Ron Paul Wins Lifelong Fight, Now May Be Forced To Vote Against Everything He Believes

Chadwick Matlin — Fri, 20 Nov 2009 22:12:39 +0000

Ron Paul has finally won. Buoyed by a crappy economy, a distrustful public, and a nervous legislature, he has convinced his colleagues to audit the Federal Reserve. His bill calling for more transparency at the Fed has, for all intents and purposes, cleared the financial services committee. And from here on it’s in good shape. The bill has massive support in the House—the majority of the chamber has signed on as co-sponsors—and 30 co-sponsors in the Senate. It’s an epochal development in the relationship between the government and the country’s quasi-governmental central bank. A man who wants to kill the Fed altogether may have convinced Congress to hasten its demise.

When I wrote about Paul’s bill back in July, I wondered whether it was the biggest threat to Obama’s regulatory overhaul. Obama wanted to invest the Fed with more powers while Paul and the House wanted to monitor the ones it already had more closely. But the regulatory debate has taken different turns in Washington, with Chris Dodd and Barney Frank moving away from Obama’s vision. Perhaps the support of Paul’s bill furthered the divide.

But Ron Paul’s principles are about to get conflicted. The bill will likely be mashed-up with the broader regulatory overhaul that Barney Frank is preparing. But a libertarian like Ron Paul believes in free markets no matter what, which would make him opposed to regulatory overhaul. But he supports his own legislation to audit the Fed! He’s stuck between a free market and a transparent one.

Liberty Maven suggests he’ll vote for the bill since regulatory reform will likely pass even if he votes no. It’s a rare compromise for Paul. This time, he’s determined to secure a win, even if it means taking a philosophical loss.

Wonk Watch 11.20.09

Matthew McKnight — Fri, 20 Nov 2009 21:59:21 +0000

Paul Krugman attacks the "deficit squeamishness" of the Obama administration again. The issue, as he understands it, is that government officials "don’t trust the demand for long-term government debt, because they see it as driven by a 'carry trade,' " which, as TBM explained this week, is when players borrow cheaply in the short-term and use that money to buy long-term bonds. The fear is that long-term interest rates may rise, resulting in losses for those doing the carry trade, forcing them out and crashing the Treasury market. But as Krugman says, "The whole problem right now is that the private sector is hurting, it’s spooked, and it’s looking for safety...[m]eanwhile, the public sector is sustaining demand with deficit spending... ." Further, he asserts that the relationship between public and private borrowing isn’t dangerous because we are facing a prolonged period of near-zero short-term interest rates. In fact, he says, it is the thing that will help the nation climb out of unemployment.

Brad DeLong turns his sights to the interest rates as well and applauds Paul Krugman on a thorough analysis. But he doesn't really agree with Krugman. DeLong narrows in on Krugman's assertion that the underlying problem is a "a technical matter of maturity mismatch." DeLong points out that our read on the market may not be so straightforward. He says, "The long Treasury market is thinner than many people think: it is not completely implausible to argue that it is giving us the wrong read on what market expectations really are." All in all, DeLong is just more hesitant than Krugman. DeLong says, "[t]his is something to think really hard about."

Felix Salmon wags his finger at the SEC today. He cites a report put out by oil consultant Alan von Altendorf that lays out the commission's plan to allow oil companies to "to use internal, proprietary computer models to essentially pull their 'proven reserve' numbers out of thin air." Salmon asserts that this is just another failure in accountability and regulation, by the institution whose job it is to ensure just those things. He says, "Frankly, it’s not thinking at all: this is just another case of regulatory capture. And a sign that, so far at least, nothing has changed at the unsalvageable and dysfunctional institution."

Barry Ritholtz doesn't say too much today. Instead, he makes two recommendations: one book (The Greatest Trade) and one Web site (Innumeracy.com).

Word of the Week

Caitlin McDevitt — Fri, 20 Nov 2009 21:29:46 +0000

A government report released this week said that the New York Fed mishandled last year’s bailout of American International Group (AIG). According to the report, the Fed “refused to use its considerable leverage” in negotiations over how to handle the beleaguered insurer’s obligations to various trading partners. Neil Barofsky, the special inspector general for the TARP, accused the Fed of giving a “backdoor bailout” by allowing these partners to get paid in full. What’s a backdoor bailout? Well, a lot of the money that the government handed over to save AIG ended up going straight to other too-big-to-fail banks to which AIG owed money. Instead of getting an infusion of taxpayer funds the old-fashioned way, some of these big firms didn’t even have to ask.

Our New Home Page

TBM Staff — Thu, 19 Nov 2009 20:05:00 +0000

If you think The Big Money looks a little different today, it’s not your imagination. We’ve redesigned our home page to make things a little easier to find. Loosely based on the design of our sister site Foreign Policy, TBM’s new look allows us to showcase blogs and features in snazzier, more accessible ways. In addition, we’ve added standing links to our regular bloggers, columnists, contributors, videos, and podcasts. We hope you find the redesigned page handsome and useful. Please send any feedback to tbmcontact@thebigmoney.com.

Norah Jones and Hulu Unintentionally Create Good Idea Having Nothing To Do With Norah Jones

Chadwick Matlin — Wed, 18 Nov 2009 21:30:50 +0000

Norah Jones is not really an actress. Yes, she was in that Wong Kar Wai movie My Blueberry Nights, but her career path does not exactly fit itself into Hulu’s wheelhouse. And yet today was her big debut; she now has an entire page dedicated to her on the streaming video site. Why? Because she can sing, and all of a sudden Hulu is a place for music videos, not just all the TV and movie clips we’ve gotten accustomed to.

This is part of a larger arrangement Hulu now has with Jones’ record label, EMI. Hulu won’t just become a repository for music videos, a la MTV’s streaming service or Sony (SNE) and Universal’s upcoming site, Vevo. Instead it’s going to offer fans—how many times have we heard this before?—an “immersive experience.” Jones’ page on Hulu has all sorts of live performances alongside her music videos, and can presumably house anything else she records. The videos run with a pre-roll ad, so the more videos, the better for Hulu’s bottom line.

This move is most interesting, though, for the new possibilities it opens. If Hulu is willing to make a page for one specific person in music, why can’t/shouldn’t they for one specific person in movies or TV? Would you watch a collection of Jane Lynch scenes from Glee? Tony Hale in Arrested Development and Chuck? Tracy Morgan on 30 Rock? Of course you would. As of now, Hulu is still a site focused on the macro. It organizes by show, not stars inside the show. But there’s nothing stopping it from going small, tagging different excerpts with the actors’ names so that it can have hundreds of pages of beloved actors. Think of it like a iTunes Genius playlist—the page would be automatically updated with all the newest clips, populating like a streaming-video RSS feed. And think of the search-engine optimization potential! Every time someone searches “America Ferrera” on Google, one of the top returns could be the Hulu landing page. There’s no reason not do to this, other than the time involved with tagging the clips. Hulu has already changed the way we watch TV and movies. It has the potential to change the way we watch stars, too.

Wonk Watch 11.16.09

Matthew McKnight — Mon, 16 Nov 2009 22:38:33 +0000

Paul Krugman continues his lobby for low interest rates. He says, “[U]nemployment is high, inflation is low, and the Fed has no business raising rates any time soon.” Today, the issue was raised as Matthew Yglesias responded to a Washington Post editorial by David Ignatius, who worries that the Fed may not garner the political support to raise rates. You can almost hear Yglesias shouting through the screen: “It would be good for the Fed to have public support in combating inflation if combating inflation were a good idea.” Krugman takes a more subdued approach, citing the Taylor Rule, which relates interest rates to unemployment and inflation. According to that rule, the interest rate should be at minus 6.7, given the high unemployment. Krugman’s answer isn’t surprising given that he has championed the low-rate cause for quite some time.

Barry Ritholtz picked up on the warning signs of the faltering commercial real estate market months ago. Today, he posts John Carney’s response to this question: Who is to blame for the commercial real estate disaster? Though Ritholtz is not “on board with everything [Carney] trashes,” he does say it’s “worth checking out.” Carney spreads the blame around, calling out the government, central banks, and investors. But Ritholtz especially takes note of the lightweight requirements on commercial mortgage-backed securities and the rising volume of smaller regional banks involved in “riskier [commercial real estate] activities.”

In today’s two-part discussion, Felix Salmon weighs the pros and cons of privileging corporate debt by taxing interest payments. This morning, he gives it up to James Surowiecki, who says, “A debt-ridden economy is inherently more fragile and more volatile.” So why not tax? One reason that Salmon notes upfront is that “it’s politically impossible.” But Salmon presses on, and in his second post on the topic, he offers three more possible answers. First, “the corporate income tax is a tax on income, and a tax on interest payments isn’t a tax on income, so you can’t expand corporate income taxes to include a tax on interest payments.” Second, a commenter makes the point that it would be impossible to craft such a law without loopholes. And, third, he cites Megan McArdle, who argues that debt is a legitimate business expense for some companies. All in all, it sounds like Salmon is in favor of such a measure. He says:

We want to move away from over-reliance on debt finance, and towards a world where equity finance becomes much more common and much more boring. If investors want to leverage corporate profits with debt they can do so themselves, by buying stock on margin. But let’s not implement the leverage at the corporate level, where it’s imposed on even the most risk-averse equity investor.

Brad Delong shows readers an e-mail that he received today about power outages in Venezuela. In response to the enraged e-mailer, Delong simply says this: “Electricity shortages in a country whose sole export is energy are truly a miraculous thing. It takes a very special government to produce them.”

NYTimes Earns Profit on Lesson Plans; Questions Teachers Who Do Same

Chadwick Matlin — Mon, 16 Nov 2009 20:17:18 +0000

Sunday morning’s New York Times brought with it a front-page story on teachers selling their lesson plans for profit. The gist: Teachers work hard, but aren’t paid enough for their work. This is what economists call a market inefficiency. And so there are a bunch of teachers turning to the private market, shopping their lesson plans around like they’re at an educational bazaar. Other teachers, apparently in surplus of both funds and laziness, are willing to buy.

Reporter Winnie Hu does what she can to lend the trend story gravitas, dutifully collecting views from both sides. Teachers should be doing their own work, say the detractors. If teachers are going to work this hard, they should profit from it as much as possible, say the benefactors. This back and forth is what happens when education’s profit-motive is made explicit. The acknowledgment that pursuit of money might be getting in the way of a child’s education is always divisive, even though money plays a (hidden, seldom discussed) role throughout education.

It should be said, though, that the Times is engaged in its own version of lesson-plan revenue. Tucked away on NYTimes.com is a blog called “The Learning Network,” an interesting little project where the Times ... wait for it ... offers lessons plans to teachers. The lesson plans are based on Times stories, and they’re really just suggested questions for conversations and to test for reading comprehension. An article about America’s search for an Olympic figure skater, for example, is supplemented by a parade of Whos, Whats, Wheres, Whens, Whys, and Hows. The kicker, of course, is that the Times is running ads against the page, therefore profiting from the very thing it questioned in its cover story. On second thought, it’s actually not that surprising. If there’s anybody who can empathize with not getting paid for their hard work, it’s those who work in the newspaper industry.

Presented By:

Mon, 16 Nov 2009 20:17:18 +0000

Wonk Watch 11.13.09

Matthew McKnight — Fri, 13 Nov 2009 23:18:15 +0000

Brad DeLong tackles the future of the US budget and deficit, but doesn't place much faith in Congress for being able to manage it. He quotes Doug Elmendorf--Director of the Congressional Budget Office--and Matthew Yglesias as they discuss the nation's economic future and the politics that they believe gets in the way. All three focus on medium-term future, between 2012 and 2020. Elmendorf says that the debt-to-GDP will likely remain stable as "as long as output does not grow more slowly than projected and as long as congress observes PAYGO: as long as congress pays for whatever policy changes it makes." But, Yglesias corroborates Elmendorf's worry when he says, "The problem... isn’t... that we’re driving toward the edge of the cliff. The problem is... congress seems overwhelmingly likely to steer us [over the cliff]." DeLong adds that Congress could solve the problem "by simply saying no" to the President.

Barry Ritholtz poses a challenge to corporate governance, and agrees with Bloomberg’s David Reilly, who notes, “buried deep within the 1, 136-page, financial-reform legislation unveiled this week by Senate Banking Committee Chairman Christopher Dodd. It is a proposal to let shareholders nominate directors to corporate boards." Ritholtz says that the people who stand to lose the most in a company, don't have a say in the corporate governance. He writes, "..the biggest shareholders of public companies, the mutual funds who typically hold the vast majority of a firm’s stock on behalf of shareholders, refuses to engage in any corporate governance." Ritholtz acknowledges the changes in the Dodd proposal, and likes what he sees. "We have been forced into a situation that is intolerable — massive taxpayer bailouts of incompetent bankers, with AWOL Boards. Its hard to see how any change could make matters worse. It just might start improving things."

It seems that Paul Krugman has had enough of all the deficit talk. He says, "It’s truly amazing, and depressing, how completely deficit-phobia has swept the field in Washington." He acknowledges that "we’re going fairly deep into debt," but he says that it is not an unprecedented course and that the deficit likely to be incurred in the near future will be to help working Americans and to put many Americans back to work. He says, simply, "Anyway, the point is that the economy desperately needs more help — and yes, we can afford to provide it."

Felix Salmon weighs in on the continuing too-big-too-fail debate. He responds to one of today's posts in Economics of Contempt. The post asserts that many of the major banks didn't invest enough in their risk management systems. But it also points out that Goldman Sachs and JP Morgan did, claiming economies of scale at play. Salmon counters, saying that Goldman and JP aren't the biggest banks, ruling out economies of scale, and that Goldman actually made a mistake in it's decision to hold illiquid CDOs on its balance sheet. Salmon says, "Goldman’s shenanigans in the CDO market were an aberration, and were not something societally useful which sprang from being large." And, he concludes by recasting James Kwak's comment: "As James Kwak notes, economies of scale top out long before bank size does; beyond that, it’s all moral hazard."

Word of the Week

Caitlin McDevitt — Fri, 13 Nov 2009 19:05:32 +0000

The Wall Street Journal had a report this morning about former bank executives starting up “blind pools.” Like “dark pools,” which TBM explained recently, these things sound murky. How do “blind pools” work? Like this: Investors commit money to a certain fund. The people in charge of that fund then decide how to invest their money, often leaving investors in the dark about where it ends up. In this case, people are forming blind pools to buy up failed banks in FDIC-run auctions. If the bid is accepted, then that now-struggling bank’s future performance will determine how much the investors win or lose. Not surprisingly, jumping into a “blind pool” can be a hazardous move, so best to swim at your own risk.

Wonk Watch 11.10.09

Matthew McKnight — Tue, 10 Nov 2009 22:03:12 +0000

Barry Ritholtz picks up on a keen insight from Floyd Norris, who points out how last week’s unemployment figures were misleading. The official report said that unemployment had risen to 10.2 percent. Norris reports that due to seasonal adjustment, the figures were skewed and that the actual unemployment rate sits at 9.5 percent. Norris also found that the number of jobs grew by 80,000. And, as Ritholtz says, “The unadjusted numbers are actually constructive: they suggest that some hiring (College grads especially) is starting to improve.”

Felix Salmon gives us his perspective on Bob Pozen’s new book—Too Big to Save? How to Fix the U.S. Financial System. Salmon shows a nifty makeshift chart that illustrates how many good recommendations (read: the ones he agrees with) are in the book. Though Salmon and Pozen are in quite a bit of agreement, for Salmon, there are a few major points of dissent. According to Salmon, Pozen believes that “banks should have small and professional super-boards which, rather than simply rubber-stamping the decisions of the CEO, take a much more active interest in the way the bank is run,” encouraging private equity firms to own and invest in banks. Salmon counters:

My view is that the rates of return targeted and required by private-equity investors are far too high for banking, which should be a boring industry, and that even if safeguards are put in place to stop PE-owned banks from lending to sister companies, management at such institutions will try as hard as they can to bend the rules to maximize leverage and profits. And that they will be positively encouraged to do so by their small super-boards.

But the two agree on one important point: that if swift and ambitious action is not taken (as recommended in the book), “we will have more crises, they will be increasingly severe, and they will be increasingly frequent.”

Paul Krugman examines a recent study put out by Barry Eichengreen and Kevin O’Rourke—among others—that explores policy effects and fiscal multipliers. Looking into our own economic history alone is misleading, as Krugman and his subjects say. Krugman writes, “We didn’t have a really big fiscal expansion until World War II; and WWII isn’t a good experiment because the surge in defense spending was accompanied by government policies that suppressed private demand, such as rationing and restrictions on investment.” To get around this, Eichengreen and O’Rourke use “a broad international cross-section,” which according to Krugman works. And, in the end, Krugman sums up their findings: “Yes, fiscal expansion is expansionary.”

Today, Brad DeLong posts an econ-comic.

Even Microsoft’s Ad Agency Can’t Get People To Advertise Through Microsoft

Chadwick Matlin — Tue, 10 Nov 2009 20:04:18 +0000

The latest social media survey is making the blogosphere rounds this week. This one comes from RazorFish, Microsoft’s former digital ad agency, which the company sold to Publicis Groupe earlier this year. The report is about the way various brands are using the Web and social media to spread their gospel, with various extrapolations about the fundamental nature of the Internet based on a small sample size.

Among the most interesting tidbits, though, are the data from Razorfish’s own clients. (The client list is impressive, with dozens of major brands ranging from Visa to Victoria’s Secret.) In 2008 Razorfish’s clients put 72 percent of their search advertising budgets toward Google ads. Yahoo garnered 22 percent. Razorfish could only convince its clients to funnel 4 percent of their budgets to ads on Microsoft’s live.com search engine. (Live.com has since been replaced by bing.com.) The message is clear: In 2008, Microsoft’s search platform was so bad, its own ad agency couldn’t entice people to advertise on it. (Much of this spending, we should note, took place during the epic Microsoft-Yahoo footsie session of 2008.)

But Microsoft has corrected past mistakes. It inked a search deal with Yahoo and successfully unveiled Bing. Most impressive of all, given our context, was the deal it put together when Publicis bought Razorfish this summer. Along with the $530 million Publicis paid for the ad agency, it also agreed to a five-year initiative of ad placements on Microsoft sites like MSN and Bing. Thus the scarcity of search dollars is bound to be more favorable next year. Only by selling Razorfish did Microsoft ensure Razorfish would push money its way.

Wonk Watch 11.09.09

Matthew McKnight — Mon, 09 Nov 2009 22:19:42 +0000

Felix Salmon gives it up to William Black—a blogger at MichaelMoore.com—for making “mincemeat of the idea that the government can and should keep a top-secret list of systemically-dangerous institutions which are subject to ‘heightened prudential standards.’ ” The Fed and the Treasury have proposed legislation to respond to systematically dangerous institutions (SDIs) by creating a list of SDIs that “can receive special federal bailouts when they get in trouble,” says Black. But the legislation proposes that this list be kept secret, as noted in these two clauses of the legislation:

“(f) NO PUBLIC LIST OF IDENTIFIED COMPANIES. The Council and the Board may not publicly release a list of companies identified under this section.

(b) CONFIDENTIALITY. The Committees of the Congress receiving the Council’s report shall maintain the confidentiality of the identity of companies described in accordance with paragraph (a)(3) and the information relating to dispute resolutions described in accordance with paragraph (a)(4).”

Both Black and Salmon find this proposal to be absurd and implausible. Salmon says, “In any case, as Black says, it’s hardly the job of regulators to keep from investors the fact that their bank is looking shaky … The plan as it stands is just idiotic.”

Barry Ritholtz also focuses on big banks. He wrote a post about the bill that got overshadowed by health care reform this past weekend. The Volcker Plan was proposed by Sen. Bernie Sanders (I-VT) and would give the government the power to break up banks or other financial institutions deemed “too big to fail.” Specifically, as Sanders writes in the Huffington Post, the legislation would “give the secretary of the Treasury 90 days to identify every single financial institution and insurance company in this country that is too big to fail and to break up those institutions within one year.” Ritholtz didn’t offer his opinion, and it is still unclear whether or not Sanders’ bill will receive support.

Over the weekend, Paul Krugman refuted the belief that the economy has performed better since 1980 than it ever did before (read: because of Reagan). Today, he continues his debunking rampage on two fronts: economic productivity since 1980 and third-world financing. On productivity, Krugman responds to commenters who assert “that Ronald Reagan, financial liberalization, or both ushered in an age of much faster economic growth.” He offers this one piece of data: Labor productivity between 1950 and 1980 rose on average by 2.3 percent per year, and 2.0 percent between 1980 and 2007. Then he provides a bit of context, saying, “Postwar productivity growth had three eras: a period of rapid growth from the late 40s to the early 70s, then a big slowdown that lasted until the mid 90s, then an acceleration that continues to this day.” On his next refutation, Krugman responds to comments saying that you can’t attribute China’s growth to modern finance, as it didn’t receive much capital from abroad, but many other fast-growing developing countries did. Krugman notes the “three big waves of capital flows to developing countries,” since 1980: to Latin American countries in the '80s, Southeast Asia in the '90s, and Eastern Europe this decade. None of the success experienced in these areas, Krugman says, have been driven by international finance.

Brad DeLong finds the decision about how to move forward and begin to repair the U.S. economy simple. He says, “From my perspective, deciding whether to tighten or ease is easy.” The answer for DeLong comes down to a short series of questions about unemployment and the key options to lighten its drag on the economy. Larger short-term fiscal deficits, will “almost surely” work, says DeLong. And, he says, they won’t exceed the country’s debt capacity. He writes, “You know that the debt capacity of a country is about to be exceeded when the term structure of interest rates slopes upward very steeply—when interest rates on government debt are high and expected to keep rising. There is no sign of that right now.”

Wonk Watch 11.06.09

Matthew McKnight — Fri, 06 Nov 2009 22:16:40 +0000

Felix Salmon came back earlier this week and has dived right back into parsing the turmoil. Today he addressed the rising unemployment rate—which, as we've learned, is at 10.2 percent, its peak since 1983. Salmon takes the time to draw out the implications of such high unemployment and comes to a rather depressing conclusion. At the first level, he points out that consumer spending will continue to decrease as unemployment increases. Makes sense. And it also makes sense, he says, for the Fed to keep interest rates at or near zero while so many Americans are out of work. And this is where it gets complicated, according to Salmon and Mohamed El-Erian, whom he quotes throughout his post. El-Erian—the CEO of Pimco—writes in the Financial Times, "There is one public good that needs to be replaced: the key role that the US has played as the engine of global growth. This role is now constrained by the debt of US households." And Salmon believes that this shift calls for a structural change to U.S. global and economic policy and, more importantly, swift and coordinated action. But Salmon is skeptical. He says, "So far I’ve heard nothing out of Washington which says to me that the White House has a plan for addressing long-term structural problems in terms of unemployment, capital flows, and interest rates." And the depressing conclusion: "Maybe, then, there simply isn’t a solution: the problem is just too big, too complex, and too intractable."

Paul Krugman, though, discusses one possible solution: a New-Deal-era Work Projects Administration. He says, "You can make a pretty good case that just employing a lot of people directly would be a lot more cost-effective; the WPA and CCC cost surprisingly little given the number of people put to work." Although Krugman considers a Work Projects Administration to be a viable solution, he, too, is skeptical saying that government and politics often move too slowly to stop the bleeding. "So why aren’t we doing this? Politics, of course: government is the problem, not the solution, even when it is, you know, the solution, and cheaper than running things through the private sector."

Brad DeLong also takes a look at the unemployment rate and looks back into his own blog history for a cause. In July 2008, DeLong wrote, "If we find ourselves in a financial-meltdown world where unemployment or inflation kisses 10%—then I will unhappily concede, and say that Greenspanism was a mistake." To make good on his promise, today he writes, "Yes, it was a mistake. I hereby deny, abjure, and repent my previous allegiance to the gospel of 'Greenspanism.' I reject Greenspan, and all his works, and all his empty promises ... I will strive now to walk in the light."

On another note, Barry Ritholtz also scowls at our government for considering measures to scale back the regulations in the Sarbanes-Oxley Act, passed in 2002. "So long economic collapse," he says,"hello accounting fraud." The Sarbanes-Oxley Act was passed in response to Enron and the like in order to ramp-up regulation. Ritholtz quotes Floyd Norris, who writes, "The House Financial Services Committee this week approved an amendment to the Investor Protection Act of 2009—a name George Orwell would appreciate—to allow most companies to never comply with the law, and mandating a study to see whether it would be a good idea to exempt additional ones as well." Then Ritholtz points out that the recent "near systemic collapse" was caused by banks given special exemptions. The main culprits, according to Ritholtz, are aggressive lobbyists who continue to push for less transparency and less oversight. He says, "This is a shameless attempt for a freer hand to avoid responsibility and correct marking of assets."

Word of the Week

Caitlin McDevitt — Fri, 06 Nov 2009 22:09:46 +0000

The Securities and Exchange Commission has been busy recently looking into all sorts of sneaky-sounding market practices that may be giving some traders unfair advantages over others. This week, SEC Commissioner Elisse Walter told Reuters that she’s increasingly concerned about "sponsored naked access."

What’s that? It’s a practice in which brokerages that are certified to trade on an exchange, such as the Nasdaq, rent their access to that exchange to high-speed traders. While trading directly on the exchange is desirable because it’s faster and more competitive, the SEC is concerned that the practice introduces too much risk. According to the Wall Street Journal, one worry is “that a trading outfit could suffer a massive loss through a computer glitch that threatens the financial stability of the sponsoring broker, or triggers a sudden and unexplained decline in the broader market.” Recently, SEC Chairman Mary Schapiro offered a helpful analogy to describe the situation. She said, "I liken it to giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied."

Wonk Watch 11.03.09

Matthew McKnight — Tue, 03 Nov 2009 22:17:03 +0000

Barry Ritholtz discusses the importance of McClatchy’s big investigative report into Goldman Sachs (GS) and its conflicting behavior throughout the housing meltdown. According to McClatchy, “In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.” So they knew what they were doing the whole time. But, as Ritholtz points out, the real focus of the investigation lies in a few key areas: Whether the bank misled borrowers, the bank’s involvement in offshore tax havens, how GS deployed lawyers to repossess homes foreclosed under their own faulty mortgages, and on the bailout packages that helped GS that were issued under Henry Paulson. Ritholtz quotes Laurence Kotlikoff, an economics professor at Boston University, who asserts, “This is fraud and should be prosecuted.” Ritholtz, though, seems to believe that an SEC prosecution wouldn’t stand up in court. He imagines Goldman’s response would be: “Of course we did not know the future ... After the fact, it may look like prescient, but an investment opinion is not the same as knowing the future. That is, of course, impossible.”

Paul Krugman wags his finger both at the economic “conventional wisdom” du jour and at President Obama for even talking about it as though he is a believer. He writes, “Not a day goes by without my reading some assertion that ‘markets are anxious/jittery/worried about the deficit’—an assertion based on no evidence whatsoever.” Krugman is a proponent of more stimulus money in order to sufficiently deal with the high unemployment rate and is not concerned about the deficit spending, citing low interest rates on U.S. debt and CDS spreads. On Monday, the President told his Economic Recovery Advisory Board, “The government is going to have to get serious about reducing our debt levels.” Noting Obama’s “unfortunate tendency to echo ‘centrist’ conventional wisdom,” Krugman hopes his economic advisors will counsel him otherwise.

Brad DeLong stands up for his buddy Krugman today. Ned Phelps wrote in the Financial Times that Keynesian economists, “take the position that fiscal “stimulus” of all kinds is effective against slumps of all causes.” And the staunch Keynesian Krugman responded forcefully, saying “Nobody, and I mean nobody, holds that alleged position.” But DeLong takes a more hard-line approach and imagines what he would have said were he Phelps’ editor:

An editor should have asked: ‘Who are you talking about who takes the position that fiscal 'stimulus' of all kinds is effective against slumps of all causes?’ And then should have killed the column.

There’s a lot of tension in the economics blogosphere today.

This just in: Felix Salmon is back stateside. Can hardly wait for his return to blogging tomorrow. Let's hope he’ll show us pictures from Spain.

The Government Needs To Learn To Use Google Ads

Chadwick Matlin — Tue, 03 Nov 2009 13:36:06 +0000

While reading the New York Times this morning, I came across this well-reported story about the government's testy relationship with "free" credit report services. The Federal Trade Commission is struggling to fight back against private credit report services that lure people with the promise of a free credit score but then latch them onto a $15-a-month monitoring service. The FTC runs its own free credit report site, but few know about it because the private sites have commercials with catchy jingles.

To fight back, the FTC has made its own video spoofing the private spots. (Slate reviewed the spots back in April.) The song isn't nearly as catchy, but it gets the point across: Trust your government more than your fellow citizen. All good and fine, but why isn't the government fighting back on Google?

If you search for "free credit report," the first official return Google spits back is to the FTC's site, AnnualCreditReport.com. But it's superceded by three sponsored returns, all of which are the kind of private sites the FTC wants us to stay away from. Same issue when you search for "credit report" or "free credit": The FTC site shows up first; the sponsored sites push it down the page.

So why isn't the FTC buying these ads, too? If the goal is to run the other sites out of town, surely they can scrounge up some funding to buy an ad on credit report keywords. (I have a call into the FTC for more comment. I'll update this post if I get any.) To push back only through video ignores the broader medium in which the private sites thrive. In the Google age, it takes more than a parody to fight the good fight. The FTC can do better.

Wonk Watch 11.02.09

Matthew McKnight — Mon, 02 Nov 2009 22:04:44 +0000

Barry Ritholtz responds to USA Today’s report that says economists are expecting steady growth in the GDP. The paper surveyed 46 economists, and four out of five “say the stock market rally since March is heralding a sustainable recovery.” Ritholtz, though, finds it hard to believe “the same people who missed the worst oncoming recession in 80 years, the credit collapse (worst in US), and the market crash…” OK, point taken. But, Ritholtz doesn’t indicate why he disagrees so staunchly. Even though Ritholtz does believe that the rally is slowing down, there doesn’t seem to be a considerable difference between “sustainable recovery” and the “minor reversal” that Ritholtz foresaw.

First thing’s first: Brad DeLong shares some pretty pictures. Later, he rips into Allan Meltzer, calling him a “shameless partisan hack.” Meltzer released a memo in which he argues that the idea of “saving jobs” is an unmeasurable metric created by the Obama administration to make people believe that the stimulus package is working. To refute DeLong conjures Milton Friedman’s counterfactual analysis, in which he says that an extra $1 billion of open market operations would have stopped the Great Depression. Just as Friedman asked, “What if we had acted differently?” in 1931, the Obama administration asked the same question and is saying that without the stimulus, more jobs may have been lost. Ergo, “jobs saved.” DeLong believes that Meltzer’s motivations are purely political. He ponders, “So why is Allan Meltzer doing this—saying that Milton Friedman talked nonsense in The Great Contraction?” He answers his own question: “Because it is to the temporary tactical advantage of the Republican Party for him to do so … Exercise some moral responsibility, Allan.”

T-minus two days until Felix Salmon gets back from Spain and resumes blogging. We continue to await his return.

No, Paul Krugman; Veterans Day is next week. Where are the Monday posts?

Presented By:

Mon, 02 Nov 2009 22:04:44 +0000

Word of the Week

Caitlin McDevitt — Fri, 30 Oct 2009 16:03:19 +0000

In his written testimony to the House financial services committee yesterday, Timothy Geithner discussed how the government plans to prevent, or at least deal with, the failure of big financial institutions in the future. Calling current regulations “inadequate and outdated,” he called for greater supervision of major firms, stricter capital requirements, and an end to “excessive risk-taking.” He stressed that banks should take steps to avoid getting themselves into trouble in the first place, but also that they should be prepared for the worst case scenario. He notes, “major firms must be subject to a prompt corrective action (PCA) regime and be required to prepare and regularly update what some have called 'living wills.' ..."

What’s a “living will”? When it comes to human beings, a living will typically details the medical measures or treatments you’d like to receive in an end-of-life situation. A financial institution’s living will serves a similar purpose. Geithner described it as a plan for “rapid resolution in the event of distress.” In other words, the living will would map out what the firm would do when it’s on the brink of going under. It doesn’t seem like the government is interested in bringing dying banks back to life at the last minute anymore.

Wonk Watch 10.27.09

Matthew McKnight — Tue, 27 Oct 2009 21:13:33 +0000

Following his bullish streak, Barry Ritholtz says, “I am now starting to pull my horns in a bit, as this rally looks to be getting a little tired and showing signs of technical deterioration.” He predicts a 5 percent to 15 percent correction over the next 60 days. Ritholtz lists five indicators that inform his renewed caution:

“Over the past 4 days, we have had 3 failed rallies;
The number of New Highs on the major indices is contracting;
Stocks seem to be reacting far less enthusiastically to earnings beats then they had been;
The Transports have been acting squirrelly lately;
The S&P is forming an Ascending Wedge. ...”

Though Ritholtz is a bit more cautious right now, he doesn’t see the need for alarm, calling this a “more of a minor reversal,” because of the low interest rate.

Brad DeLong pulls excerpts from two articles (one and two) that discuss the current recession and the grim outlook for a strong recovery. Both articles—as does DeLong, presumably—call for more stimulus. It is the economically sound thing to do. However, they say that various political roadblocks are likely to stand in the way. DeLong praises the New York Times’ editorial board for understanding macroeconomics, “unlike every single congressional republican.”

Paul Krugman echoes Peter Orszag’s blog post in response to Fred Hiatt’s column in yesterday’s Washington Post. Hiatt criticizes the Senate finance health bill for not including cost-control measures, which Orszag reminds us, are, in fact, in the bill. Krugman believes that Hiatt’s attack is insincere and is used to hide the fact that he “won’t accept any version of fiscal responsibility that doesn’t involve gutting Social Security and Medicare” ... even if the claim is “completely bogus.”

Felix Salmon is still fishing.

Wonk Watch 10.26.09

Matthew McKnight — Mon, 26 Oct 2009 21:03:20 +0000

All the way from Quito, Ecuador, Paul Krugman, says the dollar is gold. This is to say that the dollar is weighing down the Ecuadorian economy and policy options the same way that gold did to protectionist countries in the 1930s. These countries used import restrictions to peg the value of their currency to gold. But, as Krugman quotes Barry Eichengreen and Doug Irwin, who say “that trade protection in the 1930s was less an instance of special interest politics run amok than second-best macroeconomic policy management when monetary and fiscal policies were constrained.” In January of this year, Ecuador instituted a series of similar measures to protect itself as the dollarized country was stuck in our crisis. Krugman writes: “Anyway, no deep moral here, except to say that the problems that faced nations on the gold-standard in the 1930s are being replicated in countries pegged to the euro or the dollar today.”

Felix Salmon is also on vacation. No, he’s not with Krugman.

Barry Ritholtz declared today “Real Estate Monday” and began the day with a post recasting facts presented in a two-part Seattle Times series (one and two) that uncovers the “reckless course that doomed [Washington Mutual].” Interviews with former employees and internal documents reveal that the bank “systematically dismantled … controls meant to prevent the bank from taking on too much risk.” The results:

“WaMu’s subprime home loans failed at the highest rates in nation. Foreclosure rates for subprime loans made from 2005 to 2007—the peak of the boom—were calamitous. In the 10 hardest-hit cities, more than a third of WaMu subprime loans went into foreclosure.”
“By the summer of 2004, nearly 60 percent of the loans WaMu was making were the riskiest sort—option ARMs, subprime mortgages and home-equity loans.”

Later in the day, Ritholtz linked to a story in the Mercury News that looks at the rise in office vacancies in Silicon Valley. And as a supplement he posts comments from his “hedge fund friend,” in San Francisco who has also seen a trend toward downsizing office space.

All Brad DeLong does today is share an e-mail he received from HRL Laboratories, LLC—“a corporate research-and-development laboratory owned by The Boeing Company and General Motors specializing in research into sensors and materials, information and systems sciences, applied electromagnetics, and microelectronics.” He might as well be on vacation too.

Word of the Week

Caitlin McDevitt — Fri, 23 Oct 2009 19:56:44 +0000

This week, Kenneth Feinberg, the government’s special master for executive compensation, said that the seven largest companies that haven't yet paid back their government bailout funds have to slash their top executives' compensation. Separately, the Fed released new pay guidelines for banks and announced plans to review the 28 largest firms to make sure that their compensation structures don’t encourage risk-taking. Officials hope that the new policies will quell public outrage over outsized pay at government-rescued firms and discourage pay practices that are just plain excessive. Some would count “gross ups” among those practices that should be done away with.

What’s a “gross up”? In this context, it means to pay someone a full salary without any tax deductions. That sounds nice, but kind of illegal. So here’s what they do: Since a salary must be taxed legally, an employer will sometimes “gross up”—or inflate—the salary, so that after taxes are accounted for, the employee gets the full amount promised. Maybe death and taxes aren’t both so certain after all.

Memo to Blodget: Most Journalism is Local

Dan Mitchell — Wed, 21 Oct 2009 22:22:33 +0000

Henry Blodget has written another one of those "journalism isn't really dying" things. People need, he says, to stop "whining" about it. Newspapers might be dying, he says, but that doesn't mean journalism is.

Blodget makes the utterly clueless, but very common mistake of equating "journalism" with national and global coverage. He doesn't even mention local or state coverage, which, since it has always made up the vast bulk of what constitutes newspaper journalism, is also suffering the greatest losses as newspaper staffs are decimated.

Bloomberg and Reuters are doing well, he says, so that means journalism is doing well, even if newspapers aren't. Every example Blodget gives of a story broken by a Web operation or a wire service has to do with a national or international event or issue. (It's telling that he doesn't mention the AP, and that the wire services he names cover business news.)

Most of the 13,000 journalists who have lost their jobs this year covered states and localities. Blodget should take a field trip to a three-quarters-empty statehouse bureau sometime and ask the people there what is being missed.

Lots, they'll tell him. I'll guarantee you that right now, there is rampant corruption going on across America that would either never have happened or would have been uncovered if newspapers were at their staffing levels of just a decade ago.

And not only corruption, but incompetence, waste, and other problems of local and state governments, school boards, cops and courts, police, park districts, local business. And not only problems—even the good stuff that government does is going unnoticed or undercovered. Even just everyday stories of budgets being passed or cops being hired helps people understand the workings of their government. But even those stories are going un- or undercovered.

Local and state news is what most directly touches peoples' lives. It's a sort of elitism to automatically equate journalism with big-time journalism.

There are some local and regional Web operations like Minnpost.com and the San Diego News Network that are trying to fulfill the duties that newspapers once carried out. I hope they succeed, but we have no idea yet whether they will. So far, the numbers look pretty grim, though they are doing great work.

But Blodget didn't even mention them, and didn't even use the words "state" or "local" in his screed. Which to me shows that, as with so many other likeminded observers, he didn't think very deeply about the issue before he decided to call those of us who care about this problem "whiners."

Wonk Watch 10.20.09

Matthew McKnight — Tue, 20 Oct 2009 20:49:30 +0000

Felix Salmon discusses a “stunning” selection from Andrew Sorkin’s new book, Too Big to Fail, which was released today. The book presents the first behind-the-scenes look at what went on during the greatest financial American meltdown since the Great Depression—and it’s already got people talking. Salmon’s excerpt reveals that Henry Paulson, former secretary of the treasury, had a clandestine meeting with Goldman Sachs' (GS) board of directors in Moscow. In the meeting, which was referred to as a “social” gathering, according to Sorkin, Paulson reminisced with stories of his time in the Treasury, gave his predictions for the economy, and discussed the need for the government’s ability to save failing banks. Salmon raises his concern flatly: “This is sleazy in the extreme, and will only serve to heighten suspicions that Paulson’s Treasury was rigging the game in favor of Goldman all along.”

Paul Krugman gives a dual lesson on international financial relationships and on translating the language of Fed chairmen. He parses Bernanke’s speech to Asian nations and comes up with this question: Should the United States pressure China to stop buying dollars and revalue its currency? Krugman says yes. And by translating Bernank-ese, he says the chairman agrees. The Fed has been engaging in something called quantitative easing, a tactic that countries normally employ to stimulate the economy with increases in the money supply. It’s intended to encourage lending and ease borrowing. Because China is holding so many U.S. Treasury bills, if it were to sell some into other currencies, Krugman says, it would actually be engaging in quantitative easing on behalf of the Fed. There are risks, though. Banks could still be skittish lenders despite the easing, and it may be too effective, resulting in hyperinflation.

Barry Ritholtz examines the rates of mortgage delinquencies, as the nation is supposedly emerging from the burst housing bubble. He cites a study by Realpoint Research that indicates a recent rise in dollars delinquent and dollars in unpaid transactions from 2005, 2006, and 2007. The data don’t bode well for the future and might indicate that if mortgage lenders learned any lessons, they have since been forgotten. Ritholtz says, “Banks continue to rack up serious unpaid mortgages, which over time is very likely to lead to increased foreclosures.”

Bradford DeLong was too enmeshed in Superfreakonomics to post about anything else today. This post promises to be his last on the book. Let's hope so.

Wonk Watch 10.19.09

Matthew McKnight — Mon, 19 Oct 2009 20:50:43 +0000

Last week, the House financial services committee passed an amendment to a bill that would influence the regulation of banks and credit unions. Today, Felix Salmon weighed in. The legislation proposes the creation of the Consumer Financial Protection Agency, which would keep an eye on everything from home loans to credit cards and payday loans. Salmon looks into the heart of the matter: that consumer finance needs plausible and swift regulation. So, he suggests letting the customers do it for them. “[C]onsumer finance is crying out for some kind of centralized, crowdsourced database of bank fees and practices,” he says. “Then violations of CFPA rules could be automatically flagged and forwarded on to the agency as soon as they arise, even without formal examinations.”

Barry Ritholtz finds a little-discussed data point that might illuminate the lending practices during the subprime mortgage meltdown. He reports, “A study found that securitized mortgages were five times as likely to be delinquent as mortgages that were not resold to securitizers.” This bit of info makes Ritholtz think that the nonsecuritizing banks had different lending practices from the banks that quickly passed on the debt. Naturally, banks that hold on to mortgages would be less risky with the debt incurred. And if Rithotlz’s data are correct (oddly, he can’t remember where he found it), it might suggest that the lenders knew what was going on while continuing to lend money to issue bad mortgages. This Ritholtz post is a fitting follow-up to his morning post, publicizing tomorrow’s PBS special on Brooksley Born, the “Cassandra of the derivatives crisis.”

Paul Krugman continues to warn us against the “gold standard mentality,” which, he says, “might lead to premature monetary tightening.” He cites the cover story in this week’s Barron’s that proclaims: ”There’s no need for short-term rates to remain near zero now that the economy is recovering.” But Krugman disagrees, especially because the unemployment rates are still soaring. Krugman sticks to his guns, saying that interest rates should remain low until the country gets firmly back on its feet. And, for him, the key indicators of firm ground are employment and more rapid growth, not the value of the dollar or commodities.

Bradford DeLong wrote a few less-than-flattering posts today about Levitt and Dubner’s new Superfreakonomics book. In one, he says the authors are no longer thinking like economists. Making great use of the semicolon, he writes, “Economists believe that there are always substitutes—alternatives; economists believe that there are always complements—always ways of doing things that reinforce each other, especially in situations of uncertainty in which diversification is especially valuable; economists believe that orders of magnitude are very important and that the right simple numbers are good guides to orders of magnitude.” And there are several points in the book where, Delong says, the authors fail to support their environomic claims with pure economic thinking.

Wonk Watch 10.16.09

Matthew McKnight — Fri, 16 Oct 2009 20:59:47 +0000

Obama’s pay czar, Kenneth Feinberg, made a less-than-bold move today, says Felix Salmon. Feinberg requested that former Bank of America (BAC) CEO and Chairman Ken Lewis not receive his $1.5 million salary for 2009. Lewis will, however, still walk out with $125 million—$53 million in pension and $72 million in accrued and deferred stock compensation. Salmon calls the move to snatch the cherry from Lewis’ sundae “largely symbolic.” He writes, “Since Feinberg had no real jurisdiction over the big lump sum due Lewis, he just decided to bring the sum he could control down to zero.”

Paul Krugman gets a nod from Financial Times columnist Samuel Brittan. But it’s not one that he agrees with. After discussing the global imbalances between U.S. and Western European deficits and the surpluses in China, Germany, Japan, and oil-exporting countries, Brittan suggests making Krugman the “Comptroller of the US Currency,” to better regulate greedy commercial banks. Brittan continued by referring to Krugman as a “radical Keynesian economist” (and that’s the part that bugged Krugman). While Krugman is, admittedly, a Keynesian, he doesn't view himself as radical. He writes, "I’m just a Keynesian, willing to follow the logic of my analysis." What gets called “radical economics,’ Krugman says, is “just being intellectually honest.” Whereas what is often called “sound economics” is “economic analysis trimmed and softened to fit political realities/prejudices.” Sore spot, maybe?

Barry Ritholtz doesn’t care about the Dow 10,000. As many take the Dow’s climb as a positive sign, Ritholtz calls it a “meaningless number, without any impact technically or quantitatively.” And he cites the fact that the rally didn’t last as evidence of its lack of substance. He may be right, but the rise above 10,000 has more of a psychological effect as investor confidence slowly returns after bottoming out earlier this year.

Brad “Bueller” DeLong took another day off from econoblogging.

Archives

Ron Paul Wins Lifelong Fight, Now May Be Forced To Vote Against Everything He Believes

Wonk Watch 11.20.09

Word of the Week

Our New Home Page

Norah Jones and Hulu Unintentionally Create Good Idea Having Nothing To Do With Norah Jones

Wonk Watch 11.16.09

NYTimes Earns Profit on Lesson Plans; Questions Teachers Who Do Same

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Wonk Watch 11.13.09

Word of the Week

Wonk Watch 11.10.09

Even Microsoft’s Ad Agency Can’t Get People To Advertise Through Microsoft

Wonk Watch 11.09.09

Wonk Watch 11.06.09

Word of the Week

Wonk Watch 11.03.09

The Government Needs To Learn To Use Google Ads

Wonk Watch 11.02.09

Presented By:

Word of the Week

Wonk Watch 10.27.09

Wonk Watch 10.26.09

Word of the Week

Memo to Blodget: Most Journalism is Local

Wonk Watch 10.20.09

Wonk Watch 10.19.09

Wonk Watch 10.16.09