Felix Salmon


Nick Rizzo
Oct 19, 2011 22:31 UTC

Debt is “like a drug” in Europe’s second-most indebted nation — Der Spiegel

The housing crisis has changed some young people’s attitudes towards homeownership — WSJ Real Time Economics

Median pay is back to ’99 levels — Reuters

Orszag: Labor’s value is shrinking and there’s not much we can do about it — Bloomberg

David Einhorn has some ideas about the price of coffee — WSJ

News Corp execs reportedly knew about the WSJ Europe circ scam for almost a year — Bloomberg

The Economist gives in to Apple’s app terms — paidContent

And Groupon will IPO next week — Reuters

These are just a few of the links available at Counterparties.com. Search the site for “Groupon” for all the best articles on that company in the last two months.


“It was a non-ethical practice.” Oh, such a neutral, such a detached and, shall I say it, non-threatening term this.


Sorry, Mr. Van Mol formerly of News Corp. The circulation-inflating was a scam. A lie. A calculated malfeasance.

It was UNethical. Not “non-ethical.”

And people still wonder why the Occupy people are upset?

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Fact and fiction about student loans

Felix Salmon
Oct 19, 2011 19:20 UTC

Post updated, see below

USA Today’s Dennis Cauchon has a very odd story today, headlined “Student loans outstanding will exceed $1 trillion this year”:

The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York.

Note Cauchon’s link, there — it’s meant to take you to the USA Today page for the New York Fed, although for me I just get a 404. What it doesn’t do is take you to the NY Fed’s own website, or give any indication of what data Cauchon thinks he’s using. Because, not to put too fine a point on it, Cauchon’s facts — including the headline on the piece — are simply not true. Here’s the NY Fed’s data, in Excel form, and here’s a chart I just put together, from the NY Fed data:


This chart shows the total stock of credit-card and student-loan debt, up to the second quarter of 2011. The most recent figures show total credit-card debt at $690 billion, and total student-loan debt at $550 billion. It is not true that Americans now owe more on student loans than on credit cards, and total student-loan debt isn’t even close to $1 trillion.

Unfortunately, Cauchon’s article is seeping into the blogosphere: Suzy Khimm picked up on it today, and Kevin Drum and Eyder Peralta followed her lead, asking for “more analysis, please”. Which is always a good thing to ask for, when USA Today can’t get its facts straight.

As for what the real facts show, I think it’s pretty clear: the stock of student loans outstanding continues to increase at a pretty much the same pace it’s been rising at for the past six or seven years. It doesn’t seem to have accelerated with the rise of private-sector online universities, but at the same time it also shows few signs of declining along with credit-card and mortgage debt. And of course it’s also much harder to discharge than mortgage or credit-card debt. It’s a problem, I think. But it’s not a trillion-dollar problem, and it shows no sign of becoming a trillion-dollar problem any time soon.

Update: It turns out that the NY Fed data, which Cauchon cited, is wrong, and is about to be revised; when that happens the total amount of student loans will rise to more than the level of credit-card debt, but still less than $1 trillion. Details here.


This chart says the same ting: one generation has passed its debt and the burdens of their extravagance (granted by China) to the next.

Note Felix Salmon’s “update” that student loans have in fact passed credit cards debt.

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Why congestion pricing will always be unpopular

Felix Salmon
Oct 19, 2011 16:04 UTC

Traffic expands to fill the space available. This is known as Down’s Law of Peak-Hour Traffic Congestion, and has been known since 1962; new research shows that it’s true even more generally than previously suspected.

Increasing lane kilometers for one type of road diverts little traffic from other types of road. We find no evidence that the provision of public transportation affects VKT. We conclude that increased provision of roads or public transit is unlikely to relieve congestion.

Eric Jaffe draws a simple conclusion from all this:

Whenever a driver shifts onto public transportation, another one quickly grabs the open lane. That leaves just one solution to the traffic problem plaguing American cities: congestion pricing.

“We cannot think of any other solution,” says Gilles Duranton, the paper’s co-author. “As soon as you manage to create space on the road, by whatever means, people are going to use that space. Except when people have to pay for it, of course.”

I’m a fan of congestion pricing. But I’m also realistic about it, and the fact is that for all Jaffe’s enthusiasm, congestion pricing has its own Down’s-like characteristics. Jaffe raves about the “success” of congestion pricing in London and Stockholm, but the only chart he provides gives numbers for the trial period in Stockholm. If you go looking for recent data on traffic in London, Stockholm, or other cities with congestion charges, it can prove surprisingly difficult to find.

Here’s Jaffe, again, quoting Duranton:

“My feeling is, yes, people tend to be against it before they see it at work,” says Duranton. “They think it’s going to cost them more money, which directly it will, but they’re all very unclear about the benefits; i.e. traffic is way more fluid, way faster, and pollution is going down.”

There’s another way to look at this phenomenon, though. When congestion pricing is first introduced, people recoil against it — they expend quite a lot of effort to avoid the charge, and traffic goes down. Over time, however, it becomes just another part of the cost of driving, along with gas and insurance and parking tickets. As that happens, traffic goes back up again. Congestion-charge revenues go up too, of course, and those can be reinvested into public transport.

But traffic is like water — it wants to find its own level, which tends, in cities, to be maximum capacity. If you want to implement a system which keeps traffic below maximum capacity, then you need to apply significant pressure on drivers to keep them away from the roads. And that means not just implementing a congestion charge, but also regularly increasing the amount of the charge over time.

This is how the Singaporean congestion-charging system works. Think of a shutter-priority camera: you set the shutter speed, and then dial the aperture so that the exposure is correct. In Singapore, they set the amount of traffic they want, and then dial up the congestion charge until they get it. It’s much the same idea as the one behind SFPark: you set the number of empty parking spaces you want, and then dial up the parking-meter pricing until you get there.

But the point in all of these cases is that the charge has to be variable over time — specifically, it has to increase over time. Without those steady increases, drivers become inured to the congestion charge, and traffic will go back up to its former level.

As a result, drivers are pretty much never happy with congestion pricing. Either it’s painfully expensive and going up in price — expensive enough to keep them from driving — or else it doesn’t have much effect.

That doesn’t mean that congestion pricing isn’t good public policy. It is. But it’s always going to be unpopular with a powerful constituency. (Drivers, in nearly any city you care to mention, tend to have a disproportional amount of political clout.) Local politicians looking for a popular platform will run on reducing or abolishing the charge, or at the very least not increasing it. And so the old fight keeps on being fought over and over again: while increasing a charge isn’t as politically difficult as introducing one, it’s still tough.

This is something worth remembering when urbanists start waxing utopian on the subject of congestion pricing: once it’s introduced, the fight isn’t over. It’s never over. And if you leave a system long enough without increasing its price, its efficacy starts declining dramatically.


As someone who lives close to London and regularly travels into the city I think the congestion charge is a fantastic thing.

The reality is that the charge does not hit the poor (because they weren’t driving a Bentley or Rolls-Royce into central London on a Thursday afternoon in the first place.) It hits the rich who want to do something that is in their interest but against the interest of everyone else.

Typical Londoners or travellers to London do not drive. Now the roads are far less crowded for the buses that these people do travel on.

Obviously this isn’t necessarily representative, but I don’t know anyone who actually lives in London who thinks the congestion charge isn’t good. Remember that highly efficient cars are exempt, as are people who live inside the congestion charging zone.

Providing the alternatives are viable (and in London, with the Tube and buses they are) the congestion charge works very well indeed.

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Nick Rizzo
Oct 19, 2011 00:55 UTC

Some of the best links from Counterparties.com:

The S & P downgrades twenty-four Italian firms — Reuters

Not to be outdone, Moody’s cuts Spanish sovereign ratings two notches — Reuters

Bernanke: We may use monetary policy for “financial stability.” Or maybe not — Federal Reserve

Only 1 in 7 US workers are normal weight with no chronic health problems — WSJ

Alabama scares away its migrant farmworkers, has trouble harvesting with only fat, unhealthy US citizens — AP

Goldman reports only its second-ever quarterly loss since going public — Business Wire

BofA turns a profit, thanks to asset sales and wonky accounting — Bloomberg

New York has the most super-rich people, though San Francisco also has a lot — WSJ

The brave analyst who dared to downgrade Apple — WSJ

Robots have learned how to play ping pong – yet still cannot love — Youtube

How Groupon’s auditors and underwriters got it so very wrong — Dealbook

Steve Jobs offered nine figures for Dropbox, and was turned down — Forbes

Should we be worried about stock-market illiquidity?

Felix Salmon
Oct 18, 2011 14:58 UTC


When volatility rises, so do bid-offer spreads. That’s entirely natural — volatility means danger, and a higher chance that the market will move against you if you’re a market-maker. So you require a bigger spread between your bid and offer prices before you’re willing to trade.

But does that mean, in the words of the WSJ, that “cracks are appearing deep in the workings of the stock market”? And looking at the chart above, would you agree with this?

In some ways, investors would be expected to leave the market in uncertain times, but traders say the exodus of late is striking and underscores the nervousness of market participants, and the lack of willingness of many to step in to trade.

it seems to me that insofar as illiquidity is something separate from volatility, bid/ask spreads have actually been less volatile than the VIX.

And I’m far from convinced that bid/ask spreads in the 4-5bp range are particularly harmful. Not so long ago, remember, NYSE stocks traded in eighths of a dollar — which means that on a $20 stock, the smallest possible bid/ask spread was more than 60bp. And Europe is going so far as to try to increase the cost of trading: its mooted financial transactions tax is being pegged at about 10bp.

Large investors always complain that they can’t get good execution, in much the same way that large exporters always complain that their currency is too strong. When bid/ask spreads go up, they complain about that; when bid/ask spreads go down, they complain that they can only trade in small size at the quoted spreads.

It’s worth remembering, too, that the kind of liquidity measured by bid/ask spreads — the minute-to-minute and second-to-second ability to buy or sell as much stock as you want without moving the market — is precisely the kind of thing that high-frequency trading shops exist to provide. If you want to encourage that kind of liquidity, fine — but the flipside of doing so is always that they risk disappearing the minute you actually need them.

Overall, stock-market liquidity concerns are pretty much the least of my worries right now. We managed to navigate all the way through the financial crisis without any real liquidity problems in the stock market at all, and even on its worst days, today’s stock market is vastly more liquid than it was, say, a decade ago during the dot-com boom and bust.

Indeed, the anecdotes purportedly demonstrating the market’s illiquidity say something very different to me:

One well-known manager of a large hedge fund said he recently tried to buy $250 million of shares of Tempur-Pedic International Inc., a mattress maker with a nearly $4 billion market value. The manager, who declined to speak on the record, says he gave up after his initial order of $20 million of shares pushed prices of the stock up too far.

What we’re seeing here is someone trying to take a very large stake of more than 6% in Tempur-Pedic — and expecting to do so without moving the price much. In an efficient market, someone making such a big play in a company should move the market upwards. When a big buyer comes in to the market, prices go up. That’s how markets are meant to work.

At some point in the future, if the ETF craze continues to grow at its current pace, it’s possible that so much trading will be taking place in ETFs that individual stocks are going to become harder and harder to trade. That’s a theoretical worry. But it hasn’t happened yet. Instead, we’re just seeing markets behave entirely rationally, with bid/ask spreads reflecting broader stock-market volatility. That’s not a cracked market. It’s an efficient one.


Hey, thanks a lot for this post I found it really interesting and insightful. Recently I have been using some investment analysis software which has really kept me on track with my finances. There is a really good Equity pricing tool too. It was all a bit daunting at first but now it has been amazing for me because it is online tool I can access their help forums 24/7. Thanks again for the post.

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Mortgage refinance doesn’t belong in the settlement talks

Felix Salmon
Oct 18, 2011 13:23 UTC

The WSJ has the latest mortgage-settlement trial balloon, and it’s pretty weak tea: under the terms of the deal, if (a) you’re underwater on your mortgage, and (b) you’re current on your mortgage payments, and (c) your mortgage is owned by the bank outright, rather than having been securitized, then you would be given the opportunity to refinance your mortgage at prevailing market rates.

It’s worth remembering, at this point, that mortgages are by their nature prepayable. When you write a fixed-rate mortgage, you make a general assumption that if mortgage rates fall substantially, the borrower is going to pay you off and refinance. The underwater questions we’re talking about here were written during the housing boom, when banks simply assumed that house prices always went up; those banks cared massively about prepayment risk at the time, and spent huge amounts of money and effort trying to hedge it.

As it happened, mortgage rates did fall substantially — with the result that the banks’ hedges paid off. But then the banks realized that they could make money on both legs of the deal — that they could collect on their mortgage-rate hedges, without having to worry about prepayment. Because now the borrowers are underwater, they’re not allowed to refinance. So the banks continue to cash above-market mortgage payments every month — something they never expected that they would be able to do.

Naturally, they’re clinging on to this undeserved income stream for dear life:

The refinance program would be particularly costly for banks because they would be forced to give up expected interest income on loans for which borrowers are current on their loan payments and, given their payment histories, unlikely to default. Banks can’t reduce rates on loans they don’t own because the result would be a net loss to the investor.

“Nine months ago this would have been inconceivable,” said one person familiar with the banks’ thinking.

Well no, it’s not inconceivable at all. In fact, wholesale mortgage refinance for underwater borrowers is a major part of Barack Obama’s jobs bill, and the CBO has been costing it in various ways. At heart, it’s a way of rectifying a market failure, and thus makes perfect sense.

But that’s precisely why I don’t think that this plan deserves a place in the mortgage-settlement talks. For one thing, it’s downright unfair and invidious to allow 20% of underwater homeowners to refinance while ignoring the other 80%. More to the point, giving homeowners the ability to refinance their mortgages is what you do, if you’re a bank. It’s not some kind of gruesome punishment.

So let’s keep mortgage-refinance proposals in the arena of public policy, where they belong, and where they can be implemented universally rather than piecemeal. And let’s keep holding the banks’ feet to the fire in the mortgage-settlement talks, and try to get something much more substantive out of them than this.


we are almost 300% underwater in our mortgage, we are current on our payments and we both work and have no promblem making payments. BUT the city just did reconstruction on the ditches and roads and now our front yard is under water literally! we just bought new windows last year and we are not sure if we can walk away, shortsale???

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The Abacus sign

Felix Salmon
Oct 18, 2011 04:57 UTC


Ben Furnas only has 325 followers on Twitter, but that’s all it took to make this photo of his go seriously viral over the past few days. He posted it on Twitter at 5:42pm on Saturday, with no commentary other than the hashtags #ows and #win. It didn’t take long (I’m a little bit unclear about the timezone of BoingBoing timestamps) before Xeni Jardin posted it on her hugely popular blog. And from there it went, well, everywhere.

By this morning, Conor Friedersdorf, the author of the words in question, was already writing a meta-post about the photo, and how it demonstrates that OWS is “the product of the decentralized networked-era culture”. Xeni, too, had a meta-post of her own. And the makers of the sign were revealed to be Brooklynites Will Spitz and Caitlin Curran. (Sorry, they’re a couple.)

Still, the meme was far from out of juice: when I posted the photo on my Tumblr at 4pm this afternoon, grabbing it from Barry Ritholtz, it very quickly became by far the most liked and shared thing I’ve ever put up on that platform.

A lot of that is because Curran is one of those protestors that photographers dream of. And then there’s the setting — Times Square, with Starbucks in the background and the big Nasdaq sign.

But the heart of the photo is the language on the sign — language much more powerful and striking than the blog post (or even the sentence) from which it was lifted. It’s funny, on the sign — something true, and accurate, and touching, and grammatical, and far too long to be a slogan, and gloriously bereft of punctuation, and ending even more gloriously in a mildly archaic preposition. Friedersdorf has managed to encapsulate the essence and the impropriety of the Abacus deal in just 45 words, and it’s fantastic that Spitz and Curran — and Furnas and Jardin and everybody who shared this image — managed to give those words the global recognition they deserved.

And most wonderfully of all, this sign seems to resonate just as much with the general public, most of whom have never heard of Abacus, as it does with Abacus nerds like myself.

In any case, I’m very glad that Abacus is coming back. During the first Abacus-go-round, I toyed with the idea of making a self-indulgent derivative artwork of the famous quote by “Fab” Fabrice Tourre:

What if we created a “thing”, which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?

I’d print these words in a sans-serif face on aluminum, or maybe in neon, and use them to comment not only on the futility of Wall Street, but also on the parallels between Wall Street and the art world. (William Powhida is much better at this sort of thing than I am; his show, called Derivatives, which includes my birthday present, opens Saturday at Postmasters, and you should go check it out. )

This picture is a vastly better way of bringing Abacus to the public’s attention. And it’s also a fantastic example of why it’s great that OWS isn’t a carefully-organized movement with an easily-identifiable and discrete set of demands. The fact that OWS is open-ended means that it’s much more open to the kind of creativity which went into this sign, and also means that snapshots like this one are much more likely to go viral.

The sentiment behind OWS has resonated worldwide — and I’m sure that this photo has already been forwarded all over Goldman Sachs. It’s a very healthy reminder, for squids both junior and senior, that the world will not soon forget what they got up to at the end of the subprime boom.


You assume wrong, very wrong. I assume life has not taught you about bad timing. Or the folly of knee jerk assumptions. May your lucky life continue.

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Nick Rizzo
Oct 17, 2011 22:41 UTC

A few of the links available on Counterparties.com:

Schauble admits that banks will take bigger losses on Greek loans — Guardian

Another German admits the obvious: the EU’s crisis will last into next year — Bloomberg

Citi’s accounting adjustment hides some “truly terrible trading figures” — FT Alphaville

Wells Fargo revenue is down, earnings are up, amidst an i-banking “bust” — Dealbook

CalPERS has lost $78 million on vineyard investments — Sacramento Bee

Enron’s former president is a billionaire — WSJ Deal Journal

America’s biggest growth industry: declinism — Reuters

Apple sold 4 million iPhone 4Ss in three days, the highest sales for a phone everAppleInsider

Obama will make anti-Wall Street anger a “central tenet” of his campaign — The Washington Post

Would you like to see a video of Herman Cain singing John Lennon’s “Imagine” with lyrics about pizza? Of course you would — The Daily Beast


“Tff, china is set to crash in the 1-2 year period.”

Yeah, strong signs of that.

Still, they have FOUR TIMES THE POPULATION of the US. They cannot help but pass the US in GDP some time in the near future. Our personal productivity would need to be 4x theirs for that not to happen, and that simply isn’t a sustainable margin. Not even for a “dominant player” like the US.

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Bag-check datapoint of the day, AA edition

Felix Salmon
Oct 17, 2011 20:48 UTC

In March 2010, I had the bright idea — stolen shamelessly from Eric Joiner — that airlines might charge a negative bag-check fee.

A lot of people, of course, simply hate the idea of risking their bags being lost, and/or of milling around at a baggage carousel waiting for their bags to arrive. But many others would love the idea of getting paid, in dollars or in frequent-flyer miles, for checking their bags…

Passengers would get on and off planes more quickly, the airlines would make more money, and everybody would be happier.

My commenters were unimpressed. Wouldn’t this just encourage people to pack more and therefore add more weight to the plane? Wouldn’t it even — at the margin — encourage people to check empty cardboard boxes, and not even bother picking them up at the other end?

But lo — look what American Airlines has just announced!

Through November 22, 2011, American Airlines will offer AAdvantage® elite status members the opportunity to earn a minimum of 500 AAdvantage bonus miles for checking bags on flights departing Boston Logan International Airport (BOS).

Earning the bonus miles is easy – simply visit a BOS Self-Service Check-In machine on the day of your departure and follow the normal steps to check-in with bags. Check at least one bag under your own name to earn the bonus miles, which will automatically post to your AAdvantage account five business days after you have completed the travel associated with your itinerary. As a reminder, all AAdvantage elite status members are entitled to check two bags free of charge (within current size and weight limits) in addition to earning the bonus miles with this special offer.

By confining the offer to elite status members — you need to be gold or platinum — AA has presumably minimized the number of people who will try to check empty cardboard boxes, or pack more than they need. But this does seem to confirm that AA has begun to realize that its current incentives are misaligned: it’s got far too many business travelers wheeling on luggage which is carefully designed to go right up to the limit of the carry-on rules. As a result, it takes far too much time to get people on and off planes, whose luggage bins are permanently overstuffed. And flyers unhappily schlep heavy bags all over airports across the country.

I have no idea whether AA’s experiment will catch on — for the time being it’s only at one airport, and it’s only lasting a few weeks. And AA is in pretty desperate straits right now — it’s probably willing to try things it wouldn’t normally consider. But this is a big conceptual leap from AA’s current policy of charging extra for checked bags and therefore giving people an incentive not to check. If it’s a success, dare we hope that those bag-check fees might start going away?

(via the indispensable Joe Brancatelli)


Just get an AA credit card or lite status with oneworld to offset bag charges. Really easy! Torsten @ http://www.mightytravels.com

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