Simpler standards for investment banks

The Federal Reserve and Treasury Department have proposed new regulations for investment banks as well temporary access to emergency lending from the Fed.

However, Allan Meltzer observes,

Only in the weird world of Washington are mistakes rewarded with major new responsibilities. After mismanaging both housing loans and the dot-com mess, the Federal Reserve may now become responsible for supervising investment banks.

He offers a simpler, alternative prescription:

Investment banks don't need the Fed to regulate them. Some clear rules on capitalization would suffice.

Did Sen. Schumer cause the run at IndyMac?

Federal regulators closed the California-based bank and mortgage-lender, IndyMac, on Friday. The Federal Deposit Insurance Corporation (FDIC) will step in to run the bank and may have to pay off depositors with insured accounts. With some $19 billion in deposits, the FDIC payment to depositors could be the largest in nearly a quarter century. Even with the FDIC bailout, depositors could lose half a billion dollars from accounts that exceeded the FDIC maximums, and of course, investors would lose their funds.

IndyMac was active in the mortgage market just below the prime level but just above the sub-prime level. The bank had been struggling, with losses in the hundred of millions of dollars over the last several quarters and with no expectations of profitability for at least the rest of this year. The share price of the bank plummeted 80% from October until February, briefly rebounded, but then resumed its decline. So, the fundamentals of the bank were fraying.

Things, however, came to a head two weeks ago, when a letter from Sen. Charles Schumer (D-NY) to banking regulators was leaked. The letter expressed fears that IndyMac was likely to fail without an intervention. A run began almost immediately and continued until the FDIC stepped in on Friday.

In announcing the closure, The Office of Thrift Supervision blamed the senator, saying his letter was "the immediate cause of the closing." The announcement went on to criticize Sen. Schumer's "interference in the regulatory process." Sen. Schumer has, in turn, has said that IndyMac's condition was well-known and that regulators were "asleep at the switch."

Was Sen. Schumer right in publicly airing his concerns about a specific bank? It's hard to see how his comments could have helped IndyMac continue as a going concern or how the comments could have headed off a takeover. The only reasonable positive motivation would be to force the feds to move in while the bank still had some funds left.

Banks are extremely fragile propositions. At any time, they have more loaned out in illiquid investments than they have on hand to cover nominally liquid deposits. Regulations, deposit insurance, and the ability to borrow from the Federal Reserve are intended to maintain confidence and solvency. However, investors and large depositors can still get spooked and withdraw a bank's capital. "Naming names" as Sen. Schumer did was sure to make that happen.

There is little doubt that Sen. Schumer's letter forced the issue. Now that the feds have moved in, the remaining question is whether anything could have been done to save the bank or to mitigate its losses. If Sen. Schumer's letter pre-empted an orderly and less expensive bail-out of the bank, he's a self-aggrandizing scroundel. Then again, if he prompted a takeover while there was still something to save, he deserves our thanks.

Rep. Rangel "flat" out wrong

Like many New York City residents, Rep. Charles Rangel benefits from the city's rent control laws. However, unlike other residents, he has four rent-controlled apartments: three grouped together to form a suite and another on a separate floor that serves as his office.

Rep. Rangel's cozy arrangement violates both the spirit and letter of the city's rent control law, which is intended to make residences there more affordable. In particular, rent-control is only supposed to apply to residences. He also appears to be violating House ethics rules that ban representatives from accepting gifts in excess of $100. The difference between the controlled rents that his landlord has agreed to accept and the fair market rents for his units is several thousand dollars per month and should be rightly viewed as a gift.

Rep. Rangel should "get his house in order" by ending this arrangement immediately, and the House ethics panel should do likewise by investigating and determining an appropriate disciplinary action. Come November, the voters of New York will have an opportunity to decide whether additional "House cleaning" is needed and whether Mr. Rangel should have more time to putter around his inexpensive digs.

Positive UI claims data

Today looks like a nail-biter on Wall Street, as investors watch the accelerating slide of mortgage guarantors Fannie Mae and Freddie Mac.

Lost in the gloomy economic news was a positive report from the Department of Labor that initial claims for unemployment insurance last week dropped by 58,000 to 346,000 on a seasonally adjusted basis. Claims at or above 400,000 per week are usually associated with increasing unemployment.

The data from last week are hard to interpret because they include the 4th of July holiday. Also, the seasonally adjusted trends didn't match the unadjusted trends--the raw number of new claims rose substantially from the week before. In addition, the total number of people collecting unemployment insurance increased.

This year's slowdown in economic growth has been felt especially acutely in the labor market, where unemployment is about one percent higher than it was last spring. If the latest unemployment claims numbers hold up and continue, we could see joblessness stabilize.

Always Look on the Bright Side of Life

Phil Gramm: "We have sort of become a nation of whiners. You just hear this constant whining, complaining about a loss of competitiveness, America in decline."

Sounds a little...well...whiny. So what does it say, when you start whining about whiners? Worse, what does it say when you write a whiny blog about whining about whiners?

I'll just stop while I'm ahead.

Equality in crash tests

Starting in 2010, the U.S. Department of Transportation will include female dummies as passengers in its automobile crash tests.

Despite this long-awaited change, it seems unlikely that the male dummies will stop to ask for directions.

Democrats should let the energy bill go forward

The Hill reports that the Democratic leadership in Congress is sitting on important energy legislation, fearing that Republicans and centrist Democrats would amend the legislation to allow drilling in new areas, including the Alaska National Wildlife Refuge (ANWR) and off the coasts of the country.

The Democrats are crowing that they have already forced the Republicans into difficult votes, such as a provision in the existing legislation that energy companies either use their existing federal energy leases or give them up so that they can be used by others (a majority of Republicans took the side of oil companies and opposed this provision). However, Americans who are facing $4 a gallon gasoline and will shortly face huge heating bills will certainly see through this gamesmanship.

The Hill quoted an unnamed Democratic aide as saying, "our strategy on gas prices is 'Drive small cars and wait for the wind.'" In other words, the strategy, such as it is, is to tweak consumption, to hope for a technological fix, and to pray that Americans don't mind high prices in the meantime.

Unfortunately, the policy neglects a full and appropriate supply response. Because of this, it inflicts unnecessary hardship on consumers and the economy as a whole.

A sensible energy policy requires more conservation and greater efficiency but also should include new production from both renewable and non-renewable sources. New drilling won't help immediately and won't cure all of our problems even in the long run, but it is a sensible part of the solution. Moreover, drilling appears to be a necessary political compromise to get other things that the Democrats want and that the country needs.

It's time for the Democratic leadership to end its political games, to act on behalf of the American people, and to bring comprehensive energy legislation to the floor of Congress for a vote.

Iraq Prime Minister playing into the hands of the enemy

The government of Iraq, which the Bush administration occassionally treats as being sovereign, is balking at an open-ended occupation by U.S. forces.

Speaking in the United Arab Emirates today, Prime Minister Maliki said

One of the two basic topics is either to have a memorandum of understanding for the departure of forces or a memorandum of understanding to set a timetable for the presence of the forces, so that we know (their presence) will end in a specific time.

Perhaps President Bush can trot out some of these tired chestnuts to change the Prime Minister's mind--specifically, that a withdrawal

• "is wrong for our troops and ... wrong for our country,"
  
  
• "would undermine our troops and threaten the safety of the American people here at home,"
  
  
• "is not a plan to bring peace to the region or to make our people safer at home,"
  
  
• "would embolden our enemies and confirm their belief that America is weak,"
  
  
• "would be an invitation to the enemy to attack America and our friends around the world,"
  
  
• "forc(es) our nation to withdraw on the enemy's terms," and
  
  
• "would increase the probability that American troops would one day have to return to Iraq and confront an enemy that's even more dangerous."
  

Sen. John McCain could further admonish the Prime Minister that "setting a date for withdrawal is chaos, genocide, and we'll be back, because Al Qaeda will then succeed."

Instead, the Prime Minister is foolishly and selfishly overlooking the needs of the U.S. by calling for a deadline. How can he be so short-sighted and ungrateful?

No End in Sight

The story is depressingly familiar by now. The Bush administration, having made up its mind to go to war in Iraq, also deludes itself into thinking that the war can be done on the cheap. It then goes on to make one calamitous decision after another, all the while sneering at those who had the temerity to question its "wisdom."

No End in Sight documents the chain of mistakes that contributed to the explosion in violence in Iraq in 2006 and 2007. It should be required viewing of every nationally elected official.



The most profoundly maddening element of the story is how the administration marginalized experts who didn't buy into its hubris. Shelves of State Department reports on the challenges that a post-Saddam Iraq would went unread, and the State Department itself was excluded from the reconstruction effort. The advice of military professionals, such as Gen. Shinseki, with experience with difficult peace-keeping operations in the Balkins was dismissed. A National Intelligence Estimate that pointed to a deepening and broadening insurgency was derided as "just guessing" and "pessimistic predictions." First-hand observations from troops and officials were ignored. All of this came at the cost of thousands of American and Iraqi lives.

Over the last year, the situation in Iraq has become less hellish, with civilian casualities back at the levels they were at in 2005 (roughly the level they were at when Vice President Cheney famously observed that the insurgency was "in the last throes"). However, the Iraqi government continues to put off important steps toward reconciliation, and our troops continue to see no end in sight.

Job situation continues to deteriorate

The June 2008 employment figures are out, and the news isn't good.

The seasonally-adjusted unemployment rate held steady last month at 5.5 percent. That's nearly a full percentage point higher than the rate last June and up half a percentage point since the start of the year.

The bad news, however, comes in the numbers behind this number. The number of employed people and the number of jobs (these are measured in separate surveys) each fell, while the number of people who were unemployed (out of work but looking for a job) rose.

How then did the unemployment rate stay steady? The number of people who indicate that they "in the labor force" (people either working or looking for work) fell. The unemployment rate is calculated by dividing the number of people looking for work by the number of people in the labor force. The labor force number fell just enough to keep the measured unemployment rate steady.

Jobs disappearing and people leaving the labor force are not good economic signs. While we may yet dodge a full-blown economic recession, it is clear that we are well into an employment recession.

One more Chinese import

The New York Times reports that the interrogation techniques that were taught to the personnel at Guantanamo Bay were taken directly from Korean War POWs experiences at the hands of the communist Chinese (compare page 51 of the "interrogation techniques" PDF link to to page 4 of the "experiences" PDF link).

Not only were the Chinese techniques, such as compelling a POW to stand or sit for prolonged periods, previously described as "torture," but the results obtained from these techniques were recognized as "false confessions" and "brain-washing."

...one form of torture was experienced by a considerable number of Air Force prisoners of war during efforts to coerce false confessions from them. The prisoners were required to stand, or sit, at attention for exceedingly long periods of time-in one extreme case, day and night for a week at a time with only brief respites. In a few cases, the standing was aggravated by extreme cold. This form of torture had several distinct advantages for extorting confessions.

It just goes to show that some styles do come back into fashion and that what's old can become new again.

More seriously, what does adopting the most despicable tools of totalitarians say about us, especially when we know that the intelligence value of those tools has been discredited?

Democratic hypocrisy on "big oil"

If I blogged about every instance of political hypocrisy, I wouldn't get anything done (I'm already unproductive enough, thank you very much). However, this story from The Hill about Democratic members of Congress criticizing oil companies while holding substantial amounts of stock in those companies stands out as a glaring example of the "say one thing and do another" attitude in Washington.

Some of the Democrats interviewed for the story said that it was evidence of their virtue, as it showed how they are willing to legislate against their own personal interests. However, the Democrats' actions don't square with their rhetoric.

Consider the statements of Tenn. Rep. Steve Cohen, who has said that oil companies' profits are "unconscionable" and that the companies are "gouging the American public." Or consider N.Y. Rep. Carolyn Maloney's remarks that oil profits are "eye-popping" and that companies are "working hard to prevent gasoline alternatives" and possibly "manipulating capacity."

In each case, the representatives argue that the oil industry's behavior is immoral and perhaps illegal, yet they don't seem to mind benefiting for that exact behavior through the dividends and capital gains on their oil company stocks.

It would be foolish to suggest that members of Congress divest themselves of all stocks. However, one would think that they would stand behind their rhetoric and divest from companies that they really believed were harming American consumers. The fact that so many continue to hold these stocks tells us all we need to know about where they really stand on these issues.

IEA predicts that oil market will remain tight

In a presentation to the World Petroleum Congress, Lawrence Eagles of the International Energy Agency (IEA) predicted that oil markets would remain tight over the next five years while also downplaying the role of speculators in the recent price rise.

If correct, this is bad economic news, with Eagles going so far as to suggest that the world may be experiencing a "third oil shock" and that the share of output going to oil expenditures may return to levels from the early 1980s.

The bright spots in the IEA analysis are that oil demand among developed countries has declined (and is likely to continue declining) even as their economic output has expanded and that capacity is expected to grow, albeit at a very slow pace after 2010. Overall demand, however, is likely to grow because of rapid growth in consumption among developing countries.

Another spoke sorely needed in this transportation hub

Greensboro is a major transportation and logistics hub that features a large, modern airport, rail links, several interstate highways, and even an inland port. The city and region are especially proud of their airport, Piedmont Triad International (PTI), which is a focus of economic development but is also struggling to maintain airlines and passengers.

Given the region's many transportation strengths but also PTI's vulnerability, it is surprising that the airport is so poorly served by public transportation and, in particular, that it lacks direct bus service to downtown Greensboro (or Winston-Salem or High Point).

A passenger arriving at PTI who wants to get to downtown Greensboro--a short 12 miles away--in something other than a private or rented automobile faces the following transportation choices:

1. take a taxi, run by the airport's monopoly transportation service, at a fixed cost of $21.70,
   
   
2. take a shuttle, run by the same service, at a fixed cost of $18.05, or
   
   
3. if the passenger happens to arrive during work hours on a weekday, take the Piedmont Authority for Regional Transportation (PART) shuttle to the PART hub and then catch the "express" bus to the downtown bus and train depot at a cost of $2.00.

In other words, there is no bus service to the airport on weekends or late in the evening, and the existing weekday service by PART includes an inconvenient stop and transfer at a hub outside of town. Note that the PART hub does allow you to connect to buses to Winston-Salem, High Point, and Durham. Nevertheless, it's incredible that there is no direct service from the airport to any of these locations.

A modest suggestion to PTI, PART, and the Greensboro Transportation Authority (GTA) is to initiate a direct bus line that connects PTI with the train and bus depot.

Not only is the depot located downtown, but it also serves AMTRAK, several bus companies, and GTA's own buses. A direct route between the depot would thus be convenient to downtown visitors and encourage air/train and air/bus connections.

The route from the depot to the airport could easily be tweaked to pass by the courthouse complex, Greensboro College, UNCG, and the Friendly Shopping Center. This would increase the usefulness to residents, students, and visitors. Ridership by residents and students would also take pressure off the parking lots at the airport, which tend to be oversubscribed around holidays and school breaks.

Finally, given the growing employment at new businesses near the airport, especially the new Fed-Ex facility, public transportation would be useful for daily commuters.

A great feature of bus links is that they have relatively low start-up and adjustment costs. The road network to get to and from the airport is already in place as are bus/shuttle stops. The main start-up cost would be the buses themselves. Thus, it's easy to experiment with new routes and easy to drop routes if demand doesn't materialize.

Even better, the route to the airport could be classified as a special service and priced differently than other routes. For example, riders could be restricted to either using an existing bus pass or purchasing a one-day unlimited pass. This would be helpful to most commuters who would use existing bus passes but would effectively raise the price of one-way service for PTI passengers to the daily unlimited bus fare ($3.25 vs. $1.20).

A bus link seems like a low-risk way to take advantage of and cross-promote the region's transportation capabilities. Importantly, it is a way to make PTI more competitive, and to the extent that it substitutes for cars and taxis, it may even help the environment.

Missing George Carlin

George Carlin was a fantastic observational comedian, equally adept at pointing out the absurdities and truths in life.

One of my favorite bits was when he explained "that anyone driving slower than you is an idiot, and anyone going faster is maniac." This summed up his comic philosophy perfectly. We laugh first at his jabs at everyone else's driving. We then laugh as we realize that we've also been skewered for our own short fuses.

He was an equal opportunity comic, and we were all equal opportunity targets.

Trip to London, expensive; embarrassing your children while you're there, priceless

After more than a decade and a half of parenting, my wife and I have become experts at embarrassing our two children (actually, given that both of the children are teenagers, life with us right now is more or less a constant embarrassment, but some times are definitely more mortifying than others). Vacations are our time to shine, and the trip to London has provided some excellent opportunities.

Embarrassing moment number one was finding out that the paper thin walls between the living area and the bathroom in our flat allowed every bodily noise to be heard loud and clear. Note, this was more embarrassing to the older teenager; the younger one saw this as a great opportunity to practice sound effects when he was in the bathroom and to offer commentary when anyone else was there.

Embarrasing moment number two was getting the boys to pose for pictures in different settings. The picture at right from the Tower of London with Cathy and the boys posing next to a giant beefeater bear is a good case in point. The looks on the boy's faces really say it all. If you look closely, you can see them each saying "thanks Dad" or something along those lines.

Almost as embarrassing was making the boys share a dessert at a restaurant. Getting a double portion of a dessert instead of two separate desserts saved us about two pounds--a nice savings given the exchange rates. It's times like this where they really hate having an economist for a father.

However, the piece de resistance embarrassment-wise was running out of toilet paper and having to ask the front desk for more. Apparently, there is a toilet paper shortage in the U.K. The hotel doesn't stock the rooms with any extra rolls when you check in and only provides additional rolls upon request. Fortunately, the clerk saw my two boys with their heads buried in their hands and gave me an extra package. A perfect end to a perfect Father's Day.

Getting while the getting's good

We've left Greensboro for a conference and vacation in London. The temperature today in Greensboro is right around 90 degrees, and smoke from the big fire in the eastern part of North Carolina has brought the air quality down.

In contrast, London is a cool and breezy 66 degrees this afternoon.

The boys are enjoying the wealth of Cadbury selections. Their mom and dad are enjoying the beer. And all of us are getting caught up in the European Cup.

Free Hugs Campaign

Economists' standard consumer choice model predicts that if something of value is offered for free, there will be infinite demand ...

Verbal rape

In his interview last night with Scott McClellan about McClellan's new book, What Happened, Bill O'Reilly accused McClellan of "playing into the hands" of "every Bush-hater." Haranguing McClellan about his interviews with rivals, such as Keith Olbermann, O'Reilly spewed, "You sat there while these people at NBC and some at CNN just raped the president verbally."

O'Reilly is seldom given over to introspection. Nevertheless, given his own sordid experience, you would think that he would be more careful with terms like "verbal rape."

A Very Inconvenient Truth

NASA's Office of Inspector General has just released a report into actions by political appointees in the agency to hush up climate change science and especially one of its scientists, Dr. James Hansen. The report says

• that during the fall of 2004 through early 2006, the NASA Headquarters Office of Public Affairs managed the topic of climate change in a manner that reduced, marginalized, or mischaracterized climate change science made available to the general public,
  
  
• that the Office's actions were inconsistent with the mandate and intent of NASA’s controlling legislation,
  
  
• that relations between NASA’s climate change science community and the NASA Headquarters Office of Public Affairs had somehow deteriorated into acrimony, non-transparency, and fear that science was being politicized—attributes that are wholly inconsistent with effective and efficient Government, and
  
  
• that at least one climate change news release, “Aura Sheds New Light on Pollution,” was intentionally delayed by NASA Headquarters Office of Public Affairs until after the election.

Good public decision-making depends on the best available information, however inconvenient. Instead, time after time, the Bush administration has run its permanent campaign in which all information must either be spun to suit the administration's policies or be suppressed. It's a shameful record of deceit.