Opinion

Felix Salmon

US consumption datapoint of the day

Felix Salmon
Sep 5, 2009 16:22 UTC

From Jon Mooallem’s very good NYT Magazine article on the self-storage industry:

By the early ’90s, American families had, on average, twice as many possessions as they did 25 years earlier. By 2005, according to the Boston College sociologist Juliet B. Schor, the average consumer purchased one new piece of clothing every five and a half days.

That’s an average of 66 clothing purchases per person, per year. I’m sure that the number for men is a lot lower than the number for women, so I fear to think what the number for women is.

Mooallem is also good on explaining how the self-storage industry is essentially a way of monetizing the sunk-cost fallacy. Indeed, the industry itself is happy to admit it:

Clem Tang, a spokesman for Public Storage, explains: “You say, ‘I paid $1,000 for this table a couple of years ago. I’m not getting rid of it, or selling it for 10 bucks at a garage sale. That’s like throwing away $1,000.’ ”

Of course, you really threw away $1,000 when you bought the table. But you probably justified the purchase by considering it an “investment”. Despite the fact that if you’ll never sell something for more than you bought it for, it can never be an investment.

COMMENT

Ken beat me to the tube socks bundling issue.

Posted by bdbd | Report as abusive

Damian Tambini’s internet bigotry

Felix Salmon
Sep 4, 2009 15:58 UTC

Jeff Jarvis is kvetching, reasonably enough, about “internet bigotry” — the idea that everything bad which happens in the media must somehow be the fault of the internet, and bloggers, and other such new-media developments. It’s a theme running through Damian Tambini’s very long and boring essay on ethics in financial journalism, which has just been published by the LSE and Polis. For instance:

The views of the journalists interviewed for this paper revealed considerable diversity of views on their basic responsibilities: views ranged from those who saw their responsibility in terms of selling newspapers (and thus focused on the shareholders of the companies employing them) – to those with a very developed idea of the social function of financial journalism and associated ethical responsibilities. Others identify with the values of the profession as a whole. And an interesting new challenge is that many of those providing services akin to financial journalism in the new media reject the label of journalist altogether, preferring to opt out of any ethical framework associated with it

Clearly in the days of blogs, messaging and email newsletters it is important that professional financial journalists put clear boundaries between themselves and the rumour mongers.

(My emphasis.)

Tambini’s paper is not only larded with 17 footnotes and a two-page bibliography; it is also highly concerned with things like “standards of verification and sourcing”. Yet a comment like this — essentially saying with no basis whatsoever that lots of finance bloggers actively choose to “opt out of any ethical framework” — can easily and casually be thrown into the paper. He doesn’t even stop to wonder whether conflating blogs with “rumour mongers” might not be entirely fair.

As Jarvis points out, in many cases (such as Chelsea Clinton not getting married) it’s the professional journalists, not the blogs, which are the worst offenders. And in the world of finance, the most virulent rumors are those spread by the likes of CNBC, while blogs are if anything better at debunking rumors than they are at spreading them. (Alphaville, in particular, is very good at this.)

The problem is that Tambini talked overwhelmingly to old-media types: he doesn’t seem to have had any interest in even trying to approach bloggers or other new-media denizens to get their take on the ethics of financial journalism. Maybe he thought that he might catch something nasty if he got too close.

COMMENT

“While I agree with Ryan’s comment, I think that more can be said. I think that blogs are essentially commentaries and editorials for the most part and usually have no initial background work (no, linking to another article is not research, just like reading Oliver Twist isn’t research on the condition of orphans.)”

While this is often true, what’s interesting to me is that it decidedly wasn’t the case in the financial crisis. The best reporting bar none on the subprime disaster was done by Calculated Risk’s Tanta, based on her own experience in the industry and detailed understanding and explanation of the mechanics of loan underwriting, securitisation and modification. In fact, the analysis of what went wrong with securitisation was better on (some, widely read) blogs was better than anything in the non-specialist press, and better than quite a lot of the specialist press. There’s an awful lot of terrible reporting/analysis/commentary on the less informed blogs as well, but arguably nothing worse than some things I’ve seen in newspapers with circulations in the hundreds of thousands.

And I say all this as a print journalist myself. There are many things for people like me to fear from the rise of the internet, but this supposed ethics or responsibility gap is not one of them.

Posted by Ginger Yellow | Report as abusive

Historical lessons in disincentivizing bankers

Felix Salmon
Sep 4, 2009 15:10 UTC

There are too many bankers, and they make too much money. How to deal with this? You can try to crack down on bankers’ pay directly, but that’s unlikely to work. You can try to fiddle with capital-adequacy standards, so that big banks become less profitable, but that’s unlikely to have much in the way of immediate effect. Or, you could follow the lead of Holland, circa 1581, as explicated by Simon Schama:

Bankers were excluded from communion by an ordinance of 1581, joining a list of other shady occupations—pawnbrokers, actors, jugglers, acrobats, quacks, and brothel keepers—that were disqualified from receiving God’s grace. Their wives were permitted to join the Lord’s Supper, but only on condition that they publicly declared their repugnance for their husband’s profession! Their families shared the taint and were only permitted to join communion after a public profession of distaste for dealing in money.

Given that Mammon has long since triumphed over God, I reckon most bankers these days would happily give up communion in order to be able to continue to make their seven-figure bonuses. Maybe we should try banning their children from attending expensive private schools instead.

COMMENT

Ahh … what Dogman really meant to say was he hates socialist crap in things like health care or pensions for instance. But he eats it up when it’s going to the bankers.
So I guess he’s eating a lot of crap these days, hmmm… love it with cheese!

Posted by Patz | Report as abusive

The weight of unemployment

Felix Salmon
Sep 4, 2009 12:51 UTC

The number jumping out at me from this morning’s employment report is 6.9 million: the total decline in employed people since December 2007. The macroeconomic effects of that kind of change are huge: if each person ends up spending $20,000 less a year on average, that adds up to $138 billion in lost economic activity.

Over 10% of US males, and over 15% of US blacks, are now unemployed — and those are percentages of people who aren’t so demoralized that they’ve simply stopped looking for work altogether. Then there’s the “marginally attached” — here’s the Labor Department’s press release on the official “discouraged workers”.

About 2.3 million persons were marginally attached to the labor force in August, reflecting an increase of 630,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Among the marginally attached, the number of discouraged workers in August (758,000) has nearly doubled over the past 12 months. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.

The U6 measure of broad underemployment spiked up from 16.3% to 16.8% — yet another all-time high. I’m well aware that these figures are a lagging indicator, but the absolute levels alone should be more than enough to depress anybody looking for any sign that the US economy is looking remotely healthy. Markets, of course, are still high, and can always go higher. But the fundamentals look much less pretty.

COMMENT

No it is not rocket science…but it is the destiny of our nation and our ‘captains of industry’ are not going to suddenly obsorb Karma.

Posted by csodak | Report as abusive

Late links, September 3

Felix Salmon
Sep 4, 2009 02:59 UTC

The Geithner plan is out!

PayPal is opening its platform to Third Party Developers. But do they need to use that music?

Best law-firm memo ever

Is Spain crumbling? The debate continues

COMMENT

- “Trendy Word” ALERT: Twigged

Posted by flippant | Report as abusive

Can higher capital standards cause lower pay?

Felix Salmon
Sep 3, 2009 21:51 UTC

Robert Peston is skeptical that the Brown/Sarkozy/Merkel plan to restrict bankers’ pay is either workable or a good idea.

It’s pretty difficult to put a lid on pay in the wider financial industry, especially a globalised one.

Remuneration in finance is like a blancmange. If government and regulators squeeze one part, it will bubble up somewhere else.

If big banks are restricted in the cash rewards they can pay their top staff, they will reward them in other ways – with increased pension contributions perhaps, or cheap loans. Or they’ll pay a fortune to the best ones by hiring them on rolling short term contracts, to keep them off the official books.

He’s basically right — which is why the Europeans might be interested in the Geithner plan (warning: 14-page PDF) to impose higher capital standards on systemically-important banks.

The insight here, I think, is that the biggest banks — Goldman Sachs, Morgan Stanley, Merrill Lynch, etc — are the price-setters when it comes to banker remuneration. If they are socked with higher capital ratios, then their profitability will fall, their bankers will be paid less, and prevailing remuneration expectations in the industry as a whole will decline accordingly. Which would be a most welcome development.

COMMENT

nope, i think that hedge funds set market rates for renumeration.

Posted by q | Report as abusive

How miscommunication caused Lehman’s collapse

Felix Salmon
Sep 3, 2009 21:24 UTC

Larry Elliott and Jill Treanor have a big story today, although I’d love to see it re-reported elsewhere. Remember the tick-tock on why Lehman Brothers was allowed to fail: although there was a bid on the table from Barclays, it required government funds, and neither the US nor the UK government were willing to provide them.

One hurdle remained: To ink a Lehman deal, Barclays needed a shareholder vote. There was no way to get one on a Sunday. Barclays would need the U.S. or British government to back Lehman’s trading balances until a vote could be held.

Government approval never came, though there are diverging views on why. Some blame the U.S. government for refusing to commit resources. Others say the British government refused to entertain a deal they worried would expose England to unnecessary risk.

From the other side of the pond, it seems that the Brits were convinced all along that the US money was there for the asking:

In London, the Treasury, the Bank of England and the Financial Services Authority all believed that the US government would step in with a financial guarantee for the troubled Wall Street bank…

The UK tripartite authorities – the FSA, the Bank of England and the Treasury – had expected the US government to stand behind Lehman in the way that it had backed two crucial mortgage lenders the previous week and helped to orchestrate the bailout for Bear Stearns in March.

No explanation has ever been given for the lack of government funds offered in the final weeks of the Bush administration, which had to step in to prop up the insurance company AIG days after Lehman’s demise.

That final paragraph is not strictly true. An explanation has been given, repeatedly: that Treasury had no legal authority to provide such funds. It’s just that nobody really believes it. In any event, it’s pretty clear that no one in Treasury was making its inability to provide funds clear to anybody in the UK. Treasury should have been saying “look, gents, we’ve saved the world three times now, but we’ve come a bit unstuck on this Lehman thing, we’re not going to be able to do it ourselves, do you think you could step up this time, give those Barclays chaps a bit of a helping hand, we’ll owe you one, it’s rather urgent”.

Instead, there seems to have been a complete breakdown in communication, with the UK team convinced that the US could and would bail out Lehman. After all, the Yanks had given them every indication that they were perfectly capable of dealing with such things on their own, and didn’t need any help from abroad:

The UK tripartite authorities were concerned about the financial system in the spring of 2007 and asked their American counterparts to participate in a “war game” to prepare for the collapse of a major US bank and develop a response to a financial crisis. However, the war game, which was to have included the UK, Switzerland, the Netherlands and the US, never took place because of a lack of willingness to participate by the US regulatory bodies.

The enormous global costs associated with the chaotic Lehman bankruptcy were entirely avoidable, and to my knowledge no one in power has ever apologized for letting it happen. Maybe Hank Paulson could be the first, in his upcoming memoir.

COMMENT

Have you not read the papers – academic, not press – which showed the governments were unaware of certain crucial factors because London’s light-touch regulatory regime was designed to attract capital flows by allowing secrecy. It’s been demonstrated that Euro banks were much more dependent on short-term dollar financing than anyone understood, certainly much more than Treasure and the Fed thought. This financing flowed through London – hidden information flows come back to bite – and relied on the US money markets. Remember that Lehman was a huge money market instrument provider so when it collapsed the money markets needed every available dollar so they yanked what they could and that caused an instantaneous cascade in the linked markets in which Euro banks suddenly found they had no dollars and thus no short-term funding. The Fed recognized this immediately and made something like $600B available to the ECB – repaid, btw – but the absolute lack of dollars caused the system to lock up like an engine with no oil. That lack of knowledge of capital flows, a classic information sink, was the basic precipitating cause of the credit lock-up. I would say if Treasury and the Fed knew what the heck was going on with the Euro banking demands for short US money, they would have acted differently, maybe allowing Lehman to fail but with money safeguards in place beforehand.

These papers are not exactly a secret.

Posted by jonathan | Report as abusive

What would Wilmott buy?

Felix Salmon
Sep 3, 2009 20:29 UTC

A fantastic catch from Nemo after Paul Wilmott appeared on CNBC this morning to make a very good point: that there’s still a huge amount of model risk in the system, that the sheer size of financial institutions still poses a massive potential systemic risk, and that high-frequency trading, in particular, does a bad job of efficiently allocating long-term capital, which is the primary purpose of the markets.

Larry Kudlow then proceeded to respond in the the only way he knows how:

Is there an asset class that looks cheap to you from a pricing standpoint?

Let’s look at gold, energy, commodities. Let’s look at stocks, let’s look at bonds, for example… I’m just asking you, off the top of your head, what looks rich and what looks cheap now?

Let me rephrase it. Is there an asset class that looks cheap to you right now?

Your judgment. Somebody gives you a billion dollars. What looks cheap? What would you buy?

Poor Paul eventually gets bullied into some semblance of an answer: essentially he says “buy options”, since there’s a significant chance of a huge move, one way or the other. Which of course garners the only possible response, from Trish Regan: “I, I, I don’t understand…”

COMMENT

ok, who wants to buy a binary put on CNBC surviving more than 24 months? Foxbusiness has already jumped the shark with Don Imus comign on board and CNBC is getting ever more desperate for someone to care about them. With only a few hundred thousand viewers and many of those just TV in brokers empty waiting rooms, you’ve got to ask how much longer. Using Gott’s Theorom I would guess 60% change gone within 24 months…any takers?

The demise of the advertorial business

Felix Salmon
Sep 3, 2009 19:59 UTC

Two of the most popular blog entries I ever wrote were on the subject of AFA press. AFA is a publisher of sleazy advertorials, targeted mainly at companies in developing markets. (In the US, they operate under the name “Summit Communications”, when producing inserts for the New York Times.) Between my original March 2006 blog entry and its July 2006 follow-up, there are now more than 50,000 words of comments from people either involved or thinking about getting involved in this business.

But finding the good stuff amidst so much volume is not easy, so it’s great that Alan Furth has now blogged his own experiences working for this kind of company.

I was in charge of the editorial for the supplements, so I had to “interview” CEO’s and key government officials on their views about the attractiveness for business of their countries and companies.

A typical “interview” was structured as a 30-minute conversation that had to strike a delicate balance between gathering information for the copy of the supplements, and most importantly, making the interviewee say the right things that would allow my accompanying colleague — invariably an attractive, sharp, aggressive saleswoman as most people in positions of power in the developing world are still men — to construct the arguments for selling him an expensive ad in the supplement…

I became totally focused on listening attentively to my interviewee’s answers, taking notes, and coming up with witty comments for sparkling the space between questions and adding flavor to the conversation. I had to pay close attention to my interlocutor’s body language to gauge his emotional state: if he was tired, bored or angry, the pressure was on. I needed to wake him up somehow, to find which buttons to press in order to put him in the right frame of mind for a sale, while still feeling he had been “interviewed” by a journalist. Seeing his mood change subtly in the right direction was exhilarating, each favorable micro-expression getting me a bit closer to signing an advertising contract, and a commission of several thousand dollars.

The problem with this kind of thing is that once the big guys have been burned once or twice, they’re unlikely to fall for the same scam again. So Furth had to go lower and lower on the food chain, looking for unpicked-over companies:

In our hunt for “virgins”, we scoured the countries searching for them, storming into office buildings, taking advantage of relaxed, unstructured, friendly local cultures to steal 30 minutes of the boss’s time, and walking out with a 25,000 USD ad contract from a small stock brokerage firm that didn’t make a million USD in yearly turnover. Or for that matter, from a truck-manufacturing company that had no exports, no international expansion plans, or any other minimally rational reason for advertising with us.

I guess that the good news here is that this business model contains all the seeds of its own demise: according to its own website, Summit Reports has published nothing since February. With luck, it’ll be a long while until such things re-emerge.

COMMENT

Has anyone heard of Commit (bcommit) or Veritas Communications? They both produce special sections for French media (Valeurs actuelles, Les Echos).

If you have, or if you know anyone who works / used to work for either company, please do let me know. I am a French journalist based in Paris. You can follow me on Twitter: @cbonnerot

Posted by cbonnerot | Report as abusive
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