Opinion

Felix Salmon

Counterparties

Felix Salmon
Nov 17, 2009 04:13 UTC

Two weeks until Latin America’s first gay marriage! — Inca Kola

49 million Americans lack dependable access to adequate food, the largest number ever — Alea

Alloway sums up what we do and don’t know about those weird Goldman CDO structures — Alphaville

More tales of price-gouging by Verizon from Pogue — NYT

“Duh” news of the day: Study finds eating dark chocolate helps people deal with stress — Epicurious

James Kwak asks why on earth we’re allowing tax-loss carry-backs. It makes no sense! — Baseline Scenario

My contribution to a Newsweek listicle; unfortunately they’ve jumped onto the white-on-black bandwagon — Newsweek

CNN paid Lou Dobbs $8 million to quit — NYP

Newsweek tries to convince NYT that 50% ad drop isnt that bad — NYT

It’s good to be Elin McCoy, living the life sybaritic at the Villa D’Este — Bloomberg

Clay Shirky on ontology, circa 2005. Still very fresh — Shirky

Hedge funds aren’t too big to fail. Even in aggregate, they’ve proved systemically unimportant — Rivast

Lesbians are better parents — Times

Town’s ‘Diana style’ show of grief for dead albino rodent — Daily Mail

Must-read Pinker review of Gladwell and his “cherry-picked anecdotes, post-hoc sophistry and false dichotomies” — NYT

COMMENT

As long as you’re pointing people to Pinker on Gladwell, maybe you could rethink linking to the epicurious linkbait, which is based on Nestle asking 30 people.

Posted by Sam Penrose | Report as abusive

Are Obama’s policies working?

Felix Salmon
Nov 17, 2009 04:04 UTC

The iq2us website is rather horrible, all flash-based and white-on-black and lacking permalinks, but tonight’s debate was well worth attending all the same. The motion was “Obama’s economic policies are working effectively”, and the interesting thing about it was that it wasn’t a left vs right thing at all.

Proposing the motion we had old-fashioned lefty Larry Mishel, who was joined by Steve Rattner and Mark Zandi. Opposing it were the even more interesting bedfellows of Jamie Galbraith, Eliot Spitzer, and, of all people, Allan Meltzer. An interesting debate was pretty much guaranteed.

The voting was interesting too. At the beginning of the debate, 32% of the audience supported the motion, 29% opposed it, and a very large 39% were undecided. By the end, the undecideds had shrunk to just 12%, the proponents were up to 46%, and the opposition was up to 42%. With an increase of 14 percentage points compared to the opposition’s 13 percentage points, the proposers were named the winners. But it was a very close-run thing, and in my view it was actually the opposition which clearly won the debate, not least because they had by far the best two debaters, in Galbraith and Spitzer.

The arguments for the motion were predictable: things aren’t as bad as they were a year ago, the Obama administration did everything that was politically within its power, and although things are certainly pretty gruesome now, they would be much worse were it not for the administration’s legislation.

The opposition was surprisingly cohesive, given that I can’t imagine Jamie Galbraith and Allan Meltzer ever agreeing on anything. The bailout was an attempt to recreate, at vast expense, the broken status quo ante which got us all into this mess to begin with. Yes, the stimulus and other Obama administration policies were necessary, but they were far from sufficient. And they have overwhelmingly helped the financial-services industry, rather than real Americans, who are still losing jobs at a rate of 200,000 a month.

The revelation was Eliot Spitzer, who was impassioned, fluent, compelling, and clearly enjoying himself. He made some very good points: how come Tim Geithner has managed to get away without ever being forced to justify the decision to pay all of AIG’s counterparties at 100 cents on the dollar? How come no one in the White House seriously pushed for judges to be able to modify mortgages in bankruptcy? How come more effort hasn’t been spent on preventing manufacturing jobs from disappearing, given that once such jobs go, they never come back?

In general, the proponents came across as weak and dry statistics-spewers suffering from a failure of imagination: they couldn’t even conceive of persuading the Democratic Congress to pass anything truly ambitious, even as the opponents were citing precedents from FDR to Reagan. That then prompted Steve Rattner to channel Rahm Emanuel, and accuse Eliot Spitzer, of all people, of being the kind of person who thinks up bright ideas while sitting in the shade at the Aspen Institute.

What’s more, the motion wasn’t whether the current economic policy was the best we could hope for given political realities, it was whether it’s working effectively. And if you’d asked Larry Summers when the stimulus bill was being passed what kind of year-end 2009 unemployment rate would indicate that his policies weren’t working effectively, he would have given a figure much lower than 10.2%. I think we should take him at his hypothesized and counterfactual word. The administration has tried its best, and done some necessary-but-not-sufficient things, but it hasn’t succeeded in its stated aims.

COMMENT

I enjoyed most of the debate, but I disagree strongly with your view that the opposition “clearly won the debate.” Nothing could be further from the truth. Excellent points were made from both sides, and I would say that Steve Rattner continually made the best and most concrete points during his time in the debate, and it was perhaps he more than anyone who swayed the results in favor of the pro side. All in all, a very close contest.

I was (as another commenter mentioned) really dissatisfied with the questions from the audience. I had one myself which I didn’t get to ask, and weighing it against those that did find air was very frustrating. I wish that questions could be keyed in somehow and someone in the back would select the best of the questions for the panel to respond to. For the record, my question had to do with the fact that all the discussion had centered on the whether or not Obama’s economic policies were working… from a domestic viewpoint. But that is extremely myopic and perhaps xenophobic. It’s like a fraternity council debating its initiation rituals while the host university is debating whether it can keep its doors open. On the very day that the WSJ reported that China had accused Obama and the U.S. of protectionism and is considering further action in retaliation, to disregard the incredible presence of such “foreign” interests in the equation was just foolish. It makes any conclusion reached as a result of the debate seem pretty academic.

All in all, a close contest, as far as it went. But yes, I felt that the “pro” side did have an edge, which reality was borne out by the vote.

A Broad retreat

Felix Salmon
Nov 16, 2009 18:36 UTC

Last year, I applauded Eli Broad for not donating his art to Lacma, and instead keeping it in his own foundation, whence it could and would be lent out around the world. I even suggested that it might make more sense to donate art to the Broad Foundation than to a museum:

Museums tend not to spend any time or effort lending out the works they’re not showing: if they’re asked they might say yes, but they’re not proactive about it. So while they might claim to be driven by the desire to show art to the public, in reality they only really want to do that within their own four walls.

Broad’s new foundation, by contrast, will exist with the stated purpose of truly maximizing the public exposure that its art receives. That’s a proposition which could be very attractive to collectors wondering what to do with their legacy: they provide the art, and Broad will take care of all the paperwork and relationship management. So if you’re buttering up a gallerist, maybe the best thing to do is no longer to hint that you’re thinking of donating your collection to a museum: better that you hint that you’re thinking of donating your collection to Eli Broad.

Of course, this was the charitable view of Broad. The uncharitable view was that he was just another collector with a big ego, who wanted to keep his art for himself and his own greater glory. Now comes the news that he’s playing off Santa Monica against Beverly Hills and a third LA location to build a huge new public monument to himself:

The conceptual drawings for the Beverly Hills museum, delivered to city officials last month, show a much bigger project than the original proposal: a 126,600-square-foot, three-story building with the footprint of an arrow pointing east.

Of that, a museum of about 43,000 square feet and an adjoining 6,100-square-foot outdoor sculpture court would occupy the top floor, compared with the first proposal’s total 25,000 square feet of exhibition space. An additional 67,000 square feet would provide an “archive” for the art not on display and offices for all three Broad foundations — for art, education and medical research.

Inevitably, any museum of this size will overshadow the part of the foundation which exists to lend out unexhibited art. That idea was potentially very powerful and new, but it seems that Broad has retreated to the more boring and old-fashioned paradigm of simply exhibiting his own art himself. It’s now pretty clear where Broad’s priorities lie, and I have no faith at all that his foundation will do something game-changing. A shame.

COMMENT

It was pretty obvious from the get go that this would happen. He should have given it to LACMA. At least it would have benefitted the museum and the local community.

Posted by david | Report as abusive

Reasons not to tax interest payments

Felix Salmon
Nov 16, 2009 17:35 UTC

Philosophically speaking, why don’t we tax corporate interest payments? (Practically speaking, the answer is that it’s politically impossible.) So far, the answers have fallen into three broad categories.

The first one feels like a category error to me, and basically says “the corporate income tax is a tax on income, and a tax on interest payments isn’t a tax on income, so you can’t expand corporate income taxes to include a tax on interest payments”. Well, yes, if you taxed interest payments you’d be taxing something other than income. That’s the whole point. Private equity shops love to load so much debt service onto their portfolio companies that they never make a profit, and therefore never have to pay taxes. This is not something we want to incentivize. There are lots of non-income taxes in the US; this would just be another.

The second two answers are better. Kyle says that it would be almost impossible to build such a law without loopholes: “there are lots of ways to create debt like exposure that appear to be expenses”. And Megan McArdle writes that debt really is a legitimate business expense for certain companies:

Heavy industrial companies need more capital to make new investments, and it can make good sense to match the duration of the financing to the expected life of the asset. That’s accomplished by borrowing money, not floating a new stock issue or trying to accumulate enough retained earnings to keep up with your competitors.

Interestingly, these two objections seem to cancel each other out somewhat. If an industrial company wanted to finance the purchase of a major asset, it could simply sign a long-term lease instead, turning a taxable interest expense into a legitimate business expense. And it would be quite easy to say that leasing companies had to be part of federally-regulated bank holding companies (which would be exempt from this tax), and couldn’t be part of the same corporate ownership structure as the companies they were leasing to.

I agree with Megan that implementing this tax “would make companies that do use debt finance much more risky”. That’s the whole point. We want to move away from over-reliance on debt finance, and towards a world where equity finance becomes much more common and much more boring. If investors want to leverage corporate profits with debt they can do so themselves, by buying stock on margin. But let’s not implement the leverage at the corporate level, where it’s imposed on even the most risk-averse equity investor.

Update: Steve Waldman adds that what we’re talking about is eliminating a tax deduction, rather than imposing a new tax. A useful thing to bear in mind.

COMMENT

‘implementing this tax “would make companies that do use debt finance much more risky”.’
NO
The firms are already risky, it would serve it less attractive to be so risky.

Posted by Jim Caserta | Report as abusive

Can ETCs replicate the carry trade?

Felix Salmon
Nov 16, 2009 15:01 UTC

Now I’m confused. Back on November 6, the FT’s Denise Law ran an article about a set of new currency ETCs which are going to be listed on the London stock exchange — think ETFs, but for foreign exchange. She quoted Nik Bienkowski, the chief operating officer at ETF Securities, which has created these instruments:

“The benefit of a currency ETC is that it provides exposure to local interest rates. It’s safer than putting money in a foreign bank account,” Mr Bienkowski said.

Is this an interesting new way to play the carry trade? As a good blogger should, the FT’s Izabella Kaminska revisited the subject on Friday, and found all manner of reasons why small investors should stay away from this product. Most startlingly, she writes of the maximum upside from investing in these things, that they have

all of the performance of a currency index, for relatively low management fees, but without any interest or dividend (no carry trade here then).

So which is it? Does the ETC provide exposure to local interest rates, or does it pay not interest or dividend at all? The official website for these things says that they “reflect movements in exchange rates between two currencies, plus exposure to local interest rates”, which seems pretty clear. But Index Universe says something rather different:

Each ETC will track the total return version of one of the Morgan Stanley Foreign Exchange (MSFX) indices. The total return index for any given currency pair has two components: a constant (long or short) position in the relevant MSFX currency, achieved by daily rebalancing via a “spot-next” transaction, and an interest component which tracks the one-month US dollar Treasury bill rate.

That’s certainly the impression I get from the official MSFX documentation:

For the Total Return versions of the MSFX Indices based on the deliverable MSFX Currencies, in order to replicate the return of a constant fully collateralized strategy, the related MSFX Index will accrue interest daily at the One-Month T-Bill Rate… Hence, the daily return on the related MSFX Total Return Index will be computed as the sum of the MSFX Currency return and the One-Month T-Bill return.

There certainly doesn’t seem to be any mention of local interest rates there. And given how much one-month Treasury bills are likely to yield for the foreseeable future, you’re not going to get much in the way of interest on that front, either.

So I’m confused about why and how ETF Securities is claiming that ETCs provide exposure to local interest rates. Is there something I’m missing here?

Update: I understand them now. And yes, they do provide exposure to local interest rates. Or they’re designed to, anyway.

COMMENT

Does anyone know how to go about getting a Yen mortgage to purchase UK property, as a way to profit on a potentially weakening Yen in the longterm?

Posted by AndyTal | Report as abusive

It’s a large world after all

Felix Salmon
Nov 16, 2009 14:32 UTC

Ultimi Barbarorum’s little-known other author, “Bento”, has a great blog entry up about the iPhone in China. Bento lives in Shanghai, and explains very simply why official Chinese iPhone sales are low: official Chinese iPhones are artificially crippled, thanks to a law banning phones with wifi capability. So the tech-savvy Chinese simply buy unlocked (and cheaper) iPhones from Hong Kong instead, which don’t show up in the official sales numbers.

This dynamic is well-known in Shanghai and across much of the rest of China:

The distribution model is extensive and robust, and in fact most Chinese buy their mobile phones from stalls like this. There are no iPhone shortages, as prices fluctuate to meet demand.

Yet somehow, in this age of universal connectivity, none of the Apple-watchers seems to have known anything about it. Instead they took the official statistics at face value, trying to read all manner of implications into them about Chinese demand for iPhones or the lack thereof.

I’m curiously reassured by this episode: it goes to show that markets really aren’t all that efficient after all, and that information flows in unpredictable ways. And that good bloggers and journalists can still be very helpful in telling the markets something they didn’t know, even if it’s common knowledge in Shanghai.

COMMENT

There’s quite an amusing symmetry here. US phone networks have crippled smartphones (especially Nokia’s) for years, which was a major factor in allowing the iPhone to make such inroads in the US despite offering less functionality than many much cheaper smartphones would if they weren’t crippled (and do in other countries). Now the iPhone is being crippled in China, causing Apple and mainland China’s economy to lose revenue. Silly behaviour all round.

Posted by Ginger Yellow | Report as abusive

How can the government reduce unemployment?

Felix Salmon
Nov 16, 2009 14:08 UTC

Nouriel Roubini says the federal government has to be much more aggressive on the unemployment front:

There’s really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation.

I’m sympathetic, but I’d note that the low-hanging fruit has already been picked, when it comes to “labor-intensive, shovel-ready infrastructure projects”, with the first stimulus, and I’m not sure that there are actually any left. Instead, might I suggest arts subsidies?

COMMENT

“Art would be just another form of spending on consumption, not investment.”

I can still remember the WPA mural in the local post office when I was growing up. That lasted 40 years, probably as good an investment as any.

Posted by a | Report as abusive

What are the arguments for privileging debt?

Felix Salmon
Nov 16, 2009 06:25 UTC

Three cheers to Jim Surowiecki for unambiguously adding his voice to those who would abolish the tax-deductibility of interest payments:

Debt didn’t get dangerously out of scale because the system was broken. It got out of scale, in part, because the system worked…

As much as possible, the tax system should be neutral between debt and equity, and between housing and other investments. It’s not, and, worse still, as we’ve seen in the past couple of years, debt magnifies risk: if companies or individuals rely on large amounts of leverage, it’s much easier for bad decisions to lead to insolvency, with significant ripple effects in the wider economy. A debt-ridden economy is inherently more fragile and more volatile.

The weird thing for me is that when I start banging this particular drum, I always get exactly the same answer: “yes, great idea, not gonna happen”. But is there any intellectual justification whatsoever for making corporate interest payments tax-deductible? I can see an argument for a carve-out for highly-regulated banks, since their entire business is based on making profits from the spread between the rate at which they lend and the rate at which they borrow. But banks aside, why should companies pay lots of tax on dividends, and no tax at all on bond coupons?

In a way it’s depressing: if this were a real debate and Paul Volcker had a remote chance of making interest taxation happen, then surely there would be no shortage of academics and corporate lobbyists making the case for keeping the status quo. The fact that they’re not even bothering is all the evidence we need that this isn’t even going to reach trial-balloon status, let alone get signed into law.

But still, the question remains: if they were to start taking this seriously, what arguments would they use? After all, as Surowiecki notes, the likes of Brazil and Belgium seem to do perfectly well without giving debt this artificial advantage.

COMMENT

I like the view, HAL. Re: The double-taxation of corporate income as a price paid for enjoying limited liability. I retract my prior rhetoric.

Counterparties

Felix Salmon
Nov 14, 2009 16:17 UTC

The WSJ discovers Bob Hodgson and his debunking of wine tastings — WSJ

The fate of the bluefin — Politics of the Plate

Autocomplete Me

Fox Business is in 50m households, Bloomberg TV in 60m. Neither can crack 35,000 viewers per show — VF

Megan Fox, in verse — Awl

COMMENT

Story about Reuters logo
http://4.bp.blogspot.com/_a7jkcMVp5Vg/Sv 9ricLpt_I
/AAAAAAAAKV8/ebvj89VoJUA/s1600-h/thomasr euters.jpg

Posted by v | Report as abusive
  •