Felix Salmon

The limits of statistics

Felix Salmon
Nov 16, 2011 15:03 UTC

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.


“Is Mr Salam aware that slavery ended nearly 150 years ago?”

Institutionalized racism — the remnants of slavery — was with us into the 60s, and cultural momentum makes it difficult/slow to break entrenched patterns.

More African-American students are making it into (and through) college than ever before, but even today most of their parents are not college educated. You can’t overstate the importance of having role models to teach academic attitudes and success.

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Nick Rizzo
Nov 16, 2011 00:08 UTC

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


dsfan, what’s interesting about the 70% figure is not so much the number itself, as the fact that it’s so much higher for the top 1% than for everybody else. Look at the graph in the full article — for most of the income scale, the percentage is 35-45%. Then suddenly at the very high end, it spikes. IOW, the very wealthy use their connections to help their kids get a good start. Not surprising, and not even necessarily immoral or anything like that — but it should make us doubt the “I got my wealth by lifting myself by my bootstraps” rhetoric that the wealthy use to justify their anti-tax zealotry. Nobody becomes wealthy SOLELY through their effort — they rely on many other factors, including the luck of being born into the right family, the physical and legal protections of the gov’t, and so on.

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The limits of macroeconomic statistics, Ontario edition

Felix Salmon
Nov 15, 2011 18:19 UTC

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:

ontario new york median household income.JPG

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.


Can you please tell me what the source is for the Ontario data in the second chart? Also, has anything been done to adjust the data in the chart? Thanks for an interesting post.

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Krugman vs Summers: The debate

Felix Salmon
Nov 15, 2011 05:53 UTC

x Munk Debates TST-CIA108.jpg

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)


@spectre855, you hit the nail on the head. Corporate corruption and person-hood are ridiculous. And while Krugman’s prescription for our economy might work, it is locked in a debate that seems to go nowhere. The political theater isn’t ready for a change because it’s funded by the o.5%. Change may be coming though, with our own Arab Spring– the Occupy movement.

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Nick Rizzo
Nov 15, 2011 00:41 UTC

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

The unemployment debit-card scandal

Felix Salmon
Nov 14, 2011 23:17 UTC

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.


Knibblet–Felix doesn’t like payment systems that don’t generate fees for banks.

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Europe’s liquidity crisis

Felix Salmon
Nov 14, 2011 15:33 UTC

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.


Spare me the details: how can I make a profit from it? Looking back, fear of “inevitable” inflation kept me from some insured CDs that I wish I had now.

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The future of online advertising

Felix Salmon
Nov 14, 2011 06:24 UTC

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.


I don’t assume that”black hat advertisers” is really a propper identify. See links would be the pretty essence of your web, and you can simply call these back links a black hat linkbuilding tactic in the event the Information doesn’t match a sequence of components which include relevance and originality. Precisely the same goes into the embedded inbound links – when the targeted pages are irrelevant5, than sure! it´s a small stage but still really helpful Web optimization approach. Anyway I similar to this form of post very considerably – any dialogue is best than a cryout from publishers blaming google for their absence of negotiation capabilities.



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Nick Rizzo
Nov 11, 2011 23:57 UTC

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


So what I don’t understand, with all this talk of “underwater” mortgages, is what happens if some entity happens to take your underwater property through imminent domain?

How much is “just compensation”? Do you get stiffed? Does the lender? Are you happy or sad?

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