Felix Salmon

The case against QE

Felix Salmon
Nov 15, 2010 16:12 UTC

An impressive group of right-leaning technocrats has signed an open letter to Ben Bernanke, objecting to his adoption of QE2. And it’s hard to disagree with what they have to say:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

It seems clear that the G20 meeting in Seoul achieved absolutely nothing largely because of the unfortunate timing of Bernanke’s QE2 announcement. It overshadowed everything else, it put Obama on the defensive, and it made it impossible for the G20 to agree on anything. I don’t think that the FOMC anticipated the volume of the international criticism of U.S. policy, and that alone is reason to reconsider what they’re doing. After all, if a policy designed to increase confidence only serves to increase mistrust, it probably isn’t working.

QE isn’t necessary: there’s no immediate and obvious harm which will befall the U.S. if it’s discontinued. If it doesn’t increase employment or decrease unemployment, there’s certainly no reason to do it. And so far the evidence that QE has any effect on employment is slim at best. So yes, there’s a case to be made that QE should be discontinued.

The letter continues:

We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

This is surely true, and I doubt that anyone on the FOMC would disagree. Indeed, the Fed’s own response to the letter explicitly agrees with this point:

The Chairman has also noted that the Federal Reserve does not believe it can solve the economy’s problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators, and the private sector.

But back to the letter:

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

Markets have definitely been distorted by QE2. Here’s a screenshot from Reuters’s brilliant interactive graphic:


If these assets were to fall as much as they’ve risen in the past couple of months, the effect on markets could be devastating. And what’s particularly noteworthy, here, is that the main asset that the Fed is targeting—long-dated Treasuries—is pretty much the only asset which hasn’t moved at all. Bernanke’s blowing bubbles, here, and there’s an increasing chance that it’s all going to end in tears.

The letter concludes:

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

I’m inclined to agree. In theory, QE can help jump-start U.S. economic growth, which in turn will help the rest of the global economy. But when no one in the rest of the world seems the slightest bit grateful for the Fed’s help on this front, something is clearly amiss.

The Fed’s job is not to try to replicate a fiscal stimulus by monetary means, and global policymakers don’t believe that the Fed is truly independent of the U.S. government. (I don’t believe that either.) QE is an experiment, and like all experiments it can go wrong. At the very least, the Fed should have some clear criteria by which they can determine whether it is working or not, and should commit to unwinding the program should the latter be the case.


@JDB —

I sort of feel like with the standoff we have between right and left, plus with Bernanke at the Fed, we can actually get exactly the fiscal stimulus you are talking about.

The right is fiercely against tax increases of any kind. The left is fiercely against spending cuts of any kind. Witness its almost complete unwillingness to take that tiniest of baby steps, addressing earmarks.

So where does that leave us? With a huge *already existing* unaddressed structural deficit that is paid for directly out of thin-air fed money, day after day, year after year until the bond market vomits and goes into siezure. That is as though there is a giant Friedmanite new-money-financed tax cut every year until ________.

QE looks bad at the moment, but when there is a crisis of some kind (I think a bond crisis, but maybe a crisis in risk assets a-la March of 2009) a further round or two of Q.E. won’t meet as much protest.

That’s my view and so I shun bonds.

Posted by DanHess | Report as abusive

The bizarre decision to kill Newsweek.com

Felix Salmon
Nov 15, 2010 15:38 UTC

Mark Coatney has joined at least one Newsweek.com staffer in presenting a very cogent case for saving Newsweek.com on Tumblr. Their points about SEO, and about the long tail of Newsweek.com’s archives, and about the relationship with MSN, and about the relationship with advertisers in Newsweek magazine, are all well taken.

But if you take a few step backs the decision is, if anything, even more depressing.

For one thing, it demonstrates a clear failure to understand the web. Tina Brown is a creature of print, not of the web; Ryan Tate, for one, has chronicled her difficulties making the transition from the former to the latter. In the world of print, as Coatney says, it’s conceivable that you can take one magazine’s readership and transfer it to another—think the way that Life‘s readers were steered to Time, or Gourmet‘s to Bon Appetit. But you can’t do that online, for reasons which Coatney outlines well and which the new bosses at Newsweek don’t seem to grok at all.

More generally, there’s a clear and obvious move among online media companies towards creating coherent sites for clearly-defined audiences, rather than attempting a one-size-fits-all mush. AOL has lots of sites at lots of different domains, as does Gawker Media and even the New York Times and Washington Post companies. The Newsweek Daily Beast Company is coming into existence owning two valuable and major websites with clearly distinct audiences. There’s almost certainly a strong case not to try to build a third, while Newsweek is still in turnaround mode. But equally it’s idiotic to try to cut those two sites down to just one.

Finally, it’s worth remembering Jack Shafer’s seven stages of press moguldom:

In securing Brown as editor, Harman is now entering Stage 2 of the seven stages through which all vanity press moguls pass after buying a faltering magazine or newspaper: The owner replaces the editor with a journalistic star, redesigns the publication, expands budgets, moves to better quarters, and thinks about turning the publication into a media empire. (Harman completed Stage 1 when he bought Newsweek, announcing that quality, not profits, are the immediate goal.) Stage 3 is always the hiring of big-name writers, which I’m sure Brown is doing at this exact minute. Stage 4 is grumbles from moguls, in this case Harman and IAC’s Barry Diller—owner of the Beast and now Harman’s 50-50 partner in the Newsweek Daily Beast Company. They complain that the magazine is not a charity and order cutbacks. In Stages 5, 6, and 7, the star editor gets sacked, a pushover is hired as replacement, the moguls strip the publication down to its chassis and wheels, and they look for a new sucker to buy the publication.

The point here is that you don’t amputate one of your most highly-regarded limbs in Stage 2 or Stage 3; that kind of thing doesn’t come until Stage 7. But that’s what’s going on here—the only colorable reason to close Newsweek.com is a budgetary one.

The really bizarre thing, of course, is that on a budgetary level Newsweek.com is the cheapest and most efficient part of the entire organization, losing less money and providing much more bang per buck than either TheDailyBeast.com or the print edition of Newsweek. It also has more readers than both of them put together.

The summary execution of Newsweek.com makes sense only as a power-grab by Brown, and a sign that she somehow thought of it as a threat rather than a source of ideas and readers. I understand that her job is to reinvent a failing magazine rather than to make friends with the chronically underfunded staffers at Newsweek.com. But this decision makes no sense at all.

Update: I agree with Rafat Ali, who says he suspects the DailyBeast Newsweek people don’t even know what “shutting down a website” means or entails. Which only increases the likelihood of a disaster like what happened when the NYT — normally quite a web-savvy company — shut down IHT.com and broke all of its permalinks.


“We’ll just redirect all the permalinks!” Sigh, I just wish I understood how reasonably smart people can be so stupid. This is truly game over for the Newsweek brand.

Posted by Curmudgeon | Report as abusive

Is QE2 already working?

Felix Salmon
Nov 15, 2010 14:29 UTC

Bloomberg’s Liz McCormick has an interesting take on QE: “Options Showing Quantitative Easing Working Before It Begins” is the headline on her piece, which concentrates on an obscure indicator known as “payer skew.”

Payer skew is an indicator which goes up when bond yields are rising, and goes down when they’re falling. When payer skew is high, as it is now, it’s an indication that markets see more risk that bond yields are going to continue to rise than they see risk that yields will fall.

But it’s a stretch, I think, to conclude that the rise in payer skew means that QE is working. And it certainly can’t be working before it even begins. After all, QE2 has already begun, with the purchase on Friday of more than $6 billion in bonds maturing between 2014 and 2016.

It seems to me that what we’re seeing in the payer skew numbers is the downside of QE, rather than its intended consequence. The stated aim of QE, after all, is to bring down long-term interest rates, and that isn’t happening at all:

Yields on 10-year Treasuries, a benchmark for everything from corporate bonds to mortgage rates rose last week by the most since December, surging 26 basis points, or 0.26 percentage point, to 2.79 percent.

Meanwhile, the problem with QE is that it maximizes the amount of volatility, uncertainty, and tail risk in the markets generally and the bond market in particular. Since businesses invest when they have certainty about the future business environment, QE risks exacerbating the very problem that it’s intended to solve.

My take, then, on the payer skew figures is that they’re an indicator of increased risk and nervousness in the bond markets. While traders don’t yet expect higher inflation outright, the demand for hedge against falling bond prices is definitely rising. There’s nothing here to encourage businesses to take out long-term loans and invest the proceeds in new permanent jobs.

So I can’t imagine that anybody on the FOMC is looking at the rising payer skew numbers as an indicator that QE is working. After all, the ultimate aim of QE is to create jobs. And I can’t think of a single reason why higher payer skew means more job creation.


Isn’t the goal of QE to jump-start the economy by bringing down long-term *real* rates? And isn’t the expectation that it will do so by increasing inflation? After all, when there is deflation with low nominal rates, that is a high real rate.

And as payer skew is about nominal rates, this seems to be working as intended, if it is a strong signal at all.

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Felix Salmon
Nov 15, 2010 05:39 UTC

Time change. You lose, you gain. Then all at once the frozen hours melt out through the nervous system — FT

My sister’s final passage to New Zealand — Smiling Footprints

“After paying $425 to the Better Business Bureau they received an A- grade for a non-existent company called Hamas” — Consumer Reports

The new joint venture will kill off Newsweek.com — MediaWeek

Buy a truck, get an AK-47 free — Fox Orlando

Vikram Pandit Has No Clothes — Baseline Scenario

The Campaign Against Photographs of Dead Bodies — Awl

The NYT’s attempt to fix the budget

Felix Salmon
Nov 14, 2010 17:14 UTC

In the wake of his excellent rent-vs-buy calculator, David Leonhardt has helped create another interactive tool, this one called “You Fix the Budget“. He writes:

The New York Times has conducted its own analysis of the federal budget, but with a different final product. Rather than making recommendations, we are laying out a menu of major options, so that readers can come up with their own plan. We have received help along the way from the deficit panel, from Congressional and White House aides and from liberal, conservative and centrist budget analysts.

It’s a good idea in theory, and I even played the game myself, solving the deficit with a mixture of 69% tax increases and 31% spending cuts. Still, I’m not a huge fan of the way it’s been executed in practice of the way that the NYT makes it both too easy and too difficult to “win” the game.

The too-easy part comes on the spending-cut side. The goal is to reduce the 2030 shortfall by $1.355 trillion, and the NYT includes an option under “health care” which simply says “cap Medicare growth starting in 2013″. By clicking on this box, which “would cap the Medicare growth at GDP growth plus 1 percentage point, starting in 2013″, you at a stroke get $562 billion of savings.

You can win the game without clicking on that box — I managed to do it — but of course the game becomes much harder if you deny yourself that easy and fanciful trick. But it is fanciful: there’s simply no credible way to enact that kind of hard cap on Medicare expenditures, in a world where the over-65 population is growing fast as the Baby Boomers retire, where that generation is also living longer than ever, and where end-of-life healthcare is becoming increasingly expensive across the board.

The too-hard part comes on the tax-hike side, where the options are far too limited. For instance, you have two choices when it comes to taxes on capital gains and dividends, both of which cap that tax at 20%. Can’t I opt to raise that tax to the same level as the income tax? Even the deficit commission does that.

Similarly, for the payroll tax, the most you can do is raise the ceiling so that it covers the same 90% of all income that it covered at inception; you can’t raise it any further than that, or abolish the ceiling entirely.

And on the mortgage-interest deduction, there’s no option for abolishing it, as I would love to do; instead all you can do is swap it out for some lower-cost credit.

Most importantly, the options for new taxes are extremely constrained. The carbon tax is relatively modest, raising $40 billion in 2015; I’d like to see something significantly larger — ideally a cap-and-trade system with credits which were fungible with Europe’s system — which would raise more money and include significant rebates for people in the bottom half of the income distribution.

The bank tax is also a good idea, but again it doesn’t go far enough, since it hits only the largest banks: why not add the option of a Tobin tax, too, which would raise revenue from financial transactions no matter who was engaging in them.

I’d also love to see the option of a wealth tax, which could raise a lot of money from those most able to afford it.

Finally, although I’m a fan of a consumption tax, I don’t like the NYT’s sole option on that front — a 5% national sales tax which applies to everybody equally. I’d much rather see something much more progressive: look at each taxpayer’s annual income, subtract their annual savings, and the difference is their annual consumption. Allow everybody say $50,000 of consumption per year tax-free, and then start taxing consumption over that point, with the tax rate rising as consumption grows. If you spend over $250,000 a year, your marginal consumption could be taxed quite highly.

In general, the NYT options on both the spending-cut and the tax-hike side tend to hit the poor and the middle classes more drastically than the rich; what’s missing here is the option to implement something much more progressive, in both senses of the word. It’s a missed opportunity, and a shame.


@TFF – Absolutely, and I would certainly support doing something along those lines myself. I don’t see any evidence, though, that Felix is proposing those types of trade-offs in order to, say, raise 20% of GDP in what he believes is the best possible manner. Instead, it almost feels like he is trying to maximize government revenue, an effort that I wouldn’t support.

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Re-examining the mortgage interest deduction

Felix Salmon
Nov 14, 2010 07:38 UTC

One of the positive effects of the deficit commission report is the way that it has brought the stupid mortgage-interest exemption back into the spotlight. David Kocieniewski’s article in the NYT is very good, although I don’t understand why simple statements of fact have to be attributed to anonymous “experts” or “economists”:

Tax policy experts say that for all its popularity, the value of the deduction in public policy is debatable. It was intended to encourage homeownership, but housing economists point out that countries like Canada and Australia, which do not allow mortgage interest deductions, have homeownership rates similar to those of the United States.

In my ideal world, Kocieniewski would also have mentioned the substantial downsides of high homeownership rates, as well as the experience of the UK, which abolished mortgage-interest tax relief in 2000, only to see house prices skyrocket afterwards.

But the broad thrust of Kocieniewski’s article is clear: the mortgage-interest deduction costs $131 billion a year, none of which goes to renters or to people who have paid off their mortgage, and all of which goes to people in the top 1/3 of the income distribution. There’s nothing fair about it at all, and in these straitened fiscal times, we’ve surely reached the point at which we have to abolish it somehow.

Given that the increased tax burden would fall disproportionately in the blue states of California, New England, and New York, you’d think that this might be something that even Republicans could get behind, but sadly I believe Kocieniewski when he says that “Congress would probably not consider it except as part of a major overhaul of the tax code.” Or, technically, when he says that tax policy experts say that Congress would probably not consider it except as part of a major overhaul of the tax code.

The problem with this kind of attribution is that it sets up a he-said-she-said equivalence between those tax policy experts, on the one hand, with people like Nancy Pelosi, on the other, who slammed the idea as a tax hike for the middle class.

In any case, I’d love to see some numbers on just what proportion of the middle class takes advantage of this deduction. And why it makes sense that $131 billion should be directed to that particular subset of the middle class, rather than to everybody on a similar income.


Some great points from TFF regarding better ways to encourage home ownership through a tax credit and a gradual phaseout of the Mortgage Interest Tax Deduction.

Posted by petepost | Report as abusive

Lies and auction hammer prices

Felix Salmon
Nov 14, 2010 06:48 UTC

The NYT has erred in the past, but generally it’s good about reporting prices paid at auction: the amount that the winning bidder pays for the item in question is the amount that the item sold for. That amount is then split between the person consigning the item to auction; the auctioneer; and, of course, the taxman. In the case of that Chinese vase, the hammer price was £43 million, the auctioneer charged £8.6 million commission; and the buyer also had to pay 17.5 percent sales tax on the commission, for a total of £53,105,000, or $85.9 million.

Which is why it’s depressing to see the front page of the New York Times today, saying that the vase sold for $69.5 million. (The web story says $70 million in its headline, and leads with the $69.5 million figure; the Guardian, too, gets it wrong, saying the vase sold for £43 million, while the Sun almost gets it right, adding in the commission but forgetting the VAT.)

The point is that the buyer doesn’t care what the hammer price is, only what he has to pay at the end of the day. If you’re willing to pay $86 million for a vase, you’ll pay that regardless of how many different parties get the money, or how that money is divvied up. The auction is mechanism for determining a buyer and a price, it just happens to be full of psychological tricks designed to make the final price as high as possible.

One of those psychological tricks is the hammer price, which is substantially lower than the final price paid: it makes you feel like you’re bidding less than you actually are. There are many other tricks, too, like the flattery and urgency of the auctioneer, the generally feverish atmosphere of the auction room, and the art of getting multi-millionaires with enormous egos to compete with each other to see who has the bigger wad of cash. There’s also the endowment effect, as explained by Don Thompson:

Each bidder starts with a top price in mind. When he momentarily becomes the high bidder, there is an “endowment effect.” He will pay more not to give up the painting, not to lose. Amid the tension of the auction, his reference point has changed to “I should win, this painting should be mine.” He is aware of the regret he would feel at losing what has become “his”.

On top of that, there’s the psychological ratification that comes with the existence of the underbidder and the public nature of the auction price, which is universally considered a benchmark, and is never considered an aberrant rip-off.

In this case, I suspect that other factors conspired to drive up the price, such as the fact that the auction was taking place at a second-tier auction house in the small English town of Ruislip. When would-be Chinese buyers discovered what was being sold there, with an estimate of just £800,000, they thought they were in for a bargain, and they flew in to snap it up.  I’d wager that most of them, being very willing to pay many multiples of the estimate, reckoned that they had a very good chance of walking away with the vase, and got themselves into that psychological state of all but owning it before the auction had even started. Which, of course, is exactly the state that all auctioneers want their bidders to be in — at that point they’re bidding to retain the item, rather than to buy it. And the price they’re paying, psychologically, is their marginal cost — the difference between their new bid and their old bid — rather than the full amount, including that hidden commission.

In any case, when a newspaper reports a hammer prices as though it’s the actual sale price of the artwork in question, it’s giving its imprimatur to a cheap psychological trick. After all, the auctioneer could just as easily say that the bids were for the final price, and that it would then take a percentage of that final price as its own cut. But no auctioneer ever does that, because prices are higher when the total price is opaque.

It’s the job of newspapers, on the other hand, to be transparent, not opaque, about what they’re reporting. So less of this hammer-price nonsense, please. The price paid is the price paid. It’s not — it’s never — the hammer price.


People who have a tough time understanding or get frustrated with the elevation of price after the hammer need to try orther sources for auctions such as penny auctions and reverse auctions, there is no hidden fees when you win a item, you pay the winning price. You should try one I recommend http://www.cra-zee.com they have quality service and products.

Posted by boedean | Report as abusive

Treasury answers your tax questions

Felix Salmon
Nov 12, 2010 22:31 UTC

I love the way that Michael Mundaca, the assistant Treasury secretary for tax policy, has taken to the blogs to help up some of the perennial confusion surrounding taxes. And yes, he tackles the biggest question of all, about those 1099s:

While businesses do not need to start filing information returns on the expanded set of payments until January of 2013, some groups have already raised concerns about the burden that this new provision may impose. As the President has said, it is important to look at whether this burden is too great for businesses to manage. Treasury and IRS are sensitive to these concerns and will look for opportunities to minimize burden and avoid duplicative reporting… Already, we have used our administrative authority to exempt from this new requirement business transactions conducted using payment cards such as credit and debit cards. So, whenever a business uses a credit or debit card, no information report will need to be filed, and there will thus be no new burden under the new law.

This is a start, even if it’s clearly insufficient; the good news, at least, is that there does seem to be a bit of time to fix things. If we can’t reach bipartisan consensus on this, then we’re never going to be able to pass anything in the next two years.

More interesting is the way that Mundaca defends the way in which dividend and capital-gains tax rates are lower than income-tax rates. I’ve never understood it, but Mundaca gives the best explanation I’ve yet seen:

The arguments in favor of taxing capital gains at a rate lower than that for ordinary income include offsetting the taxation of purely inflationary gains; reducing the tax on risky investment that would otherwise be disadvantaged by the tax system, especially because of the limits on deducting capital losses; and offsetting the “lock-in” effect where high capital gains rates can impede economically desirable asset and portfolio reallocations by imposing a tax on the sale of capital assets that can be deferred to the extent that the assets are not sold. With the exception of a few years following the Tax Reform Act of 1986, long-term capital gains generally have been taxed at preferential rates since 1921.

I’m not convinced, and I’d still love to see the tax rates brought into line with each other, if only because financial engineering makes it pretty easy to take income and convert it into capital gains, if you’re rich enough. (Don’t get paid yourself, just set up a company, then sell the company.) That’s what the private-equity honchos all did, and their low tax rates are unconscionable.

Still, the inflation argument is a good one: inflation is bad enough without having to pay taxes on it. The next argument, about encouraging risky investment, is weak—capital’s always going to flow to where it gets the best return. And as for “lock-ins”, I have some sympathy, but suspect that if it was really a problem then total return swaps would simply become a lot more popular.

In any event, let’s have more of these forums where Treasury technocrats talk directly to the public. Anything which disintermediates journalists has to be a good thing, right?

Update: Jimmy P reckons that far from raising capital gains taxes so that they’re the same as income taxes, they should instead be lowered to zero!


The alternative way to deal with the lock-in effect (at least for publicly-traded securities) is to tax them on a mark-to-market basis. That removes tax planning from the investment decision. It also taxes shareholders and wage-earners equally on their economic income. For a proposal to do exactly that for large corporations and the wealthiest and highest-income individuals, see See http://www.cadwalader.com/assets/article  /120505MillerTaxNotes.pdf and govinfo.library.unt.edu/taxreformpanel/m eetings/docs/miller_052005.ppt

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Eat your heart out Matt Taibbi

Felix Salmon
Nov 12, 2010 20:54 UTC

This is without a doubt the funniest video ever made about the Fed, quantitative easing, and Ben Bernanke. Make sure you’re in a place where you can laugh freely, and press play:

(Via Harrison)


Though there is much true in the video, it gets a lot wrong too. I couldn’t endorse it fully.

The “economists” commenting here don’t get it, though. The Fed has made things worse, not better, because they left the overhang of bad debt in place, and we still have to deal with it.

The http://www.youtube.com/watch?v=IGYAhiMwd 5E video is worth a watch though; it is the key distortion in the global economy today.

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