Thursday, December 30, 2010

Jobless milestone

The economic recovery just passed a significant threshold. Bloomberg reports
Claims for jobless benefits dropped last week to the lowest level in two years, showing the U.S. labor market is taking a turn for the better as the economy accelerates into 2011.

Applications for unemployment assistance decreased by 34,000 to 388,000 in the week ended Dec. 25, breaking the 400,000 level for the first time since July 2008, according to Labor Department figures today in Washington.
The weekly jobless figure is notoriously volatile; the week leading up to Christmas is far from typical, and the figure could subsequently be revised upward.

Nevertheless, a number below 400,000 is significant because it is generally seen as indicating an expanding labor market. The figure is also consistent with a general downward trend over the last few months.

The UI claims figures were also accompanied by other positive news. Bloomberg is also reporting
Businesses in the U.S. expanded in December at the fastest pace in two decades, adding to evidence the world’s largest economy is accelerating heading into 2011.

The Institute for Supply Management-Chicago Inc. said today its business barometer rose to 68.6 this month, exceeding the most optimistic forecast of economists surveyed by Bloomberg News and the highest level since July 1988. Figures greater than 50 signal expansion.
While these are positive developments for most of us, the good news isn't shared by all, especially the 27 percent of "patriotic" Americans (61 percent of Republicans) who hope President Obama's policies will fail.

Financial and moral bankruptcy

In the New York Times Economix blog, Simon Johnson glummly assesses Europe's financial prospects over the next few months as countries reach deadlines to roll over their debts.

He outlines some painful steps for the European Union, including greater fiscal integration, more intervention by the European Central Bank in core countries, but a casting off of some weaker countries. Although the steps are painful, Johnson concludes that
At the end of the day, the Europeans will save themselves, with the measures outlined above, only because there will be no other way to avoid wasting 60 years of political unification.
Although the U.S. faces some similar pressures, Johnson is less sanguine about our ability to solve our problems.
Our leading bankers looted the state, plunged the world into deep recession and cost the United States eight million jobs. Now many of them stand by with sharpened knives and enhanced bonuses – willing to suggest how the salaries and jobs of others can be further cut. Consider the morality of that.

Will no one think hard about what this means for our budget and our political system until it is too late?

Tuesday, December 28, 2010

Alfred Kahn, 1917-2010

Occasionally, the economics profession contributes a hero to society. Alfred Kahn, who led the effort to deregulate the airline industry in the late 1970s and who had a long, productive and admirable career at Cornell University, was one of those heroes.

Bloomberg reports the sad news of his passing.

Kahn's principal legacy was a much more (though not perfectly) competitive airline industry and the lower fares, greater choice, and yes, greater uncertainty that brought.

Thursday, December 23, 2010

Party of No Senators say "Yes" to Medicare Fraud

Bipartisan legislation that would have strengthened the protections against Medicare fraud was quietly shot down this week by Republican senators who placed an anonymous hold on the legislation.

The Hill reports
The bill makes it harder for executives at companies that have defrauded Medicare to continue doing so. It also seeks to prevent companies from setting up shell companies to insulate themselves from liability.

The bill passed the House by voice vote but died in the Senate this week after anonymous Republicans placed a hold on the legislation.
Or as the bill's sponsor, Rep. Pete Stark, told The Hill, "Fraudsters and crooks who bilk millions out of Medicare just received a Christmas present courtesy of anonymous Republican Senators."

The Republicans' cowardly, under-the-table actions show that their primary goal is to serve business interests, even if those interests defraud the rest of us.

Wednesday, December 22, 2010

Early holiday vacation for Rep. Coble

Our local man, not-in-Washington, Rep. Howard Coble decided to treat himself to an early holiday vacation and to skip several votes over the last few days. Rep. Coble stayed around just long enough on Friday to vote against help for people facing foreclosure and has subsequently been AWOL for votes on
  • The Reduction of Lead in Drinking Water Act (vote 656, Dec. 17),
  • The Defense Level Playing Field Act (vote 658, Dec. 21),
  • The FDA Food Safety Modernization Act (vote 661, Dec. 21),
  • A military appropriations bill (vote 662, Dec. 21),
  • The Protecting Students from Sexual and Violent Predators Act (vote 663, Dec. 21), and
  • the other three votes taken on Dec. 21.

Perhaps Rep. Coble is changing his affiliation from the Party of No to the Party of Not Present.

Update (12/23/2010): Rep. Coble also skipped out on yesterday's vote to compensate and fund health care for 9/11 responders.

Thursday, December 16, 2010

FCIC Republicans: the only villian is the government

Republicans on the "bipartisan" Financial Crisis Inquiry Commission (FCIC), which was established by Congress and the President to "examine the causes, domestic and global, of the current financial and economic crisis in the United States," have distributed a pre-buttal to the commission's anticipated report.

The pre-buttal lays the blame for the crisis squarely at the feet of the government, which (p. 2) "was following a social policy in addition to an investment policy" and "pushed investors toward investing in mortgage debt." Or as the report states on page 3
Through the GSEs, FHA loans, VA loans, the Federal Home Loan Banks, and the Community Reinvestment Act, among other programs, the government subsidized and, in some cases, mandated the extension of credit to high-risk borrowers, propagating risks for financial firms, the mortgage market, taxpayers, and ultimately the financial system.
The crisis was also spurred by a loss of confidence, which "exploded into a generalized market panic." The panic was precipitated by, but distinct from "mortgage losses." This is a reprise of John McCain's famous assertion in the midst of the market meltdown that "the fundamentals of our economy are strong" (the parallels shouldn't be too surprising given the McCain's principal economic advisor, Douglas Holtz-Eakin, was one of the pre-buttal's authors).

What was the role of the housing bubble? It was merely an "interrelated event" and not "a sufficient condition for the financial crisis."

Maybe the big banks come in for some blame? Nope, their "primary role ... was that of financial intermediary, providing a link between those who wished to invest in mortgages and those who wanted to take out a mortgage to buy a home."

How about the ratings agencies? They made "mistakes" and did not "appreciate" the risks of declining home prices. The report does allow that "their ratings on MBS (mortgage-backed securities" proved to be severely inflated," but notice the passive voice. The report gives an example of a security with a marginal rating but never mentions the AAA ratings that the agencies bestowed on many securities or how those agencies allowed issuers to make minor modifications to otherwise unsuitable securities to obtain a AAA rating (sort of like a health inspector allowing a restaurant to clean up just enough filth to stay open).

The report also doesn't mention the critical, knife-edge role that AAA-rated securities played.

Fraud and shoddy underwriting in originating the mortgages? The words "fraud" and "underwriting" do not appear in the body of the report ("fraud" is on the front page but only in the title of the enabling legislation), and the word "originators" only appears three times and then only in the context of a "system (that) had worked this way for decades, and worked well."

While underwriting goes unmentioned, the report does include the term "lending standards." But who, exactly, lowered lending standards? The government.

Farther removed from the mortgages, how about the synthetic derivatives (essentially, side bets that referenced but did not include an actual stake in the mortgage-backed securities)--surely, these had some role in over-leveraging the market? Not according to the report, which omits any mention of these.

A report on the financial crisis that omits the words, "Wall Street," "fraud," "underwriting," "collusion," and "derivatives" and that overlooks Wall Street's view of most clients as "suckers" isn't worth the paper it's written on.

Tuesday, December 14, 2010

FIFA's advice to the LGBT fans -- "refrain from sexual activites"

Members of the LGBT community will have to think twice before attending the 2022 World Cup in Qatar. As the U.S. State Department travel page on Qatar warns
Homosexual activity is considered to be a criminal offense, and those convicted may be sentenced to lashings, a prison sentence, and/or deportation.
Regrettably, Sepp Blatter, the president of FIFA, thinks this is a laughing matter.
FIFA president Sepp Blatter was unable to keep a straight face when asked at a press conference in South Africa what to advise gay people who hope to go to the Arab emirate.

The mainly Muslim country, which will host the tournament for the first time, forbids same-sex relationships by law.

"I would say that they should refrain from sexual activities," Blatter answered on Monday, after a long pause.
Hey, at least Blatter refrained from telling LGBT fans to go f### themselves--perhaps because that activity is illegal in Qatar.

FIFA's Code of Ethics has no prohibition against discrimination on the basis of sexual orientation. There's a similar blind spot in its choice of World Cup hosts.

Sunday, December 12, 2010

Big bank collusion in the derivatives market

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.

Adam Smith, The Wealth of Nations, 1776

Adam Smith warned the world about collusion more than two centuries ago. More recently, shady, inside, nontransparent dealing in derivatives contributed to a financial meltdown and the deepest recession since the 1930s. And yet, we continue to allow the too-big-to-fail banks to collude in the derivatives market.

The New York Times reports
On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.

In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.
To be clear, the issue isn't derivatives themselves. When traded fairly, derivatives serve an important function in financial markets, allowing firms and investors to diversify and hedge risks. Rather, the problem is how the market is operated.

At a minimum, the lack of transparency and lack of competition lead fees to be higher than they need to be. In essence, it's hard to get a good deal because buyers can't see the other deals that are out there. As the article explains
It would be like a real estate agent selling a house, but the buyer knowing only what he paid and the seller knowing only what he received. The agent would pocket the difference as his fee, rather than disclose it. Moreover, only the real estate agent — and neither buyer nor seller — would have easy access to the prices paid recently for other homes on the same block.

The profits of the colluding banksters soar but at the expense of firms and investors who buy the products.

The clearing house also gives the participating banks a tremendous and unfair information advantage. Banks start with an information advantage from assembling the derivatives. The same way that a used-car salesman has inside information about a lemon he may be trying to offload; the banks often have inside information about the securities that make up the derivative (Goldman Sachs' scandalous participation in the ABACUS CDO is but one example).

And there are other information advantages. The clearinghouse allows participating banks to see how the overall market is trending, while investors are left largely in the dark.

If banks were always neutral market makers, these information asymmetries might matter less, but the investment banks are also often parties to these transactions, trading from their own accounts or using derivatives to offload their own risks.

The clearinghouses should, in principle, be advantageous by increasing the information in the market. However, these advantages only obtain if the clearinghouses are open to all qualified institutions and if the resulting information is shared with all market participants.

Thursday, December 9, 2010

Tea Party goes K Street

The Party of No, Obstruct and Delay has adopted a new Delaying tactic--Tom Delay's tactic of climbing in bed with Washington's K Street.
During his campaign to represent Wisconsin in the U.S. Senate, GOP nominee Ron Johnson accused Democratic incumbent Russell Feingold (D) of being "on the side of special interests and lobbyists."

...But after defeating Feingold, Johnson himself has turned to K Street for help - hiring homeland security lobbyist Donald H. Kent Jr. as his chief of staff.

Johnson is not alone: Many incoming GOP lawmakers have hired registered lobbyists as senior aides. Several of the candidates won with strong support from the anti-establishment tea party movement.

...In addition to Johnson, Sen.-elect Mike Lee (Utah) has announced that energy lobbyist Spencer Stokes will be his chief of staff. Tea party favorite Rand Paul (Ky.) has hired anti-union lobbyist Douglas Stafford as his top senatorial aide.

In the House, Rep.-elect Charlie Bass (N.H.) has named food industry lobbyist John W. Billings as his chief of staff. Billings was a senior aide to Bass during an earlier stint on Capitol Hill.

Sen.-elect Chip Cravaack (Minn.) has hired former U.S. senator and former lobbyist Rod Grams as his interim chief of staff, though aides have said the posting is probably not permanent. Grams's lobbying clients from 2002 to 2006 included 3M, Norfolk Southern and the Financial Services Roundtable, records show.

Other incoming GOP lawmakers who have recruited staff from K Street include Robert Dold (Ill.), Steve Pearce (N.M.) and Jeff Denham (Calif.). John Goodwin of the National Rifle Association, one of Washington's most powerful lobbying groups, has signed on as chief of staff for Rep.-elect Raul Labrador (Idaho).
The staff choices are as fitting as they are discomforting. Many of the Tea Party candidates owe their electoral victories to corporate and special interest money.

Now the paymasters are claiming their seats at the table.

Monday, December 6, 2010

Meet the new boss, same as the old boss

Think things are going to be different in Washington now that the Tea Partiers have come to town. Think again.
After Francisco "Quico" Canseco beat Rep. Ciro Rodriguez (D-Tex.) as part of the Republican wave on Nov. 2, the tea party favorite declared: "It's going to be a new day in Washington."

Two weeks later, Canseco was in the heart of Washington for a $1,000-a-head fundraiser at the Capitol Hill Club. The event--hosted by Reps. Pete Sessions (R-Tex.) and Jeb Hensarling (R-Tex.)--was aimed at paying off more than $1.1 million in campaign debts racked up by Canseco, much of it from his own pocket.

After winning election with an anti-Washington battle cry, Canseco and other incoming Republican freshmen have rapidly embraced the capital's culture of big-money fundraisers, according to new campaign-finance reports and other records.
Especially poignant is a Republican fundraising consultant who explains
"These guys ran against Washington, but they ran against the bad parts of Washington--the bloated bureaucracy and Nancy Pelosi's agenda," he said. "That's not a contradiction to take money from a trade group or corporation that represents free-enterprise principles."
Actually, it sounds like the bad parts of Washington are doing what they've always done.

Friday, December 3, 2010

Fable of the bad gifts

This semester brought a refreshing change in teaching assignments. Instead of the usual technique-heavy graduate fare, I had the opportunity to teach a freshman seminar on "Markets and Morality" (I'll pause a moment while Bubba, Joe Guarino, Pino, and Tony Wilkins clean up the coffee they just snorted onto their computers).

...

Okay, are we all back?

Anyway, one of the more challenging assignments from the class was an analysis and discussion of Bernard Mandeville's poem, the "The Grumbling Hive," from his book The Fable of the Bees or Private Vices, Publick Benefits.

In "The Grumbling Hive," Mandeville, an early 18th century essayist and provocateur, describes a colony of bees whose many vices actually contributed to the overall prosperity of the hive.
Thus every Part was full of Vice,
Yet the whole Mass a Paradise;
Flatter’d in Peace, and fear’d in Wars,
They were th’ Esteem of Foreigners,
And lavish of their Wealth and Lives,
The Balance of all other Hives.
Such were the Blessings of that State;
Their Crimes conspir’d to make them Great:
And Virtue, who from Politicks
Had learn’d a Thousand Cunning Tricks,
Was, by their happy Influence,
Made Friends with Vice: And ever since,
The worst of all the Multitude
Did something for the Common Good.
The bees, recognizing only the vices and none of the public benefits, pray for and are granted virtue. However, many jobs and incomes depended on the bees' wasteful and dishonest activities. When vice disappears, the demand for goods shrinks, and soon after, the hive collapses, leading Mandeville to conclude
Then leave Complaints: Fools only strive
To make a Great an Honest Hive
T’ enjoy the World’s Conveniencies,
Be fam’d in War, yet live in Ease,
Without great Vices, is a vain
Eutopia seated in the Brain.
Fraud, Luxury and Pride must live,
While we the Benefits receive:
Hunger’s a dreadful Plague, no doubt,
Yet who digests or thrives without?
Do we not owe the Growth of Wine
To the dry shabby crooked Vine?
Which, while its Shoots neglected stood,
Chok’d other Plants, and ran to Wood;
But blest us with its noble Fruit,
As soon as it was ty’d and cut:
So Vice is beneficial found,
When it’s by Justice lopt and bound;
Nay, where the People would be great,
As necessary to the State,
As Hunger is to make ’em eat.
Bare Virtue can’t make Nations live
In Splendor; they, that would revive
A Golden Age, must be as free,
For Acorns, as for Honesty.
Mandeville's insight was that in a decentralized society, vice could be a source of demand. When coupled with possibilities for trade, this demand (despite its corrupt underpinnings) motivated supply, which then led to prosperity. Some years later, Adam Smith formalized this lesson when he described in The Wealth of Nations how the "invisible hand" of the decentralized marketplace transformed individual greed and self-interest into social well-being.

For the class, students were asked whether Mandeville's thesis had any relevance for today. The students were pretty sharp, and most recognized how the parable related to a market economy and thus to modern society (I tried not to get too discouraged over the remaining few who wrote that Mandeville's analysis was irrelevant because we hadn't become bees).

This morning, however, Slate's Timothy Noah provides a more direct application of Mandeville in our times as he extols wasteful gift-giving.
Economists never tire of pointing out that gift-giving is economically wasteful. The ur-text is O. Henry's famous short story "The Gift of the Magi." Della cuts off her silky tresses to buy husband Jim a platinum fob for his gold watch. Jim sells his gold watch to buy wife Della tortoise-shell combs to groom her silky tresses. Merry Christmas! Even if Della hadn't cut off her hair, economic theory would demand to know why, if Della really wanted the combs, she wouldn't already have bought them. Or why, if Jim really wanted to replace his worn leather watch strap, he wouldn't already have done so.

But let's consider an alternative interpretation. Yes, Christmas gift-giving will visit upon Della and Jim heartbreak and economic waste. But upon the altar of their sacrifice they create economic stimulus. Jim and Della suffer that the rest of us may prosper. Long live inefficiency!

...In a weak economy, Americans don't have the luxury of worrying whether their spending patterns are efficient; they just want to see somebody spending money, period. Nor (despite the sudden vogue for deficit reduction) do they really want to spend much time worrying about debt. Efficiency and debt are both important considerations, but not while unemployment remains close to 10 percent.
Noah criticizes economists for their obsession with efficiency, most notably Joel Waldfogel's yule-tide chestnut about the deadweight loss of gift-giving. However, Noah also reaches back further, writing
Many, many years ago, economists used to worry that people's economic wants far exceeded their economic needs. These wants were judged the creation of evil advertising executives on Madison Avenue. Advertisers, John Kenneth Galbraith famously observed in his Mad Men-era book The Affluent Society, "bring into being wants that previously did not exist."
If Noah had reached back another 200 or so years (or sat in on the seminar), he would have found that economic thinkers once held a much more accommodating view of people's wants and of inefficiency.

Thursday, December 2, 2010

No, no, no

Like a broken record (or an old Ringo Starr song), the Republicans continue with no, no, no.

This is leading some of them to go to great lengths to distinguish their no's from others.

However, every once in a while, you'll hear a yes.

Wednesday, December 1, 2010

Phony frugality

Extended unemployment insurance benefits have once again expired due to Republicans' phony concerns regarding the deficit. Bloomberg reports
Thousands of Americans are set to begin losing unemployment benefits after Congress failed to agree on extending aid to the long-term unemployed.

In a replay of a dispute earlier this year, lawmakers are deadlocked over how to finance an extension even as the aid starts to lapse. Democrats yesterday offered to extend benefits for a year, with the $56 billion cost financed with borrowed money.

Republicans balked, demanding the extension be offset with savings elsewhere in the government’s budget.
Republicans express no such concerns regarding the budget-busting $700 billion tax cut for America's richest 1/20th of households. There's no cry that those revenue losses be plugged. They're even willing to hold all other legislation, including tax cuts for the other 19/20ths of households and ratification of the revised START treaty hostage.

It wasn't that long ago that extended assistance to the jobless was routinely granted in recessions and that helping luckless people who had histories of work had bipartisan support. Not so much anymore.

With the unemployment rate still near 10 percent, with just over 40 percent of unemployment spells lasting more than six months, and with state unemployment funds being tapped out because of the length and depth of the recession, an extension is more than warranted. However, what's a little more immiseration when tax cuts for the rich are at stake.