Felix Salmon

How Obama wants to cut taxes on million-dollar incomes

Felix Salmon
Aug 13, 2010 15:37 UTC

8-12-10tax-f1-infocus2.jpgWhat happens to people on seven-figure incomes when they pay lower taxes on their first $250,000 income, but higher taxes on the rest, as the Obama administration is proposing? It turns out that they end up paying fewer taxes altogether: $6,349 less per year, on average. (See Thoma, Klein, Marr.)

This is definitely not what I would have expected. For households in the $200k to $500k range I can see that the benefits from the lower-income tax cuts might outweigh the costs from the higher-income tax hikes — but once you’re earning over $1 million, the vast majority of your income is subject to higher, not lower, taxes. And still you end up saving money with this bill!

I’m sure there comes an income point — $2 million? $5 million? more? — where the Obama bill ends up being a net money-loser for the ultra-wealthy. But it would be good to publicize that point, and say that the bill being called a tax hike actually lowers taxes for everybody up to (say) $3 million a year, or whatever it is. That would surely make it harder to oppose, no?

Update: According to scarpy, in the comments, this graph doesn’t show proposed 2011 taxes compared to 2010 taxes, as I naively assumed; instead it shows proposed 2011 taxes compared to what taxes would be in 2011 if the Bush tax cuts expire and nothing is done at all. As he says, it’s important to be clear about these things, and it’s distressing that such clarity seems to be hard to come by.


I think the government should nationalize 25% of all domestic assets and use that to pay off the national debt.

Actually, I don’t. But it doesn’t seem any less confiscatory than a 90% income tax bracket.

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The huge obstacles facing Murdoch’s new tablet newspaper

Felix Salmon
Aug 13, 2010 14:48 UTC

Rupert Murdoch is launching a new national newspaper, which will be “distributed exclusively as paid content for tablet computers such as Apple’s iPad and mobile phones”.

The interesting thing here is the “paid content” part — most iPad news apps are free, but Murdoch is evangelical about the need for consumers to pay for online content.

If this succeeds, it will be against all odds. A few reasons why:

  • There’s not much in the way of an existing brand on which to piggy-back. People know and value the Wall Street Journal, which is why they’re willing to pay for it online. But a brand-new publication doesn’t have any brand equity, so it’s hard to see how News Corp is going to try to persuade people to pay for it. I imagine that it’s going to have to be free at the beginning, or for some kind of trial period.
  • The new newspaper will be devoted to “offering short, snappy stories that could be digested quickly”. It’s hard enough getting an audience for that kind of thing when it’s free, since there’s a huge amount of competition in the space, much of it from low-cost aggregators who don’t even have a newsroom.
  • This content doesn’t help people make money, it isn’t porn, and it isn’t a game. Which, again, makes it much harder to charge for it.
  • The target audience is young, and therefore social. But apps make it hard to share content, and paywalls make it almost impossible; put the two together, and there’s pretty much no way that any of the content here can be shared or go viral.
  • There could be a fight with Apple, which is a bit capricious when it comes to the publishers who want to give apps away for free and then charge for subscriptions within them. (As opposed to charging for the apps themselves in the iTunes App Store.) Time Inc is having big problems on this front, and although the WSJ iPad app seems to be OK in the eyes of Apple, that’s no guarantee that this new product will be able to use the same model.
  • More generally, WSJ users are OK with the idea of charging three-digit sums to their credit cards; the broad mass of people who buy apps, however, are much more comfortable with buying things for less than $10 directly from the App Store. How to turn that kind of behavior into a regular income stream for a news organization, with subscribers paying regularly to retain access to the content, is a nut no one has yet cracked.

My feeling, then, is that this is a project born more out of ideology — “people must pay for news online and on tablets” — than out of any particularly compelling business model. I’d never be foolish enough to bet against Rupert Murdoch on anything. But I will be very, very impressed if he manages to make this work.


it’s an ideology born by an old technology, when the fogeys die off Murdoch’s Newsltd will disappear into the desert dusts of South Australia from whence it came. Right wing claptrap is not premium content. Every right wingnut and global warming denialist has their own blog now, and some are subsidised by big oil, why should I pay for something from Murdoch given so freely away by others?

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Regulatory arbitrage of the day, CRA edition

Felix Salmon
Aug 13, 2010 12:15 UTC

National People’s Action have a fascinating report out today about America’s big four banks — Citi, JPM, Wells Fargo, and Bank of America — and how they all seem to be able to easily obtain “outstanding” ratings on their CRA exams.

The CRA, of course, is the Community Reinvestment Act, and it exists to ensure that America’s largest banks are doing a good job of providing the same (and not higher-priced) products in poor areas as they do in rich ones. Regulators have been examining fewer banks of late under the CFR, but one thing remains constant: the number of “outstanding” ratings is always very small as a percentage of the whole. And yet all four of the big banks always seem to be able to get that rating. How come?

It turns out they’re using two tricks, neither of which is available to most smaller banks. First, they do most of their lending to poor people outside what’s known as their key “full-scope assessment areas”, on which they’re mainly judged. Taking the four big banks as a whole, just 19.2% of their high-cost loans to low and middle-income borrowers take place in these assessment areas.

wells.tiffAnd secondly, they use subsidiaries and affiliates to do their high-cost lending to poorer Americans, which aren’t included in the CRA exam. These subsidiaries account for just 17.1% of the loan volume for the big four banks, but 45.5% of the high-cost loans.

In other words, if you get a mortgage from Citimortgage or Citifinancial rather than from Citibank, you’re not going to get noticed in Citi’s CRA exam. And at Wells Fargo, the list of affiliate mortgage lenders goes on for the best part of three pages. A snippet, just to give you an idea, is at right.

Add it all up, and it’s pretty obvious that the way that the CRA is administered has signally failed to keep pace with the way that banks lend. As the report says:

The intention of the Act was to cover the mortgage lending industry. In the mid-1970s that meant depository banks originating mortgages from a network of branches. As a result, the CRA exam conducted by a banking regulator grades only that lending that takes place in a bank’s predetermined “Assessment Areas” that are based on where the bank has physical branches.

People don’t get their mortgage from their local bank branch any more, and it’s silly that the CRA is still predicated on the idea that they do. If the CRA is to have any meaning going forwards, it has to assess the actual lending that these banks do, rather than a tiny subset thereof. Let’s hope the Consumer Financial Protection Bureau is significantly savvier than what’s on show in this report.

Update: AABender1, in the comments, says that the CRA is not, as the report implies, the main tool by which the US government tries to prevent discriminatory lending, redlining, and the like. It’s a good point, which I’m a bit annoyed that I missed. But insofar as a CRA “outstanding” rating has any value at all, it should probably take such things into account.


I wonder about the extent to which this is an unintended effect of CRA itself. At the time it was written, the assumption was that the core retail activities of a bank would take place through its branches. So it imposed standards based on the locations of those branches – to ensure that local deposits would be used to fund local lending.

When big national banks began to pursue subprime lending as a potential profit center, they might have opened branches in low- and moderate-income neighborhoods. But that would have extended their full-scope assessment areas, making it harder to hit CRA targets. Even worse, it would have undermined the whole point of the expansion – to muscle in on the highly-lucrative market for subprime products. They quite simply could not have originated a sufficient supply of subprime loans to meet demand while also complying with CRA. So they worked instead through affiliates and subsidiaries, which, unfettered by CRA, were free to steer a great many of their customers who had the credit to qualify for prime products into subprime loans. Problem solved.

Of course, this has a variety of perverse effects. For one thing, it provided a strong disincentive for banks to extend their services to the unbanked via the construction of new branches. For another, it placed much of the lending out of the regulatory spotlight, if not out of the regulatory purview entirely. And it set up a separate-but-not-equal lending architecture, in which the same financial behemoths had two parallel lending systems: one for residents of fairly homogenous and relatively affluent communities, and another for more heterogeneous areas, including their affluent and successful residents.

It’s neither an argument for more or less regulation. I think it’s an argument for more unified financial regulation. Crafting specific regulatory acts and agencies for specific functions has its benefits, but it never keeps pace with change. Having regulators with broad purview, who can rapidly retask to account for unfolding change, makes a good deal more sense. Now if only we had a reliable way to actually make them do that…

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Felix Salmon
Aug 13, 2010 05:50 UTC

Teenager-backed bonds — Alphaville

The Problem With Financial Journalism — HuffPo

“Somehow, so far, Apple has gotten away with it, maybe because nobody’s even realized this feature is in there” — NYT

“Vaughn Walker is something special, and the way he has worked this case is simply a work of art” — FDL

Treasuries are risk-free up to 2 years. Bunds are risk-free past 10 years — Alphaville

The UK joining Schengen is a no-brainer, and should have happened years ago. But the Tories’ll never do it — Economist

“The negative TIPS yield is a rational reaction to the lunatic casino that has infested every market in the world” — Self-evident

Beautiful charts: World Population by Latitude/Longitude — Kedrosky

Slater’s tantrum “as the inevitable nadir of a decade-and-a-half-long deterioration in passenger stowage” — Gawker

Gridlock Sam’s great op-ed on the idiocy of NYC bridge tolls — NYDN

Comedy pays better than drama — Yahoo

Six essential questions about the deficit, Wall Street and Washington — Nieman Watchdog

Ryan Avent has a very smart take on the unemployment issue — Economist

Quants: The Alchemists of Wall Street – a good Dutch doc — YouTube


Quants: The Alchemists of Wall Street 26:25 was very telling about ‘changing the maths to make it look less risky’ and hide risk.

37:36, and how to modify the speed of light?

Thanks for adding that… it interesting.

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The limits of government debt statistics

Felix Salmon
Aug 12, 2010 21:13 UTC

The Economist finds some interesting common ground between Larry Kotlikoff, who thinks that America’s fiscal situation is worse than Greece’s, and Jamie Galbraith, who thinks that it’s really nothing to worry about:

In some ways, these unconventional thinkers resemble each other more than the less striking birds in-between. Neither thinks that official debt figures mean all that much. Neither thinks the government’s balance-sheet can be understood on its own, without reference to what the other spouse is up to.

Messrs Galbraith and Kotlikoff both worry above all about the distributional effects of taxing and spending. Mr Kotlikoff fears that fiscal entitlements allow the elderly to make outsize claims on the young. He denounces “gerontocracy” and “fiscal child abuse”. Mr Galbraith fears that in the name of fiscal restraint, taxpayers will shirk their responsibility to the country’s most vulnerable citizens, who rely on public pensions and health care. For both, then, the chief fiscal danger is inequity not insolvency, as normally understood. The question is not whether the government can pay its bills, but who pays what, when.

I’m inclined to agree with them both, if that’s possible — with the caveat that looking at a lot of historical debt figures, as Reinhart and Rogoff have done, can be helpful (if not very helpful) in terms of working out when countries are likely to run out of fiscal rope.

There’s clearly no urgency to pare back US government finances today, given that the government can borrow for 10 years at just 2.75%, and for 2 years at just 0.55%, and given that the government is still performing an important role as borrower of last resort. On the other hand, if the problems identified by Kotlikoff aren’t considered urgent, they’ll never be addressed.

For the time being, I’m with Galbraith on this one. We’re trying to steer one of the world’s most important economies onto a path of sustainable growth: let’s not get distracted by contentious long-term fiscal arithmetic for the time being.

At some point, when the nation’s interest payments really start to hurt, we’re going to have to start looking at those deficits-as-far-as-the-eye-can-see, and wondering whether addressing them in a structural and strategic manner might be less painful, in the long run, than being forced into drastic measures at an unforeseeable time in the future. But as Kotlikoff and Galbraith would probably agree, the key thing to look at is cashflows between various segments of the population and over time, rather than the simple headline debt or debt-to-GDP figure.


Last I heard, they were targeting an average maturity of 6-7 years, longer than the historical norm of 5 years. Not sure where to find this data, however.

Wonder how much of a market they could drum up for 30-year fixed-rate debt without sending interest rates sky high? There is huge demand for short-term stuff right now, which is perhaps why they have issued so much of that to cover the recent deficits.

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Why museums need more art lending

Felix Salmon
Aug 12, 2010 18:32 UTC

Eli Broad hasn’t given up on his rallying cry, which I first wrote about two years ago:

“If 90% of your work is in storage you need to begin lending it to other institutions. Get art out of the basements,” he said at the conference, which took place in his hometown of Los Angeles at the end of May. He then told The Art Newspaper: “With all the money being spent to store and conserve work, it doesn’t make sense economically or morally not to share it with the largest possible audience.”

Lacma on Fire has a very funny response, explaining that museums have a finite amount of shelf space, but Broad sounds as though he’s running Hilbert’s hotel.

Broad talks as if everything in his 2000-piece collection can and must eventually be on permanent view. The art that’s not in his planned museum will be lent out, notwithstanding the fact that this would require the equivalent of about ten Whitney Museums, sitting empty out in the hinterlands.

The bottom line is that there is more art than museum space to show it. Thus museum installations, particularly of contemporary art, are ever-changing and (to use the fashionable term) “curated.” What’s so bad about that?

This is true, but at the same time I’m sympathetic to Broad’s cause, even in the wake of his rather self-aggrandizing decision to set up his own museum. So where’s the hole in LoF’s argument?

There are two, I think. Firstly, it would be great if museums could carefully curate shows, using the vast quantity of unexhibited work in storage at museums as a glorious resource from which they could pick and choose as they liked. Unfortunately, that’s not how the world works in reality.

In the real world, organizing loans is a huge pain, and museums tend not to do it unless they have to or unless they’re organizing some big blockbuster show. Museum curators at would-be borrowing institutions tend not to be very enthusiastic about navigating the enormous amount of politics and paperwork involved, and administrators at would-be lending institutions are no more excited about trying to put in place all the protections needed for lending out their art. It’s so much easier to just keep it stored in their own basement.

One complicating factor here is the fact that museum funders tend not to give any credit for shows elsewhere which use artworks borrowed from the museum they support. Funders want to see the crowds and the shows at their museums, not someone else’s. And so they have little enthusiasm for using their museum staff’s time to help glorify some other institution. As a result, the system of inter-museum loans is based on all manner of mutual back-scratching, on the idea that the loaner is doing the borrower a favor, which should at some point be repaid.

The sad consequence is a very large number of shows culled only from a single museum’s permanent collection. Such shows are nearly always pretty thin gruel, unless they’re at a one of a handful of super-high-end museums. Smaller museums, in particular, simply don’t have the permanent collections needed to be able to curate great shows.

So having foundations dedicated to lending out art is a really great idea, I think. Such foundations could and should work proactively with museums who might benefit from borrowing their art, and make it as easy as possible for them to do so; the result would be much better shows at small and medium-sized museums around the country.

What’s more, while there might indeed be “more art than museum space to show it”, the situation is slightly different in Broad’s field of very expensive contemporary art, where museums simply can’t afford to acquire works by today’s biggest artists. (Nor might they want to, at these prices, given how uncertain it is that the works will turn out to be particularly important.) At the same time, many museums would love to be able to put on shows of such artists, without necessarily wanting them in their permanent collections. They can get a fair amount of cooperation from the artists’ galleries, but entities like the Broad Foundation would surely make life a lot easier still.

Meanwhile, there’s no harm, and potentially quite a lot of good, when large-scale museum benefactors like Broad encourage museums to start lending out their collections more. Philanthropists with their eye on the health of art museums as a whole, rather than individual institutions, are a good thing. Even when, as in Broad’s case, they retain a certain degree of fallibility and ego.


Why stop at lending to museums? Why not lend them out to the general public?

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Goldman’s gym tax

Felix Salmon
Aug 12, 2010 17:24 UTC

Social Workout has photos from inside Goldman’s spanking-new 54,000-square-foot gym, but leaves the most interesting factoid in the comments. It turns out that being a Goldman employee might be necessary to gain entrance to the gym, but it’s not sufficient: you also need to cough up a monthly membership fee in order to gain access to those standard-issue Russell Athletic t-shirts and gray shorts. If you’re a managing director or higher, the fee is $132 a month; vice-presidents pay $75 a month; and everybody else pays $51 per month.

I’m wondering what the logic is here — is it a Pigovian tax aimed at minimizing the number of healthy employees? Is it an attempt to stop the unfit from complaining about having to cross-subsidize those who work out? Is 54,000 square feet not enough for the whole company, and the charge an attempt to keep numbers down? Or is it some misguided attempt at saving corporate cash, from a company which spent $2 billion on the shiny new building, including $5 million for a Julie Mehretu mural? All very odd.


The unfit and those who belong to other gyms or prefer to work out outside. It doesn’t seem unreasonable for this not to be free.

There’s also the standard behavioral reason, that asking someone to pay for something will make them more likely to actually use it than if they don’t. Not that Goldman traders are anything but hyperrational.

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Getting the housing market back on track

Felix Salmon
Aug 12, 2010 14:10 UTC

David Streitfeld’s NYT piece on home-equity defaults is so aggressively anecdotal, rather than quantitative, that he even says at one point that “the amount of bad home equity loan business during the boom is incalculable”. I really don’t think that’s true: a lot of very smart analysts have done a lot of pretty accurate work on that front. And Streitfeld himself belies the statement by including a pretty illuminating chart with his story.

streit.tiffThe key thing in this chart isn’t the drop from 2009 to 2010, which is a function of the fact that the 2010 data covers only the first quarter. Rather, it’s the fact that first mortgages actually account for a minority of home-loan write-offs, and that home equity lines have accounted for significantly more, in the way of write-offs, than second mortgages.

Which brings me to the first of three op-eds that the NYT has published today on the subject of Frannie and the FHA. Here’s Katherine Stone:

Until recently, most Americans paid for their homes through 30-year self-amortizing mortgages, in which interest and principal are paid at the same time. These work well as long as homeowners have stable, long-term jobs that enable them to regularly make their monthly payments.

But these days such careers are increasingly scarce. Therefore, any effort to recover from the crisis must include more flexible mortgages that take today’s employment landscape, with its frequent job-hopping and episodic unemployment, into account.

The problem here is, as a glance at Streitfeld’s chart will show, that “more flexible mortgages” are also more dangerous mortgages. Home equity loans had all the flexibility you could possibly want — and they failed disastrously.

What’s more, Stone doesn’t actually want to get rid of the 30-year fixed-rate mortgage. She just wants to layer gimmicks on top of it: an option to pay only interest if you’re laid off here, an escrow account available in the event of unemployment there. These things don’t really make the mortgage more flexible, they just make it more expensive for the borrower, who has to pay either for the option (which he might not want or need) or else has to pay directly into the escrow account, which would be a sure-fire money loser due to paying an interest rate lower than the rate being charged on the mortgage.

Bill Poole, meanwhile, has a plan which would make mortgage rates rise much further still, assuming that mortgages were available at all:

Fannie and Freddie could not be shuttered immediately; they are too large. A sensible transition plan would have them stop buying new mortgages, and their portfolios would decline as the mortgages they own are paid down. Within 10 years, the portfolios would shrink to insignificance…

In 10 or 15 years, the companies would be gone, closing a chapter in American financial history that enjoyed considerable success but ended very badly and at great taxpayer cost.

The fact is, as John Carney says in his own op-ed (the most sensible, but also the narrowest, of the three), that the FHA and Frannie now back more than 95 percent of new mortgages. If they simply stopped buying new mortgages, the entire housing-finance business in the US would come to a screeching halt. No one could buy, no one could sell, and home values would be entirely hypothetical for years.

Yes, it’s possible to slowly build an entirely private system of mortgage lending. But you can’t do that overnight, as Poole seems to think. And he’s completely wrong, too, when he says that “if the home finance market were fully private, then it would bear the losses from its own mistakes in pricing and insurance”. Not true: when there’s a major housing crash, the government ends up bailing out the lenders whether they’re public or private. Look at Ireland.

So let’s embrace Carney’s idea of forcing lenders to retain 5% of whatever they originate, even when they sell their loans to the FHA or Frannie. And let’s try to get these state-owned behmoths out of the mortgage business in a controlled and non-chaotic manner. But let’s not do anything drastic. The last thing we need is another housing crisis, before the current one has even finished playing out.


History has proven that the private sector will risk ANYTHING for a profit. If they stick to the basics, mortgages can be written safely and profitably. You just need to follow sensible underwriting standards, require a substantial downpayment, and don’t bundle/slice loans in the hope that you can turn cheap meat into filet mignon.

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Felix Salmon
Aug 12, 2010 04:20 UTC

Jeff Skilling’s legal fees might reach $150m, while Lehman execs are racking up fees at a rate of $5m/month — NYT

Wells Fargo Must Pay Consumers $203 Million in Overdraft Case — Bloomberg

Today’s Market Action As Predicted By Jim Cramer — ZH (forward to 3:10)

$220 Million London Penthouse Now World’s Most Expensive — Luxist

The endangered terraced verandas of Kashgar — Flickr

Prisoners of Debt: an hour-long documentary on the 1982 debt crisis — NFB

“Hedge funds now account for 20% of trading volume in the Treasury bond market, up from just 3% in 2009″ — FT

“Every sommelier has a pet wine & wishes more guests would drink it. These wines are intentionally well-priced” — Atlantic

Now THIS is how to sell newspapers — Twitpic

“Greek Statistics” makes Schott’s Vocab — NYT

The deterioration in CMBS numbers here prolly says more about MBIA than about CMBS — NYT

Murakami at Versailles — Dezeen


You made me listen to Cramer and now my ears are bleeding! Not nice Felix!

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