Felix Salmon

In general, immigration is incredibly healthy for any economy. Immigrants tend to work hard, boost GDP, fill jobs which would otherwise be hard to fill, and also create jobs of their own. But whatever’s true of immigrants in general is much more true of legal immigrants. And whatever’s true of legal immigrants in general is much more true of smart, high-qualified legal immigrants.

The US has various visas specifically designed to encourage the kind of skilled, legal immigration which has driven its economy for nearly all of its history. The three main ones are the O visa, the H visa, and the L visa. The O visa is a small program for “aliens of extraordinary ability”, and the H visa all but suffocated under its own popularity in 2007 and 2008. But the L visa kept on allowing people in. It’s given to employees of foreign companies, who have spent at least a year working for that company abroad, and who are only allowed to work for that company when they’re in the US. And historically it’s been quite easy to get, with Customs Immigration rejecting fewer than one in ten applicants. Until:

This is bad, but it gets worse — the spike in denials seems to target specific countries over others. In 2008 the L-1B denial rate stood between 2% and 3% for India, Canada, Mexico, and the UK. In 2009, it rose: to 2.9% in Canada, and 4.1% in the UK. And 15.1% in Mexico. And 22.5% in India.

Meanwhile, in order to make things even harder, Customs Immigration didn’t just approve the applications that they didn’t deny. Instead, they increasingly sent them back with RFEs, or “requests for evidence” — a layer of bureaucracy which at best adds months to the visa-application process and makes it much harder for global companies to move employees to where they might be urgently needed. If you think the rise in denial rates is bad, just check this out:

It really does look as though Customs Immigration is in the middle of a massive crackdown on L-1B applications here. Now, why would they do that? Maybe because the number of applications was suddenly very high? No — it turns out that the drop in L-1B applications for Indians, the people who suffered the brunt of the crackdown, preceded the crackdown by a couple of years.

If you look at this last chart, what you’re seeing is just the number of L-1B visa applications from Indians. It’s falling sharply enough on its own — but then on top of that an increasing number of those petitions is being denied, and most of the rest are being sent back with an RFE.

All too often, the questions in the RFE, or the reasons for rejection, seem to imply rules which simply don’t exist:

Employers say that at times they believe applicants are rejected for L-1B status if a particular consular officer or an adjudicator believes a company could not possibly have more than three to five people with specialized knowledge in a particular area. Nothing in the statute or regulations indicates “specialized knowledge” need be restricted to a handful of people in a company. In fact, in companies employing thousands of people in highly specialized fields and product lines, it would not even be feasible to operate in most circumstances if specialized knowledge was restricted to three or four people at a time in a specific subject area, product or service.

Another type of denial, employers say, comes from USCIS adjudicators and consular officers requiring a standard of “extraordinary ability” be met to permit the transfer of employees into the United States with specialized knowledge. Requests for Evidence for L-1B have included asking whether the individual received a patent. And companies note that even patent holders have been denied L-1B petitions under the new, arbitrary standards.

Of course, Customs Immigration has discretion to reject anybody for any or no reason. No one has the right to immigrate to the US. But it does seem here that the US is rejecting far too many people — as though their job is to keep them out, rather than welcome them in.

Thanks to the National Foundation for American Policy for putting these charts together. As they note, everybody rejected has had a huge amount of money and effort put into their application. And so it does seem as though something bad is going on here.

Given the resources involved, employers are selective about who they sponsor. The high rate of denials (and Requests for Evidence) is from a pool of applicants selected by employers because they believe the foreign nationals meet the standard for approval, making the increase in denials difficult to defend. Denying employers the ability to transfer in key personnel or gain entry for a skilled professional or researcher harms innovation and job creation in the United States, encouraging employers to keep more resources outside the country to ensure predictability.

American cities won’t win the global competition for talent if federal officials keep on behaving like this. Canada can do this stuff well; why can’t the US?

The long-awaited mortgage settlement is here! And it looks like a good one. The biggest worry was that the attorneys general would give away the shop in return for big headlines. While in fact they seem to have been quite successful at limiting the immunity that the five banks (Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial) are going to receive:

In the agreement’s expected final form, the releases are mostly limited to the foreclosure process, like the eviction of homeowners after only a cursory examination of documents, a practice known as robo-signing.

The prosecutors and regulators still have the right to investigate other elements that contributed to the housing bubble, like the assembly of risky mortgages into securities that were sold to investors and later soured, as well as insurance and tax fraud.

Officials will also be able to pursue any allegations of criminal wrongdoing. In addition, a lawsuit Mr. Schneiderman filed Friday against MERS, an electronic mortgage registry responsible for much of the robo-signing that has marred the foreclosure process nationwide, and three banks, Bank of America, JPMorgan Chase and Wells Fargo, will also go forward.

Along with how broad the releases would be, California’s attorney general, Kamala Harris, also pushed for her state to be able to use the state’s False Claims Act. That would enable state officials and huge pension funds like Calpers to collect sizable monetary damages from the banks if officials could prove mortgages were improperly packaged into securities that later dropped in value.

If you’re a bank shareholder breathing a sigh of relief, then, don’t. The only thing you’re protected against, now, is lawsuits over robosigning. Were those likely to cost $25 billion if they had gone to court? It seems unlikely to me that they could have raised that much. Other big-money lawsuits over securitization can and almost certainly will still be brought — which means that the big banks all still have significant litigation risk hanging over their heads.

So why did they do this deal? Well, for one thing, it’s not nearly as expensive as it might look at first glance. It’s not like they’re paying out $25 billion and getting nothing but a bit of immunity in return. A huge chunk of the money will go towards principal reductions on underwater mortgages — which means that it’s not really a cash outlay at all.

Let’s say I lent you $350,000 to buy a house, and that house is now worth only $250,000. I’m holding that mortgage on my books at par, but if I sold it there’s no way I could get $350,000 for it, or even $250,000. I give you a principal reduction of $40,000, so that you now owe $310,000. That’s good for you — which is why the settlement is a welcome development. And it means that I have to take a $40,000 write-down on my balance sheet. But the mortgage is still being held on my books at $310,000, which is still more than I could have sold it for before the write-down.

In other words, what’s happening here is that the mortgage settlement is at heart largely just encouraging banks to bring their balance sheets closer to reality — which is something they’d have to do sooner or later in any case. Indeed, insofar as principal reductions can increase the value of a mortgage, this deal is actually making banks money, over the long term.

So think of this as that rarest of settlements, one which really is a win for all sides. The attorneys general get a big deal, homeowners who got foreclosed upon get $2,000 apiece, and the banks get to do the kind of principal reductions they probably have wanted to do for a while, but while getting significant immunity from prosecution at the same time.

Now, I guess, we just wait and see what happens with all the other possible prosecutions and lawsuits, especially in New York and California. And, of course, from the FHFA.

Sarah Thornton has an interesting theory on why art prices keep on spiraling upwards:

The burden for the stinking rich is what to do with their money. There is currently no interest to be earned on cash, so they can’t leave it in the bank. The property market is nearly paralyzed and, for these globetrotters, the drawback of real estate is that it is tied to specific currencies. A Mayfair flat sells in pounds, but the Francis Bacon painting that hangs on its wall could sell in Hong Kong dollars and take up residence on a yacht in the South Pacific. Like historic or extra-large diamonds, works by artists with international recognition are a hedge against volatile currency fluctuations.

Fifteen years ago financial advisers were not in the practice of recommending that rich people diversify their portfolios by buying art. Now it is the norm. While buying emergent art is high-risk, speculative investment, acquiring established masterpieces is perceived as the opposite – a back-up in hard times. If all goes wrong in the world, if the eurozone cracks, the Middle East erupts in war, and a tsunami hits Manhattan, that rare, portable 1964 Marilyn by Andy Warhol will still be worth something.

This would be a lot more convincing if Thornton actually named or quoted any of the financial advisers who are reportedly “recommending” buying art as an investment. Because I’d love to talk to one. Art’s a dreadful investment: it’s got a negative carry, it’s highly unpredictable in terms of value, there’s no reason whatsoever why prices should go up rather than down, and, of course, you can put your elbow through it at any time.

In my experience, the only people who ever recommend that rich people diversify their portfolios by buying art are people who are going to make money, somehow, from the deal: people selling art investment or advisory services. Everybody else is generally pretty sensible, and sticks to saying the simple truth: Buy art because you love it, not because you think it’s going to rise in value.

More generally, the stinking rich are, as a rule, swamped with bright ideas from people guiding them on what to do with their money. They all have family offices, replete with highly-paid investment managers: The alternative here is not to simply leave the money in the bank, earning no interest. (More likely, they own the bank, take other people’s deposits, and lend them out at a healthy profit.)

And the idea of art as “a hedge against volatile currency fluctuations” is just bonkers; I’m not at all surprised that the line appears in a column for the Guardian, rather than in Thornton’s normal home of the Economist. If you have billions of dollars and you want to hedge against currency fluctuations, then — and I hope you’re sitting down for this — you hedge against currency fluctuations. Options and swaps and futures and forwards and the like are as commoditized as they come in the foreign-exchange markets, and much easier and cheaper to buy and sell than any major artwork.

Thornton’s wrong, too, about the intrinsic value of a 1964 Marilyn by Andy Warhol. If it was worth 10% of its current value a few years ago, it can be worth 10% of its current value in a few years’ time, too. Admittedly, 10% of its current value is still “something”. But that hardly makes the Warhol a remotely sensible investment. The whole point of art is that it has no intrinsic value: that its financial value is a magical number which is some highly variable function of how much various incredibly rich people love and covet the work.

But she’s right about this aspect of why the two big auction houses are doing so well these days:

Christie’s and Sotheby’s are superlative marketers who are getting better at funnelling demand for objects by a small group of well-tested artist brands.

The key word here is “brands”. CNBC’s Zac Bissonnette recently wrote to me saying that what he hates about contemporary art is the way in which “you can just put it there and all your friends will know what it is. People might as well hang a Nike swoosh over their couches.”

Zac’s exactly right about this: the one thing that pretty much all ultra-expensive art has in common is that it’s instantly recognizable as the work of a given artist. (And that goes for Cézanne as much as it does for Jeff Koons.) Fine art has become the billionaire’s-club equivalent of a Louis Vuitton bag, slathered in logos. It’s not connoisseurship which drives values, so much as recognizability. Which in turn helps to explain why the most prolific artists (Picasso, Warhol, Hirst) are also the most expensive: the more of their work there is, the more exposed to it people become, the more they’ll recognize it, and therefore the more desirable it is.

I do hold out some small hope that the Chinese art market will provide a correction to this syndrome — there, I’m told, the value of an art work is (at least sometimes) much less a function of its recognizability as the work of a certain artist, and much more a function of the way that it can fit itself into a long artistic tradition.

Once upon a time, the western art market worked that way too: there were genres, and artists worked within them, and then would be judged on how well they painted within the constraints of that genre. Those days, of course, are over now. But that doesn’t mean for a minute that the value of a Warhol is somehow forever. As with any other investment, what goes up can always go down.

Last year, I blogged a paper about the way in which wineries lie about the alcohol content of their wines. Now, the same authors have a new paper out, trying to get to the bottom of exactly why wine is getting hotter.

One thing I like about this paper is that it doesn’t look directly at wine-alcohol levels, but moves back a step to the sugar content of the grapes going into the wine. If you turn high-sugar grapes into wine, one of two things has to happen: either you get sweet wine, or you get high-alcohol wine. Since taste in wine is getting dryer rather than sweeter over time, higher-sugar grapes mean hotter wine. And those grapes are definitely getting sweeter, especially when it comes to white wine. Here are the charts for California:

Is there a global-warming thing going on here? After all, warmer temperatures mean sweeter fruit. But, no. Here are the temperatures of California’s wine-growing regions for the years since 1990 that sweetness has been rising quite dramatically:

But we kinda knew this already. The most interesting thing in the paper, is not that hotter wine is unrelated to global warming. Instead, it’s that hotter wine is quite strongly related to price:

Sugar content of grapes at harvest was relatively high for red varieties and premium varieties, and for grapes from ultra-premium and premium regions. The same categories tended to show evidence of faster growth rates in sugar content as well… In all of the models, the analysis shows a higher propensity for growth in sugar content for premium varieties, compared with non-premium varieties… This feature and the patterns of the level of sugar content among regions and varieties could be consistent with a “Parker effect” where higher sugar content is an unintended consequence of wineries responding to market demand and seeking riper flavored, more-intense wines through longer hang times…

We found that the region with the lowest price of wine grapes (under $500 per ton) had significantly lower average degrees Brix at crush compared with all other regions… It may be profitable, in producing lower-priced wines, to opt for a higher yield of wine per ton of grapes in exchange for lower Brix.

Simplifying, you can think of vineyards in one of two ways. Either they’re a source of grapes which get sold by the ton, in which case you want to maximize the yield. That, in turn, means lower sugar content. Alternatively, they can be a source of carefully-cultivated grapes which get turned into premium wine selling for $20 per bottle and up. In that case, the quality of the grapes starts trumping their quantity. And it’s pretty clear that what winemakers want, if they’re going to sell expensive wine, is grapes with a lot of sugar. That’s their expressed preference, anyway.

All of this is consistent with what I wrote last year — that wine drinkers say that they want lower-alcohol wines, and will even go so far as to prefer to buy wines with lower alcohol numbers on the label. But when they actually taste the stuff, in general the higher the alcohol the happier they are. Especially when the wine is expensive.

The Economist has a cute chart today, showing the net worth of the world’s richest men (and one woman), divided by their age. Warren Buffett has, on average, built just over $600 million of net worth per year of his life, putting him just behind Bernard Arnault and well behind Bill Gates and Carlos Slim, who right now constitute the billion-dollar-a-year club. (I’ll save you the math: that’s $2.7 million per day.)

There’s a good chance that when Facebook IPOs, Mark Zuckerberg will join that tiny group: he’s 27 years old, so the market cap we’re looking for here is $95 billion. If Facebook is worth more than that, Zuckerberg will have increased his wealth by $1 billion a year, on average, from the day he was born onwards.

Which helps to put Zuckerberg’s ten-figure tax bill in perspective. If you’ve been getting a billion dollars wealthier every year for 27 years, a one-off payment of $2 billion doesn’t seem particularly excessive, in tax terms — especially if all your other tax bills, before and since, are relatively minuscule.

What’s more, Zuckerberg’s $2 billion tax bill is only coming about because of a quirk in the way his Facebook equity has been structured: on top of his 414 million shares of Facebook, he also owns 120 million options. Zuckerberg’s shares are generating no tax bill at all; it’s only the fact that he’s exercising the options which is giving him $5 billion or so of taxable income, for this year only. (And even that income is offset by the fact that Facebook itself gets an equal and opposite corresponding deduction — and since Zuckerberg owns 28.4% of Facebook, what he’s losing personally he’s partially making up through his corporate shareholding.)

David Miller explains how founder-billionaires get off even more lightly than private-equity GPs when it comes to taxes:

If Mr. Zuckerberg never sells his shares, he can avoid all income tax and then, on his death, pass on his shares to his heirs. When they sell them, they will be taxed only on any appreciation in value since his death.

Consider the case of Steven P. Jobs. After rejoining Apple in 1997, Mr. Jobs never sold a single Apple share for the rest of his life, and therefore never paid a penny of tax on the over $2 billion of Apple stock he held at his death. Now his widow can sell those shares without paying any income tax on the appreciation before his death. She would have to pay taxes only on the increase in value from the time of his death to the time of the sale.

Miller has a rather complicated way of getting America’s ultra-rich to pay taxes: if you earn more than $2.2 million per year, or own $5.7 million or more in publicly traded securities, then you have to mark your wealth to market every year and pay income tax on the amount that it has gone up. Conversely, if your wealth declines, then you can get a massive rebate.

Personally, I think it would be much better idea if we simply implemented a small wealth tax, on top of income tax, for the very wealthy: last year I proposed that any wealth over $5 million should be taxed, annually, at a 1% rate. For someone with $5.7 million in wealth — that’s the top 0.1% — such a tax would increase their tax bill by just $7,000 a year. But for Mark Zuckerberg, it would bite. Right now, he stands to pay essentially no taxes in 2013. But if there was a 1% wealth tax and he was worth $27 billion at the end of 2013, that would generate a $270 million tax bill.

When politicians talk about taxing the rich, a common rejoinder is that income is not the same as wealth, and it’s wealth, not income, which really makes you rich. Fair enough. So let’s tax wealth. It’s fair, and it could provide some very useful revenue for anybody looking to balance the national budget.

Stephen Fidler reports that the ECB is kindasorta going to tender its bonds into the Greek debt exchange, thereby helping the country achieve some €11 billion in extra savings.

The details are sketchy, but to a first approximation, it seems to work like this: the ECB has €50 billion of Greek bonds, which it bought for €39 billion. It will sell those bonds to the EFSF for €39 billion, which in turn will “return the bonds to Greece”, whatever that means. Greece, in turn, “will then agree to repay the EFSF” — which may or may not mean issuing new bonds to be held by the EFSF. Since Greece will now have €39 billion of debt rather than €50 billion, that’s an €11 billion savings.

The ECB, under this plan, ends up breaking even, without monetizing any debt. As Zero Hedge says,

The ECB could have taken the loss directly and just printed money for that loss. So this demonstrates an unwillingness to print money. The ECB could take the loss and get capital from the member states. By using the EFSF rather than new capital calls, it is a sign that countries are at the limit of what they will contribute. Hoping for new money is unrealistic – since this was the perfect opportunity to put up new money and tell the world that Europe is truly united and willing to contribute. This just uses up money that was already allocated.

I’m also a bit worried about Greece’s new €39 billion debt to the EFSF — how is that going to be structured? Right now, the €50 billion of ECB debt comprises exactly the same bonds that anybody else can buy, but a big new EFSF debt might well be some kind of senior, bilateral obligation which effectively subordinates the new bonds that Greece is going to issue in a bond exchange.

And more generally, the problem here is that the EFSF, which was created to lend new money to countries in distress, is instead being used to retire debt that Greece issued years ago. That, in turn, hurts the EFSF’s ability to fund Greece — and all the other countries in Europe, for that matter — going forwards.

So there’s not a lot to get excited about here in structural terms. In big-picture terms, however, this is clearly good news, since it’s a signal that Europe is actually finding ways to get everybody on board for a new debt deal between Greece, its bondholders, and the Troika. Will it be enough? No. But it’s a step in the right direction.

Prashant Gopal has an intriguing story today on the way in which banks are not only doing more short sales than they used to, but are even throwing in cash sweeteners to speed things along. Why would they be doing such a thing? The banks aren’t saying, but theories abound:

Lenders can often afford to forgive debt, offer the incentive and still make a profit because they purchased the loan from another bank at a discount, said Trent Chapman, a Realtor who trains brokers and attorneys to negotiate with banks for short sales…

Cecala of Inside Mortgage Finance said he wonders whether lenders are making big payments on properties with underlying title problems. Evan Berlin, managing partner of Berlin Patten, a real estate law firm in Sarasota, Florida, said representatives of a large bank told him the incentives are primarily given to borrowers when it doesn’t have the proper paperwork needed to win its foreclosure case.

It certainly rings true that banks are more likely to take losses on a loan when they purchased that loan at a discount. We saw that with principal reductions, last year, and it’s no surprise that it might be moving into short sales too.

More generally, it makes sense that once a homeowner has been living in their home for a year or more without making any kind of rent or mortgage payments, they start getting quite comfortable with that lifestyle, and become rather difficult to dislodge. Cash incentives can work much better than lawsuits, especially when there are title problems.

Frankly, the banks brought this on themselves. It’s well known in mortgage-servicing circles that the faster you move, when a mortgage goes into default, the more money you can save. But too many banks have let far too many mortgages fester in default for far too long — which means that all too many of them are all but worthless at this point.

What the banks should have done, when these mortgages went into default, was work with the homeowners, giving them a menu of options. Would you like to do a short sale? Would you like a modification, with lower monthly payments? Would you like some kind of principal reduction? Would you even be interested in some kind of deal where you sell your house and then get to rent it back from the new owner?

Instead, the banks did nothing, rebuffed attempts from homeowners to contact them and work something out, and generally said no to innovative ideas. Leaving them much worse off, and forced to resort to actions like this:

JPMorgan gave one Phoenix homeowner $20,000 after she sold her property in June for $32,000, according to Royce Hauger, the real estate agent who represented the seller and shared a copy of the settlement sheet with Bloomberg News. The bank also agreed to forgive more than $70,000 in debt, she said.

As such deals continue, and the homes then get dumped onto the market at any price, they will only serve to further depress the US housing market more generally. What’s more, they’ll act as an incentive for homeowners to stop paying their mortgage and start holding out for a big check in return for leaving their homes quietly. The whole thing is an unholy and unnecessary mess. Although I’m shedding no tears at all for the banks, who are admittedly the biggest losers.

Banks need to be regulated. Depositors can’t be expected to do due diligence on their financials, so you need deposit insurance. And in turn, the government — which provides the deposit insurance — needs to make sure that the banks have certain minimum levels of capital. Otherwise, the insurance fund will go bust in no time.

All of this is wholly uncontroversial — until you get to the subject of money-market funds. At heart, as they exist today, MMFs are banks. They borrow money which is repayable on demand, and they lend it out for fixed terms, taking a certain amount of credit risk while doing so. If their borrowers fail to repay the money, or if their depositors all demand their money back at once, then they’ll be left needing to be bailed out.

Paul Volcker, in September, gave a speech laying out the problem with MMFs very clearly:

Started decades ago essentially as regulatory arbitrage, money market funds today have trillions of dollars heavily invested in short-term commercial paper, bank deposits, and notably recently, European banks.

Free of capital constraints, official reserve requirements, and deposit insurance charges, these MMMFs are truly hidden in the shadows of banking markets. The result is to divert what amounts to demand deposits from the regulated banking system. While generally conservatively managed, the funds are demonstrably vulnerable in troubled times to disturbing runs, highlighted in the wake of the Lehman bankruptcy after one large fund had to suspend payments. The sudden impact on the availability of business credit in the midst of the broader financial crisis compelled the Treasury and Federal Reserve to provide hundreds of billions of dollars by resorting to highly unorthodox emergency funds to maintain the functioning of markets.

Recently, in an effort to maintain some earnings, many of those funds invested heavily in European banks. Now, without the backstop official liquidity, they are actively withdrawing those funds adding to the strains on European banking stability.

The time has clearly come to harness money market funds in a manner that recognizes both their structural importance in diverting funds from regulated banks and their destabilizing potential. If indeed they wish to continue to provide on so large a scale a service that mimics commercial bank demand deposits, then strong capital requirements, official insurance protection, and stronger official surveillance of investment practices is called for. Simpler and more appropriately, they should be treated as an ordinary mutual funds, with redemption value reflecting day by day market price fluctuations.

Wonderfully, it seems that the SEC has been listening. The WSJ article is a bit hard to follow, but the SEC seems to have a three-pronged approach to regulating these beasts.

Firstly, they’ll be forced to raise capital. Secondly, depositors won’t be able to withdraw all of their money at once, just 95% of it. The last 5%, they’ll have to wait 30 days. And thirdly, the net asset value should be allowed to float, rather than being fixed at $1.

What are the chances of all of this happening? Zero. Reading between the lines, it seems that the SEC is making a big ask, and will probably be willing to compromise: even Volcker painted reform as a choice between more capital and a floating NAV, rather than a both-and approach.

But just forcing MMFs to raise capital will be a huge and important step forwards. Not that it’s going to be easy:

J. Christopher Donahue, president and chief executive of Pittsburgh-based Federated Investors Inc., which manages $255.9 billion of money-fund assets, said he plans to sue the SEC if the new regulation interferes with his firm’s ability to do business.

“We’re going to do everything in our power to attack it,” Mr. Donahue said of the possible regulations.

This is kinda hilarious, given the official Federated argument against Volcker:

With 30 million investors and $2.6 trillion in assets, MMFs are hardly unseen, hidden or surreptitious. Not only are they subject to significant control, examination and oversight by the Securities and Exchange Commission, with detailed prospectus requirements for the issuance of their shares, demanding reporting requirements, regular surveillance, and substantial requirements as to liquidity, asset quality and maturities, but they must publicly and frequently disclose the contents of their portfolios, on their websites and in regulatory filings – down to the individual security level.

In other words, the reason that MMFs need no further regulation is that they’re already regulated by the SEC. On the other hand, if the SEC itself wants to step up its regulation of MMFs, then they’ll sue it.

The reality is that MMFs are a monster source of systemic risk in the US, and the SEC is absolutely right to want to get some kind of a grip on them. They need to make a choice: are they mutual funds, where investors risk taking losses? Or are they banks, which need to be regulated by the government? Up until now, they’ve managed to have their cake and eat it — but those times must come to an end. Here’s hoping Mary Schapiro sticks to her guns on this one, in the face of what is sure to be extremely stark opposition.

Many thanks to Zac Bissonnette for fisking the latest Bloomberg gushery on art funds for me, so I don’t have to. This fund isn’t going to produce disappointing returns: it’s probably not even going to get off the ground to begin with. Does Bloomberg’s Scott Reyburn have a clue what “unconfirmed commitments” are? I suspect they’re the fund-world equivalent of vaporware.

But the fact is that the intersection of money and art is a busy place these days. You have what John Powers cleverly calls Spot Markets, for starters — the global Hirst-spot bazaar is in full flower right now. And then there’s that $250 million Cézanne — a figure confirmed by “multiple sources” of Alexandra Peers, and which, as Marion Maneker says, serves to validate other nine-figure prices paid for important works.

Interestingly, the Cézanne is particularly special in that it’s a 19th-Century work: everything else north of $100 million has been 20th Century. This could be the beginning of a relative-value trade, where older masterpieces finally converge in value on the silly prices being paid for modern and contemporary works. Or it could just be an outlier: there are precious few undisputed masterpieces of this sheer size in private hands. The Cézanne is 130 centimeters wide — that’s over 51 inches, which is huge by the artist’s standards. (Some of The Bathers are significantly bigger, but all of those are in museums.) If you want a trophy painting, it’s still the case that you’re going to want something big.

So when Peers quotes the venerable Gary Tinterow describing the Cézanne as “the darkest, the most stripped down and essential” of its series, that’s all well and good — but the real driver of the $250 million price was, I suspect, its square footage.

Alice Gregory has a great piece in the latest n+1 magazine about working at Sotheby’s during the run-up in prices following the 2009 crash. Here’s a taster:

After a few months on the job, I was assigned a new duty—writing the essays that are printed beneath and between the reproduced images in the sale catalogue…

I sprinkled about twenty adjectives (“fey,” “gestural,” “restrained”) amid a small repertory of active verbs (“explore,” “trace,” “question” ). I inserted the phrases “negative space,” “balanced composition,” and “challenges the viewer” every so often. X’s lyrical abstraction and visual vocabulary—which is marked by dogged muscularity and a singular preoccupation with the formal qualities of light—ushered in some of the most important art to hit the postwar market in decades… It was embarrassingly easy, and might have been the only truly dishonest part of the Sotheby’s enterprise. In most ways, the auction house is unshackled from intellectual pretense by its pure attention to the marketplace…

Sotheby’s felt detached from the posturing that happens in Chelsea galleries and the gnomic garbage that counts for art-world conversation. Auction house employees don’t invoke half-remembered poststructuralism or make inapt analogies. They don’t have to. The prices speak for themselves.

We’re in a world right now where distinctions between art and money and value are becoming increasingly blurred, in a way which plays straight into the hands of the nouveau riche and the hedge-fund managers who love to splash millions on big and shiny work. This is a fad, and it will pass, along with former M&A dealmakers who think that owning an expensive art collection gives them the ability to make money flipping paintings on a six-year time horizon. Sociologically, it’s fascinating. But when the crash comes, it’s going to be very, very painful for anybody in the art world who’s gotten used to today’s excesses.

This isn’t good; the Greece talks have now moved past their clear deadline and have reached the finger-pointing stage. The broad outline of the dynamics here is now very clear: you need three different parties to agree on a deal for the whole thing to have a chance of success. Private-sector bondholders need to agree to a very deep cut in the value of their bonds; the Greek government needs to agree to enormous spending cuts over and above the 1.5% of GDP that they’ve already offered; and the Troika of the EU, ECB, and IMF needs to agree to pony up extra bailout money to cover the larger-than-expected deficits that Greece is running.

Of the three, the bondholders are the least of anybody’s problems. In fact, almost everything they’ve done in recent months can be viewed as a way of showing that if and when everything goes pear-shaped, it’s not their fault. They will talk to anybody, agree to pretty much anything, and be perfectly reasonable all along; it’s the various governments, here, which are finding it impossible to come to terms.

And it’s easy to see why. The Greek economy is in a very severe recession, exacerbated by the spending cuts already imposed. Every extra euro cut will only serve to shrink the economy even further — and no country in the history of finance has ever achieved a sustainable debt level by reducing its GDP. It almost doesn’t matter whether government spending on things like unemployment benefits is too high on an absolute level: if you cut it now, you doom the Greek economy to perpetual recession, and Greek society to ever-greater levels of political unrest.

On the other hand, you can see why German taxpayers — or anybody else in the rest of Europe, for that matter — have no particular inclination to continue to pay for Greece’s high benefits, especially when the Greek government seems incapable of raising the taxes needed to pay for those benefits itself, and when, as Euro Group president Jean-Claude Juncker says, “there are elements of corruption at all levels of the public administration”.

The result is an impasse which, the longer it goes on, the harder it becomes to break; the Troika won’t even let the Greeks do a bilateral deal with bondholders unless and until there’s a much bigger agreement between Greece and Europe. Which means, in turn, that the bondholders are staring down a worst-case scenario — a default outside the context of any kind of negotiated exchange offer — through no fault of their own at all.

The Troika doesn’t want that — banks across Europe would suffer much-greater-than-necessary losses as a result, both on their Greek holdings and on their holdings of newly-endangered debt from Portugal and other countries on Europe’s periphery. But at this point, it’s probably easier for France and Germany to bail out their domestic banks directly for their sovereign-debt losses than it is for them to shovel any more cash in Greece’s direction.

If the Troika fails to save Greece, the past 66 years of ever-increasing European unity will come to a sudden and drastic halt, and all eyes will turn to Portugal, asking if it will be next. (The Europeans will say no, and indeed already the ECB seems to be pre-emptively shoring up Portuguese bond prices; the bond markets will say yes.) There will also be a second sovereign default, sooner rather than later, in Cyprus, and at that point the European and international communities will have essentially no credibility in terms of its ability to prevent dominoes from falling.

But I’ve never seen less appetite, at the European level, for a policy of continuing to kick the can down the road. Which means that there’s a very good chance that the long-awaited and long-feared crunch might soon be upon us. Greece and the Troika might not be able to agree on whether the latest deadline has been missed, but there’s one deadline no one can move: March 20, when Greece’s big €14 billion bond issue comes due. Either there’s an exchange offer in place by that point — or else the European project will have failed.

There are three main reasons that I like entering into bets with people. The first is, simply, that it’s fun. The second is that I love to win bets. And the third is that I love to lose them. I don’t ever trade the markets: all of my investments are strictly buy-and-hold, with a time horizon measured in decades. That rule has saved me a lot of money over the years, not that I ever had much inclination to trade in the first place. But it has also prevented me from learning the kind of lessons that all traders learn early and often.

For pundits, it’s easy to be wrong: in many ways, it’s what we’re paid for. If what you want is facts and certitude, stick to old-school journalism. But it’s much harder for us to learn from our mistakes, precisely because the cost of being wrong is in many cases negative. So when I get the opportunity to express a conviction in the form of a wager, I tend to jump at it, partly because it’s one of the very few ways for me to be forced to admit that I was wrong about something, and to ask myself what the lessons are.

All of which is a very long-winded way of saying that I’ve gone and lost another bet, much to the delight of Elizabeth Spiers. She’s firmly ensconced at the helm of the New York Observer, a year after being given the job; I said she wouldn’t be. I didn’t think that she was going to prove herself good at running a newspaper, and — more to the point — I didn’t think that her boss, Jared Kushner, would stick by her.

In point of fact, Spiers has not been all that great at running a newspaper. Over the past year, I can barely remember a single time I’ve even so much as seen a physical copy of the Observer; I certainly haven’t read one, and neither has anybody I know. And on the rare occasions that I’ve read an Observer story online, it’s seemed under-edited and rather lightweight, for a newspaper which fancies itself the house organ of the elite.

But the point of hiring Spiers was never to get a great newspaper editor, some kind of heir to Peter Kaplan who would burnish its reputation as the paper slowly dwindled in relevance and lost a few million dollars a year. Instead, making a virtue of necessity, Kushner decided to go as webby as he possibly could, with the newspaper quite explicitly in the position of an afterthought — the legacy brand upon which the new business was going to be built.

And Spiers — to her credit — has absolutely executed on that strategy. The Observer is now, first and foremost, Observer.com. (It’s a hugely valuable domain name, which, by some freakish accident of history, wound up getting snaffled by a dilettantish New York weekly before it could be claimed by the venerable newspaper in England.) There’s a slew of verticals, running the gamut of New York interests — Wall Street, media, art, real estate — as well as a bold attempt to break into the tech blogosphere with BetaBeat. Page design is sophisticated and effective, with all sites linking generously to all other sites, with the emphasis on dynamic headlines rather than bland navbars.

The Observer’s inimitable voice is gone, replaced by a barrage of bloggish posts by a group of writers so young that many of them can’t even remember a time before Gawker. (Which was birthed, by Spiers, in 2003.) The old Observer was edited, on a story-by-story basis, in a way that the new online Observer isn’t — Spiers doesn’t have either the time or the money to have a layer of experienced journalists reworking her bloggers’ prose before it’s published.

And so, in the proud tradition of good blogs everywhere, readers are left with a highly variable product. The great is rare; the dull quite common. But — and this is the genius of the online format — that doesn’t matter, not any more, and certainly not half as much as it used to. When you’re working online, more is more. If you have the cojones to throw up everything, more or less regardless of quality, you’ll be rewarded for it — even the bad posts get some traffic, and it’s impossible ex ante to know which posts are going to end up getting massive pageviews. The less you worry about quality control at the low end, the more opportunities you get to print stories which will be shared or searched for or just hit some kind of nerve.

Add in a few linkbait listicles, and you’ve got a recipe for a successful website — which can only be helped by its association with an honest-to-goodness print newspaper which, still, has extremely good name recognition with most New Yorkers and which we generally think fondly of. There are even nods to the old Observer’s buttoned-down worldview, here and there, if you look hard enough. For instance, there’s the way in which striking photos and videos are largely notable by their absence. The Verge this is emphatically not; while gorgeous design has its place in the Observer media empire, for the time being it seems to be confined largely to glossy magazines. Even hyperlinks are generally confined to web-first content: when stories from the physical paper appear online, they rarely have any at all.

Spiers’s Observer is not the one that her predecessor Tom McGeveran dreamed of when she was hired — one which serves to remind the rich of themselves, on which manages “to speak the patois that is being developed at Le Cirque at the table with Michael Bloomberg”. That kind of thing would always be too precious, too nichey, to work in a medium where the table stakes, in terms of reach and scale, are rising very quickly indeed. Instead, the new Observer is carving out new audiences, is aggressively embracing social media, and has much more attitude in common with HuffPo than it does with, say, the New York Review of Books. That’s something that Spiers is good at, and it’s something Kushner is happy to encourage.

I’m happy that I was wrong about the NYT paywall, and I’m happy too that I was wrong about the Observer. My mistake in both cases was to be too conservative: to think that change was probably going to be a bad thing, even in the context of a broader media world where change is the only possible alternative to death.

Both the NYT and the Observer threw out the old and did something brave and new; there are many people, in both cases, who preferred things the way they were. Myself included, truth be told. But it’s profoundly fallacious to believe that what you want is what should be, in some kind of normative sense. Spiers has come up with a formula which works, in practice, significantly better than its immediate predecessors. In the world of professional journalism, that’s something to celebrate. So, if she wants to join me and John Carney for our forthcoming lunch, she’s more than welcome. It’s on me.

Update: I should also have included the Observer’s traffic figures, which haven’t noticeably been improved much by Spiers’s arrival.

What mean reversion? This is two fantastic jobs reports back-to-back, with the second even better than the first.

You thought the December jobs report was great? I certainly did — but it’s been revised, now, and it’s even better than was first reported. And the January report is positively glowing.

Unemployment was just 8.3% in January, marking three successive months where it fell by 0.2 percentage points. This time last year, there were 13.9 million unemployed; that figure has now dropped by 1.2 million people, or 8.3%. That’s really impressive for an economy which is hardly booming. And it’s a real decline, too: the employment-to-population ratio is just as high as it was a year ago, even as the total population has risen by 3.6 million people.

One glance at these charts is enough to show that there’s still a very long way to go. Unemployment is far above where it should be; payrolls need to stay strong for a long time to make up for all the jobs lost during the recession; much more of the population needs to be working; and, most importantly, we need to do something about the stubbornly large ranks of the long-term unemployed.

But none of these things can be addressed in a single month: creating jobs takes time. And what we’ve been seeing over the past couple of months is an economy moving smartly in exactly the right direction.

And lookie here! If you check out Table A-5, and look at the unemployment rate for male Gulf War-era II veterans (that is, veterans of the wars in Iraq and Afghanistan), you’ll see that it’s fallen from 15.5% to 7.7% in one year. If that’s not great news, I don’t know what is.

So while there’s a lot of work to be done, let’s allow ourselves a bit of celebration today. For all the problems in the world — and the US economy could still be derailed if something nasty happens in Europe — things are moving very much in the right direction for the time being. Long may it last.

Edward Wyatt makes a very good point today — why is the SEC doing big favors for big banks, every time it slaps a fine on them?

If a bank settles a fraud case, it automatically loses certain privileges, like the ability to issue debt securities opportunistically, without going through laborious SEC filings, and the ability to shelter forward-looking statements against lawsuits from investors.

It’s worth noting here that no company has any kind of right to these privileges. If a company tells lies to investors, those investors should be able to sue it. And if a company wants to issue securities to the public, it’s the SEC’s job to examine the proposed offering first.

But somehow, along the way, a handful of very big companies — especially banks — managed to persuade the SEC that they were trustworthy corporate citizens, and that they didn’t need to be bound by those rules.

That’s a little bit suspicious just for starters. But it gets much worse. The SEC, quite naturally, put in place a policy which said that if any of those companies ended up being fined by the SEC for violation of securities laws, then it would lose its special privileges.

And then the SEC proceeded to ignore that policy.

An analysis by The New York Times of S.E.C. investigations over the last decade found nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions. Those instances also include waivers permitting firms to underwrite certain stock and bond sales and manage mutual fund portfolios.

JPMorganChase, for example, has settled six fraud cases in the last 13 years, including one with a $228 million settlement last summer, but it has obtained at least 22 waivers, in part by arguing that it has “a strong record of compliance with securities laws.” Bank of America and Merrill Lynch, which merged in 2009, have settled 15 fraud cases and received at least 39 waivers.

Wherefore these waivers? Former SEC chairman David Ruder says that were it not for their privileges, these poor banks might have difficulty staying in business. Which, it seems to me, is a very good reason to remove those privileges. Too-big-to-fail banks should be rock-solid, with fortress balance sheets, able to withstand big and unexpected shocks. If their ability to operate as a going concern would be threatened by forcing them to comply with standard SEC regulations, then there’s something very wrong with them indeed, and they don’t deserve special waivers at all. Instead, they require extra-close scrutiny.

But in fact losing the privileges is not the end of the world for a bank. Look at Citigroup, which lost its privileges for three years in October 2010, and is certainly in poorer financial shape than, say, JP Morgan. It’s still chugging along quite happily, making a net profit of well over a billion dollars per quarter.

The SEC does seem to be far too cozy with America’s biggest banks, going soft on them when they commit fraud just because it fears for their livelihood if it gets tough. That’s wrong. America can live without big banks; what’s truly dangerous is a world where too-big-to-fail banks have de facto impunity and can do what they like. Right now, the fines banks pay to the SEC are like protection money: they pay a few million bucks here and there every so often, and in return get to continue doing whatever they like. It’s time the SEC put a stop to this. But I’m not holding my breath.

Ken Doctor has a very smart and interesting take on the news that the NYT now has 390,000 paying digital subscribers — plus another 16,000 at the Boston Globe. It’s unambiguously good news, on many fronts.

First, and most importantly, digital ad revenues went up by 10% in the area of the business with the paywall, while plunging by 26% at About Group, which doesn’t have one. The big worry about the paywall was always that it would eat into ad revenues, and that really doesn’t seem to have happened. Of course, it’s impossible to know what the NYT’s digital ad revenues would have done sans paywall. But my gut feeling is that it’s a net positive: it allows for much more targeted advertising and therefore higher ad rates.

What’s more, the NYT still has massive reach outside the paywall: it has at least an order of magnitude more unique visitors each month than it has paying subscribers. The NYT can still sell those other visitors just as it always could; they certainly haven’t become less valuable since the paywall went up.

The only possible cloud in this picture is in overall traffic growth: the NYT doesn’t give pageview numbers, but sites like Quantcast and Compete say that they see no real growth in traffic to nytimes.com, and possibly a small decline. Again, the counterfactual is impossible to know: would traffic have been bigger had the paywall not been in place? I don’t think that the paywall has reduced traffic very much, but I do think that the amount of time and money and editorial effort which went in to constructing the paywall might well have found its way into other innovations, had the paywall not happened, which would have made the NYT an even better and more popular product.

That said, the paywall has probably paid for itself already, and with luck some of the extra cashflow it throws off will be reinvested in more consumer-friendly innovations.

The other big news today is this:

Churn is less with digital than print customers: Skeptics opined that people might sign up, but then flee after sampling the paid digital product. The opposite appears true: Smurl says digital churn is less than print churn.

I didn’t expect this, but I believe it, and it’s really great for the NYT. It’s easy to cancel a NYT subscription, but by the same token it’s easy to keep one, too. And it seems that once you’ve taken the plunge and started paying for the NYT, you keep on paying — even more than with a print newspaper.

The result is that the NYT’s digital subscribers are a bit like a bank’s depositor base: although in theory they could leave at any time, in practice they’re an incredibly stable funding source. Much more stable, to be sure, than any advertiser.

But while I’m happy about this state of affairs, I still don’t really understand it. Here’s Doctor, again:

It took about 12 seconds for Times’ readers to figure out the new subscription math, when the company when digital-paid last year. When they did the math and saw they could get the four-pound Sunday paper and “all-digital-access” for $60 less than “all-digital-access” by itself, they took the newsprint. Which stabilized Sunday sales, and the Sunday ad base. Then the Times was able to announce a near-historic fact in October: Sunday home delivery subscriptions had actually increased year-over-year, a positive point in an industry used to parsing negatives. Now, Sunday is emerging a key point of strategic planning.

This is great news for the Sunday newspaper, which is highly profitable for the NYT. But it also raises the obvious question: why are 390,000 NYT readers eschewing a Sunday paper they could get for less than nothing? Some are IHT subscribers who don’t have that option; others are naturally peripatetic. And the cheapest digital subscription is actually still cheaper than the Sunday-only delivery.

It seemed to me, when I entered into my ill-fated bet with John Gapper, that NYT readers would go for the free access bundled with the paper, rather than plump for digital-only access. But increasingly it seems that readers actively dislike having to manage a physical paper, and are willing to pay for making the whole experience virtual.

If that’s the case, then the least the NYT can do is to continue to invest in its iPad app. Right now the website is still superior to the app, except for offline reading. The app desperately needs search, and it needs to retain hyperlinks from the original articles, and it needs to somehow build in the sense of serendipity and of relative importance which newspaper readers love so much. It’s hard to tell what’s important, in the app, once you move off the front page. And it’s hard to have your eye caught by a great story you didn’t know you wanted to read. But those things will come, I’m sure. If only because there’s now a very healthy income stream — Doctor estimates it at more than $80 million per year — which can pay to help develop them.

Many thanks to Mark Bergen for finding me this data; I asked him for it because I thought that maybe we could learn something from the way in which China has managed to keep employment growing steadily through some extremely turbulent economic times.

What you’re looking at here is total Chinese employment from the All China database. Primary industry is commodities, basically, including agriculture; secondary industry is manufacturing; tertiary industry is services.

It comes as little surprise to see that agricultural employment has been falling steadily for 20 years. But it is surprising to see that if you take out the services sector, total Chinese employment has been going nowhere, and basically falling, for the same amount of time.

Caroline Baum, using a different data source, says that China lost 15 million manufacturing jobs between 1995 and 2002; according to these figures, employment in “secondary industry” was flat in those years, going from 156.6 million to 156.8 million before starting to rise again and reaching 218.4 million in 2010. (It’s worth pausing here to appreciate the sheer scale of this chart: each horizontal line is another 100 million workers.)

Meanwhile, the services industry — tertiary industry — has been on fire: it now employs 263 million people, more than are employed in secondary industry, and has doubled since 1992. All this, remember, in a country with more or less flat population growth, thanks to the one-child policy.

Of course it’s hard to find work in the services industry if you’re a rural peasant: tertiary industry is a fundamentally urban thing, which brings me to my second chart.

It comes as no surprise to see that urban employment is growing incredibly fast — 13.7 million urban jobs were created in China in 2010 alone. What does come as a surprise is to see that urban jobs are still in the minority in China — which means that there’s a lot of room for growth going forwards.

In the U.S., we had a huge construction boom in the aughts, which was concentrated on building bigger suburban and exurban residential houses. That’s good for homebuilders and makers of granite countertops, but it doesn’t really boost the economy more broadly. The Chinese construction boom, by contrast, is building cities and roads and crucial infrastructure, which allows the service economy to keep on growing at a torrid place.

Realistically, there is very little chance that global manufacturing employment is going to increase in future at a rate which will provide jobs for a growing global population. If we’re going to find jobs in the U.S. and the rest of the world, they’re going to have to be found in exactly the area where China is finding them — tertiary industry, or services.

How do you create service-industry jobs? By investing in cities and inter-city infrastructure like smart grids and high-speed rail. Services flourish where people are close together and can interact easily with the maximum number of people. If we want to create jobs in America, we should look to services, rather than the manufacturing sector. And while it’s hard to create those jobs directly, you can definitely try to do it indirectly, by building the platforms on which those jobs are built. They’re called cities. And America is, sadly, very bad at keeping its cities modern and flourishing. 1950s-era suburbia won’t cut it any more. But who in government is going to embrace our urban future?