Wednesday, April 22, 2009

Break Up the Banks


I sense this idea is starting to gain some well deserved momentum. Mark Thoma has some detailed commentary on why he thinks the large banks may actually be the root cause of the current crisis:

But what should we make of the fact that every singe step in the process is compromised? Every market that was supposed to self-regulate failed? Does every single market in the chain fail at the same time through some highly unlikely coincidence? What are the chances that, on their own, independently, each and every step in the chain would have been subject to a market failure that just happened to let the bubble keep inflating? Whatever it took to keep the money flowing through the system seems to have come to pass.

So more and more I'm starting to thing there may be a single explanation after all, that the regulators of these markets were captured by powerful forces that wanted the game to continue. The power of regulators, and the will to enforce the regulations, must match - in fact exceed - the will and power of those being regulated to resist having constraints placed on their behavior. I've talked about why ideology may have eroded the will of regulators, but their will is partly a function of their power. So long as we allow huge, clearly over-sized financial institutions to exist, this problem will potentially be present.

A Surprising Profile of Barney Frank


Now one of the most powerful people in America, I was surprised by the fairly positive profile in the Economist, a magazine that isn't very sympathetic to the Barney Frank world view:

But his talents have never been put to better use than they are today. He has been a fixture on the financial services committee since 1981, mastering arcane detail about everything from securities to insurance. He has been at the centre of the financial crisis from the start: Nancy Pelosi, the speaker of the House of Representatives, made him the Democrats’ chief negotiator with the Bush administration back when Lehman Brothers collapsed.

Mr Frank has also accumulated a long record of brokering deals between free-market Republicans and pro-regulation liberals—experience that is standing him in good stead when it comes to balancing the conflicting demands of the pragmatists in the Treasury and the populists in Congress. He claims to be a strong supporter of free markets, and has provided plenty of evidence that this is more than talk. He has refused to sponsor legislation regulating hedge funds, backed many free-trade agreements, and has voted against farm subsidies.

Daily Noise Reduction (4/22)


Today's Must Read:
How Healthcare and Education are Related

Ryan Avent on the IMF's "Bearish" World Economic Report

Meet the Treasury Secretary

Tuesday, April 21, 2009

Daily Noise Reduction (4/21)


Today's Must Read (especially for anyone considering investing in bank stocks):


High Speed Rail Is Coming


This map of high speed rail lines under consideration is pretty exciting, it will be interesting to see how much the stimulus spending can bring down prices. 

Hat Tip: Ryan Avent

Monday, April 20, 2009

Another Botched Story on Taxes


Is it too much to ask that journalists actually know what they are writing about, prior to writing an article that will stay on the front of Yahoo! Finance all weekend and Monday?  I guess so:

Ellen Parnell and her husband, Donald Parnell Jr., seem like the kind of well-off couple President Barack Obama has in mind when he suggests raising taxes on families earning more than $250,000 a year. A surgeon at Fort Sanders Sevier Medical Center in Sevierville, Tenn., he drives an Infiniti. They vacation at a beach resort every year.

Yet, right now he is working seven days a week. The car is more than a decade old, the vacation home in Sandestin, Fla., comes at a moderate weekly rate because members of Ms. Parnell's extended family own it. Her family of five would like more room than they have in their 2,500-square-foot home, yet they can't afford anything larger. The downturn has them skittish about paying for renovations.

"I'm not complaining, but the reality is Obama may call me wealthy, but I thought we were just good old middle class," says Ms. Parnell. "Our needs are being met, but we don't have a load of cash to cover wants."

Under Mr. Obama's budget proposal, two of the highest tax brackets would see rates rise, and deductions would be reduced for households earning more than $250,000 annually. President Obama said Wednesday, "We've made a clear promise that families that earn less than $250,000 will not see their taxes increase by a single dime."

Yes, they may see rates rise, but only on their 250,001st dollar.  The tax increase is on the marginal rate, which means that someone earning $249k and $251k will be paying roughly the same amount of taxes. 

That being said, this proposal by Matt has merit: 
I wouldn’t have a problem with launching a new, slightly higher rate, starting at $500,000 and a higher one starting at $1 million and another at $2 million another at $4 million another at $8 million and another at $16 million. I don’t see any reason to think that the progressivity of the scale should max out at $250,000 when obviously there’s a huge difference between someone earning that much money and someone earning ten times that amount.

The Banks - Something Doesn't Add Up


There was quite a bit of banking news today, largely spurred by this NY Times article discussing the government's plan to convert their preferred shares from TARP to common shares as a method of recapitalizing the banks.  

Krugman, Cowan, Kwak and others have argued that this is "just an accounting gimmick" akin to "arranging the chairs on the deck of Titanic".  I'm always suspect, of any Krugman criticism of the Obama administration since he hasn't had a good thing to say about it yet (it started with this spat during the primary).  That isn't to say he hasn't been right about some things.

However, this is a situation where he and the others mentioned are a little off base.  The preferred shares that the government currently owns are very similar to debt, obviously you wouldn't further increase the liquidity in the credit markets by saddling a bank with more debt (it's another question on why this was done initially).  University of Louisiana at Lafayette professor Linus Wilson makes the point :
Even if no new money goes into banks, common stock creates different incentives than preferred.  Managers, if they are doing their job, maximize the value of common stock (not preferred stock).  Limited liability means that a distressed bank will have perverse incentives until it has enough common stock to absorb those losses.  With too little common equity, banks will pass up good loans because too many of the gains are realized by preferred stockholders and debt holders.  Managers running banks with too little common equity will be tempted to make speculative loans and shift those losses onto senior creditors (preferred stockholders and bondholders).  

Maybe that explains why the banks haven't been lending:
Note: as you can see above, some banks like Wells Fargo actually have been lending

But if they haven't been lending?  Why are they rushing to give back the TARP money, which they clearly need to be comfortable lending again?  It has to be the executive compensation limits, but if that is the case then that is a very bad sign for the future of the "public-private" partnership.  Hopefully Geithner stands his ground and doesn't allow the return of the TARP money until the banks show they are willing to lend.

Daily Noise Reduction (4/20)


Today's must read:


Stewart on Fox and the "Protests":

The Daily Show With Jon StewartM - Th 11p / 10c
Nationwide Tax Protests
Daily Show
Full Episodes
Economic CrisisPolitical Humor

Saturday, April 18, 2009

Home Ownership, Health Care and Labor Mobility


This Economist article about a side effect of America's high home ownership is interesting:

Mobility is part of the American dream. In “The Grapes of Wrath”, when Tom Joad’s farm in Oklahoma was repossessed he packed up his family in a sputtering truck and set off for California. Things didn’t work out so well for John Steinbeck’s hero. But throughout history, Americans have dealt with economic shocks by picking themselves up and moving on. Their mobility underpins America’s flexible, dynamic labour market. Now it faces two threats.

One is the housing bust. House prices have collapsed by 27% since their peak in 2006. By December last year a fifth of homeowners with mortgages owed more than their homes were worth. Such people are only half as likely to move as those whose homes are above water, estimate Joseph Gyourko and Fernando Ferreira of the Wharton School of business.

Some cannot sell their homes at all. Others could, but don’t want to take a big loss on an investment they thought was safe as houses. Either way, they are stuck. If a good job comes up in another town, they cannot take it. This effect is partly offset by the impact of foreclosures. Last month alone 291,000 homes received a foreclosure notice. The newly evicted are not merely free but obliged to move. This is unfortunate, but although jobs are in short supply nearly everywhere, being mobile at least increases the odds of finding one.

The article also points out that health insurance being tied to a persons job further reduces mobility.  The point about foreclosures is important, but once housing settles it would be interesting to see a study of how this affects overall American competetiveness, if it affects it at all.   

Friday, April 17, 2009

Daily Noise Reduction (4/17)


Must Read:


Wednesday, April 15, 2009

What Do The Protesters Want?


I've avoided commenting on the tea-baggers up until now because these protests are just noise. However, at a certain point the noise becomes the issue and I think these "tea parties" have reached that point.

From what I can tell, these protests are focused on the Obama administration because of the government's rapidly increasing deficit, the bailouts and the proposed spending in Obama's budget. Yet, the majority of the recent deficit increase is due to cleaning up the last administration's mess: the financial industry bailouts and an economic stimulus supported by all leading economists. No leading economists have disagreed with either of those at a conceptual level.

The key point here is this, to cut spending and reduce the size of government right now would require 2 things:

  1. Cutting spending during a massive recession
  2. Cutting Medicare, Social Security and Defense or massively raising taxes

There is no expert or historical support for doing either of those things right now. To attempt #1 with knowledge that being afraid to spend money is exactly what caused and prolonged the Great Depression is insanity. To attempt #2 would require massive tax increases (again, insane during a recession) or to resolve issues that have been hanging over this country for 25+ years.

Solving Medicare, Social Security and Defense spending, the 3 largest drivers of the federal budget in his first few months in office is completely unreasonable.

But look at the tone of and initial cuts in Gate's FY10 defense budget that was released weeks after Obama's budget. I suspect as Social Security and Health care are addressed in the coming months, you will see spending adjusted accordingly as well. These things take time, the bureaucracies built around defense, health care and social security are extremely complex and can't be unwound with an edict from the President.

Daily Noise Reduction (4/15)


Must Read:
More Stimulus?

Interactive Government Spending Guide (via Andrew)

Yglesias Comments on the Geithner Plan Narratives

Monday, April 13, 2009

The Race for the Electric Car


America has some competition:

So when Buffett's friend and longtime partner in Berkshire Hathaway (BRKB), Charlie Munger, suggested early last year that they invest in BYD, an obscure Chinese battery, mobile phone, and electric car company, one might have predicted Buffett would cite rule No. 3 above. He is, after all, a man who shunned the booming U.S. tech industry during the 1990s.

But Buffett, who is 78, was intrigued by Munger's description of the entrepreneur behind BYD, a man named Wang Chuan-Fu, whom he had met through a mutual friend. "This guy," Munger tells Fortune, "is a combination of Thomas Edison and Jack Welch - something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it."

A bad sign for the future of American auto makers, their recovery depends on being the first to develop a commercially viable electric car. This also a bad omen for American ingenuity and entrepreneurship. Regardless, an impressive story of a self-made business man.

Daily Noise Reduction (4/13)


Must Read:
Publius Makes a Point About Regulation and the Internet

Ari Fleischer On Tax Reform

Ritholtz on Bear Markets

Stimulus Projects Running Under Budget


From today's press conference at the Department of Transportation:

And that's why I'm pleased to hear that in state after state across America, competition for these projects is so fierce, and contractors are doing such a good job cutting costs, that projects are consistently coming in under budget. The final bid for one road project in Connecticut was $8.4 million less than the state budgeted for. Another one in Louisiana was $4.7 million less. A project at BWI Airport will be completed for $8 million less than expected. Bids for projects in North Carolina have been 19 percent under budget. Colorado is reporting bids up to 30 percent less than they expected. And the officials in California have seen bids that are close to half as much as they had projected.

And because these projects are proceeding so efficiently, we now have more recovery dollars to go around. And that means we can fund more projects, revitalize more of our infrastructure, put more people back to work, and ensure that taxpayers get more value for their dollars.

Interesting timing for the President's statements considering there was some growing sentiment that trying to control wasteful stimulus spending was counter-productive. A win for the administration.

Saturday, April 11, 2009

Is the Banking Crisis Over? - Hell No


Andrew linked to this Time article late last week:

Banks became the visible and ugly wound that reminded Wall St. each day that it had torn down what it spent decades building, which was a money-making machine driven by leverage and the cleverest synthetic financial instruments the world has ever seen.

But, the great banking crisis of 2008 is over. It began last September 15 when Lehman Brothers filed for bankruptcy and bottomed when Citigroup (C) traded below $1 last month.

The author seems to equate the apparent bottom of banking stocks with the banking crisis, two very different things. He then backs up his argument by pointing to the Wells Fargo earning surprise that was announced last week:

All of those plans, no matter how well-intentioned they may seem, are unnecessary now. Wells Fargo (WFC) indicated that it made about $3 billion in the first quarter of the year and declared its buyout of the deeply troubled Wachovia to be a success. Wells Fargo (WFC) said that the low cost of money from the government combined with a surging demand for mortgages was all the medicine that it required.

Banks stocks reacted to the news, which took the markets completely by surprise, by driving up Wells Fargo's stock by 32%. Bank of America (BAC) shares jumped 35%.

Oddly absent from the discussion of how well Wells Fargo did is why the government was in the midst of testing bank balance sheets at all. The experts at the Treasury had been thrown off the scent and consequently had missed the fact that there was not need to test what is already working well.

Again, and I hate to be the bearer of bad news, but the banking crisis is nowhere near over. Wells Fargo has been the best positioned bank throughout this crisis, to use them as an indicator for an overall banking recovery is wishful thinking.

Considering two banks failed the day the article came out, I wouldn't bet on the author.

Friday, April 10, 2009

Daily Noise Reduction (4/10)


Must Read:


Wednesday, April 8, 2009

Daily Noise Reduction (4/8)


An all independent noise reduction today, the must read:
Public Goods and Stimulus

The Public Is Gaining Confidence, the Pundits?

The "D" Word

Tuesday, April 7, 2009

The Widening Fiscal Gap


This article by Clive Crook is pretty weak:

Mr Obama intends to squeeze the rich, but the scope for this may be more limited than US liberals would wish. Few Americans seem aware that the US income tax code, as a recent Organisation for Economic Co-operation and Development study showed, is already one of the most progressive.* Even before the rise in top marginal rates promised by Mr Obama, the US income tax collects 45 per cent of its revenues from the highest-income decile. Compare that with Britain at 39 per cent, Canada at 36 per cent, France at 28 per cent, Sweden at 27 per cent and an OECD average of 32 per cent.

Hmm, I wonder if that has anything to do with the fact that incomes for the vast majority of Americans have been stagnant for 30 years, while incomes have risen astronomically for those in the top 10% of earners. Take a look at these charts:

The above chart shows the median household income according to the US census, adjusted for inflation using CPI.

This chart shows the US income per person, an increase of 80% using inflation adjusted numbers. Since median household income has barely increased, this large increase in overall income (total income divided by number of people) means that all that extra income has gone to a small group of top earners.

Crook's article accuses the middle class of not providing their fair share, while at the same time writing a sob story about how much the top earners are paying in taxes. Please. To suggest that the President should do something about this now (read: raise taxes on the middle class) is bad policy, bad economics and bad politics.

The real gap Crook should take a shot writing about is the growing gap between the top earners and the middle class. Once some balance is returned there, while being careful not to penalize the successful, the economy will take off again (a strong middle class has money to spend) and then the focus can turn to balancing the budget.

One note: The article I linked to above (where these charts came from), tries to debunk the data using some voodoo math (modifying the inflation rate and redefining what household means). Ignore it, I just wanted to provide the source of the data.

What Happened to the US Market Summary?


In case you were wondering, I had to remove that U.S Market summary that used to be on the right of the screen, the creator modified it to include a huge spam message begging for donations.

I'll try to find a replacement.

Daily Noise Reduction (4/7)


Must Read:
Comments on a Global Currency

Goldman's CEO Calls for Executive Pay Overhaul

Greenspan: Will Stocks Lead the Recovery?

Blodget on How Bear Markets End

The Bush Years: The Lost Decade?

Monday, April 6, 2009

Daily Noise Reduction (4/6)


The NCAA Hoops Championship turned out to be a dud, as a Big Ten guy, I was hoping for a better showing by MSU.

Also: Sorry for my laziness on Friday in not getting any links up.

Today's Must Read:
Gates Unveils His Defense Budget Approach

WSJ: From Bubble to Depression?

Counter to My Thinking: House Prices to Fall another 30%?

The Weekly Standard Piles on The GOP Budget

Ezra: Could This Be Worse Than The Great Depression?

Andrew Comments on a Return of Confidence

Thursday, April 2, 2009

Daily Noise Reduction (4/2)


G20 today - did it matter:


Wednesday, April 1, 2009

Case-Shiller Index for January


The Case-Shiller 20-city home price index came out yesterday, unfortunately the national numbers only come out quarterly, but the 20-city index showed the same sharp decline that the national NAR January numbers did:

The Case-Shiller 20-city home price index fell a record 2.8% in January ...

Prices are down 29% from the peak in mid-2006, according to Case-Shiller. Prices have fallen to September 2003 levels.

Remember, these are only looking at a set of 20 US cities, they aren't national numbers. The NAR median home prices stayed relatively flat in February, it will be interesting to see if the CS numbers again follow suit. The NAR numbers are normally more volatile than the CS numbers due to what they measure.

The GOP Budget Proposal - Part II


The GOP unveiled their budget "with numbers" today. I gave version 1.0 a fair shake last week so I don't feel bad calling it what it is: utterly incoherent. A round-up from the blogs:


As we already knew (because it was the one specific detail in the last “budget”), the plan has a massive tax cut for the wealthy – lowering the highest marginal rate to 25%. Higher-earning taxpayers can, however, voluntarily opt to pay the old higher rate. Here’s the kicker – the GOP’s deficit assumptions assume that everyone will opt for the older higher rates.

That's it? Seriously? They claim Social Security is going bankrupt and their proposal is to reduce PIA by 0.25% per year starting in 2036? This takes gutlessness to a whole new level.

Conor Clarke on the below graph

As near as I can tell, Paul Ryan and his staff just took the CBO projections that ended in 2019 and drew a random line, extending upward at about a 45 degree angle, until 2080. There's no real attempt to make it look scientific.

John Marshall:
We see today from their House GOP 'budget' that their new-found allegiance to fiscal discipline has them lowering the top marginal tax rate to 25% (it's currently 35%, with the Bush tax cuts), which for anyone who knows anything about the federal budget would pretty much inevitably lead to gargantuan federal deficits and the Treasury exploding probably some time early in the next decade.

Freddoso trying to stay positive:
This graph, featured in a House Republican press conference this morning, whets my appetite for some real numbers, which will be forthcoming tomorrow. You'll notice that it projects out to 2080, which is a bit far for my taste. It's bad enough to look at Obama's budget through 2019.

I must say, it looks like any opposition to Obama is going to have to come from the moderate democrats. The current GOP has become about as irrelevant as AOL.

Daily Noise Reduction (4/1)


Thanks to the reader who provided the "scale" idea, I like it.

Today's Must Read:
Drum Comments on the Unveiled Cap and Trade Bill

Frum Puts the Current Economic Environment in Context

Calculated Risk Notes the Auto Sales Uptick

Our Deal

The markets are crashing, thousands of people are losing their jobs and the government keeps funneling money into broken banks. This little blog will help explain why this is happening and how we fix it.

I'd like to preface this experiment with a contract between myself and my readers. My promise to you is that I will be civil, non-ideological, well researched and honest. In return, I only ask that you think.

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