little Gas Tax?
May 1 2009, 12:38PM
Chrysler: The Car of the Future!
Apr 30 2009, 7:27AM
Ken Lewis Out At Bank of America?
Right now, Ken Lewis remains CEO--the board expressed unanimous support. But at this point, it seems likely that it's only a matter of time. (If it isn't, it will become a famous business school case on the Principal-Agent problem.)
It's hard to imagine that it wasn't long ago that Ken Lewis was the guy who was celebrated for transforming BofA into the 800 pound gorilla in the banking market. Every time I read one of those glossy CEO profiles, I remember how many of them end this way.
Apr 29 2009, 12:52PM
Is There a Doctor In the House?
Apr 28 2009, 12:48PM
Penny Wise, Pound Foolish
One enterprising videoblogger, however, has undertaken to illustrate the impact of Obama's recently announced $100 million in budget cuts:
Apr 28 2009, 8:59AM
Stressed!
What I'm not clear on is how this helped. I think Bank of America and Citibank were well aware that they really needed some capital to steady their balance sheet. Certainly, the rest of us weren't in any doubt. But capital's sort of scarce right now--you may have read something about it in the papers. Announcing to the world that Bank of America and Citibank are kinda teetering doesn't seem likely to help them tap the capital markets. It's yet another roundabout way of saying, "Hey, you know, I think we have to give you some more money."
Apr 27 2009, 5:04PM
GM Makes The Moral Equivalent of a Hail Mary Pass
Apr 27 2009, 3:56PM
Recessionitis: Why Do Startups Hire People Right Before Going Belly-up?
Apr 27 2009, 3:15PM
The End of Capitalism?
Apr 27 2009, 12:26PM
Portfolio Magazine: Born May 2007-Died April 2009. R.I.P.
Apr 27 2009, 6:54AM
The Worm Turns
Apr 26 2009, 1:53PM
Those Swine!
The mortality in Mexico is shockingly high: 81 cases out of 1300, or about 6%. The great Spanish Flu pandemic, on the other hand, had a mortality of about 2.5%. Normal rates for flu are less than a tenth of 1%, with most of those deaths occurring in people who are already weak: children, the elderly, the immunocompromised. The Spanish Flu hit hardest the 15-34 age group, who seem to have been done in by their own strong immune response. It's not clear which pattern this flu follows.
Apr 25 2009, 5:16PM
Car Talk
Apr 24 2009, 4:34PM
De-Stressing
The banks will be fine if the economy is fine, says Treasury. (And the economy will be fine if the banks are fine!) But then there are all those haunting passages in the Monetary History of the United States where they talking about how swimmingly everything was going in 1931 . . . right up to the point where the Second Banking Crisis, suddenly and for no apparent reason, appeared.
Apr 24 2009, 9:49AM
Fair Pay
Apr 24 2009, 8:38AM
PPIPed
Apr 23 2009, 3:46PM
Chrysler Headed for Bankruptcy?
Apr 23 2009, 2:06PM
Ken Lewis: Paulson Made Me Do It!
Apr 23 2009, 12:16PM
Annals of Advertising: The Teeny Boppers Retire
Apr 23 2009, 11:42AM
Fiat Goes Big
Apr 22 2009, 4:29PM
MBAs Return to Their Roots
Apr 22 2009, 11:42AM
TARP Cops
Apr 22 2009, 11:27AM
Freddie Mac CFO Commits Suicide
Apr 21 2009, 4:49PM
The Price of PPIP Participation
Apr 21 2009, 3:42PM
How Big is a Budget Number?
Apr 21 2009, 2:13PM
Blogging For Big Bucks
Apr 21 2009, 11:20AM
Mad Ireland
Apr 20 2009, 4:51PM
Did Chrysler Execs Tank the Company Over Compensation Fears?
Apr 20 2009, 4:06PM
Financial Journalism Shut out of Pulitzers
Seriously, though, I have to wonder if this isn't an education problem. The Pulitzer committee doesn't want to get caught in an embarassing error, implicitly endorsing a theory that turns out to be wrong. Neglected children are comprehensible, and everyone agrees that they're terrible, so they make great Pulitzer fodder. Credit default swaps are trickier. Why take the risk?
Apr 20 2009, 3:53PM
Question of the Day: Bank Robbers!
How has it been lost on people that Citi's new CFO (Ned Kelly) has the same name as an infamous Australian bankrobber?
I don't know, but what once was lost, now is found.
Apr 20 2009, 2:51PM
No Parting from TARP
Apr 20 2009, 11:55AM
Pity Party
But the left wing response to the tea parties is stirring my sympathy.
Apr 20 2009, 11:10AM
Are Tiny Cars Unsafe?
Apr 19 2009, 11:15AM
Quote of the Day
In the early 1990s I had negotiated a transaction with a fabulously wealthy Hong Kong property entrepreneur. After the deal was closed, we were out on his yacht in the harbor, and he began to grow a little wistful - which, in my limited experience, is a pretty rare state of mind for a Chinese magnate. He told me the story of coming to Hong Kong as a child. His family was travelling illegally by foot through southern China in the attempt to get to Hong Kong and freedom. They had to travel at night to avoid arrest. That part of China in those days was mostly dark at night, because so little of it was electrified. So they navigated by looking for the glow on the horizon and walking toward it, knowing that it had to be Hong Kong.
Hong Kong was once a light in the darkness. Increasingly, it's just another city in a rapidly-developing China.
Apr 17 2009, 2:34PM
Chrysler Negotiations Going Nowhere, Slow
The sweetener? There is none. The banks are supposed to make this touching gesture out of the goodness of their hearts. If they can still find them down in the vault where they put those useless organs away for safekeeping thirty years ago.
Apr 17 2009, 1:13PM
EPA to Attack Global Warming?
Apr 17 2009, 12:49PM
Video Game Sales Fall in March
But it turns out that video game sales are off across the board.
Apr 17 2009, 9:42AM
Do We Hate Credit Default Swaps for The Wrong Reasons?
Apr 16 2009, 5:46PM
In Search of the Perfect Pension
Apr 16 2009, 3:09PM
Depression Schtick
Apr 16 2009, 2:01PM
Question of the Day: Where Did Those Bank Profits Come From?
If the current rally in financials is predicated on how great an environment this is for banking operations - borrowing money for free and lending at prevailing rates - why is it that JP Morgan's Net Interest Margins are the same as last year? It looks like the entire beat was generated by bond trading - which means usurious bid/ask spreads, most likely.
Even the bankers are warning that these profits are unsustainable . . . yet the markets are still loving 'em.
Apr 16 2009, 1:49PM
The Economics of Streetcars
Apr 16 2009, 12:49PM
Happy Tax Day!: Mental Health Break
Apr 15 2009, 2:56PM
How Badly Will Bankruptcy Hurt GM Pensioners?
Apr 15 2009, 12:05PM
Happy Tax Day!: The Return of the Death Tax
It's pretty surprising to see CNBC use that phrasing. It obscures, rather than clarifies the tax incidence, and it's pretty clearly a political choice. We tax estates. Estates used to belong to dead people. But we're not taxing death; we're recognizing that when someone inherits, they're experiencing a material gain. There's no reason that that sort of income should be exempt from tax. So we tax the estate.
Apr 15 2009, 11:36AM
Real Business: No Customers Need Apply
Today I give you: The Sufi Coffee Shop.
Apr 15 2009, 10:45AM
Mixed Messages to Banks
Still, this does not bode well for promises of an exciting new era of regulatory competence which will keep banks from taking too many risks:
Apr 15 2009, 9:52AM
Those Lucky Canadians
Boy, the more I read, the guiltier I feel about living in Canada. We sort of have the ideal position
We're large enough that most of us don't see the direct comparison with the American system, (which is nice, but three times the price). America operates as our second tier which is close enough that the rich aren't upset about going there for expensive health-care, but far enough away that the even the moderately well-to-do don't look at it as a serious alternative.
Apr 14 2009, 2:54PM
Why Bankruptcy Matters
Karen Andrews can't speak. Every time she starts to tell her story, she puts her head down and crumples. She is slim and angular and has the faded radiance of the once-rich, even though her clothes are as creased as her forehead. I find her in the car park of one of Dubai's finest international hotels, where she is living, in her Range Rover. She has been sleeping here for months, thanks to the kindness of the Bangladeshi car park attendants who don't have the heart to move her on. This is not where she thought her Dubai dream would end.
Apr 14 2009, 1:47PM
Health Care Hypothetical
My oldest daughter is in her mid-twenties. She has a friend the same age who was stricken with cancer last year. She was treated with chemotherapy, Initially, the doctors thought this had worked, but now the cancer is back. My guess is that her prospects at this point are rather frightening.
That ends the anecdote. What follows is my imagination.
Apr 14 2009, 12:31PM
Democracy and Capitalism
That's a valid critique. But here's the problem: the Fed has performed vastly better on any metric except "being elected" than the Congress. There's little doubt in my mind that if we had not had an independent central bank, unemployment would be many percentage points higher, GDP would have contracted much more strongly, and we wouldn't now be making optimistic noises about the thing bottoming out.
Where does that leave me?
Apr 13 2009, 10:13PM
Little Bargaining Power Against a Hated Governor
One of the groups he's crossed is the public sector unions, from whom he is demanding a 3% pay cut (in line with what the non-union workers have taken). The union has responded with a furious public service campaign--but to no avail, because Paterson's ratings are so low that even a vicious negative ad run can't drive them any lower. I expect the anti-tax groups are having the same problem.
Apr 13 2009, 8:56AM
Age Before Beauty
This is often thought of as pure age discrimination, but it's more complicated than that. Blue collar workers at 60 may not be able to physically keep up with their old jobs. They don't slot well into union shops that are designed to hoover up young workers and keep them for life. And its harder for them to work for minimum wage, because they have obligations.
Apr 11 2009, 12:12PM
Ask the Editors: Why Does Health Care Cost So Much?
Apr 10 2009, 12:13PM
Talking Down Auto Bondholders
The UAW has been largely unwilling to negotiate with GM until it sees what concessions will be made by bondholders and others.
The standoff between bondholders and the UAW underscores the difficulty surrounding GM's attempt to reorganize without the coercion of bankruptcy. Key players in the Obama administration are pointing to the lack of progress as a reason that bankruptcy could be unavoidable.
At Chrysler, the U.S. wants banks and investors who control its bank debt to give up about 85% of the nearly $7 billion they are owed. In bankruptcies, such senior secured lenders typically get most of their money back.
Some senior lenders believe they would get more than 70 cents for each dollar of their secured loans if Chrysler is broken up and sold under bankruptcy, said people familiar with the talks. Other lenders don't have an exact number nailed down and are awaiting detailed figures from the auto maker on its assets.
All of the 40-plus lenders and investors are nonetheless incensed by the last Treasury offer: that they accept about 15 cents per dollar of face value of their loans.
The government wants to keep the automakers out of bankruptcy because it wants to maximize gains for employees. GM's pension, thank God, was actually overfunded last time I looked, so at least retirees won't lose the income they've planned on as so many do in these legacy industry bankruptcies--the PBGC fund top benefit is well under a little over* $50K per annum. But the health benefits will probably vanish, as will a lot of jobs, and the union contracts all get torn up.
But it's trying too hard to maximize that value. It has no credible threat of nationalization with congress in its current mood, so why would bondholders take a deal where they barely recover any of their money? Social welfare might (might) be maximized by keeping these conpanies as big as possible, but I doubt the bondholders feel any personal obligation to bear that cost. They've already lost at least 30 cents out of every dollar they gave the auto companies.
This is what modern American bankruptcy is for. If you look at systems where senior creditors have too much power, there's evidence that they will screw the junior debtholders by taking the money and running, rather than trying to maximize enterprise value. (Though, to be fair, there's also evidence that maximizing enterprise value entails much higher administrative costs.) The administration essentially has a hold-out problem, and unless it nationalizes, or sweetens the deal considerably, you need bankruptcy to resolve it.
The administration seems to be negotiating like a sovereign, which, of course, it is. But GM is not. Unlike Argentina, it can't just default and flip off the bondholders. When it defaults, its creditors can put it into bankruptcy. The administration seems to be trying to prevent that in order to preserve stakeholder value--but the recovery in bankruptcy is essentially the floor of what the creditors will accept.
Or maybe this is all some elaborate Kabuki ritual, where the government pretends to be talking tough in order to placate Big Labor, while quietly waiting for the inevitable. Either way, it seems like a giant waste of time.
* Sorry, folks; I was working from memory, and they've upped their maximum guarantee
Apr 9 2009, 5:12PM
The Incredible Shrinking Public Pension Funds
Apr 9 2009, 11:52AM
Historical Interest
Apr 9 2009, 10:56AM
Media Notes: The End of Embargoes?
Apr 9 2009, 10:41AM
Most Unnecessary Health Story of the Day
Apr 8 2009, 3:03PM
The Return of the Uptick Rule?
Apr 8 2009, 2:42PM
Fedspeak
Apr 8 2009, 1:24PM
A Jobs Program for Destitute Bankers
Luckily for them, unlike many categories of displaced workers, they have skills that will be useful in our newest growth industry: regulating financial companies. Apparently, the Federal government has realized this, and is having a jobs fair in New York for them.
Apr 8 2009, 10:46AM
The Problem with Chris Dodd
Meanwhile, with the power to give out our money as they wish, congressmen take campaign money from lobbyists and industries they regulate. Sen. Chris Dodd, D-Conn., is only the latest poster boy for that, but boy is he a good one. There may be no one who better represents all that is wrong with Washington. The powerful Senate Banking Committee chairman got a sweetheart mortgage from Countrywide; he has received $280,000 in campaign contributions from troubled insurer AIG; and he made sure that AIG executive bonuses were untouched by Congress -- then claimed for 24 hours that he knew nothing about it, before reporters forced him to admit the truth.
Polls show Dodd is in re-election trouble. But don't hold your breath: Despite record-low approval ratings for Congress last year, we continued sending our congressmen back at about a 90 percent retention rate.
We have, sadly, been corrupted.
I have to say, the worst allegation I've heard about Chris Dodd is
not that he's in the pocket of banks and insurers--financial companies
naturally seek to curry favor with the Senate Banking Committee, but I
don't really see the case that he's sold us out for his benefit. No,
the more damning case is that the Senate Banking Committee was
basically non-functional in the early part of the crisis, because Dodd
was running for president. Even if early action could have saved us
money and pain later--and that's a big if--I recently heard a plausible case made that such action was made impossible by
his presidential campaign. But somehow, no one finds that offensive, or even notable.
Apr 8 2009, 9:54AM
US to Bail Out Life Insurers
This can't go on. Regardless of the wisdom of the plan, it seems to me that the political system won't take much more of this. The only thing that is sustaining it now is Obama's high approval ratings, which it seems to me rest largely on the public perception that all of this is being done by Timothy Geithner, that Obama is somehow floating above it. How long can that last?
But even if it does, Congress is getting more and more intransigent every day. The money is not unlimited. How much longer can Treasury keep on like this?
Apr 7 2009, 2:35PM
What Makes a Good Pharma CEO?
The changes reflect a shift for the scientists who once dominated senior pharmaceuticals positions to give way to executives with backgrounds in marketing, legal or other more general business backgrounds.
Apr 7 2009, 1:03PM
What's the Real Price of a Toxic Asset?
But Economics of Contempt does not like this paper. No, he does not like it at all:
Sounds like the paper is going to examine the prices of the toxic assets that the Treasury is planning to buy, right?
Wrong. Instead, the authors examine investment grade corporate credit risk, using the CDX.NA.IG index. But ABS and CDOs backed by investment grade corporate bonds are not eligible for either the TALF or the PPIP. In other words, investment grade corporate bonds aren't considered "toxic assets."
The authors conclude that market prices of investment grade corporate credit risk are accurate--which isn't surprising, seeing as the CDX.NA.IG is the most liquid contract in the CDS market. Amazingly, however, the authors use this to conclude that the Treasury's plan to buy up the banks' toxic assets is misguided
This is why I'm still having trouble wrapping my brain around the notion that even a very large increase in the default rate can wipe out something like 2/3 of the value of these assets. Most of these loans will perform. And in the case of those that don't perform, while the value of the underlying collateral has fallen, it hasn't fallen to zero. They can't possibly be priced at any reasonable expected cash flow--or rather, if those expectations are reasonable, then we need to stop fannying about with the banking system, because where we're going, we won't need a banking system. We'll need canned goods and ammunition.
Apr 7 2009, 12:35PM
Fat Cats
Apr 7 2009, 12:24PM
The Odyssey of Larry Summers
Apr 6 2009, 6:32PM
Why Don't We Have More Green Products?
So here's the deal. Phosphates really are a danger, creating runoff that kills fish and plants. And Spokane has a uniquely bad problem with phosphates. And apparently it's entirely possible to create phosphate-free detergents. The industry just didn't feel like doing it.
But now their hands are being forced. And guess what? It turns out they can do it after all. Imagine that.
Er, industry also knew how to make low-flow toilets, which is why every toilet in my recently renovated rental house clogs at least once a week. They knew how to make more energy efficient dryers, which is why even on high, I have to run every load through the dryer in said house twice. And they knew how to make inexpensive compact flourescent bulbs, which is why my head hurts from the glare emitting from my bedroom lamp. They also knew how to make asthma inhalers without CFCs, which is why I am hoarding old albuterol inhalers that, unlike the new ones, a) significantly improve my breathing and b) do not make me gag. Etc.
Apr 6 2009, 6:13PM
Cuomo Goes After Merkin
Was Merkin in on the scam? Does it matter? He charged clients for due diligence he couldn't possibly have done--anyone who investigated the firm halfway seriously noticed that they hadn't heard of the auditor, whom fairly cursory inspection revealed to be working out of a mostly unused storefront in a strip mall.
Apr 6 2009, 11:00AM
Mark to Marketing
First of all, the banks have to disclose in the notes to their financial statements the size of the boost their balance sheet gets from the change in accounting rules. That will give investors a good guide to backing out that change--which is probably why Bloomberg reported this morning that Citibank isn't even bothering to make it.
Apr 2 2009, 11:58AM
More Media Meltdown
A bunch of my journalist friends and I have decided that our new toast is "to 2010". 2009 has so far been pretty disappointing for almost everyone I know, not to mention the country for which we all have great affection.
Apr 2 2009, 10:06AM
Why Did so Many UAW Workers Stay?
I've worked at UAW assembly plants as a supplier and the average UAW worker gets their news through "the grapevine." Up until recently one of the popular views was that the big 3 weren't actually in trouble and that management was cooking the books to show a loss in order to demand concessions from the workers and break the union. It may seem silly but I have heard this from several workers at several plants. I don't know how to explain it other then most UAW workers have an absolute distrust of management.
Apr 2 2009, 9:22AM
Department of awful statistics
Apr 1 2009, 2:33PM
The Bankrupt Future of the Auto Industry
If Obama follows through, and actually puts the companies into bankruptcy, I'll be awfully impressed--it's hard for any president to give up Michigan, but especially for a Democrat who wants labor support. So then the question is, what next? Which marques go? Buick, for sure, and Pontiac. Which plants close? And what is the government going to do to help autoworkers? They're not just out of a job--they're stuck in a state that will be absolutely devastated by these closures. Their houses will be worth almost nothing. What do you do with a 50-year-old auto worker who has lived in a factory town all his life?
Apr 1 2009, 9:35AM
Unemployment Continues Its Upward March
Mar 31 2009, 3:48PM
Europe Free Rides, Again
Well, sort of. As Paul Krugman points out, they're overselling this:
Mar 31 2009, 3:36PM
Should I have called the market bottom last month?
Mar 31 2009, 1:52PM
More Media Meltdown
Mar 31 2009, 11:29AM
Why we won't get an awesome appetite suppressant any time soon
I've long been wary of these, since we've found (over and over) that human feeding behavior is protected by multiple, overlapping redundant pathways. We are the descendants of a long line of creatures that have made eating and reproducing their absolute priorities in life, and neither of those behaviors are going to be altered lightly. The animals that can be convinced to voluntarily eat so little that they actually lose weight, just through modifying a single biochemical pathway, are all dead. Our ancestors were the other guys.
By all accounts amphetamines work pretty well. Except for the part where your teeth fall out and everything.
Mar 31 2009, 10:21AM
House Prices: Still Free Fallin'
Mar 30 2009, 4:04PM
The rich really are different
As Ed says, the argument is that "we can't have progressives taxes because somebody's rich uncle might not have the wherewithal to subsidize somebody's business start-up."
I'm not going to dignify this with a response. I'll just note that Schramm is president and CEO of the Kauffman Foundation and I believe he was in the room when I first heard the "rich uncle" argument, so I may have been present at the creation of this particular talking point. Meanwhile, the crippling long-term budget deficits that will result from refusing to raise new revenues are not going to be doing any wonders for entrepreneurs. And perhaps more directly to the point, the lack of a guarantee of affordable health coverage is a major impediment to entrepreneurship in the United States. The status quo systematically discourages talented, skilled people form leaving jobs at existing firms in order to strike out on their own, and this is one of the things the administration is trying to address in its budget proposals.
Mar 30 2009, 3:50PM
More secret bonuses
(h/t Tyler Cowen)Many of GM's dealers will receive lavish buyouts as an inducement to close their doors, for a total cost in the billions of dollars. That's disgusting, but it's required both by GM's contracts with them and by the welter of state laws that protect the dealers. (If you want to know who the political power brokers are in any given city or town, look for the car dealers.)
This is going to be kept scrupulously out of the news, because car dealers contribute huge sums to every last man and woman in Congress and the Senate. The public was ready to torch the private residences of AIG executives, but they won't make a peep about paying billions of their own hard-earned dollars to provide a cushy retirement for thousands of already-rich auto dealers.
Mar 30 2009, 3:50PM
Whither GM?
Mar 30 2009, 10:08AM
Should we feel sorrier for bankers or autoworkers?
The point is that there's so much uncertainty built in to the bonus system that the expected bonus has to be enormous in order to make up for it. Suppose I give you a choice between a base salary of $75,000 a year and an expected bonus of $1 million, or a base salary of $350,000 a year. If you're anything like me, you'd take the smaller amount with the higher predictability.
Now in the case of guaranteed bonuses, the calculus does change somewhat -- in that case, you might well opt for the $1 million. But the guarantee doesn't mean that you're certain to get that seven-figure payday; it just means that the degree of uncertainty has fallen substantially. And as Mike points out, you're still very much running the risk that your entire company goes bust, or that its new owners decide to abrogate those guarantees.
Not getting your bonus is a bit like those bad beats in poker. There's no point railing against them, they're bound to happen some of the time, and indeed if they never happened then the game wouldn't be structured that way in the first place. So accept it and move on with equanimity.
I know the answer on the left: of course you should feel sorrier for the autoworkers, because they don't make as much money. But though experiences aren't really transitive, I don't think you can say it's worse to have your job and industry destroyed as an autoworker than as a banker. Having the whole life you planned on snatched from you is a miserable, miserable experience. Neither group is going to starve; neither groups will, as a group, have nearly as affluent a life as they planned on.
The reason I ask the question is that the fundamental difference between bankers losing their jobs, bonuses, and so forth is that the bankers had it happen suddenly. It's all very well to say they should have known, but they didn't, and suddenly having to sell your house, yank the kids out of their schools, etc. is not some just punishment for the terrible crime of working for an insolvent firm.
The autoworkers had some warning. They had plenty of time to see the writing on the wall and get new jobs. So maybe I should feel less sorry for them. But the very slowness of the change may, paradoxically, have made it harder to adjust. All the bankers currently getting fired have gotten a very strong signal to get the hell out of an industry that needs to radically downsize. The very slowness of the process of downsizing the auto industry has made it harder for autoworkers to disconnect; there's no firm moment when they should have said, "Yup, that's it." So maybe I should feel sorrier for them.
Mar 29 2009, 7:00PM
Ask the Editors: What's Wrong with Deflation?
Policymakers are concerned about possibly deflation - but I'm confused as to why lower prices is a problem. It's been happening in technology for decades without mayhem? And after the oil price shocks of 2008, I'd expect prices of other goods to drop as the cost of maintaining the supply chain have come down. My question is how do we tell the good type of deflation (firms are learning how to be more efficient) from the bad type, and what exactly is the bad type?
In theory, deflation sounds great! You have your same paycheck, and everything costs less. What's not to love?
Mar 29 2009, 6:57PM
Rick Wagoner is stepping down
The chairman and chief executive of General Motors, Rick Wagoner, is resigning, just hours before President Obama was expected to unveil his rescue plans for G.M. and the ailing American auto industry, a person close to the decision said Sunday.
Mr. Wagoner was asked to step down, and agreed to do so, as part of G.M.'s restructuring agreement with the Obama administration, according to an administration official who spoke on condition of anonymity because a formal announcement has not been made yet.
Rick Wagoner is no managerial genius, but I'm not sure this will actually help much. GM is caught in the jaws of its own structural problems--labor costs, yes, but also its corporate culture, its legacy physical plant, and so forth. Perhaps most perniciously, GM is the victim of a brain drain--it's difficult to recruit top talent to a dying firm, especially when it's located in a dying industry.
On the other hand, it can hardly hurt. And the symbolism, both to the taxpayer and the employees, is important. GM can't be given vast sums without some visible sign of serious change. Let's hope the new CEO actually brings some, rather than providing window dressing for a continuation of business as usual.
Mar 29 2009, 6:10PM
Ask the Editors: Can't we Blame This Mess on Clinton?
To what extent (if any) do you think that Clinton's 1997 tax break for home value appreciation created/fueled the real estate bubble?
Everyone's looking for some convenient policy villain for the current crisis, but the answer with this--as with just about every other regulatory change you can name--is "maybe a little, but not that much". (Even the 2004 SEC decision to let banks lever up to 30-to-1, while certainly a bad idea, wasn't nearly sufficient to take much of the blame. This thing had been building for years, if not decades, before that.)
Blaming the tax change is an attractive theory because house prices did start to depart from trend around then. But the real inflection point is years later, in 2001. And while the tax break undoubtedly sent a bad signal to the market, so did a dozen other things, from interest rates to all those home shows on TLC.
Mar 27 2009, 4:58PM
Please, Take the "Work" Out of Networking
Mar 27 2009, 11:55AM
Foreigners + Money = Crisis?
From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:
- insistence on free movement of capital across borders;
- the repeal of Depression-era regulations separating commercial and investment banking;
- a congressional ban on the regulation of credit-default swaps;
- major increases in the amount of leverage allowed to investment banks;
- a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
- an international agreement to allow banks to measure their own riskiness;
- and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.
The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.
Mar 27 2009, 10:57AM
GM gets a reality check
Anne was sitting with Ruby Gillis in the Gillis' garden after the day had crept lingeringly through it and was gone. It had been a warm, smoky summer afternoon. The world was in a splendor of out-flowering. The idle valleys were full of hazes. The woodways were pranked with shadows and the fields with the purple of the asters.
Anne had given up a moonlight drive to the White Sands beach that she might spend the evening with Ruby. She had so spent many evenings that summer, although she often wondered what good it did any one, and sometimes went home deciding that she could not go again.
Ruby grew paler as the summer waned; the White Sands school was given up -- "her father thought it better that she shouldn't teach till New Year's" -- and the fancy work she loved oftener and oftener fell from hands grown too weary for it. But she was always gay, always hopeful, always chattering and whispering of her beaux, and their rivalries and despairs. It was this that made Anne's visits hard for her. What had once been silly or amusing was gruesome, now; it was death peering through a wilful mask of life. Yet Ruby seemed to cling to her, and never let her go until she had promised to come again soon. Mrs. Lynde grumbled about Anne's frequent visits, and declared she would catch consumption; even Marilla was dubious.
"Every time you go to see Ruby you come home looking tired out," she said.
"It's so very sad and dreadful," said Anne in a low tone. "Ruby doesn't seem to realize her condition in the least. And yet I somehow feel she needs help -- craves it -- and I want to give it to her and can't. All the time I'm with her I feel as if I were watching her struggle with an invisible foe -- trying to push it back with such feeble resistance as she has. That is why I come home tired."
It would be nice to take a break from the escalating unreality: "We project that aliens will descend from the planet XXorkzz and selectively vaporize the Japanese automakers, the airlines, the busses, and the subways, leaving us with some very attractive market opportunities". But what does that leave us with? The sure and certain knowledge that without considerable further government assistance, the company will topple.
Mar 27 2009, 10:29AM
Ask the editors
Mar 26 2009, 11:09AM
What does one trillion dollars mean to you?
Mar 25 2009, 10:19PM
AIG gets a French kiss-off
Mar 25 2009, 3:40PM
Institutional investment
Mar 25 2009, 10:13AM
A twice-told tale of AIG
Of course the AIG bonuses should go back! They were paid to people in the very group that lost money! They were paid to people who have already left the firm, putting the lie to the idea of retention bonuses! Also, they couldn't get jobs anywhere else anyway, so retention bonuses are unnecessary! And it's all just unmitigated greed! They're lucky to have jobs at all! They should be volunteering to work for free, wearing sackcloth and ashes, and grovelling on the ground in front of every taxpayer they can find, begging for forgiveness!
Mar 19 2009, 5:31PM
Helicopter Ben fires up the engine
Mar 19 2009, 5:06PM
Putting a price on carbon
If you collect carbon tax revenue, figure out what each household spent on carbon, and refund that amount to each household, then there is no incentive to reduce carbon. You're basically just making work for bureaucrats. This is why no one, as far as I know, is proposing such a scheme.Rather, they are (or I am, at least) advocating a plan in which revenues are chopped into equal parts and redistributed, either to everyone or to lower income households. Then, you've successfully increased the relative price of carbon-intensive goods or services, and helped to offset the impact on household incomes with the refund. And household income will be spent on a less carbon-intensive basket of goods and services, based on the relative price change.
In fact, it seems to me that as long as you raise the relative price of carbon, it doesn't matter whether you rebate back to people on the basis of their carbon consumption, or simply use a flat rebate: carbon consumption goes down. That's because people still have to trade more of their rebate to purchase carbon-intensive goods. By making the terms of the tradeoff more favorable to low-carbon goods, you encourage people to substitute away from carbon.
The reason no to attempt to do this is that it would be administratively impossible. But I think this is an important point: in terms of carbon reduction, what's important is the price, not the distribution of the revenues from the tax (or the permit sales).
That's why I don't buy the argument that we need to auction permits in a cap-and-trade system in order to get the maximum carbon reduction. The auction changes where the revenues go, but it shouldn't fundamentally alter the amount of carbon emitted. A company deciding whether to buy a permit or reduce their emissions is not economically different from a company deciding whether to sell a permit or keep their emissions at the same level.
Mar 19 2009, 3:43PM
Multimedia Thursday
There was an old lady who swallowed a cow.
I don't know how she swallowed a cow!
She swallowed the cow to catch the goat...
She swallowed the goat to catch the dog...
She swallowed the dog to catch the cat...
She swallowed the cat to catch the bird ...
She swallowed the bird to catch the spider
That wiggled and wiggled and tickled inside her.
She swallowed the spider to catch the fly.
But I dunno why she swallowed that fly
Perhaps she'll die.
There was an old lady who swallowed a horse -
She's dead, of course.
Mar 18 2009, 2:15PM
Pay scales
Today's tax code makes no distinction between income above $373,000 and income above, say, $5 million. Both are taxed at 35 percent.That is a legacy of the tax changes of the early 1990s, when far less of the nation's income went to millionaires. Today, you can make a good argument for a new, higher tax bracket on the very largest incomes. In the past, the economist Thomas Piketty says, higher marginal tax rates tended to hold down salaries and bonuses, because executives had less incentive to angle for multimillion-dollar pay.
Do these ideas stem in part from anger and bitterness? Of course they do. How can you not be a little angry and bitter about the role that huge, unjustified pay played in causing the worst recession in a generation?
In fact, that's sort of the point. Given the damage that's been caused by our decidedly unmeritocratic system of paying executives, the most irrational course of all would be the status quo.
I'm not angry and bitter; I'm about as mad as I am at the prospect of people who bought homes they can't really afford getting a bailout while I continue renting--which is to say, not very. Life is rather too short to spend it getting angry at remote strangers.
I also note, just as an aside, that the definition of "very rich" seems increasingly to be set at "just above the level a top-notch journalist in a two-earner couple could be expected to pull down".
That said, I don't see why brackets top out at a relatively low level of income. Indeed, I don't see why we have tax brackets. They're inefficient, and a lot of them have pernicious marginal effects on those near the ceiling. Why not a continuously scaling function from negative (EITC) to some maximum? These days, people use either printed tax tables or tax software to prepare their taxes; this shouldn't present an undue hardship. Obviously, with my preference for less government, I would recenter the scale so that people making $250,000 a year pay relatively less, and those making $10 million pay relatively more, in order to make the proposal revenue neutral. But the basic concept seems bipartisan.
Mar 18 2009, 1:10PM
SEC files fraud charges against Madoff's auditor
Mar 18 2009, 12:15PM
Money matters
Barney Frank, however, uses the bonuses to make an important point: the compensation structure at all of these firms is seriously screwed up. Bonuses originally intended to encourage performance have morphed into deferred guaranteed compensation, for reasons that aren't clear. That's not necessarily a huge issue--except now, when the time-shifting leads to moral outrage. But the really pernicious problem is that the contracts are set up so that bonuses cannot be substantially cut if profits fall.
It's not clear to me how contracts have come to be written that way--after all, they weren't always handing out taxpayer money, and the big bosses who wrote those contracts were also sizeable shareholders in their firms. The result, however, is that all of the employees holding these sorts of contracts have vastly excessive incentives for risk taking. Perhaps some of them were taking big risks on the moral hazard of having Congress bail them out--but as Lehman shows, that was never a slam dunk. And I doubt a handful of these traders and money managers thought they were betting the firm. Most of them thought they were gambling on their own careers--just not very much of a gamble.
Frankly, Congress shouldn't need to intervene in these contracts; they're inexplicably stupid. Shareholders, having been alerted to the problem, ought to be demanding a fix. Of course, look who's managing a lot of that shareholder money. Honor among thieves?
Mar 17 2009, 4:41PM
AIG clawbacks: barely legal
This has interesting implications for the banks that have already taken government funds, and certainly, any banks that might be considering doing so in the future. I suspect it would be hard to write a specific tax that applied only to AIG and not, say, to Citibank--and that's assuming that the Democrats in Congress would want to. I think it's safe to assume that if this passes, any banks that possibly can will rush to return bailout funds to the Treasury. And perhaps this is a good thing. But the attempt to shield shaky banks behind a general distribution of funds will be over.
I suspect that it would also not do any good things for whatever future plans Treasury has. All of the plans I'm currently aware of involve substantial voluntary participation from sound financial institutions. I don't think you'll get much voluntary cooperation from banks if you declare that any acceptance of government funds will involve substantial risk that they will appropriate your paycheck.
Mar 17 2009, 4:31PM
Banking, again
Yes, there is fear that some banks may fail. But there are a lot of banks in the United States, and not all of them are Citigroup. So the issue here is not that no lending is available (and this was Megan's initial point -- that a lack of lending would reduce the multiplier on the stimulus). And the Treasury has taken steps to limit the negative competitive effect of propping up zombies, by throwing open TARP money to many, many financial institutions. Is there still an argument for more intervention, in particular, to find ways to wind down the systemically important insolvent banks? Absolutely! But I don't think it's absurd to say that such actions come with intolerable risks to the financial system.
Megan says I "slam" her by saying that she's looking for a way off the Obama train. My point was this -- she said she had buyer's remorse, and given the ludicrous ideas coming out of the GOP, and John McCain, that makes no sense, economically speaking. I don't know why someone focusing solely on the policies would write that, and so I concluded that Megan was focused on something other than just the policies. Which perhaps was improper. My bad! But still, it makes no sense.
Mar 17 2009, 10:59AM
Do the banks matter?
Mar 17 2009, 10:28AM
Shovel-ready . . . ish
Advantage: Asymmetrical Information. The Wall Street Journal reports:
It turns out, though, that shovel-readiness is in the eye of the beholder. Soon after his visit, Mr. Biden found out that his model stimulus project wouldn't see a shovel for almost four more months, possibly longer, knowing how such timetables slip. In North Middleton, a White House eager for action had run up against locals eager to avoid disruption. The locals won.
Mar 17 2009, 9:46AM
Grassley to financial executives: drop dead
Iowa Sen. Charles Grassley suggested on Monday that AIG executives should take a Japanese approach toward accepting responsibility for the collapse of the insurance giant by resigning or killing themselves.
Mar 16 2009, 3:16PM
What do do about AIG?
This is a very common problem in business literature, and bankruptcy law. One of the unnoticed provisions of the 2005 bankruptcy reform made it much more difficult to use KERPs, or Key Employee Retention Plans. The problem is that these funds, often large, were frequently used by management as a slush fund to keep themselves from suffering too much in bankruptcy. The other problem is that without these funds, bankruptcy often doomed hurting companies, because the only employees willing to stay on a sinking ship were the ones who couldn't get a job anywhere else.
Which is it, at AIG? The problem is, there's no way to tell from the outside. The employees of AIG know which traders are good, and which ones are idiots who made a bad mess worse. But they're not going to tell us--or rather, they'll tell us, and the idiot traders will point the finger at someone else. From what I understand, you can't even just ask which traders lost money--some of the traders will be able to argue, with justice, that they lost money because they were helping the company cut its risk exposure rather than taking bets they might win. Others made good trades that were Overtaken By Events.
Why not just say "no bonuses for anyone at AIG"? To hell with the bums! Well, we now own the company. If we hasten the flight of quality employees out of the company, that will cost us money. The answer might be some kind of performance bond. But as in other financial firms, traders often take as bonus what should be salary, which means that they need at least part of their bonuses to maintain their lifestyle. If they're faced with bankruptcy, the traders who are talented will go elsewhere--the financial market is shrinking, but the top traders still have other opportunities. AIG has a lot of positions to unwind. Do we want to leave the job to the dregs of the organization?
I don't know the answer to this question. Perhaps it is true, as my interlocutors accuse, that I am too stupid to understand the obvious. On the other hand, perhaps excessive confidence in your diagnosis means that you just haven't asked the right questions.
Mar 16 2009, 2:34PM
Collective action
Mar 16 2009, 12:47PM
What's the matter with Jim Cramer?
This is purest poppycock. Jim Cramer had no influence over the twin manias that afflicted America in the last ten years: the madness of homebuyers for ever more expensive houses, and the madness of bankers for buying bonds based on those homes. Jim Cramer did not persuade the Asian savers to pour moronic amounts of capital into oversaturated American markets. He did not talk up MBS or CDOs to any level that could be vaguely said to have meaningfully increased the amount of leverage in the system. If you want a television host, or network, to blame all of our troubles on, you'd do better to cast your ire on Home and Garden Television, and Flip This House. They're the ones who told Americans, over and over and over and over, that it was possible to get rich by installing granite countertops.
Mar 15 2009, 7:29PM
Ask the editors: What difference does it make to the recession if Citibank and Bank of America fail?
In some sense, all of history's progress from lives that were nasty, brutish and short to today's splendiferous buffet of iPhones, nine-month courses of physical therapy, and year-round fresh broccoli can be summed up in three words: gains from trade. We live better than a tribe of chimpanzees roaming through the primordial forest because we specialize and then exchange the fruits of our skills with each other. Trade, as the ecoomists say, increases the size of the economic pie to be divided between us.
But trade introduces an element of uncertainty into our lives above and beyond the possibility that we will be eaten by something bigger than ourselves, or starve to death when the rains fail. We still have to worry about those uncertainties, although the monsters now most likely to hasten our demise have four wheels and cost entirely too much to service. But now we also have to worry about our trading partners. In an advanced economy like the United States, that means millions of other people who are somehow involved in either making the things you buy, or buying the things you make. We spend more and more of our energy trying to guess what is going on in their pointy little heads. Since we haven't even met 99.9% of them, these guesses are necessarily somewhat imperfect.
Mar 13 2009, 2:04PM
Ask the editors: What happens if Citigroup fails?
Mar 13 2009, 2:03PM
Cramer v. Stewart
Mar 13 2009, 1:41PM
We like Obama, but not as much as we used to
Mar 13 2009, 9:13AM
Maxine Waters: crazy like a fox
Mar 12 2009, 4:35PM
Rodge Cohen: never mind
My liberal commenters want me to excoriate the Republicans for making the president worry about tax trivia. I thought I did, yesterday. But okay, consider them excoriated. Now, back to The President. The one with the really sizeable majority in both houses and the stellar approval ratings.
Mr. President, it's time to get serious. Go on the road and complain about Republican obstructionism, if it's such a big problem. You've got a lot of political capital to spend. Use it. Tell the public why this issue is important. Tell them the Republicans are irresponsibly grandstanding and that sainthood cannot be a job requirement for these appointments. Because unless you think Jesus is coming back, like, tomorrow, we can't really afford to wait for his return to call 144,000 potentially qualified Treasury undersecretaries out of their graves.
Mar 12 2009, 4:17PM
The US is not France
Mar 12 2009, 3:18PM
Gaming the requirements
Mar 12 2009, 11:02AM
Obama too sunny?
Mar 12 2009, 10:36AM
GE downgraded
What happened next was surprising, in a "What the goddamned $@%! hell just happened?" sort of way: the stock price rose 8%. This is about 1600 basis points more than you would expect. The market had clearly already priced in the risk of a downgrade, and Immelt's statement that the company was prepared to operate as a AA+ company sounded soothing even to me.
Mar 11 2009, 5:31PM
Banks start giving back
What to think of this? One's first instinct is to say that this is an unalloyed good--the restrictions have made taking the funds costly enough that only truly troubled institutions will do so.
The problem is, that's precisely what the Fed was trying to avoid. Central bankers have long made a practice of keeping it a secret who borrows from them at the discount window, because publishing the names of those who need a temporary cash infusion could trigger a bank run. In order to get the money into the banks that needed it to stave off a liquidity crisis, Bernanke and Paulson very deliberately asked banks that were widely believed to be sound to take the money too. Otherwise, the government bailout funds might have touched off the very crisis we were trying to avert.
Mar 11 2009, 1:38PM
Jamie Dimon: "Bad regulation drives out good"
There's a decent case to be made that instruments like CDS's essentially became instruments of regulatory arbitrage--a way to get around prudential regulations on things like issuing insurance. The bank holding companies became a way to amalgamate risk in an entity that was not directly regulated by anyone; each piece had its own regulatory agency that was not responsible for the whole.
Still, I have niggling doubts. Our financial regulation system is hopelessly fragmented, to be sure. On the other hand, other countries, with clean central systems, have banks that are in even worse shape than ours. Centralizing regulation eliminates overlap at the cost of the one regulator you have getting the whole system badly wrong.
Mar 11 2009, 12:18PM
Good question
Mar 11 2009, 11:42AM
Is the cabinet Caesar's wife?
The genesis of that crisis is that we have lost perspective on what the criteria for selecting and approving government officials ought to be. Financial trivia, minutiae from people's personal lives and political litmus tests have grown in importance while character, experience, intelligence, creativity and wisdom have fallen by the wayside. Ridiculous threshold obstacles stand alongside obscene ones and when taken with the relentless personal attacks associated with high level jobs in Washington -- the low pay, and the extreme difficulty of getting anything done -- we are seeing even those selected for senior jobs turn away in droves. We are at a moment of not one but an extraordinary array of great crises and challenges for America and we are effectively keeping the people we need most out of the positions we most need filled.
Mar 11 2009, 8:24AM
Is Apple moving into touch-screen PCs?
My first reaction is "I want one!!!" But my second reaction is "for what?" Given my profession, I really need to be able to type; I can't use a jumped-up iPhone as my main computer. And I can't think why I would carry a ten-inch extra computer around with me. If the touchscreen is simply an add-on to a laptop with a regular keyboard, I might be interested--but I'm not sure how much extra I'd pay.
This goes to the question everyone is asking about Apple--can they survive, and thrive, without Steve Jobs? The product that will answer this question isn't a touchscreen being installed this fall; it's the first product to be designed and executed substantially without him, which is still eighteen months or more away.
Mar 10 2009, 2:59PM
Penny wise, pound foolish
Burke talks a lot about transparency, but he doesn't make quite explicit the related problem of monitoring costs. If you cut a department, it's easy to monitor--you no longer have that department. But if everyone's supposed to spend 1% less on everything, it requires a phenomenal amount of administrative overhead to design those changes, and then keep track of them. Transparency can help by effectively outsourcing some of the monitoring to the community. But you still need someone to, say, formulate a lightbulb policy, hear complaints about the lightbulb policy, and ensure that the lightbulb policy is being enforced.
Mar 10 2009, 12:45PM
Has the market bottomed?
The chatter on Bloomberg is the most optimistic I've heard in a long while. And Vikram Pandit sounds positively giddy with the news that Citigroup was profitable in January and February; his stock is up more than 40% on the news, which would be more impressive if that didn't represent a gain of less than 50 cents per share.
But as traders say, even a dead cat will bounce if you drop it from high enough. I'd put my money on short covering before I'd bet on a bottom.
Mar 10 2009, 11:24AM
Rodge Cohen to Treasury after all?
Mar 9 2009, 5:43PM
Markets in everything
Mar 9 2009, 5:40PM
Is nationalization contagious?
Mar 9 2009, 3:00PM
Bed, bath and beyond
Mattresses, however, were part of the great American fad for upscaling ordinary consumer goods into luxury items. Companies expanded, went private, and levered up in the expectation of steady cash flows. By the end of this year, sales are expected to be down around 20%, and both manufacturers and retailers are in deep trouble.
Mar 9 2009, 2:39PM
Credit cut to the bone
As in many of these stories, what's not made clear is why the credit lines are being cut. The man featured claims to have carefully kept the credit cards he uses to finance his business used at no more than 1/3 of maximum capacity. This seems like an ideal customer.
But, like many of the people featured in these stories, their Exhibit A is in the construction business. The companies cutting his credit lines are probably right that it's dangerous to give him too much room to run them up.
Mar 9 2009, 2:17PM
No experience necessary
Cohen would be a fantastic choice for any top government position, and Treasury would be lucky to have him. Few people in the world have a deeper understanding of the global financial system than Cohen.
In today's political environment though, I have a hard time believing that Cohen could get confirmed by the Senate without a bruising political fight. He was heavily involved in the events of last September. He represented Lehman during the weekend negotiations before it filed for bankruptcy, then a few days later represented Barclays in its acquisition of Lehman's U.S. investment banking unit. He also represented Wachovia (his longtime client) in the Citi/Wells Fargo debacle, and presumably advised Wachovia's board of directors that its fiduciary duty required it to accept Wells Fargo's offer, even though that meant violating its exclusivity agreement with Citi. I'm sure Cohen has represented other Wall Street financial houses at various points in the financial crisis as well.
Perhaps we should just give up entirely on the idea of putting someone who, like, knows something about the financial system, in charge of the financial system. Is Dr. Phil available? Sure, he may not know much about banking, but he's very popular, and people like to watch him bossing other people around.
Mar 9 2009, 12:41PM
Bank of America unhires foreign MBAs
As a committed free trader--and an MBA who went through the mass layoffs of the last recession--my sympathy is all with the MBAs. These are people who mostly aren't eligible for scholarships or subsidized student loans; they've borrowed or spent close to $100,000 in America to get their degree, many of them in hopes of staying here. They're intelligent, highly skilled, and promise to be net contributors to the tax system . . . so America kicks them in the teeth and sends them home without a job.
Mar 9 2009, 11:30AM
Ask the editors: What happens if Citigroup fails?
During the Lehman failure, the Federal Reserve and other agencies put quite a lot of effort into making sure that the ripple effects didn't spread too far in the markets where Lehman was a major counterparty. They were successful: the unwinding of Lehman's positions has actually been rather smooth, though slow and not particularly happy for the counterparties. What they hadn't known, and indeed, couldn't really have known, was that the effect on Lehman debt would cause the value of a smallish money market fund aimed at institutional investors would break the buck. And because breaking the buck is so rare--the last major one had occurred in 1994--they certainly didn't see what would happen next, which is that the commercial paper market would completely freeze up, threatening massive effects in the real economy, like firms not being able to make payrolls.
Mar 8 2009, 12:42PM
Ask the editors: Will your mortgage rate stay low until the economy recovers?
Mar 8 2009, 10:49AM
Ask the editors: Isn't a mortgage cramdown just price fixing?
Mar 6 2009, 4:24PM
Moral bankruptcy
It's a nice grill. But I've since realized that our landlords have an old, broken grill that we might have been able to repair with enough duct tape, saving me almost $200. Meanwhile, I've discovered that I can't sell the grill for a profit, because Home Depot seems to have a large number of very similar grills in stock which they are willing to offer to buyers for a mere $200. For that matter, I can't even sell it for the value of the loan with which I financed it. The equity in my grill has dropped by about 50%.
Mar 6 2009, 1:41PM
Should Geithner go?
Mar 6 2009, 9:21AM
Payrolls fall
Mar 6 2009, 8:37AM
Ask the Editors
Mar 5 2009, 4:32PM
Pennies from heaven
- AIG (39 cents)
- Citigroup (98 cents)
- E*Trade (66 cents)
- Fannie Mae (39 cents)
- Freddie (39 cents)
- Unisys (37 cents)
Mar 5 2009, 4:19PM
Why not nationalization?
- No US institution currently has the legal authority to take over a multinational financial conglomerate. Banks are relatively simple operations, and the FDIC has extensive experience in resolution of a liquidation. But banking and insurance and stockbroking and securities underwriting and capital markets trading all piled into one institution are vastly more complicated--there is, after all, a reason why each of these businesses have different regulators. The argument for breaking banks into commercial and investment banking doesn't seem to have made much sense from an economic standpoint, but it may have made sense from a regulatory standpoint. At least in the US, no regulator had the expertise to oversee these giant companies.
- The FDIC does not have the funding to perform these kinds of takeovers. The FDIC is basically an insurance pool--it is structured to handle a market with enough small players to constitute an actuarial universe. Since it was set up, however, we have built up institutions big enough, and idiosyncratic enough, to swamp the actuarial pool.
- Other countries have regulatory oversight of these financial conglomerates too, and they may object to a U.S. takeover. Our global institutions are woefully inadequate to regulate global capital markets. I think that capital controls are a terrible idea, for reasons I will outline anon, but if we don't want them we'd better figure out better ways to coordinate global actions like these. We need the financial equivalent of war--specifically, World War II, when countries terrified of existential threats cooperated more than they really wanted to.
I'm beginning to have a lot more sympathy for Japanese banking regulators.
Mar 5 2009, 2:15PM
GM is toast
But don't take my word for it--listen to their auditors:
Mar 5 2009, 1:24PM
Mad money
Bernard Madoff is seeking to keep a $7 million Manhattan penthouse and an additional $62 million in assets, saying they are unrelated to the fraud that authorities say cost victims more than $50 billion. In court papers filed Monday in U.S. District Court in Manhattan, Madoff and his lawyer claim the apartment, $45 million in municipal bonds and $17 million more in a separate account all belong to Madoff's wife, Ruth.
This is--what's the word I'm looking for? Oh, right--the words I'm looking for can't be printed on a family blog. It is true that the money will not do much to make $50 billion worth of investments whole, but a little money is better than nothing, and those investors certainly deserve it better than Ruth Madoff, who has been living high off of ill-gotten gains for years.
Mar 4 2009, 7:14PM
Atlas raised his eyebrows
I don't think that we will see a mass exodus of productive people to secret hideouts. I look to Atlas Shrugged more for conveniently totable beach reading than an economic blueprint. What's interesting to me, though, is how many details Rand did get right--like the markets in "unfreezing" Ukrainian bank deposits, so similar to the frozen railroad bonds of Atlas Shrugged. Or the cascading and unanticipated failures, with government officials racing to slap another fix on to fix the last failing solution. If only the people in her novels had acted remotely like actual people, rather than comic book characters, I, too, would be rereading the thing now.
Mar 4 2009, 6:33PM
Lunatic idea of the week: why not take banks private?
When the US government started talking about paycuts for banks' "top executives", it seemed at the time that they were talking only about the top four or five C-suite officers of the company. When the press uses the term, however, it seems to mean "anybody at the company who makes a lot of money".
Mar 3 2009, 4:20PM
GM's European engine runs dry
For all our bitching about regulation, Americans rarely appreciate just how important it is to have a central mechanism for disposing of insolvent firms. Our bankruptcy code is the best in the world: transparent, quick, and focused on making people better off rather than punishing firms that have made mistakes. When you don't have that kind of authority or skill, you get what is apparently happening to GM as it struggles to sell off Opel before the cash crunch hits. This has big ramifications for us:
Mar 3 2009, 2:09PM
Rooting for the apocalypse
Naturally, when the market crashed, and kept crashing, I took a certain amount of satisfaction in being proven right, and also, in seeing a real, genuine stock market crash. I was (and remain) a big fan of John Kenneth Galbraith's Great Crash of 1929, and it was fascinating to see what such a legendary episode firsthand.
Mar 3 2009, 9:58AM
What is Jean-Claude Trichet thinking?
Though in the public mind, all of economics is a war between Keynesians and Friedmanites, this wasn't particularly controversial between left and right (though people on both fringes disagreed). A generation of PhD candidates built their burgeoning careers on writing about "The Great Moderation"--the kinder, gentler business cycle we seemed to have discovered in recent decades. Financial regulators certainly bought it--indeed, who wouldn't love a theory that told them that the world no longer suffered through crippling economic declines because they'd just gotten so darned good at their jobs? That confidence was the genesis of the 2004 SEC rule allowing investment banks to lever up to 30-to-1 and other follies--many of them merely mirroring similar developments in Europe.
Mar 2 2009, 6:24PM
How low will the stock market go
There were four massive stock bubbles in the 20th Century: 1901, 1929, 1966, and 2000. During each of these bubble peaks, the S&P 500 neared or exceeded 25X on professor Robert Shiller's cyclically adjusted P/E ratio.* After the first three of these peaks, the S&P 500 PE did not bottom until it hit 5X-8X. We're still in the middle of the last one.
Mar 2 2009, 1:03PM
Playboy dips a toe into investigative journalism
What's that you say? The link is dead? Indeed it is. Fortunately, as it happens, I happened to have a second browser open with the article; text below the fold.
Mar 2 2009, 11:46AM
Spenders turn into savers
Savings, meanwhile, is on the march: personal saving rose to 5% in January. As Paul Krugman notes, that means that in the short run we can expect the economic contraction to continue, especially since banks aren't doing much to transform the savings into new investment (in part because businesses aren't much interested in investing in new productive capacity while demand is slumping). The personal savings rate isn't even particularly high right now by historical or international standards--something closer to 8-10% would be more in line with everything except very recent history.
Mar 2 2009, 10:34AM
Freddie Mac CEO resigns
Feb 28 2009, 8:59AM
A grim world tour
Feb 27 2009, 4:26PM
How likely is that cap and trade revenue?
That sounds like roughly $100 billion per year. Is that reasonable? The United States produces about 7 billion tons of CO2 equivalent a year right now, which means that Obama expects his cap-and-trade plan to generate a price of about $14 per ton in its first year -- assuming it covers every single molecule of carbon emitted in the U.S. If only half of all emissions are covered at first, it means a price closer to $28 per ton.For comparison, the European ETS cap-and-trade plan currently prices CO2 at about 10 euros per ton. That's roughly $13. And that price has dropped considerably over the past few months thanks to the recession. By 2012 it's likely to be back up in the range of $20 or more.
I'm going to disagree, for a couple of reasons. First, spikes like the one we saw between 2004-8 have long lags. I bought a tiny fuel efficient car, in part because of high prices. I will now drive it into the ground. It will be five or ten years before I even have an opportunity to increase my carbon footprint. Ditto weatherproofing homes, replacing air conditioners, etc. Moreover, when supply suddenly goes from tight to loose, oil prices tend to overshoot, because big producers, especially those in OPEC, have gotten dependent on the money. They cheat on their quotas, and the price falls further--look at 1986 or 1998.
Second, I doubt economy-driven demand will have recovered by 2012. The major economies are crashing so hard that it will take years of growth to get demand back where it was, and the big developing countries that drove demand past capacity are in worse shape than we are; they were depending on growing consumer demand in the US to drive their growth.
Third, I think it is decidedly iffy whether congress actually passes any cap and trade system with teeth. For a cap and trade system to work, it will have to make energy more expensive at a time when incomes are declining. This will be very, very, very unpopular. I imagine the Democrats will try to get the Republicans to kill it for them, but they don't have much margin--one flipping Republican in the Senate and a few in the house should let them pass it. If the Republicans are smart, they will provide three moderate Republicans in the Senate, a few Republicans from safe seats in the House, and make the Democrats suffer the consequences of raising the price of gas and electricity. But I doubt they'll be smart; they'll do Pelosi's dirty work for her.
Feb 27 2009, 3:19PM
Loan masters
It's not that I particularly care whether the government guarantees the loans, or makes them directly. Frankly, I think the whole idea of government sponsored student loans, and possibly even grants, is iffy, and suspect it's done little more than inflate tuition costs. But I don't see any a priori reason to believe that the private sector is doing a bang-up job.
That said, the government is not a bank. Originating loans is not merely a problem of issuing some t-bills and funneling the proceeds to students; it requires a fairly large administrative apparatus to manage the applications, disburse the money, track the funds, oversee repayments, provide customer service to borrowers, adjudicate requests for forebearance, collect bad debts, close out the loans and accurately forecast the need for all of the above. That's why government loan programs, from VA loans to SBA assistance to student loans, has traditionally been handled by banks rather than directly through the government.
I'm not predicting that it will be a debacle, although it could be--it's a lot harder than it sounds to start up a bank, which is why it doesn't happen that often. But I suspect that we'll find that the money the banks skimmed off goes to pay our own staff. Banking operations have scale and synergy; the government programs free ride on competencies developed to service other loan areas. Reinventing the wheel rarely proves as lucrative as it looks.
Update: Yes, I'm aware the government makes direct loans. I'm sure it's lovely. I just don't think it will be particularly cheap to go from servicing a few big schools to a zillion little ones.
Feb 27 2009, 2:59PM
Rocky Mountain News: RIP
What to say about the death of a fine paper? Except that it's no wonder so many journalists are starting to wonder if they haven't lashed themselves to the deck of the Titanic.
Feb 27 2009, 2:19PM
Geithner's gift
Henry Blodget notes Vikram Pandit saying:
In many ways for those people who have a concern about nationalization, this announcement should put those concerns to rest.
Which sounds sort of like "Well, after we got the diagnosis, he stopped being so concerned about dying. My, doesn't he look natural laid out like that? And such pretty flowers!"
Feb 27 2009, 2:08PM
GE cuts dividend
Feb 27 2009, 12:16PM
GDP fell 3.8 6.2% in the fourth quarter
Feb 26 2009, 3:24PM
Obama's big-bath accounting
Looking through Obama's budget, I am reminded of those massive one-time-write-off festivals. Only the Obama administration has gone one better: he has actually gotten everyone to congratulate him for his breathtaking honesty.
Feb 26 2009, 11:07AM
Lost
Why is the government so reluctant to hand losses to the bondholders? The standard explanation on both far left and far right is that Treasury and the Fed are in the pocket of the banking industry, and Geithner et. al. are simply bailing out their corporate masters. I don't entirely discount this theory, though I would (and did) put it more nicely: all the information the regulators has comes from the people they are trying to regulate. This naturally biases them towards the regulated. Every time I am tempted to get outraged about this, I think through the alternative: regulators who don't have much interaction with those they oversee. I'll take Tim Geithner over Maxine Waters any day of the week, and twice on Sunday.The guarantees that the US government has already extended to the banks in the last year, and the insufficient (though large) capital injections without government control or adequate conditionality also already given under TARP, closely mimic those given by the Japanese government in the mid-1990s to keep their major banks open without having to recognize specific failures and losses. The result then, and the emerging result now, is that the banks' top management simply burns through that cash, socializing the losses for the taxpayer, grabbing any rare gains for management payouts or shareholder dividends, and ending up still undercapitalized. Pretending that distressed assets are worth more than they actually are today for regulatory purposes persuades no one besides the regulators, and just gives the banks more taxpayer money to spend down, and more time to impose a credit crunch.
These kind of half-measures to keep banks open rather than disciplined are precisely what the Japanese Ministry of Finance engaged in from their bubble's burst in 1992 through to 1998 ...
And in this case, I don't think that's the whole, or even the greatest part, of the explanation. Rather, I think their problem is largely political: avoiding the "n" word, yes, but more importantly, avoiding any more crisis injections of capital into the system.
It's easy to blithely say "Why don't they just make the bondholders take a haircut?" Harder when you think about who those bondholders are: insurers. pension funds. the bond component of your 401(k). Financial debt makes up something like a third of the bond market, and the largest holders are pensions and insurers.
The insurers are the biggest problem, because they're just so heavily regulated. They're not allowed to hold risky assets. Convert their bonds to equity and they will be forced to dump that equity at prices that will trend towards zero. Many insurers will see their capital impaired below the regulatory limits, requiring a government bailout.
Pension funds are the next biggest problem. They're already in big trouble because of stock market declines. The bonds are the "safe" portion of their portfolio, the stuff that's supposed ot be akin to ready cash. Convert their bonds to equity--or worse, default--and suddenly they're illiquid and even further underwater.
Nor is the 401(k) problem small. Bond funds are typically held most heavily by the people closest to retirement; they're for income, not capital gains. What is your mother going to do when a third of her mutual fund income gets converted to equity that produces no cash and can't be sold because the insurers have all had to dump their shares on the market at once? Or simply disappears into the land of bankruptcy lawsuits?
There's also the problem of what it does to the ability of banks to raise capital. Bank bonds are sold on the implicit assumption that the taxpayer, not the lender, will eat capital deficiencies. Changing that understanding risks runs on the bank a la Lehman whenever a financial institution looks the least bit shaky. Banks are inherently highly leveraged institutions even in a good regulatory environment; this might make our banking system much more volatile in the future. It's somewhat akin to what would happen if we simply announced that the FDIC would stop tomorrow.
I think what Geithner et. al. fear is that nationalizing or reorganization will put the government on the hook for massive and immediate losses in both the banking system, and the "safe" entities that lent it money. I fear they may be right. But I think the lesson of Japan is that we have to do it anyway. I don't know what form the fix should take. I don't know how painful the fix will be. But I'm pretty sure any fix that makes us recognize the losses, recapitalize the banks, and move on, will be better than two decades of zombie banks and glacial growth.
Feb 25 2009, 9:17PM
Our house . . . in the middle of our street . . .
This misses the fact that, like any leveraged borrower, the homeowner has already taken substantial losses. Homeowners are no different from any other leveraged borrower. Is Cerberus on the hook for all of Chrysler's losses? Are bank shareholders liable for unlimited capital calls in the event their company loses lots of money? No. Most secured loans are non-recourse, and banks understand full well the concept of a non-recourse secured loan: if the value of the security falls below the value of the loan, they're liable to lose money.
Now legally, it's true, many US mortgages have recourse to the borrower. But it's equally true that in the real world, the overwhelming majority of mortgages are de facto non-recourse.
Feb 25 2009, 5:42PM
Deficit driven
Feb 25 2009, 4:22PM
Mortgage interest deduction: a uniter or a divider?
Will hopes that this represents the kind of good policy a liberaltarian can get behind:
Here's something, like trashing ag subsidies, you can get a lot of libertarians and liberals to agree on. It can be a bit disheartening to see just how little this kind of agreement amounts to when compared to the incentives of the politicans. (Iowa's extremely powerful Senators will die in the last ditch for our subsidies.) But I think this kind of wonk consensus building really matters over the medium-term. Democracy is not a mechanical cui bono machine and elite opinion can, when not coopted by the incentives of the parties, work as a countervailing force.
Feb 25 2009, 12:18PM
The power of government
Since I'm on a roll irritating the libertarians, I think I'm going to keep going.
David Brooks today writes that Obama is about begin in the world's biggest political engineering project with his economic stimulus package and other policy proposals. While liberals think that government can fix things, conservatives think that human society is way too complicated and anytime that government gets involved, it makes a right mess of things. Welfare=welfare queens.
Feb 24 2009, 6:30PM
Asymmetrical information
This post by Matt Yglesias makes that argument:
There really is plenty of blame to go around here. But I just don't see how more than a tiny fraction of it could possible adhere to our electrician or teacher or secretary who's decided, basically, that the financial services professionals and government regulators know what they're doing. Now could she have known better? Sure. She could have been reading Dean Baker and Paul Krugman and others. The idea that this lending was all being undertaken on a false premise that a nationwide housing bust was impossible wasn't a highly guarded secret. I was, for example, familiar with the chart above and with the analysis suggesting that a bust was, in fact, likely. And I believed that analysis. But at the same time, I write about U.S. public policy debates for a living. If there's a dissident line of thinking that, despite its general unpopularity, is popular among left-of-center economists--well, that's the kind of thing I know a lot about. But our nurse? Why would she know?
Think back to 2006. It's not as if CNBC and your paper's real estate section were rigorously probing this question. Alan Greenspan and Hank Paulson weren't saying "the economy seems dangerously vulnerable to the possibility of a nationwide decline in real estate prices, something that major financial institutions' models say is impossible but that history says is likely." And to be fair and non-partisan, it's not as if Harry Reid was saying it either.
Feb 24 2009, 1:38PM
The problem of experts
I think Roubini, Dodd and Greenspan haven't thought this one through. The U.S. isn't Sweden, and not just because our blondes aren't au naturel. Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders' interests. To go further, however, and "haircut" senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite.
The problem is that seeing as he's a gigantic manager of bond funds, this is also the policy that will make Bill Gross best off.
Feb 24 2009, 1:03PM
Crunching credit
It used to be that credit-card companies lured customers with cash rewards. Now American Express Co. is paying to get rid of them. The card issuer is offering selected customers a $300 AmEx prepaid gift card if they pay off their balances and close their accounts.
Feb 24 2009, 11:19AM
The renter/owner divide
Feb 23 2009, 6:04PM
AIG goes back to the well
Until just now, my money was on Citi, in the long run; it's just so damn BIG. But AIG is doing its best to get its mojo back:
The American International Group, the battered insurance giant that is now effectively majority-owned by the federal government, is in talks to receive more government aid as it prepares to record another giant loss.A.I.G. could take as much as another multi-billion dollar hit when it reports earnings during the next week. It expects to disclose losses across a wide variety of holdings, from commercial real estate to credit default swaps, the private contracts that helped lead it to the brink last fall. A loss of that magnitude could lead to another sweep of credit rating downgrades, prompting a fresh round of capital demands that could again pose a serious risk to the firm and its trading partners.
Feb 23 2009, 5:27PM
The problem of administrative costs
Anyone who thinks that the mortgage plan should have a way to determine whether the people it's trying to help sent their kids to private schools or took expensive vacations or put in marble countertops is presumably willing to spend the large sums of money it would take to find that sort of thing out about the 3-4 million people the loan modification program is designed to reach. Moreover, s/he should be willing to accept the serious intrusion into people's privacy that this sort of investigation into people's past spending would entail. And s/he should also be prepared to reach many fewer people, since presumably a number of people would not be able to document that all their spending fell within whatever guidelines we deem acceptable.
Feb 23 2009, 2:01PM
Everything you always wanted to know about the banking bailouts but were afraid to ask
the government here seems to be coming up with ever-more-obscure forms of capital which it can inject into the banks.
It seems to me that all the seemingly inexplicable twists and turns of the banking bailouts can be reduced to this one sentence. For the next round, I'm proposing a new instrument to be known as the "Squibble", which will have an unknown and unknowable face value based on a secret random numbers table, a payout schedule to be determined by spinning a big wheel installed in the company's headquarter lobby for that purpose, and a structure to be arbitrated under the financial laws of a country picked at random every quarter. This will prevent anyone from definitely stating that the banks are undercapitalized. It will also provide financial journalists with some much-needed entertainement.
Feb 23 2009, 12:22PM
Post-finance New York
Feb 23 2009, 11:54AM
Government seeks bankruptcy financing for automakers
It's clear at this point that there's little alternative to either bankruptcy, or a government-steered process that looks very like it. Detroit's sales are now falling below the "worst case scenario" the Big Three presented to Congress last fall. I suspect that Detroit knew it then, and hoped that they could rope the government into throwing good money after bad.
Feb 20 2009, 3:49PM
Law for law's sake
Washington has slowly sunk into an ocean of law, rules, and processes, most created in the past forty years--over 100 million words of binding federal statutes and rules, with more added every year and almost none ever taken away. You may like the idea of tight legal controls over bureaucrats--no official can do anyting without swimming through years of legal processes. But inertia in government is costly. It's hard to cchange priorities, or fix what doesn't work. The legal detail perpetuates failure while also insulating Washington from democratic accountability . . .
Feb 19 2009, 5:42PM
Thought for the day
1. Person X thinks that Person or Program Y was responsible for this disaster
2. This is clearly nonsense because of fact Q.
3. That is why people of good sense know that in fact, the entire thing is the fault of Person Z, who is an evil and irresponsible moron.
Is the human brain even capable of coming up with an explanation that does not require the activity of some nefarious agent?
Corollary: Would the crisis be solved more quickly if we stopped nattering about the banking system and simply burned us some witches?
Feb 19 2009, 3:50PM
What do you mean by "New Deal"?
1) Was there a fiscal stimulus?
2) Did it shorten the Great Depression?
The tenative consensus answer is that the stimulus was small compared to, say, 10 years later, and that other factors probably contributed more than the fiscal stimulus.
Feb 19 2009, 2:10PM
A tale of two theories
Feb 19 2009, 1:06PM
Do you mind if I rant a minute?
Feb 19 2009, 12:26PM
Damning with faint praise
I have to say I like the look of Obama's housing-bailout plan. It's quite elegant, and makes full use of the fact that Fannie and Freddie are now owned by the US government -- which means they can be forced to offer 105% loan-to-value mortgages even when the borrower isn't creditworthy at all.
Obviously, all of this comes at a cost to the US government: the figures being bandied around today range from $75 billion in the NYT to $275 billion at Bloomberg. But really nobody has a clue how much it will cost: that's entirely dependent on whether or not the plan succeeds in arresting the fall of house prices.
Feb 18 2009, 4:09PM
Home sweet home
Well, the obvious point is that it represents a massive transfer to borrowers from lenders and the rest of us. As far as I can tell, there is no penalty for having borrowed more than you could realistically afford to repay--not so much as a speck of dirt on the credit report. The administration's release talks a lot about "responsible homeowners", but very few responsible homeowners have payments that amount to 43% of their monthly income. There are exceptions, of course, such as people who have just lost their jobs, but most of the people being helped are, nearly definitionally, people who bought more house than they could afford in the belief that prices would keep rising indefinitely and they would make big bucks. It was leveraged investing, just like a hedge fund, and often at the same kind of leverage ratios.
Feb 18 2009, 11:07AM
Thoughts on Geithner
Feb 18 2009, 10:54AM
Sign of the times
Agricultural leaders in Thailand, the world's biggest rice exporter, are asking Vietnamese counterparts to help them stabilize the tumbling price of rice -- the latest indication of how dramatically circumstances have changed since food riots gripped the developing world a few months ago.Industry experts aren't expecting any major price-fixing accords between the two countries, which together control roughly 45% of global rice exports. A Thai participant in the meetings, held with industry representatives in Vietnam this week, stressed the two countries are only speaking in general terms about how to keep prices from falling further from their current levels.
But he said the two sides hoped to announce some form of increased coordination at an upcoming summit of heads of state from the Association of Southeast Asian Nations later this month in Thailand. One idea already on the table is the creation of a regional rice reserve that could be used to prevent food shortages and absorb excess stocks during periods of oversupply, analysts say.
"We have to stabilize the world price," said the participant, Chookiat Ophaswongse, president of the Thai Rice Exporters Association. If not, "it's going to hurt the overall market."
Good luck. Attempts to fix the prices of agricultural commodities at artificially high levels were one of FDR's ideas that probably prolonged the Great Depression. In deflationary times, the last thing you want to do is keep the staple food commodity of your nation's poor at artificially high levels, even if that does help the farmers.
Feb 17 2009, 1:00PM
Did World War II end the Great Depression?
The Great Depression indisputably ended during World War II, which is when the output gap closed. But was it causal? Like everything else about the Great Depression, it's really hard to know.
Feb 17 2009, 12:34PM
More on unemployment
Feb 17 2009, 9:43AM
Sign of the Times
Feb 16 2009, 5:01PM
Japan's economy goes from doldrums to despair
And the Wall Street Journal says the decline isn't finished yet:
Already, data point to further deterioration in the economy. Industrial output is expected to drop by around 20% during the first quarter, a government survey says. After tumbling by a record 35% in December, exports sank 46% from a year earlier during the first 20 days of January. In this environment, the jobless rate could climb to an all-time high of 6% or so later this year, from 4.4% in December, economists say.
It wasn't long ago that I was pleased to start writing that Japan was creeping out of more than a decade of doldrums; now it seems to me that this was just the very tail end of America's credit bubble, as our uncontrolled spending boosted demand in an economy that was still fundamentally weak.
Update: A Fistful of Euros has more.
Feb 16 2009, 3:56PM
What is "unemployment" she said, and washed her hands . . .
This harkens back to an uncompleted argument I had with Eric Rauchway and never finished; I've been meaning to write this post for months. And since I think we're going to be having this argument again and again over the next months or years, it seems like a good time to do it.
Feb 13 2009, 2:19PM
Time to short Jenny Craig?
Feb 13 2009, 10:06AM
Euro-area growth falls fast
Well, for starters, it's not accurate to say that our subprime market is the simple cause of this. Banks in most of the developed world were participating in the credit bubble, though what they invested in varied. If it wasn't their own subprime bonds, it was ours, or emerging market debt, or some other species of unexpectedly risky asset.
The other problem Europe has is that their major economies, especially Germany's, have historically been heavily dependent on exports. The biggest source of robust domestic demand growth has been the United States consumer, and that turned out to be illusory. Unfortunately, Europe's relatively paltry stimulus efforts seem to indicate that they still, somehow, believe that the United States consumer can pull them out of it, which is insane considering how overleveraged we are. Unless they can overcome the need for our consumer spending, they'll continue to suffer longer and harer than we do.
Feb 12 2009, 3:31PM
Oh, Canada!
Drum and Zakaria are busy applauding us Canadians for our financial foresight. While it is true that the relative lack of leverage in the financial system was a good thing, it is also true that the Canadian economy tends to follow the course of the US economy with a 2-3 quarter lag. In short, does this (Canada's trade balance, released Tuesday, attached) look like the chart of a healthy economy? We are a leveraged play on the US and Asian economies.
Feb 12 2009, 12:31PM
Unbanking
One argument is that we can't fix the economy without fixing the banking system, for reasons that Matthew Yglesias outlines:
Feb 11 2009, 7:42PM
Out of control
Feb 11 2009, 7:13PM
But seriously, folks
That's not really funny. This is the crack talent that's supposed to reform the banking system into something more robust? Imagine how you'd feel if any of the folks who didn't seem to grasp the distinction between Bank of America and State Street showed up to represent you at your closing. Save everyone a lot of time and aggravation, and declare bankruptcy on the spot, hmmm?
Feb 11 2009, 5:26PM
Market failure
Craigslist springs up to facilitate low cost transactions between individuals: good!
The market for used furniture booms, allowing people to furnish their houses more nicely/cheaply, while giving a little extra cash to those parting with unwanted furnishings: good!
The boom in used furnitures spreads bedbugs, leading to a quasi-epidemic in some areas: eeeeeeeeeeeeeek!
Now I'm afraid to buy any used furniture at all, other than from an antique dealer. (Which means, I'm not buying any used furniture). As far as I can tell, the only real way to get rid of a bedbug infestation is to throw out practically everything you own. It's not worth saving a couple of hundred dollars on a futon if it means I might have to throw out thousands of dollars worth of other furniture.
When markets fail, we're supposed to recommend government intervention, but damned if I can think of one that would solve this problem. I think we're stuck with Caveat Emptor.
Feb 11 2009, 4:01PM
Weirdest quote of the hearings
"Basically you come to us today on your bicycles after buying girl scout cookies and helping out Mother Teresa, telling us 'We're sorry, we didn't mean it, we won't do it again, trust us' . . . . I don't really have a question, but I was told that I can use my five minutes."
~ Michael Capuano, D-Mass
He goes on to make some moderately intelligent points about the fungibility of money, combined with some impassioned ranting about the failure of the banks to lend as if money were going out of style.
Feb 11 2009, 2:17PM
Poor little rich boys
The problem is, this acts as if the price of all these goods is exogenous. Housing and schools cost so much in New York because all the people at the top make millions of dollars a year. If they made hundreds of thousands of dollars a year, the goods they consume would be priced accordingly. Given how badly the economy of New York is distorted by extreme wealth, inexorably forcing the middle class farther and farther towards the periphery, this might not be a bad thing. Not that I would support achieving this laudable goal by government fiat, if it weren't for the fact that they're taking quite a bit of money by same.
Feb 11 2009, 1:24PM
Maxine Waters brings the crazy
Feb 11 2009, 9:52AM
Krugman and Barro, revisited
Feb 11 2009, 9:43AM
How to interpret an economist
I'm not sure if Larry is being disingenuous. What I'm pretty sure of, which is why I wrote my original statement, is that he probably doesn't much like the "stimulus" bill. Notice that I used the word "doubt," rather than claiming that I know. I haven't talked to Larry since 1993 or 1994. How could I claim to know what he thinks?In response to Charlie, I wrote:
Have you noticed that we haven't heard any strong endorsement of the bill by Summers? The standard way a political appointee deals with the situation when he/she doesn't like what his/her boss is doing is to be quiet or, if asked his/her opinion, to say, "the President believes."Responding to me, Charlie wrote:
I don't recall seeing the "the president believes quotes" from Romer and Summers either.Take a look at the transcript of Larry Summers's appearance on "This Week" yesterday. Countless times, Larry talks about the President's wants and beliefs. When he states an opinion as his own, it's typically about the state of the economy, not the merits of the "stimulus" bill.
One sample:
There are crucial areas, support for higher education, that are things that are in the House bill that are very, very important to the president.Another:
There are certain priorities -- education, health care, infrastructure investment -- that the president is certainly not going to want to lose sight of.
I'm actually surprised by how deftly Obama's advisors have managed to avoid personally endorsing things they do not believe to be correct. Not entirely, of course, but the degree of deniability is nonetheless impressive. It will be interesting to see how much longer they can keep it up.
Feb 10 2009, 5:19PM
The Way of the Business Writer
The worst, however, was a book called "The Way of the Cockroach", in which would-be CEOs were explicitly instructed to behave like vermin. Apparently there is nothing so contemptible that a business writer will not stoop to . . . telling other people to imitate.
Come to think of it, I may have found an explanation for the last twelve months . . .
Feb 10 2009, 1:24PM
Don't let the perfect be the enemy of nothing at all
Feb 10 2009, 12:50PM
I'm from the government, and I'm here to help you
The plan, which would ideally involve a mix of government and private capital, aims to stabilize the U.S. financial system by injecting capital into banks, helping to determine prices of toxic assets weighing on firms' balance sheets and stemming foreclosures.
"We believe that the policy response has to be comprehensive and forceful," Treasury Secretary Timothy Geithner said in his speech Tuesday. "Instead of catalyzing recovery, the financial system is working against recovery. And at the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it."
Feb 10 2009, 7:15AM
Sign of the Times
Feb 9 2009, 12:02PM
The joys of unemployment (insurance)
He also covers unemployment insurance. Like unionization, unemployment insurance is known to increase unemployment--not the number of people who lose their jobs, but the number of weeks they spend unemployed. As long as the checks are coming in, people are less motivated to take any job that's offered.
Feb 9 2009, 11:20AM
More love for Big Labor
What does this mean for the stimulus? Union labor is more expensive. Every project that uses a PLA will cost more, and many of those jobs will use as much capital equipment as possible to minimize the demand for labor. That means that we will get a lot less employment for every dollar of stimulus spent than we would without the PLA.
Obama is offering these "cheap" concessions to the unions because it's lookng less likely that the Democrats will be able to get EFCA through. But these things aren't free. They're just less transparent.
Feb 9 2009, 10:45AM
Auto woes
Feb 9 2009, 10:11AM
The coming of Kindle 2.0
As it prepares to launch Kindle 2.0, it looks like they're making great strategic decisions to increase their dominance of the ebook marketplace:
Feb 9 2009, 9:52AM
Starbucks tries to scoot downmarket
Their calls for latte austerity went unheeded through most of the decade, but as Americans slash budgets, it seems that Starbucks is finally falling prey. And trying to do something about it:
Feb 7 2009, 1:52PM
Niche marketing
And indeed, Consumer Reports informs me that it should be around $50. What gives?
Feb 7 2009, 11:48AM
Pioneer may exit TV business
Feb 6 2009, 4:09PM
Good afternoon, readers
It didn't, quite, but the jobs numbers suggest, as Joseph Brusuelas put it, a "slow motion train wreck". Unemployment is a lagging indicator. Let's say that Ken Rogoff and Carmen Reinhart are correct in their comparison of this crisis to other developed-world financial disasters:
Feb 5 2009, 3:31PM
DTV in never-neverland
Feb 5 2009, 9:25AM
Productivity, and unit labor costs, rise
These numbers seem great, but off course, this is actually what you'd expect in a deflationary recession. For all the hyperbole about incompetent managers, layoffs are not actually performed at random. They tend to target the least productive workers in the department, or the least productive departments (though of course there are many individual exceptions to that generalization). That means that productivity rises even though output falls. Meanwhile, the increase in real incomes is being driven by a general collapse in aggregate demand that has lowered prices for most classes of goods.
This highlights the ironic fact that recessions can make many, or even most people materially better off, because wages are sticky downward and prices are much less so. Most of what recessions do is deepen the gap between the haves and the have-nots. Those who have a job may experience declining costs and actually improve their purchasing power. But the number of the unemployed rises, the length of the time required to find a new job stretches out, and the net decrease in their welfare far outstrips the moderate increase in the purchasing power of most consumers. Plus, of course, the fear of the abyss among those who aren't in it takes a sizeable toll on welfare.
Feb 5 2009, 9:03AM
Wal-Mart reports that same-store sales grew 2.1% in January
- People are cutting back on everything they don't HAVE to have
- People are trying hard to save money on the things they do need
Feb 5 2009, 7:49AM
Austerity begins at home
Feb 4 2009, 3:58PM
The Costco model
Feb 4 2009, 2:03PM
How effective are tax cuts as stimulus?
Feb 4 2009, 11:09AM
When saving becomes dissaving
Yesterday's report on consumer incomes, spending, and saving showed a sharp rise in the personal savings rate; it also showed a decline in nominal personal incomes, the third in a row, reflecting the weakening economy.
I don't know who else has made this point, but it's quite clear that we're in serious paradox of thrift territory here. Or perhaps more accurately, we're in a paradox of debt.
Consumers are pulling back because they've realized that they're too far in debt. The economy is shrinking in large part because consumers are pulling back. And the result, almost surely, is to leave household balance sheets worse than ever. I can't do this accurately until the Federal Reserve's flow of funds data have been updated, but almost without question the ratio of household debt to personal income has been rising, not falling, as consumers try to save more.
What does this mean for the stimulative effects of tax cuts, transfer payments, or any other kind of government spending? What does it mean for the savings rate--savings could conceivably go up as a fraction of income at the same time it goes down in absolute terms. I don't know--I'm not even sure how we could know. Has any other country ever had this level of personal debt before?
Feb 4 2009, 10:36AM
Quote of the day
"That is pretty draconian -- $500,000 is not a lot of money, particularly if there is no bonus," said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. "And you know these companies that are in trouble are not going to pay much of an annual dividend."
Feb 4 2009, 9:55AM
Wall Street jobs no longer a license to print money
President Barack Obama will unveil a series of pay curbs on Wednesday, including a strict new limit on executive salaries for companies that receive "exceptional assistance."The rules represent the White House's attempt to ensure that financial institutions receiving government money are held accountable for spending it responsibly, an administration official said.
Under the new rules, companies that receive "exceptional assistance" from taxpayers may not pay any top executive more than $500,000 a year, an administration official said. Any additional compensation would have to be in restricted stock that will not vest until taxpayers have been repaid, the official said.
A reader writes to ask whether this is a good idea. Won't it mean executives will leave these firms in droves?
Feb 4 2009, 9:04AM
Nonfarm payrolls declined in January
Nonfarm private employment decreased 522,000 from December 2008 to January 2009 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from November to December 2008 was revised up by 34,000, from a decline of 693,000 to a decline of 659,000.
The decline was slightly better than expected, but still grim.
Feb 4 2009, 8:52AM
$900 billion stimulus package runs aground
Senate Democratic leaders conceded yesterday that they do not have the votes to pass the stimulus bill as currently written and said that to gain bipartisan support, they will seek to cut provisions that would not provide an immediate boost to the economy.
I think this is the right way to do it. Moreover, I wonder if this won't make more sense for Democrats, ultimately. The stimulus package as written by the House did let them advance some priorities, like health insurance, but was so expensive that it was going to make it much harder for the Democrats to pursue broader reforms.
Feb 3 2009, 5:37PM
Liar, liar pants on fire
Item One: Even a dead cat will bounce if you drop it from a high enough height. GDP contracted by nearly a third during the acute phase of the crisis, from 1930-32. It wasn't actually going to continue to contract indefinitely. This is basically the pattern you see in most countries with major financial crises: severe contraction, and then rapid climb back towards former output levels.
Feb 3 2009, 4:36PM
A brief history of macroeconomics . . .
5. Certified macroeconomists were taken by surprise by what has happened. A lot of people saw the boulder of the housing bubble ready to roll down the mountain. Hardly anybody foresaw the financial avalanche that would ensue.
6. Certified macroeconomists were badly polarized in the early 1970's, with Chicago types essentially denying the idea of involuntary unemployment and the MIT types clinging to macroeconometric models. By the late 1970's, the arguments were over. The models had all sorts of problems, and everybody gave up on them, although people had different reasons for doing so. Methodologically, everyone agreed to work on irrelevant math probems, and substantively everyone agreed that reasonably stable money growth would lead to a reasonably stable economy.
7. We had reasonably stable money growth under Greenspan and Bernanke (at least that is what most people would have said at the time), but look what happened.
8. So now, it's back to the early 1970's, with Chicago denying reality and MIT back to thinking in terms of macroeconometric models.
History may not repeat itself, but it stutters like hell.
Feb 3 2009, 4:06PM
40% of Japanese investors think there is a risk of a US default
Forty percent of Japanese investors said there is a risk that the U.S. government will default on its debt, a survey published by Barclays Capital showed.
Almost 34 percent of the 66 respondents in the poll sent to Japanese institutional investors from Jan. 26 to Jan. 28 said there is a "significant" or "slight" risk that the U.S. will lose its AAA sovereign debt rating this year. Twenty-two percent said they were concerned about the credit risk of German government bonds. China surpassed Japan in September to become the biggest foreign holder of U.S. Treasuries.
I don't know how much of this is related to the $815 squintillion stimulus, or whatever it is we're proposing to spend this week. There are other reasons to worry about US debt, like the downturn, the dollar, and our entitlement problems. But when the citizens of a country with a debt-to-GDP ratio of 1 and more than a decade of economic stagnation behind them start complaining that you're not such a good credit risk, it's time to start worrying.
Feb 3 2009, 7:55AM
The burden of proof
There are a lot of people in my comments saying, apparently in all earnesty, "I really think the burden of proof is on the wackos who don't want the stimulus."
I am frankly flabbergasted. The proponents of the stimulus are proposing to spend nearly a trillion dollars. That's about $3,000 for every man, woman, and child in the United States. Do you have $3,000 lying around that could just be spent on any old thing without you really caring? You may call me crazy, but in the McArdle household, we view $3,000 as quite a tidy sum, the kind of money we want to make sure is wisely spent.
Feb 2 2009, 1:31PM
All stimulus, all the time
Tyler's latest on temporary versus permanent government consumption clarifies what the confusion is over my very simple point. I don't think Tyler understands what I (and everybody else) means by government spending. I don't mean the government handing someone a rebate check; I mean the government actually, you know, buying something -- say, building a bridge.
When Tyler says
The Keynesian boost to aggregate demand arises because people consider the resulting bonds to be "net wealth" even when they are not,
the only way that makes sense is if he's thinking of a rebate check. If the government builds a bridge, the boost to aggregate demand comes not because people are "tricked" into feeling wealthier but because the government is building a bridge. The question then is how much of that direct increase in government demand is offset by a fall in private consumption because people expect their future taxes to be higher; obviously that offset is smaller if they think the bridge is a one-time expense than if they think there will be a bridge built every year. That's why temporary government spending has a bigger effect.
OK, I guess there's an alternative theory of what Tyler is talking about -- maybe he doesn't consider the wages of the bridge-builders count, that only what they do with those wages matters. But that's not the way either employment numbers or GDP are calculated: bridge construction is part of GDP.
I quake to take on a Nobel-Prize winning economist, so perhaps I should call these my misunderstandings of, rather than my problems with, the post.
Feb 2 2009, 11:46AM
The madness of crowds
I've been pondering recently how this applies to blog discussions. Just as with live debates, losing your temper and fulminating about the many character deficits, general stupidity, and probable misbehavior of the target is perceived by people who already agree with you as the natural reaction to an opponent so morally bankrupt and thoroughly stupid that there is no point in wasting further time actually arguing with them. But how does it play to the rest of the audience?
Feb 2 2009, 9:10AM
Damned if they do, damned if they don't
Feb 2 2009, 8:16AM
The Madoff fallout continues
I hadn't thought of what that would mean for Brandeis, but Felix Salmon suggests that it's become a major problem for their already-strained endowment:
Feb 1 2009, 10:00AM
How forward looking are we?
It wouldn't necessarily bolster the case for stimulus to assume that people will not correctly estimate the costs--people could overshoot as well as undershoot, meaning that they'd actually oversave to pay for future taxes. What matters is, first, are people paying more or less attention to future taxes than they used to, and second, are their estimates more or less optimistic than they used to be?
It's armchair sociology, of course, but I'd argue that people have suddenly become much more focused on estimating their future income and expenses, rather than living paycheck to paycheck--hence the suddenly renewed interest in savings. They've also, empirically, become a lot more pessimistic--at least, if we can count consumer confidence indices as empirical evidence. That will impact how much of the stimulus they save. This does not mean that there will be no multiplier--only that it will be lower than in an era less future focused.
Feb 1 2009, 9:36AM
Good as gelt
Feb 1 2009, 9:30AM
The problem with bonuses
I can't believe I'm typing this but the $18 billion in bonuses paid to Wall Street executives makes the industry almost completely analogous to US automakers. Both are dependent on government largesse to create an artificial microeconomic environment mimicking a previous era - the 1970s for the Big 3 and the decade ending mid-2007 for finance. Moreover, the points of similarity extend to an unconflicted sense of entitlement that this be so.
I write business every day and I doubt that I have ever written anything more difficult and repellent to my (maybe previous) sensibilities than that. God is dead and I hate this.
Feb 1 2009, 9:11AM
Corrections and amplifications
Jan 30 2009, 4:02PM
The labor movement takes its pound of flesh
Obama signed the changes to labor provisions today:
-Require federal contractors to offer jobs to current workers when contracts change.
-Reverse a Bush administration order requiring federal contractors to post notice that workers can limit financial support of unions serving as their exclusive bargaining representatives.
-Prevent federal contractors from being reimbursed for expenses meant to influence workers deciding whether to form a union and engage in collective bargaining.
As a matter of policy, it seems ridiculous to give federal contractors money to lobby against a union. On the other hand, taking down notices that workers have rights against the union seems to be frankly pandering. The rhetoric about unions always focuses on the workers, but an awful lot of the actual policy seems designed to enhance, not the power of the workers over their employers, but that of the union over the workers.
Jan 30 2009, 1:44PM
Jamie Dimon, Grim Reaper
Let's talk about the JP Morgan Chase and Bernie Madoff story we mentioned yesterday. If we're following this correctly, it seems that starting in 2006 JP Morgan allowed investors to make bets on the performance of hedge funds that invested with Bernie Madoff. This basically means that JP Morgan was institutionally short Madoff, which is interesting in itself. What made JP Morgan think it could beat the guy who had over forty-years of steady results?Even more interesting is the fact that JP Morgan initially hedged this bet against Madoff by investing $250 million of its own money with Madoff. And then, as late as last fall, it decided to take off this hedge. What happened in the fall of 2008 to make JP Morgan believe that the bets it had made against Madoff were now so safe that they didn't need to be hedged?
Perhaps the most tantalizing idea is that JP Morgan's withdrawal might have triggered the collapse of Madoff's fund. Recall that although Madoff claimed to be managing tens of billions of dollars, he actually had only a tiny fraction of those assets under his control. A seemingly small withdrawal the size of JP Morgan's $250 million could very well have left Madoff without liquidity to keep up his fraud.
We know that JP Morgan began to become very conservative with its assets last fall. It made collateral calls on Lehman Brothers and Merrill Lynch, requiring the investment banks to hand over billions. Those collateral calls more or less consigned those firms to death. So did JP Morgan also doom Madoff? It does look like Jamie Dimon's shop has played the role of the Grim Reaper all through this credit crisis.
Jan 30 2009, 12:22PM
All you have to do is believe . . .
Ryan Avent writes about the possibility of an economic "placebo effect" from the stimulus.
But the underlying point is intriguing -- that much of the value of action may be psychological. Even if a government plan isn't directly contributing to public welfare, the idea that something is being done which will improve things will encourage people to spend, businesses to invest, banks to lend, and so on.
This gets at something that another participant, Robert Shiller, calls the "confidence multiplier," of which he says:
The focus has to get off of "what fraction of this stimulus will be spent" to "how does this stimulus affect confidence".
This is worth considering when we read that Americans are strongly in support of significant infrastructure investments. I know that I've been all over the map in terms of what the stimulus should include and how it should be structured, but it does occur to me that authorizing a plan to move forward on major infrastructure projects, even if we know those projects won't come online in the next year or two, could have strong, immediate beneficial effects for the economy (in additional to the long-term effects of the value added by the infrastructure). Critics may note that we'll wind up spending money after the economy has already recovered, but of course, that's less of an issue when you're building things that need to be built in any case.
The real question, I think, is how close the permanent income hypothesis is to being true. The basic idea is that people are forward looking, and they try to smooth their consumption over time. So if you give them a "temporary tax cut", they save most of it, knowing that eventually they will have to give the money back.
But of course, this should also be true of "temporary government spending"--if people think the money won't be there next year, they'll salt as much of the money away as possible. This is a topic very underexplored in the various estimates of the stimulus multiplier, even though consumers are massively overleveraged and will presumably save as much of their new income as they can.
Tax cuts give conservatives great confidence, of course, just as spending makes liberals with great faith in the power of the government feel all shiny and happy and optimistic. The question is how much faith others put in those nostrums.
Jan 30 2009, 9:54AM
GDP falls, deflation looms
Jan 29 2009, 5:48PM
Dissecting the stimulus debate
Jan 29 2009, 3:49PM
More questions about the mortgage cramdown
Jan 29 2009, 9:19AM
Ford's balance sheet no longer comes in black
Ford Motor Co., which has already slashed thousands of jobs, will cut even deeper and draw on available credit lines after the auto maker burned through $5.5 billion in cash in the fourth quarter and posted its third consecutive annual loss.For the fourth quarter, Ford recorded a net loss of $5.9 billion, or $2.46 a share, as its full-year loss ballooned to $14.6 billion compared with $2.72 billion for 2007.
Ford, which succeeded at easing its cash burn during the fourth quarter, now has $13.4 billion on hand to get it through 2009.
Keep in mind that this is the auto company in the best shape of all the US domestics. Whether through luck or wily strategy, Ford managed to mortgage everything but the little blue logo before the financial crisis hit. They're drawing down about $10 billion in credit to supplement the $13 billion worth of cash they finished up the fourth quarter with.
Jan 28 2009, 10:34PM
Bad news, and the paradox of thrift
This is Keynes' famous argument that all spending is someone else's income. If we (hypothetically) decide to eliminate takeout from our menu and eat tuna sandwiches instead, we are saving money. But the restaurant loses it. By foregoing spending, we are pulling money out of the economy. This is the insight behind the liquidity trap--if everyone tries to hoard money by selling more goods and services while buying fewer, the total demand for goods and services will drop, and we will make ourselves worse off.
Jan 28 2009, 1:23PM
Just in time
Jan 28 2009, 1:20PM
Those Wall Street leeches
Then there would be a recession, and everyone in New York would realize that all those overpaid weasels were, um, paying our bills. Bloomberg estimates that the cumulative tax loss to the city and state from the 2008 fiasco will be at least $33 billion--mostly in corporate income taxes, but $1.3 billion of that is just taxes on bonus income that evaporated in 2008. And if you think 2009 is going to be a lot better, would you be interested in putting a downpayment on a beautiful bridge linking Brooklyn to downtown Manhattan? No need to make a full payment until you get that bonus!
North of $50 billion seems like a better bet for the gap that the city and state are going to have to close over the next few years.
On the upside, it'll probably be a lot cheaper to get a nice condo on the Upper West Side. If you can find a solvent banker to float the loan . . .
Jan 28 2009, 10:40AM
More on Dick Fuld
Leave aside Fuld's strategic decisions, about which there will be long debate. Here's one thing you simply cannot excuse him for: by all accounts, he didn't bother selling out because that would have meant surrendering the executive office, and this he could not bear to do. Instead, he played chicken with the markets and the Fed. The result was a bankruptcy that wiped out the shareholders to whom he owed a fiduciary duty, touched off a massive financial panic, etc.The blog entry is here, and the court filing therein is simply dispatched by Sam Jones:
It is disingenuity of the highest order to suggest that banks like Lehman were passive victims of a stormy market. Their actions created the stormy market in the first place. Dick Fuld's Lehman reaped what it sowed.
In fact, the filing actively celebrates all the risks that were taken by Fuld and Lehman in the years leading up to the collapse, talking about Lehman's "four consecutive years of record-breaking financial results" between 2004 and 2007, and citing with admiration Lehman's soaring share price.
I'm sure he had no idea that Reserve Primary would break the buck, markets would lock, massive layoffs would ensue, and half the journalists in DC would be spending their evenings debating just how low you can turn the thermostat before the pipes freeze. But he certainly knew that he was risking the future of thousands of employees and the shareholders who employed him because he liked to see the letters "CEO" after his name. To add insult to injury, as I blogged earlier, he's now playing shell games with his assets, trying to ensure that the shareholders who sue him can't cut kick him out of the mansion he bought with their money.
Exonerated? Like OJ, maybe.
Jan 28 2009, 10:02AM
Strange accounting
This is very odd because, first of all, that's not really how mortgage accounting works--banks don't mark houses to market, and a very good thing, because their balance sheets would have been puffing up like blowfish for most of the decade. They very sensibly do not do this because in a rising market, they are unlikely to get their hands on a house in foreclosure to sell at a profit. So what they look at instead is the potential cash flow from the mortgage.
Jan 27 2009, 7:49PM
Should we worry about government borrowing crowding out private investment?
Over the longer term, it has more bite. The government will eventually have to roll over all this debt, at which point it will undoubtedly be a) more expensive and b) more prone to crowd out private demand for funds. But the supporters can plausibly argue that if we get ourselves stuck in a liquidity trap, the investment climate will be even worse.
Jan 27 2009, 5:23PM
More on mortgage cramdowns
Jan 27 2009, 3:30PM
Good. Fast. Expensive. Pick Two.
This is presenting some problems now that the actual aim should, by the theory of Keynesian stimulus, to spend money as fast as possible on almost anything you can find.
It is very obvious, now that we have the stimulus plans, that the Democrats are using stimulus as an excuse to spend money on things they want to spend money on. Their demand for things like alternative energy programs is inelastic; it's just that it happens, right now, to be convenient to bill them as stimulus.
The problem is, that contra the Republicans, Democrats do care that money spent on these important projects is spent well. And spending a lot of money well takes time. It's an inversion of the old engineering aphorism: good. fast. expensive. You can only have two of the three.
Jan 27 2009, 12:17PM
How OJ Simpson may help keep Dick Fuld from stiffing his shareholders
As you may or may not be aware, Florida is notorious among bankruptcy analysts because OJ Simpson bought a house there in the hopes of shielding his assets from the civil suit over the murder. Florida is one of the few states with what is known as an "unlimited homestead exemption". All states permit you to shield your primary residence from creditors in bankruptcy (though not from a mortgagor, as discussed in my previous post). As long as you keep making any payments on loans secured by the house, you can keep it. However, most states cap the value of the home you can thus shield. Not Florida. So OJ's strategy was, as far as we can tell:
1) Buy enormous house worth zillions of dollars and move into it
2) Wait until civil suit is over
3) Declare bankruptcy
4) Sell house for a zillion dollars; thumb nose at justice.
Jan 27 2009, 10:04AM
What's the matter with mortgage cramdowns?
Axiom: There Ain't No Such Thing As A Free Lunch. If you make the bankers pay, they will make you pay.
Jan 26 2009, 4:25PM
Sheer genius
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Jan 26 2009, 4:12PM
Mortgage cramdowns are a bad option
New Worry: Mortgage Cram Downs Could Set Off Huge Bank Losses
This seems to me to be a very old worry--I've been voicing it for months. Why do people want to do mortgage cramdowns? They want to bail out distressed homeowners. And because this will be very expensive, they want to do so in a way that does not involve a direct government outlay of cash. The normal way that the government gets what it wants without paying for it is to make a rule forcing someone else to shell out.
Jan 26 2009, 3:03PM
Euroskepticism is back in fashion
Jan 26 2009, 1:57PM
Department of non-leading indicators
The e-card, which allows the sender to select the disease involved and includes links to public health sites and services, is part of that strategy. "Notifying the person exposed to a sexually transmitted infection is the critical piece in preventing further spread," said Dr. Susan Blank, New York City's assistant health commissioner for sexually transmitted disease. "And as the reach of the Internet expands for use in finding instant sex partners, we're using that technology as part of the solution."
Along with eight other cities and three states, New York City has been working with inSPOT, the online partner notification system through which Steve, in San Francisco, received his syphilis e-card. (It is currently aimed at gay men but is expanding its audience to include heterosexuals, and plans to start a national site this year.)
The system was developed in 2004 by Internet Sexuality Information Services, a nonprofit agency in Oakland, Calif., with the support of health officials in San Francisco. Deb Levine, the agency's executive director, said two factors in San Francisco led to the idea: the rise in Internet use among men who have sex with men, and an increase in syphilis among that group.
On the one hand, it's not really a product you want--but on the other hand, it's a product you might need.
Jan 26 2009, 8:15AM
Pfizer and Wyeth will merge
Jan 25 2009, 4:47PM
Follow us on Twitter!
Jan 23 2009, 3:50PM
Don't just stand there, do something!
All you know is you throw everything at it and whether it's more effective if you're fighting a fire to be concentrating the water flow on this part or that part. You're going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they've been very, very wrong and most of them in recent years on this. We don't know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don't know how effective in the short run we don't know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.
At least it's honest.
Jan 23 2009, 3:07PM
GE: still bringing good things to life?
That legacy left our major industrial giants with massive finance arms: not just the automakers, but places like GE, which was regarded as an interesting, even an innovative, place to get a finance job when I was in business school. GE never reached the same dependence on financing than GM did, which was often aptly described over the last decade as "a bank with a sideline in cars". But its profits were swollen by finance earnings . . . and now, like the other industrial giants, all that financial business is turning into a wee bit of a problem:
Jan 23 2009, 12:16PM
Why is government IT so awful, Part III
The reader email you posted that mentions webdev in straight html is dead-on, specifically noting how buttons cannot be used because screen readers cannot interpret them. For more information on this specific situation you need to familiarize yourself with Section 508: http://www.section508.gov/
Basically it is a 1998 law that requires all web information be accessible by all people (I'm paraphrasing, of course). Because it was written before many gov agencies even had web presences it is terribly outdated. It also terrifies web developers and keeps sites looking plain and worthless. Talented web developers avoid gov work as a result, and IT pros who haven't updated their skill sets in over a decade have permanent job security.
s for agencies to work on, but something that must be covered by A RULE. You cannot trust the Social Security Administration to care whether disabled people have access, so you have to mandate it. And if that clumsily drawn mandate cuts off ten other features that would help people access social security information, well . . . DIDN'T YOU SEE THERE'S A RULE????!!!
Jan 23 2009, 9:26AM
Britain's economy definitely in recession
Britain fell deeper into recession during the final three months of last year as the economy contracted by 1.5 per cent, according to new figures released on Friday.
The rapid decline in UK economic growth in the fourth quarter of 2008 was the worst performance since the second quarter of 1980, when the country was in the middle of steep downturn, and confirmed the economy grew at its slowest annual pace for sixteen years.
Fourth quarter growth was weaker than the 1.2 per cent decline economists on average had been expecting and follows a 0.6 per cent contraction in the third quarter. For the whole of 2008 growth was just 0.7 per cent.
Jan 23 2009, 12:02AM
Put up or shut up
Dave Brown, one of this city's best-known home builders, had kept his head above water through the housing downturn, not missing a single interest payment on his loans.So he was confounded a few months back when one of his banks, spooked by the decline in his company's revenue, suddenly demanded millions of dollars in additional collateral to continue carrying loans on his projects.
He was unable to come up with the money, and in October, JPMorgan Chase foreclosed on five of his developments. Shortly thereafter, Brown Family Communities, 33 years in the business, decided to shut its doors.
Perhaps the details are other than described in the article, but whatever the circumstances, it's hard to see how a bank benefits from foreclosing on a performing loan in this housing market.
Jan 22 2009, 11:38PM
Waves of red ink wash banks away before regulators can intervene
That competence counts for a lot. As any student of the banking system will tell you, one of the major causes of a bank run is . . . fears of a bank run. The fact that the FDIC is so good at taking care of bank failures makes depositors and creditors a lot less likely to summarily demand the return of their capital in the first place. Libertarians are right to bemoan the survival of creaky old FDR-era institutions on sheer inertia. (TVA, I'm looking at you!) But the existence of the FDIC goes a long way towards vindicating the New Deal.
Jan 22 2009, 4:32PM
Whither the New York Times? Whither journalism?
In other words, fire a bunch of people, especially editors, charge more for the product, and wall off your front page.Our Plan To Fix The New York Times
- Cut costs 40% by 2010.
- Continue to raise print subscription prices
- Explore charging an online subscription fee
Jan 22 2009, 11:48AM
Former Merrill chief ousted at Bank of America
John Thain was ousted on Thursday at Merrill Lynch, just three weeks after the brokerage firm was acquired by Bank of America. Mr Thain's departure came in a meeting with BofA chief executive Ken Lewis, who flew up to New York from Charlotte, North Carolina, for a face-to-face meeting.
This can hardly come as a huge shock to Mr. Thain. It certainly isn't shocking to anyone who's ever spent more than five minutes in a corporation, or for that matter, a meeting of the Altar Society. Someone had to go. And if it wasn't Mr. Thain, it was going to be Ken Lewis.
Jan 22 2009, 11:41AM
On the dole
Jan 22 2009, 11:25AM
Annals of awful advertising
Whether you're engaged . . . know someone engaged . . . or hope to give your partner a little nudge--Bed, Bath & Beyond promises to make wedding planning as simple as saying "I Do".I know that times are hard for retailers. Every day seems to bring an increasingly desperate missive from Banana Republic, Crutchfield, or Burpee seeds promising fantastic savings, free shipping, and if I choose the option at checkout, the firstborn son of the Marketing Director. But this . . . well, it quite takes my breath away. The desperate leading the desperate, so to speak.
I'm no game theorist. Or psychologist. And a business site is not quite the right venue for dating advice. But I'm pretty sure you cannot overcome a reluctant suitor merely by going ahead and registering for the wedding without him. Seriously. Just ask Lehman Brothers.
Jan 22 2009, 11:24AM
It's so . . . stimulating
Jan 22 2009, 11:23AM
TurboTax denies responsibility for Geithner's mistakes
.
Jan 22 2009, 9:39AM
Assessing Obama's stimulus
Jan 21 2009, 4:25PM
Why is government IT so awful, part II
Jan 20 2009, 9:38AM
Cui Bono?
Tracy Kratzer, 27, enrolled in the International Academy of Design & Technology in Orlando, Fla. in 2003. With visions of making big bucks as a Web designer, she didn't give much thought to the interest rate on her loan from Sallie Mae
(nyse: SLM - news - people ), the Fannie Mae (nyse: FNM - news - people ) of student lending. Kratzer didn't know it at the time, but she was part of an experiment that has proved disastrous for borrowers and shareholders of Sallie's parent, SLM Corp. It's called "nontraditional" lending. "That's not a sociological term," Albert Lord, chief executive of SLM Corp., told an audience of financial analysts last fall. "It's basically kids and parents with poor credit who are at the wrong schools."
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