Felix Salmon

If proof were needed that the crisis is over and that we’re back to idiotic business-as-usual, then look no further than the fact that Dealbook—Heidi Moore, no less—is running a long story about art funds. These ludicrous creatures have strong claim to being the most ridiculous asset class in the world, no one should ever invest in them, and they invariably fail.

Heidi takes a disappointingly evenhanded “opinions on shape of earth differ” tone, presenting various art funds, and even the hilarious Art Exchange, with a perfectly straight face:

Proponents, like the art research firm Skate’s, are trying to legitimize the emerging movement by making the market more transparent and providing guidance to investors new to the art world…

By investing through funds, wealthy individuals can own art without paying the large fees and heavy taxes usually associated with full ownership. Some money managers claim returns can run as high 20 percent.

The field, with $300 million in assets, is small but growing. In Paris, the Art Exchange has plans to publicly list at least six pieces, including one by Sol LeWitt, and sell shares to investors. The Russian asset management firm Leader — controlled by close associates of Vladimir V. Putin’s — created two art-related investments. Last summer, Russia passed regulations to allow art to be turned into securities, the second country to do so after India. Noah Wealth Management and the Terry Art Fund are starting portfolios in China…

A handful of companies are trying to bring transparency to the historically shadowy, unregulated arena. Skate’s — founded by a Russian investment banker and entrepreneur, Sergey Skaterschikov — has set out to be “the Standard & Poor’s of art,” said its chairman, Michael Moriarty.

Most tellingly of all, the story comes with a highly-respectful portrait of Mr Skaterschikov by a NYT photographer. Heidi does gesture at reasons to be skeptical of this re-emergent market, but overall her piece is a ratification of the asset class, rather than the stern debunking it really deserves.

The first mini-boom in art funds came between 2005 and 2007; as Heidi notes, most of those funds have already cratered, less than five years after being founded. Anybody who invested in art funds last time around will have lost their money—and anybody who does so today will suffer the same fate. All art funds fail; the only question is when, rather than whether. I have never seen a single example given of an investor (as opposed to a principal) in such funds who has actually made money on his investment, and I don’t expect I will.

The silliest fund of all is the Art Exchange, which takes the concept of art-as-investment to its logical conclusion, and which is selling off shares in pieces by Sol LeWitt and Francesco Vezzoli at €10 apiece. It’s got to be the most stupid investment that anybody could ever make: the only way that it could ever be profitable is through the greater-fool theory.

Art is by its nature a negative-carry investment: you have to pay to store and insure it, but it pays no dividends and throws off no cashflow. As a result, the present value of a share of stock in, say, Sol LeWitt’s “Irregular Form” is equal to the amount it will eventually be sold for in the future, discounted by whatever discount rate you want to use. Except then there’s this, from the official Art Exchange brochure:

Simple exit conditions

In Art & Finance Service’s market, an artwork can only be removed from the marketplace once a single shareholder possesses all the shares.

This is essentially a guarantee that the artwork will never be sold. There are over 10,000 shares outstanding, and some of them will surely be bought on a lark by people tickled by the concept of owning 1/11,000th of a gouache. Trying to find those people and persuading them to sell their shares is far more trouble than it’s worth.* But since the piece will never be sold, the value of the shares, on any kind of DCF analysis, is clearly negative.

There is a case to be made that the wealth-management arms of big banks can and should have experts in the art market on staff. High net worth individuals often have a significant proportion of their net worth in art form, and that changes their risk profile. On top of that, they will occasionally want to borrow money against some or all of their collection. Their financial advisers should understand how the art market works and how much financial value there really is in the collection, over and above the pleasure that the collectors get from owning and viewing the work.

But if any adviser is asked about the wisdom of investing in an art fund, the answer should come clearly and swiftly: don’t even think about it. It’s all downside and no upside, and people who invest in such funds would always be better off just taking their money and buying an artwork they like instead.

*Update: Nicolai Hartvig reports that if an investor buys 80 percent of the shares, he or she can force the sale of the remaining 20 percent. But if an investor can buy 80% of a Sol LeWitt, they might as well just buy 100% of one outright, from a gallery.

Anand Iyer, after reading the article I wrote in Wired with Jon Stokes, emails with a couple of questions:

The age of analysing a company’s stats, looking at its balance sheets, researching the market the company operates in, and looking at the people running the company seems to be gone. It’s all bots (highly sophisticated ones) who operate the financial world.

What I wanted to ask was would it make sense for a single person to be doing investing the good old fashioned way in this scenario (I do and I guess I will even if your answer tends to suggest in the negative, but I would be VERY interested in your answer).

Finally it would be very helpful if you were to recommend me some books on this algorithmic approach of investing and advise if it is indeed possible for one individual to do the very same thing.

My answer, I fear, won’t make Mr Iyer very happy.

Firstly, there are millions of individual investors doing diligent homework on companies and trying to invest intelligently in the stock market. When they finally arrive at a conclusion and the time comes to buy or sell, their collective decisions are known politely as “retail order flow,” and less politely as “dumb money”; high-frequency trading shops make lots of money by paying for the privilege of filling those orders and taking the opposite side of those trades.

It’s possible that one individual investor—Mr Iyer himself, perhaps—can beat the odds and make more money on his own than he would do simply investing in an index fund. If he does, then it might be due to luck, and it might be due to skill. But if I know nothing about Mr Iyer except for the fact that he’s a retail investor looking at corporate fundamentals, I wouldn’t give him much of a chance of beating the market. Fundamentals-based investing is (still) a very crowded trade, and most people who try it fail—they get picked off by faster, smarter, more sophisticated players in the market.

On the other hand, fundamentals-based investing is vastly more sensible than an individual investor even thinking about entering the shark-infested waters of high-frequency algorithmic trading. You can’t do it, don’t even try. If you do give it a go with real money, expect to lose all that money, very quickly.

The good news is that for the time being it’s not even possible for individual investors to enter this market: the barriers to entry are just too high. But if it ever does become possible, stay very far away. Unless you want to know what it feels like to lose years worth of savings in a matter of hours.

Jim Surowiecki has an excellent column this week on the declining influence, and increasing unpopularity, of labor unions:

The advantages that union workers enjoy when it comes to pay and benefits are nothing new, while the resentment about these things is. There are a couple of reasons for this. In the past, a sizable percentage of American workers belonged to unions, or had family members who did. Then, too, even people who didn’t belong to unions often reaped some benefit from them, because of what economists call the “threat effect”: in heavily unionized industries, non-union employers had to pay their workers better in order to fend off unionization. Finally, benefits that union members won for themselves—like the eight-hour day, or weekends off—often ended up percolating down to other workers. These days, none of those things are true…

Labor may be caught in a vicious cycle, becoming progressively less influential and more unpopular. The Great Depression invigorated the modern American labor movement. The Great Recession has crippled it.

I can’t envisage unions ever getting their mojo back in the US private sector. At the same time, however, I can envisage a world in which the pendulum of power starts swinging back towards labor and away from capital. What I’m very unclear about is how that’s going to happen. Unions have lost their power, and Marxian rhetoric in general, about class or rent extraction or the balance of power between capital and labor, is treated with great suspicion by the broad mass of the population.

Meanwhile, of course, as Chrystia demonstrates, the people who control capital are willing and even eager to take money they would otherwise use employing middle-class Americans, and spend it on cheaper and equally productive workers abroad.

If the era of the union is over, as it seems to be, what other countervailing force will work to preserve the value of labor? Somehow I doubt that an epic shift to a new human age will manage to do the trick.

At the end of 2010, the Federal Reserve system had $2.423 trillion in assets and $2.367 trillion in liabilities, which means that the simplest measure of its total equity — assets minus liabilities — comes to $56.6 billion. The Fed also managed to earn net income of $80.9 billion in 2010. Which means that its return on assets was incredibly high at 3.3%, while its return on equity was an astonishing 143%.

I think it’s fair to say that no bank in the history of the world has ever had income of anywhere near $80 billion in one year: that’s over $700 per US household. Somehow, the Fed is making roughly $60 per household per month, and remitting that money straight to the Treasury. Of course, its cost of funds is ridiculously low, and in any event the Fed can simply print new money any time it wants. But still, $80 billion is enormous — more than four times the Fed’s profit in 2004, for instance. And it’s a useful reminder of just how massive the Fed’s balance sheet has become — and also of how monetary policy can make a serious dent in the funding-need side of fiscal policy.

Chrystia and I differ on whether Davos is actually important. I say it isn’t, and Exhibit A is this invitation, which I received today. There will be many, many more like it arriving over the next couple of weeks:

The whole thing, obviously, is [sic]. But Davos does tend to attract the kind of people who can straight-facedly pretend to believe that entering the human age, or the New Reality, or unleash and leverage human potential as the key competitive differentiator to win, or entering a new era, or epic shifts are converging, or talent is the new ‘it’ actually mean something.

The panel that these people have put together is prototypical Davos: dean of this, best-selling author of that, general secretary of the other, plus a CEO and a corporate president. There’s no shared expertise here, and there won’t be any real debate. Instead, they’ll all intone sonorously in an attempt to appear visionary and important, as jet-lagged delegates ask themselves why on earth they dragged themselves out of bed at 7am Swiss time (which is 1am New York time) to listen to such pablum.

The main purpose of these panels is to make their sponsors—in this case, CNBC and Manpower—feel important, as they splash their logos around in front of a select group of the most important people in the world. They either don’t know or, more likely, don’t care that their panel discussions look utterly ridiculous. Just about everything in Davos is ridiculous in its own way. It’s like Disneyland. So long as you suspend your disbelief, you’re fine.

FT Tilt has now officially launched. Calling itself “a premium online financial news and analysis service focused exclusively on the emerging world,” it has a total staff of 12, including 8 reporters scattered around the world. Founded by Paul Murphy and Stacy-Marie Ishmael of FT Alphaville fame, it has so much blog in its look and feel and its DNA that it’s probably fair to call this the most ambitious paywalled blog in the world.

The design of Tilt is very clean and very modern—all Ajax and HTML5 and CSS3, in austere black-and-white reminiscent of Khoi Vinh’s Subtraction. It clearly needs work, especially on navigation from article pages, which feel like dead ends right now; even bylines aren’t linked to anything. And the site is far too prone to opening not only external but even internal links in a new tab. But that’s all fine: if you’re not embarrassed by the first version of your Web site, you’re doing something wrong. The trick is to get something up, and then iterate continuously.

One thing is clear, however: the paywall will stay, with all the problems that implies in terms of sharing tools, commenting, and other central parts of any bloggy enterprise. Tilt is designed to provide valuable information to bankers and other financial professionals; the business model is to sell subscriptions on an enterprise level for thousands of dollars a year and up. Eventually, the content could even be rebranded and provided by those financial institutions as a perk for their buy-side clients.

The result can feel a little odd. Tilt behaves in many ways like any number of premium news and analysis services which distribute their content over terminals—except it’s distributed on a website instead. That makes it much easier to build a community: Tilt is built to allow clients to republish their own work and to talk to each other and comment on stories. But because Tilt isn’t available on Reuters or Bloomberg machines, traders aren’t going to see its stories effortlessly shuffled in to their main feed of news and analysis—they’ll have to make a specific trip to the site to find them. Similarly, all the headlines on Tilt are its own: while it will link to outside stories from within its own posts, it doesn’t aggregate external headlines and drop them into its main headline feed.

All of this makes the task facing the Tilt team a very tough one. They don’t want to be one more source of news and analysis for financial professionals who already have dozens of such sources; they want to change the way those professionals consume media on a day in and day out basis—adding an extra site where those professionals feel they must spend valuable time.

The Tilt team is at pains to note that they’ve built one community already—the Long Room, a by-invitation extension of FT Alphaville which has proved very popular. And the community areas of Tilt are going to be free, just as the Long Room is: they’re outside the paywall. Still, I’ll believe it when I see it. One of the key parts of the Tilt architecture is that it doesn’t have an edited front page, since every client is going to be interested in different asset classes and regions. And a necessary corollary of the heterogeneity of its audience is that it’s going to be hard to spark interesting discussions among communities of interest.

What’s more, even if the community areas do prove popular, that’s not going to drive subscriptions. Some institutions are doubtless going to prove willing to pay for access to what Tilt’s handful of journalists are writing; others won’t be.

Murphy explains that he’s filling a gap in the coverage provided by most media organizations based in London or New York, which tend to give much more weight to local deals in their own towns than they do to big deals in countries like Colombia or South Africa. “Western business media is so fixated on London and New York: it just can’t get over itself,” he tells me. “The quality of the journalism tends to deteriorate, the further you move away. It’s a parochialism we’re trying to overcome.”

It’s a very fair criticism. But Murphy’s not really competing with the FT and the WSJ here: he’s competing with expensive news wires and free daily brokerage reports. Many of those are very strong in emerging markets. Murphy is asking his overstretched journalists (just one person for all of Latin America, for instance) to tell financial professionals something they don’t already know: that’s a tall order.

The big picture here, to me, is not that the FT is making an ambitious move into becoming a genuinely global financial-news organization, but rather that it isn’t. Important news about what’s going on in crucial global markets should be a core competency of the FT, a key part of why people read it rather than, say, the WSJ, which seems to be more interested in building up its New York City coverage. Instead, the big Tilt project is being ghettoized behind its own high paywall, is being forced to pay for itself through high-priced subscriptions, and is being deliberately withheld from the broader FT audience.

I’ve said before that the FT is retreating to a newsletter model; I called that “a sad and narrow fate for what should be a proud and global newspaper.” Tilt only reinforces that diagnosis, and seems to be based on the idea that the FT won’t invest in ambitious new projects which are central to what its target audience wants, unless it can wall those projects off and get them to pay for themselves on a narrow, self-standing basis.

I’m friendly with both Paul and Stacy, and I wish them success with Tilt. But both they and the FT would surely have found success much easier to come by if they’d simply made Tilt freely accessible to all FT subscribers.

Peter Lattman on the market in “so-called gourmet cupcake shops” — NYT

The income of the top 1% of the US population = the total annual expenditures of the US government — Quiggin

We’re too quick to use “mental illness” as an explanation for violence — Slate

Matt Miller’s massive unpublished profile of Gene Sperling from 1999 — Miller

Larry Summers is the keynote speaker at the 17th Annual Global Hedge Fund Summit in Bermuda — Marhedge

David Streitfeld reckons that if mortgage delinquencies continue to pile up without turning into foreclosure actions, that could be good for the economy as a whole:

Foreclosure activity fell 21 percent in November from October, the biggest monthly decline in five years. Here in Phoenix, foreclosures fell by more than a third in the same period…

If the slowdown continued through this month and into the spring, it could be a boost for the economy. Reducing foreclosures in a meaningful way would act to stabilize the housing market, real estate experts say, letting the administration patch up one of the economy’s most persistently troubled sectors. Fewer foreclosures means that buyers pay more for the ones that do come to market, which strengthens overall home prices and builds consumer confidence in housing.

“Anything that buys time, that reduces the supply of houses coming onto the market, is helpful,” said Karl Guntermann, a professor of real estate finance at Arizona State University.

I think he’s probably right. Consumer confidence is a key factor in the health of the housing market and there’s an obvious connection from lower supply to higher prices, to higher confidence in housing as an asset class. That confidence might well turn out to be misplaced, of course. But a warm occupied home is a much happier thing, economically speaking, than a cold and empty one, even if the occupiers haven’t made a mortgage payment in years. Foreclosures carry a large economic cost and all things being equal, the less of them there are the better.

There’s something conceptually attractive, especially to small-government libertarians, about ripping the bandage off the patient harshly. Foreclose on anybody who’s delinquent, stop providing massive government subsidies to the mortgage sector and let the market find the true market-clearing level for house prices. But we simply can’t do that — it would mean a financial crisis much larger than the last one, with substantially the entire banking system becoming insolvent; the resulting plunge in stock prices and global economic growth could make the last recession look positively tame.

The realistic alternative is to muddle through — to artificially support the housing sector and mortgage valuations for however long it takes, which might well be forever. As Bethany McLean notes, “federal involvement in housing has been a constant since the 1930s” and it’s hard to see any politically-acceptable way of changing that.

The big winners in all this will be the delinquent homeowners who continue to live in their houses without making their mortgage payments. The losses, meanwhile, will be spread around a large number of banks and investors, all of whom can cope with — and even fully expect — smaller streams of cash flowing from their mortgage portfolios.

Some potential buyers, worried about the shadow inventory of homes which could be foreclosed upon at any minute, will choose to rent rather than buy — that’s fine, and indeed is probably a good thing. We want the homeownership rate to fall. Other buyers, seeing rising prices and a shrinking supply of houses coming on the market, will jump in regardless. And so long as there’s enough government support and buying interest to keep prices from falling further, everybody will be more or less content. The tail risk will still be there, of course. But merely running the risk of a catastrophic outcome is surely a better idea than actually triggering that outcome.

David Segal is the best writer on the NYT’s business desk, so it’s a good thing that he was chosen to pen today’s 5,000-word disquisition on the economics of law degrees. He’s taken a particularly dry subject and turned it into a compelling and accessible read; that’s no mean feat.

At the heart of the article is law schools’ bait-and-switch operation: universities rake in millions of dollars in tuition fees from students who are given to understand that a well-paid job lies waiting for them upon graduation. But such jobs are hard to find and precious few law graduates will ever waltz straight into a $160,000-a-year Biglaw job, especially if they graduate from a non-top-tier school.

The connection between well-paid jobs and top-tier universities is well known and as a result, there’s something of a statistical arms race going on between universities, all of which want to improve their rankings. Segal doesn’t quite accuse the colleges of outright lies, but he comes very close: at one point, for instance, he talks about the “several different explanations” which Georgetown Law provided to explain a suspicious-looking offer of temporary work to unemployed graduates, one of which claimed that the university — which was also the graduates’ employer — didn’t know where those alums were.

But I’m a wonk and I’d like to have seen a few more numbers in this piece. For instance, when Segal says that only “a small fraction of graduates are winning the Big Law sweepstakes”, I’d like to know what that fraction is: roughly what proportion of the nation’s law graduates, each year, is going to get one of those $160,000-a-year jobs?

And then there’s this:

In the Wonderland of these statistics, a remarkable number of law school grads are not just busy — they are raking it in. Many schools, even those that have failed to break into the U.S. News top 40, state that the median starting salary of graduates in the private sector is $160,000. That seems highly unlikely, given that Harvard and Yale, at the top of the pile, list the exact same figure.

Even at Harvard and Yale I’m suspicious of that $160,000 figure; for the non-top-tier colleges, it’s clearly fictional. No matter how many of your graduates go on to $160,000-a-year jobs, there’s always going to be a significant number who earn a lot less than that and there are going to be almost none who earn more. As a result, the mode might be $160,000, but the median will never be that high. (And in reality the distribution of law-grad salaries is highly bimodal, with the first mode at a much lower level.)

Dean Baker has a more serious criticism of Segal’s piece, noting that “most of the new jobs that are being created are at the top and the bottom of the skills level”. If that’s the case, he says, “then the NYT has seriously misrepresented the state of the legal market”.

I wouldn’t go that far. For one thing, I’m not sure that someone clutching a law degree from Thomas Jefferson School of Law in San Diego really counts as being at the top of the skills level; Segal’s whole point is that lower-tier law schools are churning out graduates who would have been better off not getting a graduate degree at all, partly because they could put their skills to better use in the world of employment rather than racking up hundreds of thousands of dollars in student loans.

But Baker’s point is well taken: “the economy,” he says, “could simply be suffering from a situation in which there are too few jobs in total”. Given the NYT acreage afforded him, Segal could and should have spent a little time looking at how the number of law-school graduates has changed over time and how their employment prospects have changed as well. If the number of graduates is holding roughly constant even as the number of jobs has plunged, then that looks like a problem with the broad economy more than a problem of law school mendacity.

The 16-page decision in the case of US Bank vs Ibanez does not make for easy reading. But it’s a very important case: it’s a solid precedent saying that if a bank doesn’t own a mortgage, then it can’t foreclose on a home. That was the decision of the lower court in Massachusetts, back in March 2009, and it has now been unanimously upheld on appeal to the Massachusetts supreme court.

After speaking to crack Reuters reporter Jonathan Stempel, I’m even more worried about this case than I was before.

The immediate effect of the ruling, which covers two separate cases, is that Mark and Tammy LaRace get to stay in their home, despite being foreclosed on in 2007. And Antonio Ibanez gets title to his home back, which means that the bank will either have to let him retake possession or else pay him for his deed.

Essentially, these homeowners bought their homes, defaulted on their mortgages, and then — after a long legal struggle — get to stay in their homes. It’s unclear whether they still owe money to any lender, and Massachusetts is a recourse state, which means that the bank could try to go after them personally, as it might had it lent them money on an unsecured basis. But in reality, if a bank does not have the ability to foreclose and the borrower is genuinely distressed and in default, there’s no point pursuing them for the balance of the loan.

The legal craziness that this decision sets in motion is going to be huge, I’m sure. Anybody who was foreclosed on in Massachusetts should now be phoning up their lawyer and trying to find out if the foreclosure was illegal. If it was — if there was a break in the chain of title somewhere which meant that the bank didn’t own the mortgage in question — then the borrower should be able to get their deed, and their home, back from the bank. This decision is retroactive, and no one has a clue how many thousands of foreclosures it might cover.

Similarly, if you bought a Massachusetts home out of foreclosure, you should be very worried. You might not have proper title to your home, and you risk losing it to the original owner. It might be worth dusting off your title insurance: you could need it. And if you ever need to sell your home, well, good luck with that.

Going forwards, every homeowner being foreclosed upon will as a matter of course challenge the banks to prove that they own the mortgage in question. If the bank can’t do that, then the foreclosure proceeding will be tossed out of court. This is likely to slow down foreclosures enormously, as banks ensure that all their legal ducks are in a row before they try to foreclose.

This decision won’t be appealed: the state law seems pretty cut-and-dried, every judge who’s looked at it has come to the same decision, and there’s no conceivable grounds for the US Supreme Court to take on the case.

What’s more, courts in the other 49 states are likely to lean heavily on this decision when similar cases come before them. The precedent applies only in Massachusetts for now, but it’s likely to spread, like some kind of bank-eating cancer.

If a similar decision comes down in California, which is a non-recourse state, the resulting chaos could be massive. People who are current on their mortgage and perfectly capable of paying it could simply make the strategic decision to default, if and when they find out or suspect that the chain of title is broken somewhere. They would take a ding to their credit rating, but millions of people will happily accept a lower credit rating if they get a free house as part of the bargain.

The big losers here are the banks — of course — as well as investors in mortgage-backed securities, including of course Fannie and Freddie, a/k/a the US taxpayer. No one knows how it’s all going to play out: there’s certainly going to be a lot of litigation in every US state, and there’s a good chance that the federal government is going to feel the need to get involved as well. Not every jurist and legislator is going to see things the same way as the judges of Massachusetts, and there’s a case to be made that banks should have the ability to go back and cure their mistakes once they’re pointed out, rather than just losing the house altogether, as they did in this case.

But of course the problem is that the banks can’t cure their mistakes: in many cases the original mortgage is lost, at this point, if it ever properly existed in the first place.

The tail risk here is enormous, and there’s no easy solution to the problem. And this is over and above the problem of putbacks, or legal risk associated with the scandal of banks lying to investors in many mortgage-bond deals. And it’s certainly yet another reason not to buy a house right now. You don’t know if you really have title to what you’re buying, you don’t know whether you’ll be able to sell it if you have to, and there’s a good chance that as a result of all these problems shaking out, home prices could fall dramatically.

Maybe we’ll muddle through this somehow — that’s still probably the base-case scenario. But maybe we won’t. And if we don’t, the downside here, to the banking system and to the economy as a whole, could hardly be larger.

Update: Adam Levitin emails with three other points, all important:

• The ruling should (but surely won’t) led to a ratings downgrade of every securitization trust with MA properties in it.  The documentation sloppiness in Ibanez was hardly unique.
• Notice how MA rejected the “mortgage follows the note” argument and also the “assignment of mortgage in blank” argument that ASF has argued is beyond reproach.  There are (in my opinion) stronger arguments about the mortgage notes, but that wasn’t raised in this case.
• The MA Supreme Judicial Court is widely considered the best state court in the country.  No one questions the quality of the jurists on the court (unlike in some other states).  It’s one of the few state supreme courts that can routinely compete with federal appellate courts in recruiting top clerkship candidates and the only state court I know of that has had clerks go on to US Supreme Court clerkships.

Eddy Elfenbein notes that the Dow has significantly underperformed the market of late. Here’s how it compares to the S&P 500 over the past 180 days: up 16.6%, which is great, but not nearly as great as the S&P’s 19.9% gain.

Is this a bearish sign of speculative activity? Perhaps; Eddy’s theory is that “the Dow hasn’t captured the strength in cyclical stocks.” But the big picture, of course, is that the Dow is a ridiculous way of measuring the stock market, and that it’s certain to diverge from the S&P 500 on an irregular basis. The real surprise, frankly, is not that it diverges as much as this now and then, but rather that it hews so closely to the broader stock market most of the time.

One thing worth noting here is that two of the top five companies in the US, by market capitalization, are essentially disqualified from being part of the Dow: Apple is over $300 a share and Google is over $600 per share, which makes it impossible for either of them to enter a price-weighted index. Google has 1.38 times the weighting of Bank of America in the S&P 500; if it entered the Dow, it would have more than 43 times BofA’s weighting.

I do wonder what it is about the Dow which keeps it alive in the popular imagination and the financial media. I think it might have something to do with having an index level in the thousands: it’s like video-game scores, which always add a few zeroes just to feel more impressive. The S&P 500 should probably have been set to 500 rather than 44 at inception in 1957: then there would be no need for the silly Dow at all.

Justin Fox has a smart piece on the revolving door today. “There doesn’t have to be a problem with a revolving door between government jobs and non-government jobs,” he writes, and indeed the movement back and forth between the public and the private sector “has for most of the nation’s history been more strength than weakness.” The problem, he says, is specific to Wall Street, which pays so much better than any other area of the economy.

With that kind of pay differential, Wall Street inevitably begins to emit a giant sucking sound as it hoovers up smart, self-interested people. This is apparent at top business schools, in physics Ph.D programs — and in Washington, where smart out-of-office (or just burned-out) government officials who want to secure their family’s financial future before either retiring or heading back into public service now flock to Wall Street jobs. Larry Summers did. Rahm Emanuel did too. John Snow did. Bill Daley did. Phil Gramm did. Harold Ford Jr. did. Peter Orszag is doing it. Heck, I’d probably do it if I were in their shoes. Gene Sperling, to be fair, didn’t go so far as to become a banker. But on the whole, if you believe that people respond to economic incentives, you have to believe that Wall Street’s artificially high pay scales have come to have a big impact on decisionmaking in Washington — and that this is an unhealthy development for our democracy and our economy. So making a stink over Sperling’s Goldman paychecks is, under the circumstances, a perfectly appropriate thing to do.

It is is also, of course, a mostly ineffectual thing to do. He’s got the job. But now that he’s got it, maybe he should try to figure out what to do about the chasm between Wall Street pay and compensation in the rest of the economy.

But there’s the rub. Government is perfectly capable, were it so inclined, of shrinking the financial sector and making it much less profitable. Banks could become highly-regulated utilities, bonus culture could be eradicated, hedge funds would no longer be exempt from SEC rules about transparency and investor protection, private-equity honchos would have to pay income tax on their income, leverage would be discouraged in the tax code by eradicating the tax-deductibility of interest, and so on and so forth. The economy might lose a bit of possible debt-fueled upside, but it would be much less fragile and much less prone to banking crises.

If that happened, then the huge gap between what people earn on Wall Street and what they earn everywhere else would disappear: we’d be back in the 1970s, essentially, when the best and brightest went into all manner of different industries.

But it’s not going to happen, because the public servants who could enact such a change currently have the ability to earn millions of dollars per year when they leave DC. Government work pays well, but not that well. The real value of a government position, especially in the economic team, is in the marginal net present value of all those juicy future earnings that you’ll be offered upon your departure from the administration. And so any reforms aimed at shrinking the financial sector would do massive damage to the economic health of the reformers themselves. And those reformers are wonks, remember: precisely the kind of people who consider probability-weighted future earnings to be genuinely valuable things.

In that sense, the revolving door is arguably less distasteful when it swings the other way, from Wall Street to Washington. People like Hank Paulson or Bill Daley have already made their Wall Street millions, and so the marginal net present value, to them, of taking a government job is probably negative. The problem in these cases is that after so many years on Wall Street these people have internalized the worldview of the financial sector, where banks create value and bonuses are great and what’s good for Goldman Sachs is good for America. They’re not going to gut the very system which was so good to them. (Although in rare cases they’ll tinker at the margin, as Gary Gensler is doing at the CFTC.)

One solution here, I think, is to radically reduce the number of political appointees in the economic team. It’s impossible to have a successful career at Treasury or the NEC, because all the top jobs are political: when the president changes, especially when there’s a change of party, all the old appointees get kicked out. As such, every senior appointee is always going to have, in the back of their head, the question of what they might do next. It’s not a question we really want them to have, since right now Wall Street is always going to be on everybody’s shortlist.

The December jobs report turns recent history on its head. We’ve been used to healthy increases in employment making no dent in the unemployment rate, but this time a mediocre jobs figure—just 103,000 new jobs were created—coincides with a gratifyingly large fall in unemployment, to 9.4% from 9.8%. For those keeping track at home, that’s employment up by 103,000 and unemployment down by a whopping 556,000.

There’s no doubt that the headline payrolls number is a disappointment. The economy just doesn’t seem to be creating jobs: we need to see 150,000 new jobs a month just to keep pace with population growth. But is there some good news, at least, on the unemployment front?

I’m not sure. While unemployment is down from both December 2009 and December 2010, it’s down only for those who have been out of work for less than 26 weeks. The ranks of the long-term unemployed are still rising:

Meanwhile, the numbers of “discouraged” people continue to rise very fast indeed: these are the people who’d love a job but have given up looking for one and therefore don’t count as unemployed.

Among the marginally attached, there were 1.3 million discouraged workers in December, an increase of 389,000 from December 2009. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.

The headline unemployment rate is important, and it’s great that it’s coming down. But if you’ve been out of work a long time, there’s little hope in these figures for you.

Convicted of insider trading in NY? You’re likely to get off lightly — Reuters

You can’t make a balloon dog. Only Jeff Koons can make a balloon dog — L

The $700 billion bailout of… the highway system? — The Atlantic

Goldman Facebook Pitch or Nigerian Email ‘Opportunity’? — WSJ

John Abell asks a very good question about a privately-traded Facebook:

Aren’t all the people investing at this moment assuming that a $50 billion valuation is a bargain? What will drive a higher valuation — let’s limit it to the Goldman Sachs Golddiggers — that makes the investment savvy?

Can a relatively illiquid market (one open to only ultra-high net worth individuals) do that? Or are these new investors buying at what they hope will be pre-IPO bargain prices? Would they otherwise, i.e., would they put up $2 million to get a upside potential based solely on privately-reported earnings?

For the answer, it’s worth looking to Justin Fox. Yes, public markets are much more liquid and transparent than private markets. But, as accounting firm Grant Thornton says,

Generally speaking, economists and regulators have maintained that competition, and reduced transaction costs are of great benefit to consumers — but only to a point. When it comes to investments, higher front-end or transaction costs and tax structures that penalize speculative (short-term) behavior can disincent speculative behavior and incent investment (buy-and-hold) behavior that may be essential to avoiding boom-and-bust cycles and maintaining the infrastructure necessary to support a healthy investment culture. As markets become frictionless (i.e., when there is little cost to entering into a transaction), it becomes easier for massive numbers of investors to engage in speculative activity.

Goldman is requiring that investors in Facebook commit to holding their shares for an indefinite period of time: the bank does seem to be making a good-faith effort to find long-term investors rather than people looking to flip their shares the minute there’s an IPO. And for those people, the speed and efficiency of public markets, where the average stock is held for just 22 seconds, looks much more like a bug than a feature. It means that stocks become highly correlated with each other, and that the value of a stake in Facebook becomes much more a function of the performance of the stock market as a whole than it is a reflection of the value of Facebook.

Goldman’s clients are looking for uncorrelated investments, and Facebook will become much more correlated to other stocks the minute it becomes public. That’s why the clients will be happy with Facebook remaining privately-traded. After all, private markets have already bid the value of Facebook up to $50 billion: there’s no reason why they can’t bid it higher still.