Felix Salmon

Does Larry Summers Get Things Right?

Reuters Staff
Mar 16, 2009 10:07 UTC

Noam Scheiber has a 6,000-word profile of Larry Summers in the New Republic which as good an introduction as any to the man and his temperament. If there’s a theme running through it, it’s one of Summers being right, but lacking the political ability to implement his vision.

It happened with the Mexico bailout in 1995: Congress had no interest in it, and the bailout only happened because Bob Rubin happened to find a $35 billion slush fund, designed for something quite different, and repurpose it without the need for Congressional approval. It happened at Harvard:

Summers had assumed Harvard was a pure meritocracy–where ideas win out on the basis of their strength and little else. His own experience as a professor there had taught him as much. When he proposed, say, revising the undergraduate curriculum to focus more on basic knowledge than on the latest intellectual fashions, he was prepared to defend the logic of the plan, not sweet-talk professors who felt threatened by it.

And, of course, it’s happening right now:

It’s not clear our political system is even equipped to deal with economic crisis. With the financial markets teetering and Congress refusing to give the administration another cent to save the crumbling banking system, one could be forgiven for thinking the lesson still applies. Even the stimulus, bold when it was conceived, no longer looks sufficient. But Congress is unlikely to part with more money any time soon.

Scheiber concludes that insofar as it’s practicable, we should "unleash our hard-charging geniuses and get out of their way" — essentially hand economic policy to Summers on a platter, and tell him to have at it.

But in fact there’s precious little evidence that when it comes to policy prescriptions, Summers has any particular special ability to alight upon exactly the right course of action at any given time. He’s good at asking pointed questions, but I don’t see many people standing around right now and saying "if only we’d listened more to Larry".

Although Scheiber picks on one particular FT column of Larry’s as indicating that he might be more inclined towards bank nationalization than Tim Geithner is, the real lesson of Summers’s tenure as an FT columnist is that most of his policy prescriptions tend to be carefully-hedged conventional wisdom, the kind of thing that most left-leaning economists would be hard pressed to disagree with. I was econoblogging for the entire time that Summers spent at the FT, and I almost never found anything worth blogging in his columns: they struck me as being made up mostly of hot air and self-importance, with very little of actual substance.

So maybe the NEC is the right place for Summers after all: he gets to be interested in lots of things — something he’s very good at — without taking responsibility for running the economy. The big question is whether the rest of Obama’s economic team — Geithner, Volcker, Romer, and the rest — are going to be able to get a look-in even as the enormous Summers ego fills up most of the West Wing. If he crowds them out — and there’s every indication that he’s doing just that — he might end up doing more harm than good.

Reprinted from Portfolio.com

Replacing Social Security With Carbon Taxes

Reuters Staff
Mar 16, 2009 08:19 UTC

Hendrik Hertzberg gets stuck in to the fiscal-policy debate this week, with a proposal to essentially abolish payroll taxes and replace them with various sorts of carbon and consumption taxes. It’s not a bad idea: payroll taxes are horribly regressive, and, as Hertzberg notes, they actually exceed income taxes for three quarters of the US population.

Hertzberg does his best to paint this proposal as having bipartisan support, but political realities in Washington mean that Congressional Republicans would never actually vote for it. It’s certainly ambitious: it would not only introduce a large-scale carbon tax but would also essentially abolish the idea of individual Social Security accounts. Given that radical Social Security reform and carbon taxes both lie on the outer edge of the politically feasible, doing both at once seems needlessly ambitious.

But as Rahm Emanuel has famously said, a crisis is a terrible thing to waste, and if this kind of major fiscal-policy reform can ever be implemented, now is surely the time. The trick, I think, would be to connect it more directly to the crisis we’re now facing: Hertzberg’s arguments could have been made — and, indeed, have been made — at any point over the past 20 years. If the Obama administration can compelling present this kind of fiscal reform as a smart response to this particular crisis, then maybe it has a glimmer of hope.

Reprinted from Portfolio.com

Extra Credit, Sunday Edition

Reuters Staff
Mar 15, 2009 22:56 UTC

Dream of homeownership remains strong despite current recession: Americans: will they never learn?

Study finds less than third of HFs actually pocket mythical “2 and 20″

ABS Issuance: Is going up in the rest of the world as fast as it’s declining in the US.

Wal-Mart Can Do Us Good Taking on Bank of America: David Reilly makes the sensible suggestion that if we want new, well-capitalized banks, then Wal-Mart would be a great place to start.

Ex-IMF Chief Calls For New Global Super-Agency: Camdessus seeks to beef up the IMF.

Who needs a lawyer? A very useful Stanford FAQ from Alex Dalmady.

A think-nugget from Arnold Kling inspires a very long riff: On how banks add value, on the risks that they pose, and on what we might be able to do about it. Steve Waldman then follows up with this:

I don’t think those previous recoveries were real. My view is that the crisis that we’re in now is precisely the same crisis we’ve been in since at least the S&L crisis. We’ve had a cancer, with some superficial remissions, but fundamentally, for the entire period from the 1980s to 2008, our financial system in general and our banks in particular have been broken.

Reprinted from Portfolio.com

AIG’s Not Very Transparent List of Counterparties

Reuters Staff
Mar 15, 2009 21:43 UTC

It’s good that AIG has released a list of its counterparties. But if it really believes in "the importance of upholding a high degree of transparency with respect to the use of public funds", this is a very odd way of releasing the information.

If you’re not already familiar with the intricacies of AIG’s operations, it’s very easy to just start adding up the numbers in the various appendices, coming up with a kind of bailout league table: Goldman Got $12.9 billion! Barclays got $8.5 billion! But in fact it’s much more complicated than that.

There are four appendices in all. Before we get to them, it’s worth reading a bit of Gretchen Morgenson today:

Even A.I.G.’s own independent directors haven’t been told which of the counterparties were paid…
Such secrecy raised hackles because the insurance claims were paid off in full, even though widespread defaults on the underlying debt have not occurred. Why, many people wonder, did the Fed make A.I.G.’s counterparties whole on losses that have not happened yet?

What Morgenson is talking about here is the second of the four appendices: the payments made by the company known as "Maiden Lane III". After banks insured their assets against default, AIG essentially used Maiden Lane III to take those assets onto its own books, thereby allowing it to cancel out the insurance contracts. The big winners here are SocGen and Goldman Sachs — and it’s worth noting that unlike the first appendix, where the counterparties are helpfully listed in order of size, in the second appendix there seems to be no particular order at all, and the two biggest recipients of government money are hidden in the middle of the list.

The other three appendices are not in the same class: they don’t really constitute government giveaways in the same way. The first lists collateral postings which AIG has made but which haven’t really been spent: pace Morgenson, if the losses never happen, then AIG gets all that money back. The third appendix is a list of states, which pretty obviously was included to make it seem as though public money was somehow just getting shunted around and returned to taxpayers in some other form.

The final appendix is a list of AIG’s securities lending counterparties — this is pretty much meaningless, and these counterparties hadn’t bought any type of insurance from AIG at all. Instead they had simply borrowed securities from AIG, posting collateral of their own; when they returned the securities some time later, they got their collateral back. In the interim, AIG had managed to invest that collateral very badly, so it had to make up the losses itself. But those losses were not in any way related to the counterparties who borrowed AIG’s securities, and it doesn’t really make a lot of sense to think of those counterparties as being bailed out to the tune of $43.7 billion. If AIG had been liquidated, those counterparties would at the very least have kept hold of the securities they’d borrowed, instead of giving them back — including the securities which had gone up in value rather than down. So the maximum loss to the counterparties would have been much smaller than $43.7 billion.

In any event, so many of the counterparties on this list had hedged their AIG exposure that it’s massively oversimplifying matters to conclude that even the banks with the biggest exposures on the second appendix are the ones which effectively got the biggest government bailout. It’s not nearly as simple as that — and AIG should be much more upfront about such matters than it is being with this release.

Reprinted from Portfolio.com

What Could Have Averted the Housing Bubble?

Reuters Staff
Mar 15, 2009 20:53 UTC

Greg Ip has a strongly-worded yet sensible rejoinder to Alan Greenspan’s latest attempt at self-absolution, and it’s well worth reading:

In the earlier part of this decade Mr Greenspan asserted on a number of occasions that while America might have local housing bubbles, there was no national housing bubble. Yet he now asserts there was a global housing bubble. It has always puzzled me how he could go from seeing local bubbles to a global bubble without at some point diagnosing a national bubble.

Ip reckons that if Greenspan had hiked interest rates into a recession-inducing 8%-to-10% range, that might have sufficed to stop the housing bubble — but of course that would have violated the Fed’s mandate. Alternatively, says Ip, Greenspan could have taken the regulatory approach: requiring 20% downpayments or mortgage insurance for all mortgages, for instance, or requiring stricter underwriting at the originator level. But of course, these moves, as Ip says, would never have been implemented by Greenspan, the great deregulator.

Ip says that there would have been a reduction in homeownership if the Fed had followed this course:

It is hard to believe that society would have been significantly worse off if we’d limited the growth in home ownership to, say, 66% instead of 69%, by excluding people unable to make a substantial financial commitment.

I’m not even sure that is true: the 69% figure was hit between the second quarter of 2004 and the first quarter of 2005 — before the worst excesses of no-money-down mortgage lending. I suspect that the rise in homeownership was more a cause than an effect of the housing bubble — that homeownership rates served as a leading indicator of house prices.

But I certainly agree that if the US had followed the lead of pretty much every other country in the world and simply regulated its lenders, a lot of the worst excesses of the bubble could have been avoided. I don’t know where major regulatory overhaul stands on the Obama administration’s list of priorities, but I do hope that by the end of this administration, we will no longer be in a position where lenders can lend out billions of dollars to homeowners with essentially no regulatory oversight whatsoever.

Reprinted from Portfolio.com

Kiton’s Eye For Detail

Reuters Staff
Mar 15, 2009 13:29 UTC

In February, the NYT ran a lavishly-illustrated thousand-word article on the new Kiton boutique at Saks Fifth Avenue. This is no low-rent operation:

The retailer is about to find out how many men are left in New York with the money, and the moxie, to pay more than $7,000 for an off-the-rack suit, or as much as $21,025 for the made-to-order version.
For the more budget-minded, Kiton sunglasses can be had for $1,395. Trousers are $1,195. And jeans? A mere $795…
Kiton — which employs 330 tailors who create its garments by hand — produces only a few thousand pieces a year. It takes 25 hours to make a jacket.

Kiton is now reciprocating, with a full-page ad in the NYT. Graphically, it’s a bit dull, and the tag line is just plain weird: "sex. mystery. royalty." But most bizarrely of all, the brand is described as "Neopolitan fine tailoring for men". A brand which prides itself on attention to detail is spelling "Neapolitan" in a manner which can charitably be described as unorthodox, and less charitably can be described as just plain wrong.

The wordsmiths on newspapers often struggle with numbers, and file copy of astonishing innumeracy. I guess this is an example of the same kind of thing: the artisans at Kiton, who are great at cutting cloth, struggling with their spelling. Or maybe it’s just part of the mystery of Kiton.


Reprinted from Portfolio.com

The Hopeful Future of News

Reuters Staff
Mar 15, 2009 11:53 UTC

Straight on the heels of Clay Shirky’s great essay on the future of newspapers, Steven Johnson comes along with an equally great one on the future of news, and why it makes sense to be hopeful and optimistic. For the vast majority of things we’re interested in, the breadth and depth and speed of the news we’re getting now constitutes a vast improvement on what was available only a few years ago — and there’s no indication that trend is in any way reversing. So yes, many newspapers might well be doomed. But that’s only a small part of a much bigger — and much happier — story.

Reprinted from Portfolio.com

Chart of the Day: US Sovereign Weirdness

Reuters Staff
Mar 14, 2009 12:48 UTC


This chart comes from A Credit Trader, who has a long and very useful blog entry on the subject of US sovereign CDS. He basically gives the simple answer to my question of "who on earth is buying protection at these levels": it’s people who think that the spread is going to widen out. So far, people making that trade have made a lot of money, so there’s a good chance that the simple answer is here the right one.

He provides this chart as an example that there are all manner of weirdnesses in the capital markets right now. It shows the yield of 30-year swaps (the blue line) and 30-year Treasuries (the red line); right now, Treasuries (which are risk-free AAA securities) are yielding more than swaps (which carry a double-A credit risk). Now one way of looking at this chart is to say that the market now reckons that Treasuries are not risk-free, and that in fact they carry more credit risk than swaps. But as ACT explains, that’s basically an incorrect explanation: the correct explanation is something much more boring and technical to do with the flattening of the swap curve.

Similarly, ACT is convinced that technical factors probably underlie the widening out in US sovereign CDS spreads: they’re illiquid at the best of times, and they’re really only following the rest of the CDS market in gapping out.

But there’s no doubt that if you want a single datapoint demonstrating how weird the markets are right now, the US CDS spreads in triple digits are a very good one to use. It doesn’t say much about the safety or otherwise of Treasury bonds, but it does say a lot about the usefulness of looking to the CDS markets as an indicator of anything much.

Reprinted from Portfolio.com

The End of (Most) Newspapers

Reuters Staff
Mar 14, 2009 02:09 UTC

Clay Shirky has a brilliant essay on newspapers and the internet: go read it now. Here’s a taste:

When someone demands to be told how we can replace newspapers, they are really demanding to be told that we are not living through a revolution. They are demanding to be told that old systems won’t break before new systems are in place. They are demanding to be told that ancient social bargains aren’t in peril, that core institutions will be spared, that new methods of spreading information will improve previous practice rather than upending it. They are demanding to be lied to.

I am hopeful, amid the fear; but that doesn’t mean the fear isn’t justified. The wreckage in the newspaper industry is already devastating, and it’s only going to get worse; my base case is a last-man-standing scenario in which the big boys (NYT, WSJ, Guardian, BBC, Reuters) win, and most smaller publications lose. I just hope that the NYT is big enough to survive the storm; its loss would be irreplaceable.

Reprinted from Portfolio.com