Felix Salmon

Banks “are devising complex and potentially risky” deals to keep borrowing from the ECB — WSJ

Congress’s 10 favorite stocks, and which members hold the most (it’s mostly Kerry) — Ritholtz

Why the missing MF Global customer money is like a “lost child” — Dealbook

The Nevada AG brings felony charges in a robo-signing case — WSJ

26 reporters arrested in the Wall Street protests and what they do — The Awl

TechCrunch’s CEO is leaving AOL — BI

2.5 stars: Yelp files for a $100 million IPO — Fortune

And the ECB releases an iPhone game, but the whole goal is keeping inflation low. Of course — Reuters Macroscope

Many more great links are available each day from Counterparties.com.

On Monday, I wrote about the unemployment debit-card scandal, based on articles by Janelle Ross and Kate Berry. But Berry’s article has been down since Tuesday, replaced by a placeholder saying only that “an updated version of this story will appear soon”. And the state of California, in particular, was extremely unhappy with Berry’s coverage. So today I had a long conversation with the Californian department of employment development, trying to understand exactly what’s going on there.

The conversation was a bit frustrating, because the questions I was asking weren’t fully aligned with the answers they wanted to give. The Californians were very keen on telling me how much better their debit cards are than the old paper-check system — something I completely agree with. And they’re also very proud of the fact that it’s possible to use their debit cards without incurring any fees. That’s great, too.

Where we part ways is the issue of direct debit. California has a lot of unbanked people –  1.2 million, by one count. Many of those people are eligible for unemployment and disability benefits, and it’s important to do well by them. For those people, the debit card is great. On the other hand, there are 37 million people in California as a whole, and seems a little bit silly, to me, to design the entire unemployment system around the unbanked, when the unbanked are massively outnumbered by people with bank accounts. After all, the whole point of unemployment insurance is that you get it when you’re laid off from your paid job. And if you have a paid job, you’re very likely to have a bank account.

It’s my contention that if you have a bank account, then it’s a no-brainer that you should have your unemployment or disability benefits paid directly into that account by direct debit. But none of the Californians were inclined to agree with me on that front. “Our focus on everything we put out is to tell our claimants how to avoid fees,” said Sabrina Reed, project director for the electronic benefits project, talking about things like the nine-minute YouTube video explaining how to use the debit card. The direct-deposit part of the video starts at the 6:40 mark, where it presents direct debit as “another option”; we then cut to a woman holding a newborn who says that “with a new baby it was a good option for us to do direct deposit, because it’s hard to go to the bank”.

At no point does the state of California ever come out and say that direct deposit is a good option; it’s just an option, offered to those who would like to take advantage of it. “Many people like the convenience of using the card,” Reed told me. “People who are savvy enough to use direct deposit sign up for direct deposit.” When I asked whether, in the interests of education, it might be a good idea to encourage Californians to sign up for direct deposit, she replied by saying that “you’re making a presumption we’re not making”.

Let me rewind here for a second. In my original post, I quoted Berry’s article which in turn quoted representatives from both California and BofA, talking about the fact that California does not offer direct deposit. The truth is that direct deposit is an option — but you always have to get a debit card, and then if you want direct deposit, you need to work that out not with California but rather with BofA. And BofA has no incentive to make the direct deposit option easy or convenient or attractive — because BofA makes all of its money from the retained balance on the debit cards, and from the interchange fees it gets when those debit cards are used. If you set up direct deposit so that there’s no balance on the debit card and you never use the card to buy anything, then BofA won’t make any money off you.

Reed understands that BofA will never push the direct-deposit option — but she also sees no reason for California to push it, either. In fact, she says, people getting Californian unemployment benefits “have a better debit card process than you and I have with our banks”. And she came up with a clever example of why someone with a bank account might not want to transfer all the money over using direct deposit: if that person had a third-party ATM on their street corner, then it might be cheaper to withdraw money from that ATM using the California debit card, rather than using their bank’s ATM card. “It’s a personal choice for every individual,” said Reed. “While direct deposit may be convenient for one person, it may not be for another.”

Now it’s easy to be a bit suspicious of California’s motives here. The state has entered into a revenue-sharing plan with Bank of America, under which BofA remits back to California some percentage of the total unspent balance on the debit cards each period. The fewer people using direct debit, the more money Bank of America makes — and the more money California makes, too. The money isn’t huge — it’s about $10 million a year. But if direct deposit was easier, or was encouraged more, then California might have to start paying BofA to run this scheme, rather than getting a multi-million-dollar rebate every year. (Reed is a huge fan of high interchange fees, and hates the Durbin amendment, even though benefits debit cards were exempted from it: it’s “ultimately going to hurt the taxpayer”, she says.)

More generally, if you have a bank account, of course you should sign up for the direct-deposit option. The whole point of having a bank account is that it’s the single place through which all your transactions flow, and people on unemployment or disability benefits generally get most of their income from those schemes. The debit card can’t be refilled by anybody other than the state of California — in no sense is it an alternative to a bank account. The money on the card should be used to avoid overdraft fees; it should not simply sit unused on the card.

Reed gave me a long explanation of why it makes sense to California to outsource the direct-deposit function to BofA, and I’m pretty much convinced on that front. I do believe it’s cheaper and more efficient for California to outsource these things than to try to do them itself. But I also believe that if California wants to do right by its claimants, it should ask them to provide their bank account details when they sign up for benefits, and tell BofA to sign them up for direct deposit as the default option.

By all means give people the option to opt out, and to keep their benefits on a prepaid debit card if they’d rather do that or if they don’t have a bank account. But the opt-in system that California has setup seems designed to minimize the number of people who will use direct debit. As does the distinct lack of any documentation from California saying that direct deposit is a really good idea. The money arrives automatically in your bank account, a good two or three days earlier than it would in the bad old days of paper checks. You don’t need to keep close track of how much money may or may not be on your debit card at any given time. And you can keep all your money in one place, give it to someone else by writing a check, and enjoy all the other conveniences of having a bank account. Prepaid debit cards are all well and good, but bank accounts are always better.

In fact, if California really wanted to do right by its claimants, it would force BofA to give them a bare-bones, no-fee bank account rather than just a debit card. The bank account would come with a debit card, of course. But you could add money to it whenever you wanted, without incurring any fees — something which apparently is illegal with benefits cards. California has more than 2 million claimants receiving some $100 million per day: that gives the state a lot of negotiating power to get what it wants. And it’s a little sad, I think, that what California turned out to want was a way of maximizing interchange fees for BofA and for itself.

Emily Badger has found a fantastic paper (not online, sadly) from the University of Connecticut. Authors Chris McCahill and Norman Garrick took aerial photographs of New Haven, Hartford, and Cambridge, and started counting up the number of off-street parking spaces over time.

There’s a general tendency, in American cities, for the number of parking spots to rise inexorably — and that’s exactly what happened in New Haven and Hartford. As McCahill and Garrick write:

If places were to grow, it was assumed that most of the growth would be served by automobile, so new development would require supplemental parking facilities. In the city of Hartford, Connecticut, city officials stated in 1972 that, “the most critical improvement to [neighborhood shopping districts] which could be made at this time is the provision of off-street parking facilities”. In 1982, responding to the claim that his city had more parking than any other Connecticut city, New Haven Mayor Biagio DiLieto stated that he was “strongly committed to maintaining and improving parking facilities for workers, shoppers, and visitors in the downtown area”.

The authors add, waspishly:

Applying this thinking to U.S. cities, without knowing any other information, one would expect that the cities with the greatest increases in parking over the past fifty years have also experienced the greatest growth of development and activities. And conversely, the cities in which parking has not increased substantially might be struggling to achieve growth.

Of course, that’s not what happened at all. New Haven had 21,690 parking spots in 1951, and 106,410 in 2009; Hartford went from 47,000 to 141,000 in the same time period. But both were shrinking, rather than growing, in population.

Meanwhile, Cambridge took a different tack, and decided in 1985 to essentially ban the creation of any new parking spots. That decision marked the beginning of a reversal in its population trend: it started growing quite impressively. Here’s the chart:

Parking lots are — with only a handful of exceptions — the best possible way of destroying a city’s soul. They’re gruesome, lifeless places, and I’m constantly astonished by the way in which governments and developers are convinced that they’re a great idea. Instead, local government should act as a brake on private developers’ desires to build out new parking: while that might (or might not) be good for an individual commercial operation, it can at the same time be bad for the city as a whole. Cambridge is living proof that this can be done: other cities, including New Haven and Hartford, should follow its lead.

This is a chart of corporate income tax as a percentage of total corporate profits, and it’s the main thing you should bear in mind when people start saying that the US corporate income tax is too high. And while you’re at it, you should remember this chart, too, showing corporate income tax as a percentage of GDP.

Once upon a time, the corporate income tax generated a significant share of tax revenues; now, it’s bumping along in the 2%-of-GDP range. Yes, the marginal rate of corporate income tax is high, at 35%. But US companies are extremely good at not paying that.

But at least we know the aggregate amount that corporations pay in taxes. What we don’t know — because they won’t say, and no one’s forcing them to say — is how much any given public company pays.

Allan Sloan has a very good column on this today. Companies already report 16 different tax metrics; they should simply be required to add a 17th — the amount they pay the IRS in taxes — which in many ways is most important. The companies already file tax returns; the number’s right there, on lines 31 and 32. They just refuse to say what it is.

Here’s Sloan:

During the past few months I’ve repeatedly asked three big companies in the tax-wars cross hairs — GE, Verizon, and Exxon Mobil — to voluntarily disclose information that would refute allegations that they incurred no U.S. federal income tax for 2010. All have refused, saying they won’t disclose anything not legally required. They still manage to complain about the allegations, however. I suspect that if I called the rest of the Fortune 500, I’d get 497 similar responses.

As a society, we need the “taxes incurred” information to inform our current tax debate. Investors, too, would benefit; knowing the tax that companies actually incur would be a useful analytical tool.

Once the taxes-paid number was public, we could start dividing it into the company’s GAAP profits, to get an idea of what kind of tax rate companies are really paying right now. And of course, companies would be more than welcome, if they were so inclined, to reveal how much tax they were paying in other jurisdictions as well. But for the time being, all we can do is look at the aggregate numbers. Which are showing, very clearly, that corporate income taxes in America are very low and falling.

Update: Kevin Drum creates the chart I should have led with: corporate taxes as a percentage of pretax profit.

Evans-Pritchard: EU leaders are bypassing democracy to save the Euro — Telegraph

Both parties are reaching for accounting gimmicks as Supercommittee nears failure — WSJ

Federal prosecutions are up, except for bank fraud — NYT Economix

Congress declares pizza a vegetable — AP

Congress is less popular than BP during the oil spill, or worse, Paris Hilton — Washington Post

Your middle class neighborhood is probably disappearing — NYT

“Blink” your small business worries away with Malcolm Gladwell and BofA — Market Watch

We shouldn’t have said Fannie Mae paid Gingrich $300K. It was actually $1.6M — Bloomberg

Representative John Tierney of Massachusetts is one of those politicians whose questions tend to be substantially longer than the answers they elicit. But that doesn’t mean the questions, pared to their essence, aren’t good ones. Here he is grilling FHFA head Ed DeMarco, asking why he’s refusing to consider principal reductions on mortgages.

DeMarco’s answers come at 2:15 and 4:50. He starts off quite explicitly:

We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer.

Later on, he agrees to furnish Congress with these analytics: I, for one, would love to see them. There are two ways that you can come to this conclusion, and I suspect that the analysis uses both. First, you can try to maximize the probability that underwater borrowers will continue to make payments after a loan modification, rather than simply strategically walking away; and secondly, you can maximize the probability that borrowers who are current on their mortgages will strategically default if they think they can get a principal reduction by doing so.

At heart, what any lender needs to do with regard to any given loan in default is make a choice. You can modify it in any number of different ways, some involving principal modification. Or, you can just foreclose. You know, pretty much, what the costs of foreclosure are — and they tend to be enormous. So there’s a good case for modifying the loan, if the present value of the modified loan payments is decent. But in order to calculate that present value, you need to have a handle on the probability of a redefault. The lower the redefault probability, the more attractive a modification is to the lender. The higher the probability of a redefault, the more likely it is that you’d be better off simply foreclosing now.

Now here’s Tierney’s point: redefault rates are significantly lower when you do a principal reduction than they are when you don’t. It stands to reason: if you have equity in your house, you’re going to want to keep that equity. If you have negative equity in your house, not so much. As a result, principal reductions reduce redefault rates, and are a good way of maximizing the value of a loan.

In order to demonstrate that Tierney is wrong, then, DeMarco is likely to attempt to show that redefault rates don’t drop very much if you do a principal reduction. I think that’s going to be hard, not least because we haven’t had much in the way of principal reductions, so the data on redefault rates is going to be pretty thin.

And then there’s the second leg of the argument DeMarco has to make, which is even harder to get good data on. It’s the moral hazard problem: if you start doing principal reductions, everybody’s going to want one — even people who are current on their mortgage right now. And you don’t want to do anything which will give people an incentive to default, just so that they can get their mortgage modified.

Again, however, the argument here is a relative one. Any kind of modification program, at the margin, is going to provide an incentive to default. So DeMarco is going to have to demonstrate that people are more likely to strategically default the minute a principal-reduction program gets implemented. And I can’t imagine where he could possibly find the data to support that conclusion.

It’s worth noting that DeMarco made neither of these arguments in his answers to Tierney. Instead, he started attacking straw men:

I do not believe that I’ve been appropriated taxpayer funds for the purpose of providing general support to the housing market…

I believe that the decisions that we’ve made with regard to principal forgiveness are consistent with our statutory mandate… I do not believe I’ve been authorized to use taxpayer money for a general program of principal forgiveness.

Tierney was not asking DeMarco to provide “general support to the housing market”. He was not saying that DeMarco’s actions to date were somehow illegal. And he certainly wasn’t suggesting that DeMarco use taxpayer money for a general program of principal forgiveness.

In fact, he wasn’t suggesting that DeMarco use taxpayer money for anything at all. He was suggesting, instead, that DeMarco would save taxpayer money if he did principal reductions on certain mortgages. And he rattled off a long list of private-sector lenders who are doing just that, which suggests that there’s definitely a profit motive in there somewhere.

Obviously, no one’s suggesting that the FHFA start doing principal reductions across the board for all mortgages: Tierney’s only suggesting that DeMarco allow such things where it makes financial sense to do so. That’s a no-brainer; what’s weird is DeMarco’s certainty that it never makes financial sense to do so. Fannie and Freddie own a lot of mortgages; surely a few of them, at least, are good candidates for principal reduction — especially ones where the home is worth half or less the amount of the mortgage.

DeMarco does have one other alternative — he could just come clean and be honest. In which case he’d say something like this:

“We’re keeping millions of underwater mortgages on our books at par. We know they’re not worth 100 cents on the dollar, and so do you. But our accounting conventions allow us to pretend that they are worth that much, and as a result we’re managing to kid ourselves that our assets are worth a lot more than they really are. If we modify the loans while keeping the principal amounts constant, we can continue to carry those loans on our books at par. But if we do principal reductions, the accounting conventions finally grow some teeth, and we’re forced to take a write-down. Since we don’t want to recognize reality and take that write-down, we’re simply going to avoid doing principal reductions instead.”

Since it seems to be impossible for anybody to remove DeMarco from his supposedly interim position, he might as well come out and say this. After all, no one seems to be capable of firing him, no matter what he says.

I got some very smart responses to my post about statistics in Ontario, none more so than from Reihan Salam. Picking up on my chart of median household income in Ontario and New York, Reihan responds by saying that, essentially, that particular game is rigged: Ontario has more married-couple households, even if it doesn’t have bigger households, and that will help explain at least some of the difference.

I think that Reihan’s right here, although I suspect that even if you adjust for household size, median incomes in Ontario are still going to be higher than in New York. But Reihan’s argument is essentially a subset of a bigger fact, which is that it’s never possible to make true apples-to-apples comparisons between two different states or countries — especially if you take into account things like “the particular historical challenges facing a post-slavery society”.

This is simply a basic fact of statistical analysis: making comparisons across time is a lot easier than making comparisons across space. So measuring GDP growth, for instance, is actually easier than measuring GDP, which is surprisingly difficult. As was demonstrated in a particularly startling manner last year:

To show that this is not an arcane point, consider the case of Ghana, which decided to update its GDP last year to the 1993 system. When they did so, they found that their GDP was 62 percent higher than previously thought. Ghana’s per capita GDP is now over $1,000, making it a middle-income country.

The fact is that when you’re comparing GDP per capita between two different states, there are just as many weird idiosyncrasies as there are when you’re comparing median household incomes. Ontario, for instance, has significantly lower GDP per capita than resource-rich states like Alberta, but that doesn’t mean that people in Alberta are better off than people in Ontario. And if Albertan GDP Is artificially raised by the energy industry, then New York’s GDP is artificially raised by Wall Street — something which does little good for poor families upstate or even people in New York City struggling with a cost of living which has been inflated by bankers’ bonuses.

And then when you’re comparing states with two different currencies, as we are here, you run into a whole other set of problems. In the comments to my post, “topofeatureAM” declared that “PPP is the correct way to compare stats cross border”, and in general that’s right. But PPP is really hard to measure, and I defy you to find a useful time series showing the purchasing power of the Canadian dollar over time. (The people at the conference I attended didn’t even try: they just decided that the purchasing power of a US dollar is 1.2 Canadian dollars now, and it basically always has been.)*

In the specific case of Ontario, there are actually good reasons to look at FX rates rather than PPP: the vast majority of Canadians live very close to the US border, and quite regularly buy their goods in the US. I work in Times Square, and there are lots of Canadians there on any given day, enjoying the purchasing power that the Loonie has over here. When the Canadian dollar appreciates, that really does result directly in a higher quality of life for millions of Canadians, even if Canadian exporters will predictably moan.

And if PPP makes sense — and it does, in many ways — then shouldn’t we be using it when we compare New York to, say, Illinois? The purchasing power of US dollar varies widely from state to state — is there some way of incorporating that into statistics?

The big point here is that if you’re comparing two different places, it’s silly to try to reduce them to a single datapoint like PPP GDP per capita. Even if that’s the best single datapoint — even if it’s better than median household income, or Rawlsian thought experiments, or anything else — it’s still going to be flawed in many ways. We should be looking at many more indicators, and we should be looking at distributions rather than medians or means. It’s the same point I was making about the online advertising industry: what we can measure and what’s important are not always the same thing.

Statistics can be illuminating, but they can also be misleading: we all know this. The trick is to try to get a feel for when they’re the former and when they’re the latter. And that kind of thing — often based on the old-fashioned smell test — is always going to be more of an art than a science.

*Update: For much more on Canadian PPP, how it’s measured, and how it changes, see this paper from Statistics Canada.

An audit says that it’s nearly even money the FHA runs out of cash next year — WSJ

Struggling cities are paying more and more to ratings agencies — Bloomberg

Gingrich called Freddie Mac “insane,” was later paid $300K to lobby for them — Bloomberg

70% of the top 1% have been employed by their father’s firm — milescorak

Even Glenn Hubbard is calling for “radical change” — Washington Post

Even as one of their reporters is arrested by the NYPD, the Daily News says “Bravo” to Bloomberg’s eviction of Occupy Wall Street — NYDN

Short sellers are “waiting and watching” for a chance to all make a killing on Groupon — Reuters

And Netflix takes up 32.7% of all internet bandwidth — Mashable

I spent this morning at the release of the tenth annual report on “Prospects for Ontario’s prosperity” — you’re jealous, I know. Ontario, if you read the report, is in pretty bad shape, when compared to its peers.

The general theme of the report is that the way to fix this situation is to improve Ontario’s performance when it comes to productivity and innovation; there was a general consensus in the room that Ontario wasn’t nearly productive or innovative enough, and that this was a big problem.

So, being a bit contrarian, I decided to push back. The first thing I did was point out that the chart above is rather misleading: there’s a very good reason why the two Canadian provinces are at the bottom of the league table. All numbers have been converted using “2010 PPP”, under which one US dollar is worth 1.2 Canadian dollars. In reality, of course, one US dollar is worth 1.02 Canadian dollars. So if you simply use exchange rates rather than PPP, suddenly Ontario looks much better off, with GDP per capita of $54,700 — above, rather than below, the median level of its North American peers.

And if you look at other metrics, those of us who live in New York should probably take relatively little pride in our status atop the GDP-per-capita stakes. Here’s one chart Nick Rizzo put together:

And of course in lots of other metrics, too, like health outcomes, or the poverty rate, or just general quality of life, Ontario manages to handily beat New York state. GDP masks more than it reveals, much of the time; New York state’s high GDP Is largely a function of the financial industry, and that in turn only serves to make life much more expensive for the overwhelming majority of New York City’s population which does not work in that industry.

Besides, especially during an economic slump, improving productivity is not necessarily a good thing: it often just means that businesses are laying a lot of people off. Dividing GDP by the total number of workers can make for an interesting exercise, but if the number of workers is falling faster than GDP, no one’s going to be happy, even as productivity numbers are likely to look great.

And innovation is not always a good thing either, if the downside of failure is high. Innovation usually ends in failure: the most innovative areas are ones where the cost of failure is low. Before you can become an innovative economy, you need to have a culture of rewarding people who fail. That exists in places like Silicon Valley, but it’s hard to implement in bigger states like Ontario or even, for that matter, New York.

And of course the one area where New York really did innovate was financial services: AIG’s a prime example. It came up with fantastic innovations when it came to guaranteeing super-senior tranches of CDOs, or lending out its securities and investing the proceeds in synthetic bonds. In doing so, it came thisclose to bringing the entire global financial system to its knees.

I ended my talk by asking the crowd to engage in a classic philosophical thought experiment. I’ll give you a choice, the day before you’re born. You can either be born to a randomly-chosen mother in Ontario, or else you can be born to a randomly-chosen mother in New York state. Which do you choose? For me, and for most of the audience, the choice was clear: Ontario. Its PPP-adjust GDP per capita notwithstanding.

I’m glad I found myself in Toronto this evening, because tonight’s Munk Debate was illuminating and enjoyable. The motion was that “North America faces a Japan-style era of high unemployment and slow growth”; Paul Krugman was arguing for it, while Larry Summers was arguing against.

Krugman found himself with the home-team advantage through being paired with Canadian economist David Rosenberg; Summers had strong rhetorical backup from Eurasia Group’s Ian Bremmer. But at heart, this was Krugman vs Summers, which is an inspired match-up: especially in election season, one of the most important criteria for any debate is that it not cleave easily and obviously along party-political lines. That way people just end up voting their party and rehearsing tired party-political talking points.

This debate, because it took place within a basically Keynesian, leftist worldview, was very interesting. Both Krugman and Summers spent a lot of time saying that they agreed with each other — with one big difference. They both quoted Keynes as diagnosing “magneto trouble” — the engine of the economy is broken, and it needs to be fixed. Summers has faith that, in Churchill’s phrase, “Americans can always be counted on to do the right thing, after they have exhausted all other possibilities” — the right thing, here, being to fix the magneto with expansionary fiscal and monetary policy. Krugman, by contrast, sees political gridlock as far as the eye can see, and says that it doesn’t matter how innovative or philanthropic or demographically attractive the U.S. is — if you don’t fix the magneto, the car won’t start, and America’s magneto ain’t gonna get fixed any time soon.

Economically speaking, the Nobel laureate largely had the better of the technocrat. We’re already four years from the beginning of the U.S. recession, and we’ve certainly been going nowhere over that time — the question isn’t whether the economy is lost, so much as whether there’s something which can help it back onto its feet in the next few years. As Rosenberg said, if you look at employment, or the stock market, or median income, or house prices, all of them are back to where they were years ago. Things might improve in the future, but they sure aren’t healthy right now. And Japan is proof that economies can stagnate more or less indefinitely — it’s now, as Krugman pointed out, 19 years into its “lost decade”.

And Summers made a couple of surprising rhetorical missteps, for someone who cut his teeth on debate teams. At the very beginning he praised the debate’s sponsors, Peter and Melanie Munk, holding them up as an example of how North American philanthropists help to keep the continent vibrant. But the gesture rang a little hollow, coming as it did from a man who was being paid extremely handsomely to turn up and do the bidding of the Munks’ charitable foundation. Summers is many things, but he’s hardly top of the list of people in need of large philanthropic donations.

Summers also tried to defend inequality, at least in part, by saying that “suppose the United States had 30 more people like Steve Jobs” — that, he said, would be a good thing even as it increased inequality. “So we do need to recognize that a component of this inequality is the other side of successful entrepreneurship; that is surely something we want to encourage.” This might have been received better had Summers not earlier praised America, while pointing to Bremmer, as “the only country in the world where you can raise your first $100 million before you buy your first suit and tie”.

Bremmer is undoubtedly a rich and successful entrepreneur — and one who never wears a tie, to boot — but he’s making money entirely from the 0.1%, and at heart Eurasia Group’s business model is one which does better as the ultra-rich get richer. In the context of a debate about how to rescue the economy for the other 99% of us, it doesn’t much help to point to One Percenters like Jobs and Bremmer who have managed to do well for themselves in an otherwise stagnant economy.

For his part, Bremmer had one theme, and he was sticking to it: the U.S. might be in a mess, but it has stronger fundamentals than other regions, especially Europe and Japan. But Bremmer never explained how being not-as-bad-as-Europe was going to help drag the U.S. out of its current slump, especially when, as Krugman pointed out, every single country to successfully recover from a financial crisis has done so by means of exports.

But here’s the thing: Summers really is a formidable debater. He met Krugman’s gridlock argument head-on, saying that Barack Obama’s legislative achievements in 2009-10 were greater than those in any two year period since 1965-66, or possibly even 1933-34. And in his concluding remarks, he declared that “things are never as bad as you think they are when things are bad”, adding optimistically — and accurately — that in politics, “the transition from inconceivable to inevitable can be very rapid”. Summers’s optimistic sentiment went down well with the well-heeled Toronto crowd: people who are wealthy and healthy and happy, like the Munk Debate audience, tend to be attracted to arguments saying that there’s no need to feel guilty or fearful.

And so, in the end, host Rudyard Griffiths declared a “technical victory” for Summers and Bremmer. They didn’t win a majority of the votes — in fact, they were beaten by Krugman and Rosenberg, 45% to 55%. But Krugman and Rosenberg started the debate with 55% support, while Summers and Bremmer started with just 25%: basically, the undecideds all plumped for Summers over Krugman.

As for me, I entered the debate torn, and I exited it that way as well. There’s something very un-American about doom-mongering, and it’s fair to say that any given economist, at any given point in time, is more likely to be wrong than right. In order for Krugman to be right, he has to be right — right in his analysis, and right in forecasting what the macroeconomic implications of that analysis might be. But the Krugman-Rosenberg teams couldn’t even agree on the analysis: while Krugman was convinced that a bunch of borrowing and spending would fix what ails the economy, Rosenberg was convinced that we’re at the beginning of a massive deleveraging and that you can’t fix an over-indebted economy by piling even more debt onto it.

Krugman is certainly outside the economic consensus, and while that doesn’t mean he’s wrong, it’s certainly prima facie reason to be skeptical about his analysis. Besides, Krugman’s been so pessimistic for so long, now, that it’s almost impossible to imagine what kind of evidence could get him to change his mind and declare that we’re not headed for a lost decade after all. Summers, by contrast, doesn’t think in forecasts so much as in probability distributions — a much less constricting way of thinking.

So, do I think that North America faces a Japan-style era of high unemployment and slow growth? I’ll agree with Summers and Krugman on this one: yes, it does. Will it manage to do what’s necessary to avoid that fate? That’s something no one can know with any certainty. But life’s certainly a lot easier if you believe that it will.

(Photo: Sandler via Central Image Agency)

Angela Merkel hints at a fiscal union for the Eurozone — Bloomberg

Meanwhile, her party votes to allow voluntary exits from the Euro — Bloomberg

The United States has youth unemployment in line with Arab Spring countries — Rortybomb

The SF Fed thinks there’s more than a 50% chance of a US recession next year — FRBSF.org

All the key fiscal drags the President will face in the next two years – FT Alphaville

It turns out that Wall Street fleeced municipal governments roughly $50 billion — Businessweek

Banks are trying to recoup $15 to $20 monthly per depositor — NYT

Like a man biting a dog, farmers are buying up foreclosed housing developments — WSJ

What “stock and flow” means for the future of online media — AdAge

Very few places in America have lots of bars and cheap marijuana — Atlantic Cities

And Michael Lewis is still using poop analogies, this time about transatlantic journalism — LAT

Few people despise paper checks as much as I do. They’re expensive, insecure, anachronistic, and dangerously reliant on the less-than-stellar delivery record of the US Postal Service. Recently, banks in my neighborhood have been swapping out their ATMs with new machines which read checks — something which must be a hugely expensive investment, for them, in a technology which deserves to be killed off with extreme prejudice.

So I’m a great fan of the way in which states including Oregon, South Carolina, and California are doing away with the unemployment check. If you want unemployment benefits, have them directly deposited into your bank account. Or, if you’re unbanked or otherwise don’t want to do things that way, get your unemployment benefits on a prepaid debit card.

Except, it hasn’t quite worked out that way. HuffPo’s Janelle Ross has been all over this — she started with an exposé of the fees associated with the prepaid cards, and followed up with a tough piece about the cozy relationship between South Carolina and Bank of America on this front. And then today, American Banker’s Kate Berry has found something truly evil going on in California:*

The states sell banks exclusive contracts to run their benefit-card programs, giving Bank of America Corp., JPMorgan Chase & Co. and their rivals millions of new customers in one fell swoop. These banks then collect uncapped, higher fees from merchants with every card swipe, often kicking back some profits to the states as part of revenue-sharing agreements. California, for example, has earned $7.7 million from Bank of America since December 2010…

B of A spokesman Jefferson George says it was California’s decision not to offer direct deposit. It takes 24 hours for B of A to transfer funds, he says, adding that further delays are caused by the other banks.

Jill O’Connell, chief of accounting for the California Employment Development Department, says the state did not offer direct deposit to recipients because doing so would have required the state to hire more employees to track the deposits.

This is, simply, bonkers. I have no idea what “hire more employees to track the deposits” means, but if California is getting $7.7 in kickbacks from BofA, it could probably afford to hire a few more employees with that money. It’s a no-brainer that direct deposit is the easiest, cheapest, and most efficient way of getting money from the state to the unemployed. And yet, faced with a first-best option like that, California doesn’t offer it, choosing to take BofA’s $8 million bribe instead. And BofA is laughing: the prepaid debit cards aren’t subject to the Durbin cap on interchange fees, so it can charge merchants through the nose every time one of these cards is used.

As Ross’s stories show, people on unemployment benefits live very stretched, high-stress lives where pennies count. And they simply can’t afford the fees that banks like BofA and US Bank are levying with abandon on some of America’s poorest and neediest. The fact that the states are going along with the banks on this is just gruesome. Check this out:

The state asserts that people who are prudent, timing their withdrawals while adhering to the limits, can secure all of their funds without charge.

“With careful use, South Carolina cardholders can avoid paying any fees,” said Fairwell.

But people who rely on such cards to collect their benefits have a difficult time hewing to polite language when they hear such characterizations.

“That’s bullshit,” said Sandra Gortman, 55, a Columbia resident who says she incurred some $10 in fees within the first weeks of using her card. “Excuse me. But, really, there is no way given the way you have to live when you have very, very little money and copious amounts of stress, to avoid paying fees.”

I’m sure the banks have been buttering the states up nicely. But let’s hope the Consumer Financial Protection Bureau, or someone, steps in and brings some common sense to bear. Because right now those who can least afford debit-card fees are being essentially forced to incur them. And there’s absolutely no reason why people getting unemployment benefits should have to worry all the time about debit-card fees and how to avoid them. Especially not when they already have bank accounts which their money could be going into directly.

*Update: Berry’s piece has now disappeared, to be replaced by a placeholder saying only that “an updated version of this story will appear soon.” The state of California says that Berry’s original piece contained errors, and specifically that California does offer direct deposit, just not with the first payment. It’s all a bit confusing; I’m looking into it.

Update 2: Here’s my exchange with someone from California’s EDD. In brief, they do offer a direct deposit option, though one has to get a debit card anyway, and they do not go so far encourage people with bank accounts to use direct deposit.

I had a long lunch meeting on Friday with a hedge-fund manager with an astonishing ability to navigate the Bloomberg Blackberry app. And there was one chart in particular which he clearly pulled up on a regular basis: the spread on senior unsecured bank debt in Europe. As Lisa Pollack points out, it’s tempting but dangerous to look at the iTraxx Senior Financials index in this context, because it’s an easy index to follow but it also includes non-bank names like Aviva, Axa, and Munich Re. So here’s the 3-month Euribor/Eonia spread, instead, which also has the advantage of going back to 2007. It’s not the best indicator when it comes to measuring banks’ cost of funds, but it’s fantastic if what you’re looking for is a guide to how stressed the Euroland funding market is.

This chart comes from a 40-page note on European bank liquidity published by Daniel Davies and Jag Yogarajah of Exane BNP Paribas; I can highly recommend you try to get yourself a copy of it somehow. And in fact the situation is worse than this chart makes things look, since in the months immediately following Lehman’s bankruptcy, the three-month interbank funding market effectively did not exist, and the numbers being charted here are, in the note’s words, “arguably somewhat hypothetical“. Take out the nonexistent market following Lehman’s collapse, and spreads in Europe are right at their all-time highs.

We all know why this is, of course. European banks have lots of European sovereign debt. European sovereign debt is falling in value. Therefore European banks are insolvent. Therefore, they have greatly increased credit risk. Therefore, spreads are rising.

Except, this isn’t really true. Greek banks are insolvent, it’s true, if you mark their sovereign debt exposure to market. But to a first approximation, no other banks are. Mark French banks’ holdings of Italian sovereign debt down by say 10%, and they’re still fine; their capital drops, of course, as it would with any write-down, but certainly to nowhere near zero.

What is true is that Europe is in the middle of a textbook liquidity crisis. Banks are not lending to each other — and the ECB isn’t stepping in to solve the problem. This is a serious structural issue with the way that the European monetary system was constructed: the ECB is tasked only with guarding inflation, and not with ensuring the health of the banking system. Individual national central banks are meant to do that. But they can’t print money — only the ECB can. So when there’s a liquidity crisis, no one’s able to step in and solve it.

Here’s another chart from the report:

The light-blue line is the share prices of US banks. They fell steadily through all of 2008 and the beginning of 2009, with TARP barely making a difference. Who caught that falling knife and stabilized US bank share prices? Not Treasury, but the Fed, with its quantitative easing. As soon as that started (see the dark blue line), US financial institutions suddenly looked as though they’d be fine.

For this reason, the Exane analysts are convinced that talk of European bank recapitalizations is silly — essentially, it’s treating the wrong disease:

There is no reasonable amount of capital that can cure a liquidity shortage. The reason why people are refusing to lend to the banks is not primarily because they fear an underlying solvency problem (although some people do), but because they fear an obvious and immediate liquidity problem. It is rational not to lend to an institution that you believe to be illiquid.

The real problem here is simply that banks are hoarding their cash and not lending to each other. Look at the way that bank debt issuance has fallen off a cliff — even the issuance of covered bonds, which to a first approximation don’t have any credit risk.

And the way the banking sector works, banks have to be constantly lending to each other: in nearly every country in Europe, the amount of bank debt coming due every day is higher than the total amount of bank capital in the system. The overnight interbank market is the bloodstream of the European financial system, and the flow of blood is coming to a halt. Or, as the Exane report puts it, “if we think of wholesale funding as commodity input, it is much more like the supply of limestone to a kiln than the supply of flour to a bakery – not only can the banking sector not produce loans without new financing, it cannot shut down for a short period of time either, it needs constant supply.”

And here’s how a recent BIS report put it:

Quantitatively, private liquidity dominates official liquidity… private global liquidity is highly cyclical because it is driven by divergences in growth rates, monetary policies and, above all, risk appetite.

Private liquidity can give rise to international spillovers… This international component of liquidity can be a potential source of instability, because of its own dynamics or because it amplifies cyclical movements in domestic financial conditions and intensifies domestic imbalances.

The liquidity situation at European banks is similar to that at the sovereign level, too, as James Macdonald explains very cogently. Italy’s debt, it turns out, is not particularly high, by historical standards.

Instead, the problem is that Italy is being forced to roll over its debts on a regular basis.

Before World War I, countries considered truly creditworthy borrowed on terms that are unrecognizable nowadays. The vast majority of their debts were in the form of perpetual annuities…

In 1900, for example, France had a public debt amounting to 105% of GDP; but over 96% of it was in the form of perpetual annuities, and less than 4% in the form of short-term Treasury bills. Therefore the country’s annual funding requirement was only 4% of GDP. The credit of a country with such a debt structure was virtually impregnable short of a world war.

Since those halcyon days, however, western governments have raised their debts on a far shorter-term basis… France, with a public debt of (only) 86% of GDP, now has an annual funding requirement equivalent to over 20% of GDP. It is in good company. Belgium Italy, Spain, and Portugal also have to finance 20-25% of GDP each year. The USA has a funding requirement of nearly 30% of GDP, thanks to the folly of the Treasury Department’s decision to stop selling the 30-year T-bond in 2001 in a misguided attempt to shorten the average duration of the debt.

The result is that the sovereign borrowers that the markets have been accustomed to think of as “risk-free” have become a little similar to banks… At any time, a ripple of suspicion about their long-term ability to repay their debts (not unreasonable given the relentless build-up of their off-balance sheet liabilities since the war) could set off a chain reaction which ends up with a self-defeating rush for the exits.

This is what is happening to Italy.

You can see the dilemma facing the ECB here. It’s facing a dual liquidity crisis: not only within the European banking system, but also at European sovereigns. And it doesn’t really have a mandate to address either one.

But it’s liquidity crises which are the most violent, and which can kill a financial system — indeed, an entire economy — more or less overnight. Someone in Europe needs to come up with a plan for how to address the current crisis — now. Because if it gets any worse, it could well be too late.

I gave a talk on Thursday at the AppNexus Summit in front of a few hundred digital advertising types. The first part of the talk was a macro overview, but when the Q&A session started, all that anybody wanted to talk about was my take on online media. And given how granular the discussions over the course of the rest of the day were going to be, I wanted to push back a bit against some of the unexamined assumptions which I encounter most of the time when I meet online-media people.

The first is that there’s something necessary and inevitable about ad-driven models dominating the online media industry. That’s certainly how things have worked out to date, but there was nothing inevitable about it. From the very early days of the World Wide Web, many extremely smart people pushed very hard to develop a workable micropayments architecture online. Ads looked like a non-starter: as Gary Wolf put it in his history of Wired, “the computer screen was low resolution; the ads themselves were tiny, and they disappeared as soon as the user scrolled down”. A few sponsors would buy ads in order to understand the new medium, but there was never anything particularly promising in online banners.

Meanwhile, people were happily paying small sums for newspapers, for magazines, for coffee, for any number of fast-moving consumer goods. And websites were about as fast-moving a consumer good as the world had. A simple and painless online payments system was clearly the way that the web was going to make money. The only problem was — and is — that the payments world is old, and slow, and very resistant to change; rumor has it that Mastercard actually twisted Marc Andreessen’s arm so that he would remove his <payments> tag from the early versions of the Mozilla browser.

With the US payments system being stuck on ACH for the foreseeable future, payments online have been clunky and unwieldy, based around expensive and cartelized credit-card transactions; the only real competitor, PayPal, is a for-profit company, a wholly-owned subsidiary of eBay which doesn’t clear at par and which has many other obstacles to being adopted as a broad-based payments architecture.

So one of the big reasons why online advertising has done so well is simply the negative one: online micropayments were a disaster, and never took off. But they’re much more compelling as a business model, and there’s a decent chance that at some point in the future the financial system as a whole is going to get its act together and put together something which actually works and which people are happy to adopt. At which point, the online ad industry will face a major threat.

My second point was that black-hat SEO advertisers, like the ones who got in touch with Hamilton Nolan last month, do at least serve one purpose: they show just how valuable simple links — as opposed to expensive branded ad campaigns — can be. Hamilton was being asked to insert links into blog posts he was writing; more recently, I got an email from someone named “Whitney Meyer” offering me $50 every time I added a link to an old post of mine. Google’s PageRank algorithm is a lot more sophisticated than it used to be, but the fact is that it still gives enormous weight to who’s linking to whom, for very good reason. Links are what the web is built on, and a large part of why it’s so incredibly powerful and popular.

Finally, after the obligatory plug for Counterparties, I laid out my vision of what online advertising could be. Check out the front page of Reuters.com: we have what is basically an ad unit at the bottom of the right-hand column which acts as an ad for Counterparties. It’s got Counterparties branding, but the meat of it is four links to four different external sites. (As I write this, they’re the NYT, the Guardian, the Economist, and the Huffington Post.) We want you to click on those links; when you do, you leave Reuters.com, and you don’t go to Counterparties.com. Instead, you go directly to HuffPo, or wherever. Reuters gets no traffic when you click on that link: indeed, we’re sending you away. That’s a good thing: we’re providing a valuable service for our readers, pointing them to great content. If you believe in putting the audience’s needs first, this kind of thing is a no-brainer.

What we have cobbled together is something really rather novel: an ad unit that smart readers actually want to click on. I’ve been looking at ads online for over 15 years now, and I’ve never wanted to click on one, with the exception of a handful of very bloggish sponsored posts at Gawker Media, which were interspersed seamlessly between inferior original editorial posts. It’s a known fact in advertising circles that only idiots click on ads — and yet advertisers still think that click-through rates mean something, and that a higher click-through rate means a better ad. It’s the measurement fallacy: people tend to think that what they can measure is what they want, just because they can measure it. And it’s endemic in the online advertising industry.

In fact, with very few exceptions, I’ve never even wanted to look at online ads: its quite astonishing, the degree to which we’ve collectively trained ourselves to ignore ads when we bring up a web page. And what that says to me is that online advertising is missing something really huge.

At one point in the Q&A session, I asked the audience to raise their hands if they read Vogue magazine; maybe three or four people, in a crowd a hundred times that size, did so. Most of the people in the audience literally didn’t know that when people buy Vogue, they want to read the ads; in a very real sense, the editorial is something which just gets in the way.

Leaf through a glossy fashion magazine like Vogue, and you’ll find dozens of pages of ads at the front of the book, with basically zero editorial content to break them up. If advertisers thought that readers only looked at ads insofar as they were adjacent to editorial, then they would ask for placement opposite editorial. But that’s not what happens: the ads all cluster at the front, the editorial gets relegated to the back, and readers spend more time looking at ads than they do looking at editorial features. In fact, the most avid readers of the editorial shoots are the advertisers, who use them for ideas when they’re planning their next campaign.

Vogue is a prime example of the power of advertising: if, as an advertiser, you know how to give people something they want, then you don’t need to rely on second-best stratagems like adjacency. And no one ever clicked on an ad in Vogue. Which is one reason why Gawker’s former ad chief Chris Batty once proposed that all ads on Gawker Media should be images only, and not clickable at all — it would force advertisers to create something good, instead of chasing after clicks from idiots.

Because it’s so easy to measure things like impressions and click-through rates, the online ad industry has missed the real power that advertising can have, and its practitioners tend to sneer at old-media ad money as being largely wasted, in contrast to the carefully quantified campaigns one sees online. One questioner at the conference proposed that ad spend could soon be counted simply as a cost of goods sold in accounting statements, since technology had made the relationship between adspend and sales so transparent.

But there’s something very powerful about brand advertising — something which helps explain why so much more money still gets poured into TV ads rather than online campaigns. Part of it is that TV ads are glossier and more self-contained, not competing for attention with simultaneous editorial content. And another part of it is that Americans have demonstrated quite clearly that they prefer lean-back to lean-forwards: cable TV is still a higher priority for the vast majority of the country than is broadband access. And the content they prefer to ingest in a lean-back way includes advertising.

So what’s an advertiser to do, online? My idea is to move away from the idea of getting people to click on ads, but at the same time to treat with suspicion the idea that it’s possible to deliver a beautiful, self-contained brand proposition online in the same way that you can in Vogue or on TV.

Instead, take a leaf out of the book of sites which really have generated a huge amount of loyalty online — sites like Drudge, or Reddit, or Techmeme, or Fark, or any number of other aggregators and curators with enormous followings. Millions of people love these sites, and visit them with astonishing regularity. Why? Because they send them to fantastic third-party content.

It’s easy to create an ad unit which is primarily links to third-party sites; I’m sure with a bit of effort and creativity you could put one together which is even better than the Counterparties unit on Reuters.com. Start placing that ad over the web, and people will, for the first time, actually have a reason to want to look at your ad; when they see it, they’re even likely to click on it! Sure, that click won’t take them to your site — but it’s still a great measure of engagement. And they will love you for sending them to great content.

And what if it’s too hard for you to put together a dynamically-updated list of great content to link to? In that case, you could always ask the people who do it well if they’d be willing to put together a white-label version of their own links for you. The Browser might be a good place to start — or you could even ask us at Counterparties. And our partners at Percolate are already doing something similar for corporate clients. Here’s how they put it:

In a digital world, we believe brands can be signals. Pointing consumers to valuable information that is not necessarily about the brand directly, but speaks to the brand promise and consumer mindset.

I’m not saying that online advertisers should drop everything and just start linking to third-party sites. But I am saying that it’s worth a try — it’s an idea worth experimenting with. If you do it, and you start getting lots of positive feedback from consumers, you’re probably doing something right. And you might just have discovered a way to build your brand online, even if you’re not necessarily a particularly digital company.

Paul Krugman explains the Euro crisis in one sentence — Business Insider

An interesting attack on ECRI’s recession call — Stone Street Advisors

Pretty much everyone at MF Global was fired en masse — Reuters

29% of all US mortgages are underwater — Ritholtz

And the gigantic foreclosure settlement won’t give homeowners very much — Huffington Post

Unemployment for young veterans is 30% and rising — Businessweek

While homelessness for female veterans has increased each of the last six years — LA Times

UK MPs will probably find James Murdoch “ill-informed” but not “mendacious”.  They’ve got it reversed — Guardian