Opinion

Felix Salmon

What do credit-card interest rates reflect?

Felix Salmon
May 22, 2009 16:37 UTC

Next time someone tries to justify those 28% credit-card interest rates by talking about the highly-granular and ultrawonky credit analysis that the card companies do, just point them to this post at Rortybomb. Or, if that’s too long and wonky, just ask them why all that highly-granular and ultrawonky credit analysis seems to treat everybody exactly the same way: 2 days late on your credit-card payment, and boom, your interest rate skyrockets.

Mike’s also right that Steve Waldman’s distinction between transactional credit and revolving credit is a crucial one which all too often gets elided in the credit-card debate. And the elision is largely the credit card companies’ own fault: they don’t make it easy to pay your bill in full each month, and they do make it easy to think “I can buy this now and use my upcoming paycheck to pay for it, and not pay any interest” — a very dangerous line of thinking indeed, for most of us.

My dream is that eventually cellphones will replace credit cards as the primary source of transactional credit: you pay for things using an RFID chip in your phone, and then just pay your phone bill every month. If you don’t have the money to hand, then you tap some kind of credit and borrow it, and you can’t kid yourself that that credit is actually transactional. The distinction between transactional and revolving credit would become much clearer, and the regulations on credit cards would make even more sense than they do now. But I fear it’ll be a long time until we get there.

COMMENT

As far as your “cell phone dream world” is concerned, that’s real. Some of the major cell phone providers in Japan already offer that service, and it sees regular (if not widespread) use.

Posted by Baron | Report as abusive

The politics of rating the USA

Felix Salmon
May 22, 2009 15:03 UTC

When I said yesterday that any S&P downgrade of the USA “would be entirely political”, I was referring not to US politics but rather to the internal politics of S&P and even of McGraw-Hill, its parent: my guess is that no such decision would be made without the explicit consent not only of McGraw-Hill’s CEO but even of its board.

If you want proof that US sovereign ratings say everything about the rating agency and much less about the US, here it is coming straight from the horse’s mouth:

SR Rating, a Brazilian firm, will soon issue a judgment on American government bonds. Its verdict is not pretty: the company says it will issue a AA rating.

Paulo Rabello de Castro, who chairs the ratings committee at SR, describes the decision to rate Uncle Sam as “an outright provocation”.

Not that de Castro doesn’t make sense:

Mr de Castro argues that perfect scores should henceforth be saved for places like Norway that sit on lots of oil, put revenues from its sale into a piggy bank and are unlikely to be invaded by their neighbours. As for the structured products that were mistakenly given AAA ratings over the past few years, he argues that no asset that has been around for less than ten years should be considered worthy of the accolade.

This is uncontroversial stuff: even Moody’s has come out and said that Norway is more creditworthy than the USA. But the fact is that the US sovereign rating is so imbued with symbolism, especially since the Treasury-bond rate being considered the risk-free rate of return, that it can never be taken at face value.

COMMENT

CB,

You are confusing two separate things. National scales, which is what international rating agencies use within certain countries are not the same as the international scale you have in mind.

Another common error is to think that countries don’t default on their own currency. In fact, they do. A lot.

Tv

Posted by Gabriel | Report as abusive

The reality of Google PowerMeter

Felix Salmon
May 22, 2009 14:21 UTC

Blog_Google_Powermeter.jpg

Kevin Drum is getting a bit ahead of himself, I fear, in his embrace of Google PowerMeter. He reproduces this chart, and says that the

PowerMeter app can be embedded on your iGoogle home page. Open it up and you can see exactly how much power you’re using every time you turn an appliance on or off. Neat.

In reality, however, we’re not remotely there yet. You see all those nice smooth lines and little wiggles in the Google chart? That’s not what you’re going to see when you combine PowerMeter with San Diego Gas & Electric’s smart meters. Instead, you’re going to see something much blockier: it’ll only show you total energy consumption on an hour-by-hour basis. So you’ll know how much energy use there was in the hour between 7am and 8am, say, but you won’t be able to see obvious spikes like the one for the dryer in the chart above.

And what’s more, if you turn on your dryer and then run to iGoogle to see what’s going on, you’ll see no change: the data on iGoogle will be for yesterday, not today.

More generally, the information you get from PowerMeter will be a subset, not a superset, of the information you can get directly from SDG&E. PowerMeter, at least in this case, is no more than an information delivery device: there’s no inside-the-home hardware involved, or anything like that. And if you get the information directly from SDG&E rather than from Google, you’ll be able to see not only how much electricity you’re using but also how much that electricity is costing you.

So the dream is great, and the reality is cool, but let’s not confuse the two.

COMMENT

Well this is a contractual requirement that SDG&E (and all other California investor owned utilities (IOUs)) own & control the data.

Customer data is jealously guarded by the IOU’s in California, you should see the contract language they have.

Normal damages are insufficient to compensate them from damages of customers owning and posting their use profiles, blah, blah, blah.

Posted by sunsetbeachguy | Report as abusive

Citigroup’s doomed IT strategy

Felix Salmon
May 22, 2009 13:38 UTC

Why do I get the feeling I’ve seen this movie before?

Citi had originally estimated it could save $3bn over three years by rationalising its operations and technology functions, which employs 140,000 people including 25,000 software developers – more than many IT companies.

But recent progress in reducing overlaps between systems, and linking IT infrastructure across businesses that had previously run individual systems has prompted Citi executives to sharply increase its cost-saving target.

I’m going to go out on a limb here and say this ain’t gonna happen. The first thing any new management team or management consultancy does, on looking at the nightmare that is Citi’s web of incompatible IT systems, is decide that they should be unified and rationalized. And the second thing they do is blame Sandy Weill for the current mess. (Yes, that’s in the article too.)

The problem, of course, is that these legacy systems — all of which support vital operations and databases — won’t just die and go away. Citi’s IT honchos have the same problem that Microsoft’s do: everything they do needs to be backwards-compatible with everything that went before, or else they have to build some brand-new system which nobody currently knows how to use and into which all the old data can be seamlessly imported. Both options are so complex and difficult as to be, practically speaking, impossible — especially in a dysfunctional company like Citigroup which is simultaneously putting significant resources towards splitting itself up as opposed to integrating itself.

It’s a rare sign of good news within Citigroup that executives reckon there has been “recent progress” on the IT front. But extrapolating from that progress to billions of dollars in new cost savings is bound to prove overly ambitious.

COMMENT

Mega sized companies suffer the same project mistakes of governmental projects, namely:- Risk Analysis Was Limited In Depth, and…- Top-down Planning With Little Input From Those Working On The Project, and (last but not least)…- Timeline is not realisticI’m sure had whoever was involved in managing that project studied made his/her homework about supporting the legacy systems, the project would’ve been in a much better shape. But then again there is little accountability in such organizations.

A public service announcement

Felix Salmon
May 22, 2009 04:59 UTC

Are you thinking of buying or reading Edmund Andrews’s book about how subprime lenders drove him to insolvency? Read this first. And thank your lucky stars that there are bloggers out there (in this case, Megan McArdle) who do a much better job of policing NYT journalists’ memoirs than any MSM journalist is ever likely to.

Update: Andrews responds to McArdle, in a lily-livered way: he does it to PBS, rather than to McArdle directly, and he genuinely asks us to believe that his wife’s two consecutive bankruptcies are entirely irrelevant to the story of his own foreclosure. McArdle is actually quite gentle in her response; she could have been much harsher. As one of her commenters says, “if the two bankruptcies were as innocuous and unrelated as Mr Andrews described, why would he be afraid to include this information in the narrative?”

COMMENT

Hello my name is Leigha Hoffner and I am the mother of a 3 year old son named Jamil. My son was diagnosed with a rare genetic condition called Bassen Kornzweig Syndrome. This is a rare deadly condition. Because of the horrors of what my son and family have been through I started a foundation called A Cure for Bassen Kornzweig Foundation. I am writing to ask if it is possible if our story of the story of our foundation can be aired on your show. We are trying to bring about awareness of this disease but also since my son is the only child in this state with this disease to find a doctor who is willing and knows how to treat him before it is too late.

I have no other options. I am a mother and I do not want my son to die.

Thank you and may God bless you for your helping.

Leigha

When long-term investors panic

Felix Salmon
May 22, 2009 04:46 UTC

The WSJ published a rather odd column by Neal Templin on Thursday:

My company retirement accounts, despite what I thought was a relatively conservative mix, were down close to 35% in early March from the fall of 2007. That, in turn, forced me to do some painful thinking…

I have good reason to be fixated on the health of my 401(k). It took me 20 years — my entire time at the Journal — to accumulate it, and it represents all our retirement savings…

Since I told [my wife] a few months ago of our losses, she started tearing open the envelopes from Fidelity Investments to see “how much poorer I am.”…

The whole experience makes her wonder about my push to keep maxing out our 401(k).

“I think maybe I could have spent more and lived it up a little,” she says.

There’s a fair amount of pretty woolly thinking here. For one thing, retirement funds are just that — funds put away with the express intention of not touching them until a point pretty far off in the future. Because they’re so long-term in nature, people can invest in riskier instruments than they otherwise might do, since there’s no reason for them to sell when the market is low, and they can ride out periods of volatility: they have no immediate need to raise cash.

In that sense, anybody with a 401(k) has a huge advantage over hedge-fund managers, say, who live in fear of quarterly redemptions and who will be asked for money just when the markets are at their lowest.

Given that the single biggest advantage that Templin has over hedge-fund managers is that he didn’t need to sell his stocks after they dropped, what did he do? Sell his stocks after they dropped. “Holding 50% stocks was simply too risky in a turbulent era,” he says. “I concluded 30% was the right level.”

But here’s the thing: the riskiness of stocks is a function of how expensive they are. The cheaper stocks get, the less risky they become, and if a 50% allocation to stocks made sense when stocks were expensive, there’s a good case to be made that your allocation should actually rise when they become cheap.

What’s more, Templin and his wife seem to have a particularly unhealthy way of looking at their retirement savings. Does Templin add up all the money that he put into his 401(k) over the years and sorrowfully compare that sum to what the account is worth now? No — that’s a calculation he never makes, and for all we know it would show him still in positive territory. Instead, he picks the single point in time when the value of his 401(k) was at its absolute maximum, and then compares its current value to that peak.

If you invest in a risky asset class like stocks, your portfolio will nearly always be worth less than it was at some point in the past. You know that, when you retire, you can ruefully pick a date and say “we should have retired back then, we would have had more money”. But you still invest in stocks because you’d much rather have a portfolio go up to $3 million and finish at $2 million than you would have a portfolio which boringly and steadily rises to a final value of $1.5 million.

Unless, of course, you’re Neal Templin, who seems to think that in the first case he would have “lost” a million dollars, and that in the second case he’d be going out at an all-time high and blissfully happy. He doesn’t seem remotely interested in the amount he has accumulated over the course of his 20 years at the WSJ: instead, he’s only interested in the difference between that amount and its mark-to-market value on a certain date chosen to make him feel as miserable as possible.

As for his wife, she seems if anything even more ignorant: she doesn’t even seem to appreciate that the less money you save, the less money you save. If she had spent more and lived it up a little, then the drop in their retirement account would have been smaller only because the retirement account itself would have been smaller. The only way to get a bigger retirement account is to save more, not less.

All of which goes to reinforce my message to Justin Fox — the idea of long-term shareholder value is simply meaningless. If anybody should have an eye on the long term, it’s people with retirement accounts which can’t and won’t be touched for decades yet. But instead they obsess so much over a single year’s drop that they radically alter their entire asset-allocation strategy at the worst possible time, and choose to sell steadily into a rising market. That’s just human nature: you might think you’re a long-term investor, but when put to the test, it turns out that, really, you’re not. And if you’re not a long-term investor, then you should never have been investing on the basis that you were.

COMMENT

Felix, you write:”Given that the single biggest advantage that Templin has over hedge-fund managers is that he didn’t need to sell his stocks after they dropped, what did he do? Sell his stocks after they dropped.”

Yet, in the linked article, I read:
“Dropping my equities allocation to 30% would have meant selling a big slug of stocks at the bottom and locking in my losses. That didn’t seem smart. So I waited for the market to rise.”
So, did he sell them after they rose…or, as you say, after they dropped? Seems a little of both. In any event, it looks to me like, as tegwar noted above, he’s just rebalancing his risk allocation. Hardly what I would call “woolly thinking”…especially since it’s not at all clear that we are out of the woods yet. This depression could drag on for YEARS. If the guy wants less risk in his investments, why ridicule him? Does it make you feel superior?

Posted by McLovin | Report as abusive

The US triple-A: Nothing to worry about

Felix Salmon
May 21, 2009 20:26 UTC

Bill Gross seems to have caused a bit of an uproar with his off-the-cuff comment to Reuters:

Asked what is driving the market declines, Gross told Reuters via email that investors fear the U.S. is “going the way of the U.K. — losing AAA rating which affects all financial assets and the dollar.”

On the one hand, as ex post explanations for market declines go, this one’s quite good: if true, it helps explains why both stocks and bonds are going down on the same day. What’s more, it tidily fits in to a news story — that S&P has downgraded the UK’s triple-A outlook — and journalists love any explanation for a market move which makes it seem that it’s some predictable result of an event in the news.

But let’s get some perspective here. The Dow and the S&P 500 closed down 1.5% and 1.9% respectively, which by recent standards is a perfectly normal move, well within the range of what you’d expect on any given day. What’s more, S&P putting the UK on watch for a possible downgrade is a decision prompted by economic fundamentals. Any such move with the US, by contrast, would be entirely political, and in any event would say much more about S&P than it did about Treasuries.

The most important thing to remember here, however, is that ratings agencies don’t matter any more. They lost their credibility when structured finance blew up, and the number of people buying Treasuries because S&P says that they’re triple-A rated is exactly zero.

There are lots of triple-A rated securities; people buy Treasuries because they’re liquid. The US triple-A may or may not disappear at some point, but if and when that happens it’ll be a lagging indicator, and there will already be a select group of alternative securities which are trading at lower yields in dollars. So long as Treasuries have the lowest yields in the dollar-denominated world, they will retain their triple-A, and there are much more important things to worry about.

COMMENT

Hey boys & girls out there in radioland, I just want to remind you that all this hyper-spending by the radical left that is now running Washington, et al, WILL be paid for eventually – by Inflation & Higher Taxes! The public will have to guess how much of each is required and plan their investments accordingly. I say guess because nobody in the Obama-Geithner-Bernanke gang has a clue either.

Posted by Bud Woods | Report as abusive

Will consumers give up their credit-card protections?

Felix Salmon
May 21, 2009 19:58 UTC

Dear John Thain wonders whether credit-card companies might ask would-be consumers to “voluntarily” opt out of the protections they’ve been given under the new regulations being passed in Washington; their ability to opt back in again would exist in theory but in practice be very hard to find.

I’m not particularly worried that this will happen, because the minute that credit card companies start sending out mailings offering more attractive cards (or cards at all) to people who give up the protections which have just been imposed, there will be such an outcry from both politicians and the media that the companies in question will be forced to back down, or face even more onerous legislation going forwards.

Some protections you’re forced to have: you basically need to open a bank account in a foreign country if you don’t want your funds to be insured by the government. The credit-card protections are like that: they will apply to everybody, whether they want them or not.

COMMENT

No one ever went broke underestimating the intelligence of the American consumer.

Posted by Newton Minnow | Report as abusive

Can we inject uncertainty into monetary policy?

Felix Salmon
May 21, 2009 19:06 UTC

Just had an interesting lunch with Nick Denton, who clarified that his 27% rise in revenues was year-on-year in the first quarter, and that the second-quarter rise in sales is even larger. He also talked about his decision to cut back in the face of a coming recession: while he has pangs of regret about selling Consumerist, he said, he also feels that recessions can be helpful when it comes to forcing business owners such as himself to take tough decisions they otherwise might be able to avoid taking.

Denton has a theory about how we ended up in the midst of this huge economic crisis: he blames the hubris of central bankers in general and Alan Greenspan in particular — people who thought they had abolished the business cycle, and whose belief was shared by the business and finance worlds. It’s the theory of the Greenspan put, basically — we all reckoned that if things got really bad then the Fed would bail us all out, as they did in 1991-2 and then again in 2000-1. As a result people weren’t nearly as cautious as they might otherwise have been inclined to be, and dangers built up until they exploded.

How to fix this? Is it not the job of the Fed to try to minimize the severity of recessions? One alternative approach would be to consider it to be the job of the Fed to minimize the severity of the worst possible recession. What would happen if, for instance, rates were set using a random-number generator? Every FOMC meeting, some kind of virtual die would be rolled, moving rates up or down even if that was the opposite of “correct” monetary policy. The resulting uncertainty would force people to take a more defensive stance at all times, just in case rates went sharply upwards — even if the probability of such a rate hike was quite low.

Maybe monetary policy is a bit like optimal poker strategy: a certain percentage likelihood that you’ll do this, a certain percentage likelihood that you’ll do that. The Fed governors can then release a decision saying, essentially, “we plugged in a 10% chance of a 50bp cut, a 50% chance of a 25bp cut, a 25% chance of keeping rates steady, and a 15% chance of a 25bp raise, and rolled the electronic dice; guess what, we we ended up with the 25bp raise”.

OK, so that’s probably a silly idea. But some element of uncertainty is I think useful in monetary policy.

COMMENT

You are essentially arguing human risk taking doesnt work and we ought to regulate it so it comes down. I believe the entire history of capitalism proves that wrong, even with periodic and serious crisis RISK TAKING WORKS

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