Felix Salmon

Wednesday links get tweeted

Felix Salmon
May 27, 2009 21:48 UTC

Since moving onto Twitter, I’ve pretty much stopped the daily linkfest, moving the quick hits onto there. But there’s no reason they shouldn’t continue to exist in blog format too. So here are some of my most recent tweets. Is there an easy way to automate this kind of thing?

# Pequot Capital closing. End of an era, but there won’t be too many tears.    

# My new strapline, explained by Andrew Leonard

# Sotomayor’s a foodie! My mouth is watering, I could do with some lengua y orejas de cuchifrito right now

# The Manichean history of teabags and douches

# Moody’s said that the USA’s Aaa rating is stable “even with a significant deterioration in the US govt’s debt position.”

# I wouldn’t pay $2 at the newsstand for a print version of the daily NYT. Who would?

# Martin Feldstein knows from recessions. And he reckons this one won’t be over until 2010

# Mark Thoma has your daily Sachs vs Easterly-and-Moyo links. All very predictable and boring.

# Warren Buffett’s long-time excuse for not paying a dividend doesn’t work any more. But he’s still not paying a dividend.

# The comptroller of the currency is “totally unsuccessful”. Time for the entire OCC to go.

# Obama’s White House is just as addicted to needless secrecy as any other administration

# Silicon Valley discovers the recession

# It has been Far Too Quiet of late… “maybe we are on the verge of a financial Krakatoa

# Interesting S&P500/gas price chart — but what’s the significance of the 403 level?

# I like this, on student debts; I wonder how is it related to this

# David Brooks Fail: Brad DeLong brings Godwin’s Law down on the hapless columnist

# Top 10 Electronic Police States


Thanks Josh.

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The sorry story of the Rose Art Museum

Felix Salmon
May 27, 2009 21:30 UTC

Allison Hoffman of the Jerusalem Post brings us up to speed on the Brandeis affair — if you haven’t been following it, the small Jewish university decided last year to close down its art museum and sell off its contents, only to backpedal desperately in the face of a massive public backlash. Where are we now? Well, the Rose is essentially dead — its donors have rescinded their pledges, artists are asking for artwork back, the director has been fired, and it has no chance of being able to raise a penny in new money any longer. That’s the downside, for Brandeis, whose own reputation has been trashed in the process. And the upside? Pretty much nonexistent: no art has been sold, no art will be sold for the next couple of years at least, and confusion reigns on campus and beyond.

A case study, in other words, in how not to make and implement hard decisions in the face of an economic crunch. Now, remind me why Jehuda Reinharz is still president?


One thing that became clear to me at a Brandeis event at the Harmonie Club on Tuesday night was that at least some of Brandeis’ many board members openly joked that they don’t go to board meetings, which helps to explain a lot about the Rose fiasco. As we’ve seen at numerous companies, an inattentive board allows the CEO to run amok.

Oh — and Reinharz was sporting a very nice tan!

Hyperbole watch, Bloomberg edition

Felix Salmon
May 27, 2009 21:18 UTC

Ryan Chittum quite rightly brings the hammer down on a ridiculous “story” from Bloomberg today, which runs under the headline “U.S. Inflation to Approach Zimbabwe Level, Faber Says“, and which starts like this:

May 27 (Bloomberg) — The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.

Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.

“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said.

This is basically Bloomberg taking a silly journalistic staple — the let’s-quote-someone-just-because-he’s-rich story — and elevating it to the level of utter farce. Yes, there are people who are genuinely worried that US monetary policy will mean high inflation down the road. But hyperinflation on the order of 230 million percent? (And that actually vastly understates the real rate of inflation, which, last time I looked, was actually closer to 89.7 sextillion percent, or about 38 trillion times 230 million.)

Marc Faber is not a policymaker, and if news agencies get into the habit of quoting people whenever they say something outrageous and just because they say something outrageous, that only encourages a culture of unhelpful, nonsensical, hyperbolic, and fundamentally ridiculous sound-bites. (Or CNBC, as it’s also known.)

As for Faber being “100% sure” about what’s going to happen in the future, that’s a classic signal to ignore what he’s saying, since it’s proof in and of itself that he’s bullshitting and posturing rather than saying anything substantive. Shame on Bloomberg for encouraging him in this manner.


Felix you have not said why the US should not suffer hyperinflation. Is it because the “US is the best country in the world” or because they are a “Superpower”
or have they perhpas suspended the laws of nature where they can print with no consequences whatsoever? All you have done is through stones at Bloomberg and especially at Marc Faber. Shame on you and Reuters. What if Faber is right! Will you and Reuters executives apologize to people who follow your advise? You seem to be 100% sure of what you say at least Faber admits he might be wrong.

All Faber said was that if the US keeps printing, “than i can guarantee you the US will at some point in the future suffer hyperinflation, maybe not the at the same rate as Zimbabwe but close” This is what he said to bernie during the interview.

As many here have stated Faber is the only investor/economist out there who never speaks his book. He does not manage people’s money he has an exclusive fund of 300 million dollars and that’s it. When you and your kind where putting stories of how good things where Faber was warning people of the coming catastrophe. In the past 20 years Faber’s advise has always been spot on, while you and the Cramer’s of this world where having an orgy with Goldilocks and the bears.

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The economics of pumpkin bombs

Felix Salmon
May 27, 2009 20:21 UTC

How fabulous is Ecocomics, a new blog about the economics of comic books? Well, here’s a taster:

In the world of comic books any individual who has more than 5 million dollars in saving or assets immediately becomes bat-shit insane. It’s a strange rule, but it seems that every independently wealthy individual in superhero comics decides that fighting/committing crime is the best way to spend their free time. They ignore possible hobbies like golfing, yachting, and collecting antique cars and go straight into wearing a mask and creating a global organization designed to save/destroy/conquer the world. The examples in comic book fiction are nearly limitless.

Of course, the author ignores the problem of sampling error: millionaires in comic books cannot be considered a representative sample of millionaires in the alternative worlds they inhabit. But still, he has a point.


I hope this won’t be considered threadjacking, but it is related. Whenever I watch a movie like Deep Impact or Independence Day or War of the Worlds, I always think a much more interesting movie (to me) would be about what happens after the events in the first movie. What happens to the economy if New York, Los Angeles, Washington, Houston, and several other major cities in the U.S. are vaporized by alien death rays? How quickly do we recover (if we recover)? Can the country hold together politically or economically after this? Being pessimistic, I figure that even after we defeat the Martians, we find it impossible to regain our previous levels of economic prosperity and security.

Who will replace GM in the Dow?

Felix Salmon
May 27, 2009 18:50 UTC

What’s going to happen to the Dow once GM files for bankruptcy? Matthew Hougan has a few ideas:

If I were a betting man, I’d say that the good folks at Dow Jones do a bit of a clean-up of the index, replacing not just GM but Citigroup (NYSE: C), too. If that happens, the smart money says that Wells Fargo will enter the index as a new financial representative, with Goldman Sachs (NYSE: GS) a distant second bet.

Beyond that, it’s an open race. I still think Amgen would be an interesting choice, but Nike (NYSE: NKE), Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG) and a few others probably make the short list as well.

I don’t think that we’ll see a Citi-for-Wells Fargo exchange — swapping into a higher-priced company in the same industry seems to be asking for trouble. I also don’t think that Goldman is likely to make it into the average. Yes, the Dow is arguably “short” financials now that AIG has been swapped out for Kraft, but to no greater an extent than the economy as a whole. I think that adding Google — arguably the strongest stock-market brand in the world these days — makes a lot more sense.

On the other hand, GM is a hugely-important industrial company, and having a Dow with no automakers feels weird. Dow Jones could definitely be excused for just replacing GM with Ford.


What will happen to Citigroup stock after being dropped from the DOW?

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Fed funds datapoint of the day

Felix Salmon
May 27, 2009 16:04 UTC

The Taylor Rule ran smack into the zero bound back in October — and kept on falling. Now, according to the Fed’s Glenn Rudebusch, “in order to deliver a degree of future monetary stimulus that is consistent with its past behavior, the FOMC would have to reduce the funds rate to -5% by the end of this year”:


Rudebusch says that when a central bank can’t loosen monetary policy by implementing negative nominal interest rates, then that only serves to lengthen the amount of time that it is forced to keep interest rates at zero:

According to the historical policy rule and FOMC economic forecasts, the funds rate should be near its zero lower bound not just for the next six or nine months, but for several years. The policy shortfall persists even though the economy is expected to start to grow later this year. Given the severe depth of the current recession, it will require several years of strong economic growth before most of the slack in the economy is eliminated and the recommended funds rate turns positive.

But what about all that quantitative easing? Doesn’t that have the same effect as lower nominal interest rates? Not really: it “has likely only partially offset the funds rate shortfall”, says Rudebusch, and in any case the Fed’s balance sheet is going to have to shrink as the crisis abates — which will serve to act as an effective rise in interest rates. And which will only force the Fed funds rate to stay at zero for that much longer. Maybe it’s time for Bernanke to just set rates at zero and head to the beach for the summer — monetary policy seems to be pretty clear for the foreseeable future.


It will be an interesting summer, housing is showing signs of recovery, but labor is deep in the red. Bernanke should really just leave rates at zero and head to the beach.

- L. Berstein

When bank defaults are a good thing

Felix Salmon
May 27, 2009 15:25 UTC

One of the problems with the banking bailout in both the UK and the US is that it’s set up a massive moral hazard trade. Bank debt is trading at a massive discount to face value, and investors have been buying it in the hope and expectation that the governments of the two countries won’t let any major financial institution default on its debt after seeing the repercussions of the Lehman and WaMu defaults.

Given that many banks need a lot of recapitalization, the fact that their bonds are trading at a discount presents a great opportunity: they can swap those bonds for equity, or otherwise retire the debt below par, thereby reducing the bank’s liabilities and increasing its capital base. But bondholders will be averse to selling or swapping at the current levels unless they believe there’s a credible threat of default, even in the face of reassurance from the authorities that defaults won’t be allowed to happen.

So it’s great news that Bradford & Bingley has defaulted on its subordinated debt and that, as Neil Collins notes, “there’s nothing the holders can do”. Subordinated debt is meant to have equity-like characteristics, after all, including the risk that interest payments will be missed without the bank being considered to be in default. The fact that B&B’s customers are unaffected by this move is very welcome: in the US, I suspect the FDIC would intervene to take over any bank which defaulted on its subordinated debt*. In this case, by contrast, there’s still a chance that B&B might be able to continue indefinitely as a going concern. Sheila Bair, take note.

*Update: B&B has actually been taken over by the government once, so this is not a very good example. Although, as JH notes, it’s heartening all the same that the government doesn’t feel obliged to pay out on all of B&B’s remaining obligations, Anstaltslast -style.


Felix – you might want to brush up on B&B’s recent history.

It effectively failed last year and was nationalised – its deposit book and branches were sold to Santader (who today announced they would be merged under the Santander brand). Its lending book, which apparently contains lots of high LTV (including buy-to-let) mortgages is now taxpayer owned.

So the premise of your last paragraph is wrong – the equivalent of the FDIC already swooped in and taken it over to protect depositors, in September. Today’s action is just a welcome demonstration that the taxpayer won’t be bailing out every bank creditor 100%.

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GM bondholders vs UAW retirees: a false equivalence

Felix Salmon
May 27, 2009 15:07 UTC

If you invest a large chunk of your 401(k) in the stock of just one company, your actions are fraught with peril. If that stock performs badly — which is always possible — then you could end up with a significantly diminished standard of living in retirement. But at least there’s a possible upside: if the stock does spectacularly well, you can end up in clover.

By contrast, there’s no reason whatsoever to invest a large chunk of your 401(k) in the bonds of just one company. You still have the same downside — the company can default on its debt — but there’s no upside at all: the best-case scenario is just that you muddle through getting your coupon payments until the bonds mature.

The WSJ editorial page today features a complaint from one Dennis Buchholtz, however — a man who did just that:

I am an American retiree. Like many small investors, I am relying on “safe” investments…

I purchased GM bonds in 2005 and own $91,000 worth. These bonds account for a very sizeable portion of my retirement income, and so it is absolutely devastating to watch GM’s problems bring the once venerable company to the brink of failure. My standard of living is truly in jeopardy.

It’s not easy, as a retail investor in America, to purchase individual series of corporate bonds. It’s possible, of course, and GM did make an attempt to target such investors. But thankfully most stockbrokers and financial advisors will tell you that if you want credit risk in your 401(k) then by far the best way of doing that is to buy a bond fund, which minimizes your exposure to any one credit. As a result, there are — happily — precious few people in Buchholtz’s situation. Most bond investors are large institutions which watch their portfolios carefully and make sure they’re diversified at all times.

Now the UAW retirees, it’s worth noting, do not have a similar way of diversifying their GM exposure. As such, if you’re worried about the well-being of retirees, it makes perfect sense to treat the UAW’s retirees better than those who either have a small amount of exposure via their bond funds, or those who actively sought out GM exposure by buying its bonds. “The government’s proposed restructuring plans benefit one class of retirees at the expense of another,” complains Buchholtz — and it’s entirely proper that they do so. Buchholtz has no one to blame for his current predicament but himself: caveat emptor, and all that. That can’t be said of the UAW retirees.


No one seems to put much importance on what the federal government threatened to do. (They threatened to withhold further funds)

No one seems to put much importance on the power of a Federal Judge. (He makes the hard decisions)

I don’t like any outcome that gets crammed down your throat, but the Judge decided that the Federal Government was not bluffing and the Judge surely felt there was no choice.

Bondholders can sue the Federal Government in Court. I hope they win something.

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John Taylor’s disingenuousness

Felix Salmon
May 27, 2009 13:09 UTC

John Taylor is a genuinely eminent economist who has a fundamentally sensible point to make — that a step-change in the US debt-to-GDP ratio from about 40% to about 80% is not a good thing and is something with systemic consequences.

I don’t understand, then, why he has to lard his comment with stuff like this:

A 100 per cent increase in the price level means about 10 per cent inflation for 10 years…

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.

The first statement is simply false: a 100% increase in the price level means about 7% inflation for 10 years. One would expect that John Taylor, of all people, understands the concept of compound interest.

But the “of course” in the second statement is even weirder. The connection between inflation and depreciation is far from clear; it depends very much on the country’s balance of trade, and even more on the amount of inflation which has gone on in other countries. Does Taylor really expect 0% inflation over the next decade in both the Euro zone and Japan? And does he really think that real gold prices have ever stayed remotely constant?

As Mark Thoma points out, though, the most disingenuous part of the entire column is something Taylor doesn’t mention at all — that he was very recently calling for permanent tax cuts to stimulate the economy. It’s pretty much impossible to square that with this:

While there is debate about whether a large deficit today provides economic stimulus, there is no economic theory or evidence that shows that deficits in five or 10 years will help to get us out of this recession. Such thinking is irresponsible.

Or maybe deficits caused by permanent tax cuts are somehow to be preferred to deficits caused by temporary stimulus spending?


Spending cuts not a logical option? Or logic not an option?