Felix Salmon

April 2 was meant to be a great day in the history of sleazy free-credit-report websites like Ben Stein’s employer Freescore. A new FTC rule came into effect (read all 22 pages of it here), forcing all such websites to have a huge notice across the top of every web page, saying that AnnualCreditReport.com is the ONLY authorized source for credit reports under federal law, and providing a prominent link to this page.

Yet here we are on April 5, and Freescore.com has no such disclaimer. Neither does CreditReport.com. And the biggest site of them all, FreeCreditReport.com, has no such notice either — but instead of simply ignoring the law, like its competitors, it’s trying to find a loophole. Instead of the notice, there’s a box saying this:

Why isn’t my Credit Report free?

Due to federally imposed restrictions it is no longer feasible for us to provide you with a free Experian Credit Report. So for now we’ll be charging you $1 for your Report. But instead of keeping your $1, we’ll donate 100% of the proceeds to Donorschoose.org, an online charity providing funds to classrooms in need.

Underneath that text is the DonorsChoose logo; it’s worth noting that the underlined text, which looks like a hyperlink, isn’t one, and that it’s impossible to click away from FreeCreditReport.com to DonorsChoose.org. I’d also be astonished if DonorsChoose approved of this despicable stunt.

The idea here is that if FreeCreditReport charges $1 and immediately donates that money to charity, then the report isn’t free any more, the name of the site notwithstanding, and therefore the site doesn’t need to carry the FTC-mandated notices. I do hope that the FTC doesn’t allow that kind of nose-thumbing.

But in any case it’s pretty clear that both Freescore.com and CreditReport.com are simply in outright violation of the new laws. I look forward very much to seeing them slapped with some huge fines.

Tom Brakke has a great explanation of how and why earnings estimates move, based on a hypothetical analyst who wants to up his estimate to $1.65 while the consensus ranges from $1.22 to $1.35.

Often what is easy to do in a situation like this is to think, “You know, if I use $1.45, I would be well above the high range. I’d still get credit for being right. There’s no sense being too aggressive on this.” And so begins a game of behavioral leapfrog. The other analysts covering the company will immediately notice the new number and think that they too should take another look. They will be asked questions about the estimate you published. Their reviews may discover some of the same improvements that you spotted, and their estimates will move higher, sometimes by a little and sometimes by a lot. Someone who can see that same $1.65 potential as you did will decide to top you with $1.50 or $1.55.

This can go on for quite awhile.

The lesson here is not to pay much attention to forward p/e ratios, since the denominator in such ratios is the consensus earnings estimate, and the consensus earnings estimate is a moving target which pretty much by definition is behind the curve.

And of course this also helps explain why “whisper numbers” are so much more important than official consensus earnings estimates — the estimates don’t necessarily reflect what the analysts really think.

(Via AR)

As the SEC investigates the question of just how many banks were abusing Repo 105, Vipal Monga today points out that abusing Repo 105 is exactly the same thing as using Repo 105: there’s no conceivable innocent use of this particular part of the accounting-standards rulebook.

The rule in question is SFAS 140, and as Vipal says, the only reason for the rule to exist is so that it can be abused, Lehman-style:

The simple fact that FASB set a bright line acted as an invitation to exploit it. Put another way, FAS 140 seems to officially sanction such treatment. “The only reason to have the rule is to give sale treatment to a borrowing,” Willens says. He adds that Ernst & Young LLP, the auditor that signed off on Lehman’s accounting, was acting “well within the accounting guidelines,” which says something about the rule itself.

It’s pretty much inconceivable that SFAS 140 would have been implemented without a lot of support from people intending to use it. What’s more, we know that the people who used it didn’t disclose that fact — no disclosures surrounding Repo 105 have been made in any financial institution’s filings.

So if and when the list of Repo 105 abusers is finally revealed, expect it to be a long one. And expect to see the ABA’s Ed Yingling out there earning his $2.29 million salary trying to justify the unjustifiable.

Those who live close to it won’t be surprised to hear that the Cross Bronx Expressway is officially the most congested road in the US. It has an astonishing ability to instil deep-seated passions in drivers:

The Cross Bronx carries 184,000 cars a day, according to the State Department of Transportation, and Mrs. Moore’s intersection is congested 94 hours a week, with cars traveling at an average speed of 11.4 miles per hour at those times, according to Inrix.

Long portions of the expressway have no shoulder, so even minor accidents can snarl traffic for miles. The lighting is poor, and exit and entrance ramps are too short. Most of the road sits inside a trench, leaving commuters to stare at concrete walls, longing for the distraction of scenery. After too long the trench can feel like a crowded coffin…

Mr. Nolan, a traffic reporter for WPLJ-FM, has watched the Cross Bronx Expressway for 30 years…

“I absolutely, positively, completely, totally believe that that is the worst road in the metropolitan New York area,” Mr. Nolan said. “I can’t imagine there being a worse road anywhere.”

He has had holidays ruined by the Cross Bronx — he still gets angry describing the Thanksgiving dinner that was delayed for nearly two hours because relatives were stuck in Cross Bronx traffic.

“I go as far out of my way as I possibly can not to have to take the Cross Bronx,” he said. “I avoid it at all costs to the point of adding 20 or 30 miles to a trip I’m taking.”

The disastrous phenomenon being seen here is the way in which highways in general, and the Cross Bronx Expressway in particular, clog up dramatically once they reach a certain tipping point. A badly-designed highway might be able to carry say 3,000 cars per hour flowing freely — but the minute that traffic gets heavier than that, a jam appears, and the throughflow plunges to less than 1,000 cars per hour.

This is the kind of problem where a congestion charge is a blindingly obvious solution. Put a small toll on the Expressway, and more cars could travel on it, and they would travel faster. The trick is to keep the toll just high enough that those short entry and exit ramps don’t clog up; indeed, putting the toll simply on a few strategically-chosen entry ramps might suffice. You don’t need to toll every car on the road, you just need to hit the bottlenecks. (Research into cordon pricing, as seen in cities like London, shows that congestion is reduced significantly even when the cordon is porous: you don’t need to charge every single entry point into the city in order to have a significant positive effect.)

When Mike Bloomberg was trying to introduce a congestion charge in Manhattan, he got a huge amount of pushback from elected officials in the Bronx. It wasn’t particularly rational pushback: Bronx drivers would likely have benefitted from less through traffic from points north, while barely paying the toll themselves, since they rarely drive into downtown Manhattan.

Maybe a few tolls on the Cross Bronx Expressway would help to show the residents of that borough just how effective such measures can be. It’s got to be worth a try: make it so that for a few key on-ramps, you need an EZ Pass to get onto the road, and it will charge you a few bucks each time. If it works, Joe Nolan, for one, would surely thank you.

It’s pretty easy to adjudicate the fight between Sharon Waxman of The Wrap and Michael Wolff of Newser: just look at how the latter responded to the former. Not only did they link to the HufPo excerpt of Waxman’s complaint rather than to the complaint itself, they also took to hurling thinly-veiled legal threats, with Newser’s CEO writing to Waxman saying that “we are not free-riders and we would consider it libelous for you to make that claim outside correspondence”.

Of course Newser is a bunch of free-riders: Wolff admits as much himself. His passive-voice construction is the giveaway: “The facts are the facts—resorted, rewritten, republished as soon as they are known.” And Waxman shows quite clearly that he’s not a generous part of the blogospheric conversation: he quite clearly wants Newser’s readers to stay on his own site, rather than go anywhere else.

This, for instance, is what Wolff is referring to when he talks about a “BIG RED SOURCE BOX” which his readers are welcome to use to find the external links on his site:

As a general rule, links to other sites should always be part of the flow of the story, and should be inserted at the first available opportunity. (Wolff waits until the very end of his piece before he links to Waxman.) If you confine your links to the bottom of the blog entry, as Barry Ritholtz sometimes does, or put them over to the right, people will miss them, and won’t consider them to be an integral piece of your post.

And the practice of serving roadblock ads at people leaving your site, rather than people landing there, is particularly skeevy. “Please take a moment to visit our sponsor,” it says in a narrow bar at the top of the page. “You will be redirected to [the external site] in a few seconds”. Well, I’ve had that page open for a few minutes now, and there hasn’t been any redirect. And when you do land on a Newser page, the site has a habit of breaking your Back button, too: it’s extremely hard to go back to where you came from if you stay there for more than a few seconds.

The big point here is that Wolff and Murdoch have more in common than Wolff might care to admit: both aspire to being one-stop news shops in an era when people get their news content from hundreds of different sites, and neither has any particular interest in sending his readers elsewhere. It’s a strategy which not only annoys others but which is also, ultimately, self-defeating. A website which fails to leverage the enormous power of the external link is a website fighting with one hand behind its back. And in today’s ultra-competitive world, that spells doom.

Jenny Strasburg finds a couple of former in-house prop traders with new funds of their own: Arvind Raghunathan, formerly of Deutsche Bank; and Mark Carhart, who was at Goldman’s Global Alpha fund when it blew up. Both are pushing a quant strategy, although Raghunathan layers on top some outsourced fundamental analysis, with more than 50 researchers in Chennai poring over public filings.

The main question which Strasburg anticipates from potential investors is basically “why should I invest in you when your strategy blew up in 2007″. But more fundamentally, I just don’t see the attraction of prop traders setting up their own shop with huge investments from their former employer. I’d love to see some numbers on that: how often do such funds have huge success, and how often do they fail?

Anecdotally, banks have enormous difficulty replicating the success of their sell-side traders when they move those traders over to a buy-side structure. The reasons for this aren’t obvious, but I suspect that it’s because Chinese walls are always more porous than banks think they are, and that when you’re sitting on a big trading floor, or even just part of that business, you get a feel for short-term capital flows which is very hard to replicate at a much lower-volume hedge fund. This isn’t (necessarily) about privileged insider information, but ask yourself this: what would happen if a hedge fund manager asked to lease a desk on the Deutsche or Goldman trading floor, using none of the bank’s own money, but simply trying to monetize the advantage of just being physically in that place? It’s pretty obvious that the bank would say no immediately, no matter how high the offered lease payments were.

So in general I’m suspicious of hedge funds being set up by sell-side superstars: once they go buy-side, their hot streak has a tendency to come to a screeching halt. No matter how clever they are, or how unique their strategy is.

Bookstaber is worried about munis – and doesn’t even mention the monolines — Bookstaber

Summers asked for, and received, full cabinet-member status in return for not getting the Fed chief job — National Journal

Taibbi on muni finance in Alabama. Well done — RS

How contango kills the UNG ETF — TBI

I consider myself smacked — Sprizouse

South African far-right leader Terre’blanche murdered — Reuters

April 1 headline: “Good sign for economy: Hiring rebounds on Wall Street” — USA Today

Clay Shirky is talking about media, but might as well be talking about finance:

Complex societies collapse because, when some stress comes, those societies have become too inflexible to respond. In retrospect, this can seem mystifying. Why didn’t these societies just re-tool in less complex ways? The answer Tainter gives is the simplest one: When societies fail to respond to reduced circumstances through orderly downsizing, it isn’t because they don’t want to, it’s because they can’t.

In such systems, there is no way to make things a little bit simpler – the whole edifice becomes a huge, interlocking system not readily amenable to change. Tainter doesn’t regard the sudden decoherence of these societies as either a tragedy or a mistake—”[U]nder a situation of declining marginal returns collapse may be the most appropriate response”, to use his pitiless phrase. Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites.

Meanwhile, Steve Waldman makes the case that banks are far too complex, these days, for notions of “capital” to mean anything any more. What we need, he says, is to get simpler: “we are doomed,” he says, “unless and until we simplify the structure of the banks.”

Which, if true, is to say that we are doomed. We have reached a level of institutional complexity which renders radical simplification impossible, short of outright collapse. We can see this even in relatively simple structures like that of U.S. financial regulators: such things are much easier to create than to abolish, and so they tend to multiply. But it’s even more true of finance more generally. The world’s biggest banks must become much simpler; the world’s biggest banks won’t become much simpler. The conclusion is not a pretty one.

In his wonderful essay about Warhol and authenticity, Richard Dorment writes:

The single most important thing you can say about a work of art is that it is real, that the artist to whom it is attributed made it. Until you are certain that a work of art is authentic, it is impossible to say much else that is meaningful about it.

He ends the essay with the story of a highly important Warhol which was part of the collection given by the art dealer Anthony D’Offay to the English nation, but which D’Offay “has been forced to withdraw” from his gift as the Andy Warhol Foundation has refused to certify it as authentic. Without that stamp of official authenticity, the painting cannot be sold or exhibited at the Tate.

This curiously binary it-is-or-it-isn’t attitude towards Warhol looks even odder when you compare it with the market in Duchamps. Sarah Thornton, in the Economist, examines the market in Fountain, the iconic Duchamp urinal which was originally made in 1917 but which didn’t last long:

The urinal went the way of many of Duchamp’s early ready-mades; it was smashed or trashed. So insignificant was the porcelain pissoir at the time that no one can remember exactly what happened to it.

Decades later, beginning in 1950, Duchamp started authorizing curators to purchase urinals in his name; in 1964, he made an edition of 12 replicas in an edition of eight with four proofs. These fountains aren’t urinals at all: they’re earthenware sculptures modeled on the Stieglitz photo of the 1917 original. But they have real value — one sold for $1.8 million in 1999.

It turns out that the story doesn’t end there. There’s a 13th Fountain — a “prototype” which was signed by Duchamp and owned by Andy Warhol, and which was sold by Sotheby’s in his 1987 estate sale. Sotheby’s put an estimate of $2,000 to $2,500 on the piece; Thornton doesn’t say whether the estimate was so low because the auction house didn’t really consider it to be an authentic Duchamp in the first place. It was bought by Dakis Joannou for $65,750; he, for one, is happy to talk about its “historical importance”.

And there’s more! There’s a 14th Fountain, belonging to Gio di Maggio, and a 15th, belonging to Luisella Zignone; neither is signed by Duchamp, but both have been shown in museums. There might be a 16th, owned by Sergio Casoli, and finally there’s a 17th, which Arturo Schwartz, who oversaw the production of the of the 1964 edition, seems to be willing to sell for $2.5 million.

Duchamp purists says that these supernumerary unauthorized Fountains aren’t Duchamps at all — but they clearly have value. Museums will display them, collectors will buy them, and dealers will happily talk nonsense about them:

Daniella Luxembourg, co-owner of Luxembourg & Dayan, a New York gallery that recently held a Duchamp mini-retrospective, says the artist’s market has “the atmosphere of relics in a religion,” adding that “with globalization, the differences between what was signed by Duchamp and what was in his vicinity will become smaller and smaller.”

My feeling is that all of this is right and proper. The market price for something should be determined by the market; so long as questions about authenticity are clearly understood by both buyer and seller, there’s no reason to effectively ban trade in these things between educated and consenting adults.

The question of whether a museum should exhibit the questionable Duchamps is a little trickier, since doing so has the effect of ratifying their authenticity and increasing their market value.

The Economist has decided to run Thornton’s piece under the cute headline “Rogue urinals”, with a subhed asking “Has the art market gone Dada?”. The answer, of course, is no: the market has grown up, and doesn’t feel the need to by nannied by self-appointed guardians of an artist’s estate. Would that the same thing happened with Warhol.

(HT: Maneker)

It’s long past time, I think, to introduce a Basel III tag on this blog, since in terms of financial regulation it’s clearly the area where there’s the biggest gap between its importance, on the one hand (high) and the amount of reporting going on around it (very little). If you find good stuff on this subject anywhere, do please send it my way; I feel this is one area where the blogosphere can perform a very useful public service in terms of trying to tease out what’s going on, and why, and what kind of effect it’s ever going to have.

One thing I haven’t really seen is a 30,000-foot view of how Basel III Is being put together, so I’m going to take a stab at it. The key thing to note is that it’s basically being driven by national regulators — not just substantially every central bank, but also people like the FSA in the UK and the alphabet soup of regulators in the U.S. (OTS, OCC, FDIC, etc). In this country, it seems that Treasury, and its subsidiaries, are taking the lead in the discussion; Fed officials are more involved in the details, dotting i’s and crossing t’s when it comes to actually drafting highly complex regulations.

Very few of these regulators, it seems unnecessary to say, are on exactly the same page. Many of them think that they’re doing their own jobs perfectly well, thankyouverymuch, and that they neither want nor need to be bigfooted by overarching rules emanating from Basel. Interestingly, this kind of attitude isn’t only found at regulators with a reputation for fighting turf battles aggressively (yes, Sheila Bair, I’m looking at you) — it’s also found in places like the Bank of Canada, which genuinely did do a good job of regulating its country’s banks in the run-up to the crisis, and which is none too excited to implement a far-reaching fix for something which, in Canada’s case, is not obviously broken.

The other hugely important constituency here, of course, is the banks, which are intimately involved in the discussions at all levels. As a general rule, they want as little regulation as possible, and there’s a good chance they’re going to succeed. The small world of top bankers and regulators gets very clubby very quickly — the revolving door has been spinning between the two worlds for decades, and everybody seems to be friends with everybody else.

The relationship between banks and their regulators is crucial. Ultimately, sovereign countries are sovereign, and banks are always going to end up being regulated by a national regulator. Basel just sets the rules, it doesn’t implement or enforce them. And we’ve seen with Basel II in the US that if national regulators don’t like those rules, they’ll just go ahead and ignore them.

Some banks — the French have been mentioned as one example — seem to be perfectly happy for Basel III to go ahead and be extremely strict, because they have their national regulator captured, and are confident that they’ll be given the freedom to ignore the rules they can’t or won’t comply with.

The American banks, while a bit more worried about Basel III than the French, are similarly unlikely to be hit with its full force. For one thing, Basel III is layered on top of Basel II in much the same way that early versions of Windows were layered on top of DOS: it’s really a form of providing Roman reinforcements to the Greek Basel II forces more than it is a whole new capital-adequacy system. To date, the Americans still haven’t adopted Basel II, and there’s no realistic timetable for when they will; unless and until they do, questions surrounding Basel III are pretty moot.

This is where American legislators come in, too. America has many more small, low-tech banks than most other countries, and they’re really not up to the task of complying with Basel II regulations. (Whether the big, high-tech banks can do it is another question entirely.) It’s OK, under Basel II, to grant small banks an exception to the rules, but US legislators don’t like doing that, because they fear — with good reason — that it will give the big banks an unfair advantage over the small banks, since it seems that Basel II banks have more freedom than their Basel I counterparts.

Now it’s possible that once Basel III is layered on top of Basel II, the small banks won’t mind so much about there being a bifurcated set of regulations. It’s possible, but I’m not holding my breath. And there’s a good chance that we’ll have continued pressure from Congress on regulators, telling them not to impose new hardships on their local community banks, or to create an even more uneven playing field between small banks and big ones than there is at the moment.

Meanwhile, the various banks and regulators are all fighting in Basel for their own pet causes. The British regulators want tight controls on liquidity to stop it fleeing a national jurisdiction, as it did not only in the case of Lehman Brothers but also in the case of Bear Stearns; the Japanese banks want to continue to be able to count the value of their internal software towards their levels of capital. (Seriously.) Treasury, as we’ve seen, is worried about US banks ending up at a “competitive disadvantage” to their European competitors.

The banks in general seem to have done a pretty good job of persuading their regulators that there need to be lots and lots of impact studies trying to anticipate what might happen to the global financial system if certain rules were enforced. These studies have a useful delaying effect, of course, and also help to marshall arguments against any big changes. On the other hand, the regulators do seem to have learned one big lesson from Lehman, which is that they have to be able to independently confirm what the banks are saying to them. If a bank says X, the regulatory response these days is “show me”, rather than simply taking the assertion at face value.

The one thing that seems certain is that the negotiations are going to drag on well past the Basel Committee’s self-imposed deadline of end-2012 for implementing the new rules. And it’s also pretty clear that Basel III is the world’s best hope for fundamentally reforming the amount of systemic risk that can be buried inside the global financial system. But whether it’s ever going to get implemented by regulators around the world in anything like its present form is very far from clear.

The Dunkin Donuts redesign. Bold! — Under Consideration

Why did Wolfram|Alpha drop its iPhone app to $2? Obvs because it now has to compete with the website on the iPad — CNET

Barney Frank Permanently Bans Staff From Communicating With Aide-Turned-Lobbyist — HuffPo

I wonder how many individuals have donated money to ProPublica — Davos Newbies

Mike Konczal, blogging chez Ezra today, finds a revealing letter from Tim Geithner to Rep. Keith Ellison on the subject of why Geithner doesn’t want leverage caps in financial-reform legislation. (The link to the letter isn’t working from Mike’s blog, if it doesn’t work from this one either, then go here first and follow the link from there.)

Geithner, in this letter, is essentially passing the buck when it comes to leverage caps, saying that the Basel Committee on Banking Supervision is the right and proper place to set such things. And his first reason for that is essentially that the chaps in Basel are very clever, while the chaps in Washington, well, aren’t:

Devising and calibrating regulatory capital requirements is a complex endeavor… The regulatory process is not perfect, but it is designed precisely to collect the information and conduct the empirical analysis necessary to calibrate regulatory capital requirements that maximize financial stability at the least cost to economic growth.

In other words, “leave this to the experts, Keith, they know what they’re doing, and if we left it to you, you’d probably bollix it up”.

The problem is, as Mike points out, that this is a very Greek way of doing things, where leverage caps are a fundamentally Roman tool. (The distinction, a very useful one, is Paul Krugman’s). Basel II, you’ll recall, was one of the most Greek pieces of regulation ever, full of highly complex rules which proved utterly useless when the crunch came. Basel III is going to have to be more Roman and more robust, but it’s likely to remain pretty complex, and an extra simple rule or two at the domestic level can’t really hurt.

Geithner continues:

In addition, the financial markets are dynamic, and it is imperative that regulatory capital requirements be able to adapt quickly to innovation and to changes in accounting standards and other regulations. Placing fixed, numerical capital requirements in statute will produce an ossified safety and soundness framework that is unable to evolve to keep pace with change and to prevent regulatory arbitrage.

This just doesn’t ring true to me at all. Basel capital regulations take many years to negotiate, and they emphatically do not “adapt quickly to innovation and to changes in accounting standards and other regulations”. Does Geithner really believe that they do?

Geithner then writes:

Fixed, numerical statutory capital requirements also could hinder the Federal Reserve and other banking agencies as they strive to make their capital requirements less pro-cyclical and explore the costs and benefits of making capital requirements affirmatively counter-cyclical.

Which is all well and good, except he just boasted, earlier on in the letter, about how “the Administration successfully pushed for the G-20 Leaders to endorse a supplementary leverage ratio as part of each nation’s regulatory capital framework for banking firms.” I guess here that he’s trying to draw a distinction between a “numerical statutory capital requirement”, on the one hand, and a “supplementary leverage ratio”, on the other, but he’s not doing a very good job of it — especially when he goes on, later in the letter, to talk about how the U.S. authorities actually want “to design and calibrate a leverage constraint for U.S. financial firms”.

But I think the real meat of the letter comes at the end:

Finally, preserving the flexibility of the Federal Reserve and the other U.S. banking agencies to design and calibrate a leverage constraint for U.S. financial firms is essential to enable the agencies to successfully negotiate a robust international leverage ratio that works in all the major jurisdictions and does not leave U.S. firms at a competitive disadvantage to their foreign peers.

The key word here is “negotiate”. The U.S. is one of many parties to the talks in Basel, and it wants to keep its options open in those negotiations. If Congress has already imposed a leverage cap, then that reduces the American negotiating leverage in Basel.

Personally, I’m not particularly fussed about the degree of leverage that American technocrats have in Basel negotiations — especially when they’re using that leverage with an eye to preventing the “competitive disadvantage” of foreign firms. The idea here, I think, is that if Congress passes a leverage cap, then Basel might impose a slightly less stringent cap, and that U.S. firms would then be placed at a competitive disadvantage because they couldn’t use as much leverage as their “foreign peers”.

But the fact is that we don’t want to return to a world where banks compete with each other on how much leverage they can take on. Sure, it’ll be nice if and when the gnomes of Basel force all the banks in the world to compete on a level playing field. But if they end up giving European banks a bit more rope to hang themselves, that’s no reason to extend the same noose to American banks as well.

Alyssa Katz has a very long piece in The Big Money today about the housing market in Texas:

It’s one of the great mysteries of the mortgage crisis: Why did Texas—Texas, of all places!—escape the real estate bust?

I didn’t think it was a mystery at all: Mike Konczal had a compelling blog entry in April 2009 explaining that it was a function mostly of banning prepayment penalties, along with other consumer protections such as banning balloon repayments, banning negative-amortization mortgages, and banning loans based only on collateral value without regard to the borrower’s ability to repay the loan.

But Katz ignores all of those things, and says that the heart of the matter is another part of Texas law: the bit about Helocs and cash-out refinancings.

Across the nation, cash-outs became ubiquitous during the mortgage boom, as skyrocketing house prices made it possible for homeowners, even those with bad credit, to use their home equity like an ATM. But not in Texas. There, cash-outs and home-equity loans can’t total more than 80 percent of a home’s appraised value… And when a borrower refinances a mortgage, it’s illegal to get even $1 back…

“Delinquency and foreclosure rates are significantly lower in Texas,” boasts Scott Norman, the president of the Texas Mortgage Bankers Association. “The 80 percent loan-to-value limit—that’s the catalyst for a lot of this.”

I’m not convinced. Yes, the rules on Helocs and cash-out refinancings were good things, at the margin. But I don’t think it makes sense to concentrate solely on them, while ignoring all the other consumer protections that Texas implemented in the mortgage space.

The point here is that Texas had a set of strict restrictions on mortgage lending, all of which emerged naturally from an overarching philosophy which was generally suspicious of banks and leverage. In the language of rules vs principles, we can say that the rules were put into place in order to express a relatively simple principle.

As a result, I don’t think that Katz is right when she suggests that simply adopting Texas’s restrictions on Helocs and cash-out refis is an easy and obvious way to prevent future housing bubbles nationwide. As we saw over the past few decades, it’s easy to repeal rules if there isn’t a strong set of principles underlying them. And I think that what we saw in Texas wasn’t one rule having a large effect; rather, it was a large set of rules, including crucially a ban on prepayment penalties, having a large cumulative effect.

In any case, I think that the example of Texas does go to show that rules put into place to protect consumers are likely to help, rather than harm, the safety and soundness of banks. Texas didn’t think that giving consumers access to mandated cheap credit would help them, as John Dugan seems to fear. Instead, the state put limits on how much credit they could take out. And that worked out very well, in the end.

Update: Katz has a really good follow-up on her personal website. Let’s have more, please, of journalists continuing the conversation after their piece appears! She’s less impressed by the prepayment ban than I am, since it applied only to “high cost” mortgages and that was a loophole it was easy to get around. I’m not completely convinced, since there’s no evidence that lenders did manage to get around that loophole in practice. So I still think it was the big philosophy which really mattered here, rather than any individual rule. Also, there are some great comments below, and elsewhere in the blogosphere: see Konczal, Drum, and Avent.

In my continuing attempt to come up with bright ideas for how bloggers can turn traffic, readers, and influence into money, I met this morning with interactive marketing executive Gaston Legorburu of SapientNitro. It was a mildly depressing meeting: he pointed out that many very smart publishers are looking hard into these questions, and that none of them have had a lot of success.

He did make two points I thought interesting. The first is that the key goal for publishers is to get “off the spreadsheet” — to provide some kind of offer to companies which they can’t try to reduce to a CPM equivalent. Sponsored posts, for instance, are not going to be particularly lucrative for bloggers, because they will still be looked at on a CPM basis, and there’s a limit to how much money any company is going to pay when it’s thinking in CPM terms.

Meanwhile, a lot of the ways in which companies try to work with bloggers involve PR-type activities: giving them scoops and media, that kind of thing. That can be good for building traffic and influence, but it doesn’t help turn that traffic and influence into money.

Gaston also noted that the most successful blogs, be they on politics or sports or cars or gadgets, tend to be about subjects that readers get passionate about. When a blog has a high reputation and passionate readers, that’s a potent combination. Interestingly, one of the most successful new finance blogs, Zero Hedge, is exactly the one which has tapped in to a seam of high-passion readers. A high degree of passion often turns into a lot of traffic, which can then be monetized through old-fashioned, low-yielding CPM-based ads. But so far it’s hard to find blogs which have monetized themselves in other ways.

For bloggers, as opposed to blogs, it’s easier: we can get good jobs, or book deals, or speaking gigs, and monetize our reputation that way. But if you’re trying to set up a blog-based for-profit business, so far the only business models which have really worked have been the ones based either on high traffic or on conferences. I hope to see that change. But it hasn’t really happened yet.

Justin Fox sums up the overwhelming majority of economics papers in one sentence:

The basic form of an academic economics paper is a couple of comprehensible paragraphs at the beginning and a couple of comprehensible paragraphs at the end, with a bunch of really-hard-to-follow math or statistical analysis in the middle.

What he doesn’t (need to) mention is the way that journalists, myself included, read economics papers: we generally have no ability or inclination to try to understand the details of the formulae and regression analyses, so we confine ourselves to reading the stuff in English, and work on the general assumption that the mathematics is reasonably solid.

The problem of course is that we really have no basis for making that general assumption: we make it not because we think it’s particularly justified or justifiable, but because we don’t have any choice. What’s more, because we’re always interested in what’s new, and because we have easy access to the internet and little access to expensive journals, we gravitate to preprints at sites like SSRN, rather than papers which have gone through peer review.

I worry about this. The blogosphere is full of interesting debates between people who understand and respond to what everybody else is saying. But the minute that economic papers get cited, the degree of understanding plunges, and most bloggers and journalists are cowed by all those equations into simply assuming that it all stands up somehow.

There’s no easy way around this problem, but at the very least it should probably be much more out there in the open than it is. No one likes admitting ignorance, but the blogosphere would be a better place, I think, if we all did so more regularly, especially when it comes to the nuts and bolts of economic analysis.

On the other hand, maybe the general assumption is justified. Any economists care to weigh in on the frequency with which important problems in an economics paper are buried in the math?

Update: An Econ grad student writes to Andrew Sullivan:

[U]nderstanding the math lets you realize how narrow the analysis is and how stylized the world depicted by the model has to be for its conclusions to follow. As descriptions of the world, they’re metaphors; but without the math it’s hard to show someone where the metaphor holds and where it’s just an analogy not to be taken literally.

Update 2: Robert Waldmann writes:

The sloppy translation of “Pareto efficient” to “efficient” has caused huge damage…

However, things are much much worse than you imagine. It is not rare for the plain English parts of articles published in top journals to contradict the statistical analysis presented in the body of the paper. I absolutely assure you that it is not rare for the abstract introduction and conclusion to state that a hypothesis has not been rejected when the empirical results include rejection of that hypothesis.

Update 3: Mike Mandel says that “the real joker in the deck is not the mathematics, but the data.  Or more precisely, the lack of good economic and financial data in many areas.” Although it’s unclear whether this results in incorrect papers, or just in the absence of good and important ones.