Opinion

Felix Salmon

Did wifi cause a rise in bus ridership?

Felix Salmon
Dec 26, 2011 16:49 UTC

bus1.tiff

What’s behind the rise in bus travel in recent years? It certainly seems very impressive, according to the latest research from DePaul University.

Here’s how Bloomberg’s Jeff Plungis characterizes it:

Megabus.com and BoltBus led U.S. curbside bus companies that boosted trips by 32 percent this year as travelers opted to leave their cars behind and surf the Internet while traveling.

And here’s Matt Yglesias, with a slightly different take:

Like Duncan Black, I’m far from certain that the right way to understand this is actually as intercity bus trips substituting for intercity car rides. The way I would primarily interpret it is as these services leading to additional trips that wouldn’t otherwise have been taken. Instead of riding Amtrak to New York once a year, you ride the bus three times instead.

If you look at the data, Yglesias seems closer to the mark than Plungis. Could the massive 30% rise in curbside bus ridership be accounted for by the 1% fall in private autos? Possibly. But it’s more likely that something else is going on.

bus2.tiff

Both Plungis and Yglesias, I think, miss the elephant in the room, and the obvious reason why the DePaul measurements for bus ridership have been growing at such a startling rate. Here’s how the paper puts it:

The analysis we provide also excludes all “Chinatown operators,” which have significant different qualities than mainstream operators. As a general rule, those carriers listed on the GotoBus.com web site are considered for purposes of our study to be Chinatown operators. Many of these carriers do not invest in a brand identifiable by the paint scheme or insignia on their buses.

Indeed, DePaul specifically excluded the dramatic growth of California’s USAsia Bus Lines, just because they determined that it counted as a Chinatown operator.

The obvious theory, then, is that big operators like Megabus and Bolt Bus saw the huge success of the Chintaown bus market and saw an opportunity there. They brought in branding and professional marketing and wifi and much higher safety standards, and succeeded in taking a huge amount of market share from the Chinatown operators who were never part of the DePaul survey in the first place.

That theory is borne out by my own anecdotal experience: when my friends took the bus from New York to DC or Boston ten years ago, it was normally a Chinatown bus. Today, it’s more likely to be a Bolt Bus, or even a higher-end product like the Limoliner.

In other words, the DePaul data is consistent with total bus ridership actually staying constant, with the recognized curbside buses simply taking ridership share from unrecognized Chinatown operators. In reality, I suspect that bus ridership is growing. Just not nearly as fast as the DePaul paper would have you believe.

As for the much-vaunted wifi on these buses, it’s basically the same as the wifi on Amtrak, or from Gogo in-flight: in a word, crap. If you’re working on a laptop and can download emails or web pages in the background while reading or writing something else, then it’s fine. But it’s pretty much useless for people on iPads, where the lack of multitasking means you can’t read one thing and download something else at the same time.

It seems to me that the travel industry in general has done a very bad job of adjusting to the fact that most wifi-enabled devices these days are not laptops. I even stayed at one pretty high-end hotel in England, recently, which thought that providing an ethernet cable was a perfectly good alternative to providing wifi, and which didn’t have any kind of Airport Express devices or similar that it could lend out to guests who didn’t have ethernet ports on their computers or tablets.

So far, no one’s really cracked the problem of the mobile web — we’re still in a world where connecting to the internet when on the move is far too difficult, and needs to be configured (and often paid for) on a device-by-device basis. Companies like Lightsquared want to change that, but for the time being they’re vaporware, and I’m not holding my breath for them to arrive. Which means that for the time being it’s a bit of a stretch to say — as Plungis, for one, does — that the mobile web is actually changing the way we travel from city to city.

COMMENT

Your title is misleading: it’s not the wifi, it’s the new fish jumping into the chinatown bus pond. 10 years ago, Chinatown buses were awesome deals compared to greyhound, but lots of people either didn’t know about them or were culturally uncomfortable with buses that seemed to be for a particular demographic (chinese people or poor people). Now greyhound’s fares are much reduced and the new buses offer cultural acceptability. Wifi is window dressing.

Posted by colburn | Report as abusive

Why muni investors shouldn’t worry about Jefferson County

Felix Salmon
Dec 26, 2011 00:23 UTC

There’s a distinct whiff of the faux-naive coming off Mary Williams Walsh’s article about the fate of Jefferson County’s general-obligation bonds:

People who own what is considered the safest type of municipal bond may be in for a surprise.

This safe debt, called a general-obligation bond, is said to be the next strongest thing to Treasuries because it is backed by a “full faith and credit” pledge. That means the government that issued it will pay it on time, no matter what.

But now Jefferson County, Ala., has stopped paying such debt, breaking with convention and setting up a fundamental test of what full faith and credit truly means.

While we’re repeatedly told what “conventional wisdom” has to say on such matters, or what certain fund managers might once have been taught, not once is any authority actually cited saying that GO bonds are “the next strongest thing to Treasuries”.

Which is hardly surprising, since the muni market hasn’t been considered particularly strong for some time now. Back in February I blogged Michael Corkery’s article on how individual investors were abandoning the market, precisely because they had become aware that it was anything but safe. When 60 Minutes is running alarmist pieces on how hundreds of billions of dollars of muni bonds could default, no one’s sitting back with a smug expression and saying “well, your muni bonds, backed by actual cashflows, might default, but my muni bonds, backed by some amorphous ‘full faith and credit’, are perfectly safe”.

And in truth no one ever said that — it’s hardly been a closely-held secret that Jefferson County has no tax-raising abilities. In fact, that’s one reason why revenue bonds came into being: as in most other markets, there’s a strong case to be made that secured bonds are safer instruments than unsecured bonds.

Indeed, if you carry on reading through the end of the NYT piece, you’re eventually told that Jefferson County’s MBIA bonds were wrapped (that is, insured) by MBIA. Obviously, if everybody thought they were perfectly safe, then no one would have demanded them to be insured.

But the biggest problem with the NYT article is its deep premise: that Jefferson County is some kind of harbinger, and that if it can default on its GO bonds, then lots of other municipalities can as well. This meme is both very pervasive, and very dangerous, as Bond Girl explained in a long blog entry in October:

Some people mistakenly characterize Jefferson County’s financial problems as a canary in the coalmine for the municipal bond market, which suggests that they still have no idea what transpired there (or how long Jefferson County has been in financial distress). Portraying Jefferson County as a typical municipal credit is akin to portraying Enron as a typical corporate credit. With Jefferson County, various financial firms – but primarily JP Morgan – exploited an existing culture of corruption and made taxpayers the victims of one of the largest frauds in the history of the financial markets.

I’ve been saying at least since at least April 2009 that munis are one of those asset classes which is safe until it isn’t — that once you get some unknowable number of municipal bond defaults, suddenly no one will have access to the market any more, and the whole market could implode:

If five or six munis default, things get much, much worse. At that point, the cost of default for a wrapped muni issuer plunges, and possibly even goes negative. Once a few munis default, no one’s going to lend to any muni, even the ones which are current on their debt. So why bother staying current? Why not just default and let the insurer, rather than your local taxpayers, take most of the pain?

In other words, there’s a very serious, and pretty much impossible to hedge, risk of snowballing muni defaults.

But the point here is that Jefferson Country is sui generis and emphatically not one of those five or six munis. It’s a case unto itself, cut through with corruption and fraud, and is in no sense an example for any other municipality to follow. Jefferson County’s GO bonds are not an example of the safety of GO bonds more generally: as Bond Girl says, they’re more akin to the way that people lost their money with Enron or Madoff. The germane risk in Jefferson County is fraud risk, not GO-bonds-defaulting risk.

And remember that no one knows what the recovery value is likely to be even on Jefferson County’s bonds: it could yet turn out to be quite high.

Now I’m no great believer that bondholders should be senior to everybody else, to the point at which bond coupons are more important than vital municipal services. But let’s not look to Jefferson County to blaze a trail on that particular front. What’s going on in Jefferson County is an interesting datapoint, but it’s in no sense the beginning of some kind of muni-default snowball.

COMMENT

Kudos to Cate Long for an informative posting. One of the major challanges in the Jeffco Chapter 9 is that the securities at issue are not Bonds, they are Warrants. There appears to be an important question under Alabama law whether a municipality (like Jefferson County) can unilaterally act to raise taxes in order to satisfy these Warrants (assuming Jefferson County even wanted to voluntarily do so)without State approval.

We are currently investigating possible legal claims against certain parties involved with the underwriting of these Warrants.

TURNER LAW OFFICES, LLC
hturner@tloffices.com

Notice: The purpose of this posting is to identify select issues that may be of interest to readers. Under Georgia’s Code of Professional Responsibility, portions of this communication may constitute attorney advertising. This posting should not be construed as legal advice or opinion, and is not a substitute for the advice of retained counsel.

Posted by LITIGATOR1 | Report as abusive

The Bank of Cattaraugus’s numbers

Felix Salmon
Dec 24, 2011 01:56 UTC

Alan Feuer has the story of the Bank of Cattaraugus, a tiny community bank in the eponymous town an hour south of Buffalo. It’s a heartwarming tale of community banking:

A few years ago, when Ms. Bonner fell behind on her property taxes and was forced to sell her home, the bank’s president, Patrick J. Cullen, who held the mortgage on the house, had his son Thomas buy it. Thomas Cullen, who lives in Chicago, never intended to live there.  Ms. Bonner and her sister were able to stay as renters.

“The whole thing was incredible,” Ms. Bonner said the other day, a single pine branch hanging in her living room in lieu of a full Christmas tree, which she could not afford. “I just didn’t realize there were people like that in the world, people who would help you.

“Especially,” she said, “a banker.”

Feuer doesn’t get much into the financial details, but the ones he does have are intriguing:

With $12 million in total assets, the Bank of Cattaraugus is a microbank, well below the $10 billion ceiling that defines small banks…

In its 130-year history, the bank has rarely booked a profit for itself in excess of $50,000. Last year, Mr. Cullen said, it made $5,000…

The largest employer in the village is the school district, and many village residents survive, like Ms. Bonner, on pensions or government subsidies, in homes that have an average mortgage of $30,000..

Even in Cattaraugus — population 950 — Mr. Cullen says he receives at least two offers a week from larger institutions that want to buy him out. He claims to be unsurprised by these overtures, though his business is exceptionally simple: 80 percent of the loans in his portfolio are mortgages.

The bank’s official FDIC reports add a bit more detail — and show income of $8,000 on total assets of $16.2 million as of September, along with $1.1 million in equity capital. Last year, net income was $47,000, which even then was a return on assets of just 0.3%.

Total salaries and employee benefits are $276,000, split between eight employees, plus $34,000 in directors’ fees. (Both the CEO and his daughter, the CFO, are directors; his son Thomas is “Director Emeritus”.) Feuer describes Mr Cullen as “a well-to-do man”; but he’s clearly not extracting a huge salary from his bank. Instead, Cullen uses the bank as a vehicle for his civic ambitions: he holds a position of great importance in this town. It’s easy to see why he has no interest in selling the bank and getting replaced by some ambitious banker working his way up the corporate ladder. Instead, this bank is a family affair: a Cullen has been president since 1957, and Cullen’s daughter will surely replace him when he retires.

Understandably, Bank of Cattaraugus doesn’t have online banking, although it does have something it calls “bank-by-mail”. And there are signs of significant political clout, too: the bank is home to state and municipal deposits totaling $5.42 million, more than 37% of its total deposit base. Without those deposits, its hard to see how the Bank of Cattaraugus could run any kind of profit at all.

What the bank does have, of course, is much more liquidity than any individual in town. And although it doesn’t engage in complex trading strategies, it does do its own kind of risky proprietary trading: the bank took took over one abandoned house, for instance, fixed it up, and sold it for an eventual loss of $500.

Most interestingly, it also has a local monopoly. As a result, it faces little competition when it comes to things like deposit interest rates, and extremely little competition even when it comes to lending rates. No other bank understands local property values like the Bank of Cattaraugus does, which almost certainly means it’s often the first and last stop for locals looking for a mortgage. Cullen also tells the story of a local Amish man who got an $85,000 consolidation loan from the bank: no one else would loan him anything like that, given his declared income of just $2,300 a year. But the result is that if you get a loan from the Bank of Cattaraugus, you’ll pay whatever Patrick Cullen says you’ll pay.

Now there’s no evidence that Cullen is abusing his monopoly at all. The bank has earning assets of $13.7 million, on which it earned net interest income of $544,000: that’s an average interest rate of less than 4%. And service charges are running at $58,000 per year, which works out to just under $3 per month, on average, for each of the bank’s 1,625 deposit accounts. That’s an entirely reasonable sum to pay for the utility service of having a bank account at your local community bank.

The Bank of Cattaraugus, then, really does look as though it’s everything Feuer says it is. It’s run by a pillar of the local community, to really help local businesses — and the town itself — thrive. I’m sure that if you wanted to buy up the old hotel in the center of town and spruce it up a bit, Cullen would give you all the help and support you needed. The Cullen family gets to live well in, and provide some financial plumbing for, a town they clearly love and feel partially responsible for. And the bank looks perfectly healthy, even without much in the way of profits.

Of course, this kind of model doesn’t scale: that’s kinda the point. And neither could some enormous franchise with hundreds or thousands of branches ever provide the same kind of service that the Bank of Cattaraugus does now. But without what you might call the Cullen family’s noblesse oblige, they would surely have sold the bank for a seven-figure sum by now, and gone off to more lucrative careers elsewhere.

How can one institutionalize that kind of citizenship? The answer is simple: credit unions. While the Bank of Cattaraugus is a prime example of a small community bank which really is doing God’s work (on a total asset base rather lower than Lloyd Blankfein’s annual salary), everything it does could also be done by a credit union, without the associated risks of the owners selling out at some point.

Everything, that is, except one important thing: banks are allowed to accept state and municipal deposits, while credit unions are not. If the Bank of Cattaraugus became a credit union tomorrow, it would have to return $5.42 million in deposits, and it would become insolvent overnight. So while I don’t for a minute begrudge the bank those deposits, I do wonder why credit unions don’t have the opportunity to do the same kind of thing with them. The world would be a better place if they could.

COMMENT

Auros, when I wrote my message the previous one to mine was not yet up.

Even so, you are making assumptions that a person’s salary can be lumped in with his wife’s. I did say “total salaries are so low” relatively speaking to consider the man wealthy and I still maintain that. (why you had to take what I wrote out of context is beyond me) Perhaps he made his money elsewhere as TFF says.

No need to presume me wealthy, or elitist as I make a very modest income with which I do amazing things like take care of my family, pay off my mortgage and I started saving for college when my child was 4… so it is paid for. I am not sure why you presume otherwise.

My questions arose being the article Felix is writing about speaks of the banker’s “wealth”, his modest income (either he is making a modest income or his employees are grossly underpaid, being it doesn’t state what his salary is) and the millions he is spending on museums and depressed building… he and the bank.

Posted by youniquelikeme | Report as abusive

Counterparties

Nick Rizzo
Dec 23, 2011 23:32 UTC

S&P on Europe: still pretty much hopeless — Reformed Broker

Bernanke sees his shadow, may keep cheap money around for two more years — WSJ (paywall)

Meanwhile, Bloomberg releases all his 2007-2009 emergency lending data — Bloomberg

Low holiday prices should terrify retailers about the future — NYT

AIG’s CEO would like to hang around a while longer — WSJ (paywall)

FT Alphaville’s New York team present their awards video — FT Alphaville

What it was like to run a bar in Baghdad during the Iraq war — The Atlantic

Buzzfeed’s 50 funniest headlines from 2011 (two strange ones to follow) — Buzzfeed

Handsome accordian maker is North Korea’s kingmaker — Reuters

‘Gay Robot’ Heckles Bachmann At Iowa Event (VIDEO) — TPM

More links at Counterparties.com and across the pond. I’ll be off next week, so your Counterparties posts will be by OG Felix Salmon himself. Thanks so much for reading, enjoy your holidays, and I’ll see you in the New Year!

 

COMMENT

> Somehow the phrase “everybody comes to Rick’s” is running through my mind.

My first thought was ‘Club Scud’.

Posted by seanmatthews | Report as abusive

The philanthrocapitalism debate

Felix Salmon
Dec 23, 2011 17:50 UTC

The Stanford Social Innovation Review is hosting a debate over philanthrocapitalism in which Kavita Ramdas, on the anti-philanthrocapitalist side, makes some very salient points.

Firstly, Ramdas breaks philanthropy down into three groups: traditional philanthropies; philanthrocapitalism; and what she calls “social change philanthropies”, which “are emerging to challenge the substance, form, and direction of philanthrocapitalism as well as the current, largely unequal systems of trade and global capitalism”.

Ramdas doesn’t give examples of these anti-capitalist social change philanthropies, so I’m a bit unclear on what exactly she has in mind, although Occupy Wall Street and its funders certainly seem to count. And interestingly, although Ramdas is siding with the social-change philanthropies against the philanthrocapitalists, the philanthrocapitalists, in the form of Matthew Bishop and Michael Green, seem more interested in opposing traditional philanthropies:

We still need to talk about nonprofit performance and impact. Most nonprofits are “black boxes” to their supporters. We are excited that the Internet and social media can engage and mobilize “mass philanthrocapitalism” from ordinary donors. Organizations such as GlobalGiving, Kiva, and DonorsChoose have made a great start, but this revolution has a long way to go. And we mean revolution, maybe even a mass extinction of traditional nonprofits that cannot engage their givers.

Although I have no desire to overthrow the capitalist system, I have a lot of sympathy with Ramdas, here, and very little with the philanthrocapitalists. The idea that a “black box” is always and obviously a Bad Thing is oversimplistic: while transparency and accountability are good, they can result in conservatism and a lack of the very kind of risk appetite and failure-embracing that the philanthrocapitalists love to espouse.

Meanwhile, Ramdas has a strong point here:

Current philanthropic practice is also driven by the need to find technological solutions, the same “fix-the-problem” mentality that allowed business people to succeed as hedge-fund managers, capital-market investors, or software-developers. This approach is designed to yield measurable and fairly quick solutions. A symptom of this may be found in the kind of skills that new foundations are seeking. I am struck by how few social scientists are employed at the new “mega-philanthropies.” Instead, the people most sought after are management consultants, business people, former industry leaders or lobbyists, and scientists. Each of these is expected to bring a crisp and coolly efficient approach to their work, demonstrating their “expertise” on specific issues—climate change, agricultural productivity, soil quality, or infectious disease. The nuance and inherent humility of the social sciences—the realization that development has to do with people, with human and social complexity, with cultural and traditional realities, and their willingness to struggle with the messy and multifaceted aspects of a problem—have no cachet in this metrics-driven, efficiency-seeking, technology-focused approach to social change.

Pointedly, Ramdas asks for — and the philanthrocapitalists fail to provide — “evidence that philanthrocapitalism works”. When the Gates Foundation, armed with a million-dollar salary for its new CEO, ends up hiring a second Microsoft centimillionaire, the simplest explanation is usually the right one: it’s not because that person, at that salary, is the best possible choice for the foundation. It’s just that extraordinarily rich people, like everybody else, like familiar surroundings. And they’re also disproportionately likely to have an immodestly high opinion of their own ability to be a success in any field they choose. If they hired management consultants as a tool to make lots of money, then why not hire management consultants as a tool to give it away?

There’s a lot of this which can’t and won’t be changed. Philanthropy is driven by money, and money comes from rich people. If it’s rich people who are paying the philanthropic piper, then it’s rich people who will call the philanthropic tune. And non-profit organizations which don’t pay the requisite lip service when it comes to return on investment and the like will simply get passed over, when the dollars are doled out, in favor of fundraisers who can talk the talk.

I have little reason to believe that the rich are better at giving away money than the poor, or that they run philanthropies better. But this is how rich people like to give away their money, these days — and it’s better that they give it away than that they don’t. I think they have a lot to learn from philanthropies which have been around for decades, but they’ll have to learn that themselves, slowly. In the mean time, we don’t need to celebrate philanthrocapitalism in order to be happy that the rich are choosing to give their money away, rather than just keep it in their families forever.

COMMENT

For some, money is subsistence.
For some, money is security.
For some, money is freedom.
For the very wealthy, money is power and fame.

Giving money to a charity would be ceding that power. Giving up the ability to splash your name all over the headlines. Surely that must take precedence over charitable endeavors?

Posted by TFF | Report as abusive

Counterparties

Nick Rizzo
Dec 23, 2011 02:39 UTC

Europe hasn’t learned the lessons of Argentina’s financial crisis, say Argentinians — Spiegel

“China hedge fund bears look good in shorts” — Reuters

Ron Paul’s investments are a “half-step away from a cellar-full of canned goods” and ammo — WSJ Total Return

Actually, 18 years ago, Ron Paul wrote a letter warning of a “coming race war” — Reuters

Katya Wachtel learns Paulson’s Advantage Plus fund’s off more than 50% on the year — Reuters

Fred Wilson: The market for web company IPOs is healthy and rational — A VC

Brookings’s favorite economic stories of the year — Brookings

Many more great links at Counterparties.com, as well as further reading at our salmon-colored friend’s.

COMMENT

Wonder if Abacus case would have been quite as compelling if ACA and ABN had known a hedge fund manager that lost 52% of its capital in one year was the other side of the bet vs one that – after the trade was made – got immortalised in a book.

Posted by Danny_Black | Report as abusive

The global youth unemployment crisis

Felix Salmon
Dec 22, 2011 17:16 UTC

When Occupy Wall Street launched, there were hopes and fears that it would recapitulate the Arab Spring. Those hopes and fears sprang largely from a simple fact: that both OWS and the Arab Spring are characterized in large part by angry, unemployed young people.

As we come to the end of 2011, it’s worth taking note of the fact that stunningly high youth-unemployment numbers are increasingly a global phenomenon — and that this is a new thing, which postdates the financial crisis, and which doesn’t seem to be improving anywhere.

Here are the numbers for a few key Eurozone countries: you can see not only that Spain and Greece have almost unthinkably high youth unemployment approaching 50%, but also that Ireland, in particular, has seen its youth unemployment rate go through the roof since the crisis, from below 10% to over 30%.

dc_13.jpg

And don’t think that the US is any better, it isn’t. The US measures youth unemployment once a year, in July, and that series looks like this:

fredgraph.png

The thing to note here is not just the absolute level — youth unemployment is now 18.1%, and for blacks it’s 31% — but also the sharp rise. Countries differ in how they measure unemployment, but however it’s measured, it’s going up alarmingly, and the level in the US is in exactly the same ballpark as the levels we saw in the Middle East which caused the Arab Spring. We’re lower than Egypt and Tunisia, but we’re higher than Morocco and Syria:

imf_youth_unemployment.jpg

The Economist had a great article on youth unemployment in September, saying that its negative repercussions “will be felt for decades, both by those affected and by society at large”. In peripheral European countries, youth unemployment causes a massive brain drain, and in all countries there’s a clear link between youth unemployment and the crime rate. In turn, if a higher crime rate leads to a higher incarceration rate, then a significant chunk of a whole generation essentially loses the opportunity to have a successful career, since having prison on your resume tends to be very harmful indeed for job prospects.

And as far as total future national income and wellbeing is concerned, we’re causing huge amounts of damage here:

Youth unemployment leaves a “wage scar” that can persist into middle age. The longer the period of unemployment, the bigger the effect. Take two men with the same education, literacy and numeracy scores, places of residence, parents’ education and IQ. If one of them spends a year unemployed before the age of 23, ten years later he can expect to earn 23% less than the other. For women the gap is 16%. The penalty persists, though it shrinks; at 42 it is 12% for women and 15% for men…

Unemployment of all sorts is linked with a level of unhappiness that cannot simply be explained by low income. It is also linked to lower life expectancy, higher chances of a heart attack in later life, and suicide.

As for the particular case of America, one big effect of the lack of jobs for young people is a significant rise in student-loan debt. The Economist drily notes that “as they build up debts, not all these students will be improving their job prospects”.

The global financial crisis had many causes, and there’s a lot of blame to go around. But the one group which is almost entirely blameless is the group being hit the hardest, over the long term, by the crisis. And I worry very much about how the global economy will fare in decades to come as this cohort of workers, angry and deeply scarred by the post-crash economy, is tasked with driving economic growth.

COMMENT

You talk Global but don’t mention africa, asia or latin america. Very well done.

Posted by Latamer | Report as abusive

Where will the ECB’s billions go?

Felix Salmon
Dec 22, 2011 14:50 UTC

The market has had a full day now to digest the results of the ECB’s debt auction, and Floyd Norris, for one, is wildly enthusiastic about them. The ECB’s strategy, he writes, “may be enough to stem the European crisis for at least a few years, and go a long way to recapitalizing banks in the process”.

Norris’s bullishness is based on what you might call the Sarkozy trade — the idea that a huge amount of the ECB’s new lending will end up being invested in Eurozone government debt. He calls it “an obvious, virtually risk-free, option” for the banks who borrowed ECB funds:

It would be nice if some of it were lent to the private sector to spur growth and investment. But the logic of putting it in two- or three-year government notes is obvious.

Well, it’s not that obvious. Here’s the math: if you take all the new ECB money which entered the market yesterday and subtract out all the maturing ECB debt which needed to be rolled over, you end up with some €210 billion in new funds — a number which is startlingly close to the €230 billion of European bank debt which is coming due just in the first quarter of 2012.

And for the time being, the ECB is the only entity in the world willing to lend European banks €230 billion. Which means that the prudent course of action, for Europe’s banks, is to use this ECB money to pay down their own debts. Doing so would address a big funding risk, and would also help derisk their balance sheets in the eyes of the world and of Basel.

The big question, then, is how long the ECB is going to be doing this kind of thing. If this operation is a signal to the market that the ECB will be the lender of last resort to European banks for at least the next couple of years, then the banks don’t need to worry so much about their own financing needs and can lock up the funds in two- or three-year government bonds as Norris and Sarkozy anticipate. On the other hand, if this is more like Federal Reserve quantitative easing — something designed to be temporary rather than quasi-permanent — then banks will be looking to help themselves before they help others.

Gavyn Davies, for one, is clear on this point: “we should call a spade a spade,” he writes. “This is quantitative easing on a significant scale.” And he has the chart to prove it:

ftblog199.gif

I suspect that the ECB is not going to be happy seeing this line rise indefinitely. The Federal Reserve’s balance sheet is bloated enough, after two rounds of QE, and it now stands at $2.85 trillion. The ECB is just getting started on this round — the next disbursal of 3-year debt comes in February — and already its balance sheet is well over $3 trillion and rising.

Greg Ip has been talking to the ECB, and has come back from a trip to Europe with a blog post saying that its lending is “eternal and infinite”. Which carries its own risks:

The longer Europe muddles through, the more banks’ demands on the ECB will grow. Even if the ECB can, legally, become the sole source of funding for peripheral euro-zone banks, is that sustainable politically? At some point won’t the leaders realise that lacking all private-sector confidence, their banks can no longer finance a growing economy? At that point, they will conclude the euro is not sustainable and prepare to exit, and the ECB’s limits will have been reached.

So there’s clearly a limit somewhere. If I were running a European bank, I’d fill up on ECB lending now, when it’s plentiful, because you never know for sure when that limit might be reached. That’s what happened yesterday. But I’d definitely think twice before turning around and lending it all back out again to Italy or Spain. Yes, that trade is a profitable one. But the one thing that European banks need more than anything else right now is liquidity. Profits come second.

COMMENT

Are we having 3 zero’s too many in the graph?

Posted by jmv2010 | Report as abusive

Counterparties

Nick Rizzo
Dec 22, 2011 03:50 UTC

El-Erian: There’s more than a 1 in 3 chance the EU will implode — Bloomberg

Europeans are basically fleeing the continent in droves — Guardian

The world suddenly has a shortage of “risk-free” assets — WSJ (paywall)

Economists and politicians explain 2011 with (their favorite!) charts — Washington Post

BofA settles the Countrywide discrimination case for $335 million — Reuters

Dear Jamie Dimon… “we don’t hate the rich. What we hate are the predators.” — Reformed Broker

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COMMENT

European might flee the continent in droves, but the Guardian has trouble reading data: the World Bank tables are a tally of the stock of migrants at the end of 2010, not the flow during the year 2010. So 11% of the Greek population lives abroad, they didn’t all move there in one year.

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