Megan McArdle: April 2009 Archives

Ken Lewis Out At Bank of America?

Not exactly a surprise: Bank of America shareholders have stripped him of his chairmanship. I don't find it hard to believe that Ken Lewis genuinely believed that he was singlehandedly saving the US financial system--though it is also true that he probably couldn't have gotten out of the merger agreement by the time he (and Merrill) knew about the losses, even if he wanted to. But that doesn't really matter. If my husband sacrificed our child to save thousands of people, I might recognize, at some abstract level, that he had done the right thing. But we wouldn't stay married.

Right now, Ken Lewis remains CEO--the board expressed unanimous support. But at this point, it seems likely that it's only a matter of time. (If it isn't, it will become a famous business school case on the Principal-Agent problem.)

It's hard to imagine that it wasn't long ago that Ken Lewis was the guy who was celebrated for transforming BofA into the 800 pound gorilla in the banking market. Every time I read one of those glossy CEO profiles, I remember how many of them end this way.

Is There a Doctor In the House?

A lot of liberal blogs, and a few conservative ones, are discussing this article from the New York Times, which points out that if you look at actual economic resources, instead of prices, increasing health care utilitization isn't going to be so easy, because there's not a lot of spare capacity in the system. Gee, where have I heard this before?

The core problem is that we don't actually have a ton more doctors and nurses. Libertarians (and I think some liberals) argue that the problem is the AMA cartel: they control the number of med school admissions slots. But when I look at the numbers, I don't see all that much room to believe that getting rid of the AMA would let a thousand flowers bloom. In 2008, 42,000 people applied to medical school, and 18,000 enrolled. Presumably some who were admitted decided not to go, and some who weren't shouldn't be doctors. There don't seem to be, say, 10 qualified people for every slot. And nursing schools aren't swamped by more qualified applicants they can handle, yet there's a nursing shortage.

Another problem is that a teaching hospital is a hard thing to construct--given how much training doctors need, we won't do that overnight. Teaching hospitals are very expensive, and receive heavy government subsidies. Obviously, we could increase the number of doctors by some amount, but it wouldn't take care of the supply problem.

It's more reasonable to note that reimbursement structures are creating an undersupply of primary care physicians, compared to the number of specialists. We reimburse for procedures, not wellness, so surgeons are well paid and GPs aren't. This has led to the bizarre fact that Medicare chronically underreimburses (and thus insures an undersupply of) geriatricians, which should be the one doctor a program like Medicare produces a lot of.

Most commentators who note this seem to think they have discovered a miraculous new fact. Unfortunately, this has been true for decades, and generations of wonks and policymakers have also lamented it in their time. It's a lot harder to change than it sounds.

First of all, thanks to previous generations of these reimbursement policies, the AMA is dominated by specialists. It's a democratic organization, and there are more specialists than GPs, so guess who wins? They will launch an all-out war against any politician who changes the reimbursement policy, and the politician will lose, because they can't fight ads featuring sad, sick, telegenic grannies.

Second of all, it's actually really, really hard to pay GPs well, at least in the context of cutting overall costs. Note that private insurers, who are presumably not attempting to ingratiate themselves with the AMA, also reimburse procedures, not wellness. That's because procedures can be monitored, and wellness can't. Oh, you can implement some insane, byzantine system to take into account prior conditions, but this will not improve your administration costs. What you will see--what you do see, among specialists who are monitored for their success rates on procedures--is what liberals complain about with insurance companies: physicians will compete to get rid of their sicker patients. Pay for office visits, and you will get a lot of unnecessary office visits. As David Cutler once told me, it's no coincidence that health care and education are the two fields where outcomes are hardest to monitor, and where costs are growing uncontrollably.

Nor can you simply slash specialty reimbursements as a way of herding people into general practice, because med school applications are already declining; they're down 3.5% since 2001. Doctors are not, by and large, altruists who dream of living on a GS-13 wage. Nor can I blame them.

Penny Wise, Pound Foolish

It's hard to think about the Federal Budget in terms we can understand. A moderately successful American will, over the course of a forty year career, earn several million dollars. But we don't even see all that money all at once. Numbers a million times bigger than our total lifetime earnings literally boggle the imagination.

One enterprising videoblogger, however, has undertaken to illustrate the impact of Obama's recently announced $100 million in budget cuts:

Arlen Specter switches parties

Sigh. Can it really be so long ago that I was out protesting his leadership of the dastardly Republican conspiracy to interrogate Anita Hill? Backwards, turn backwards, oh time in thy flight . . .

Instant analysis: this is probably not a good sign for the future of the Republican party, not because Arlen Specter is so crucial to its ideological or political integrity, but simply because he's a seasoned politician from a swing state, and what does he know that other Republicans don't?

On the other hand, I remember when that savvy political prognosticator, Jim Jeffords, sealed the doom of the Republican Party in the Senate. I hope that Specter has better sense than Jeffords in titling his next self-serving autobiography.

Stressed!

Shockingly, the stress tests seem to indicate that Citibank and Bank of America need to raise capital; perhaps that's why I got a notice in the mail yesterday that my Bank of America credit card fees were going up. I know, I know . . . you didn't see this coming. None of us did. You may be feeling that if Citibank and Bank of America can't pass the stress tests without more capital, there's no hope for any financial institution. You may be pricing canned beans and ammunition. You may be wondering if there's any point in going on. This is what valium is for.

What I'm not clear on is how this helped. I think Bank of America and Citibank were well aware that they really needed some capital to steady their balance sheet. Certainly, the rest of us weren't in any doubt. But capital's sort of scarce right now--you may have read something about it in the papers. Announcing to the world that Bank of America and Citibank are kinda teetering doesn't seem likely to help them tap the capital markets. It's yet another roundabout way of saying, "Hey, you know, I think we have to give you some more money."

Your Morning Omnibus

Hobbits!
Moronic photo-op
How to make money without really trying
Pontiac through the years
Bold is not beautiful (necessarily)
Ross Douthat's Times debut
Was Helen Gurley Brown a feminist icon or a mercenary tramp?

Bleg

I'm headed to Omaha on Thursday for Warren Buffet's annual meeting. Food, drink, and entertainment recommendations are solicited.

GM Makes The Moral Equivalent of a Hail Mary Pass

GM has released its latest never-never financial plan for an imaginary future where the bondholders evaporate into clouds of fairy dust, while American consumers mob its dealerships, begging for a piece of the GM dream. The company is apparently planning to ask a bankruptcy judge to enforce the same bond exchange terms it's currently offering its bondholders. If GM gets its wish, the bondholders will do better by settling out of court, because they won't have the administrative costs of a bankruptcy, which are typically high.

But that's a big "if". The terms are hardly overly generous: they're offering to exchange $27 billion worth of debt for about a 10% stake in the company. The firm's whole market cap is about $1.25 billion, and it looks like its 5-year average EBITD is somewhere in the neighborhood of $400 million. These are less than encouraging numbers--the analysts contacted by most news sites seem to be valuing this deal at pennies on the dollar. Meanwhile, the UAW is being asked to exchange $10 billion in health care obligations for a 39% stake.

That's not quite as breathtakingly lopsided as it sounds at first glance; workers, being needed to keep the company going more than bondholders, tend to get relatively generous treatment by a bankruptcy court (and conservatives winding up to say they should just fire the UAW and replace them with scabs should go look at some OB literature. Firing all the plant workers would probably kill the company, which is in no shape to train an entirely new workforce.) Still, bankruptcy judges are rarely that generous--if they were, companies would have a mighty hard time floating bonds. Presumably the government is supposed to quasi-impose those terms as a condition of its debtor-in-possession financing.

But can it make a credible committment not to provide DIP? The problem with this deal, as with the attempted Chrysler throwdown, is that the creditors would probably be better off in bankruptcy court even if the company was straight-out liquidated and its equipment sold off to other car companies. Since the government is plainly not going to let that happen, this has the feel of an empty gesture.

Recessionitis: Why Do Startups Hire People Right Before Going Belly-up?

Matthew Yglesias's commenters are angry at Portfolio for hiring Ryan Avent and firing him three weeks later. And believe me, I'm not about to defend this, both because Ryan's a friend, and because, well, that should just never happen to anyone.

Nonetheless, it has happened at every startup I've ever worked at--at least the ones that went bust, which was most of them. I myself turned down a nice, stable job at Booz Allen right out of business school to work for an exciting new tech strategy company, which then laid me (and the rest of my associate class) off. I worked for several other startups where I lasted less than three months, because the whole company (or in one case, division) was shut down. At that, I've never felt too badly used, because at the first startup I worked for, one guy worked there for exactly one hour--he had finished up at his old company the night before, came in at 9 am on Tuesday morning, and at 10 am was called into the staff meeting where they told us the company was done.

(Anecdotal evidence suggests that 85% of these meetings are held at 10 am, with the remaining 15% evenly divided between 1 pm, 2 pm, and 3 pm. Not sure why 10 am is the heavy favorite. It's not like you really want to sleep in before you fire everyone who works for you.)

Yet the bosses who did this were among the best bosses I've ever worked for. I still remember that company very fondly, as did everyone else I knew who worked there. The reason: they didn't know it was coming. They found out the company was shutting down when the bastards funding us failed to wire the money for our payroll. I'm sure that was also the case with the people who hired Avent. These things happen because the people disbursing the money aren't the people running HR.

Most executives making hiring decisions don't go to the money men and say, "Hey, I want to hire someone--should I go ahead, or are you going to suddenly shut down the company and ruin some guy's life?" Nor would the money people likely tell them if they did. The money people are comfortably far away, not meeting the person whose life they're helping immeasurably complicate. And they have their own organizational problem. They haven't decided whether or not to shut down the company. Sometimes they don't shut it down. And if they say, "Hey don't hire anyone, because we might be about to fire the whole staff in two weeks", then all the other people will stop making whatever it is you make, and start looking for other jobs, and the best people will leave first, and suddenly you'll have to fire everyone, because the company's not making any money at all. A Ryan Avent who is a chess piece, not an actual human being sitting across the desk from you, seems like a worthwhile sacrifice to the greater good.

This is what hiring freezes are for. Unfortunately, when someone as central to your website as Felix Salmon leaves, it's hard to just let that slot lie empty. Luckily, Conde still has quite a lot of money--enough to undo a lot of the damage (and give themselves a nice PR bonus) by offering Ryan a really generous severance package. I hope they do.

Quote of the Day

"Protesting the International Monetary Fund by smashing up and spray-painting a PNC bank and Wachovia branch in Logan Circle a mile and a half away is roughly akin to registering your dissatifaction with a New York Stock Exchange meeting on Wall Street by urinating on some Greenwich Village ATMs."

~ Matt Welch

The End of Capitalism?

I think that John Quiggin is voicing an opinion held by a lot of people on the Left: the current financial crisis has somehow discredited American-style capitalism, that the only way out of the mess we're in is to embrace a more social democratic society.

One way to think about the political impact of the GFC is to look at the range of political positions it's rendered untenable. This range is large, encompassing, in the US context, everyone from Bill Clinton to Newt Gingrich. More generally, it covers anyone who embraced the claim that a US-style economic system, as of, say, 1995-2005, was the best that had ever been seen anywhere, and could only be improved by making government smaller and/or more business-like.

. . . The only tenable position for anyone who wants to maintain any part of the existing economic and social order is Keynesian social democracy, modernised to deal with the developments of the last few decades, and disciplined enough to avoid the disasters that brought down the Bretton Woods system in the late 1960s and early 1970s.

I believe that many on the left believe this. I even believe that it may have some political salience, although not nearly as much as John Quiggin wishes. But as an empirical matter, it is high-test hokum.

Or perhaps John Quiggin has some different, special meaning for the words "Keynesian social democracy" that have nothing to do with aggregate demand management, and everything to do with regulatory oversight of credit growth. But at Chicago, we had a different word for those who thought that the unchecked growth of the credit supply was the main problem confronting macroeconomists. We called them "monetarists".

Monetarist theory is, of course, not especially helpful when it comes to thinking about the current banking crisis, but then, neither is Keynesian theory. The idea that the writings of Lord Keynes offer us the key to adequately managing global capital flows and the level of Tier One regulatory capital is no less bizarre than the notion that one could divine such a blueprint from the work of Milton Friedman.

Especially odd is the notion that the only tenable position, unless we are to go Marxist, is social democracy. Would we not have had a financial crisis if we'd had really super single-payer health care?

It is true that the belief in both tighter bank regulation and a larger welfare state cluster on the left, but if social democracy is some sort of preventative cure-all, how come the US economy is outperforming places like Denmark, Sweden, and Germany, not to mention the OECD as a whole? Why, if the problem is "American style capitalism", are the biggest GDP declines found elsewhere? I understand that the left finds it politically convenient to link the uninsured and the banking crisis, but this seems only very slightly less silly than blaming it on gay marriage--indeed, looking at the countries worst effected, the latter's correlation seems stronger.

But is he right poliically? The cluster may be irrational, but that doesn't make it any less politically salient. Maybe. On the other hand, it was less than five years ago that we were talking about a permanent Republican majority based on the obvious political victory of a militant foreign policy. I'm not sure I'm quite ready to write capitalism off the electoral map.

Mental Health Break

Cat v. Printer:

Portfolio Magazine: Born May 2007-Died April 2009. R.I.P.

I've been meaning to send Ryan Avent a congratulatory note on his move to Portfolio for weeks now (though I really should have been sending that note to Portfolio for snagging Ryan.) Alas, instead, I had to send him condolences this morning: Portfolio is shutting down. There will be a lot of retrospective quarterbacking, but in the end, launching a $100 million magazine into the teeth of a recession is a dicey project. Especially when it's launched the Conde way, with high-gloss finish and an all-star cast of thousands.

Most readers don't notice, but it's on the top of every journalist's mind that every publication we pick up these days feels nearly emaciated. That's because everyone's losing ad pages--and editorial pages, because the ad pages pay for the content between them. It's a rare publication where the revenue from subscriptions and newstand sales exceeds the cost of printing and distributing the paper. All the costs of producing the content are paid for by advertising, and companies aren't doing much of that these days.

Not much comfort to Ryan, though, or the 84 others who have to look for jobs in a very tough media market. Speaking from my own household experience, I think journalists are going to be very leery of getting involved with media startups for quite a while.

Annals of Journalism

Every time I am tempted to take foreign correspondents seriously, moronic stories like this snap me back to reality.

Memo to the authors:

No one who actually retailed cocaine, etc. to Wall Street's overpaid minions would be sleeping in a homeless shelter. That's a high-end specialty business, more like being a personal trainer than a street thug
Homelessness, as in people sleeping on the street, is not correlated with foreclosures. Even homelessness, as in people staying on relative's couches, isn't very well correlated with foreclosures. People who end up without somewhere permanent to stay generally have much bigger problems than a sheriff's notice
The number of Americans receiving food stamps has risen by about 20% since last year. That is a lot of people, and not a number that should make anyone happy. But it hardly heralds the return of "mass poverty"
Likewise, the number of uninsured Americans has risen modestly. This is not the same as millions standing on breadlines
It is not true that "Anyone who forgets to lock his car at night" in Georgetown "can expect to see unwanted guests sleeping in it by the next morning. It is not even true that anyone who forgets to lock his car at night can expect to find the radio stolen, although that is a much larger risk--one with which Germans are not altogether unfamiliar, as I recall. I haven't even heard one anecdotal case of this happening, much less a citywide epidemic. Anyone who tried sleeping in someone else's car in my considerably less posh neighborhood is very likely to have the police stop and point out that this is not technically legal.
While it is probably true that "Nowadays, politicians spend as much time visiting homeless shelters as they once spent at Silicon Valley startups", this was also true two years ago, five years ago, or whatever time period you'd care to name. American politicians, unsurprisingly, like to give the public photographic evidence that they care about the poor.

It kind of makes you wonder if they've actually, like, been to America, or if they're getting the whole story phoned in by ACORN activists. I don't mean to trivialize the very real increase in suffering, concentrated among those who were already struggling, that this recession has wrought. But the moderate boost in the number of Americans getting food stamps is, for all my issues with the program, a *good* thing--it means we're helping out those who have lost income during the downturn. And the cartoon picture of destitute, formerly middle class Americans making a forced migration to living in their SUVs or fleabag motels is ridiculous.

The Worm Turns

John Thain claims that he told Bank of America everything before the merger, and had an agreement in writing to accelerate the bonuses. Bank of America is sticking to its claims that he suckered them. It should be pretty easy to resolve this one: if he got it in writing, produce the document.

In related news, Porter Goss says that members of Congress who are indignantly claiming they knew nothing about waterboarding, etc. were fully briefed. This may explain the lukewarm enthusiasm for a Truth Commission. Question: how do the grassroots supporters of such a commission feel about it if it brings down the Democratic Party? The Democrats who signed off on this are still in power. The Bush administration will be long gone.

Those Swine!

How worried should we be about the Swine Flu?

The mortality in Mexico is shockingly high: 81 cases out of 1300, or about 6%. The great Spanish Flu pandemic, on the other hand, had a mortality of about 2.5%. Normal rates for flu are less than a tenth of 1%, with most of those deaths occurring in people who are already weak: children, the elderly, the immunocompromised. The Spanish Flu hit hardest the 15-34 age group, who seem to have been done in by their own strong immune response. It's not clear which pattern this flu follows.

But mortality is not the only consideration; transmissability also matters a great deal. Something like 25% of Americans ultimately got Spanish Flu. But animal viruses usually aren't that efficient at moving from human to human. And the quicker and deadlier a virus is, the less likely it is to spread--the victims die before they can pass it on.

At first glance, though, this one seems to have gotten pretty good at passing from human to human. A few days after we first hear of it, it's in New Zealand, Hong Kong, Spain, the US. To be sure, we don't have large troop movements from the area of infection, thoughtfully bringing it home with them. Nonetheless, with modern travel, if it is transmissable, it will be nearly impossible to stop. Hong Kong is implementing strong quarrantine measures--but Hong Kong is a small island.

The bright side is that mortality here seems to be a lot lower--nonexistant so far. People living in poorer countries tend to have weaker immune systems for the obvious reasons. And the strain that's arrived here may just not be as deadly as the one still in Mexico.

Still, this seems more worrying than SARS was, and SARS was pretty worrying. And if it gets much bigger, it will deal a heavy blow to an already struggling world economy, because this will have deep impacts on global trade flows.

Car Talk

Two automakers are looking relatively perky these days: Fiat and Ford. Fiat seems set to get a sweetheart deal on Chrysler, courtesy of the US government. Until this week, most analysis has presented bankruptcy as an alternative to a Fiat deal; now it looks like a precursor. The creditors get a deep haircut on their debt, the US government bails out the UAW retirees, and the taxpayers get . . . nothing, not even a complimentary hood ornament.

At least the UAW members vote. I'm having a very hard time figuring out what Fiat has done to deserve this largesse:

Debt holders have expressed agitation about Fiat, itself weakened by the global recession. As designed, the Turin company would get 20% of the auto maker without putting a dollar of its own capital at risk. Fiat's main commitment to Chrysler would be to provide some technology and to share the guts, or "platforms," of certain models.
The U.S. government has already agreed to forgive the $4 billion it lent Chrysler and to inject another $6 billion into the auto maker to finance its possible bankruptcy and operations.
Most important to Chrysler's health, the government has negotiated a deal with the United Auto Workers union that should reduce the company's pension and health-care costs, lifting a burden off the company.
For the lenders, the fear is that Fiat doesn't have enough at stake in the negotiations, given it will likely assume day-to-day control of the company without putting up its own money.
Several lenders said their concern is Fiat will overcharge Chrysler for new technologies or parts, effectively stripping money out of Chrysler over time via technology-transfer agreements. It could also make in-kind equity contributions over time to build up its equity stake if it does decide Chrysler has a future.

The idea seems to be to keep Chrysler operating at all costs--at least until the current administration is safely out of office.

Meanwhile, the folks at Ford have to be awfully glad they didn't take government money. They've apparently gotten quite a brand boost out of it, with a large number of their current customers trading in Chrysler or GM cars for a piece of the company that isn't teetering on the edge of receivership. It's not that Ford's future is necessarily that bright--but taking billions from the government sends a strong signal that there might be a problem with your cars in the future.

De-Stressing

My news feed tells me that stocks are up on the good news from the stress tests. I'm not sure why. It's long been obvious that the stress tests are like those kindergarten field days where everyone gets a prize for participating.

The banks will be fine if the economy is fine, says Treasury. (And the economy will be fine if the banks are fine!) But then there are all those haunting passages in the Monetary History of the United States where they talking about how swimmingly everything was going in 1931 . . . right up to the point where the Second Banking Crisis, suddenly and for no apparent reason, appeared.

Babies: Not Just for Breakfast Any More!

Reader Michelle writes:

It's rather as though someone responded seriously to Swift's "Modest Proposal" by pointing out that eating boiled baby isn't really very good for you anyway. Not only is it obvious that this isn't your motivating objection, but you always run the risk of someone putting out a new study declaring boiled baby "Nature's Most Perfect Food."

In G. K. Chesterton's satirical novel The Flying Inn, there's a chapter mostly about a journalist who thinks in this fashion:

In his early days he had had a great talent for one of the worst tricks of modern journalism, the trick of dismissing the important part of a question as if it could wait, and appearing to get to business on the unimportant part of it. Thus, he would say, "Whatever we may think of the rights and wrongs of the vivisection of pauper children, we shall all agree that it should only be done, in any event, by fully qualified practitioners."

I should say that I don't think you can never mix consequentialist and deontological arguments. But if you do so, you need to be clear that that is what you're doing: say, "I would be against torture no matter what, but . . . ", and you need a better argument than "I've heard dozens of people who agree with me say that torture never works!"

It may be that there is an ironclad argument against ever using extreme interrogation techniques because they're never as effective as some other method, but I haven't seen it. I've seen better effectiveness arguments against recent US policy . . . i.e., we used it ineffectively, too much. But that is not an argument for never waterboarding. It's an argument for making our waterboarding more effective (and don't think I don't see the dim little minds of trolls preparing to quote that out of context.)

The argument for not doing it at all has to rest on proving either that it's morally repugnant, or that there is no way to have an effective waterboarding policy, or that the costs exceed the benefits. Unfortunately, I seem to see too many opponents of current policy simply arguing that it never produces usable intelligence, so everyone else is a big fat moral cretin.

It feels slightly cheap, like supply-siders claiming there are absolutely no tradeoffs whatsoever to cutting taxes. The people who support waterboarding, and the Bush administration, perceive themselves to be wrestling with a genuine moral dilemma: how do you weigh the suffering of suspected terrorists against the suffering of innocent victims of terror? That's not an easy question, and if it were you who were trying to save, say, your child from a terrorist, your attitude about the utter impermissibility of torture might undergo a sea change.

That doesn't mean I agree we should waterboard--people will do lots of things for their children that should not be state policy. Only that some of the people I've heard saying they have to resort to these shaky arguments because their opponents are moral no-shows without a shred of decency seem to me to be awarding themselves vast moral credit for parroting, like a third-grader, the trivial truism that torture is bad. They find it easy to call their opponents immoral because they're ignoring a hard moral question. One that is, of course, easy to set aside if you seize on every piece of evidence suggesting that physical pressure is ineffective, and block out the people saying it's worked.

I'm against waterboarding. It's wrong. The state should not do this, for the same reason the state should not pull the wings off of flies. I've nearly suffocated from an asthma attack, and anyone who thinks it's not so bad is invited to come over to my house for some fun with a 3/4 full bathtub.

But I'm against it with the knowledge that this might, at least in some circumstance, result in some innocent person dying from lack of information. My defense is, first, that it is not okay to do purely morally repugnant things to save people--I wouldn't murder an innocent baby to save 1,000 people, either. And second, that a state which allows itself to do those things will do more harm to more people than any terrorist conceivably could.

As you can see, I do think there are ways to mix consequentialist arguments about the use of torture with the deontological argument about its morality. But I think it's easier to prove empirically that torture gets out of hand--as waterboarding clearly did, even though there's no evidence that the people administering it were specially bad, rogue agents--than that it never produces useful intelligence.

I haven't seen any particularly conclusive evidence either for or against the proposition that torture never generates useful intelligence (though as a practical matter, I can't see how it wouldn't work in some narrow situations where the information you're seeking is easily confirmable.) But also, as I've pointed out, we may well be very close to being able to make torture effective in many situations. If you can tell whether someone is lying by seeing which parts of their brain light up on a scan, then torture is an extraordinarily effective way to get information. Tell me what I want to know, or I will smash your fingers with this hammer. If you lie to me, I will know it, and smash your fingers harder. Some people will hold out, because they can resist pain, just as some people in the medieval era died rather than give their interrogators the satisfaction. But most people will break. If giving their interrogators good, useful information is the only way to make the pain stop, they will make. it. stop.

I don't want to live in a state that does that, for both moral and practical reasons. I think the greatest good for the greatest number lies in having a state that is forbidden to waterboard suspected (or known) terrorists. But I would feel just the same if those waterboardings were producing usable intelligence. And I don't know whether or not they are. So I'd like to keep my arguments to areas where I can make a really strong case.

Fair Pay

One of the dividing lines between me and a lot of the commentators on the Wall Street crisis is that I am not outraged by their pay. If any of my classmates are left on the Street, I'm well aware that they mortgaged their last ten years in order to bet on a directorship that's now at best a badly tainted prize, and at worst just evaporated beneath their fingers. I work 60 to 80 hour weeks doing something I love. They've been working 30-50 hours a week more than that, doing work that no reasonable human being could claim to enjoy the mechanics of. I do not resent the difference between their well-located New York co-ops and my tiny row house in an "emerging" neighborhood in DC. I'm only thankful I'm the one in the row house.

As Economics of Contempt says, this is what builds their outsized sense of entitlement to their compensation:

To me, the former Lehmanite was simply expressing a well-worn sentiment in the financial sector: yes, compensation is extremely high, but it's not like working on Wall Street is all champagne and caviar. The hours are insane, the lifestyle is brutal, the pressure is never-ending, etc., etc.

This, to most Wall Streeters, is justification enough for their exorbitant compensation. I don't buy this argument, but this is the way they think about it. Yves Smith--not one to sympathize with Wall Street, mind you--summed this mindset up well (in what was probably the last thing I agreed with her on):

You do not know how hard you can work, short of slavery, unless you have been an investment banking analyst or associate. It is not merely the hours, but the extreme time pressure. Priorities are revised every day, numerous times during the day, as markets move. You have numerous bosses, each with independent demands and deadlines, and none cares what the others want done when. You are not allowed to say no to unreasonable demands. The time pressure is so great that waiting for an elevator is typically agonizing. If you manage to get your bills paid and your laundry done, you are managing your personal life well. Exhaustion is normal. One buddy stepped into his shower fully clothed.

And exhaustion and loss of personal boundaries is an ideal setting for brainwashing, which is why people who have spent much of their career in finance have such difficulty understanding why their firm and their world view might not be the center of the universe, and why they might not be deserving of their outsized pay.

The difference between me and them is that I don't think they deserve their pay, either. Now it may be that I, in my position as taxpayer, have to continue to pay these guys their huge salaries, because the unintended consequences of trying to regulate their pay will make it harder to get the banking system back on its feet. (It also may not be so--it's an empirical question to which I don't have any good answer). But the bankers genuinely seem to believe that I have a moral obligation to do so, that they are entitled to two million a year, or whatever it is they're pulling down, because they work so hard.

Guess what, honey? You're not entitled. You can do everything right, and the universe doesn't owe you anything. Neither do your fellow taxpayers. If there is any way to save the banking system without paying you $2 million a year, I will do it, not because I hate you and want to rob you, but because I don't want to pay more than I have to. You may have come across this concept in business school. At Chicago, we called it "a market".

The real problem with investment bankers goes deeper, and is the problem of the entire upper middle class: we have come to believe that complying with the rules produces excellent results as by some natural law. In school, if you do your work, teacher gives you an A. It comes to seem like a sort of a natural law: if you have a good education and work hard, the universe is supposed to reward you. After school, the upper middle class gravitates towards careers with very well defined advancement hierarchies: medicine, law, finance, consulting, where this subtle belief is constantly reinforced.

True, a lot of people fall by the wayside in the up-or-out structures of most of the top firms. But that was always true--the whole idea that you deserve to be rewarded for your hard work always involved ignoring the entirely undeserved natural endowment of intelligence and social capital that most upper-middle-class kids are given by their parents. The people who stay in the system and make it to the upper levels do not see it as mostly the product of luck; they view it as the just reward for all their hard work and sacrifices.

I include myself in this group. When I was laid off for a long time in 2002, I felt as betrayed by the universe as if the law of gravity had suddenly ceased to operate. I had worked hard, gone to an excellent business school, and I was supposed to have a job, just as an apple thrown into the air falls back to earth. I was angry, but also deeply shaken, by the notion that I could work hard, do everything right, and still end up unemployed.

We're watching the entire investment banking industry go through what I endured seven years ago. They aren't going to be paid so well in the future, even though they made the colossal mistake of giving up the best years of their lives to the finance industry. It feels--and it is--massively, nearly unfathomably unfair. On the other hand, that's a pretty good description of the universe: massive. nearly unfathomable. unfair.

Just ask any manager at Chrysler with two swell kids and a nice house in a Detroit suburb.

Anyone who has a halfway decent job is incredibly lucky--and yes, journalists and academics, complaining that it isn't fair you don't get paid much, that includes you. If your IQ had been forty points lower, or Mom had been on drugs, or you'd been born in Africa, you'd be spending your days doing hard, disgusting manual labor. The difference in utility between your salary and an investment banker's is trivial compared to the difference in utility between your salary and a Bangladeshi farmer's.

So for all the bankers annoy me, their pay--and its difference from mine--doesn't outrage me. The difference between their pay and that of a physical therapy assistant or an auto line worker doesn't outrage me. No one deserves their pay, so I can hardly be angry at the folks on Wall Street for taking what they could get. And so I wonder why so much of the commentary on Wall Street--not on the pay caps, but just on Wall Street in general--focuses on how much they were paid. Would it have been better if they had only been paid a third, or a tenth, or a twentieth as much? Would that make the recession significantly more enjoyable for the rest of us?

They made colossal mistakes, to be sure. But if you thought that high compensation was supposed to guarantee no errors, I have the same response to you that I have to the bankers: the universe does not owe you anything in the way of guarantees. Besides, their mistakes were no more colossal than those of the homeowners to whom they loaned the money. I don't see why I'm supposed to be angry at either group, or the regulators, or the Chrysler workers. Trying to make as much money as an employer will legally give you, and making mistakes, are neither legal nor moral offenses. Why isn't it enough to say, no, thank you, I'd rather not pay you that much money? Why is it also necessary to hate them?

The Problem of Opportunistic Argument

The other day, I wrote that to argue about the effectiveness of torture is to concede that this argument is relevant to the debate over whether or not we should do it. Conor Friedersdorf disagrees:

That's incorrect. All one concedes by arguing about the effectiveness of torture is that people worth persuading believe -- mistakenly or not -- that utility is a relevant factor. I happen to think that every American who exerts influence on his or her government is a person worth persuading. A mistaken policy like torture is least likely to happen if as large a plurality of citizens as possible think that it's a bad idea, for whatever reason.

In theory this is true. In practice, people who argue opportunistically don't fare well much outside debate tournaments.

In real life, when someone argues that we shouldn't torture, and also that torture doesn't work, and also that torture leads to socialism, their arguments lose force, particularly if they are forced to admit that one of their arguments was wrong. That's because the people you're arguing with care whether torture works, and you don't. They are interested in the factual question of what interrogation techniques produce usable information. You are interested in proving that torture doesn't work as a way of forcing them towards your moral conclusion. They will rightly suspect that your investigation of the factual question is not likely to be of a high quality. And indeed, that is what I find in these arguments: people wildly overstating an at best modest case that torture rarely produces all that much usable intelligence.

Once someone has been through that wringer with you, and you say, okay, well, you're right, I didn't really care whether torture worked, and my arguments weren't very good, but Look! Another argument against torture! . . . well, you've proven that you'll say anything to try to herd them towards your moral conclusion. And also that you're willing to waste phenomenal amounts of time making irrelevant arguments. They will be angry with you, and not particularly inclined to listen to yet another argument.

Acting as if you're persuadable when you're not often seems like an initially attractive way to sucker your ideological opponents into an easy victory. But I've rarely seen it work in practice. Think of the ridiculous debates over breast cancer and abortion, or the rear-guard action against climate-change science. When they conceded, people didn't say, "well, okay, science is hard, it was a mistake, could have happened to anyone." Those arguments severely weakened the credibility of those movements on their issues, and they now have to fight the perception that they are mendacious ideologues who will say anything, no matter how stupid, to win.

PPIPed

Today's the deadline for applying to be one of the five asset managers charged with raising funds for the PPIP--Treasury's public-private partnership program where investors take public non-recourse loans to bet on toxic assets. As predicted, the funds that are supposed to apply are extremely nervous about the executive compensation restrictions, and broader problems of regulatory risk.

Potential buyers of assets complain that, a month after Tim Geithner, US Treasury secretary, unveiled the public-private investment programme, the authorities have yet to reassure them they would not be subjected to draconian Congressional scrutiny.
The Treasury did say that, aside from the small group of asset managers, investors who receive the generous loans available under the PPIP will not have to abide by restrictions on employees' pay imposed on the banks that got funds from the troubled assets relief programme.
Yet some fund managers fear Congress and the government may change the rules mid-course, as they did with Tarp. Wesley Edens, chief executive of Fortress Investment Group, said: "The most important thing for the government is consistency."
Colm Kelleher, finance chief at Morgan Stanley, which is considering buying some of these assets, said this week: "I don't understand what the implications for corporate governance are ... [The authorities] need to be clear what the implications are."

I think it's very clear what the implications are: if you take the King's Shilling, the King gets to micromanage your life. Nor do I see what good it will do to have Treasury clarify its statement. The government is no longer capable of making a credible committment to keep its hands of firms that participate. If the voters decide that you make too much money, Congress will move heaven and earth to take that money away from you, plus some extra money, and maybe they'll deny you permission to build that bathroom addition, too. They also reserve the right to tell you how to run your company.

And in general, I am not against having strings attached to government money. Congress has a perfect right to exercise its prerogratives--but they are, I think, at odds with the goal of getting experienced managers to donate some money and a great deal of time to pricing all these bad assets. I think any rational manager right now would note that the better this deal turns out to them, the more likely they are to have a congressional committee breathing down their necks, bad-mouthing them to the press, and working overtime to tax away any profits. The upside seems limited. Even JP Morgan and Citi, which ALREADY have oversight busybodies watching their every move, are declining to participate.

Chrysler Headed for Bankruptcy?

The New York Times says that Treasury is preparing a bankruptcy filing for the automaker. After failing to get the bondholders to make concessions, the government is stepping in to guarantee the workers' pensions and retiree health care benefits. This will be very expensive, and it hardly seems fair to other workers whose pensions aren't guaranteed. On the other hand, it beats bailing out the bondholders, and whatever you think of the unions, leaving members who were promised pensions high and dry isn't particularly fair.

It's possible, of course, that this is just a negotiating tactic--but I don't see what the tactic is. The government wants to salvage as much value as possible for the workers. As long as they're trying to save UAW jobs, the bondholders will always be able to get a better deal in bankruptcy, because the UAW is paid well above the market rate for its work, and has huge legacy costs that would be written down in a liquidation.

Meanwhile, a blast from the past: remember Chrysler's last brush with bankruptcy?

Ken Lewis: Paulson Made Me Do It!

The accusations released by Cuomo are certainly explosive: Ken Lewis claims that Paulson basically forced him to buy Merrill without disclosing its problems to shareholders. If it hasn't, Paulson would have sacked him and his board. Paulson confirms this, but claims that this was because Fed analysis showed that Bank of America had no grounds to back out of the deal. The Fed is, thus far, silent.

Thoughts:

I'm sure that Paulson and Bernanke made this threat. I also think they thought they were acting in the best interest of everyone, possibly even including Bank of America shareholders. Further, I think they may have been right. Lehmann's demise was catastrophic enough; a second investment bank failure immediately on its heels might have made the disaster ten times worse.
But of course, there's no way to run the counterfactual. This is deeply troubling, both because of the lack of transparency, and because a CEO was forced to screw his own shareholders. But I'm not sure what would make it better. If you have regulators, they have the ability to threaten their regulated companies outside of the public limelight. Many of the things they make CEOs do will be against the interests of shareholders--witness the games the regulator has been playing with Fannie Mae and Freddie Mac's accounting.
The political fallout will be limited unless Geithner is somehow involved in this mess. But since Geithner was then the president of the New York Fed, that's not entirely out of the question.
Bernanke can probably count on not having a second term. That's no criticism of Bernanke--what has been done, what may well have had to be done, has been unpopular. I don't see Obama displaying that kind of loyalty to someone he didn't appoint.

Annals of Advertising: The Teeny Boppers Retire

Those of you who are my age may remember the Patty Duke show from when you were home sick:

It seems the Social Security Administration is using Patty Duke to advertise its online services:

There are five videos in all.

I have to say, even I find it a little creepy to imagine those perpetual teenagers retiring. I can only imagine how it feels to someone who was an actual teenager when the show aired.

Fiat Goes Big

Fiat had its earnings call today. We've got more details on its plan to buy a 20% stake in Chrysler, with an option to increase that to a majority stake if Chrysler gets its act together. Meanwhile, the company is in talks to possibly buy a stake in Opel, GM's European car manufacturer. The company aims to triple its car production in order to make itself more competitive in the global marketplace.

It's not clear to me that Fiat has the managerial capacity to make that happen--that's a big move to be making in a collapsing market (and moreover, one which isn't likely to improve any time soon--if the global economy recovers, that will just push oil prices higher. A stake in Chrysler will not be helped by such a movement.) But this is how global automaking overcapacity will be reduced--one dubious merger at a time.

Does Torture Work?

I've long said that we shouldn't waste time arguing that torture doesn't work. For one thing, the evidence for those arguments seems empirically shaky, especially since many people employing them insist on arguing that torture basically never works, rather than that it doesn't work very often and therefore has a bad cost-benefit ratio. For another, arguing that something doesn't work isn't necessarily an argument for not doing it--it could just as easily be an argument for improving our technique. And if advances in brain scanning research let us develop a reliable lie detector, as seems possible in the relatively near future, then torture will work very, very well.

If that happens, we're in a nasty spot. Most people who make this argument do not, in fact, care whether torture works. They would still be every bit as much against it if waterboarding worked perfectly. Yet when they argue about whether torture works, they're conceding that torture's effectiveness is relevant to the question of whether or not we should engage in it. That implicitly means that if torture becomes nearly perfectly effective, they should change their minds--otherwise, it's not a relevant criteria. So if we get that lie detector, they have to explain why we still shouldn't use this very valuable interrogation method--or confess that they're basically opportunists who will say anything that might advance the case. This will make it somewhat harder to convince people to listen to their other, better arguments.

Thus I think it is much safer to keep arguments about torture on solid moral ground: we shouldn't torture because it's wrong.

On the other hand, Jim Manzi offers a different empirical argument. It's anecdotal, but appealling:

Let's assume arguendo that torture works in the tactical sense that I believe has been used so far in this debate; that is, that one can gain useful information reliably in at least some subset of situations through torture that could not otherwise be obtained. Further, assume that we don't care about morality per se, only winning: defeating our enemies militarily, and achieving a materially advantaged life for the citizens of the United States. It seems to me that the real question is whether torture works strategically; that is, is the U.S. better able to achieve these objectives by conducting systematic torture as a matter of policy, or by refusing to do this? Given that human society is complex, it's not clear that tactical efficacy implies strategic efficacy.
When you ask the question this way, one obvious point stands out: we keep beating the torturing nations. The regimes in the modern world that have used systematic torture and directly threatened the survival of the United States - Nazi Germany, WWII-era Japan, and the Soviet Union - have been annihilated, while we are the world's leading nation. The list of other torturing nations governed by regimes that would like to do us serious harm, but lack the capacity for this kind of challenge because they are economically underdeveloped (an interesting observation in itself), are not places that most people reading this blog would ever want to live as a typical resident. They have won no competition worth winning. The classically liberal nations of Western Europe, North America and the Pacific that led the move away from systematic government-sponsored torture are the world's winners.
Now, correlation is not causality. Said differently, we might have done even better in WWII and the Cold War had we also engaged in systematic torture as a matter of policy. Further, one could argue that the world is different now: that because of the nature of our enemies, or because of technological developments or whatever, that torture is now strategically advantageous. But I think the burden of proof is on those who would make these arguments, given that they call for overturning what has been an important element of American identity for so many years and through so many conflicts.

MBAs return to their roots

The Wall Street Journal reports that MBAs, unable to find the lucrative jobs in consulting and finance that they paid big bucks to access, are going back to whatever it was they used to do. That's what happened to my class in 2001--though not to me, because I'd come from the one field, technology consulting, that was doing worse than finance or management consulting. I did sniff around to see if there were any jobs available, but as one recruiter pointed out, my skills were two years old, and the market was glutted. "Find a nice guy," he advised, "and have his babies."

But even those who can return to the mother ship are usually more than a little embittered by the experience. Most people get an MBA because they want to switch fields. Paying $80-$100,000 for a promotion is a pretty hard pill to swallo.

Freddie Mac CFO commits suicide

The acting CFO of Freddie Mac has been found dead in his basement, an apparent suicide. He's one of the executive team who has been clashing with regulators over how much to disclose about the ways the government has been running the company for its benefit, rather than that of the shareholders.

The pressure of his job, the public spotlight, and the clashes with regulators probably contributed to this. But there's no reason to blame either the regulators, or some dark scandal, as I imagine some commentators will try to. Kellerman wasn't tainted by the entity's earlier problems, and you don't commit suicide because you're mad at regulators. You commit suicide because you have deep mental health issues.

Still, this isn't exactly going to make it easier to put Freddie Mac back together. It's an institution with deep problems that seem to be getting worse, rather than better.

TARP Cops

As head of the TARP Congressional Oversight Panel, Elizabeth Warren has massively extended her mandate, using the office as a sort of forum for broad-ranging commentary on the financial crisis. Rather than tracking the expenditure of the funds, she's increasingly using the oversight board to push her own ideas about what should be done with the banks.

This is wildly inappropriate. Elizabeth Warren knows a lot about bankruptcy--but just because it has the word "bank" in it, doesn't make her an expert in banking. Her specialty isn't even in corporate liquidations; she mostly writes about consumer bankruptcy. The highly specialized world of bank resolution is not one where she has, as far as I can tell, very much expertise.

Moreover, this isn't her job. Her job is to watch where the TARP funds go and monitor their effectiveness, not lecture Congress on how hard to punish wayward bank executives. This Forbes column is scathing:

There are indeed very good lessons to be drawn. There has to be a process to decide which institutions are solvent. One needs an orderly process for dealing with those that are insolvent, particularly if they pose systemic risk. It is unproductive to prop up "zombie" banks. And so on. Most important is to understand why certain policies worked as well or as poorly as they did and what the long-term consequences were. This kind of analysis is largely lacking in the panel's reports.
But the Congressional Oversight Panel Report seems to have come to a more controversial conclusion. The COP argued that historical lessons show that the most effective response to banking crises has involved a combination of ousting "failed management" and liquidating banks. The April report takes on the Treasury's responses in these areas and questions how effectively it has implemented its goals in dealing with the crisis.
The report essentially argues for nationalization on the grounds that, under government reorganization, bad assets can be removed, failed managers can be ousted or replaced and business segments can be spun off from the institutions. "Depositors and some bondholders are protected, and institutions can emerge from government control with the same corporate identity but healthier balance sheets," the report argues, parroting a position that has been staked out by many prominent economic pundits.
Clearly, this is Elizabeth Warren's particular crusade against the banks, since a majority of panel members dissented from the direction the report took and two refused to sign off on it at all. Her letters to Secretary Geithner and Chairman Bernanke stop just short of attacking them for trying to restart the market for asset-backed securities. These markets have been an important part of the financial intermediation system for decades, funding student loans, consumer credit and small businesses. But Professor Warren has had a long-standing antipathy to consumer credit markets.
The sad thing is that the COP now seems completely politicized and fractured at a time when there are important questions to be asked. There is plenty of room for thoughtful analysis of the stress tests. For example, how do accounting rules and the evolving economic contraction affect their validity?

We seem to have lost an oversight panel, and gained another voice shouting slogans at congress.

The Price of PPIP Participation

Looks like firms that participate in PPIP (the Treasury program establishing a public-private partnership to buy toxic assets) may be subject to executive compensation caps after all. Treasury had said they wouldn't be, but it sounds like their lawyers have informed them otherwise. The Economist thinks this is the end of PPIP. Ryan Avent is not so sure:

Most of the the big banks are already subject to the limits based on other TARP money they've received, and the ones healthy enough to pay those loans back are also least likely to need to get rid of their bad assets. And with stress test results soon to be in hand (along with increased equity stakes, one suspects) the government will have as much leverage over potential participants as ever. What will be interesting to learn is whether the limits will apply to the fund managers and non-bank investors (and whether they'll be able to find ways to get around the rules).

This is an interpretation problem with the article. Ryan thinks this means that banks that sell assets will be subject to caps; the Economist blogger (I think) is reading the article to imply that banks that buy assets will fall prey. The article seems to me to support the Economist's reading--they're also talking about capping salaries at Bank of New York because it's administering the consumer loan program. But it's ambiguous, and I don't think we can say either way until the actual report comes out.

Clearly, if there are pay caps on the investors, PPIP is dead. And even if there aren't, I'd say the likelihood that a given firm will participate has just declined substantially. There is clearly enormous regulatory risk for anyone who chooses to get involved with any of these programs.

How Big is a Budget Number?

Greg Mankiw was unimpressed by Obama's command to cut $100 million from discretionary spending. Stan Collender says wait a minute:

Mankiw said that $100 million out of a $3.5 trillion budget is insignificant. That's true, but the cuts aren't coming from the whole budget; they're coming from the much smaller part of "discretionary spending," that is, the parts of the budget that the members of the cabinet actually control. This excludes interest on the debt, Social Security, and things like contracts from prior years that, if cancelled, would actually cost the government money.

In fact, about two-thirds of the budget should be excluded from Mankiw's calculation for this reason.

Okay...you say that $100 million is still a virtually insignificant part of the $1.2 trillion or so of what's left. True, but a little more than half of that is military spending which, inspite of what you may have heard, the president has proposed to increase next year by 4.1 percent. That means that the cuts the president ordered have to come from about $500 billion rather than the $3.5 trillion Mankiw uses to make his point.

$100 million is still a relatively small percentage of $500 billion. But it's not even close to being as unimpressive as Mankiw wants us to believe.

Items:

$100 million is .02% of the smallest figure Collender can come up with. Imagine you are an average American household pulling in about $60,000 a year. 0.02% of your income is $12. It's like trying to solve your budget problems by cutting out 3 lattes a year, or skipping a single Date Night at the local McDonalds.
$100 million is approximately 30 cents for every man woman and child in America. It is a rounding error on the taxes of even the poorest families.
We could have achieved this same massive cost savings by asking every Federal Civilian Employee (Excluding Post Office) to take a pay cut of $1 a week.

I take the broader point that the president doesn't have that much discretion over spending. On the other hand, since the president is proposing to increase spending, both mandatory and discretionary, by quite a lot, my sympathy to this argument is limited. And just looking at the numbers he does control, I'd say this is very, very close to being as unimpressive as Mankiw wants us to believe.

Don't Let the Bedbugs Bite

This Reason Foundation blogger makes fun of the Federal government for hosting a national bedbug summit.

The U.S. Environmental Protection Agency recently hosted its first-ever National Bed Bug Summit. And, as the AP article reports, Rep. G.K. Butterfield (D-NC) is planning to reintroduce legislation to "expand grant programs to help public housing authorities cope with infestations." The bill will be called the-- I kid you not--"Don't Let the Bedbugs Bite Act."
It seems that the real bloodsuckers are the politicians and bureaucrats in Washington wasting taxpayer money on such programs. Then again, wasn't it the Founding Fathers who said that "all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness--and the Freedom from Bedbugs"?

I know I'm a squish, but isn't this the sort of thing that governments should do? Pest infestations are genuine public health problems--the kind where your tolerating a bedbug infestation means that I might end up with critters. Indeed, I'm stalking a mouse right now that seems to be feasting in the neighboring row house, then coming over to our place to sleep. Public health has made titanic achievements in sanitation, under which rubric pest infestations fall, and even most libertarians recognize this.

Maybe you don't think we ought to have public housing. But as long as we do, isn't it a good thing that we're trying to keep it from being the epicenter of a bedbug epidemic?

Blogging For Big Bucks

Like basically every other blogger whose seen it, I think this article from the Wall Street Journal on how hundreds of thousands of bloggers are making solid incomes is addled.

The best studies we can find say we are a nation of over 20 million bloggers, with 1.7 million profiting from the work, and 452,000 of those using blogging as their primary source of income. That's almost 2 million Americans getting paid by the word, the post, or the click -- whether on their site or someone else's. And that's nearly half a million of whom it can be said, as Bob Dylan did of Hurricane Carter: "It's my work he'd say, I do it for pay."

The estimates of professional bloggers seem wildly inflated--if you help update the company blog once a week as part of your marketing internship, you are not a paid professional blogger. And the numbers they themselves link to tell a much different tale from the article: most blogs bring in pitiful amounts of money for their owners.

This seems to follow the model of Mark Penn's book: find some bizarre number and mindlessly extrapolate it to an absurd conclusion. Yet I still don't understand why common sense did not keep him from publishing this article. Anecdotal evidence would suggest that almost all of us know many more computer programmers than professional bloggers--this is true of me even though I am a professional blogger, as are half my friends. Or he might have called some professional bloggers, who would have (sorrowfully) told him that no one is making $75K a year off of 100,000 pageviews a month, that being about how much traffic I pulled when I was starting up in 2002. Or, hell, he might have noticed that in the very BLS survey so nicely transformed into a table for his article, there is not entry for "blogger"--but that if you add up every writer, reporter, editor, PR person, technical writer, or "media and communications worker, other", there are only 499,890. Since Penn says that there are 452,000 paid bloggers, this implies that 9 out of every 10 communications workers are professional bloggers.

There may be one guy with some incredible niche--or moronic employer--making a ton of money with a modestely well-trafficked blog. But the plural of "anecdote" is not data.

Believe me, I'd love to think that blogging is a surefire path to riches and job security--but I'm afraid all most people get out of their blogs is the satisfaction of a job well done.

Mad Ireland

I have to say I'm kind of surprised by Paul Krugman's column today, where he diagnoses Ireland's current troubles as a mad rush into unregulated financial markets, and warns that we may suffer the same fate.

Ireland's problems are, to be sure, large--and to some extent, a rebuke to conservatives who liked to wave it as an example of supply side economics. Ireland's low corporate income tax rate did spur massive growth in the country, but this was at least as much because it made it an attractive place for eurozone countries to locate as from any impact on capital formation. The mad rush to Irish backoffice played havoc with national accounts--Ireland's Gross Domestic Product was significantly larger than its Gross National Product, which is not usual for developed countries. And it turned the whole economy into a volatile mirror of the world economy. When world GDP grew, Ireland's grew faster. When world GDP shrank, Ireland raced towards the bottom.

The problem of the banking system are large, but they are the problems of a small country that is tightly integrated with big neighbors. We are not going to have that problem--we're the neighbors. Moreover, the particular problem that Krugman describes, of their treasury having to massively tighten its belt in order to preserve the banking system and its credit ratings, is related not just to the size of the country (and its economy) but the ratio of bank assets to GDP. This table is a little dated, but it illustrates the problem well enough. By the time of the crisis, bank assets in America just about equalled GDP. In much of Europe, including Ireland and Iceland, they were 3-5 times national output.

Which just points up how little this crisis seems to be associated with any particular regulatory change, or "free market ideologues" in the government, or even housing lending--Austria is about to topple because of its massive exposure to Eastern Europe. And though you'd never know it from listening to most of the commentary, we're weathering this crisis better than many, even most, more statist countries--even Canada may suffer worse than we do, because their economy is so exposed to our importing appetite. When you look at how countries are performing in this crisis, what seems more relevant than a free market government is how big your country is, and how dependent it is on the global economy. On both metrics, we're actually in pretty good shape

Did Chrysler Execs Tank the Company Over Compensation Fears?

The Washington Post is reporting that Chrysler executives turned down a cheap government loan and opted to use more expensive private financing rather than accept the new limits on executive pay. This seems, to say the least, extremely odd. After all, the Chrysler executives are already at considerable risk of having no pay at all. Why make that outcome more likely? It's not very probable that their golden parachutes will survive bankruptcy intact.

The only possible logic I can see is that they were worried that the limits would make Fiat skittish about a deal. Which doesn't seem crazy--the US government is getting less and less friendly towards companies that take its money. (As perhaps it should.) But then, there's also simple stupidity and greed, which should never be ruled out as a possible explanation.

On the other hand, this has the feel of a targeted administration leak. It's pretty clear that the administration is frustrated by having to negotiate with unwilling partners, and the restrictions imposed on Congress are making them even more unwilling. The leak advances the narrative they've constructed of greedy executives standing in the way of Worthwhile American Initiatives. So it's worth taking this fairly explosive accusation with a grain of salt.

Financial Journalism Shut out of Pulitzers

No, seriously. Two sex scandals (Spitzer and Kilpatrick), wildfires, immigration enforcement, OSHA violations . . . but I guess no one was writing anything interesting about finance. Oh, hell, I have to concede, it was a quiet year for those of us on the finance and economics beat, with no big stories to grab a Pulitzer Committee's eye. But I feel like they might have thrown us something.

Seriously, though, I have to wonder if this isn't an education problem. The Pulitzer committee doesn't want to get caught in an embarassing error, implicitly endorsing a theory that turns out to be wrong. Neglected children are comprehensible, and everyone agrees that they're terrible, so they make great Pulitzer fodder. Credit default swaps are trickier. Why take the risk?

Question of the Day: Bank Robbers!

Reader Ben writes:

How has it been lost on people that Citi's new CFO (Ned Kelly) has the same name as an infamous Australian bankrobber?

I don't know, but what once was lost, now is found.

No Parting from TARP

I've been expecting this for a while: Treasury isn't going to let the banks pay back TARP money unless it damn well feels like it.

I'm not clear what the point is. At this point, everyone knows which of the systemically important institutions can probably repay the money, and which of them can't. Perhaps the idea is to keep Goldman from carrying out its purported plan to bust the compensation caps and thereby poach top talent from the other firms.

On the other hand, this seems certain to discourage financial institutions from participating in any future Treasury programs. Once you take the King's Shilling, apparently you've enlisted for life--and your Congressional drill sergeants reserve the right to change the rules of your employment at will.

Pity Party

I haven't been a big booster of the tea-parties. Hell, I haven't been a small booster. I think that protests and street theater are, while a sacred civil right, usually counterproductive. And I don't have much sense of identification with either the right wing grass roots, or the organizers.

But the left wing response to the tea parties is stirring my sympathy.

People are calmly assembling in the public square, waving barely legible signs, delivering stilted speeches, and cheering at each other. The wave of vitriolic contempt, nay rage, that this has unleashed is wholly inappropriate. The federal government is ratcheting up spending to massive levels, with no corresponding plan to pay for it. Even taking out the stimulus, Obama's projected deficits outpace Dubya's for the next decade.

You may think that the programs are worth the price. But dissent from that view is not unreasonable. And given that there is little representation in Congress for their views right now, the dissenters can be forgiven for taking (extremely politely, AFAICT) to the streets in an attempt to make their views heard. Whether the topic is war or taxes, telling honest citizens to shut up and do what the government tells them is not the act of a sound democratic society.

(Full disclosure: as I've mentioned, before we dated, my boyfriend worked for Freedomworks. Freedomworks is one of the organizers of the tea parties, though not, as some would have it, a shadowy secret organizer--it's on the front page of their website. Neither Peter nor I have now, nor ever have had, any involvement with the tea party movement, though some of our friends have organized and attended them.)

A new cure for high blood pressure

Apparently, Dana Milbank keeps his down by torturing cats owned by his web commenters. Could this really work? Also, how many of you have cats I could borrow?

Are Tiny Cars Unsafe?

There's been a lot of chatter around the blogosphere about the Institute for Highway Safety's report indicating that mini cars fare worse in car crashes than larger vehicles. This is not exactly news--conservative pundits, and the laws of physics, have been making this point for decades.

This reaction from Michael O'Hare is about typical of the forceful response this drew from proponents of higher fuel standards:

The facts behind the story are that in a collision between a big car and a little one, the little one will be much more damaged and the people inside more hurt. Now you might think this could be thought of in more ways than one, for example that people who choose to drive big cars are putting others at risk, kind of like people who have large vicious dogs, or smoke in bed in apartment houses, or open their car doors without looking back to check for bikes.

. . . Excuse me: why is oversizing and up-weighting not the behavior associated with an increase in deaths on the highway? Why is the "standard" car the fat, thirsty, heavy vehicle of the reckless and self-indulgent? The excess injuries are associated with different sized cars, not small cars; why is the IIHS blithely fomenting an arms race for bigger cars, instead of demanding much higher premiums to insure the road yachts that put sensible people at risk for doing the right thing?

But this is not true, at least according to the IIHS. The IIHS is, of course, a corporate funded organization--but it's funded by insurance companies that don't like paying accident claims for severe injuries and deaths. And what the report says is that small cars fare much worse than mid-sized cars, not in collisions with hummers, but in collisions with Honda Accords and Toyota Camry's. They also do worse in single car accidents.

The death rate per million 1-3-year-old minis in single-vehicle crashes during 2007 was 35 compared with 11 per million for very large cars. Even in midsize cars, the death rate in single-vehicle crashes was 17 percent lower than in minicars. The lower death rate is because many objects that vehicles hit aren't solid, and vehicles that are big and heavy have a better chance of moving or deforming the objects they strike. This dissipates some of the energy of the impact.

Some proponents of mini and small cars claim they're as safe as bigger, heavier cars. But the claims don't hold up. For example, there's a claim that the addition of safety features to the smallest cars in recent years reduces injury risk, and this is true as far as it goes. Airbags, advanced belts, electronic stability control, and other features are helping. They've been added to cars of all sizes, though, so the smallest cars still don't match the bigger cars in terms of occupant protection.
Would hazards be reduced if all passenger vehicles were as small as the smallest ones? This would help in vehicle-to-vehicle crashes, but occupants of smaller cars are at increased risk in all kinds of crashes, not just ones with heavier vehicles. Almost half of all crash deaths in minicars occur in single-vehicle crashes, and these deaths wouldn't be reduced if all cars became smaller and lighter. In fact, the result would be to afford less occupant protection fleetwide in single-vehicle crashes.
Yet another claim is that minicars are easier to maneuver, so their drivers can avoid crashes in the first place. Insurance claims experience says otherwise. The frequency of claims filed for crash damage is higher for mini 4-door cars than for midsize ones.

The outrage at the Times is not reality based. Small cars simply are not as safe as bigger cars, and they can't be made safer by yelling at people who insist on believing in the laws of physics.

I say this as the proud owner of a used Mini Cooper S. I was aware when I bought it that it was not as safe as owning an SUV. Like the hippie environmental whacko moralist I am, I believe that I have an obligation to drive the smallest car possible, when I drive, even at some extra risk to myself. I also like the gas mileage, the extreme ease of parking, the turn radius, and, yes, the styling. Life is full of tradeoffs.

On the other hand, I live in a city, and do most of my driving at speeds well below lethal. My bullmastiff does not require a carseat. And my recently formed household includes (rare for DC) a second car, a midsized sedan that can be used for highway driving. It's not as if I've really leaned into the strike zone to take one for the team.

As long as Americans insist on having children, and those children are legally required to spend their prepubescent years in some elaborate safety contraption, American cars aren't going to get much smaller than an Accord. And those Accords will continue to pose a mortal threat to those of us who drive smaller cars.

This is a real problem for proponents of higher fuel economy, not to mention the manufacturers of small cars. Cheap, fuel efficient cars are more dangerous. Even hybrids rely at least in part on making the car lighter. On the other hand, running a massive uncontrolled experiment on the global climate seems kind of dangerous too.

A close brush with almost-notoriety

A friend informs me that on my favorite ever television show, The Wire, one of the main characters was originally going to be named McCardle.

Quote of the Day

Jim Manzi:

In the early 1990s I had negotiated a transaction with a fabulously wealthy Hong Kong property entrepreneur. After the deal was closed, we were out on his yacht in the harbor, and he began to grow a little wistful - which, in my limited experience, is a pretty rare state of mind for a Chinese magnate. He told me the story of coming to Hong Kong as a child. His family was travelling illegally by foot through southern China in the attempt to get to Hong Kong and freedom. They had to travel at night to avoid arrest. That part of China in those days was mostly dark at night, because so little of it was electrified. So they navigated by looking for the glow on the horizon and walking toward it, knowing that it had to be Hong Kong.
Hong Kong was once a light in the darkness. Increasingly, it's just another city in a rapidly-developing China.

Read the whole thing.

Chrysler Negotiations Going Nowhere, Slow

The government is trying to play hardball with the Chrysler creditors, asking them to accept 15 cents on the dollar when they're likely to get more in a liquidation. That's not a haircut; it's more like what they do to you the first day of boot camp.

The sweetener? There is none. The banks are supposed to make this touching gesture out of the goodness of their hearts. If they can still find them down in the vault where they put those useless organs away for safekeeping thirty years ago.

This seems . . . odd. Of course, the four biggest creditors are banks who accepted TARP money: Goldman Sachs, JP Morgan, Citigroup, and Morgan Stanley. But the government has apparently, so far, not attempted to use that stick to make demands. The article hints that this is a surprising act of forebearance, but of course two of those banks are already rushing to give the money back, and the government presumably does not want to encourage more banks to follow suit.

Andrew Samwick says that "socialism is starting to seem a more and more apt word to describe what our government is doing:

I don't care a whit about sparing these firms from the consequences of their decisions. I do care about the power grab by the executive and legislative branches of government that their dilapidated condition is enabling.

People complain that the word "socialist" is being inappropriately used to demonize attempts at restoring economic growth. That may be true in many cases, but how is the label not valid here? Government officials are making decisions about how to direct the means of production. And they are doing so without prior authorization or agreement and with the goal of sustaining employment in undproductive pursuits. What else would you call it? Some days it seems like the only things missing from this picture of collectivism are the the guns pointed at the citizens and the widespread starvation. But I suppose we are still at the beginning of this process.

But that doesn't seem quite apt. The government isn't actually forcing companies to give Chrysler resources; they're asking. And not very impressively, either. Presumably they'd like to be more socialist, but lacking the power, they're reduced to making strident demands and lame appeals to the bankers' better natures. It's like watching a newbie substitute teacher try to bring first period arithmetic to order.

It's especially poignant because very few people outside of the labor movement think that costing shareholders $7 billion in order to continue making cars that don't sell well is much of a public service.

I don't expect that the government has much more hope than that first grade teacher. But they have to go through the motions.

EPA to Attack Global Warming?

Apparently the EPA is, for the first time, clearing the way to regulate greenhouse gasses under the Clean Air Act. This has potentially far-reaching implications, particularly with a Democratic president and congress. Cap and trade regulation is bound to be extraordinarily unpopular, and the party that passes it is going to have some 'splaining to do when voters notice higher charges on their electricity and gas bills. But if the EPA concludes that it already has the authority to regulate carbon, all the part in charge has to do is . . . nothing. That won't be popular if energy prices are rising, but it's not nearly as politically tricky as actively making people pay more for energy.

Open Music Thread

My emusic downloads are about to roll over, and I haven't had time to listen to a new band in months. What should I download?

Video Game Sales Fall in March

Walking through Costco last weekend, I saw something shocking: Wiis and Wii Fits on sale. Costco doesn't usually get merchandise that's hard to obtain--why would Nintendo discount game consoles that stores can barely keep in stock? (And indeed, the discount was underwhelming--about $5).

But it turns out that video game sales are off across the board.

Among gaming hardware, Nintendo continued to rule the industry with the Wii, which sold 601,000 units. The company's handheld DS sold another 563,000 units.
However, sales of the Wii slipped 20% from the previous month. The XBox 360 fell only 15% from the previous month, while the PS3 fell only 7%. The 360 sold 330,000 units while the PS3 sold 218,000 units.
"If there was one area that surprised me this month, it was hardware sales," Ms. Frazier said. "While it's not unusual for March hardware sales to be lower than February, I thought we'd see higher unit sales on most platforms."

There weren't many new products on sale in March, it's true. On the other hand, video games seem like one thing that ought to be countercyclical: the games are expensive, to be sure, but if they substitute for going to bars, concerts, or sporting events, they ought to pay for themselves quickly. I'm beginning to suspect that all of those people not patronizing restaurants are just . . . sitting at home talking to each other, or something.

Do We Hate Credit Default Swaps for The Wrong Reasons?

There's a lot of crazy ignorant hating on CDSs out there, especially from certain political journalists who displayed no interest in learning about the financial community until they found that pronouncing the words "credit default swaps" in a sneering tone made them seem extraordinarily wonky and profound, particularly to themselves. Credit default swaps have been indicted in so many of our national ailments that I have begun to wonder if those people do not curse credit default swaps when they stub their toes or find that the milk jug is empty again. Credit default swaps certainly caused AIG to fold, and they've undoubtedly made all manner of things worse, but giving them single-handed credit for the financial crisis is like blaming Italy for World War II.

But there are legitimate reasons to worry about the growth o the CDS markets, regulatory arbitrage first among them. And now here's another possible reason: they may be making it harder for firms to restructure short of bankruptcy:

This week, mall operator General Growth Partners (GGP) and newsprint maker AbitibiBowater both filed for bankruptcy, after failing to persuade bondholders to restructure voluntarily.

Now lawyers involved in these bankruptcy proceedings tell the Financial Times that the credit default swaps are the problem -- mainly, bondholders who have purchased CDS on this debt have little incentive to negotiate or play ball, since the CDS, if the counterparty honors the agreement, makes them whole.

. . .

If it is AIG [on the other end of the swap contracts], it means our bailout is pushing companies into bankruptcy that might otherwise be able to restructure.
Note that this has been alleged before, though previously with GM's ongoing failure to get its bondholders to exchange debt for equity. Now those involved in actual bankruptcies are citing it as a problem.

This is very troubling. We know from mutliple economic studies that systems that are too creditor-friendly have lower rates of entrepreneurship and innovation. We all have a vested interest in forcing creditors to the table short of liquidation (though to be fair, in this particular case, my sense is that the bankruptcy is expected to result in a reorganization, not a liquidation). Perhaps swap contracts should allow the issuers to get involved in these negotiations, the way insurance companies sit at the table during lawsuits.

In Search of the Perfect Pension

Naked Capitalism guest-blogger Leo Kovilakis continues to blog up a storm on the problems of state pensions. He aptly points out all the risks of a defined-contribution plan. But in my opinion, he doesn't go nearly far enough.

Kovilakis says:

Someone wrote me that defined-contributions are the future and that "people must assume responsibility for their financial health as well as their physical health. We cannot expect the government to take on such responsibilities because that is not the way evolution (real world) works."
But as I have written before, the shift to define-contribution (DC) plans is not the solution. Most people cannot deal with the stress of investing their own money or selecting between funds that are offered to them. It is important that people start doing their own due diligence and build up some knowledge on investments, but the reality is that most individuals cannot handle these responsibilities.
This is why I recommend we scrap private pensions altogether and create several large public defined-benefit plans that are capped at a certain size. These funds would follow the highest standards of governance and they would be managed by professional money managers whose interests are aligned with their stakeholders and pension beneficiaries.

In my opinion, this ignores the 800 pound gorilla in the room: pensions never work very well. Not for individuals, not for companies, not for the government. Predictions are hard, especially about the future--and predicting what you'll need forty years off is a fairly unhealthy activity. Who knew my English degree would actually turn out to be an investment good rather than a consumption good?

Everyone is very good at picking out the flaws in the pension systems they don't like. Basically, there are three entities who can save for your future:

You
Some company
The government

Liberals are very good at pointing out why you are not very good at saving for your future: you are not an actuarial universe. If you make the mistake, as my mother did, of retiring into the teeth of a financial crisis, you will find your life savings sadly depleted. Also, since you probably have some skill other than being a professional financial planner, you may make stupid decisions, and/or get bullyragged into one by a dishonest broker.

Liberals tend to prefer "your company" to "you", but many recognize that companies are also problematic, because if something goes wrong with the pension fund, employees can be left with . . . well, if not "nothing", certainly "a lot less than they expected". Sound financial planning dictates that your retirement and your paycheck should not both be dependent on a single company--which is why everyone tells you not to put your 401 (k) into your company's stock.

That's why we need the government to save for us! Conservatives have this taped: the government is also terrible at saving.

The idea that the government can handle pensions for those who lost money in a financial crisis has a major problem: in financial crises, all correlations go to one. GM's pension fund isn't in trouble because the managers were venal or stupid; their management seems (at least from the thin information available) to have been a model of sensible financial theory. The problem is, the price of virtually every financial asset except US Treasury debt has plummeted.

Would a government fund be any better? Er . . . look at the state of state pension funds. They're often worse, because the private pension funds (now) have the government to sit on them and make sure their assets bear at least a theoretical relationship to their eventual liabilities. The government is rather too inclined to cut itself slack on that necessity.

Of course, maybe we should just have people pay out of current tax dollars. That avoids the asset problem, but introduces another one. Remember, in a financial crisis, all correlations go to one. That means tax revenues, too. Any potential source of funding for retirement will be severely undercut by a financial crisis.

And a PAYGO system (which is what we call this sort of tax-payer financed quasi-transparent Ponzi scheme) just ups the government's incentive to promise now and figure out how to deliver later. When you are supposed to be accumulating assets to cover your liabilities, you are at least forced to assess the cost of new liabilities against the political benefits of new promises. With PAYGO . . . well, anything paygoes, as it were. That's why all the changes to Social Security and Medicare go in one direction: increasing them.

PAYGO also provides the illusion of saving without the actual saving. Private saving (in which category I include government pension funds) gets invested. PAYGO receipts are lent to the government and fund current consumption. Some of those sums are at least arguably spent on things that make the economy more productive, and thus make us better able to pay benefits in the future . . . but when you look at most of what government revenues are spent on, it is not possible to argue that this is true in aggregate. Benefits for retirees and aircraft carriers may be morally wonderful, but they do not much boost our productivity.

That means that, as we're now seeing with state pension funds, there's a risk that someday, some peoples' benefits will have to be cut--which means that we will have encouraged people to save less than they ideally would, if they hadn't been expecting better health care or pension benefits.

There is no entity that is capable of ensuring that everyone can consume a serene twenty or thirty years of leisure at the end of their lives. And we may be making people worse off by pretending that there is. Perhaps instead of looking for a magic system, we could seek a more flexible and ad-hoc approach--abolishing state pensions, say, and rolling them into a more generous disability benefit.

That's not politically possible, of course. What is politically possible is grinding along this path until the problem becomes too big to fix.

Depression Schtick

I hate to sound like Andy Rooney, but I think the time has come to retire the ad campaigns from retailers promising to "help" us with the recession by . . . giving us modest discounts on non-essential consumer goods. I am in receipt of the following email from Mitchell Gold/Bob Williams, from whom I bought a (very nice, reasonably priced) couch several years ago:

We understand that consumers are opening their wallets with caution during this time of economic uncertainty. So, to help stimulate the economy and your senses, we're offering you a comfortable 20% off the following:

Special Order Upholstery:
Select from 450+ frame styles available in 340+ fabrics and leathers. Save hundreds on: sofas, sectionals, sleepers, chairs, dining chairs, beds, ottomans and more. Delivered to you in approximately six short weeks.

All Tables/Storage:
Our end tables are just the beginning of your savings. Choose from cocktail tables to media consoles to dining tables and everything in-between: all 20% off.

This is of a piece with this now-ubiquitous ad:

I mean, thanks, guys, but my idea of cutting back does not involve buying expensive furniture at 20% off; it involves not buying new furniture at all. And I'm preserving my sense of "living well" by never, ever, ordering (shudder) pizza from Dominos--at least not while I still have a jar of peanut butter to my name.

Meanwhile, the hosts on QVC have apparently started prepending the phrase "We're all watching our money these days" to exhortations to buy teddy bears infused with daffodil-scented soy candle wax and similar necessities. Apparently we're all watching our money from a distance, as it disappears into the gaping maw of Mastercard.

The one industry not ostentatiously offering to help me save money is the banking industry, which hasn't been trying to entice me into their savings vehicles with high rates and low fees. We have a long way to go before the American savings culture turns into what it should have been all along.

Question of the Day: Where Did Those Bank Profits Come From?

A reader in the financial industry writes:

If the current rally in financials is predicated on how great an environment this is for banking operations - borrowing money for free and lending at prevailing rates - why is it that JP Morgan's Net Interest Margins are the same as last year? It looks like the entire beat was generated by bond trading - which means usurious bid/ask spreads, most likely.

Even the bankers are warning that these profits are unsustainable . . . yet the markets are still loving 'em.

The Economics of Streetcars

Tyler Cowen ponders why people like streetcars so much. Possibilities offered by him and his commenters:

1. Nostalgia
2. Dedicated lane
3. Less noise
4. Less swerving/lurching (presumably, also less carsickness)
5. More predictible (no one suddenly re-routes your streetcar)
6. Roomier

The streetcars I'm most familiar with are Philadelphia's, which fail many of those tests, so let me offer my take on why people (read: affluent, especially white people) like streetcars: they don't have so many poor people on them.

Streetcars are developed in a fixed area and not frequently expanded. They have a high capital cost. This means the area along the lines gentrifies. Thus, when you get on a streetcar, it normally has a lot of other affluent people on it. By contrast, when you get on a bus, it normally has a lot of poor people who have been sitting on it for an hour, patiently waiting to get to work. The association builds between streetcars and affluence, busses and poverty, in one's mind.

Problems with this theory: trains in New York are usually crowded with poor people from outlying areas; wealthier people use them anyway. On the other hand, it's basically impossible to either park or drive a car to work in New York; it is frequently possible to walk across town faster than you can drive during the day.

What Does It Mean To Be Wealthy?

It's hard to work up much sympathy for the people in this Wall Street Journal article complaining that $400,000 a year doesn't make you rich. The complaint is sort of legitimate, in that the tax code doesn't account for geographic diversity--$400,000 a year in small-town Tennessee is "set for life", while in Silicon Valley it means "I can barely afford a starter home".

But even in Silicon Valley, $400,000 means that you earn more than most of the people living in your area. The subjects of the article seem to be complaining that all their hundreds of thousands in income have gotten them is a nice house in a good neighborhood, upscale cars, nice clothes, and a thousand dollars or so in disposable income each month. To most of America, that's rich. If you don't have to worry about making ends meet, count your blessings.

That does not mean that I am in favor of raising their effective marginal taxes paid to north of 50%. The legitimate claim that wealthy people do have is that no one should have to spend more time working for the government than for themselves--and as any moderately successfully self-employed person can tell you, this is all too possible in a place like New York or DC, especially with all the deduction phase-outs. The wealthy largely get that way by working more hours than the rest of us; they shouldn't have to work those last 10 hours more for other people than themselves. I don't think that wealthy people have a right to complain that they shouldn't pay more than the middle class--but there's some justice in asking that they get to keep more of their income than Uncle Sam.

Happy Tax Day!: Mental Health Break

I did get my taxes done early this year, which for me means that I did not file an extension last night. In memory of the happy hours I spent this weekend trying to guess whether I had a qualified home office and which of my travel expenses were deductible, I give you: Form 67397-M-EZ

How Badly Will Bankruptcy Hurt GM Pensioners?

The Detroit News is reporting that pensioners expect to take deep cuts if GM's pension plans are terminated in bankruptcy. The irony is, GM actually behaved as a model of responsibility with its pension fund after the 2000 stock market crash opened up deep holes in its funding model:

The big mismatch of 2002 showed pension officials that stocks could produce more volatility than a mature pension fund like G.M.'s could bear. The company could not wait for stock prices to come back up eventually, because it had 400,000 retirees waiting to be paid about $7 billion every year.
With that in mind, G.M. sold more than $14 billion of bonds in 2003 and put the proceeds into its pension fund, making up for the preceding years' losses. It also put in the proceeds of the sale of its Hughes Electronics subsidiary, for a total contribution of more than $18 billion. That was far more than the minimum required that year.
The big contributions got rid of the fund's shortfall. (They also gave G.M.'s bottom line a lift, thanks to the accounting rule.)
Then, over several years, G.M. overhauled its investment portfolio, replacing billions of dollars worth of stocks with bonds, and adding derivatives to make the duration of the bonds better match the schedule of payments to retirees.
Bond prices can swing too, but G.M. plans to hold the bonds for their interest, not sell them. Ms. Everett said the company believed the interest payments would be more than enough to produce the $7 billion owed to retirees every year.

I reached out to GM's financial communications department, and they confirm that the bulk of their pension investments are now in debt or real estate, with about a third still in equities--a very sensible, conservative mix that hasn't saved them in an awful market.

Theoretically, the pension shortfall shouldn't matter that much, if it's simply a question of a depressed bond market. But if the plan is terminated, both its assets and obligations go to the Pension Benefit Guaranty Corporation, which insures private pension in the United States. And when that happens, the retirees become subject to the plan's maximum payouts.

For ordinary retirees, that is capped at $54,000, which may be a comedown for an auto worker, but should be enough for a retiree who owns their own home to live on. But for early retirees, the caps are brutal: less than $20,000 for a fifty-year old. From what I understand, a lot of UAW workers started in high school, "did their thirty", and retired early. A lot of others accepted buyout packages that will be liquidated in bankruptcy. To be sure, they're probably mostly still able-bodied. But as I've written elsewhere, fifty-five is a lousy time to be starting a new career.

At that, the salaried retirees say that they'll be even worse off than the UAW workers. The head of their retiree association is quoted in the Detroit News as saying that he thinks they'll end up losing 50-60% of their pension if the plan is taken over by the PBGC. I'm not sure exactly why--GM doesn't break the funds out separately, so it's not clear whether he thinks that there's a bigger funding shortfall in the salaried plans, or whether there's something different about salaried retirees: more early retirements, say, or more pensions above that $54,000 cap. The Detroit News has him implying that somehow the UAW will get a better deal for its members, which seems unlikely; the PBGC doesn't really negotiate.

This raises an interesting question, actually: could the PBGC end up better off as the result of a GM bankruptcy? What happens in a termination is that the assets and the liabilities get turned over to the PBGC. But if the problem is an asset-value issue rather than a cash-flow problem, the PBGC will slash benefits to the caps, but get an asset base which should, in a normal market, be adequate to meet the full obligations. If the assets do deliver the planned cash flows (and the PBGC can manage them adequately), the bankruptcy could, paradoxically, boost the chronically underfunded insurer.

Happy Tax Day!: The Return of the Death Tax

Stan Collender notifies CNBC that the US doesn't tax death. Though, it might be better if we did; it's the one thing we indisputably could use less of.

It's pretty surprising to see CNBC use that phrasing. It obscures, rather than clarifies the tax incidence, and it's pretty clearly a political choice. We tax estates. Estates used to belong to dead people. But we're not taxing death; we're recognizing that when someone inherits, they're experiencing a material gain. There's no reason that that sort of income should be exempt from tax. So we tax the estate.

Now, in my opinion, we ought to tax the assets as income to the recipients. A $10 million estate divided among 20 grandchildren gets taxed more heavily than a $1 million estate going to one child, even though that child is thereby made much better off than the grandchildren.

But that leads to the prospect of kids having to sell grandmother's engagement ring in order to pay the tax, and so instead we have a more inefficient, less progressive tax* that allows people to shield a very generous level of benefits from the tax man. You could solve that problem by making people pay the tax when they sell the asset, but most people would, in practice, evade this, because the IRS is not going to come by asking you for the whereabouts of the ring. On the other hand, that would leave us about where we are, with a generous practical examption, better progressivity, and greater efficiency. In an imperfect world, I expect that's about the best we're going to do.

* Middling estates actually pay a higher effective rate than really large ones, because they can't structure around the tax

Real Business: No Customers Need Apply

Every so often, you come across a business that is real, and amazing. That is, it's amazing that it's a real business, one that some blithe soul expects to make money off of. Readers are, of course, encouraged to submit their own examples.

Today I give you: The Sufi Coffee Shop.

Yesterday, a friend dragged me to a place called Sufi Coffee Shop in Mountain View (El Camino just north of Castro). The coffee was actually quite good -- it had better be quite good, the cheapest cup of drip -- of drip was $3.50. (The most expensive was $6.75. Admittedly, it was Blue Mountain.)
But the attitude. Wow, the attitude. The place is covered from wall-to-wall with angry signs admonishing the customers for various sorts of misbehavior. I took a photo of the first one, and the owner turned around, sternly instructed me "no photos!," and then demanded, as an implicit condition of selling me any coffee, that I delete the one I had taken.
Fortunately, the owner isn't terribly iphone-literate, and so, well, suffice it to say that not only did I not delete the first photo, but I took numerous more besides.

That's just the teaser. You really need to click through and gawk at the pictures.

Study Question: Is the Sufi Coffee Shop primarily selling coffee, or abuse?

Mixed Messages to Banks

Before I start, let me just say that I do not believe you can blame the mortgage crisis on the CRA. It was probably a small contributing factor, but so was almost everything.

Still, this does not bode well for promises of an exciting new era of regulatory competence which will keep banks from taking too many risks:

Continue reading "Mixed Messages to Banks" »

Those Lucky Canadians

Commenter Tom West writes:

Boy, the more I read, the guiltier I feel about living in Canada. We sort of have the ideal position

We're large enough that most of us don't see the direct comparison with the American system, (which is nice, but three times the price). America operates as our second tier which is close enough that the rich aren't upset about going there for expensive health-care, but far enough away that the even the moderately well-to-do don't look at it as a serious alternative.
We're insulated enough so that when the doctor's say "there's nothing we can do", you can believe it without feeling guilty about not destroying your family's finances to pay for some sliver of hope. We benefit from the American innovations when they're finally brought down to a cost that our bureaucrats consider acceptable. The doctors don't have to cater to ridiculous demands for unnecessary tests, and have no incentive to give them.
We have a Corolla health-care system as opposed to the American Lexus, but it does a decent job for most of us, and ends up being an element of society that binds most Canadians together rather than becomes a source of resentment and distrust. (Tommy Douglas who introduced our health-care system was recently selected as Greatest Canadian ever by viewing audiences.)
That said, sadly for those few Americans that look at our health-care system as a model, I'm afraid it wouldn't work for you. You'd be missing the one ingredient that helps it work as well as it does... You.

Why Bankruptcy Matters

This is what a world without it looks like:

Karen Andrews can't speak. Every time she starts to tell her story, she puts her head down and crumples. She is slim and angular and has the faded radiance of the once-rich, even though her clothes are as creased as her forehead. I find her in the car park of one of Dubai's finest international hotels, where she is living, in her Range Rover. She has been sleeping here for months, thanks to the kindness of the Bangladeshi car park attendants who don't have the heart to move her on. This is not where she thought her Dubai dream would end.
Her story comes out in stutters, over four hours. At times, her old voice - witty and warm - breaks through. Karen came here from Canada when her husband was offered a job in the senior division of a famous multinational. "When he said Dubai, I said - if you want me to wear black and quit booze, baby, you've got the wrong girl. But he asked me to give it a chance. And I loved him."
All her worries melted when she touched down in Dubai in 2005. "It was an adult Disneyland, where Sheikh Mohammed is the mouse," she says. "Life was fantastic. You had these amazing big apartments, you had a whole army of your own staff, you pay no taxes at all. It seemed like everyone was a CEO. We were partying the whole time."
Her husband, Daniel, bought two properties. "We were drunk on Dubai," she says. But for the first time in his life, he was beginning to mismanage their finances. "We're not talking huge sums, but he was getting confused. It was so unlike Daniel, I was surprised. We got into a little bit of debt." After a year, she found out why: Daniel was diagnosed with a brain tumour.
One doctor told him he had a year to live; another said it was benign and he'd be okay. But the debts were growing. "Before I came here, I didn't know anything about Dubai law. I assumed if all these big companies come here, it must be pretty like Canada's or any other liberal democracy's," she says. Nobody told her there is no concept of bankruptcy. If you get into debt and you can't pay, you go to prison.
"When we realised that, I sat Daniel down and told him: listen, we need to get out of here. He knew he was guaranteed a pay-off when he resigned, so we said - right, let's take the pay-off, clear the debt, and go." So Daniel resigned - but he was given a lower pay-off than his contract suggested. The debt remained. As soon as you quit your job in Dubai, your employer has to inform your bank. If you have any outstanding debts that aren't covered by your savings, then all your accounts are frozen, and you are forbidden to leave the country.
"Suddenly our cards stopped working. We had nothing. We were thrown out of our apartment." Karen can't speak about what happened next for a long time; she is shaking.
Daniel was arrested and taken away on the day of their eviction. It was six days before she could talk to him. "He told me he was put in a cell with another debtor, a Sri Lankan guy who was only 27, who said he couldn't face the shame to his family. Daniel woke up and the boy had swallowed razor-blades. He banged for help, but nobody came, and the boy died in front of him."
Karen managed to beg from her friends for a few weeks, "but it was so humiliating. I've never lived like this. I worked in the fashion industry. I had my own shops. I've never..." She peters out.
Daniel was sentenced to six months' imprisonment at a trial he couldn't understand. It was in Arabic, and there was no translation. "Now I'm here illegally, too," Karen says I've got no money, nothing. I have to last nine months until he's out, somehow." Looking away, almost paralysed with embarrassment, she asks if I could buy her a meal.
She is not alone. All over the city, there are maxed-out expats sleeping secretly in the sand-dunes or the airport or in their cars.

Health Care Hypothetical

The core of American health care cost inflation is captured by Arnold Kling:

My oldest daughter is in her mid-twenties. She has a friend the same age who was stricken with cancer last year. She was treated with chemotherapy, Initially, the doctors thought this had worked, but now the cancer is back. My guess is that her prospects at this point are rather frightening.
That ends the anecdote. What follows is my imagination.
Imagine it were my daughter. What would be my attitude? I imagine that I would be walking into the oncologist saying, "Look. There has to be something you can try. I don't know whether it's bone marrow transplants or stem cells or some clinical trial somewhere. But we can't just sit here and watch her die. Either you give us something that has a chance of working, or we'll find another oncologist who will."
Next, imagine that the best hope is a treatment that costs $100,000 and offers a chance of success of 1 in 200. Would I want her to get that treatment? Absolutely.
But look at the issue from a rational, bureaucratic perspective. You have to treat 200 patients at a cost of $100,000 each in order to save one life, for a cost per life saved of $20 million. Is that what a rational bureaucracy would do?
A rational bureaucracy would not even tell the family about this treatment option. But I think that in the American culture regarding medicine, I would find out about it.

It's worth noting that, at least anecdotally, the internet means we're increasingly exporting our cost inflation to other countries. In the 1990s, breast cancer patients wouldn't even have found out about a treatment like Herceptin. Now they fight (and win) public relations battles with their governments to get their treatments covered, even when the treatment is not deemed cost-effective by the health care regulator. And the woman who fought that famous and "inspirational" battle in Britain recently died; the drug didn't buy her that much extra time, perhaps because she had to fight so long to get it.

If your mother or your daughter or your sister or your wife is dying of breast cancer, it doesn't matter to you how much the treatment costs relative to the benefit. And indeed, the political battle over health care is infused with the belief that you shouldn't have to think about cost--that it is immoral to deny anyone a treatment that might help them.

Unless we're willing to let health care expenses grow unchecked, someone is going to have to think about costs. But so far in America, I see no means to develop a culture which will allow bureaucrats to deny potentially life-saving treatments simply because they're costly--either in the free market or in a single payer system. Thus, I predict, costs will continue to grow.

Democracy and Capitalism

I've been thinking a lot lately about the political theory of an independent central bank. A lot of the libertarians I know have deep issues with the activities of the Fed, which have been largely unaccountable to elected officials.

That's a valid critique. But here's the problem: the Fed has performed vastly better on any metric except "being elected" than the Congress. There's little doubt in my mind that if we had not had an independent central bank, unemployment would be many percentage points higher, GDP would have contracted much more strongly, and we wouldn't now be making optimistic noises about the thing bottoming out.

Where does that leave me?

Pascal-Emmanuel Gobry tackles this question as part of a larger post on the compatibility of democracy and capitalism, and his thoughts mirror mine.

Megan McArdle is very happy that Ben Bernanke, unelected and unaccountable, has a bigger role in the response to the financial crisis than Maxine Waters, and is only able to take the dramatic steps he is precisely because he is unaccountable, and so am I. But -- and I realize this is a cliché, but an unescapable one -- even if you have the smartest technocrats running the country today, what about their successors, and their successors' successors? The historical record of unelected governments in this regard is not very good.
Democracy is not so much about electing people as having a process and a system of checks and balances that ensures that basic rights are protected.

Of course, libertarians and liberals and conservatives all mostly abandon this committment to Democracy when there's a principle they care about at stake; democracy is, of course, good and wonderful, but that shouldn't let the majority dictate their opinion on the position of homosexuality in the public sphere . . .

All the people that I know, left and right, who are currently very worried about the democratic implications of the Fed's actions, seem to spend an awful lot of time trying to insulate their pet cause from the democratic process--whether that cause be property rights or sexual behavior. As an institution, what the Fed is doing now is not much different from what most of them want the Supreme Court to do on some issue or another: rule it out of the bounds of majority debate. All of those people would, of course, say that that's different--their issue is really important, and personal. But trust me, any student of the Great Depression will tell you that what happens in a massive financial crisis is both really important, and very personal.

I'm not saying that as some sort of useless hypocritical gotcha; my ideas are at least as muddy. I'm just saying that I'm having a hard time discerning some firm governing principle upon which to base my views.

Still, the longer I think about it, the longer my thoughts linger on Mencken's famous quote about democracy: 'the theory that the common people know what they want, and deserve to get it good and hard."

I think that the political process will hopelessly screw up the management of this crisis (something which libertarians are perfectly able to see when the government screwing things up is a left-wing populist one in Latin America). But maybe The People, God bless them, deserve to screw up their economy if they want. On principle, I am opposed to saving people from themselves. And anyway, maybe I'm wrong and the wisdom of crowds will prevail.

On the other hand, do they have a right to screw things up for everyone else? Should a populist 60% be allowed to plunge their neighbors deeper into crisis? In the case of America, to plunge the whole world deeper into crisis?

The uncomfortable conclusion I'm coming to is that yes, they should. Ben Bernanke should be hamstrung even though it's likely that this would make everyone worse off. And people who advocate for ending the independence of the central bank should be willing to accept all that this entails: inflationary monetary policy (the people love inflation!), bad and unpredictible banking policy, the collapse of the US economy. I just wish I didn't have to go along for the ride.

Little Bargaining Power Against a Hated Governor

Governor Paterson of New York, who stepped in to fill Spitzer's shoes, is now about as popular as a summer cold. In part, this is because he was never meant for prime-time; he's a ticket rounder without much political charisma. But he's also been handed a really lousy hand. All states are suffering in this downturn, but New York has spent twenty years getting used to the lavish spending that taxes on financial salaries enabled. If you try to take it away, they feel that their civil rights are being violated--and they take their righteous rage out on the nearest politician to hand.

One of the groups he's crossed is the public sector unions, from whom he is demanding a 3% pay cut (in line with what the non-union workers have taken). The union has responded with a furious public service campaign--but to no avail, because Paterson's ratings are so low that even a vicious negative ad run can't drive them any lower. I expect the anti-tax groups are having the same problem.

A Quick Bankruptcy for GM?

I'm struggling to understand how the government thinks that it can get GM in and out of bankruptcy in the blink of an eye. In a "prepackaged" bankruptcy, where there's substantial agreement among the parties, that may be possible. But neither the unions nor the bondholders show any signs of making generous concessions in order to get the other parties to agree. If the government wants to make labor happy--and it seems it does--it can either pay off the bondholders to go away happy, or it can wait for the thing to snake all the way through the bankruptcy courts. That generally takes more like a year than the "weeks" I've heard claimed.

There's no doubt that ultimately the bondholders are going to take a big, deep haircut in bankruptcy. But the fantasy where they quietly accept it while the court crams everything desireable into one company, while leaving a few paperclips and the healthcare obligations behind for the creditors, seems . . . extreme. Indeed, I don't think the government believes it either. I think they're just pretending too, so they can act all horrified and sad when it turns out that the UAW has to make some concessions too.

But I don't expect either group to make concessions outside of bankruptcy, even if they'd be better off not going before the court. Each side seems to believe for its own good reasons that someone else has the moral responsibility to bear most of the pain. They won't take a barely decent deal if it means someone else gets a better one.

Why Does US Healthcare Cost so Much?

A lot of interesting comments over at Atlantic Business.

Age Before Beauty

The older you are, the harder it is to find a new job if you're laid off. Older workers who are displaced often end up going on disability, taking early retirement, or starting "consulting" businesses because they find the salaried job market so unfriendly--after 55, labor market participation starts declining rapidly.

This is often thought of as pure age discrimination, but it's more complicated than that. Blue collar workers at 60 may not be able to physically keep up with their old jobs. They don't slot well into union shops that are designed to hoover up young workers and keep them for life. And its harder for them to work for minimum wage, because they have obligations.

This is even more true of white collar workers. Especially as they move up the management tree, older workers get a lot more expensive. This is in part because we've cut a sort of society-wide bargain in which people in most jobs are paid more as they age to offset rising expenses. But also, older workers have more skills.

In general, more skills is a good thing. But in an increasingly specialized society, those skills are increasingly specific,. The more skills you have, the fewer jobs there are that match them.

The New York Times chronicles the unbelievably extensive process of finding a baby-boomer executive a new job in the current recession. That's a story there will be a lot of in the next few months. Expensive older executives are often first fired, last hired.

The Heroes of Financial Fraud

The scale of Bernie Madoff's crimes has largely eclipsed the more interesting scam that broke around the same time: the antics of Mark Dreier, who bilked institutional investors for millions with faked securities. What we know about Madoff suggests that he may have become an almost accidental crook, like many of the accounting fraudsters of yesteryear: take big losses, cook the books to cover them until he could "catch up", and when you realize you're too far behind, simply ride the fraud as long as you can.

But Dreier is more like the classic con man of legend, stage and screen: an amoral, audacious rapscallion who pulls off a massive fraud mostly because no one can believe anyone would do anything so crazy:

According to prosecutors, for more than four years Dreier sold hundreds of millions of dollars' worth of bogus debt obligations to nearly 40 investment funds run by 13 of the nation's most sophisticated asset managers, including the likes of Fortress Investment Group, Elliott Associates, and hedge funds later acquired by Perella Weinberg Partners and Blackstone Group. Throughout its existence the scheme could have collapsed at any instant, if just one of dozens of duped hedge fund officials had ever run into real estate developer Sheldon Solow - the head of the duped company supposedly issuing most of the notes - at a cocktail party.
As Dreier dug himself ever deeper into criminality and debt, he resorted to ever more desperate measures to postpone the day of reckoning. He and his accomplices talked their way past receptionists of companies they weren't affiliated with; plopped themselves down in empty conference rooms; and then hosted meetings at which they pretended to be people they weren't. The scam succeeded for as long as it did because none of his victims could conceive that anyone of Dreier's stature would act with such monumental recklessness, selfishness, and self-destructiveness.
Almost as an afterthought, Dreier is alleged to have filched about $40 million from his clients' escrow accounts - including $10 million that he stole after his arrest before authorities could get a receiver appointed to seize control of his law firm and ambulance it into bankruptcy. To the 260 innocent attorneys who toiled for him at Dreier LLP's tony offices in Manhattan, Albany, N.Y., Los Angeles, Pittsburgh, Santa Monica, and Stamford, Conn., Dreier bequeathed unpaid salary checks, unreimbursed expenses, lapsed malpractice and health insurance policies, potential civil liability, and untold damage to reputations. An attorney's stock in trade is sound judgment and wise counsel. "To have hitched one's star to a thief," as a lawyer for one of Dreier's former partners puts it, is a stain that won't easily wash out. Most of Dreier's betrayed former colleagues did not return calls or e-mails, and all but one of those who did asked not to be identified.

I can kind of understand what Madoff did, if it is indeed true that he initially thought his fraud was just a temporary thing. Not condone it, nor really picture myself deciding that it was better to falsify the books than to 'fess up to clients. But understand it. The instinct to CYA is a normal human emotion. But there's no instinctive drive to run crazy scams faking bonds.

Even more, I don't understand people committing these kinds of crimes where they are virtually certain to get caught. Madoff probably didn't start out knowing that the house of cards would eventually have to come tumbling down--presumably, at least some embezzlers actually have succeeded in dipping into the till and then replacing their takings afterward. By the time he did know, it was too late to get out. But Dreier is like Michael Bellesiles, or that guy at Bell Labs who faked potentially Nobel Prizewinning research. What's the point of enjoying your fifteen minutes of fame at the price of utter, certain ruin?

It is, as the Fortune writer points out, fascinating. Except unlike the cases of Bellesiles or Bell Labs, this fellow cost people a lot more than time and anxiety. How did he look himself in the mirror in the morning? At the end of the Fortune piece, that's still a mystery to me.

Ask the Editors

We've got another edition up at Atlantic Business. It's okay to resubmit a question you haven't had answered yet; there are only two of us, so we can't do the dozens we get. As always, I'm closing the comments on this thread, because we're only accepting questions asked at the Business Channel.

Talking Down Auto Bondholders

The government is trying to get GM and Chrysler bondholders to take a hefty haircut on their debt rather than push the companies into bankruptcy. The problem is, it's a terrible deal for the bondholders, and there's no reason for them to do it:

The UAW has been largely unwilling to negotiate with GM until it sees what concessions will be made by bondholders and others.
The standoff between bondholders and the UAW underscores the difficulty surrounding GM's attempt to reorganize without the coercion of bankruptcy. Key players in the Obama administration are pointing to the lack of progress as a reason that bankruptcy could be unavoidable.
At Chrysler, the U.S. wants banks and investors who control its bank debt to give up about 85% of the nearly $7 billion they are owed. In bankruptcies, such senior secured lenders typically get most of their money back.
Some senior lenders believe they would get more than 70 cents for each dollar of their secured loans if Chrysler is broken up and sold under bankruptcy, said people familiar with the talks. Other lenders don't have an exact number nailed down and are awaiting detailed figures from the auto maker on its assets.
All of the 40-plus lenders and investors are nonetheless incensed by the last Treasury offer: that they accept about 15 cents per dollar of face value of their loans.

The government wants to keep the automakers out of bankruptcy because it wants to maximize gains for employees. GM's pension, thank God, was actually overfunded last time I looked, so at least retirees won't lose the income they've planned on as so many do in these legacy industry bankruptcies--the PBGC fund top benefit is ~~well under~~ a little over* $50K per annum. But the health benefits will probably vanish, as will a lot of jobs, and the union contracts all get torn up.

But it's trying too hard to maximize that value. It has no credible threat of nationalization with congress in its current mood, so why would bondholders take a deal where they barely recover any of their money? Social welfare might (might) be maximized by keeping these conpanies as big as possible, but I doubt the bondholders feel any personal obligation to bear that cost. They've already lost at least 30 cents out of every dollar they gave the auto companies.

This is what modern American bankruptcy is for. If you look at systems where senior creditors have too much power, there's evidence that they will screw the junior debtholders by taking the money and running, rather than trying to maximize enterprise value. (Though, to be fair, there's also evidence that maximizing enterprise value entails much higher administrative costs.) The administration essentially has a hold-out problem, and unless it nationalizes, or sweetens the deal considerably, you need bankruptcy to resolve it.

The administration seems to be negotiating like a sovereign, which, of course, it is. But GM is not. Unlike Argentina, it can't just default and flip off the bondholders. When it defaults, its creditors can put it into bankruptcy. The administration seems to be trying to prevent that in order to preserve stakeholder value--but the recovery in bankruptcy is essentially the floor of what the creditors will accept.

Or maybe this is all some elaborate Kabuki ritual, where the government pretends to be talking tough in order to placate Big Labor, while quietly waiting for the inevitable. Either way, it seems like a giant waste of time.

* Sorry, folks; I was working from memory, and they've upped their maximum guarantee

The Incredible Shrinking Public Pension Funds

America's public sector pensions have been a scandal for years. It wasn't that long ago that they finally got around to doing their accounting the way that normal pensions do: by showing how likely their assets were to generate enough revenue to pay for future benefits. When they did, we found out what critics had long been claiming: many pension funds for state and local governments were disastrously underfunded. Politicians had gotten into the habit of promising generous pensions as a "cheap" giveaway to powerful unions.

With the holes laid bare, public pension funds scrambled to find some way to fill them without making politicians do something ridiculous, like raise taxes to pay for all the promises they'd made. Many of them seem to have hit on the notion of pulling the money out of boring old bonds and putting them in something that paid a nice, high return--not just equities, but hedge funds and exotic securities.

Since the public pension funds were rarely able to pay top dollar for financial wizards, and had a number of political constraints on both membership of the boards, and the investments they made, you can just about imagine what they look like now. But if you can't, the FT lays it out:

In the past year the funds, whose collective $2,000bn-plus in assets make them key investors in every asset class, have lost about 40 per cent of their value through investment losses.

The 2,600 pension plans provide retirement savings for 22m public employees in towns and cities across the US, and range in size from the giant Calpers, with $120bn (€91bn, £81bn) in assets, to tiny small town funds which pay pensions for local garbage collectors and police.
Phillip Silitschanu, a senior analyst at Aite Group, a consultancy, says the pensions "could face a cash flow collapse, they are liquidating assets to meet their monthly cash flow needs . . . instead of selling positions that are down 10 per cent, they are being forced to liquidate positions down 40 per cent. It is a firesale liquidation of assets to have the cash on hand to meet obligations".
Bill Atwood, the executive director of the Illinois State Board of Investments, says: "Right now it's very bad. For the full year 2009 (ending in June) we will have $270m negative cash flow on $8.5bn in assets."
State pension benefits are protected by law, and must be paid even if the fund is making a loss. Calpers, the largest fund, has lost $70bn in value in the past eight months, but still has to pay $11bn in benefits this year. Unless the fund starts recouping its losses soon, the California state government, which is already mired in a huge deficit, will have to lift contributions to Calpers starting from next year.

This is not, it should be emphasized, exclusively a problem of public sector pensions; private firms are also underfunded. But the scale is vastly different. According to the Pension Benefit Guaranty Corporation, which regulates and insures pensions, the total deficit in private plans covering about 34 million workers was a little over 10 billion as of September 2008. That's almost certainly multiplied quite a bit since then. But the current underfunding in public plans, which cover about 22 million workers, seems to be something north of a trillion dollars. And they're not insured.

The funds that are responsible are a different sort of headache; they'll be slapping heavy levies on local school districts and governments to shore up their capital. That will be a nasty burden on strapped local governments, particularly in places that are already in decline. My mother's hometown in Western New York now sees its local fiscal picture vary heavily with the financial industry 350 miles away because of teacher pensions. In good years, the market booms, tax revenue soars, and not only does their mandatory pension contribution fall, but the state often offers extra help out of the tax windfall. In bad years, the state aid disappears, their mandatory contribution goes up, and the senior citizens on fixed incomes start assembling pitchforks and torches for the march on city hall.

If that's not enough to worry you, keep an eye on Social Security. The trustee's report is due out in a few weeks, and I can virtually guarantee that the estimated date when the "trust fund" will be exhausted will move at least a year closer. In bad times, tax revenues fall, and age discrimination means that older displaced workers are prone to apply for early benefits rather than looking for another job--especially if their 401(k) has kind of evaporated. The release of the annual report used to feature a festival of complaining from bloggers that the Social Security Trustees were far, far too conservative in their estimates of future growth. I don't think we'll be hearing that this year.

Update: The PBGC emails

Actually, the PBGC was reporting on the shortfall in its own insurance
program. The private sector pension plans insured by the PBGC are in
reality underfunded by hundreds of billions of dollars. A recent
Milliman study for instance shows the shortfall among the largest 100
corporate pension plans to be $217 billion. Calculated on a
termination basis (that is assuming the pension plans were ending today)
the underfunding number is much higher.

So while the two systems (public and private pensions) are vastly
dissimilar (one with taxpayers as guarantors of last resort, the other
with the PBGC backstop), neither currently has assets sufficient to keep
its benefit promises.

The problem in the public funds is still bigger, but not as much bigger as I'd initially thought--which makes sense, since a bunch of funds, like the airlines, have been chronically underfunded since the 2000 stock market crash. It's hard for any entity to keep promises made forty years in the future.

Placenta: It's Not Just for Prenatal Nutrition Any More

I recognize that the feeling of discust is mere cultural conditioning. Nonetheless, I feel quite ill after reading this. It's safe for work, but possibly not for your digestion.

Historical Interest

Out of our archives comes a very familiar account of corporate excess . . . from 1933.

It is easy now to indulge in sour morality. Three years ago it was a different story. Then it seemed that there could be no limit and no end. Our industry was 'depression-proof.' All the financial journals said so, and we believed it. 'It always gets dark at night,' we caroled. 'People must have light at night!' And with that as a slogan we went forth to sell more stock and build more power plants.

In these latter days, since the downfall, I know that there will be much talk of corruption and dishonesty. But I can testify that our trouble was not that. Rather, we were undone by our own extravagant folly, and our delusions of grandeur. The gods were waiting to destroy us, and first they infected us with a peculiar and virulent sort of madness.

Already, as I try to recall those times, I cannot quite shake off the feel that they were pages torn from the Arabian Nights. But they were not. The tinseled scenes through which I moved were real. The madcap events actually happened--not once, but every day. And at the moment nobody thought them in the least extraordinary. For that was the New Era. In it we felt ourselves the gods and the demigods. The old laws of economics were for mortals, but not for us. With us, anything was possible. The sky was the limit.

Looking back now, I see how naive were our godlike airs. Most of us were really simple folk, of humble origin. Going the circuit of our walnut desks, one would hardly have found a single executive who had not worked his way up from the ranks. They had begun in small towns as owners or operators of little companies. The companies had been bought up by Amalgamated International, and the owners annexed as super-executives. To maintain the power and glory of their new estate, they felt that it was their duty to carry on like Oriental princes.

At no time was the spectacle more imposing than at the annual conventions. Ah, those conventions! They were a Papal Mass, a Court Ball, and a Bacchanalian Revel rolled into one. Each year they were scheduled for some expensive resort. From the four corners of the country, special trains rolled in, laden with super-executives, super-executives' wives, and innumerable wardrobe trunks. The first day I stood behind a grove of potted palms in a hotel lobby and watched them register. A friend beside me pointed out the celebrities. Board Chairmen and Presidents without limit filed past, and the names of their companies read like the pages of Poor's Manual.

On the first day, the cards went out--for luncheons, dinners, and cocktail parties. London in season was as nothing compared to our convention. Each super-executive and wife had tried to get a suite of rooms more elegant than any their rivals had, to make their entertaining just a bit more splendid. In imagination I could see half a hundred wives plotting and planning weeks in advance with their super-executive husbands. 'We must not mind the expense, John, dear. We owe it to the company to make a better appearance than those Ackersons from Tulsa when he was chairman of your committee last year.' To such a proposition there could be only one answer. Advance reservations were wired to the hotel. New gowns were ordered for the wardrobe trunk. Conferences were held with head waiters and maitres d'hotel. And on the first day of the convention the cards went out.

Small wonder, then, that my head reeled with room numbers as I staggered around to pay court to the kings and queens of our industry. And, for that matter, small wonder that I staggered. When half a hundred Joneses set out to keep up with each other, the result is bound to be a Roman Holiday.

I presume the company described was Insull's Middle-West Utilities, which went spectacularly bankrupt in 1932, knocking out lights to thousands of homes, and eventually leading to the utilities regulations that still shape the corporate ownership of our power, gas and water systems.

I've been hearing a fair amount of loose talk about how the current retrenchment in consumer sentiment marks a permanent change in our consumption appetite, like the legendary tight-fistedness that characterized the Depression generations. But that kind of compulsive hoarding was borne out of this kind of utter disaster--not merely the depth, but the length. When folks lose their electricity for a couple of years, or see their entire life savings wiped out by a bank failure, perhaps we can start to talk about the return of a depression mentality. Right now, I suspect that our happy, spendthrift selves are still waiting around in the wings, eyeing the Joneses suspiciously.

Media Notes: The End of Embargoes?

Allegedly, the Wall Street Journal is changing its policy on embargoes, refusing to respect them. Felix Salmon thinks this is great news. I find it distinctly odd. Most of the embargoes I deal with are on reports from think tanks and institutions like the OECD, which would like me to be able to write intelligently about their reports, but want to be able to time that report's release with their own press conference--a little self-serving, of course, but not obviously harmful. I'm not sure what's to be gained by refusing to play along, other than having your reporters file hours behind everyone else.

Most Unnecessary Health Story of the Day

Apparently, when there's a recession, even people who haven't lost their jobs get worried and stressed. Also, sometimes people who haven't actually fallen off a building are afraid of heights. That's not in the article, though.

The Return of the Uptick Rule?

Bloomberg News just announced that the SEC is talking about bringing back the Uptick Rule, which prevents people from shortselling while the stock is on its way down. I don't understand why the Commission doesn't focus on something more effective, like installing lavish statues of Mammon on trading floors so that traders can better propitiate him.

Every time markets fall, people start looking for a hidden villain, and short sellers are often a convenient target. We are not, after all, overfond of people who make their living by betting against other peoples' success. But shorts actually provide a valuable service: they make market prices more efficient, by pricing in the shorts' expectations that prices will fall. There are two determinants of a stock's price: where people are willing to sell, and where they are willing to buy. Because a short is more willing to drop the price at which he sells than someone who is long the stock and would have to take a loss, they help more quickly drive the price down to the level at which there are willing buyers.

Without them, market prices would be too optimistic--which sounds great if you're a corporate executive, but also means that your return on the stocks you bought would be, on average, lower, since the long term value of a stock has to roughly track its future cash flows. Moreover, there's little evidence that short selling on the downtick can cause death spirals in stock prices; death spirals tend to follow bad, bad news about the stock, not ambitious shorting.

But the SEC needs to be seen DOING SOMETHING, and what better to do than to go after the much-unloved short sellers? If you want to know what's actually driving prices down, however, don't look at short sellers; look at this graph, courtesy of Clusterstock:

s&p1871onward-0.54x0.54.jpg

Fedspeak

The big news of the Federal Open Market Committee minutes just released is not interest rates, obviously, since the Fed isn't quite ready to directly pay people to borrow money, and they sure weren't going to raise them. Rather, it's the unsurprising, but nonetheless unsettling, news that the house economists are downgrading their economic forecasts, and the board was divided on the topic of pumping vast news sums into the economy. It's going to be a bumpy ride . . .

Question of the Day: Pirates! Edition

Two hundred years from now, will Somali filmmakers be making stirring, presumably holographic, action flicks about adventures on the high seas?

A Jobs Program for Destitute Bankers

The American economy is undergoing a massive sectoral shift. Just as with tech and telecoms a decade earlier, we've realized that the financial sector is way bloated, and many of its excess workers need to be found other jobs.

Luckily for them, unlike many categories of displaced workers, they have skills that will be useful in our newest growth industry: regulating financial companies. Apparently, the Federal government has realized this, and is having a jobs fair in New York for them.

The results should be interesting no matter what happens. If no one shows up, you'll know that the woebegone bankers couldn't yet bring themselves to admit that their days at Nobu are over. If they apply, and win government jobs . . . well, I'd like to be a fly on the wall the first time an investment banker realizes he needs a form signed in triplicate to order top shelf office supplies. It is true that bankers have an outsized sense of entitlement. It is also true that the bureaucratic nonsense the government forces its employees to endure is quite enough to drive anyone insane.

If any of my readers are displaced financial professionals, however, they probably shouldn't reject the notion out of hand. As someone who myself downsized from my b-school income expectations, I can report first hand that it's not nearly as bad as you think. DC is a lovely city, and unlike New York, it's quite possible to live a really full and pleasant life on about what you probably used to spend on lunch. Also, if spent wisely, leisure has as much hedonic value as even really large amounts of cash.

Streetcar Desires

I confess, I'm not sold on the benefits of streetcars over buses or subway. But it seems to me that if you're going to buy streetcars, you should go ahead and build the damn streetcar route. Unfortunately, the District's efforts in this direction are a comedy of errors.

First, they bought streetcars that work on overhead wires, only to be told that they can't put overhead wires in much of DC. Then they repeatedly changed the routing, having somehow failed to notice that the company they were buying the right of way from didn't, like, own it. DC's master planners then laid out a route which was conveniently barren of disgruntled residents, but also of potential passengers, given that it had a freeway on one side and a massive airforce base on the other. Now they've got a halfway sensible route for the Anacostia streetcar--but of course that means opposition from residents who hate construction and like driving their cars. ETA for the first segment of Washington's once and future streetcar system has now moved back from 2006 to sometime in 2012.

Libertarians like to hold up these things as examples of how government can't do anything right, but of course, New York managed to get a whole subway system built with government involvement. Tthough the actual development was done with what we would now probably call a public-private partnership, New York City's government managed to help pick routes and get the proper right-of-way to get them constructed for an entire subway system in less time than DC's government will have spent launching a 2-mile streetcar line in a not-very-populated area.

Not all of this is the DC government's fault, exactly--the legal and political culture is now heavily stacked against that kind of rapid government action. But the endless, ridiculous fiddling around, the buying of streetcars that can't be used in much of the city, and other follies are pure bad government. Government is, by its nature, bureaucratic and inefficient. But not this bureaucratic and inefficient. DC is possibly the worst-governed city I've ever lived in.

The Problem with Chris Dodd

This op-ed makes a point I've been hearing a lot of over the last few days:

Meanwhile, with the power to give out our money as they wish, congressmen take campaign money from lobbyists and industries they regulate. Sen. Chris Dodd, D-Conn., is only the latest poster boy for that, but boy is he a good one. There may be no one who better represents all that is wrong with Washington. The powerful Senate Banking Committee chairman got a sweetheart mortgage from Countrywide; he has received $280,000 in campaign contributions from troubled insurer AIG; and he made sure that AIG executive bonuses were untouched by Congress -- then claimed for 24 hours that he knew nothing about it, before reporters forced him to admit the truth.

Polls show Dodd is in re-election trouble. But don't hold your breath: Despite record-low approval ratings for Congress last year, we continued sending our congressmen back at about a 90 percent retention rate.

We have, sadly, been corrupted.

I have to say, the worst allegation I've heard about Chris Dodd is not that he's in the pocket of banks and insurers--financial companies naturally seek to curry favor with the Senate Banking Committee, but I don't really see the case that he's sold us out for his benefit. No, the more damning case is that the Senate Banking Committee was basically non-functional in the early part of the crisis, because Dodd was running for president. Even if early action could have saved us money and pain later--and that's a big if--I recently heard a plausible case made that such action was made impossible by his presidential campaign. But somehow, no one finds that offensive, or even notable.

Is Inner-City Asthma a Cockroach Allergy?

This might explain why lots of my relatives had asthma as children, but I--the longest city-dweller--am the only one in whom it has persisted to adulthood. This may also suggest I should rethink my committment to an urban lifestyle.

US to Bail Out Life Insurers

The carnage in the bond markets is producing the same kind of vicious cycle in the insurance industry that it generated in other financial businesses. Now the Treasury is apparently planning to offer them bailout funds.

This can't go on. Regardless of the wisdom of the plan, it seems to me that the political system won't take much more of this. The only thing that is sustaining it now is Obama's high approval ratings, which it seems to me rest largely on the public perception that all of this is being done by Timothy Geithner, that Obama is somehow floating above it. How long can that last?

But even if it does, Congress is getting more and more intransigent every day. The money is not unlimited. How much longer can Treasury keep on like this?

What Makes a Good Pharma CEO?

Derek Lowe has a nice little piece on the move away from having scientists in top positions at pharmaceutical companies. He quotes an FT article which notes:

The changes reflect a shift for the scientists who once dominated senior pharmaceuticals positions to give way to executives with backgrounds in marketing, legal or other more general business backgrounds.

To which Derek adds:

My take, for what it's worth, is that scientific training can be desirable in a drug company CEO, but it's not sufficient, or always even necessary. The skills needed don't overlap as much as you might think between science and management, even in a company that makes its living from science. The problem is, I don't think that the particular skills associated with law and MBA degrees are sufficient, either. Being good at running a large organization is a rather rare quality. And it's not always easy to recognize: some companies have issues (good ones or bad!) that will swamp most of the signals you might try to get about the qualities of their CEO.

What strikes me is the oddness of having lawyers in the top slot; the legal department isn't such a big customary route to the top job. But the environment has changed greatly. Fifty years ago, with the FDA pressing ever harder on efficacy, the most important thing in a pharma chief was probably knowing what went into making an effective drug. Twenty years ago, you needed to know how to market it to get the most money out of a very narrow patent window. These days, you need to be able to negotiate a fearsome political and regulatory environment.

Continue reading "What Makes a Good Pharma CEO?" »

What's the Real Price of a Toxic Asset?

A new paper out of Harvard and Princeton arguing that toxic assets actually aren't underpriced has garnered a lot of attention. As well it might: if toxic assets aren't underpriced, we're all in big, big, BIG trouble.

But Economics of Contempt does not like this paper. No, he does not like it at all:

Sounds like the paper is going to examine the prices of the toxic assets that the Treasury is planning to buy, right?

Wrong. Instead, the authors examine investment grade corporate credit risk, using the CDX.NA.IG index. But ABS and CDOs backed by investment grade corporate bonds are not eligible for either the TALF or the PPIP. In other words, investment grade corporate bonds aren't considered "toxic assets."

The authors conclude that market prices of investment grade corporate credit risk are accurate--which isn't surprising, seeing as the CDX.NA.IG is the most liquid contract in the CDS market. Amazingly, however, the authors use this to conclude that the Treasury's plan to buy up the banks' toxic assets is misguided

This is why I'm still having trouble wrapping my brain around the notion that even a very large increase in the default rate can wipe out something like 2/3 of the value of these assets. Most of these loans will perform. And in the case of those that don't perform, while the value of the underlying collateral has fallen, it hasn't fallen to zero. They can't possibly be priced at any reasonable expected cash flow--or rather, if those expectations are reasonable, then we need to stop fannying about with the banking system, because where we're going, we won't need a banking system. We'll need canned goods and ammunition.

The Odyssey of Larry Summers

Glenn Greenwald once lashed out at me for asking an "ignorant" question on a topic I admitted I didn't understand. A petty person would point out that his post on Larry Summers displays not only ignorance, but a total lack of awareness of any gaps in his understanding. And there, I guess I just did.

That's $135,000 paid by Goldman Sachs to Summers -- for a one-day visit. And the payment was made at a time -- in April, 2008 -- when everyone assumed that the next President would either be Barack Obama or Hillary Clinton and that Larry Summers would therefore become exactly what he now is: the most influential financial official in the U.S. Government (and the $45,000 Merrill Lynch payment came 8 days after Obama's election). Goldman would not be able to make a one-day $135,000 payment to Summers now that he is Obama's top economics adviser, but doing so a few months beforehand was obviously something about which neither parties felt any compunction. It's basically an advanced bribe. And it's paying off in spades. And none of it seemed to bother Obama in the slightest when he first strongly considered naming Summers as Treasury Secretary and then named him his top economics adviser instead (thereby avoiding the need for Senate confirmation), knowing that Summers would exert great influence in determining who benefited from the government's response to the financial crisis.

That speech would, of course, have been arranged months before April 2008, when no one knew who was going to be the Democratic nominee, and more importantly, when Larry Summers was still widely assumed to be tainted by his disastrous departure from Harvard. Basically, the financial crisis rehabilitated his political career, just as it was killing Bob Rubin's. They weren't paying him an advanced bribe. They were paying him because A) Larry Summers is really, really smart B) He knows a lot about global financial markets and C) Bankers, like everyone else, like to be near famous and powerful people. Larry Summers is the Brangelina of finance.

In fact, Larry Summers is exactly what we ought to want in a Treasury Secretary: a lifelong academic with no vested interests in the financial system. Following his tenure in office, Summers retreated to a University Presidency, not a lucrative job in finance. He went to DE Shaw to make money only after the Harvard debacle, when he (and everyone else) had concluded that there was no possibility he was going to occupy a prominent political role again. There's no reason to think he is guilty of any ethical breach; in fact, he went to great lengths to avoid any potential for one, until it seemed moot.

There are legitimate questions about whether government officials should be allowed to take money by essentially auctioning off the prestige of their office to private sector jobs and speaking engagements--but Greenwald isn't asking them. And there are real problems with the fact that the greatest experts on financial markets are the people who participate in them--but Greenwald doesn't name them. Instead he retreats into the crudest sort of conspiracy theorizing.

But the relationships between business and officialdom don't work that way--they're subtler, and therefore more insidious. The most upright banker in the world cannot overcome the subtle ways his thinking has been shaped by the culture and the people he operated with. The conundrum of the Wall-Street-Treasury nexus is not one that can be cracked by an investigative journalist. It wants a sociologist or an anthropologist to interrogate its insidious operations.

Why don't we have more green products?

Kevin Drum writes:

So here's the deal. Phosphates really are a danger, creating runoff that kills fish and plants. And Spokane has a uniquely bad problem with phosphates. And apparently it's entirely possible to create phosphate-free detergents. The industry just didn't feel like doing it.
But now their hands are being forced. And guess what? It turns out they can do it after all. Imagine that.

Er, industry also knew how to make low-flow toilets, which is why every toilet in my recently renovated rental house clogs at least once a week. They knew how to make more energy efficient dryers, which is why even on high, I have to run every load through the dryer in said house twice. And they knew how to make inexpensive compact flourescent bulbs, which is why my head hurts from the glare emitting from my bedroom lamp. They also knew how to make asthma inhalers without CFCs, which is why I am hoarding old albuterol inhalers that, unlike the new ones, a) significantly improve my breathing and b) do not make me gag. Etc.

In fact, when I look back at almost every "environmentally friendly" alternative product I've seen being widely touted as a cost-free way to lower our footprint, held back only by the indecent vermin at "industry" who don't care about the environment, I notice a common theme: the replacement good has really really sucked compared to the old, inefficient version. In some cases, the problem could be overcome by buying a top-of-the-line model that costs, at the very least, several times what the basic models do. In other cases, as with my asthma inhalers, we were just stuck.

That is not necessarily an argument against the switch--if the costs are high enough (and maybe, in the case of phosphates, they are), then we should go ahead and use the more annoying product. But it's well to remember that there are tradeoffs--that indeed, "industry's" reluctance is probably because they are well aware of what those tradeoffs are.

Markets in everything

When I contemplate the idea that this was an actual business, every cell in my body smiles a little.

Cuomo goes after Merkin

J. Ezra Merkin, the fellow who funneled Bernie Madoff so much business, is apparently being sued by Andrew Cuomo. Muckety.com had a fascinating graph a while back showing just how central Merkin was to the web of Jewish charities that Madoff bilked, and now in addition to the individual suits, Cuomo apparently wants to call him to account for being, at the very least, a grossly irresponsible git.

Was Merkin in on the scam? Does it matter? He charged clients for due diligence he couldn't possibly have done--anyone who investigated the firm halfway seriously noticed that they hadn't heard of the auditor, whom fairly cursory inspection revealed to be working out of a mostly unused storefront in a strip mall.

It seems to me rather likely that J. Ezra was just doing what most of us do when it comes to investing in the market: figure it must be safe, because otherwise we'd have heard of it. I've never checked out the auditors of any of the firms in the indices I buy, because I figure that someone else has. Probably, J. Ezra thought the same thing about Bernie Madoff. Thus do frauds inflate to really amazing proportions.

But there remains the question of his exact moral culpability. The problem I have in sorting through the moral implications of this whole mess is that the people who are getting in trouble are mostly doing so because they did exactly the same stupid thing as the people who invested with them. Clearly, no one checked up on J. Ezra Merkin to see that he was actually doing the due diligence he claimed, or if they did, they shut their mouths and told no one else when they found out he wasn't. Why, then, should an investor be any angrier at him than they are at themselves? Because he was getting paid for it? So are you, when you collect the savings that you didn't plow into a Ponzi scheme. And a lot of the money that was lost belonged to charitable endowments which certainly had people who could have checked up on where their millions had gone.

None of this matters to the question of the lawsuits, exactly; clearly Merkin deserves to lose everything he has, and will. I just can't figure out exactly which circle of hell to assign him to.

Mark to marketing

The talk about the FASB decision to relax mark-to-market accounting rules is seriously overblown. I do not think that this was a particularly good decision, but the idea that this will horribly spook investors, or that the FASB has given the banks permission to lie to us, is extravagently unlikely.

First of all, the banks have to disclose in the notes to their financial statements the size of the boost their balance sheet gets from the change in accounting rules. That will give investors a good guide to backing out that change--which is probably why Bloomberg reported this morning that Citibank isn't even bothering to make it.

If you can't or won't read the notes to a 10-K or 10-Q, you should not be investing in bank stocks. Let me put that another way. IF YOU CAN'T OR WON'T READ THE NOTES TO FINANCIAL STATEMENTS, YOU SHOULD NOT BE INVESTING DIRECTLY IN STOCKS. I really have no sympathy for anyone who decides to gamble on a bank stock right now without even basic financial literacy. They can hardly say they weren't warned that this is mighty dangerous behavior.

Second of all, the mark-to-market price is not the "true" price; it's a price in an extremely illiquid, and therefore fairly inefficient, market. The value the banks put on it isn't any more likely to be accurate, of course. But we're talking about swapping an optimistically biased inaccurate price for a pessimistically biased one, not The End of Accounting As We Know It.

But we are not doing this to fool investors; we're doing it because of regulatory capital requirements. The problem with things like reserve ratios is that while in theory they should be countercyclical, in practice they aren't. A nice fat stack of reserves should enable you to better weather downturns. But of course, as long as they're required reserves, you can't actually touch them. If the government required you to carry $300 in your wallet at all times, you wouldn't have plenty of spending money; you'd have no spending money, unless you carried a lot more than $300.

A perfect regulator in an ideal market would relax capital requirements in bad times, and raise them in good times. The actual regulators we have, however, are terrified of spooking the markets if they do so--and more importantly, terrified of the all-out political war that would follow. So we lower capital requirements in good times, when all that capital seems like an untouched gold mine, and leave them stat, or raise them, when everything's going to hell. FASB, which is pretty insulated from political pressure, is doing what it can to correct that problem. Unfortunately, what it can do is undermine a rule that is, all things considered, a better idea than the alternatives.

Blogging will be light

Sorry about the radio silence--I had a piece to file yesterday, and now, like Greg Mankiw, I'm at a Brookings conference this morning. Phillip Swagel, the author of the paper he linked, is just about to speak. I'll be back on line after lunch.

Meanwhile, thoughts on the G20 statement.

On the one hand, the new money for the IMF is good
On the other hand, the new spending isn't all that big, compared to the size of the wallets represented at the G20
On the third hand, there are limits to how much the IMF and related organizations can reasonably deploy
On the fourth hand . . . tax havens? Srsly? They had time for this?

More Media Meltdown

Conde laid off Julian Sanchez yesterday amid more cuts in its digital properties. Conde is in an especially bad place with the web: their core competency is selling beautiful, glossy ad pages that readers enjoy looking at. This does not translate well to a digital format, and it's hard to make your company over overnight.

A bunch of my journalist friends and I have decided that our new toast is "to 2010". 2009 has so far been pretty disappointing for almost everyone I know, not to mention the country for which we all have great affection.

Why Did so Many UAW Workers Stay?

Obviously, there's one big reason: few of them could earn comparable wages anywhere else. But there's also the problem of worldview. Management's fractious relationship with the unions over decades had built up a huge reservoir of distrust among the workers, as one of my commenters points out:

I've worked at UAW assembly plants as a supplier and the average UAW worker gets their news through "the grapevine." Up until recently one of the popular views was that the big 3 weren't actually in trouble and that management was cooking the books to show a loss in order to demand concessions from the workers and break the union. It may seem silly but I have heard this from several workers at several plants. I don't know how to explain it other then most UAW workers have an absolute distrust of management.

Department of awful statistics

Every time you find yourself saying that there must be some causal relationship between two strongly correlated variables, you should go back and look at this graph:

As Atlantic Business contributor Derek Lowe, from whom I stole that graph, notes,

I've seen a lot shakier plots used to justify some sweeping conclusions, and if those were justified, well, then I'm forced to conclude that Mexican lemons have improved highway safety a great deal. The vitamin C, maybe? The fragrance? Bioflavanoids?

This is particularly tricky when you bring time into it, because things trend--as we get richer, we buy safer cars, get better emergency rooms, etc. We also import more lemons to make our chi-chi cocktails and lemon meringue pies. Overlay the two, and you've got a hell of a causal relationship.

But I expect that four years from now, we'll still be having the same conversations with proponents of "cancer clusters" and Democrats convinced that they can scientifically prove that Democrats are better for GDP by doing ham-fisted regressions of Democratic presidencies with a few tightly correlated economic variables. What's the mechanism? What makes electric power lines cause cancer, but not the earth's vastly more powerful magnetic field? What policies did Harry Truman and Bill Clinton have in common (but not with Richard Nixon) that caused this marvelous confluence? Well, maybe we don't know the mechanism exactly, but never you mind: just look at that bee-yoo-ti-ful correlation!

The Bankrupt Future of the Auto Industry

So now we're hearing that Obama doesn't think bankruptcy can be avoided by the auto firms, and no wonder--March brought yet another round of abysmal numbers on auto sales, both here and in Japan. A car purchase is simply too easy to delay, especially with credit constrained for the bottom 30% or so of the market.

If Obama follows through, and actually puts the companies into bankruptcy, I'll be awfully impressed--it's hard for any president to give up Michigan, but especially for a Democrat who wants labor support. So then the question is, what next? Which marques go? Buick, for sure, and Pontiac. Which plants close? And what is the government going to do to help autoworkers? They're not just out of a job--they're stuck in a state that will be absolutely devastated by these closures. Their houses will be worth almost nothing. What do you do with a 50-year-old auto worker who has lived in a factory town all his life?

Fiscal Matters

More support for Amity Shlaes: a New Yorker of my acquaintance who works with the finance industry reports that the massive fiscal crisis, and regulatory uncertainty, are having a big impact on how he invests for the future:

Now when I buy Mega Millions tickets, I pick the lump sum option rather than the 26 annual payments

Unemployment Continues Its Upward March

ADP payroll figures came in at 729,000 total nonfarm jobs lost, worse than expected. This doesn't necessarily mean that the recovery hasn't started--unemployment is a lagging indicator. But the market sure doesn't like it.

April 2009 Archives

April 30, 2009

Ken Lewis Out At Bank of America?

April 29, 2009

Is There a Doctor In the House?

April 28, 2009

Penny Wise, Pound Foolish

Arlen Specter switches parties

Stressed!

Your Morning Omnibus

Bleg

April 27, 2009

GM Makes The Moral Equivalent of a Hail Mary Pass

Recessionitis: Why Do Startups Hire People Right Before Going Belly-up?

Quote of the Day

The End of Capitalism?

Mental Health Break

Portfolio Magazine: Born May 2007-Died April 2009. R.I.P.

Annals of Journalism

The Worm Turns

April 26, 2009

Those Swine!

April 25, 2009

Car Talk

April 24, 2009

De-Stressing

Babies: Not Just for Breakfast Any More!

Fair Pay

The Problem of Opportunistic Argument

PPIPed

April 23, 2009

Chrysler Headed for Bankruptcy?

Ken Lewis: Paulson Made Me Do It!

Annals of Advertising: The Teeny Boppers Retire

Fiat Goes Big

April 22, 2009

Does Torture Work?

MBAs return to their roots

Freddie Mac CFO commits suicide

TARP Cops

April 21, 2009

The Price of PPIP Participation

How Big is a Budget Number?

Don't Let the Bedbugs Bite

Blogging For Big Bucks

Mad Ireland

April 20, 2009

Did Chrysler Execs Tank the Company Over Compensation Fears?

Financial Journalism Shut out of Pulitzers

Question of the Day: Bank Robbers!

No Parting from TARP

Pity Party

A new cure for high blood pressure

Are Tiny Cars Unsafe?

A close brush with almost-notoriety

April 19, 2009

Quote of the Day

April 17, 2009

Chrysler Negotiations Going Nowhere, Slow

EPA to Attack Global Warming?

Open Music Thread

Video Game Sales Fall in March

Do We Hate Credit Default Swaps for The Wrong Reasons?

April 16, 2009

In Search of the Perfect Pension

Depression Schtick

Question of the Day: Where Did Those Bank Profits Come From?

The Economics of Streetcars

What Does It Mean To Be Wealthy?

Happy Tax Day!: Mental Health Break

April 15, 2009

How Badly Will Bankruptcy Hurt GM Pensioners?

Happy Tax Day!: The Return of the Death Tax

Real Business: No Customers Need Apply

Mixed Messages to Banks

Those Lucky Canadians

April 14, 2009

Why Bankruptcy Matters

Health Care Hypothetical

Democracy and Capitalism