The Problem of Affirmative Action

HL Mencken once defined Fundamentalism as "the terrible, pervasive fear that someone, somewhere, is having fun".  I've been thinking of this a lot watching some of the attacks on Sotomayor, but I'd frame the critics as suffering from the terrible, pervasive fear that some brown person, somewhere, is getting away with something.

Posit that everything the critics say about Sotomayor is true; that indeed, everything they say about affirmative action is true.  Is this the biggest problem facing America?  Is this the biggest problem facing America from Sonia Sotomayor? 

Given my politics, I am probably not going to like how she rules on many, maybe even most, issues.  But almost none of those issues involve racial preferences, which, even if they are a problem, are a small problem for America, affecting fewer people than almost any of the other major policy questions we're debating today.  Making race, or racial politics, the central complaint, makes it seem like your biggest policy priority is making sure that not one minority in the land gets anything they don't deserve.  But hey, we all get things we don't deserve.  I'll go further:  almost all of us get something we don't deserve as a result of our race, including white people.  Perhaps even especially white people.

If you don't believe it, ask yourself why repeated studies show that resumes with identifiably black names get fewer interview offers than identical white resumes.  Being identifiably black hurts your chances worse than having a felony conviction.  Even if you want to argue that an identifiably black name is a socio-economic marker for a certain kind of parenting, an argument I find pretty dubious, are you really willing to argue that black kids should be permanently barred from employment because their parents have dubious taste in names?  Well, go ahead, I guess, but I'm going to find it hard to take you seriously when you complain about affirmative action because it undermines our fantabulous American meritocracy.

Sonia Sotomayor is not manifestly unqualified to be a Supreme Court justice, so focusing on affirmative action is completely irrelevant.  You can argue with her politics or her legal judgement, and hey, I'm all ears.  But the affirmative action complaints aren't advancing our quest to find out whether or not she'd be a good justice.  They're just alienating the people you want to convince.

Closing Chrysler's Dealers: Cui Bono?

This certainly doesn't look good: "The basic issue raised here is this: How do we account for the fact millions of dollars were contributed to GOP candidates by Chrysler who are being closed by the government, but only one has been found so far that is being closed that contributed to the Obama campaign in 2008?"

My operating assumption is that this story is a red herring.  Democratic and Republican dealers are unlikely to be found in the same place, and the rural counties that tend to be red are probably less profitable.  I would be less surprised to find out that the administration rescued specific donors from the hit list than to find that they deliberately closed Republican dealerships.

Still the administration should answer this; it gives the appearance of Chicago-style corruption that is going to further taint a Chrysler takeover which has already left a number of people in the business and finance community wondering how firm the rule of business law is these days.

Update:  Nate Silver points out that most auto dealers are Republicans.  That doesn't quite explain why so far only one Obama donor has been closed down, but it makes it difficult to definitely conclude bad faith.

Sovereign Woes

I'm on vacation this week, so blogging will be light.  GM will have to have its death throes largely without me.

But I do want to point to two articles that point to a growing problem that the Obama administration has failed to address in any serious way:  the exploding deficits, and the resulting need to borrow heavily.  USA Today points out that tax revenues are plummeting at the same time as spending is exploding:

Federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago -- the biggest April drop since 1981, a study released Tuesday by the American Institute for Economic Research says.

When the economy slumps, so does tax revenue, and this recession has been no different, says Kerry Lynch, senior fellow at the AIER and author of the study. "It illustrates how severe the recession has been."

For example, 6 million people lost jobs in the 12 months ended in April -- and that means far fewer dollars from income taxes. Income tax revenue dropped 44% from a year ago.

"These are staggering numbers," Lynch says.

Big revenue losses mean that the U.S. budget deficit may be larger than predicted this year and in future years.

. . .

The White House thinks that tax revenue will increase in 2011, thanks in part to the stimulus package, says the report from AIER, an independent economic research institute. But it warns, "Even if that does happen, the administration also projects that government spending will be so much higher each year that large deficits will continue, and the national debt held by the public will double over the next 10 years."

The government may have a hard time trimming spending to reduce the deficit when the recession ends. The 77 million Baby Boomers-- those born in 1946 through 1964 -- will start tapping their federal retirement benefits soon, which means increased government outlays for Social Security and Medicare.

"It will be doubly difficult for federal government to reduce expenditures and narrow the deficit as rapidly as they did following previous recessions," Lonski says. At the end of the last major recession, in 1981, Boomers were in their 30s. Their incomes were expanding, as was their appetite for goods and services.

Meanwhile, in the FT, John Taylor warns that our national credit rating is in danger:

A government debt burden of that [100 per cent] level, if sustained, would in Standard & Poor's view be incompatible with a triple A rating," as the risk rating agency stated last week.

I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor's considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth - probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.

The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised. That the Fed may have a difficult task reducing its own ballooning balance sheet to prevent inflation increases the risks considerably. And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating.

Short term yields firmed up this week on better consumer confidence data, but short-term yields shouldn't be what we worry about.  Eventually the treasury has to roll that debt or pay it off, and if interest rates spike, that can prove catastrophic--just ask Argentina.  The five year, seven year, and especially the thirty year auctions will tell us much more.

If the longer-yield debt again registers weak demand, the administration is going to have to address this problem.  Up until now, most of the debate over the administration's spending plans has focused on the political problem:  will the American public accept higher spending?  But the problem isn't the spending; it's how to pay for it.  If the spending were attached to tax hikes, this would cut into its popularity (though I don't know by how much).  That's one of the reasons that administrations like to fund their new spending with borrowing.  But you can't long do this on a scale that freaks out the bond markets--just ask Argentina.  And these days, the bond markets are easily freaked.

Posner and Greenspan face off

The Atlantic gets results!  I hope you've been following Richard Posner's writing for us as an Atlantic Correspondent.   Now he's received a response to his criticisms from Alan Greenspan, who defends the "Global Savings Glut" hypothesis.

Posner finds this defense unconvincing:

The federal funds rate, being the rate at which banks borrow reserves (cash) from each other, has a strong influence on long-term interest rates. The lower the cost at which a bank acquires capital to lend, the lower will be the rates at which it lends, whether long term or short term, because competition will compress the spread between the bank's cost (its interest expense) and its revenue (such as interest on the loans it makes). At the beginning of 2000, when the federal funds rate was 5.45 percent, the interest rate for the standard 30-year fixed-monthly-payment mortgage rate was 8.21 percent. By the end of 2003, the federal funds rate was below 1 percent (and was negative in real terms, because there was inflation), and the mortgage interest rate had fallen to 5.88 percent. The Fed then gradually raised the federal funds rate, to 5.26 percent in July 2007, and the mortgage interest rate rose also, to 6.7 percent, a smaller but still significant increase; and the bubble burst. Furthermore, given the popularity of adjustable-rate mortgages--which Greenspan encouraged--short-term interest rates had a direct effect on the cost of mortgages during this period.

Greenspan's analysis implies that the Federal Reserve lost control of long-term interest rates because of foreign capital and therefore could not have lanced the housing bubble even if it had wanted to, which is hard to square with the fact that the bubble did burst when the mortgage interest rate rose. (Though there was a lag, as I explained in a blog entry of May 19, because of the self-sustaining tendency of a bubble.) And it is plain from the earlier statements to which Greenspan has directed us that he neither was aware that there was a housing bubble nor would have lanced it had he realized it, since it was and appears to still be his position that bubbles should be allowed to expand and burst, and then the Federal Reserve will wake up, step in, and clean up the debris ("mitigate the fallout when it occurs")--which we have discovered it cannot do.

 
One wades into a debate between Richard Posner and Alan Greenspan with more than a little trepidation.  Still, I have to disagree with Judge Posner on a substantive point:  the power of short term interest rates is not nearly as powerful as he implies.

I say this for two reasons.  First, we observe (and observed, during the bubble) marked disconnects between short-term and long term rates.  It is true that they usually vary roughly in tandem, but there is a confounding factor:  the Fed's expectations are tied to the market's expectations.  So if everyone thinks there will be inflation, both short term and long-term interest rates rise; if everyone things there will be a recession, they both fall.  But this does not mean that the fed's action mechanistically determines the direction of long-term rates--if it did, we would not now be witnessing Treasury yields rising as the Fed holds interest rates to nothing.  It is true that many adjustable rate mortgages (ARMs) are pegged to the Fed funds rate, but many others are not.  And at any rate, the problem ARMs had teaser rates or odd structures (negative amortization rates) that further broke the relationship between the Fed and the sticker price of peoples' mortgages.

Indeed, there's some possibility that the decision to raise interest rates by the time a bubble is firmly established may be counterproductive--John Kenneth Galbraith chronicles how the attempt to raise the price of margin loans in the late 1920s simply attracted more European money into the trade.  If the price of stocks or houses is rising by double digits every year, raising the interest rate from 6 to 8 percent doesn't much dim the mania, but it does make lending into it more lucrative.

But also, the price of credit is not merely the interest rate--it's also the availability.  Mortgage interest rates are low right now, but the credit score required to get one of these low priced loans is much higher than it used to be.  That means that the price of loans has increased for alll but the most creditworthy.  For those with the lowest credit scores, it approaches infinity.

We know for a fact that American markets were flooded with foreign loans in the early part of the decade--the current account deficit marched upwards when rates were low, and when they were high.  The price of loans fell in both interest rate and availability terms.  By that time, the house price increases that were already well established--the Case-Shiller 10 city index shows home appreciation reaching 10% a year in the late 1990s, with only a mild dip after 9/11.  In those circumstances, it's hard to see how he could have stopped this by fiddling with interest rates.  Perhaps he might have managed it had he jammed interest rates up to somewhere between 8-10%.  But the result would have been a recession like the early 1980s--the one with the double-digit unemployment levels that we now fear we may repeat.  Assuming that he had succeeded in averting the worst of the runup, most of us would now remember Alan Greenspan as the lunatic who threw millions out of work in order to pop an imaginary housing bubble.

Greenspan might have had more success with changes in the mortgage origination rules.  But his power in this area was much more limited--America's fractured system of bank regulation, which desperately needs reform, has six different agencies that oversee banks.  This patchwork affords quite a few opportunities for regulatory arbitrage (remember the Savings and Loan crisis?), which leave it an open question whether Greenspan could have succeeded in cracking down on loose lending standards.

A few weeks ago, I was talking to a well-respected journalist who doesn't cover financial matters.  She was pushing me for the culprit behind this mess, and was unsatisfied when I pointed out that there were a lot of good reasons to make most of these bad decisions.  Ultimately she cried in frustration, "but somebody must have done it!"  This is how we approach the problem:  we want villains, guilt, punishment.  But when systems fail, they usually fail systemically.  If one person, even Alan Greenspan, could bring down the entire edifice, then we'd be in massive trouble, so we should be grateful that it isn't the case. 

Edmund Andrews Explains His Decision to Omit his Wife's Bankruptcies

Edmund Andrews has responded to my piece, though, weirdly, to PBS, rather than to me.

   It is hard to believe that anybody would accuse me of trying to  airbrush a story in which I recount the cringe-inducing details of my calamitous plunge into junk mortgages.  

    But Megan McArdle, a blogger for the Atlantic, accuses me of omitting crucial information: namely, that my wife, Patty, was involved in two bankruptcies, one in 1998 with her former husband; and one in 2007, while she was married to me. McArdle says this is "material information that changes the tenor of the story," and then accuses Patty of "serial bankruptcy."

    These bankruptcies did occur, but they had nothing to do with our mortgage woes.   They were both tied to old debts from before we were married or bought a house.  They had nothing to do with my ability to get a mortgage; nor did they have anything to do with our subsequent financial problems.

   Since Patty had been so brave in letting me tell our own story so candidly, I wanted to spare her the public exposure on these older woes. But that is now impossible, so here is the story:

   The first bankruptcy in 1998, five years before Patty and I got together.  It occurred because Patty's former husband, a producer of TV commercials in Los Angeles, didn't file income tax returns for five years.  Patty, who was a stay-at-home mom and wasn't earning money, was blindsided.  She had been signing returns, but he hadn't actually been filing them.  Because her husband's business income was reported on their personal tax returns, she had to join him in the bankruptcy filing.

    All that happened in 1998, and it obviously had nothing to do with the story in Busted. It never even occurred to me to mention it.

    Patty's second bankruptcy stemmed from a loan she received from her sister, while Patty was still living in Los Angeles.  At the time, she was caring for four children, working for very modest pay, and receiving almost no child support from her ex-husband.  (Despite multiple court orders, he remains chronically delinquent on untold thousands of dollars.)

     When Patty couldn't repay, her sister followed her east and sued her. I offered to pay off the loan by withdrawing money out of my 401k, but I wasn't allowed to because the purpose didn't qualify as a "hardship."  Without an alternative, Patty had no choice but to seek bankruptcy protection.

     None of this has any connection to our story. It had nothing to do with Patty being a spendthrift.  It had no bearing on my ability to take out a mortgage, and it had nothing to do with our financial problems.
    
Fortunately or unfortunately, BUSTED is a simple story: we took out a mortgage we couldn't afford, earned less than we hoped and couldn't bridge the gap.

I appreciate Mr. Andrews' candor, but I disagree that this had nothing to do with his story.

• I'm not "accusing" Ms. Barreiro of serial bankruptcy:  she has filed bankruptcy basically back to back, which no one is disputing.  That is serial bankruptcy.
  
• Patty Barreiro's first bankuptcy does not merely clear past tax debts--indeed, it's really very difficult to shed past tax debts in bankruptcy.  They also discharged $47,655.37 in credit card debt, $4701.10 in past medical bills, $14,303 in tuition to Campbell Hall, a Los Angeles private school, and a few other miscellaneous bills.  I don't have time right now to look up what the disposition of their debts to the IRS for the 1996-98 tax years was, but I suspect they ended up paying the $70,000 they owed.  Frankly, given what Edmund Andrews' says, I'm surprised they got any of their tax debt discharged:  as I understand it, it's nearly impossible to discharge tax debts due to fraud.
  
• Patty Barreiro's second bankruptcy does not merely clear a lawsuit.  The value of the settlement was $29,000.  The total vale of the unsecured claims discharged was $55,313, inclding almost $8,000 for legal services, almost $10,000 in medical bills, $1200 in phone bills, $1100 owed to Comcast, and $5400 in credit card debt.  If the purpose of the bankruptcy was merely to clear the lawsuit settlement, she could have reaffirmed the other bills, though of course, in practice no one ever does that--if you're going to declare bankruptcy, you might as well get a really fresh start.   It's hard to fault her for clearing the debts, but the fact remains that nearly half the obligations she discharged were not part of the settlement.
  
• Andrews is saying that the lawsuit was the driving factor behind the bankruptcy, and that the other unsecured debts are therefore somehow irrelevant.  But neither the book nor the bankruptcy filing indicate the means to clear the other unsecured claims without Chapter 7; by her own worksheets, she had very little income and their joint income was exceeded by their allowable expenses.  Plus, of course, they're awaiting foreclosure now.  If she hadn't declared bankruptcy, where would they have gotten the $25,000 to pay off the medical, legal, credit card, and utility bills she discharged? 
  
• Andrews is correct that many of the debts seem to have been incurred prior to the marriage.  I'm not sure what this changes.  My contention was not that she somehow illegally shed marital debts--the judge had every opportunity to force him into bankruptcy if he wished.  My contention was, first, that the shedding of joint and prior debts along with the lawsuit settlement looks somewhat strategic, and second, that declaring bankruptcy twice is often a sign of deep problems with financial management, and thus should have been disclosed, if only to explain it away.
  
• People who declare bankruptcy really are not like other people.  People who declare bankruptcy twice, even less so.  They have very different financial profiles from the average American--less savings, more debt.  When an adverse event occurs, they have no margin for error.  And, of course, it's only worth declaring bankruptcy if you've run up some pretty substantial bills; one hears horror stories about naive people declaring bankruptcy to get rid of $2000 in credit card debt or some such, and their attorneys should be publicly shamed before being ridden out of town on a rail.  But the average debt discharged in bankruptcy in a Chapter 7 filing seems to be in the tens of thousands.
• That kind of living up to the edge is, indeed, exactly what Andrews describes happening in his marriage.  The bankruptcies suggest that this may be a symptom of a pre-existing problem, rather than the easy credit of the past five years.
  
• Andrews seems to now be arguing that the Chapter 7 filings are not relevant because they didn't affect his ability to get a mortgage.  But of course the article and the book is not just about him--rightly, because unless your marriage is pretty dysfunctional, it's a financial partnership.  The two bankruptcies seem to reveal that one partner has demonstrated a historic inability to live within their means.  So though the bankruptcies don't tell us anything about their ability to get a mortgage on their house, they may tell us quite a bit about their willingness to take on a mortgage.  This decision is at least as important as the bank's.  I'm sure banks would have given me all kinds of stupid mortgage loans in 2004, but I didn't avail myself of the opportunity.

I have an email in to Ms. Carman, Ms. Barreiro's sister, but haven't yet heard back, so I can't comment on the particulars of the story--and anyway, I'm not sure how much the particulars matter.

On a very broad note, I don't see this as a story about the goodness or badness of Andrews or Barreiro--and I've been dismayed by some of the nastiness about her in comments here and elsewhere.  Rather, I think this matters because the story Andrews told was basically about the subprime crisis, and the book casts him as a sort of everyman, lured in by cheap credit and a likeable scoundrel of a mortgage broker.  That may be what happened to many, or most people in the mortgage crisis--but the back to back bankruptcies strongly suggest that this is not what happened to Andrews.  That said, I think the story told with the bankruptcies included would still be a story well worth telling. 

Moral Bankruptcy

Should defaulters feel bad?  I've been thinking about this a lot lately.  A number of people have made the argument to me that the credit system is morally neutral, at lest from the point of view of the debtor.  The banks knew when they lent to you that there was a risk of default, and if you do, you pay the penalties.  Why feel guilty?  They don't, for selling you the rope with which you hung yourself.

To some extent, I actually agree with this.  Though I'll also note that if you default, the worst thing that generally happens to you is that it's hard to get credit.  Yet, the way the credit card companies allegedly bring on your default is by giving you credit.  I'm not sure that the argument that credit card companies should deny you credit, because otherwise you won't be able to get any credit, really works too well.

But leaving that aside, why should you feel morally obligated to repay, at great personal cost, a company which feels no obligation to you?  No particular reason, maybe, except that the belief in a moral obligation to repay one's debts may be the only reason we can have both credit, and relatively light legal sanctions for overusing credit.  If people really acted as if the choice to default were morally neutral, we'd either lose most of our credit system, or the legal rules would have to be much more punitive. 

That's speculative, of course, but there's some evidence to support it.  Meet Memphis, Tennessee, America's Miss Bankruptcy 1997:

The roots of the problem in Memphis are tangled and deep. One problem is Tennessee's debt collection law, which makes it easy for creditors to collect overdue bills directly from borrowers' paychecks--"garnishment" in legal terms. George Stevenson, a Memphis bankruptcy trustee, says perhaps as much as a third of petitioners want to stop a garnishment. Another problem is simple overborrowing. The average Memphian owes $10,137 in nonmortgage debt, 18% more than the typical American, according to the debt rating agency Equifax. A third problem is an apparent propensity for personal misfortune. Studies have shown that three main life disasters tend to push people into bankruptcy: job loss, illness, and divorce. Memphis' divorce rate is about 10% above the national average.

But all these put together aren't enough to explain the tremendously high bankruptcy rate in Memphis. A visitor soon concludes that this boomtown has a culture of bankruptcy. The city itself went bankrupt in 1879, and so have many of its leading citizens, from the founder of the Piggly Wiggly grocery chain to rock & roll legend Jerry Lee Lewis. Because so many people have lived through bankruptcy, there's a strong informal support network for anyone in financial trouble. Friends and neighbors tell each other "bankruptcy works," says David Monypeny, Jerry Lee Lewis' manager, who claims that Lewis' 1988 filing gave "The Killer" a chance to start his life over. There's also plenty of professional support for bankruptcy: The Memphis Yellow Pages features more than a dozen large lawyers' ads offering to wipe out debts for no down payment; a Honda dealer (its slogan: "The bankruptcy specialists") runs TV commercials promising to sell you a car no matter what your credit history. For some Memphians, bankruptcy is a way of life. Most financially strapped Americans liquidate their possessions and wipe out their debts in one blow, using Chapter 7 of the bankruptcy code. Memphians prefer Chapter 13, which allows debtors to keep their property but requires regular payments for five years. (Incidentally, Chapter 13 was written by a former mayor of Memphis.) Most Chapter 13 filers lose their protection because they fail to meet repayments, so they often just refile (which, to be fair, inflates the bankruptcy statistics somewhat).

There are serious costs to being the No. 1 deadbeat, of course. It's almost impossible to cash checks in Memphis. Used-car dealers charge their wholesale cost as a down payment. And lenders are either tightening or giving up. First Enterprise Financial Group, for instance, an Illinois-based sub-prime lender, closed its Memphis operations in May.

People tend to underestimate the cultural infrastructure of capitalism.  At a moment when we're looking for villains and victims, this is worth remembering.

The Road to Bankruptcy

At the end of his book's harrowing account of mortgage mistakes and credit card crises,  Edmund Andrews writes:  "While our misadventure had certainly been more extreme than those of many other Americans, our situation was not all that unusual."  And indeed the book reads like the story of an American Everyman, easily sucked in to the alluring world of easy credit as he struggled to blend a new family.  The terrifying implication is that it could happen to you--to anyone who leads with their heart and not their head.

But en route to that moral, it turns out the story has been tidied up a little.  Patty Barreiro, Andrews' wife, has declared bankruptcy twice.  The second time was while they were married, a detail that didn't make it into either the book or the excerpt that ran in last Sunday's New York Times Magazine.

Andrews' desire to shield his wife is understandable--hell, laudable.  No decent person wants to parade their spouse's financial trouble in front of the world.  But this is material information that changes the tenor of his story.  Serial bankruptcy is not a creation of the current credit crisis, and it doesn't just happen to anyone, particularly anyone with a six figure salary.

In September 1998, California bankruptcy court records indicate that Patty and her first husband declared bankruptcy.  The financial statement they filed with the court indicated family income of $174,000 in 1996, $87,000 in 1997, and $126,000 in the first nine months of 1998.  The income fluctuations are not surprising, given that her husband was in the film production industry.  By the time of the filing, the couple owed about $30,000 on 8 credit cards, over $200,000 in back taxes, and almost $15,000 in private school tuition, as well as substantial car and mortgage payments. 

In 2007, nearly as soon as she was eligible, Patty Barreiro filed again in Montgomery Country.  When called for comment yesterday, Andrews was unavailable, but there is no question that it is his wife:  his income and occupation are prominently featured in the docket.

This is really highly unusual.  For starters, the overwhelming majority of people who file bankruptcy do not make anything close to $100,000 a year--the standard estimate when the 2005 bankruptcy reform was passed was that about 80% of filers had household incomes below the median income in their state.  The number of affluent people who file twice is even smaller, and has presumably gone down since the 2005 filing largely eliminated abusive serial Chapter 13 filings, which used to be used, often by quite wealthy people, to forestall evictions or foreclosure.

The bankruptcy code requires filers to wait 8 years after a previous Chapter 7 discharge.  Barely four months after she became eligible, Patty Barreiro filed again.  And the filing shows some suggestion of strategic debt management.

Ms. Barreiro filed separately from Andrews, and had to amend the filing to include Andrews' income after a complaint from a creditor who wanted to force her into a Chapter 13 repayment plan.  She filed when her income was at rock bottom, consisting only of unemployment; the timing may have just excluded having to declare $5,000 in freelance editing income Andrews mentions in the book.  And she shed what appear to be jointly incurred debts, such as a Comcast account.  Comcast does not service the address listed on the 1998 filing, but as I can attest (to my sorrow), it is the main cable provider in Silver Spring, where she moved to live with Andrews in 2004.

Serial bankruptcies can, of course, happen to anyone with enough bad luck.  But they usually don't.  And when they do, they usually hit people with marginal incomes that leave no margin for error in the budget.  Most people, even in LA, are able to build a sustainable budget out of an income in the low six figures. 

Moreover,  pesky bad luck isn't really the picture painted by either filing.  Rather, Ms. Barreiro seems to have spent most of the last two decades living right up to the edge of her income, and beyond, and then massively defaulting.  If you structure your finances so that absolutely everything has to go right, it's hard to blame the mortgage company when you don't quite make it.

Andrews has been admirably open about many of the poor decisions and the wishful thinking that led him deep into debt.  Nonetheless, he has laid much of the blame onto irresponsible bankers and mortgage brokers.   The missing bankruptcies substantially undermine this basic narrative arc of Andrews' story.  Particularly in his book, the bankers are the villains, America's current troubles are the inevitable denouement of their maniacal greed, and the Andrews household stands in for an American public led, by their own greed and longing and hopeful trust, into the money pit. 

It's hard to argue that Ms. Barreiro was forced into bankruptcy by crazed subprime mortgage lenders in 1998.  Greedy bankers certainly didn't keep her and her first husband from paying their taxes.

Of course, her first husband was involved too--there's no way of knowing who was at fault in the first case.  If indeed anyone was:  there may have been a business failure or some other mitigating factor.  As I mentioned, I tried to reach Andrews for comment several times, leaving messages on both his office and cell phone that made it clear I was reporting for The Atlantic, and that I wanted to speak to him about Patty's bankruptcies.  For whatever reason, he has not called me back, and so I don't have his (her) side of the story to tell you.

Of course, no matter what he told me, it wouldn't let the bankers off the hook.  Whatever Patty Barreiro's spending history, it's still true that she and Andrews were able to dig themselves in a lot deeper because of fantastically easy credit from a variety of fantastically stupid bankers, most of whom now seem to have gone fantastically bankrupt.  But while the willing lenders amplified the problem, given Ms. Barreiro's history, it seems unlikely they were at the root of it.  It's hard to see them as victims either of those bankers, or a mass mania. 

Andrews married a woman with a lengthy history of debt and spending problems.  Serial bankrupts were getting into trouble long before there was a credit bubble, indeed long before there were credit cards or 30-year self-amortizing mortgages. In fact, the literary history of America is littered with them; we owe much of Mark Twain's later work  to his catastrophic financial mismanagement. 

Credit encourages people to spend more by separating the pain of payment from the pleasure of consumption.  For many, maybe most, people, this means at least one brush with unpleasantly large overdrafts or credit card balances.  And for a small subset of folks, that easy accumulation leads to real, often repeated, trouble.  Those kinds of problems can't be fixed with tighter mortgage lending standards or a 500 basis point uptick in the Fed Funds rate.  And they aren't the main problems facing most Americans today.

Department of Awful Statistics

That widely circulated map showing that the US "human development index" varies widely by state and, oddly enough, just happens to show that the most liberal states generally have the most developed human beings, turns out to be bunk.  I'll let James Joyner summarize:

It turns out that the "index" considers only three elements:  Life expectancy at birth, Adult literacy and education, and a variant of GDP per capita.   It turns out that the first two of these are so uniform across the 50 states as to be negligible, making the last the main determinant of the ranking.  Additionally, Mississippi's .799 makes it just barely fit into the arbitrary color breakdowns, making it appear to those looking at the map to be massively less "developed" than West Virginia and Louisiana, at .800 and .801, respectively.

What Gelman does not add is that "the natural logarithm of gross domestic product (GDP) per capita at purchasing power parity (PPP) in United States dollars" is actually a rather poor measure of "standard of living" given that it's not normalized for local housing prices.

Does anyone really think that there's a significantly different level of "development" between North and South Carolina?  Or that Michigan is better off than Missouri?

Joyner adds:  "This is yet another instance of a trend that I've long found aggravating: the ordinal ranking of relatively similar bodies to create the illusion of substantial disparity.  We usually see it in the form of international comparisons, which have the United States ranked 35th on some attribute despite being essentially the same as the country ranked 1st. "

Blue states are indeed richer.  But presumably the liberals who gave this map link love don't think per capita GDP is actually a really good measure of human development.

Credit Report

This morning, Kevin Drum has a horror story about a tax lien that seemingly can't be removed from a credit report.  Long story short:  confusion/error settling father's estate; tax lien incurred/cleared up; tax lien still there, making it hard to get a loan.

But as a reader points out in the comments, it's not quite that simple.  A valid tax lien is a credit event.  Just as with a bill collection, it doesn't go away merely because you've paid it.  The credit reporting agencies merely add the notation that it's been satisfied.

On the other hand, I can attest from personal experience that those smudges have staying power.  Through a series of bizarre events including a misfiled state tax return, multi-state residence, and an apparently incorrect address, the state of New York slapped me with a tax lien a few years back.  The State of New York has since admitted they were entirely in error, and indeed, that they owed me about $500 in refund. 

(Not that they paid.   Funnily enough, the statute of limitations for getting a refund from the state is much shorter than their statute of limitations for coming after arrears.)

The judgement has been vacated, the lien rescinded, yet it's still there on my credit report.  But the fault, Horatio, lies not in our credit reporting bureaus, but in ourselves.  Or rather, our governments.

The procedure for getting an error removed from your credit report is to send them a letter, and give them thirty days to investigate.  You may be astonished to realize this, but there is a population of people in this country with very low morals, and no, I don't just mean Lehman bankers.  Those scurrilous creatures will fake letters, even fake notarized letters, to gain personal advantage.  That kind of person is somewhat overrepresented in the population of people who have bad credit.  So the credit bureaus don't just accept a letter from the nice folks at the IRS. They call the IRS to check.

And apparently, in my case, when they check, the New York courts merrily inform them that I sure did have a tax lien against me, though it's been "cleared".  Which sounds like "paid".  And there it sits.

Eventually, I'll have to actually go to whatever absurd lengths are required to truly scrub the thing, but it hasn't been a huge priority--the hit to my FICO score will only really matter if and when I want a mortgage.  And if I can't, I will be very mad.

It is terrifying the power that these bureaus have assumed over us--when my bank made an error on my car loan, my first worry wasn't that they'd upped my payment by $60, but that the subsequent late charge for an undersized loan payment might show up on my credit report.  This was only slightly less panic-inducing than thinking that it might show up as a shadow on a chest x-ray.  The bank fixed its error immediately and cheerfully.  (And may I commend the Navy Federal Credit Union to all who are eligible for membership).  I doubt Experian would have been so accomodating.

But maybe it's worth remembering that the tyranny that credit scores exercise over our imagination have everything to do with the fact that we've built a society so utterly dependent on credit.  If you didn't need a credit card, an auto loan, and probably a mortgage to be considered middle class in this society, these opaque and unresponsive bureaus wouldn't be the most important source of information about us.

Photo by Flickr user TheTruthAbout . . .

Will the Urban Renaissance Outlast the Bubble?

There's a lot of angst out there over whether products like Starbucks that seem somehow emblematic of an era of wasteful spending will outlast the current downturn.  The other day it occurred to me to wonder if the same isn't true of US cities.  The first model for an urban renaissance was, after all, New York.  But while New York's renaissance was certainly a product of a lot of factors, all of the institutional improvements were funded by the post-1982 financial services boom.  New York City is projecting its 2010 revenue will be down 30% from FY2008.  That's three years after the recession started.

Those tax revenues supported New York's extraordinarily odd income structure.  New York has extraordinarily generous poverty benefits, made possible because so many of its residents make so much money that they don't really miss the extra taxes.  A city with a more normal income distribution couldn't support that level of spending.  So if the financial industry really is permanently smaller and less lucrative, what happens to the 650,000 New Yorkers in public housing, the one in three New Yorkers on Medicaid, the 50,000 or so on TANF, and so forth?

Presumably they get fewer services, and get angrier, and commit more crimes, which don't get solved as rapidly by the smaller police force.  And the families with children start moving back out.  And presumably this problem is replicated in cities like San Francisco and Seattle which depend, indirectly, on revenue generated by the financial markets.  (That is, after all, what a stock option amounts to.)

But maybe I'm too pessimistic.  Which is what comments are for. Tell me why I'm wrong.

Comparative Effectiveness Redux

A propos of my post last week on asthma inhalers, an academic who asked not to be named wrote:

Maybe you should elaborate for some of your readers on the difficulty of arguing for null effects. In my experience, when people trying to get peer-reviewed science pubs arguing for null effects they do  multiple experiments or the strongest test possible (which seems most relevant here). This study seems to have done neither and instead subjected all inhaler patients to crappier inhalers by showing that  the mildest sufferers of asthma did not show a statistically significant difference in their relatively insensitive test.

This is a hugely important point.  And there are a lot of ways in which these tests seemed deliberately designed to "prove" that there was no difference:

• Small sample:  the smaller the sample, the harder it is to find an adverse effect. That's why drugs like Vioxx made it to market:  distinguishing problems from background statistical noise needed a lot of patients.  I know more than one analyst who argues that medical studies are generally too small--because humans are so variable, they don't reliably pick up any but the strongest effects.  Hence the steady stream of articles proving that antioxidants will kill you/make you live forever/make you fat/make you thin/improve your singing voice/cause your fingers to fall off.
• Short timespan.  One study ran for a year.  The rest were 6-8 weeks.
• Only mild-to-moderate asthmatics included.  These asthmatics are generally well controlled, and don't have crises that often.  If you have a 20% increase in the number of crises over a year, but the asthmatics in your study only have a crisis once a week, it will be hard to distinguish that from statistical noise, espeically given the small samples and short timeframes.
  
• The differences may be hard to quantify, and thus not show up in the study:  if your breathing gets 30% worse, the doctor can't tell unless he happens to have you on hand to measure when you're having an attack.  Again, if you only have an attack rarely, he probably won't.

A cursory look at some of the studies indicates that they didn't really show there's no difference; what they showed was that there was no difference that a) showed up in a lab in b) a small sample of c) the patients with the mildest disease over d) generally short timeframes.

Lest you think this is special pleading, I'm pretty much resigned to my CFC-fate.  But this sort of thing matters broadly.  The FDA used the lightest possible statistical test on a pretty important medication for millions of asthmatics.  Do you want Medicare denying your mother a possibly effective treatment for her otherwise terminal cancer with the same kind of test?

The most worrying thing here is the real possibility that the FDA got the result the EPA wanted.  Will they be tempted to get the answer Medicare would like to hear about the relative merits of expensive medications?

Again, I'm not saying we shouldn't do CRE.  But for all that Democrats are enjoying thinking of themselves as the Party of Guys in White Coats With The Answers, the binary discussion of CRE (we'll find what works!) is borderline religious in the way it treats government researchers.  The process of finding out what works is considerably more complicated than giving a scientist some money and a hundred human lab rats.  And there is a real danger that a few studies will end up shutting down potentially useful treatments, as first Medicare and then private insurers turn weak or equivocal results into an iron ruling.

The Moral Hazard of a State Bailout

If the government does bail out the muni bond market, how should it go about things?  The initial assumption is that they'll only guarantee existing debt. Otherwise, it would be like handing the keys to the treasury to every mayor, county board, and state legislature, and telling them to go to town.

But once the treasury has bailed out a single state, there will be a strongly implied guarantee on all such debt.  So you don't give them the keys to the vaults, but you do leave a window open, point out where the money's kept, and casually mention that you've given the armed guards the week off.

I don't see how the government can make a credible committment not to bail out various localities who overspend, if it's already done so.  And if that's the case, there's no way to avoid the moral hazard, so we might as well go ahead and offer the explicit guarantee in exchange for some sort of say in how the money is procured and spent.

Farewell, Federalism . . . we hardly knew ye

Is California Too Big to Fail?

So what about California?  A reader asks.  Ummm, that's a tough one.  No, wait, it's not:  California is completely, totally, irreparably hosed.  And not a little garden hose.  More like this.  Their outflow is bigger than their inflow.  You can blame Republicans who won't pass a budget, or Democrats who spend every single cent of tax money that comes in during the booms, borrow some more, and then act all surprised when revenues, in a totally unprecedented, inexplicable, and unforeseaable chain of events, fall during a recession.  You can blame the initiative process, and the uneducated voters who try to vote themselves rich by picking their own pockets.  Whoever is to blame, the state was bound to go broke one day, and hey, today's that day!

There is a surprisingly sizeable blogger contingent arguing that we have to bail them out because however regrettable the events that lead here, we now have no choice.  But actually, we do have a choice:  we could let them go bankrupt.  And we probably should.

I am not under the illusion that this will be fun.  For starters, the rest of you sitting smugly out there in your snug homes, preparing to enjoy the spectacle, should prepare to enjoy the higher taxes you're going to pay as a result.  Your states and municipalities will pay higher interest on their bonds if California is allowed to default.  Also, the default is going to result in a great deal of personal misery, more than a little of which is going to end up on the books of Federal unemployment insurance and other such programs.

Then there are the actual people involved.  Whatever you think of, say, children who decided to be born poor, right now they are dependent on government programs, and will be put in danger if those programs are interrupted.

On the other hand, I don't really see another way out of it.  If Uncle Sugar bails out California, California will not fix its problems.  Perhaps you want Obama to make it fix the problems, using the same competence, power, and can-do spirit with which he has repaired all the holes in the banking and auto manufacturing sectors.  But Obma is not in a good position to do this.  California Democrats are a huge part of his governing coalition.  All Obama can do is shovel money into the bottomless pit of California's political system.

Moreover, even if the administration could fix any of the core problems of California--and New York--and the banks--and the automakers--and the energy industry--they can't fix them all.  Especially given how thinly staffed Treasury is.  The president and his cabinet only have so much attention, more than all of which seems to be occupied by the problems already on their plate.  They don't really have the time, knowledge, energy, or staff to take on running a whole 'nother government.

California will go bankrupt, muni and state debt will spike, the federal government will backstop humanitarian programs and very possibly all state and local debt, and eventually, California will figure out whether it wants higher taxes or lower spending.  But we will not actually make the world a better place by enabling the lunatics in Sacramento to pretend they can have both.

The High Price of Poverty

I think it's absolutely true that the poor pay more for a lot of things than the wealthy, and that this is a rotten shame.  Nonetheless, this article in the Washington Post, which Ezra links favorably, seems just a tad bit . . . off.  It's not just the writing style, which reads like a polished high school essay.  It's that some of the things the author says don't make a whole lot of sense to me.  Like this passage:

Just then, Lenwood Brooks walks out of the check-cashing place. He is angry about how much it just cost him to cash a check. "They charged me $15 to cash a $300 check," he says.

You ask him why he didn't just go to a bank. But his story is as complicated as the various reasons people find themselves in poverty and in need of a check-cashing joint. He says he lost his driver's license and now his regular bank "won't recognize me as a human. That's why I had to come here. It's a rip-off, but it's like a convenience store. You pay for the convenience."

First, banks have other ways to tell who you are, like signature files.  And second, I've used check cashing places.  None of them ever cashed my check without at least as good an ID as my bank would require, for obvious reasons.

Then there's this:

On a hot spring afternoon, Jacob Carter finds himself standing in a checkout line at the Giant on Alabama Avenue SE. Before the cashier finishes ringing up his items, he puts $43 on the conveyor belt. But his bill comes to $52.07. He has no more money, so he tells the clerk to start removing items.

The clerk suggests that he use his "bonus card" for savings.

Carter tells the clerk he has no such card.

Bonus cards don't cost money.  They're free for filling out a form.  This is annoying, but it's not some perk he missed out on because he's poor.

Or this assertion:

"You pay rent that might be more than a mortgage," Reed says. "But you don't have the credit or the down payment to buy a house. Apartments are not going down. They are going up. They say houses are better, cheaper. But how are you going to get in a house if you don't have any money for a down payment?"

Probably the person who said it believes it--but in Washington DC proper, prices have not fallen so low on housing that it's cheaper to pay a mortgage than to rent.  A mortgage alone would almost certainly run you more than an equivalent rental payment, and of course, there are taxes and repairs to consider.

This is all mixed in with very sensible and true observations.  So why did the writer either garble the words, or unquestioningly parrot people saying fairly crazy things?

Passages like this challenge the credibility of a very good point:  access to even small amounts of capital can be the difference between getting by and sinking.  Car downpayments, housing deposits, enough storage to buy in bulk, make it possible to get by on a lower wage.  And those endowments are persistent--if you have to live in a motel room because you don't have enough cash for an apartment deposit, you won't be able to save any money for a car downpayment, or for that matter, an apartment deposit.

There are a fair number of charities that focus on providing this sort of seed capital--interview clothes, apartment hunting assistance--but not enough.  And American political culture is particularly weak at filling those sorts of gaps.

Those Were the Days My Friend

John Podhoretz recalls the halcyon days of journalism when an expense account really meant something.  I confess, my mind boggles at the notion that this was ever possible in a news organization:

Generally speaking, the World section ran  12 pages in the magazine. Nation, devoted to news within our borders, ran about the same or a page shorter. Think of that--an American publication, marketed to millions, that devoted slightly more of its attention, and vastly more of its budget, to news about events outside the United States.

Time Inc., the parent company of Time, was flush then. Very, very, very flush. So flush that the first week I was there, the World section had a farewell lunch for a writer who was being sent to Paris to serve as bureau chief...at Lutece, the most expensive restaurant in Manhattan, for 50 people.So flush that if you stayed past 8, you could take a limousine home...and take it anywhere, including to the Hamptons if you had weekend plans there. So flush that if a writer who lived, say, in suburban Connecticut, stayed late writing his article that week, he could stay in town at a hotel of his choice. So flush that, when I turned in an expense account covering my first month with a $32 charge on it for two books I'd bought for research purposes, my boss closed her office door and told me never to submit a report asking for less than $300 back, because it would make everybody else look bad. So flush when its editor-in-chief, the late Henry Grunwald, went to visit the facilities of a new publication called TV Cable Week that was based in White Plains, a 40 minute drive from the Time Life Building, he arrived by helicopter--and when he grew bored by the tour, he said to his aide, "Get me my helicopter."

These days, a reporter is far more likely to find himself explaining to accounting why he stayed in the Holiday Inn when there was a perfectly good Super 8 only 13 miles away.

There's little doubt that this inflects peoples' reporting.  Journalists these days live in a world where a degree, long experience, a solid work history and quite a bit of talent are no guarantee of income security.  It's little surprise that that's the world they portray in the pages of the nation's few remaining print outlets.

High Standards

What to say, beyond the obvious, about the administration's decision to raise fuel economy standards?

• It will raise the prices of cars, and make them less safe
• It will reduce our carbon emissions, but not by as much as advertised, because more fuel efficient cars make driving cheaper, so people will do more of it.  This "rebound" effect robs about 25% of gains, and also means more congestion, and more wear-and-tear on roads
• This will either help the Big Three compete, or seal their doom as the Japanese manufacturers continue to eat into their market share.  If I had to bet, I'd wager this means big ongoing subsidies for our favorite three public charities.
• If you want to cut down on the pollution from driving, this is about the worst possible way to do it.  On the other hand, it may be the only politically feasible way to do it.  If you take global warming seriously, as I do, it may be the best of a bad set of policy choices.
  

Busted

So this weekend, I read the book from which the New York Times article I blogged about on Friday was excerpted.  I feel a little differently now, though not enough to take back anything I wrote.

Andrews spends a lot of time defending not feeling bad, because after all, the banks shouldn't have lent him money.  This is true, they shouldn't, and anyone who did should be profusely apologizing to their shareholders.  But when you read the book, what you discover is that while the book is ostensibly about our Great National Borrowing Binge, for Andrews, the debt is really a sideshow.  He couldn't afford to get married.  At all. 

After his alimony payments, Andrews was taking home $2770 a month, or about what I took home when I was a junior web editor at The Economist.  On this, he expected to support a wife and several children who came attached to a meagre $700 a month in child support.  Presumably, their joint income was so low because the emotional (though not yet physical) relationship between Andrews and his now wife is what triggered their respective divorces.

Middle class people in Washington DC do not expect to support a wife, several children, and the visits of several more, on $3500 a month--which they didn't get, because her ex-husband repeatedly failed to pay up.  That is not money that lets you live at any income level at all in an acceptable school district.  The tiny, run down two bedroom in Silver Spring that my sister and I shared when I first moved to DC was $1500 a month.  I don't think you could cram four or five people of varying ages and sexes into that living space--not and maintain what the middle class anywhere in the country thinks of as a decent minimum.  Even if you'd wanted to, the building management wouldn't have allowed it.

He certainly couldn't live there and do what middle class people in DC think of as "normal", like dressing yourself and your children somewhere other than the $10 rack at Wal-Mart, eating something besides rice and beans every night, and so forth. At the very best, had they moved to an exurb, they would have had a life with absolutely no margin for error.

Of course, they didn't exactly expect to pull this off on $3500 a month.  They expected his wife to get a job that paid $40,000 a year or more.  But this was not certain, and it wasn't actually all that reasonable, considering that she hadn't worked for twenty years.

Andrews took on the obligation to support two adult women and, by my count, six children.  Middle class people can't do that.  That's something that's only ever been possible for very rich men.

The credit card lenders and mortgage brokers let Andrews make a bad decision:  the decision to get married.  But if they hadn't lent him the money, it's crystal clear from the expenses and income figures he lays out, and their behavior, that they never would have gotten married in the first place.  They were spending $3,000 a month more than they were making.  Having a cheaper rental or a lower credit card interest bill would have come nowhere near to making up the gap.

So what does he blame them for?  Helping him get, and (so far) stay, married?  It's like the old joke:  take my wife--please!  Other people may have been led down the primrose path, borrowing more than they can afford.  But Andrews married more than he could afford.  Unless he's willing to repudiate the marriage, he hasn't much moral stance to repudiate the debt.

Maureen Dowd's Astonishing Feats of Verbal Memory

Language Log is extremely skeptical that Maureen Dowd accidentally remembered a verbatim quote from Josh Marshall:

Let's try a little (thought) experiment in verbal short-term memory. First, find a friend. Then, find a reasonably complex sentence about 45 words long, expressing a cogent and interesting point about an important issue -- say this one from a story in today's New York Times: "But the billions in new proposed American aid, officials acknowledge, could free other money for Pakistan's nuclear infrastructure, at a time when Pakistani officials have expressed concern that their nuclear program is facing a budget crunch for the first time, worsened by the global economic downturn."

Now call your friend up on the phone, and have a discussion about the topic of the article. In the course of this conversation, slip in a verbatim performance of the selected sentence. Then ask your friend to write an essay on the topic of the discussion. (OK, this is a thought experiment, right?)

How likely is it that the selected sentence will find its way, word for word, into your friend's essay?

Actually, there's a prior question, which is whether your friend will have stopped the conversation to ask why you're suddenly talking in such a writerly way.

If she did, she's wasted as a columnist; she ought to have her own mentalist act.

What's weird is that the truth is presumably more believable than what she said.  It's not like Maureen Dowd has a history of plagiarism, or that it's very likely she thought a verbatim lift would go unnoticed.  What probably happened is that her assistant found the quote for her, and the attribution got lost, or a friend emailed it to her and forgot to mention it was a direct lift.  All writers get ideas and funny turns of phrase from their non-writer friends, though most of us notify the friends before we steal them.  But the explanation she gave makes no sense, and makes people think she's hiding something.

Empty Desks at Treasury

The complaint that Treasury can't get anything done because they can't get the place staffed has died down some, but this Washington Post article resurrects it.  The longer this goes on, the more bite it has--in March, there was some excuse, but by June, you should probably have at least nominated someone to be undersecretary for domestic finance.

One thing I haven't seen talked about much is the apparent problem with financial nominees who have substantial assets.  Now is not a great time to liquidate a frozen position in order to put the assets into a blind trust.  Combine that with the quasi-interrogations associated with today's newer, tougher, nominating process, and it's pretty hard to convince people to take the plunge.

That's hardly Geithner's fault.  But knowing he can't do much doesn't make us any better prepared to handle the current problems.

Economy Ends; Women and Minorities Affected Most

Why are minorities disproportionately affected by foreclosures?  There's a lot of quasi-anecdotal evidence along these lines that indicates they're more likely to currently be in arrears on an unaffordable mortgage.  After decades of worrying about redlining, why are we suddenly worried that too many minorities were buying expensive houses with expensive loans?

The New York Times suggests that the problem is the mortgage brokers; immigrants and African Americans don't trust banks for a variety of reasons.  And they did trust mortgage brokers who were members of their communities, and steered them to expensive loans that earned fat commissions.

I don't say that this isn't the problem--I'm sure it's a least some part of it.  But there's a problem with this sort of analysis.  There are a number of different metrics that go into loan quality, and therefore what a buyer should pay for their loan:

• Income
• Expenses, especially outstanding debt
  
• Credit score
• Assets
• Loan-to-value ratio

Most of the studies I've seen indicating that minorities are steered into pricier loans look at just one, or at most two, of these factors.  But they all matter, particularly the size of the loan.

Putting the "Trade" in Cap and Trade

Matt Steinglass, whose blog doesn't get nearly enough love, wrote the other day about one reason to prefer cap-and-trade over taxes:  tradeable offsets.

Without cap and trade, projects that create tradable carbon emissions credits (CECs) by fixing carbon or otherwise reducing greenhouse gas levels -- things like preserving forests and planting new ones, trapping gases from organic waste and livestock excrement, or getting third-world villagers to use low-CO2-emitting gas stoves rather than free firewood from local forests (which also emits lots of greenhouse-causing soot) -- wouldn't exist. The carbon tax reduces carbon emissions by making it more expensive to burn fossil fuels. But it does nothing about all these other sources of greenhouse-causing emissions. Only cap and trade does.

What's interesting is that to me, this is a feature, not a bug.  Everything I've read, heard, and studied about offsets indicates that the audit problem is essentially insurmountable.  Favorite private projects like planting trees really don't work at all, because you can't just plant a tree--you have to certify that the land you have planted with trees will contain at least that much tree-mass forever, because as soon as a tree dies, its carbon returns to the atmosphere.  This is not really feasible in other than trivially small doses, and the larger plots tend to be in places where you really can't make that sort of committment, because it's too dependent on the continued goodwill of the government in an area where governments are historically very unstable.

The plans to pay Chinese firms to shut down polluting plants, or villagers not to adopt a carbon-intensive lifestyle, are even worse.  Carbon has about a 100 year shelf-life in the atmosphere, so it's no good just switching people into developing countries to a lower-carbon technology if the carbon is displaced into some other use.  Say you give someone a nice treadle-based irrigation system so that they don't use an inefficient kerosene generator.  Great.  Now that person has the money they would have spent on kerosene, and a generator.  If they buy a motorcycle instead, you have not saved carbon.  Steinglass points to phasing out sooty cookstoves, which is indeed a carbon reducer in the short term.  But all the stuff that gets burned in the cookstoves would have decomposed and released its carbon in another, longer-lasting form.  It's helpful, but no panacea--and it's the absolute best of the initiatives, as far as I can tell.

China is even more problematic, because given the state of the Chinese manufacturing sector, five gets you ten that whatever factory you pay someone to shut down wasn't actually making any money.  So you've just created a lucrative business in owning and operating heavily polluting facilities.

The problem is, it's very hard to certify the alternative world-state.  I don't mean this as a demand for some impossible proof, but with things like paying manufacturers not to pollute, there's very good reason to think that this might not work--indeed, have the opposite of the intended effect. 

A source fuels tax is not nearly as sexy as cap and trade; it is a less sophisticated instrument that will fall too heavily on some of the wrogn people.  But it's also hard to game.  Given all the observed problems with the European trading system, we should give that simplicity quite a bit of weight.

Debt: A Writer's Life

This is the bravest thing I've read for a long, long time.  For a reporter--an economic reporter--to admit that he's been in the hell of excess debt and unpaid bills that he reports on is a major statement in middle class America.  There was a time when America tolerated a certain amount of this in its writers--one reads nearly approvingly of the repeated flirtations with bankruptcy undertaken by the likes of Dorothy Parker or F. Scott Fitzgerald.  But these days, their profligacy, like their alcoholism, is no longer admired, or even tolerated, in the editorial world.

Yet writers are, as a class, extraordinarily at risk.  They spend their twenties, and often their thirties, living paycheck to paycheck.  They are extremely well educated, and all that education is not only expensive, but builds expensive habits.  You end up with a lot of friends who make much more money than you--who don't even realize that a dinner with $10 entrees and a bottle of wine is an expensive treat, not a cheap outing to catch up on old times.  Our business is in crisis, and we lose jobs often.  When we do, it's catastrophic.

This is what David Brooks calls "status-income disequilibrium", and unless you are among that happy breed of writers who is married to someone with a high-paying job, or who has a trust fund, you feel it keenly.  Everyone you write about makes more than you.  Most of the people you know make more than you.  And you come to feel that shopping at the farmer's market, travelling to Europe, drinking good coffee, are minimum necessities.  Your house is small, your furniture is shabby, and you can't even really afford to shop at Whole Foods.  Yet you're at the top of your field, working for one of the world's top media outlets.  This can't be so.

And so the debts creep up, one happy hour or Colorado backpacking adventure at a time.  They are confessed in moments of panic:  the 420 credit score that requires a cosigner on a new lease, the $10,000 in credit card debt, the car loan that can't be paid off nor recouped in a sale of the sadly depreciated vehicle, the deliberately bounced checks and collection calls.

But those are among friends.  Hanging it out there for the world to see is something entirely different.  We're the children of the middle class.  And ever more, a clean credit report, a good FICO score, are the standards of a life well lived.

I don't mean to moan about how terribly hard it is to be a writer.  Being a writer is great.  It's the best job I've ever had, and it's only by a most unlikely chain of coincidences that I get to do it, so I'm well aware of just how lucky I am.  All the writers I know could be doing something else more lucrative, but they like being writers, so they're willing to bear the risk.

Rather, I'm glad that Andrews is saying this because we could all use an object lesson.  Trying to live as if we aren't, well, writers, can be disastrous--indeed often is, except that the disasters are carefully hidden by people terrified of seeming to drop out of the middle class. The biggest prophylactic against getting into this sort of trouble is cultivating a notion of the good life that allows most writers to live within their means.  This should be easy to do, because most writers are friends with other writers.  And yet, so many of us get into trouble.  And yet even in a milieu now filled with people getting laid off by closing or shrinking outlets, there's visible discomfort when I state something that to me is obvious, unembarrassing, and uncontroversial:  that until Peter finds a job, there are a lot of things our household can't afford to do.

Until we're comfortable with talking publicly about the fact that we don't make much money and likely never will, that our lives are risky, and that this has obvious impacts on our ability to consume on the level of our educational peers, writers will keep getting into trouble.  Bravo to Andrews for leaning into the strike zone and taking one for the team.

Dealers: What Are They Good For?

A number of readers have asked a simple, obvious question:  why do the dealers cost Chrysler so much money that they want to shut them down?  I don't have a complete answer to it, but here's what I understand:

• Inventory:  Chrysler often has to take back unsold inventory.  A lot of dealers selling a little inventory is costly, because you have to ship a minimum number of cars to each dealer
• Financing:  Chrysler helps many dealers float their purchases (though to be fair, those dealers also tap their own credit for things like advertising, expanding the company's effective spending)
• Brand costs:  Shabby, run-down dealerships don't improve the image of the firm, and if they are the only game in town, drive users to other cars.

There's a related question, though:  what good are dealers?  They're protected by franchise law, to be sure, but they do fill a big market niche.  Why are there dealer networks in the first place?

• The franchise model provides high levels of customer service.  McDonalds doesn't franchise because it can't get access to capital; it franchises because the owner of a franchise will always care more than a hired manager about things like clean bathrooms and health regulations.  That helps keep the brand reputation high.
• Dealers tap their personal credit for expenses.  Chrysler finances a lot, obviously, but this broadens their base.
• Dealers tap into the local community.  A car is a big purchase.  People are more likely to buy a product from Chrysler because they know the guy who owns the Chrysler dealer than because they know the guy who manages the local corporate-owned store.
• Dealers provide service and move used cars.  In the internet age, new cars are practically a commodity purchase; most consumers know about what htey should pay.  Used cars, on the other hand, are idiosyncratic.  But Chrysler doesn't benefit if a consumer buys a used Chrysler lemon--that breeds consumers who won't touch a new Chrysler, and drives down the price of new Chryslers by hurting their retail value.  It's useful to have dealers who have their own incentives to keep people happy with the brand.
• Auto production has a very high minimum efficient scale.  The plants apparently don't break even until they're producing at 80-90%.  This means that the Dell model doesn't work--plants can't just scale back production until they have cars to build.  Nor does the Proctor and Gamble model work--Chrysler has to make money on every unit, but the purchase is too big for customers to be easily willing to take a less-than-perfect match. That, in turn, means that the dealers are really useful, because they do the difficult job of matching consumers to cars by adjusting price, options, and financing.
  

The Patients are the Problem

I know that everyone who is assuring me that the new inhalers work just fine does not have respiratory disease.  Do you know how I know this?  Because they point to things like this:

Studies show that HFA inhalers are as effective as CFC inhalers and have the same rate of side effects. But if they are not used properly, patients will not get adequate doses. There are three critical differences.

HFA inhalers must be pumped four times to prime them -- a number that was not so critical with the more forgiving CFC inhalers, said Dr. Leslie Hendeles, professor of pharmacy and pediatrics at the University of Florida. And each brand of the newer inhaler requires a different frequency of priming.

HFA inhalers have a weaker spray. "It's very soft so people think it's not working," Dr. Stoloff said. Where CFC inhalers deliver a powerful force that feels as if the airway is being pushed open, the newer ones provide a warm, soft mist that also has a distinct taste.

They also require a slower inhale. "You have to take a nice slow, deep breath and hold it," Ms. Sander said. If people worry that it's not working, they may not take the second puff, may fail to wait the necessary 30 seconds between puffs or may take too many puffs. ,And their anxiety may rise, further constricting their airways.

I invite anyone in the audience to take a "nice slow, deep breath and hold it" with a severely constricted airway.  Every pulmonary patient I know is reporting the same, completely effing obvious problem:  we use these inhalers for emergency relief, when we can't take a slow, deep breath.  If we could take a slow, deep breath, we wouldn't need to use our rescue inhalers.  And since my rescue inhaler no longer works very well, I may have to go on steroids, with all the fun, fun attendant side effects, for better control.

As a side note, that "distinct taste" made me gag the first time I used my inhaler, which of course makes patients reluctant to turn to their rescue inhalers until they really have to.

It would be one thing if this was necessary to save the ozone.  But it's just mindless bureaucratic indifference.  The amount of CFCs used for all pulmonary uses peaked at 1% of total peak industrial output in 1999.  They were not the culprit behind the hole in the ozone layer.  And testing these things on only mild-to-moderate asthmatics for short periods of time, which is all the FDA did before phasing them out, seems borderline criminal.

Finally, saying that the inhalers are just the same except that they require perfect technique is saying that the inhalers are not just the same.  In the real world, it's hard to get perfect technique.  So substituting an inhaler that requires really very extensive maintenance (it needs to be washed every 3-4 uses, primed if it hasn't been used in a while, and the asthmatic needs to master a fairly complex breathing pattern at a time when, I promise you, you do well just to breathe at all) is the kind of thing that only a non-asthmatic would think was a good trade.  Again, if this has to be done to save the ozone layer, fine.  But I don't see that it did; I see that we did something stupid and costly to sick people for no good reason.

Update:  That was intemperate.  But though I regret losing my temper, the point stands.  You see this attitude in IT people a lot.  There's an acronym for it:  PEBKAC (Problem Exists Between Keyboard and Chair), aka an ID10T error.  Some of that is fair--I had a very senior executive once tell me that his voice recognition software was malfunctioning because what he'd expected (from a $65 software package) was something much more like the computer on Star Trek:  The Next Generation.  But it's also a way that developers dismiss crappy UI design.  If most of your users have a problem, then it's the software, not the users, at fault.

Similarly, a medical routine that is hard to comply with is a bad routine.  Sometimes there's no alternative--what CF patients go through I wouldn't wish on my worst enemy, but that's the only way we know to keep them alive.  On the other hand, you don't decide not to give users blood pressure meds because running 10 miles a day would be just as good. A medicine that is easy to use is not the same as a medicine that theoretically gets the same results only if used perfectly every time.

Finally, I think it's worth pointing out what I said yesterday about comparative effectiveness research.  I have been repeatedly blythely assured that the FDA "proved" that the medicines are equivalent.  But a cursory look at the study shows that they were mostly short, small, and covered only mild-to-moderate asthmatics, which seems guaranteed to put the comparison in the best possible light.  Once the FDA had given them the seal of approval, however, they became somehow infallible.

Sign of the Times

Wal-Mart aims to go down-market.  Presumably the folks at the Dollar Store are now pricing pushcarts.

Chrysler to Dealers: You're Fired!

Chrysler is killing about 800 of the worst-performing dealerships in its network.  Bloomberg reports that the 25% of dealers it's cutting from the team roster account for only 14% of the company's sales; the nice chap on television added that a considerable number of them sell 100 or fewer cars a year.  Which sort of raises the question:  why do they want to keep the dealership going?  Chrysler might have accomplished the same feat with less trauma by paying a few economists to visit the lot's owners and explain the concept of sunk costs.

This should make for some interesting political theater.  During the Great Depression, auto dealers secured the first in a long series of franchise laws that made it well-nigh impossible to kill off dealerships (in many states, automakers have to pay the owner the entire theoretical sale value of their dealership, even if there's no actual buyer.  Over the years, the dealers have turned into arguably the most powerful state and local lobbying force after the public sector unions.  And why not?  Auto companies are way off in another state, while the dealers are right there, voting and making campaign contributions.  You can expect those dealer networks are on the horn to their congressmen this morning, filling their ears with angry demands for the same kind of help Obama handed the UAW.

The bankruptcy judge does not, of course, have to recognize these demands.  Indeed, I expect he will not.  But meanwhile, there are going to be some very anxious congressmen trying to pull the strings on the government-provided DIP financing.

The bigger problem is how bankruptcy laws interact with those franchise laws.  Ultimately, I don't think that they can push dealer up in line . . . but you can be sure that will be litigated extensively.

Quote of the Day

I somehow missed this John Scalzi treasure a few weeks ago:

This morning the local convenience store manager looked at me, and asked with neighborly concern if everything was all right. I told her everything was fine, except that the entire plant kingdom was trying to mate in my nose.

My asthma is terrible, and I'm stuck with one of the new inhalers, which is about as effective as waving one of those magnetic copper bracelets you buy off late night tv in front of my chest.  Long time readers know I like environmentalism, but this is completely moronic.  Asthmatics did not cause ozone holes, and engineering the CFCs out of our inhalers has not done a thing except make politicians feel good, and make me wheeze.

The Perils of Parking in DC

At 7:30 this morning, far earlier than I normally leave my house, I was outside in flip-flops and my pajama shorts, moving my car.  Nor was I the only one.  My neighborhood is filled with students and people who work from home, and a whole lot of them seemed to be making U turns to park across the street.

Why was I doing this?  The District of Columbia is trying to make up plummeting tax revenues by getting the money out of motorists, especially parking.  It's using cameras to get 100% enforcement of the street cleaning parking rules, nearly doubling the cost of many parking tickets, and upping the bill on meters--it now costs $2 an hour to park in front of the Watergate, up from $1 last month.  This is a twofer:  raise more revenue from the meter, and from the parking ticket, because who carries around $4 in change on a regular basis?

Anecdotally, they've also upped the quota on parking enforcement, which used to be more of a sinecure; my mother reports that she now has three parking enforcement officers in her small neighborhood, constantly patrolling rather than (as they used to) sleeping in front of the Congressional cemetary.  They've started ticketing her for being an "out of state car" persistently parked in the neighborhood.  I got a ticket for having no front plate, something I didn't know was required.  The district has even started ticketing people for parking in their own driveways.  After their budget meeting, the city council announced plans to raise millions in new revenue by issuing an additional 200,000 tickets this year.

It will be interesting-as an observer, not as a resident--to see how this plays out.  Most businesses do not raise more money by raising prices when people are least solvent.  Is the government different?

I can park in the garage in the Watergate for $20 a day, or obtain a monthly spot in the Kennedy center for $150, which is rapidly starting to look competitive, even though I don't drive that often in the spring and summer months.  There's a nearly empty condo across the street from us that could presumably park my car for the cost of a couple of monthly tickets in my neighborhood, and I know I'm not the only one thinking this way--everyone I've talked to who is, for one reason or another, ticket-prone, is shopping monthly spots.

Now it's possible that the costs of spots will rise so that it's still cheaper to park on the street--but with the recession on, the garages presumably have overcapacity, so maybe not.  Moreover, I can alter my decision to drive to work, or I can sell my car, depriving the district of car registration fees as well as parking revenue.

The Laffer Curve is usually used to describe American income taxes, for which it isn't all that useful.  But it was actually first developed to analyze another sort of "stealth" taxation:  seignorage, the income that a government earns from printing money.  The interesting result was that the Weimar Republic was printing money too fast--it could have earned more by keeping the inflation rate lower.

I wonder if the District won't also find that it's gone too far.  For the first time since I started working at The Atlantic, when I drove to the office on Tuesday there were multiple available metered spots in front of the building.  When I left, again for the first time since I've started working there, not a single car had gotten a ticket for letting the meter run over.  Meanwhile, the garage in the building next door was full.  People will go a lot farther to avoid metered parking at $2 an hour than at $1 an hour, and tickets at $40 instead of $25, at any time, but particularly in a nasty recession.

On the other hand, perhaps the council just wants to help out the District's struggling parking businesses.

Medicare is going to bankrupt us, which is why we need universal health care

Perhaps predictibly, someone showed up in the comments to my post on Medicare and Social Security to argue that liberal analysts have very serious plans to cut Medicare's costs, which is why we need universal coverage, so that we can implement those very serious plans.

I hear this argument quite often, and it's gibberish in a prom dress.  Any cost savings you want to wring out of Medicare can be wrung out of Medicare right now:  the program is large and powerful enough, and costly enough, that they are worth doing without adding a single new person to the mix.  Conversely, if there is some political or institutional barrier which is preventing you from controlling Medicare cost inflation, than that barrier probably is not going away merely because the program covers more people.  Indeed, to the extent that seniors themselves are the people blocking change (as they often are), adding more users makes it harder, not easier, to get things done.

I suppose there's some possible argument that only with universal health care can we prevent providers and consumers from realizing there's an alternative they prefer to the status quo . . . but that implies a Canadian style system that outlaws private care, which is not what anyone's proposing, not what anyone's going to get out of the American political system if they do propose it, and not just a little bit disturbingly totalitarian.

Otherwise, people who want to reform Medicare to make it more cost effective should go ahead and propose the changes to Medicare they can get passed.  I am not going to buy a pig in a poke on the slim chance that the pig might be able to get me 20% off an echocardiogram.

Green? Shoot.

The "green shoots" theory of economic recovery is starting to look a bit like the herbs in my back yard--the ones I forgot to tell Peter to water while I was in Omaha.  Retail sales fell again, despite confident proclamations that consumers had rethought their overreaction last fall.  And foreclosures hit another record, which was oddly described as a "levelling off" by a lot of papers.  The March numbers showed a big spike, because legislative and corporate moratoriums expired.  In that context, a 1% increase in April isn't a "levelling off"--it's extraordinarily worrying.

I don't want to push the Great Depression analogy too far, but what's surprising when you go back to primary sources from 1930 is the optimism.  I don't mean to imply that everyone thinks things are just swell.  But while you know that they are facing the worst economic decade of the twentieth century, they don't.  They're expecting something more like the recession that followed World War I.  People are cutting back, but they're still spending, particularly because companies are slashing prices to move inventory.  It was the long grind of the years that followed, and the catastrophe of the second banking crisis, that scarred them permanently.  And this shows up in the economics stats and the stock market, which did not, as we like to imagine, simply decline in a straight line.

That may not be our story--crises are sui generis, the Fed and the feds have certainly opened up the taps as wide as they can go, and we may have a quick recovery, or something more like Japan's twenty year "lost decade".  But it does give the lie to the notion that any change in the second derivative necessarily marks the beginning of the bottom.

Exercise in Futility

If you're a serious health nut, you probably exercise regularly and take anti-oxidants to ward off those nasty free radicals.  Only it turns out you probably have to choose:

And as it turns out, antioxidant supplements appear to cancel out many of the beneficial effects of exercise. Soaking up those transient bursts of reactive oxygen species keeps them from signaling. Looked at the other way, oxidative stress could be a key to preventing type II diabetes. Glucose uptake and insulin sensitivity aren't affected by exercise if you're taking supplementary amounts of vitamins C and E, and this effect is seen all the way down to molecular markers such as the PPAR coactivator proteins PGC1 alpha and beta. In fact, this paper seems to constitute strong evidence that ROS are the key mediators for the effects of exercise, and that this process is mediated through PGC1 and PPAR-gamma. (Note that PPAR-gamma is the target of the glitazone class of drugs for type II diabetes, although signaling in this area is notoriously complex).

Interestingly, exercise also increases the body's endogenous antioxidant systems - superoxide dismutase and so on. These are some of the gene targets of PPAR-gamma, suggesting that these are downstream effects. Taking antioxidant supplements kept these from going up, too. All these effects were slightly more pronounced in the group that hadn't been exercising before, but were still very strong across the board.

This confirms the suspicions raised by a paper from a group in Valencia last year, which showed that vitamin C supplementation seemed to decrease the development of endurance capacity during an exercise program. I think that there's enough evidence to go ahead and say it: exercise and antioxidants work against each other. The whole take-antioxidants-for-better-health idea, which has been taking some hits in recent years, has just taken another big one.

But take heart:  exercise may not be nearly as great as we've been told.  It definitely helps ward off diabetes, but most of that benefit comes at very modest levels.  It might have modest effects on depression, heart disease, and cancer, but it's hard to tell because of selection effects:  if you stay depressed, you probably stop exercising.  And it's hard to tease out the confounding factors in the other two:  the exercisers are also thinner, more educated, and less likely smoke than the others.  I was shocked to find out how much of the difference between women's and men's life expectancy was accounted for by their different rates of smoking, and it seems the same sort of thing may be operating here.

Oh, and exercise probably won't make you thin, either, particularly if you're the sort of person who finds it hard to lose weight.  Your appetite eventually seems to increase enough to compensate.

Basically, unless you're at risk for diabetes, Kolata says there's no solid evidence that exercise will do much besides make you sweat.

Of course, my idea of exercise is biking to work, so you'd expect me to say that.

Gains from trade

Greg Beato discusses the success of barter in the current economy.  Barter's a great way to expand the effective money supply when velocity falls.  It's also, at least until your operation gets big enough to notice, a swell way to keep from paying taxes.

(And why should you?  If it's an even swap, your net asset position can't have changed in an accounting sense.)

Barter is, of course, inefficient and ponderous--more of a hobby than a means to build up a modern economy.  Nonetheless, as taxes go up and velocity (presumably) stays low, I expect we'll see more of it.

The Structure of Comparative Effectiveness Revolutions

Liberal blogs have been bashing conservatives over the "comparative effectiveness issue".  And they're basically right.  The idea that the government shouldn't test the relative effectiveness of various treatments because this might, someday, lead some moronic bureaucrat to try to ban treatments, is not a good argument.  Comparative effectiveness research is one of those things that even a conservative should be willing to at least think about having the government do, because the government doesn't have a vested interest in the outcome.

I do want to raise some potential issues here, however, not because I am against the idea--I am for it--but because there is a danger that the government seal of approval may become far too powerful.  Governments do not have the obvious conflict of interest that plagues some pharmaceutical industry research.  But they have different problems, some more prevalent in government because there is no countervailing market discipline to weed them out.

• Perhaps the most obvious problem is that we won't entirely eliminate the financial motive--government workers sometimes leave their agencies, and the obvious place for them to go is to the companies they regulate.  If you wall off this lucrative avenue of escape (say by dictating that they can't work in a regulated company for 1-5 years after they leave their agency), you may have trouble recruiting good people in the first place, because working for the government will become something like a prison sentence.
• Science isn't always cut and dried, but government reports are supposed to produce answers.  There's a danger the bureaucrats will be more definite than the science calls for.  This is a risk in the private sector, too, but private sector errors of this sort are rarely as powerful as government errors of the same kind.  Once the government establishes a standard of care, private companies will probably follow, even if they are wrong, because it's
• Easier than doing their own analysis
• A lot easier than getting sued
• Possibly cheaper than the more effective treatment
• Government agencies are much more vulnerable to interest group pressure than private companies.  Researchers will come under tremendous pressure to say that things work when they don't--not just from big, bad Pharma companies, but from patients who do not want their insurance company to cut off access to the treatment.  And see above:  a government report saying snake oil might work has more impact than a dozen private company reports saying the same.
• Government power can perpetuate a bad paradigm.  I'm currently reading a book called Cure Unknown by a science journalist who believes she and her family are suffering from chronic Lyme disease.  I don't know if Chronic Lyme Disease exists, or is a figment of the imaginations of people with some unspecified systemic or psychological problem.  But some of the things she's angry about ring true to me because they sound a lot like other episodes from the history of science. 

  
  The spirochete that causes Lyme is hard to detect, so treatment guidelines focus on the "bullseye rash", not because there's any particular reason to think it must follow infection by the borrelia bacterium, but because it's easy to diagnose, and . . . it's part of the diagnostic criteria.  Everyone who has "real" Lyme disease has the rash, because the definition of "real" Lyme disease is having a rash.  This, of course, makes it hard to test the theory that the spirochete might cause symptoms other than a rash.
  

  Weintraub makes a compelling case that these sorts of hard-and-fast diagnostic rules have, at the very least, left some indisputable cases of Lyme undiagnosed, including that of Weintraub's son.  The CDC has turned this into a major problem, since of course most physicians do not pour through the journals themselves; they glance at the CDC criteria, which are quite restrictive.  It's pretty clear that scientists who have a lot vested in the current model of Lyme (their careers, possible malpractice accusations), have at least for now won the debate.  It's not quite so clear that they should have.  And the government imprimatur has done a lot to seal the fate of the dissidents.  This is all standard stuff to anyone who's read The Structure of Scientific Revolutions.  But those revolutions happen because there are multiple possible centers of power.  The government has the ability to potentially shut the revolutionary centers down.

As I say, I am in favor of doing the research.  But the dangers of this sort of government sanction are not quite so far off and imaginary as Matthew Yglesias and Hilzoy seem to think. I don't think conservatives have done a very good job of articulating those dangers (and don't get me started on the pharmaceutical industry!)  But I still think they're worth keeping in mind.

The Problem with Social Security

It's time for every journalist's favorite annual kabuki ritual, the one where Social Security and Medicare trustees release their reports, and conservatives interpret it as a sign of the coming geezer apocalypse where all life on earth will be extinguished by the sheer weight of outstanding medical bills, while liberals argue that Social Security is just fine and Medicare is the problem but we'll solve that problem by making some unspecified cuts at some unspecified point in the future.

This year the "it's fine" arguers have a tough uphill climb.  The year that Social Security goes bankrupt and cuts benefits by 25% moved up four years, to 2037.  The surplus fell 25%.  The date that Social Security starts becoming a drain on the general fund, rather than subsidizing it, moved forward a year, to 2016.  And suddenly these dates don't sound so comfortably far off, do they?

I'll agree with the liberals on this:  the numbers are large, but they are not, economically speaking, catastrophically large.  It is theoretically possible to pay for the program.

But I'll disagree with them on this:  Social Security is an immense problem.  But the problem is not the cash outflow of benefits draining the economy; it is political risk, and structural inefficiency.

The political risk is that whatever the economic theory, we will not politically be able to continue benefits at planned levels.  People who counted on those benefits will thereby be made much worse off, because they will have saved too little on the assumption that the benefits would be there.  (We will leave aside, for the nonce, the moral possibility of an unjust distribution of consumption between workers and retirees).

The structural inefficiency arises because Social Security encourages people to retire as early as possible.  We may raise the retirement age slightly, but this takes forever (the current increases, which started only recently, were enacted in the early 1980s).  And even after we've raised it, we're still encouraging them to retire as early as possible; we've just moved that date up slightly.  Meanwhile, people are able to work longer than ever, and they're living longer.  Retirements cannot lengthen indefinitely without massive gains to productivity, or increases in the supply of younger workers; the math doesn't work.  Eventually, living standards start to fall.

The combination of the deadweight loss from taxation and the shift of workers from production to dependence makes it harder to pay for the retirement benefits--effectively, Social Security undercuts its own political sustainability.  This is the real problem we face, and it's barely hinted at in the Trustees report.

The Better Bankruptcy Bureau

I have a piece in the new Atlantic arguing that reducing the cost of failure actually makes us all better off:

Americans' public attitude toward the bankrupt, however, is not nearly as generous as our law. Every move to make things easier for debtors meets with fierce resistance, not merely from creditors, but from ordinary people who are making payments on time. As this article went to press, the Senate was scrambling to find a compromise on a long-stalled House proposal that would allow bankruptcy judges to reduce the principal of home loans where the value of the property has fallen below the mortgage's outstanding balance. Known as a "cramdown," the idea was popular with most congressional Democrats, but apparently not with the voting public, which was telling pollsters in ever higher numbers that they thought the whole housing-bailout package was unfair.

And isn't it? Most people didn't take out giant loans with tiny down payments or do repeated cash-out refinancings. Yet the cramdown plan would make the sober, steady majority foot the bill for other people's mistakes. First they would pay as taxpayers by helping to subsidize troubled loans. Then, the next time they needed a mortgage, they'd be charged a higher interest rate to compensate for the risk that they might declare bankruptcy and ask a judge to cram down their loan. And maybe they'd have to pay a third time, again as taxpayers, by bailing out banks that got too many of their loans crammed down. Meanwhile, the guy down the street who took out a second mortgage he couldn't afford, to remodel, would be sitting pretty in his $60,000 kitchen.

It isn't fair. But by the time someone is in bankruptcy, the time for fairness is already long past. Bankruptcy is the legal recognition that someone lacks the resources to meet financial obligations. Our system works so well precisely because it mostly sets aside our instinct for just deserts, and instead focuses on minimizing the costs to everyone. It lays out clear and predictable rules for lenders and borrowers, so that they can plan for disaster, and escape as quickly as possible if it arrives. Still, it's plain as day that, in the current crisis, a whole lot of people are getting help they haven't earned. As a result, commentators, academics, and legislators presiding over hearings have diverted much time and energy away from hashing out the ugly details of rescue efforts and toward making the one point on which we can all agree: these relief measures don't seem fair.

The moral of the article:  spend less time on punishment, more time on trying to minimize the social cost of the failure.

Since I wrote that, of course, I've been blogging a great deal about Chrysler.  So it seems fair to ask:  does the Chrysler deal do that?  After all, it minimizes the cost to the unions, the largest group with substantial direct exposure to the collapse.

In fact, bankruptcy frequently does shortchange creditors if a going concern can be gotten out of the ashes.  But the Chrysler deal went a little beyond that.  It didn't just pay wages on a gamble that a reorganized firm would be worth more than a liquidation; it reaffirmed the union's pension obligations, and, AFAICT, much of the rest of their current contract.  This is unprecedented.  Moreover, it was not necessary to keep the firm going.  Detroit autoworkers do not have a lot of other exciting opportunities to make $40 an hour in compensation.  Had the bankruptcy followed a more normal course, most of them would have kept going.

That makes it a pretty straightforward transfer from senior to junior creditors.  And that's costly.  The seniority rules have no particular moral priority; like traffic rules, they matter because they are the rules.  People make decisions based on what the rules are, and if you change the rules without warning, you get nasty accidents.

Right now, senior debt is cheaper than junior debt; secured debt cheaper than unsecured.  If you declare that there are no priority rules, because the government will step in and arrange things so its friends get to cut in line, then everyone will have to pay something close to what the most junior unsecured creditors get now.  Not only will interest rates go up, but terms will shorten--no one wants to lend into a period when default risk can't be calculated.  And companies that are particularly likely to have administration "friends"--union shops, when Democrats are in office; maybe oil companies or defense contractors for Republicans--are going to find it harder to do debt financing at all.

Most people underestimate just how economically valuable the rule of law is.  A roughly stable investment environment that doesn't maximize social justice is undoubtedly better than an unpredictible one that tries to--just as the billions of poor people who live in states that have tried to exchange the former for the latter.  The winners were not the dispossessed.

This can be exaggerated--markets have memories, but they don't last forever, and robust democracies can survive a fair amount of skullduggery at the margins.  But on balance, I doubt that deal maximized utility compared to an alternative where the government stayed out of it and Chrysler made whatever deal it could.

The Risk of Debt

So why should we worry about the ability of the government to borrow?  For the past decade, at least, the American government has been able to borrow pretty much all the money it wanted without seeming to pay much of a price in terms of higher interest rates.  Bush's deficits were worrying in a number of ways, but they certainly didn't crowd out private investments, and we got a good deal on the money.

But Obama's spending plans are extraordinarily ambitious.  His projected deficits for the rest of his possibly presidency are higher than the "runaway" deficits that plagued most of the Bush administration--and after the first few years, that's not stimulus, that's ordinary spending outstripping revenue.  For a while now, I've been asking people at conferences, on and off the record, what America's sovereign debt risk is?  That is, how long until people stop treating treasuries as the "risk free" securities, and start demanding a premium for the risk that we might default.

The answer from the right has been a nervous (perhaps hopeful) 2-3 years.  The answer from the left, and professional Democratic wonks, is some unspecified time in the future.  Probably, there will be a Republican in charge.  Markets hate Republicans.

But last Thursday, the Treasury auction was . . . well, descriptions vary from "weak" to "horrible".  This raises the unpleasant possibility that markets are, as my business school professors insisted, "forward looking".  Voters may believe that getting a bunch of special interests to agree in principal that costs should be cut is the same thing as actually cutting costs.  Bond markets don't.  That's why James Carville famously wanted to be reincarnated as the bond markets so he could "intimidate everyone".

But the problems faced by Clinton were modest--moderately higher interest rates, possibly, for ordinary borrowers.  The Obama administration is trying to borrow 13% of GDP this year.  If bond markets think future deficits are a problem, they can rapidly push up rates to the point where that borrowing becomes unaffordable.  And if they do, it will be clear that they are pricing in that ugly, ugly CBO graph:



Obama can assure voters that he inherited these deficits.  But bond markets pay closer attention to the fact that Obama has already increased the projected deficit he inherited by 50%:

The White House raised the 2009 budget deficit projection to a staggering $1.8 trillion today. For context, it took President Bush more than seven years to accumulate $1.8 trillion in debt. It also means that 45 cents of every dollar Washington spends this year will be borrowed.

President Obama continues to distance himself from this "inherited" budget deficit. But the day he was inaugurated, the 2009 deficit was forecast at $1.2 trillion -- meaning $600 billion has already been added during his four-month presidency (an amount that, by itself, would exceed all 2001-07 annual budget deficits). And should the president really be allowed to distance himself from the $1.2 trillion "inherited" portion of the deficit, given that as a senator he supported nearly all policies and bailouts that created it?

The president also talks of cutting the deficit in half from this bloated level. But even after the recession ends and the troops return home, he'd still run $1 trillion deficits -- compared to President Bush's $162 billion pre-recession deficit. In other words, the structural budget deficit (which excludes the impacts of booms/recessions) would more than quintuple.

Obama's spending is not the only reason the deficits are so big--not by a long shot.  But he is using the sticker shock to slide in big spending plans without paying for them.  And while the US can certainly afford one $1.4 trillion year, it probably cannot afford 10 $600+ billion years.  As private credit markets recover, government credit markets will start to reflect that reality.

That's not to say that disaster is at hand.  Obviously, I am not fond of all the new spending plans, so I (and you) should be mindful of a possible tendency towards wishful thinking.  And this is early days--sometimes a bad bond auction is just a bad bond auction.  But I imagine that Larry Summers had at least one sleepless night.

The Society for Ethical Data

Nevertheless, it does seem that a significant number of Americans always want to come back to "24" style scenarios, where a ticking bomb is about to blow up an American stadium somewhere and some terrorist holds the code to defusing it but won't talk. Even absent this kind of extreme scenario, there is a belief - not exactly discouraged by Dick Cheney - that torture could help save American lives by revealing information about terrorist plots. There are a lot of arguments floating around in the blogosphere and media now about whether torture does in fact yield valuable intelligence information, and as I read them I thought, wow, here's a place where good social research with modern methodological tools could really make an important contribution to a policy debate (which, not coincidentally, is one of the goals of this blog).
But here's where things get complicated. My original thought was that good social science research that shows that torture does not extract useful intelligence information would be the final nail in the coffin in any public argument in support of torture. But what happens if one of us gets access to the relevant data, does the empirical analysis, and then discovers the opposite: that torture does lead to useful intelligence information. What do you do then? Sit on the results? Would any political science journal publish such a paper? How would that look in a tenure review? ("Right, she's the one who said torture was valuable . . . ")

Dan Drezner gives an unequivocal no:

I, too, would welcome good empirical findings showing that torture does not work, but my answer to Josh's questions are "no."  You have to publish your findings regardless of what you discover.  That's the only way this business can work. 

From a practical perspective, it makes little sense.  Uncomfortable findings, if they hold up, will get discovered by someone.  Sitting on them merely magnifies their impact.  One of the few currencies social scientists can use is their research integrity.  A short-term compromise of this integrity simply magnifies the impact of the discovery.

From an ethical perspective, social science results do not upend ethical arguments for or against a particular issue.  In other words, even if torture works in extracting information, there are strong normative reasons to oppose its use.  Covering up results, however, does compromise the ethical position of the person making the anti-torture argument. 

In theory, I am entirely with Dan:  the spirit of free inquiry should not be compromised--which is sort of why I argued that people should not employ effectiveness arguments against torture.  When an important moral debate rests on the outcome of an empirical question, the study of that empirical question gets compromised.  You haven't resolved the debate; you've just produced another round of dueling crap science.

In practice, however, the end of Tucker's second paragraph has a lot of weight.  The guy who finds out that torture works is not going to have a happy life either in or out of academia--particularly if his work is used to justify something he finds morally repellant.

So what we get in practice on a lot of tough questions is that the people who are willing or able to do objective research on a question bow out, leaving the people who are only interested in finding (or publishing) one of two possible answers.  The uncomfortable results don't get discovered . . . by anyone credible.

The few conversations I've had about the Bell Curve with professionals who work in cognitive sciences indicate that this is why most of the work about race and IQ seems to be written by crypto-racists with an axe to grind.  Given what we know about evolution and cognitive science, it is possible that there are real and heritable differences between genetically isolated groups (and just as possible that there aren't.)  What reputable scientist wants to risk being the guy who found credible evidence of a persistent, heritable, IQ gap?  Moreover, given all the interesting questions there are to study, why on earth would you pick this one unless started out fairly determined to prove either that blacks are genetically handicapped, or that they aren't?

Is this a big problem?  Well, for one thing, both sides of these debates end up over-reliant on poor quality evidence that allows the other side to reasonably proclaim that they are not arguing in good faith--it makes it harder to solve either the empirical or the political question.  Indeed, the mere fact that Tucker is willing to ask this question will no doubt confirm the suspicion of many conservatives that academia is engaged in the business of putting out heavily biased "science" to undermine them. 

Obama's Magical Mystery Tour of Health Care Savings

This weekend, I was on a panel where the other economics journalist and I spent a great deal of time belaboring the obvious:  Obama's health care plans are very, very expensive, and they mean higher taxes for everyone, not just that elusive klatch of greedy fools who are not in the 95% of working families now allegedly slated for stable or lower taxes.  Otherwise, how could Obama hope to pay for it?

I think we found out today:  magic!

Obama got the SEIU and various corporate entities involved with health care provision in a room and got them to promise to slash 150 basis points from the annual rate of increase in health care spending.  How will we achieve this?  Whitehouse.gov has a fact sheet which outlines the concrete proposals that came out of this meeting:

• Improving Care after Hospitalizations and Reduce Hospital Readmission Rates payments will be bundled to include the 30 days post discharge; readmitted patients will become a cash drain.  If hospitals really are making patients sicker (or not bothering to make them well) because readmissions are lucrative, it should be interesting to see what lengths they will go to to avoid readmitting very ill patients.
• Reducing Medicare Overpayments to Private Insurers through Competitive Payments.  Bye-bye, Medicare Advantage.  Maybe.  Medicare Advantage seems to cost more because it, er, provides more benefits.  It also apparently has good patient satisfaction. Directly playing with senior health care can be politically dangerous.
  
• Reducing Drug Prices  Only for Medicaid.  No dollar item attached to it, probably because the savings are relatively trivial; Medicaid is a small part of the overall budget, and prescription drug prices are a small part of its budget, and an 8% decrease in a small part of a small part doesn't sound as good as Reducing Drug Prices.
  
• Improving Medicare and Medicaid Payment Accuracy aka the infamous Waste, Fraud, and Abuse.  Traditionally much harder to get out of the system than promised by reformers, in part because the Waste, Fraud, and Abuse subsidizes other services, so if you eliminate Medicare overpayments, you suddenly get higher prices.  This is why retailers do not actually attempt to push "shrinkage" to zero.
  
• Pay for Performance  The Holy Grail of health care wonks.  Good luck.  Projected cost savings:  $12 billion

You may recognize these proposals; they are recycled from the Obama budget.  Estimated cost savings listed:  $215 billion over ten years.  That leaves just $1.785 trillion for the "stakeholders" to find.  And with a model of stakeholder cooperation like Chrysler before us, that shouldn't be hard.

This is all very well as political theater; politicians convene never-never working groups all the time.  But, being perhaps too cynical, I suspect that the announced plan to save $2 trillion is going to be used to sell Obama's healthcare plan as if we'd already found it.  Then when oh, darn, the SEIU doesn't agree to hold down wages or eliminate jobs, and pharma ratchets up the average price it charges the private sector to make sure it doesn't lose too much on its mandatory Medicaid discounts, etc, well, we'll all just have to dig into our pockets to pay for it, won't we?

Will Private Borrowing Crowd Out Uncle Sam?

So Microsoft is going to raise money on the debt markets to buy back their stock, which they consider underpriced.  This is a popular move when debt is cheap, and with Windows 7 coming, which by all accounts is what Vista should have been, Microsoft probably has good reason to think their stock ought to improve.

On the other hand, these are troubled times in markets.  The markets are heading back to a level that implies, many people think, implausibly high P/Es.  The P/Es on the broader market look all right right now--but only if you think that we will return to the record profits of the last few years.  This seems unlikely.

Nonetheless, this is a good sign that the credit markets are unlocking.  Which is good news for everyone--except, possibly, the United States government.  The reason the government can borrow money so cheaply right now is that no one wants to lend to anyone else--too risky.  So investors, particularly fund managers who have to stash the stuff somewhere, have been parking it in government debt, driving prices up to the point where the securities offer little to no return.  If they start lending to companies again, that will mean higher interest rates for all the money the administration is borrowing.  That, in turn, is one of major reasons that Congress and the administration can act as if the deficits don't matter--right now, they don't.  It's practically free money.

There are other reasons to worry about our ability to borrow, more on which later.  But that's a good place to start.

Bankruptcy: Cui Bono?

If you're interested in bankruptcy, you can't do better than David Skeel's book Debt's Dominion, which traces the emergence of American bankruptcy law.  America's free-and-easy bankruptcy regime was--indeed, is--pioneering, and I'd argue that it had a lot to do with the dynamism of our economy.  Yet his book illustrates just how messy, and contingent, that process was.  If anything, this gives me hope about the administration's shenanigans; there is no perfect historical era from which we are fallen, or falling.

But some eras are better than others.  Interestingly, Skeel has a new piece up at The American arguing that, at least on this front, the New Dealers improved bankruptcy--and that the administration's recent actions represent a throwback to a less happy era:

In the early 20th century, large troubled corporations did not file for Chapter 11 like they do today. They used a process known as "equity receivership," which involved an artificial "sale" of the company to a new entity set up by the debtor and the investment banks who represented its bondholders and stockholders. The new entity was the only bidder at the sale, and creditors who were unhappy with the terms of the reorganization had very little opportunity to interfere.

New Dealers hated the process, which they saw as opaque and designed to foist a deal crafted by the insiders on everyone else. Jerome Frank, a lawyer who later headed an important New Deal agency and became a federal judge, complained in 1933 that the judicial sale in these cases "was a mockery and a sham." He said, "A sale at which there can be only one bidder, is a sale in name only." In 1938, thanks to the handiwork of another prominent New Dealer, future Supreme Court Justice and then-SEC Chairman William Douglas, Congress dramatically altered the bankruptcy laws, eliminating the former practice.

'A sale at which there can be only one bidder, is a sale in name only.'

The Obama administration blueprint for Chrysler's bankruptcy looks startlingly like the artificial sales that the New Dealers so abhorred. Unlike a traditional reorganization, in which the parties negotiate the terms of a restructuring that is then voted on by each class of creditors and shareholders, the administration plans to quickly sell Chrysler's most important assets to a new entity--"New Chrysler"--whose stock will be owned by Chrysler's employees and Fiat. The senior lenders who objected to the government's offer (which amounted to little more than 30 percent of their claims) will not have any vote on the sale. Their only option is the one they have pursued: objecting to the sale, and praying that bankruptcy judge Arthur Gonzalez takes a hard look at its terms even while the government is breathing down his neck and saying in a sense, he better approve or else.

What makes the Chrysler plan unique is that it is a pretend sale and its main purpose is to eliminate the pesky creditors who might otherwise interfere with the government's plans.

As the administration has pointed out in defense of its plan to commandeer the bankruptcy process, asset sales (known as 363 sales, based on the relevant provision) have become a common feature of Chapter 11 cases in the last 20 years. What makes the Chrysler plan unique, and makes it similar to the receiverships of the New Dealers' era, is that it is not really a sale at all. It is a pretend sale and its main purpose is to eliminate the pesky creditors who might otherwise interfere with the government's plans. It also seems to flout bankruptcy's priority rules by giving Chrysler's employees (who are general creditors) a big stake in New Chrysler while forcing senior lenders to take a major haircut. The usual rule is that senior creditors must be paid in full before lower priority creditors are entitled to anything.

I've interviewed Skeel for several articles, and he can't plausibly be termed a right-wing lunatic axe to grind; he has flexible and nuanced views of the bankruptcy process with a healthy respect for the benefits of a debtor-generous system, as you'll discover if you read his book.  If he thinks this is rather dangerous precedent, it probably is.

Bankruptcy is often portrayed as a question of creditors v. debtors, and of course that's not a ridiculous frame.  But just as important is the tension between insiders and outsiders.  This conflict has existed for as long as we've had insolvency, and it doesn't match up to the creditor/debtor divide.  In fact, you might think of it as another axis, with four quadrants.

I suspect Obama views his administration's actions as moving along the X axis towards a more debtor-friendly system.  But in fact, Chrysler, not the UAW, is the debtor, and it's not likely the company would have ended up in liquidation.  The administration's actions weren't debtor-friendly, they were insider friendly.  This was classic collusion among creditors, and it's why the parts of the bankruptcy law that deal with Section 363 sales spend so much time talking about the importance of avoiding sham transactions.  Cutting back on that sort of abuse was at least as important an achievement as giving debtors a fresh start.

There are, of course, changes that both benefit outsiders and debtors.  Britain's recent move away from letting senior secured creditors appoint their own receivers increased total recovery from the enterprise (though, to be fair, it also increased administrative costs.)  On the other hand, France's new debtor-friendly bankruptcy law has apparently made it nearly impossible for creditors to get insolvent companies to the table--nice for the companies, but bad for the creditors, and probably bad for anyone who would like to borrow money in the future.  American bankruptcy works so well precisely because it provides an orderly process that everyone has to participate in, where no one group's interests are paramount.

Update:  Weirdness fixed, I think.

Continue reading "Bankruptcy: Cui Bono?" »

The Obama Girls Aren't Like You and Me

I'm willing to countenance the possibility that Barack Obama genuinely believes that the DC voucher program is not helping the students who participate--indeed, I think the most hard-core voucher advocate would have to admit that its modest gains are not what we had hoped.

Here's what I don't understand though:  how come the Obama girls benefit from leaving the DC public school system?  Surely, if it doesn't make any difference, the Obama girls would do just as well in ordinary, democratic, thoroughly American public schools as in an elitist Quaker institution.  Wouldn't it bring wonderful diversity to both the school, and the Obama daughters, to have the children of the president rubbing shoulders with the children of the district's more ordinary residents?  What is it about the Obama girls that enables them, nearly uniquely, to benefit from school choice?

If you know me on this issue, you know that I am very, very upset.  And that I think that there is probably a special place in hell reserved for politicians who betray our nation's most helpless children for the benefit of a sullen and recalcitrant teacher's union.  There they spend all eternity explaining to their victims why they couldn't possibly have risked their precious babies' future in the public school system, yet felt perfectly free to fling other peoples' children into it by the thousands. 

Electronic Drug Thieves

It seems a hacker has broken into the Virginia Prescription Monitoring Program and left a ransom note:

"I have your shit! In *my* possession, right now, are 8,257,378 patient records and a total of 35,548,087 prescriptions. Also, I made an encrypted backup and deleted the original. Unfortunately for Virginia, their backups seem to have gone missing, too. Uhoh :(For $10 million, I will gladly send along the password."

Lots to unpack here:

• Libertarians are, of course, deeply conflicted.  On the one hand, blackmailers are despicable criminals.  On the other hand, the practice of monitoring legal adults to make sure they don't get high without permission is also despicable, and results in widespread undertreatment of severe pain.
• How did he get at the backups?  Tech people want to know.  Several possible answers:
• It's an inside job
• He hacked the backup routine
• He didn't--it's a big lie.  (But if so, why no denial?)
• Then there's the question of how he gets the money.  Kidnapping is hard to get away with in these days of electronic transfers and high-tech surveillance of physical drops.
• This has unpleasant implications for the future of electronic medical records systems.
  

Canadian Exceptionism

Canada is one of the few countries without a major banking crisis.  Weirdly, this was also true in 1930.  I've seen this list of the success factors for Canadian banks in several places.  I want to believe it, but . . .

..it doesn't seem to be as simple as "Canadian banks are more tightly-regulated".

1. We never had restrictions on interstate banking, so Canadian banks spread their assets and liabilities across Canada. (So it doesn't matter if a local housing market goes bust).

2. We don't have Glass-Steagal. The investment banks joined the retail banks some years ago.

3. We don't have mortgage interest deductibility from taxes. So paying down your mortgage is a tax-free investment. So most people want to pay down their mortgages.

4. (Except in Alberta), mortgages are fully recourse. You can't just walk away from a negative equity home and hand the keys to the bank; the bank will come after you for the difference.

I wouldn't describe those differences as "Canada is more regulated".

But we do have higher capital requirements. And mortgages over 80% must be insured (mostly by the government-owned CMHC).

I don't find "they were more tightly regulated" a plausible explanation.  When you dig down, most of those explanations seem short on the actual regulations that accomplished this marvelous feat, or even an extraordinary risk management system, and long on glowering regulators putting the fear of God into snivelling bankers through sheer force of moral righteousness.  But more importantly, the banking crisis seems to be hitting almost every other country very hard even though they have very different bank regulators. 

The standard liberal response is that all of those regulators were in the grip of Anglo-saxon free market mania.  Maybe.  This Anglo-Saxon mania seems awfully broadly distributed, into countries that don't show much sign of it in other sectors of their economy.  More importantly, even if all of these countries had banking systems that were equally unregulated by some metaphysical metric divinable only by contributors to Crooked Timber, they were differently unregulated.  Yet countries with very different (assuming arguendo, all bad) regulatory systems were all hard hit.

But I don't find this list all that plausible either.  1-4 also describes Britain, indeed, much of Europe.  And the last item describes America--it's just people found cute ways to get around the insurance requirement with piggyback loans.

I hate to say it, but the best explanation I've heard comes from Canadian bankers, and people who have worked in/with Canadian banking.  It's that the Canadian bankers are, well, Canadian.  They're very conservative.  And they don't trust easy money.

Facing Foreclosure

The other day, Ryan Avent had a good post on who is actually defaulting on their mortgages.  Though you commonly hear the discussion framed as a question of when interest rates reset, Ryan points out that this isn't really accurate.  The problem is not principally people who can't pay their mortgages because their interest rates have reset--people will cut back on a lot of other things to keep their house, and if you can't afford a 1% rate increase even with drastic lifestyle cuts, you probably have too much house.  Rather, the main problem is people who have an income shock.  Normally, if you lose your job, and you can't afford your house, you're eventually forced to sell it.  But when the market drops 20%, if you're a recent homeowner, or if you did a cash-out refi, you can't sell it, because you'll end up owing money at the closing.  Obviously, if you had tens of thousands of dollars to hand over at closing, you wouldn't need to get out in the first place.

This has tricky policy implications.  The supply of credit--for which interest rates are usually a good proxy--has huge effects on home prices in this world of majority mortgage financing.  We've pushed interest rates down as far as they're going to go, but that's not going to reinflate the bubble.  So huge numbers of people who have income shocks are going to end up in foreclosure unless their bank allows a short sale.

But what's the alternative?  Huge write-downs to the mortgage principal of everyone who gets in trouble?  They'll still have to sell the house in a lousy market.  And it makes the banks more fragile, while unfairly handing a giant subsidy to those who happen to lose their jobs.

On the other hand, it does mitigate the claim that this is about irresponsible borrowing--at least in a lot of markets.  In places like California and Florida, where prices of large houses have dropped 30-50%, the most sensible downpayment policies wouldn't have kept people from going underwater.  Though to be fair, highly insensible downpayment policies helped inflate the bubble, and a lot of people with tiny downpayments are getting themselves in trouble.

DX Dreams

So what about the Kindle DX?  9.7 inch screen, weighs just over a pound, and . . . gulp $489 dollers.

I don't think it's going to save newspapers.  First of all, because I doubt ads look good on it; second of all, because being proprietary and all, Kindle lets Amazon capture a lot of the cost savings from not physically printing a newspaper.

If the Kindle DX has a killer format, it's not newspapers, but magazines.  Newspapers aren't losing out because they're too expensive; they're losing out because by the time the reader gets to them, the news inside is dated.  Newspaper is a daily news medium in an hourly world.

But magazine articles aren't meant to be timely.  They don't provide you with insta-analysis; they provide you with a thoughtful take.  Magazine articles are actually improved by being read without the distractions of email and so forth.  For people who travel, or who have a daily passenger commute, who spend time waiting anywhere, the Kindle is ideal.

If there's any criticism, it's that the Kindle is paperback sized when I often want something more like a magazine.  Segmenting the two is genius, and not just because it lets them capture the textbook market.  Maybe more importantly, it lets me have a paperback sized one for running errands, and a larger version for extended reading.

As you may have gathered, I want one.  Rather badly.  I can't justify buying it, unfortunately.  But I suspect it will sell very well--and it will be interesting to see what that means for Hudson News.

Innovation Pressure

I'm certainly no expert on basketball; I watch it once a year, until my NCAA bracket gets too tattered, and then I lose interest again.  On the other hand, as so many, many strangers have surmised over the years, I did play girl's basketball for four years.  I was invited to try for the college team, but declined for approximately the reasons described by my mother:  "You just want to smoke and chase boys!"  In my defense, there was also the fact that the basketball team seemed to awaken at a disgracefully early hour.

Thus, I was a little befuddled by this Malcolm Gladwell article.  I've played a full court press, and my memory is that we got creamed.  That's because my team was terrible.  Indeed, as I recall, we abandoned the tactic after three or four games, because it wasn't improving our scores, and might have made them worse. 

On the other hand, my team was really, really terrible.  Perhaps a slightly better team would have been more successful.  What do I know?

Via Kevin Drum, however, I learn that Chad Orzel has the same opinion, and he seems to know what he's talking about:

He goes on at some length about what a bold innovation up-tempo basketball is, and how it completely changes the game in favor of the scrappy underdog.

This whole line of argument is somewhat undermined by the fact that there are several decades' worth of examples of people using pressure defense successfully in basketball. OK, he does make a nod to the history of the game by talking with Rick Pitino, but contrary to what you might take away from talking with Rick Pitino, pressure defense in basketball does not begin and end with Rick Pitino. Nolan Richardson, John Thompson, Billy Tubbs Paul Westhead, and others had success with pressing teams well before Pitino's success at Kentucky.

And, in fact, Pitino's 1996 Kentucky team is a terrible example of the point Gladwell is ostensibly making. Yes, they were a pressing team, but they were hardly scrappy underdogs-- nine of the players on the 1995-6 Wildcats went on to play in the NBA. This is not some scrappy group of nobodies who took it to the big boys with their unorthodox style of play. Quite the contrary, in fact-- that Kentucky team was loaded with top-flight basketball talent.

If you want to find real examples of people using the pressing style to overcome opponents with superior talent, you won't find many at the championship level. In fact, you're more likely to find stacked teams losing in spite of playing an up-tempo game than you are to find real teams of scrappy underdogs using the press to beat better competition. Arkansas and UNLV won titles in the early 90's with a pressure game, but more or less the same UNLV squad lost to Duke in a classic game in the '91 Final Four, and Billy Tubbs's Oklahoma team lost to a Kansas team that fits the "scrappy underdog" mold a lot better-- they had Danny Manning and not much else.

There's a reason for this: the press works, as long as the other team isn't ready for it. The idea of a full-court press is to force the opponent into a rushed and frenetic game and get them out of their routine. A team that's ready for it, though, and has skilled and disciplined players, won't get rattled by the press, and can pick the press apart for lots of easy baskets. You can use the full-court press to rattle a superior team that isn't expecting it, but if they know it's coming, there are a lot of ways that pressure defense can fall apart-- missed traps in the back court lead to two- or three-on-one breaks, over-aggressive defense leads to fouls, etc.. The teams that have won titles using pressure basketball have also had lots of talent, because you need something to fall back on if the press doesn't work.

Unfortunately, while you do get bloated incumbents who collapse when you use unconventional tactics, most companies, armies, and so forth are actually run by professionals.  If they are good at their job, your unconventional tactics will make you lose worse than otherwise--think Netscape giving away its product for free in order to get widespread adoption, then finding out that Microsoft could do that for longer than a startup.  The history of business is littered with groundbreaking innovators who were eventually shoved out of the markets they'd created by incumbents with complementary assets; most business school students will be familiar with the case of medical scanning, but the examples are legion.

Worse, unconventional tactics can trigger an adverse reaction in opponents.  If they have the ability to punish you, you'll regret it.  I suspect that most of Al-Qaeda were surprised and horrified when the US reacted to attacks on US soil differently from attacks on military installations abroad:  not with surgical strikes on moderately important targets, but by invading Afghanistan.  Similarly, if the players on the basketball court think you're going too far, as any basketball player can tell you, they have lots of ways to retaliate.

Department of Textual Analysis

Who else thinks that the Chrysler PR department has been doing a little light editing of its wikipedia entry?

Continue reading "Department of Textual Analysis" »

How Do I Know That the Chrysler Bailouts are About the Unions?

This question was asked recently by a seasoned political reporter of my acquaintance.  Frankly, I hadn't realized that anyone else seriously believed there was any other reason to bail out Chrysler.  But let's go through a couple of the other stated rationales, to see why I find them so implausible:

1. Chrysler is a good company caught in a bad situation.  Chrysler has been a bad headache for years.  Daimler bought it for $36 billion in 1998, and actually paid $650 million to have Cerebrus take the company off their hands in 2007.  Robert Bruner said in 2007 that
   
   

   The alternative to a private-equity restructuring would be a government bailout. We as an investing public need to decide whether we want the public sector to step in to support these ailing manufacturers or would we rather have these turnarounds privatized."  Chrysler's major problems were not born out of the financial crisis.

   
   
2. The hedge funds benefited from the government money, so they're getting more than they would have otherwise.  As far as I know, Chrysler has burned basically all the cash they got from the government, which is why they're in bankruptcy. They haven't bought exciting new assets the secureds can liquidate; they've just produced more cars that can't be sold at a profit, put more wear and tear on machinery, etc.  The deal they made with Fiat doesn't put any cash into the company.  It's possible the government money somehow improved Chrysler's current financial hopes, but I don't see it.


3. The administration isn't kowtowing to the unions; it's trying to prevent massive job loss.  Chrysler employs about 60,000 people.  This is a rounding error in the number of jobs that have been lost since this recession began. 
   
   To put it another way, we could have taken the $8 billion or so we gave to Chrysler and given every one of the company's employees $133,000 to start their own War on Poverty, while still providing much of their pensions through the PBGC.  Of cours, the new Chrysler is going to cut many of those jobs, so the cost of actual jobs saved will probably top $200K per.  For as long as the company lasts.  Which most analysts do not expect to be long, given that their super secret surprise scheme for turning everything around is to have Chrysler sell retooled Fiats to a country with one-seventh the population density and almost twice the birthrate of Italy.
   
   
4. They're bailing out Chrysler because the company is systemically important.  Really?  When Lehman failed, huge other portions of the financial system quite unexpectedly quit working. Yet when I look out on the streets, I see no noticeable dimunition of the number of cars there.  When I turn the ignition key in my car, it still starts.
   
   Whether or not you agree with the actions the government has taken in the banking system, there is evidence that financial crises have real, nasty, systemic effects that even large industrial failures don't--particularly in a well-diversified economy like the United States.  (If Nokia went belly up, Finland would be in trouble.  But if Nokia went belly-up, Finland probably wouldn't have the scratch to bail it out, either).  I am unaware of any evidence that a single industrial failure has ever precipitated the kind of massive, widespread hardship that followed, say, the failure of Jay Cooke & Co.  Intervening to prop up a company that has been struggling for a decade is almost textbook bad economic policy.
   

The Price of the King's Shilling

Apparently, the $34 billion figure is good news because BAC has all those preferreds at Treasury that can be converted to common stock, leaving Treasury with $34 billion of common and $11 billion of preferreds.  But Joe Weisenthal asks a good question:

If this is how the conversion goes, and the bank does pay off the remaining $11 billion over the next year or so, are they considered to have repayed TARP? How does a bank that's taken the conversion ever actually repay the TARP?

This is troubling, because it's now clear that the worry many of us had at the time of the bank bailouts has come true:   the government is using its intervention in the banking system to pressure banks to give special deals to the government's special friends.

(The government is apparently still taking the line that they are only intervening because the automakers are splendid, robust companies that got caught in a "perfect storm".  If so, Chrysler must be stuck in the Bermuda Triangle, because owners have been playing "hot potato" with its dying brands for most of the last decade.)

Countries that use their banking systems this way don't get good results.  If you're a fairly uncorrupt developed country, you get slower growth and bloated "critical" sectors that are usually more critical in providing campaign support, lavishly remunerated make-work jobs, and photo ops, than any products the public actually wants.  Then, if something like Japan happens, you have a twenty-year "lost decade" while everyone pretends as hard as hard can be that everything is all right, in the sincere but misguided believe that wishing hard enough will make it so.

If you are a badly managed country, you end up like much of Latin America or Africa, with a dysfunctional economy that booms only along with the price of some commodity you happen to produce.

We are hardly Zimbabwe, or even Venezuela.  But if we keep using TARP to create a sort of "Most Favored Borrower" status, we'll erode the safeguards that keep election to office in America from being the kind of giant spoils system that's common in much of the world.  What the bankruptcy judge did was entirely right and proper--it's his job to allocate losses among creditors.  And it's always true that some of the credtiors won't like the deal they get.  On the other hand, what the administration did really wasn't.  It got its pet majority stakeholders to screw both their own shareholders, and the other creditors, in order to give a powerful union a sweetheart deal. 

When the government gives money to favored constituencies--well, I don't like it, but as PJ O'Rourke says, that's basically what our government does.  "It ought to be right there in the constitution:  'We the People, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and give money to jerks . . . ' "  But when it starts stepping in and trying to bypass the bankruptcy rules in order to make someone else give money to jerks, that's different in magnitude, and in kind. 

What particularly worries me is that it seems so unnecessary.  I heard repeatedly from progressives, in the run-up to the bankruptcy case, that the holdouts were unreasonably holding out for a trivial improvement--about 500 million dollars.  But if it was so trivial, why didn't the government just put the extra money in, rather than jeopardizing confidence in the bankruptcy system--and the creditworthiness of a large swathe of unionized firms?  $500 million is about the price of one cup of coffee per American, a trivial sum relative to the overall budget.  This move has shown potential partners that government funds are dangerous, and potential lenders that union firms are risky bets; both have probably cost American citizens more than they saved.  So why did the government risk so much for so little gain?

You know the answer, don't you?  Because they're planning to do it again.

SEC Goes After Reserve Funds

As you may remember, we blogged the hell out of Reserve Primary Fund's breaking the buck last fall.  Now the SEC has charged its operators with fraud.  As far as I can tell, their big crime is talking up their own health--claiming that they were less exposed to Lehman than they turned out to be.

What's interesting to me about this is that as I understand it, the fund didn't take in much new money on these claims; the talk was to existing investors, who didn't flee because they thought their money was safer than it was.  But on a social level, this did no harm.  It changed the distribution of the losses, but there were few-to-no extra losses as a result of their claims.  For every person they made worse off, someone else recovered more than they otherwise would have.  Yet we punish them as if they'd actively defrauded new investors, in order to maintain confidence in the system. 

Bank of America needs $35 billion

So Bank of America is officially the most screwed up bank in America.  The stress tests say that they need to raise $34 billion.  A number of people are all-aflutter because they reckon that the stress test results are a radical understatement of how much capital behemoths like BofA and Citi actually need to make themselves robust to the new environment.  On the other hand, it's going to be hard enough for BofA to raise $34 billion--how many assets can they quickly dispose of at fire sale prices?  They're sure not going to the capital markets.  What's the point of setting the bar above "unreachably high"?

I'm sure I'm about the only one who feels sorry for Ken Lewis, but really.  He bought Merrill under the twin prods of Paulson's appeals to his patriotism, and the implied threat that banks who made the Treasury secretary unhappy would have a very hard time of things going forward.   Realistically, Ken Lewis didn't have much choice.  Now it turns out that in that one moment, he steered his bank from powerhouse to poorhouse.

Paulson may have been right that this was necessary to save the system.  If that's true, Bank of America shareholders are undoubtedly better off than they would have been in a more catastrophic collapse.  On the other hand, we can't see that other, terrible world, and in this one, the BofA shareholders have been handed an unfair share of the bill for averting an apocalypse that didn't quite happen.  I expect Ken Lewis will soon decide he needs to retire so he can spend more time with his family . . . complaining about getting fired.

America's First Face Transplant

The nation's first face transplant has revealed herself.  It's hard to look at the pictures, because the "after" still looks like what you get from one of those distortion "fun" filters in Photoshop.  But at least she'll be able to walk around without people pointing and children screaming.  And apparently, there's hope that they'll fix the damage (her husband shot her in the face with a shotgun in 2004) still further.

There's been a sort of fascinated repulsion surrounding these transplants, but severe facial disfigurement is probably the worst accident that can happen and still leave you alive.  From what I understand, for a lot of people it's a kind of living death sentence.  For whatever deep evolutionary reason, people are more horrified by facial disfigurement than anything else, except possibly severe cognitive disability.  People suffering from it have the unpleasant choice of repeatedly triggering that horror among strangers, or staying home.

The Dangers of Playing with Credit Markets

Governments have unique power over credit markets.  If a private party, provided that you live in a reasonably well-functioning democracy, the government will make him pay--or at least, set out the terms by which he can avoid doing so.  Saying, like Bartleby the Scrivener, that "I would prefer not to" is usually not considered sufficient.

A government, of course, can default whenever it wants, under any terms it wants.  It is limited only by the prospect of future difficulties in borrowing money.

But in times of duress, politicians--especially in emerging markets--are willing to deal with that comfortably far-off possibility, rather than find the money to pay the creditors now.

One of the big whiffs of my career--and every journalist has one of these eventually--was the time I wrote and filed a piece stating that Argentina was of course not going to default on its debt to the IMF, because that would be so obviously, phenomenally, stupid.  Three hours later, Argentina defaulted on its debt to the IMF, and I stayed up half the night rewriting.

I also wrote that I thought it probably wouldn't actually make good on its threats to squeeze its foreign creditors down to less than thirty cents on the dollar, because that was so clearly going to starve the country of capital as it tried to recover from a financial crisis.  Argentina willfully flouted my impeccable reasoning, and wrote its foreign creditors down to less than thirty cents on the dollar.  I call that spite.

And for a while, it all seemed to be working.  The world had a commodity boom, and Argentina, which grows a lot of commodities, boomed right along with it.  Plus, countries recovering from a financial crisis always grow fast, because the contraction was so brutal.  Between 2003 and 2007, Argentina averaged 9% annual growth, and the country did a very respectable 7% in 2008.   It would take a stricter libertarian than I to deny that shedding that burdensome foreign debt at such attractively low rates probably helped the country grow back towards trend.

Unfortunately, when we sneeze, the developing world catches cold.  Lengthened unemployment and great personal unhappiness here translate into malnutrition and physical suffering in middle-income countries.  The government is running out of money--not in the vaguely doom-ridden sense in which you and I talk about coming Medicare deficits, but in the sense that it is now looting its pension system because that's the only remaining source of ready cash.  All emerging markets are worried because the volume of borrowing in the developed world may absorb all the ready funds, crowding out emerging market borrowing.  But Argentina has no access to the credit markets at all except through state agencies with real assets.  That means that it may very shortly have to run an aggressively contractionary fiscal policy in a contracting economy.  Financial assets are fleeing the country, and the yield on its existing debt has risen to levels that signal a horrifyingly high risk of default.

What Argentina did wasn't different in kind from what other emerging markets have done.  It was different in degree.  It bought short term prosperity at long term risk.  Argentina didn't use the respite to build a more productive economy; it used it to do social spending that kept the Kirchner's in power.  Now its citizens will pay the price.

The other night, I had dinner with someone who said that he wasn't that worried about the Chrysler interventions, because after all, memories in finance are short, especially when a financial crisis is involved.  And he has a point--if he didn't there wouldn't be any emerging debt markets.  But I have two questions.  First, how short?  Argentina's creditors show absolutely no signs of forgiving and forgetting.  Its own citizens won't lend it money directly.  And second, is this really true?  When capital wasn't badly impaired and the disasters were short lived, perhaps investors shrugged it off and went back for more.  But memories of the actions of both banks and private actors surrounding the Great Depression seem to have persisted more than a generation.

The Middle Class and the War on Democracy

Recently at Foreign Policy, Joshua Kurlantzick wrote that in many developing countries, the middle class was staging a backlash against Democracy:

It wasn't so long ago -- just 17 years -- that many of these same activists also fought battles in the streets of the Thai capital: middle-class Bangkokians, students, and businesspeople, and other elites. Today's yellow-shirted protesters at first seem like the same crowd: shop owners and office workers, wielding expensive cellphones and the political power typically reserved for the most influential bloc of the electorate in any country.

But the difference is that the protesters in the 1990s were fighting for democracy against a coup that had toppled an elected government. Despite its name, the People's Alliance is explicitly antidemocratic. In its platform, the group seeks election reform measures that are basically meant to slash the power of the rural poor, who comprise the majority of Thais. In the minds of the Thai middle class, poor voters only vote for politicians like the populist Thaksin because they're offered incentives such as a few baht on voting day. One former U.S. ambassador to Thailand puts it bluntly: The middle class "disdain[s] the rural masses and see[s] them as willing pawns to the corrupt vote buyers." Instead of fighting for democratic rights, in other words, the People's Alliance is protesting against them.

I'm not sure why this is surprising.  This is pretty much exactly the story of the Progressive movement in the United States, which was a backlash against the corrupt hoi polloi.  Rent-seeking populists, backroom-dealing political machines--these were both inimical to classical liberalism, and also the voice of minority-majorities, who used favorable local demographics against members of the national elite.  Think of some of the signal accomplisments of the Progressives:  Planned Parenthood.  Immigration restrictions.  Civil service reform.  Massive campaigns against the corruption of the urban machines.  "Mental hygeine".  Spot a trend?

I would tend to agree with the Progressives that the machinations of the urban machines that sustained my irish ancestors were bad for the cities they worked in.  But the machines had undeniable popular support, which is why they were so hard to stamp out.  Immigrants might not like an individual bosses.  Nonetheless, the bosses were the only thing standing between them and a WASP elite that despised them.

The poor benefit from the capitalist system, probably more than the rich--compare Pharoah to Bill Gates, then compare a standard Egyptian peasant around 2000 BC to, say, a minimum wage worker in America.  But if you don't have the social capital to make it to the top, at any given time, it may look like it pays off to undermine or overthrow the system.  Naturally, the middle class, which preserves the system, will be averse to any system that gives them the power to do so.

And if you're sitting there, feeling all superior to those benighted bourgeois, consider all the things you want to take out of the hands of ordinary Americans because otherwise those amoral toads will do the wrong thing.  Gay marriage.  Or prayer in school.  Immigration.  Trade.  I've no doubt that you have some very compelling reason that these things are entirely different from support for the rule of law or a standard liberal economic order.  The point is, no one's really comfortable with letting the majority set all the standards.

Unrated

If this becomes a trend, it's potentially revolutionary:  "Goldman Sachs's fund arm is developing a new global credit strategy for institutions that will rely on market prices rather than heavily-criticised credit rating agencies."

Any purveyor of information is vulnerable to the fact that the subjects of the information have much more at stake than the (many) consumers of said information.  You care more about the contents of your credit report than any individual bank.  In the case of the banks, this is counterbalanced by the fact that they have more money, and perhaps paradoxically, that they are fewer.  But in the case of things like bond ratings and search engine results, you always have to guard against the possibility that the subjects will find some way to bribe the intermediary.

The Goldman fund kills that incentive with transparency--if its ratings are bad, that will show up when it underperforms the market.  On the other hand, there's a real risk that its analysis will nonetheless converge with the ratings agencies, because of career risk for the managers.  If your fund drops when the market does, you still have a job.  If your fund drops at some other time, then no matter how good your probabilistic analysis, sheeplike investors will move their money elsewhere.  Like the sellout risk, career risk  seems to afflict most intermediaries that operate long enough.  (Including, natch, the government.)

Still, over the short term, it will be interesting to see whether investors prefer their black box to the black boxes at Fitch's and Moody's. 

Why is This Bubble Different From All Other Bubbles?

James Surowiecki has a very interesting column arguing that this bubble was different because unlike the earlier banking booms, there was no point to the wild spending.  The bubble didn't bring us railroads and electrification; it brought us . . . houses.  Lots and lots and lots of houses.

I'm of two minds on this.  On the one hand, I think that this is an interesting point.  On the other hand, of course, the bubble in the 1920s was not limited to electric stocks, or even stocks.   Lots of money was wasted on railroads, Florida real estate, mining concerns, and many other unrelated phenomena.  And if you look at the history of the 1920s, you see the same thing we see in the 1998-2008 era:  markets awash in too much money.

So I wonder if there isn't a sort of post-hoc, ergo propter hoc reasoning to these "explanations" of the previous booms and busts.  A market bubbling over wtih too much credit will end up plowing a lot of money into some technology or industry which ends up being really, really important twenty years later.  (The electric revolution continued, surprisingly rapidly, in the 1930s).  We look back and interpret the bubble as having been "about" that technology.  But at the time, when it's not obvious what the big winner is going to be, it just looks like a giant mess. 

Secondary Markets are Real Markets

I'm surprised to see Felix Salmon joining the crowd of liberal bloggers defending administration bullying of the holdouts on the grounds that they bought the debt at distressed prices.  (Though it's not clear that all the holdouts are vulture funds).  Secondary markets for assets are real markets.  Indeed, they are very important markets.  Just ask homeowners in Detroit what happens to the value of an asset with no secondary market. 

Chrysler was able to raise money in recent years because debtholders knew that they could sell that debt to someone else.  If that "someone else" had thought that there were special moral--and apparently, therefore legal--rules for people who purchase debt on the secondary market, they would have paid less for it.  And if the price of assets on the secondary market falls, so does the price of assets on the primary market.  That's why you don't see a lot of new homes being built in Florida.

Thus, swatting the secondary buyers means higher interest rates for the primary fundraiser.  There's a reason we order the seniority of claims by how secure the loan was, rather than how much we like the creditors.

Should I Worry About Chrysler?

For the record, I have no problem with whatever cramdown those debtholders--or any others--get in bankruptcy court.  If the judge thinks that the reorganization can't be done without making the UAW basically whole, fine.  I just think that the reorganization should be done under the well-established procedures of the bankruptcy court, not at the behest of an administration trying to reward its supporters.

 It's all very well to say that most of the senior lenders are going along, but of course, the leading senior lenders are doing this because the administration has them over a barrel.  I think most of the people enthusing about this actually recognize that in other countries, when the government uses the banking system as a slush fund to reward its constituencies, this generally turns out badly--and makes the banking system a lot more frail. 

Nor will it fly to claim that the administration's threats--and note that Perella Weinberg has most carefully not denied that they were threatened--are just standard jawboning.  Standard jawboning does not involve the White House bloody press corps.  It is true that DIP financiers often get to demand serious concessions from creditors, but those creditors are limited by what those creditors would get out of a recession, and are aimed at either maximizing enterprise value, or maximizing the likelihood that the loan will be repaid.  This deal does neither. 

Perhaps it's idealistic of me, but the American bankruptcy system actually works very, very well.  I think we should be very cautious about mucking with it, particularly when there's no reason to.  The administration didn't need to beat up the creditors in order to reorganize the company--or at least, they wouldn't have needed to do so, if they weren't trying to make the creditors take less than they'd get in a liquidation.  Nor did it need to do so to keep the UAW at the table--unlike capital, the UAW isn't going anywhere.  The administration is beating up the creditors because a) it wants to give the UAW a much better deal than they'd get in liquidation and b) they'd like someone else to pay for it.  I recognize that the law is always kind of messy, but as far as I know, this kind of blatant political intervention between debt claims is unprecedented, and worse, it's a dress rehearsal for doing the same thing at GM.  I don't think this is good for the rule of law, I'm pretty sure it will be bad for capital markets, and I'm nearly positive it's going to make it hard for any heavily unionized company to get substantial capital for the next decade.  And why?  It hasn't exactly enhanced Chrysler's already dicey chances of survival.

Falling Personal Savings: All Bill Clinton's Fault?

Matt Yglesias points to the fact that personal savings as a percentage of disposable income peaked in the early eighties, and attributes the change to "the Age of Reagan".  You might as well attribute it to the "Age of Clinton", since that's where the majority of the decline occurred, from 8% to about 2%.  In fact, the postwar average was 8-10%; Matt's chart cuts out the lower-saving late 1940s and early 1950s.  Reagan/Bush saw a modest decline to the bottom of the average range.  Clinton saw a free-fall.

But we don't actually need to attribute talismanic powers to the Oval Office.  We have a more parsimonious explanation:  the Great Depression generation had (for Americans) unusually high savings rates.  US savings peak in the 1970s and early 1980s, when the last of the generation that came of age in the Great Depression hit their peak savings years.  Then, as the last of the people who lived through the Great Depression retire, people who have never gone through a financial crisis start saving less and less.  What happened at the tail is more pathological, but also hard to attribute to the president.  I don't think Clinton made Americans take equity out of their homes or run up credit card debt to buy things.

Boston Globe, We Hardly Knew Ye

Speaking of bankruptcies and hardball negotiating tactics, the New York Times is carrying out a bruising battle against the Boston Globe's unions, and has now filed notice that it is shutting the newspaper down.  The globe is hemorrhaging cash, which the New York Times isn't exactly flush with right now--it's mortgaged its headquarters, borrowed $250 million at credit-card interest rates, demanded pay cuts and layoffs from its own union, and presumably lit about a billion candles at the nearest church for a rapid recovery in ad revenues.

I find it hard to believe that this is anything but a negotiating tactic.  The PR blowback from shuttering the globe would be huge . . . and presumably the Times hopes to sell some papers in Boston.  But then I look at their financial statements, and I wonder.  They don't look like they're generating the kind of revenue that's going to make it easy to handle 35 million a year in new interest payments.  It's possible, if unlikely, that they're seriously thinking about cutting of a limb to save the heart.

Berkshire Hathaway Liveblogging: Every Story Needs a Happy Ending

The last question of the afternoon was "Alex from Boston", who thanked his girl for being "my best friend" and then popped the question.  This turned out to be something of a setup; Alex is Warren Buffett's great-nephew.  But the arena still broke into hearty applause.

Normally I'd add, "I hope she said yes".  But this is a relative of Warren Buffett.  I'm sure he knew the answer to the question before he asked it.

Berkshire Hathaway Liveblogging: The Perils of Executive Compensation

Warren Buffett is a famous critic of executive compensation, which he suggests is, as John Kenneth Galbraith once put it, "Frequently in the nature of a warm personal gesture from the CEO to himself."  A shareholder from the Phillipines (people travel a long way to ask Warren and Charlie questions) asks him how he thinks one should structure a good compensation package for managers at a capital-intensive subsidiary.  The implication is that if the banks hadn't had such poorly structured compensation, they wouldn't have taken such outsized risks.


The responses from Warren Buffet and Charlie Munger are worth repeating at length.  They don't actually explain whatever magic metric Berkshire Hathaway has found for aligning the incentives of managers and shareholders, but they're a nice statement of their views on the Principal-Agent problem:

 We think we have a good system.

Your question implies that the board sets these things.  In the recent forty years, basically the board has had little effect on these things.  The CEO has had an important role determining their compensation.  These people pick their own compensation committee.  I've been on one compensation committee out of nineteen boards because these people aren't looking for Dobermans; they're looking for cocker spaniels.  It's been a system that the Ceo has dominated.  In my experience, boards have done little in the way of thinking through as an owner what they ought to pay these people. 

Here in town, Pete Kiewit figured out a very logical way to pay people in his business.  It's not rocket science--you would be able to figure it out, I can figure it out, but you have to understand that not every CEO wants a rational compensation committee.

I don't think there should be a compensation committee. . .

It can be done.  It's very difficult to have a system where the board, thinking as owners, care as much as the guy on the other side of the negotiating table.  But it's very important how you compensate the CEO, and it can be done.

Charlie Munger added:

Liberally paid boards of directors can be counterproductive.  There's a sort of reciprocation--you keep raising me, and I keep raising you, and it's very clublike.

This brought on applause from the value-minded audience.

But as Ed Carr argued in the pages of my former employer a few years ago, there's a problem with the "cosy boards" story.  It's widely agreed upon by almost everyone, including yours truly until Carr got to me.  Here's the problem, though:  private companies pay their managers even more.  It's riskier compensation, of course, and it's plausible to argue that all of the extra pay is a risk premium.  But if CEOs were only getting paid so much because they'd captured the boards, you'd expect to see private companies paying less.  You'd also expect to see incumbents making more than CEOs recruited from outside, but you don't.

It's hard--nay, impossible--to believe that cosy board relationships don't inflate CEO pay.  But the effect doesn't actually seem to be that large.

Berkshire Hathaway Liveblogging: "Unending Losses" for Newspapers

Up here in the plushly appointed press box, patrolled by grim looking security guards, the members of the press are paying varying levels of attention to the questions.  In part, that's because some of the questions aren't really that relevant to most business journalists, whose editors are not panting to hear what Warren Buffett thinks about promoting the principles of value investing among today's young people.  Other questions are only relevant to a few peoples' beats.  Besides, the shareholder meeting is, as these meetings go, very, very long.  Press registration started at 6:30 pm, the movie began playing at 8:30 am, the Q&A has been going on for several hours, and well, there's a buffet.  A really nice buffet, with little biscuits and three kinds of meat and all the soda you can drink.

But the minute Buffett was asked about newspapers, everyone in the place was as attentive as a doberman on high-dose Adderall.  Finally, Warren Buffett takes on the world's most important topic!

Sadly, what Warren had to say wasn't particularly novel:  newspapers are in big, bad trouble.

Most newspapers in the United States, we would not buy at any price.  They have the possibility of unending losses.  30 years ago, they were an essential business if you wanted to learn sports scores, news, etc.  They were only essential to the advertiser as long as they were essential to the reader.  That's changing, it's changing every day.  And I do not see anything on the horizon that's changing

Yes, folks, you've just lashed yourselves to the rail of the Titanic.  But at least there's a buffet on the promenade deck.

Berkshire Hathaway Liveblogging: Coming Cram Downs?

The Berkshire Hathaway Q&A is very long, and more than a little funny. Shareholders have often been compared to a cult, and it's clear why listening to many of the unscreened questions from shareholders, who ask Buffett to opine on things like financial literacy in America, national health care, and the Future of Youth, which have an at-best tangential relationship to the company.

The shareholders are clearly mad about the government bailouts, particularly of the banks. And more than one has taken to phrasing an indictment of the government's action as a sort-of-question that's really more of a thinly veiled invitation for "Warren" and "Charlie" to denounce this decidedly un-frugal endeavor.


Buffett replies that these things are institution-specific, and there's quite a lot of underlying common equity left in his holdings, so there's no reason to worry about a cramdown. But this whole line of question highlights something for me: regulatory risk is a gigantic concern this year. Every third question seems to be about some major government project, and what sort of havoc it might wreak on his business.

Last night, I went to dinner with some investors, where a long conversation about the difference between investment and gambling ensued. Warren Buffett followers aim to invest, not gamble. But when the government is involved, it's all gambling--none of the people I've spoken to, and (I'd wager) virtually none of the people in the arena, have any particular insight into the workings of the government processes. Hell, these days, the people I speak to at Treasury and the Fed don't seem all that certain about what they're going to do next.

An investment in Goldman Sachs and Wells Fargo is a bet that, first, the world economy won't really collapse, and second, the government won't get mad and take your money. There's no reason to believe that Warren Buffett, or anyone else, has any good way to assess the probability of those beliefs.

Update:  The journalist sitting next to me points out that Warren Buffett is good friends with the current administration, which probably limits the regulatory risk.  This would no doubt cheer me if I were a Buffett shareholder, rather than a libertarianish journalist.

Update II:  In the afternoon question session, Buffett, responding to another question, talks about the AIG 90% bonus tax, and says "That was uncontrolled fury.  They just wanted to do something, and they did it.  They still want to do something, maybe not something that spectacular, but Berkshire Hathaway will be affected by some of this."

Berkshire Hathaway Liveblogging: Life After Buffett

The rumors have been flying this year that Warren Buffett is going to announce his successor today.  Buffet is 79, and though he looks remarkably energetic, he is statistically unlikely to be running the company ten years hence.  So far, though, there's been no sign that he's preparing to name his replacement.  Indeed, when a shareholder asks why he hasn't brought his successor on board, so that he can groom him for the top spot, Buffett's answer seems to indicate that he hasn't picked that person yet.  Still, it is interesting. 

"If we had a good way to inject someone into some role that would make them a better CEO of Berkshire, we'd do it, but the candidates we have right now are running businesses, making decisions, getting experience.  To bring them in to the Berkshire offices while I'm sitting there reading would be a waste of talent."

Berkshire Hathaway isn't a trading firm.  What Buffett does is sit and think a lot.  And that's not a process that can be shared.

But that makes it obvious how real the concern is about what will happen to the firm after he is gone.  Value investors insist that the philosophy, consistently applied, should produce good results--but most value investors are no Buffetts.  Either Buffett is, as some insist, simply a statistical fluke--or he really is a special, rare genius.  Either way, it's not clear Berkshire's magic will outlast him.

Union Power

I see a lot of liberal blogs crowing that Obama's really taking it to the hedge funds who are holding out on the Chrysler bankruptcy.  Hedge fund managers, you see, have a civic duty to lose large amounts of other peoples' money in order to ensure that the UAW makes as few sacrifices as possible in a bankruptcy.

Here's the thing:  hedge fund managers don't care what the public thinks.  The public isn't allowed to invest in them.  And the holdouts are, basically definitionally, not direct beneficiaries of federal largesse.

No, hedge funds care what rich people think.  And if you were a rich people, how would you react to the news that a hedge fund manager who had a senior lien had refused to allow his claim to be treated like unsecured debt in a bankruptcy?  Would you be outraged and pull your money?  Remember that as a rich people, you could have donated large sums to the UAW, or the US government, if you wanted to.

This might well be good publicity for the holdouts.  I'd certainly rather put my money in with Oppenheimer than with someone manager who is going to toss his fiduciary duty to the winds and make large tax-free gifts to the United Auto Workers.  But then, I'm not very patriotic.

Which brings us to the real question, which is, when did it become the government's job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line?  Leave aside the moral point that these people lent money under a given set of rules, and now the government wants to intervene in our extremely well-functioning (and generous) bankruptcy regime solely in order to save a favored Democratic interest group. 

No, leave that aside for the nonce, and let's pretend that the most important thing in the world, far more interesting than stupid concepts like the rule of law, is saving unions.  What do you think this is going to do to the supply of credit for industries with powerful unions?  My liberal readers who ardently desire a return to the days of potent private unions should ask themselves what might happen to the labor movement in this country if any shop that unionizes suddenly has to pay through the nose for credit.  Ask yourself, indeed, what this might do to Chrysler, since this is unlikely to be the last time in the life of the firm that they need credit.  Though it may well be the last time they get it, on anything other than usurious terms.

What's the Point of a Little Gas Tax?

Ryan Avent writes of the gas tax:

. . . any politically tolerable carbon price, enacted by cap-and-trade or tax, would add mere cents to the price of a gallon of gas. I don't remember the exact data point, but I recall George Bush railing against Lieberman-Warner by saying that it would add 40 cents to the price of gasoline by the year 2020 (or something like that). At a time when prices were rising by well over a dollar in a matter of months, this was not a particularly frightening statement.

But people hate the idea of expensive gas, and it could be the case that even a small potential increase in prices would make it more difficult to pass a carbon price. For this reason, some greens (Dave Roberts, for instance) argue that a carbon pricing system should exempt transportation. I disagree -- the idea of pricing is that emission reductions will occur in difficult to predict places, which makes me extremely reluctant to exempt such a large sector of the economy -- but I understand where he's coming from.

But the most important thing to understand about the above is that consumers are far more vulnerable to market-driven swings in the price of gasoline than they are to regulation-driven changes. Any potential government-engineered gas price increase pales in comparison to the spike markets delivered in 2007 and 2008.

There are two things about this that trouble me.  The first is that Ryan and I may conceive of a 40 cent increase in 2020 as trivial.  On the other hand, I don't drive to work every day, and when I do, my commute is three miles each way.  Traffic is a vastly bigger problem for me than the cost of gas; I fill up my tank about once a month.  For households out in the Great Beyond, a permanent 40 cent a gallon increase is quite a lot--particularly if the 2008 prices were a bubble, and the permanent cost of a gallon of gas is more like $2.00.

Second, if Ryan is right, why are we doing this?  It did take a lot of increase to change driving behavior, which is why in Europe, taxes can account for as much as 90% of the price of a liter of gas.   There's a plausible argument that a 40 cent tax won't do much to change driving habits.  But then, why have the 40 cent tax at all?  If you have a Pigovian tax that doesn't alter the production of the externality, cap and trave starts to look a lot less like controlling our carbon emissions, and a lot more like taxing people who aren't Ryan Avent and Megan McArdle to top up government revenue.

Chrysler: The Car of the Future!

Well, I picked a hell of a day to get stuck on an extended plane journey, didn't I?  So while I was up in the air (or, more often, on the tarmac, thanks to rain in Chicago), Chrysler declared bankruptcy.  The plan is to do a pre-packaged bankruptcy that will allow the company to emerge relatively quickly, though of course, a judge still has to be willing to ride pretty roughshod over the holdouts for that to happen.  Ultimately, I assume the judge will go along, but I also assume it will not be anywhere near as fast as the government and the Chrysler management have been hopefully asserting.

Joe Wiesenthal thinks that Chrysler will now be run well, because the UAW just became responsible for generating the revenue to cover their wages.  I'm skeptical, for multiple reasons:

•  We just demonstrated that the penalty to the workers for helping drive the company to the bankruptcy courts is not that high
• The above will make it relatively difficult to get capital for operations
• The record of worker-run enterprises isn't that exciting--if it were, everyone would do it.  The unions can often still do better by maximizing their personal take rather than enterprise value, which is why German companies don't rule the world, and union-owned airlines showed back up in bankruptcy court.  (Though to be fair, in those cases there is often more than one union competing for rent extraction)
• The people who have a seat on the board don't represent the workers; the UAW is dominated by the retirees.  Those people typically have an extraordinarily adversarian attitude towards management, and also, they don't have an interest in maximizing long-run enterprise value.  They have an interest in maximizing their pensions now, and who cares what happens when they die?  This is a core problem with the UAW by-laws, one that is going to be very hard to fix, if it is fixed at all.

And though I'm not a gearhead, I'm a little surprised to hear the administration saying that Chrysler is going to be saved by--Fiat's world-class engineering.  As far as I can tell, the whole deal is a huge bet on the small-car market catching on in a very different landscape from Fiat's high-density strongholds.   Better hope gas prices spike a lot higher.  (I certainly do:  I own a Mini.  Cap and trade could push my resale value into the stratosphere.  Not that I would support a policy for personal, mercenary reasons . . . )

Blogging will continue to be light, as I am filing a column today and covering the Berkshire Hathaway annual shareholder's meeting pre-parties.  Don't laugh; this is big business in Omaha.  More as and when I can.