Three takes on David Weigel — Ross Douthat, Foster Kamer, me
Alex Williams on the life and tragic death of Tobi Wong — NYT
Carried interest tax appears to be dead (for now) — WSJ
AIG’s Joe Cassano goes up in front of the FCIC June 30. Mark your calendars! — FCIC
No surprise: Congress includes ban on boxoffice trading — Hollywood Reporter
The UK Times loses half its readers just by forcing them to register: it’s not even charging yet! — Hitwise
In the ongoing debate over whether or not this is the right time for fiscal austerity, everybody seems to be able to agree on one thing: the holy grail is to be able to have your cake and eat it, by reducing deficits while at the same time accelerating economic growth. Germany’s finance minister, Wolfgang Schäuble, calls this “expansionary fiscal consolidation” — but is it a chimera, or does it actually exist?
Mohamed El-Erian, for one, seems to think that such a thing does indeed exist, calling on industrialized economies “to adopt both fiscal adjustment and higher medium-term growth as twin policy goals”. And how exactly are they meant to do that?
To begin to achieve both, countries must quickly implement what were once known in the emerging market lexicon as “second generation structural reforms”…
Squaring the circle of growth and fiscal stability needs policies that focus on long-term productivity gains and immediate help for those left behind. This means first enhancing human capital, including retraining parts of the labour force, and increasing labour mobility. Then new emphasis on infrastructure and technology investment is needed, with greater support for scientific advances that promise increased productivity. Finally all nations must begin an honest assessment of the social frictions coming in the next few years. In some countries (like the US) this means an urgent bolstering of social safety nets.
The experience of emerging economies cautions that such reforms are difficult to design, and politically hard to implement. They often mean short-term pain for long-term gain – the reason policymakers take so long to realise they are the right path.
There’s something missing here: the short-term pain. Everything that El-Erian mentions is politically easy to implement, in that it involves increased, rather than decreased, government spending. So where does the pain come from? Do taxes need to rise? Must spending elsewhere be cut?
Olivier Blanchard and Carlo Cottarelli, at El-Erian’s alma mater, the IMF, have more specifics. Yes, they say, the US will have to raise taxes. And cut spending:
Some cuts should be no brainers: for example, shifting from universal to targeted social transfers would involve significant savings, while protecting the poor. Containing public sector wages—which have risen faster than GDP in several advanced countries in the last decade—will be necessary.
But by far the most important thing is to get a grip on healthcare costs:
Increases in pension and health care spending represented over 80 percent of the increase in primary public spending to GDP ratio observed in the G-7 countries in the last decades. The net present value of future increases in health care and pension spending is more than ten times larger than the increase in public debt due to the crisis.
Any fiscal consolidation strategy must involve reforms in both these areas… Given the magnitude of the spending increases involved, early action in these areas will be much more conducive to increased credibility than fiscal front-loading. And will not risk undermining the recovery. Indeed, some measures in this area—while politically difficult—could have positive effects on both demand and supply.
If you make consistently good fiscal decisions, the effects on a country’s debt ratios can be huge:
Strong growth has a staggering effect on public debt: a one percentage point increase in potential growth—assuming a tax ratio of 40 percent—lowers the debt ratio by 10 percentage points within 5 years and by 30 percentage points within 10 years, if the resulting higher revenues are saved.
Realistically, of course, those higher revenues won’t be saved — unless the government can credibly pre-commit to a medium-term fiscal timetable. And such credible commitments are extremely difficult to design — especially when they’re so contingent on cracking such tough nuts as healthcare spending.
“Obey these commandments,” say Blanchard and Cottarelli, “and chances are high that you will achieve fiscal consolidation and sustained growth.” They’re too polite to say that if you don’t obey their commandments, then the chances are low that you will get what you’re looking for. But that’s got to be the base-case scenario in most of Europe and the US.
Ah yes, the old “politically difficult.”
So all we need is an entire generation of politically-suicidal elected officials at every level of government in the dozen or so largest global economies? (Except China – semi-benevolent dictatorship has its advantages)
I don’t see any problem with that.
It’s looking as though the FT was, thankfully, a little over-hasty when it led today with a big story saying that the banks have won the Basel battle over liquidity requirements. A BIS spokesman (the BIS is the organization hosting the Basel III negotiations) says that weakening liquidity requirements hasn’t even been discussed, let alone agreed to. Yes, it’s likely that the banks will win some concessions at some point, but there’s a long way to go before then.
Joel Clark is hearing similar messages:
Senior committee members have told Risk they were shocked to see reports suggesting the proposal for a net stable funding ratio (NSFR) would be shelved, as they don’t intend to make any firm plans until the next Basel Committee meeting on July 15 at the earliest…
“Leading up to the July meeting, there are a lot of efforts to see if we have an agreement among committee members on the direction forward, but we haven’t got there yet. The committee has not agreed to the elimination of any parts of the proposal, I can say that definitively,” says one US-based regulator and committee member.
Meanwhile, another potentially enormous problem is lurking in the background: the crucial yet brain-numbing issue of accounting standards. Citigroup’s Bill Rhodes tells Global Risk Regulator’s David Keefe that the distance between the U.S. and Europe is widening, and that it could end up being a “deal-breaker”:
“Without globally agreed rules on how to measure the value of bank assets and liabilities and other aspects of the banking business, any other agreements aimed at increasing the resilience of the financial system will be virtually meaningless,” Rhodes, a former Citigroup vice-chairman, told GRR.
Amid signs that the G20’s target of achieving a convergence of accounting rules by June 2011 has already gone by the board, Rhodes says long-awaited proposals on financial instrument accounting from the Financial Accounting Standards Board (FASB), America’s accounting rule-maker, have widened the international split.
Any new regulatory regime is going to have to have banks around the world all following the same rules when it comes to basic things like measuring the value of their assets. Right now, that’s not the case — and while everybody agrees that agreement is necessary, no one seems willing to make the necessary compromises.
Is it too much to hope that Barack Obama will use his regulatory-reform victory to bash some heads on this issue at the G20? Probably yes: the details of accounting standards when it comes to measuring bank balance sheets are really not the kind of things that heads of state tend to talk about at summit meetings. But the longer the current disparity is perpetuated, the less likely it is that there will ever be any kind of an international consensus. Which could scuttle Basel III before it’s even implemented. Let’s hope that someone, somewhere, has the power to force agreement on this issue.
The bad part, with nothing substantive getting done at all, can be seen coming a mile off but is the good part about Basel III that it hasn’t gone quite as badly as it could, yet?
What kind of information will a systemic risk regulator need from banks? Sifma has just commissioned an 86-page study on this question from Deloitte, and the conclusion, though predictable, is sobering:
There is much work to be done, both domestically and globally, in order to address the issue of systemic risks in the financial system… Information gaps are inevitable, however, as noted by the FSB, “These gaps are highlighted, and significant costs incurred, when a lack of timely, accurate information hinders the ability of policy makers and market participants to develop effective policy responses.”
One of the reasons why Basel II was never fully implemented in the US is that many of the banks here simply don’t have the requisite sophistication to implement it. (In hindsight, this was a good thing.) And worldwide, it’s inevitable that many banks will lack the IT infrastructure needed to be able to give systemic-risk regulators the information they need, especially in a crisis.
You can’t regulate what you can’t measure, and it’s likely to prove impossible, in practice, to get all the world’s biggest banks up and running in terms of reliably reporting all of the information that regulators need, in an easily-tractable and standardized form. Inevitably, regulators are going to end up spending an inordinate amount of time regulating the known knowns rather than the known unknowns, like the economist looking for his keys underneath a lamppost.
As for the unknown unknowns, those you just have to resign yourself to, and hope that size, leverage, liquidity and capital-adequacy restrictions somehow keep them in check. Which is why Basel III is so important. Regulators are important, but rules are too.
Felix, you’re perpetuating one of the most toxic ideas in our policy discourse, which is that complexity and imperfect information make intelligent regulation impossible. We will never have perfect information, but we can do better at gathering the most important systemic information and applying our best minds to it, rather than their own individual trading books and year-end bonuses. It is true that lots of organizations would be unable to generate accurate, useful, timely information on a regular basis (see Lehman and the difficulty the bankruptcy court has had even figuring out what the assets and liabilities were); however, this is indicative not of irreducible complexity that must be tolerated, but poor management that must be incentivized to improve or find a new line of work. Strong institutions care about data collection, organization, and access, because the internal leaders need to be able to see this information. To the extent that our capitalists are unable to run their businesses without government hand-holding (and most of them are – see the hasty registration as a BHC and issuance of government-backed equity and debt even at the mighty Goldman Sachs), their regulators need to be able to look over their shoulders at the same high-quality information. The business of banks has become too complicated for us to accept any longer the existence of a systemically important bank that can’t rapidly generate an accurate historical cost and mark-to-market inventory of all its positions and a convincing explanation of any hedging. It’s just not acceptable any more to have this data scattered across dozens of unlinked Excel spreadsheets updated intermittently by hand, as Lehman did. We have had the computer technology to do much better for more than 10 years now, and it’s time to get serious about information management rather than continuing to treat IT departments as vehicles to help the HFT guys shave a few more milliseconds off their trade times.
It’s a great day: financial regulatory reform is done, and not a day too soon. The Consumer Financial Protection Bureau is coming — Ron Lieber has a great overview of how that will change the regulatory landscape — and while banks won’t have to sell their swaps desks entirely, they will need to spin them off into separately-capitalized, small-enough-to-fail subsidiaries which deal mainly on public exchanges. That’s a big and a welcome change.
No one really knows how the bill is going to shake out in reality: the Volcker rule, in particular, remains very vague indeed, and a lot of regulatory heavy lifting is being put onto the untested shoulders of the SEC and of other institutions which have failed many times in the past. But in general the bill makes as robust an attempt as could reasonably be expected to both monitor and ring-fence the kind of things which can cause systemic meltdowns.
The big disappointments on the consumer side were on auto dealers and annuities, neither of which are going to get the regulation they very much need and deserve; it’s also worth pouring out a glass for the late lamented vanilla option. And there are still far too many bank regulators: the OTS goes away, but the OCC remains, along with the FDIC and the SEC and the NCUA and the Fed. It’s a recipe for inconsistency, confusion, regulatory arbitrage, and turf wars.
The most important thing right now, however, is that the White House not sit on its laurels, and that it tries to carry over some of the momentum from the passage of this bill into the negotiation of Basel III, which seems to be falling apart a little. It’s in Basel, not Washington, that the most important constraints on the global banking system are going to be enacted. And pushing the rest of the G20 to get tough in Basel should be at the top of Barack Obama’s to-do list this weekend.
Correct me if I’m wrong, G-bahn, but it might be easier to regulate banks in a climate that won’t take “D’uh, not sure, but how about some more of that taxpayer money?” for a good answer from any banking conglomerate to the question of what they’ve been doing with funds entrusted to them.
It might be easier to regulate banks that aren’t viciously obstinate toward any sort of regulation, and it might be even easier still to get answers out of banks that weren’t outright bribing people who ought to be asking questions not to ask them.
In other words, you could say Obama’s job’s really a piece of cake, as long as you don’t ask where the cake’s coming from.
“Dan Costa had a cool (and different) death grip, which can knock two signal bars off his Palm Pre” — PC Mag
Great moments in BP PR, part 441: Now BP is burning sea turtles alive — TBI
Lenders won’t be happy until borrowers are living on <$400/month, after mortgage payments — Rortybomb
5,000 words on the economics of the iPhone app store — Communities Dominate Brands
Why a “professor of Innovation” thinks McChrystal shouldn’t have been fired — HBR
Wine vending machines – with built-in breathalizer – open for business in Pennsylvania — Penn Live
Photoshop, circa 1872 — MAN
The gold/silver ratio’s new normal: closer to 65 than 50 — Inca Kola News
The NYT bravely takes on Big Sunscreen — NYT
Also check out this story on community banking and “Move Your Money” — a subject you’ve discussed before.
http://www.sanfranmag.com/story/its-a-wo nderful-bank
It also has a nice sidebar on the limited info available to help you decide whether your bank is a good one:
http://www.sanfranmag.com/story/5-ways-t o-case-a-bank-sort-of
Does Renaissance Technologies — arguably the most successful hedge fund in the history of the world — know why it makes as much money as it does? A couple of weeks ago, I thought that it did, after reading a piece about RenTech’s Robert Frey in the FT. One of the fund’s four principles, he said, was rationality – “it can’t just be statistically valid”. You have to employ reason to identify a statistically significant but spurious pattern — which meant, I thought, that RenTech had a common-sense test: it wouldn’t enter into a strategy without having some kind of grip on why that strategy should work.
Ryan Avent, at the Economist, was unconvinced:
According to Sebastian Mallaby’s new hedge fund history, “More Money Than God”, the willingness to explore unexplained correlations is what sets Renaissance apart from other quant funds… The firm’s advantage is in its willingness to trade what doesn’t necessarily make sense…
Mr Frey is obviously in a better position than I am to know whether Renaissance does or does not require some theoretical model to be in place before trading on a signal can begin. But having the guts to trade relationships no one else can understand or explain would be one way to consistently beat the market over a period of two decades.
Scott Locklin, for one, thinks that’s ridiculous. Trading a relationship no one can understand or explain, he says, is “how you lose all your money in two weeks”. True scientists, says Locklin, of the type hired by RenTech, are trained to look for actual rather than spurious correlations, and to be able to tell the difference.
So, who’s right? Sebastian Mallaby would seem to be the best person to ask, here, since he spent a lot of time with RenTech types researching his doorstop of a book. So I asked him, and got this back:
The answer is that it is willing to trade stuff in the absence of intuitive explanations, and that this sets it apart from DE Shaw. But RenTech feels more comfortable when there is an intuitive explanation because that reduces the danger of data fitting errors.
Mallaby even quotes RenTech’s Bob Mercer to that effect in the book (page 302, for those of you following along at home):
“If somebody came with a theory about how the phases of Venus influence markets, we would want a lot of evidence….(But) some signals that make no intuitive sense do indeed work…the signals that we have been trading without interruption for fifteen years make no sense. Otherwise someone else would have found them.”
It’s weird, but if you believe Mallaby and Mercer, it’s true: somehow RenTech discovered a secret formula for making money. Follow the rules it spits out, and you’ll be rich, even though the formula makes no visible sense at all.
Does such a formula really exist? Is it as simple as finding it, keeping it secret, and doing whatever it tells you to do? Does that explain why the Medallion fund continues to do so well, even as RenTech’s other funds seem much more likely to come unstuck? And if such a formula does exist, would there have to be some deep reason why it works, which is just too recondite for mere mortals to work out? We’re entering the realm of the metaphysical here, which might be condign for a book entitled “More Money than God”. Maybe God — and only God — knows why James Simons is so rich, and maybe his formula is the modern-day equivalent of the Holy Grail.
I dunno if you read old comments, but Rich Jim and company used to be codebreakers. Yeah, you could call weird stuff a “potentially spurious correlation that makes no sense.” Or you could know something about information theory and code breaking, and know that your spurious correlation is statistically certainly telling you something about some underlying market mechanism you don’t quite understand. That’s more or less my point about their trading weird patterns. They probably don’t have economic models for what is happening, but I guarantee they have sound probabilistic models.
Not that I’d know anything about this and stuff.
Tom Matzzie, for reasons which are very unclear, has decided that he’s going to wage a media campaign against Steve Eisman — and, by implication, in favor of the predatory higher-education scam artists that Eisman is looking to cut down to size. Matzzie is a credible left-wing campaigner, which makes his current bedfellows very odd ones: he’s essentially defending companies which take billions of dollars from the government and put the onus to repay that money onto “students” who are very unlikely to even graduate, let alone get the kind of job which will let them repay the loan. Eisman’s testimony to the Senate today is compelling stuff, and it’s backed up by the testimony of the OIG’s Kathleen Tighe; judging by today’s hearing, no one outside the for-profit education industry, bar Matzzie, is remotely willing to step up to defend it.
Yet Matzzie insists on trying to do so, on the grounds that Eisman is short the sector:
Steven Eisman wants the regulation of higher education to get rich — not because it will be good for students or the schools. And now this hedge fund manager is leveraging a U.S. Senate hearing to take more short-selling profits.
A short-seller investor will always have a conflict of interest when speaking about a set of companies and that is why it is inappropriate to invite Eisman as an expert witness. He will typically always want to portray those companies in a bad light in order to generate news that would drive down their stock prices. His financial conflict of interest biases his testimony beyond redemption.
Could the committee possibly expect unbiased testimony? No. Eisman has staked a fortune on government action against higher education companies.
A conflict of interest happens when you have two different interests which are in conflict with each other: I see no conflict of interest at all here. To the contrary, I see an alignment of interests: Eisman has realized that if the government does the right thing, then he’ll make money, and so he’s more than happy to show the government everything he’s been able to find out about these companies.
It’s not the job of Senate committees to take testimony only from the “unbiased”, were such people to exist. It’s their job, rather, to find out the truth of the matter and act on it. And if Eisman can help them to uncover that truth, so much the better. After all, it’s not as though Eisman is trying to pull one over on the Senate: he’s entirely open and honest about his short position, and indeed it’s the promise of profits on that position which has allowed him to research the sector in such depth.
Eisman puts it like this:
Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive as the subprime mortgage industry. I was wrong. The For-Profit Education Industry has proven equal to the task.
He’s taking on that industry head-on, in public — which is a dangerous thing to do, as a long history of short sellers before him can testify. I hope this story turns out well for him. And I hope that at some point it will become more obvious why Matzzie is leading the charge against him. I can’t find any record of Matzzie having railed against short sellers in the past; I wonder why he suddenly cares so much about the issue now.
HBC said:
“It’s unlikely that the Senate will lift a finger to impede the malfeasance of Sallie Mae and the united edufraud squad. It was however remarkable that they sat still for what Eisner had to say, and at least somebody said it. They weren’t likely to invite or listen to Ralph Nader, who has absolutely zero conflict of interest… were they? ”
I reiterate, it is NOT about Eisman’s bias! Of course he is biased. It is about manipulation of the stock market and public trust in the Senate. The Senate is bound to never be seen to further self interest or improperly further another person’s or entity’s private interests.
I have never denied that what he had to say was important! it is just sad that it had to come from that source. And if you had read anything I said, I never denied Eiman’s the points! the fact remains his appearance is in his favour and self interest, NOT the students or education or for the good schools.
HBC< There were regulatory changes even before the hearings began, which hopefully do only good things and will not hurt the good schools.
And KID you tire me thinking I didn't read anything before I spoke and that I am uninformed! As a parent I am thinking like one. I did read. AT least I am not just a talking head, spewing a dislike and calling Mattzie a dbag which is really all this thread is about.
(admit it boys… you give a flying crap about education or the schools or you would see his appearance could taint the proceedings and the outcome in a negative way and Kid you said you were done with me many spews ago … what if Eisman isn't entirely correct? then it is ok to destroy them all? I see…)
How many times can Iceland’s banks fail? More than once, it would seem, in the wake of an important ruling by Iceland’s Supreme Court. It regards loans which were disbursed in Icelandic kronur but linked to either Swiss francs or the Japanese yen; the court has now ruled that the indexing is illegal, and that the borrowers need only to repay the loans at their initial interest rate in kronur.
The decision is popular in Iceland, as you might expect: these loans were in many cases the only ones available for big-ticket items like cars, and attempts to defend the banks tend to fall on deaf ears. Here’s Alda Sigmundsdottir:
It is interesting to me that these comments come pretty much exclusively from outside Iceland. I have not heard one single Icelander express this opinion. Personally, I strongly disagree with this view. I did not take out a currency basket loan and have not been subject to the same nightmare as those who did; however, not for a moment do I begrudge those people this ruling, even if it means I have to carry some of that cost indirectly and even though I still have my mortgage, which is indexed to the rate of inflation, and for which there appears to be no correction in sight, unlike that for the currency basket loans.
It’s important to note here that Iceland’s big three (new) banks are now owned by the creditors of the big three (old) banks, including RBS, Credit Agricole, and Deka. So the first-order effects of this judgment are that Icelandic citizens are the winners, while foreign banks are the losers. In the wake of a financial crisis like the one Iceland has just seen, it’s hard to argue with that kind of calculus.
Of course, it’s never exactly a good thing for a nation’s banks to become insolvent, although Iceland’s politicians don’t seem to be able to say even that these days. The result is something close to chaos. A correspondent in the Icelandic financial industry emails me:
The central bank governor has come under a lot of pressure after stating the blindingly obvious yesterday that if the foreign loans are “rewound” back to the original amount then the banks will be in big trouble. The minister of economic affairs (who is incidentally not a politician but a former econ/business professor) is allegedly under a lot of pressure as well and might be replaced after agreeing with the CB governor. Apparently they aren’t agreeing enough with the public who are somewhere between the “let the banks burn” department and the aisle of “everyone in charge hates the public”. At the same time people haven’t really given any thought to the fact that when the consumer protection agency was asked why it hadn’t looked into the possibility of illegality at the time of origination they claim that people weren’t complaining at the time, they were happy with these loans so nothing was done.
The latest move came this morning from the “Association of creditors” who advised people to withdraw their deposits from the banks before the CB governor and minister of banking’s predictions materialized. The connection between an association of people who took loans and people who have deposits hasn’t yet been explained. Among all the turbulence the one thing that you can predict with some conviction is that comments made by any lobby group, politician, or “public” figure is going to be both baffling and flawed. Looks like the road to recovery is going to be a long one.
It’s pretty irresponsible to advocate for a bank run — although since there are only really three banks in Iceland, it’s not obvious what depositors are supposed to do with their money after they’ve withdrawn it. Buy lots of smoked fish and store it in the garden shed, perhaps?
What’s abundantly clear is that Iceland’s banks have failed it to the point at which they have lost the trust of the public — and that the government, including the judiciary, is doing a good job of representing the will of the people. Given that state of affairs, which seems unlikely to change, the problems facing the Icelandic economy are even greater than many think: it’s hard for economies to grow when they have a dysfunctional banking system lacking basic trust in institutions. Especially when no one seems to be expending any effort on finding a solution to that problem.
It is not getting better.
You can see here ,at a proetst yesterday ,when the police arrested one protester in front of the govermnet building.
http://iceland-dori.blogspot.com/
And Bjork , is comlainig to parliement also
Tom Vanderbilt has a great piece in Slate on the high cost of free parking:
Minimum parking requirements are based on a form of “circular logic,” in which planners estimate parking need by looking at the highest levels of parking demand at suburban locations with free parking and no transit options. As a result, the space devoted to cars often exceeds the space devoted to humans (one study found mall parking lots were 20 percent bigger than the buildings they serviced), and the country is awash in a surplus of parking supply. In Tippecanoe County, Ind., for example, a group of Purdue University researchers noted, “[I]f all of the vehicles in the county were removed from garages, driveways, and all of the roads and residential streets and they were parked in parking lots at the same time, there would still be 83,000 unused spaces throughout the county.” And as Shoup argues, there is nothing free about this parking—everyone, even those who don’t drive, pays for it in one form or another, whether the invisible parking surcharge is built into retail prices or the various costs associated with parking-lot storm-water runoff.
For me the biggest and most invidious cost of parking lots is also the most difficult to measure: the way that they kill any attempt at decent architecture, both on the level of individual buildings and on the level of city development more broadly. Your favorite buildings, your favorite cities, and your favorite vacation destinations all have one thing in common: a distinct absence of massive parking lots. So why are these things mandated by zoning regulations across the U.S.? It makes precious little sense, and it’s high time that minimum parking requirements died a long-overdue death.
What makes the whole thing even weirder is that there is no obvious powerful lobby to agitate for the perpetuation of these requirements. Developers would love to be able to determine for themselves how much parking was optimal, and it’s not like Big Parking Lot has a massive presence in Washington; even the automakers don’t really have much of a dog in this fight. So why are these regulations so very persistent?
>Your favorite buildings, your favorite cities, and your favorite vacation destinations all have one thing in common: a distinct absence of massive parking lots.
Sort of. Isn’t Las Vegas and Orlando the top vacation destinations for Americans?
Orlando- Parking lots galore.
Las Vegas- parking structures galore
Caren Bohan has a 3,500-word profile of Larry Summers, in which she gets a lot of Washington insiders to talk about him on the record. The one person who doesn’t do much in the way of talking is Summers himself, who gets quoted all of three times; none of the quotes contains anything substantive. “If you want to do a profile, fine”, he seems to be saying. “Just don’t expect me to say anything”.
But now seems to be the time when key members of the administration’s economic team need to decide whether they’re staying or going — and a clear statement from Summers that he wants to stay is conspicuous by its absence. Last month, David Warsh laid out all the good reasons for him not to. For one thing, according to Harvard’s academic leave policy, Summers needs to return by January 2011. If he doesn’t he’ll lose his coveted position as University Professor — complete with complete freedom as to what and where he teaches, plus the ability to work one day a week for DE Shaw or anybody else, for which he could probably easily continue to pull down somewhere in the region of $8 million a year.
It’s also now clear that Obama will never give Summers either of the jobs he really wants: Treasury Secretary or Fed Chairman. So he’ll have to make do with his ill-defined current role, which gives him lots of face time with a president he genuinely admires. It’s hard to say no to Obama, but Summers is more than capable of making his dissatisfaction known within the administration when he doesn’t get his way:
First, according to informed sources, Summers asked to play golf with the president, which he did four weeks later on September 27. The economic adviser also huffed that he desired Cabinet status, an upgrade that Emanuel granted. Summers got walk-in privileges to Cabinet and other high-level meetings, for example, and he strode among the Cabinet officers who witnessed Obama’s State of the Union address. In addition, the former Harvard University president sought a personal car and driver, which happens to be a privilege that the head of the nation’s central bank enjoys. The chief of staff initially said yes, only to discover that that perk simply does not exist in the White House.
The job of the White House economic team has changed, now: we’re out of the immediate-crisis zone, and into the long hard slog back towards a world of lower deficits and economic growth driven by the private sector rather than by government. It’s painful, unrewarding work. My guess is that Summers will continue to do it if Obama manages to butter him up enough — but that for the time being he’s keeping his options open.
Yeah. In Marlon Brando’s immortal words: “Pass the butter.” But which one is Brando? Summers or Obama?
Lending Club just commissioned a new debt survey from Harris, which has some interesting results: (Update: See below, maybe they’re not interesting after all, and they’re just the result of a badly-worded survey).
Most Americans have some debt (76 percent). Among those who have debt other than a home mortgage, adults 55 and older are more likely to have credit card debt (73 percent) than younger adults 18-34 (60 percent)…
Of those who have debt, younger adults are more likely to have debt other than a home mortgage, with 93 percent of adults ages 18-34 reporting debt other than a home mortgage compared to 83 percent of adults ages 55 and above.
Older adults, however, are more likely to carry credit card debt, with 73 percent of those 55 and older who have debt besides a home mortgage reporting they have credit card debt, compared to 60 percent of their 18-34 year old counterparts.
I’m not entirely sure what this means, but it seems to imply that the young are more financially sensible than the old. It makes sense that 93% of 18-34 year-olds have some kind of non-mortgage debt, given the need for student loans and car loans. But only 60% run a balance on their credit cards, compared to 73% of Americans aged over 55. (Update: See the second update below, this isn’t really true either. Lesson: don’t trust press releases regarding survey results!)
Why are older Americans disproportionately likely to be racking up credit-card debt? I can see why Lending Club commissioned this survey: it’s pretty much a no-brainer for these people to refinance their credit card balance with a plain-vanilla unsecured loan, but precious few of them seem to do so. And I daresay that if you looked closer, a lot of them could even pay off their credit card debt with savings, and aren’t doing so.
Or is there something I’m missing, here? Is there any good reason why a whopping 73% of older Americans should be running credit-card balances?
Update: Many thanks to Beer_numbers, in the comments, who suspected that there might be something fishy going on in the survey: what if it captured people who had credit cards, but not credit card debt? If you pay off your credit card in full every month, you use your card as a transactional payments device, you never pay interest, and it doesn’t make much sense to say that you have credit card debt. Certainly you can’t save any money by refinancing that debt into something with a lower interest rate.
So, what exactly did the survey ask? It was a multiple-choice question:
Which of the following types of debt (aside from a home mortgage), if any, do you currently have? Please select all that apply.
The options were Credit card(s); Auto loan(s); Student loan(s); Health/medical; Major purchases (eg home appliances, entertainment systems); Other; and “I do not have any other debt besides a home mortgage”. If you have a credit card which you pay off every month, how are you meant to answer that question? Do you have a credit card? Yes. So it’s easy to imagine that you’d say yes to the do-you-have-a-credit-card question, even if you don’t, in reality, have credit card debt.
This was, to me, an atrociously badly-worded question. And as such, I think it’s probably best to discount the whole survey, and conclude very little from it. Shame on Lending Club and Harris.
Update 2: I just got this statement from Rob Garcia of Lending Club:
Beer_numbers is correct in pointing out that the numbers seem high. While the numbers do sound high, unfortunately for America, they are accurate and are consistent with other surveys in the market.
The exact question we asked was:
“Which of the following types of debt (aside from a home mortgage), if any, do you currently have? Please select all that apply.”We do believe that the 44% of consumers who selected “credit card debt” as one of the answers to this question are indicating debt that they are carrying month to month. If they were simply indicating that whether they had used credit cards as a payment method then the number would have been much higher.
Where did the 44% number come from, since it’s not anywhere to be seen in the official press release? It turns out that if you look closely, the survey doesn’t say that 73% of older Americans have credit card debt; it says that 73% of older Americans who have debt other than a home mortgage have credit card debt. Chalk that one up to a badly-worded press release.
The actual numbers: of 2,401 respondents, 1,831 had debt; and of them, 1,068 had credit-card debt. For Americans 55 and older, there were 804 respondents, of whom 537 had debt, and 329 had credit-card debt. That’s 41% of the total. For Americans between 18 and 34, there were 719 respondents, of whom 553 had debt (that’s 77%, not 93%), and of whom 307 had credit card debt. That’s 38% of the total. The difference between 38% and 41%, I think, is not particularly significant.
Or maybe I have my denominator wrong, I can’t work out whether I’m meant to use the “weighted base” or the “unweighted base”. Here’s a PDF of the results, have at it. Where’s Nate Silver when you need him?
Also agree with beer#s. The press release didn’t specify what was meant by “carry credit card debt.” We know that historically the percentage of convenience users who do not roll balances and pay interest runs 30-40%. I think it is likely that older cardholders are more likely to have higher income and assets than younger borrowers, and more likely to be convenience users.
When Fannie Mae got taken over by the US government, it became even more of an instrument of state policy than it was before. Today, Fannie Mae and its state-owned brethren (foremost among them Freddie Mac and the FHA) are responsible for funding the overwhelming majority of mortgages in the US: they essentially are the housing market, for most of us. So when it comes to the problems of default and foreclosure, it’s crucial that Fannie Mae be part of the solution rather than part of the problem. Instead, it’s decided to get onto a self-defeating moralistic high horse.
The headline of Fannie’s latest press release says it all. “Fannie Mae Increases Penalties for Borrowers Who Walk Away”:
Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure…
Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments.
This is going to do significant harm, and it’s going to do no substantial good at all. Mike Konczal has an excellent response, as you’d expect: the key thing to note is that Fannie is not proposing the kind of modifications that minimize the probability of redefault — ie modifications which reduce the principal amount outstanding. By encouraging homeowners to modify their loans without reducing the amount they owe or having any chance of having any equity in their homes in the foreseeable future, Fannie is kicking the can not very far down the road, and ensuring that default and foreclosure will be a nationwide problem for years to come.
Meanwhile, when Fannie is presented with innovative ways of keeping homeowners in their homes and saving on substantial foreclosure costs at the same time, it refuses to do so. I make no apologies for the long hyperlink there — this is an important an under-reported story. Rather than do something concrete and positive-sum and helpful, Fannie Mae is happier putting out press releases which talk airily and moralistically about people who walk away from their loans without any visible attempt to define what they mean by that.
Ultimately, of course, this new policy is something of an empty threat in most situations. Is Fannie really going to spend huge amounts of time and money and effort going for deficiency judgments against borrowers who clearly are victims of the housing bust, especially when it’s certain that the money they collect will fail to cover their legal costs? I doubt it. And the refusal to issue a new mortgage to these people for seven years is something of a blessing in disguise, since substantially all of these jingle-mailers will be better off renting anyway.
In fact, it would be quite wonderful if the new Fannie Mae policy created a new class of people who thought that they needed to own their home but who, after renting for seven years, finally work out that it’s a lot less unpleasant than owning, and that maybe they should just continue to do so in perpetuity. It’s not exactly the intent of the Fannie Mae policy, but let’s hope that this misguided idea has some kind of silver lining.
I shake my head too. There are still people who enjoy their homes even more, knowing paying for it isn’t money with wings. (like monthly rental versus monthly payments)
I think Felix, you are feeling for those who can’t afford to make monthly payments but wish to keep their homes? Well in that case, if Fannie is not doing what they can, then you are right … they will make more problems.
But being they were referring to “Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith”, dang straight there should be something done to deter walking away/being able to get future loans it will be en masse zombie land once word gets round they can “do” that!
There will be rejoicing in the corridors of Goldman Sachs tonight: BP has finally overtaken it in the most-loathed company stakes! Yes, Goldman is still plumbing depths rarely seen in the modern era. But BP, even after putting aside $20 billion and grovelling to the president, continues to implode: it’s now hit a level of -47.6 in the latest BrandIndex poll. That’s not far from Toyota’s low point, which was -52.7 at the end of March, but it’s going to be a much harder fight back for BP than it was for Toyota.
It’s amusing to remember that earlier this year BrandZ put out a piece of glossy research saying that the BP brand was the 34th most valuable brand in the world, worth $17.283 billion. (Love the specificity there.) Is it possible for a brand to have negative value? If so, BP has probably achieved that distinction at this point.
Meanwhile, for those of you keeping count, BrandZ put the value of the Toyota brand at $21.769 billion, post-recall, while the Goldman Sachs brand was worth $9.283 billion, up a whopping 25% from 2009. How quickly these things can change.
Also interesting is how the brand value of Toyota is steadily recovering. 6 months later and $30bn higher. BP needs to plug that hole and just have patience.
I view the carried interest tax provision as the canary in the coal mine (or from Wall Street’s perspective, the gold mine).
When basic fee-based for these hedge funds and partnerships is taxed as ordinary income, like everybody else’s fee-based income, then there is a good chance that the “bought and paid for” Congress will actually be looking out for its constituents’ best interests.