Felix Salmon

Noam Scheiber is raving about Dylan Ratigan’s new book, giving it his highest praise: he calls it “sensible”. Which is maybe not obvious from the title, Greedy Bastards: How We Can Stop Corporate Communists, Banksters, and Other Vampires from Sucking America Dry.

He’s wrong. It isn’t sensible at all. Scheiber says that “one of the more intriguing ideas” in the book comes from Dick Grasso, of all people, who wants to classify a large part of the CDS market as “online gaming” and therefore “null and void”. Which sounds like one of those ideas which sounds great in the middle of your third bottle of wine.

But giving Scheiber (and Grasso, I guess) the benefit of the doubt, I had a look at the page of the book in question. Here it is, page 54, in full:

We must require not only that banks retain more capital but also that when they place bad bets, they pay the price for their losing bets themselves. Otherwise we are stuck with the worst of two economic systems: like a capitalist country, we have private banks that keep their profits. But like a communist country, we have a system where banking losses are charged to the government. Only when we end this corporate communism will we realign the interests of the banks with the investors they serve. The way to do this is debt reduction or cancelation. If the system is so out of control that we can use a computer to fabricate trillions in new money by simply adding some zeros, then surely we can find a way to delete some zeros as well. By definition, if you can print it, you can cancel it.

As we have already seen, a swap can either be an insurance policy that helps to lower long-term costs for a business or a bet by an outsider on whether a given company or country will succeed or fail. Putting swaps on a public exchange would create the visibility for all to see the difference between commodity insurance that is critical to the economy and speculative bets that are not much different from gambling. In fact, Richard Grasso, former chairman of the New York Stock Exchange, suggested to me in a personal interview that the speculative bets that fueled the financial crisis could be reclassified legally as online gaming — and then cancelled. His technical explanation: “I believe regulators should require the product to be registered with a central clearing agent (like an exchange) and thus able to be monitored globally to prevent contracts being written in excess of the debt obligations they are designed to insure (corporate or sovereign). This is easily accomplished by [regulators] and Treasury issuing a cross-markets rule adopted by non-US counterparts. Any contracts written outside these requirements would be deemed null and void by regulators as simply online gaming.”

This is exactly the kind of thing we need much less of, at least in book form. It’s fine if you’re just shooting the breeze with a bunch of financially-illiterate friends, but it really doesn’t belong in a volume which aspires to present “smart policy” prescriptions.

I mean, we start off OK, with a standard-issue broadside about privatized profits and socialized losses. Got that. But what on earth is this supposed to mean?

The way to do this is debt reduction or cancelation. If the system is so out of control that we can use a computer to fabricate trillions in new money by simply adding some zeros, then surely we can find a way to delete some zeros as well. By definition, if you can print it, you can cancel it.

I’ve spent the best part of a day trying to work out what on earth Ratigan might be driving at here, and I’ve come to the conclusion that he was probably just high. Never mind the fact that he doesn’t bother to identify which debt he wants reduced or canceled; just admire the elegant way that he proves that debt cancellation is somehow the equal and opposite action to printing money. (In reality, of course, printing money is a way of canceling debts, by inflating them away.)

Even more admirable, in a sense, is the way that Ratigan throws in his “let’s just delete some zeros” idea and then jumps straight to something completely unrelated — the idea of putting all derivatives on exchanges. I mean, it’s not as though deleting zeros willy-nilly would destroy the fundamental nature of capitalism as we know it, and might therefore be worthy of, oh, another sentence or two. We’ve got Grasso to get to!

Of course, we’re not going to get into any nitty-gritty here about the difference between exchanges and clearinghouses, despite the fact that Ratigan’s talking about the former, Grasso’s talking about the latter, and the two are not at all the same thing. And we’ll not spend much time either on the silly idea that anything interesting or systemically important happens at the point at which the notional value of derivatives contracts exceeds the amount of the underlying. (It doesn’t.)

Because even putting those points aside, what Grasso is suggesting here doesn’t stand up to the scrutiny of sober thought. (Especially if debt obligations — the underlying bonds being insured — can simply be reduced or canceled by deleting zeros.)

The way that markets and exchanges work, there’s no way that a clearinghouse would ever be able to know whether the counterparties to a derivatives contract had some kind of insurable interest in the underlying. Grasso’s proposal wouldn’t put an end to what Scheiber calls “naked bets”, it would just allow speculators to crowd out genuine hedgers, to the point at which people who did have an insurable interest wouldn’t be able to do any hedging, because the speculators would have got there first and written contracts up to the maximum allowable limit.

Ratigan has a bully pulpit on the television, and his heart is pretty much in the right place. I can see why he’d want to publish a book where he can tease out his policy ideas in detail, while keeping them accessible to his television audience. But it’s irresponsible to boil complex issues down into a simplistic world of good and evil, complete with simplistic solutions (cancel debt! outlaw speculative gambling!). If anything, it plays right into the rhetoric of the Tea Party, which Ratigan hates.

There are big and hugely important issues to be addressed in the global economy; the least we can do is take them seriously. And stop pretending that being harsh on a coterie of banksters would be both necessary and sufficient to solve all our problems.

Vikram Pandit has a clever idea:

It is not enough to require financial institutions to disclose capital ratios. Without knowing what that institution’s underlying assets are (only insiders and select regulators know that), outsiders, including most investors, cannot properly assess how that institution calibrates risk.

What is needed is a way to compare apples with apples. Regulators should create a “benchmark” portfolio and require all financial institutions, not just banks, to measure risk against that. The benchmark portfolio would not actually exist on the balance sheet of any one institution. Rather, it would be a collection of real investments that stand in for the kinds of assets that most financial institutions actually hold at the time. What is more, its contents would be 100 per cent public.

Institutions would be required to produce, on a quarterly basis for that benchmark portfolio, a hypothetical loan/loss reserve level, value at risk, stress-test results and risk-weighted assets. Right now these measures are run only against an institution’s actual portfolio and only a limited number of the results are disclosed. Worse, those results have no common frame of reference. The benchmark portfolio would supply that needed frame of reference.

As Lisa Pollack and Kate Mackenzie say, the problem here is that investors have to be able to trust that banks are modeling the benchmark portfolio in exactly the same way, using exactly the same tools, as they use for their own real assets. And this I think is where this whole idea falls down.

In the real world, banks know when they’re doing something risky, and then they create structures which make that risk invisible. They might, for instance, classify assets as “Level 3″ in an attempt to stop having to mark them to an inconvenient market. Or they might do what Pandit’s employer, Citigroup, did, and create all manner of off-balance-sheet vehicles which don’t report to shareholders or investors at all. Or they might do something else entirely which we won’t discover until after the next crisis.

That said, there’s the germ of something useful in Pandit’s proposal. So here’s how I’d improve it. Rather than having just one benchmark portfolio, or even four, as Mark Carney has suggested, give banks a kind of pop quiz every so often. One day, at about 10am, all the big banks in America would suddenly get given a surprise portfolio as selected by the New York Fed, and told “reserve against this”. With results due at, say, 3pm that afternoon. The New York Fed would then publish every bank’s answers, along with the amount of time that bank took to generate them.

By all means keep Pandit’s benchmark, too. But don’t allow the banks to game the benchmark just because they know exactly what it contains: it’s important to see how banks’ risk-management systems treat a portfolio which they haven’t been tweaked to expect.

What I’m thinking about, here, is the series of statements coming from John Thain, when he was the CEO of Merrill Lynch, saying that this latest write-down was the last ever write-down he would ever need to make against the bank’s mortgage-related assets. In that kind of atmosphere, the New York Fed could easily have published a portfolio of mortgage bonds, and asked every big bank to mark it to market and say how risky they thought it was. And that, in turn, would give a pretty good idea of just how conservative someone like Thain was really being.

And more generally, just being able to see the range of results, for any given portfolio, will be a healthy reminder that banks measure risk in very different ways. Pandit’s proposal wouldn’t just show which banks were particularly conservative; it would also show how much variation there is in the banking system as a whole. Which is in many ways even more important.

So let’s keep this concept alive, and try to make it as good as we can. As Mark Carney says, it can’t hurt. And it might just do some good.

Jeff Horwitz has an astonishing story about Chase’s credit-card collections efforts, which look as though they’re riddled with sloppy record-keeping and even possible fraud.

Consider Dade County, for instance, in Florida: Chase was filing claims at the rate of 640 per month in January. And then, after April — nothing. There were a lot of layoffs in New York, too:

In a sign that Chase acted with urgency, numerous regional collections teams were fired in mid-2011 at the order of the New York bank’s headquarters, according to people familiar with the events.

“Nobody told anybody anything. It was very traumatic,” says a former Chase attorney who asked to remain anonymous because of a nondisclosure agreement. “I think there were investigations by the [Office of the Comptroller of the Currency] and other government entities. If we’re not there, we can’t be interviewed.”

Now every bank has a choice when it comes to defaulted debts — it can chase those claims itself, or sell them on to a collections agency. Maybe Chase just decided that supporting an in-house team wasn’t worth it, and that it would outsource most everything, going forwards. Except, Horwitz couldn’t find any surrogate claims, either, in a recent search. And then the whole thing seems to be very closely related, at least in timing, to a lawsuit in Texas last spring:

Linda Almonte, a former team leader in Chase’s San Antonio credit card services division, accused the bank of firing her for objecting to the sale of $200 million in legal judgments obtained by bank attorneys. Half the accounts lacked adequate documentation of judgment and one-sixth listed the wrong amounts owed, Almonte claimed in a suit filed in U.S. District Court for the Western District of Texas.

In its response, Chase did not dispute inaccuracies in the debt balances and documentation. Instead, it said its sales agreement allowed for errors and thus was proper. “[T]he parties explicitly agreed that the judgments were purchased ‘as is’ and “with all faults,” Chase’s attorney wrote.

Chase was unsuccessful in getting the case dismissed and settled it on undisclosed terms last April; it ceased filing new consumer debt lawsuits in many states the same month.

While collections agencies often get the amount owed wrong, no one really stopped to ask whether banks themselves might not know how much they were owed. But that seems to have been the case here: Chase was selling faulty claims to collections agencies, and I’m sure those agencies didn’t suspect for a minute that the amounts owed were often incorrect. After all, the reason you’d buy claims from a bank “with all faults” is precisely because you don’t expect there to be many faults.

Already, the move seems to be having a negative effect on Chase’s collections:

Third-quarter collections, at $266 million, were down 35% from the first quarter, and haven’t been this low in a very long time. And if Chase is willing to give up anything like $100 million per quarter by effectively shutting down its collections operation, one can’t help but suspect that the legal or reputational risk of keeping that operation in place was truly enormous. I hope that American Banker encourages Horwitz to continue digging into this case: there could be a really big story here, somewhere.

The Mafia is now the number one bank in Italy, by one estimate — Reuters

A common misconception about what Reinhart and Rogoff mean for the US economy — BI

The “Iowa effect” and the county at the center of America’s farm boom — Reuters

The unsustainable history of US healthcare costs in 7 charts — Washington Post Wonkblog (duh)

The 36-year-old head of the best-performing hedge fund is posher than you — Bloomberg

And former MF Global employees had a Jon Corzine pinata party. Good for them — FINS

This is a word cloud of the job titles of the 2,623 official delegates to the World Economic Forum in Davos this year. It’s pretty clear what’s going on: while the most important people at the forum are still the ministers and heads of state, there are only 24 ministers in all. (I’m not sure about the presidents, they get mixed up in all the executive vice-presidents and the like.) Meanwhile, there are 674 CEOs, from Mustafa Abdel-Wadood to Jaime Augusto Zobel de Ayala. And, of course, 490 Chairmen and Vice-Chairmen (but only two Global Chairmen).

There are also two Archbishops; 133 Founders; one Novelist; three Candidates; six Mayors; one Technical Support Superintendent; 109 Heads; three Hosts; six Artists; one Theorist; 11 Fellows; one Leader; six Economists; one Singer (not including Wyclef Jean, who’s coming as “Ambassador-at-Large of the Republic of Haiti”); one Curator; 27 Deans; one Executive Geek; four Consultants; two Activists; four Researchers; and four Global Heads.

And then, of course, there are the Media Leaders: 1 Journalist, 1 Blogger, 1 Photographer, 4 Writers, 18 Anchors, 19 Columnists, 19 Correspondents, 33 Editors-in-Chief, and 152 Editors of all stripes, including the Billionaires Editor at Bloomberg.

There are 40 instances of the word Global, 15 of International, and 0 of Local or Domestic. Asia appears 7 times; Africa 8; America 10; and Europe 19.

What all of this means, I cannot say. But I’m quite glad there’s only one Chief Change Officer, even though she does have one particularly wonderful line in her bio. After listing the various advisory boards she’s on, it just says “recipient of award”. All bios, surely, should say that.

For all that financial innovation has got itself a pretty bad name recently, there’s no shortage of people with bright ideas as to how to address the euro crisis. Robert Barro is one. He thinks the euro should be phased out entirely, and has a plan for how to do just that:

Germany could create a parallel currency—a new D-Mark, pegged at 1.0 to the euro. The German government would guarantee that holders of German government bonds could convert euro securities to new-D-mark instruments on a one-to-one basis up to some designated date, perhaps two years in the future. Private German contracts expressed in euros would switch to new-D-mark claims over the same period. The transition would likely feature a period in which the euro and new D-mark circulate as parallel currencies.

Other countries could follow a path toward reintroduction of their own currencies over a two-year period. For example, Italy could have a new lira at 1.0 to the euro. If all the euro-zone countries followed this course, the vanishing of the euro currency in 2014 would come to resemble the disappearance of the 11 separate European moneys in 2001.

Is this workable? It all depends, I think, on the degree to which contracts could and would be switched over to German law during the two-year period of parallel currencies. While many people might be happy to see their euros converted to Deutschmarks at a rate of one to one, many fewer would be happy to see their euros converted to lire at the same rate. Which means that there would have to be some serious coercion — and a lot of court cases, too — before people holding euro contracts in Italy were forced to see those contracts redenominated in lire.

So while Barro is correct that this approach would help solve the sovereign debt problem, by allowing the likes of Italy to simply print new money to pay off their debts, it would also be a legal nightmare, as every contract turned into a fight between creditor and debtor over which currency it should become. The creditors, of course, would all want the contract to become Deutschmarkized, while the debtors would probably all want their debts to be converted to drachmas at that one-to-one rate. Given that the whole point of European monetary union was that it would become a single monetary union, trying to break it up into 17 component parts is certain to be a legal and logistical nightmare.

Would it be easier, then, to come up with a clever way of keeping the eurozone together? Because Jed Graham has one of those: he calls it Safeguard bonds, which is actually an acronym: Sovereign Approvable First-loss EFSF-Guaranteed Upfront Automatically Recallable Debt.

Graham’s idea is not that easy to understand, so I called him up and asked him to explain it to me. Basically, if countries signed up for a fiscal austerity program, they would be allowed to issue a certain quantity of Safeguard bonds, which would be guaranteed by the EFSF. Then, if at any point they broke free of their fiscal constraints, they would have to pay down 10% of the bonds, immediately, in cash. If you held €1,000 in Italian Safeguard bonds and the country ended up borrowing too much money one year, then Italy would automatically pay you €100 for 10% of your holding, and you’d be left with €100 in cash and €900 in Safeguard bonds; failure to do so would constitute an event of default.

The idea is that this would act as a real fiscal constraint: if a country were to avail itself of this facility, it would then be in a position where any fiscal slippage would be very expensive — because it would have to borrow at a very high rate to make the bond payment. Meanwhile, the EFSF-guaranteed bonds would trade at much lower yields, because of that EFSF guarantee, and because, under Graham’s plan, the ECB would step up and guarantee all Safeguard bonds in the event that EFSF monies ran out.

Because Safeguard bonds would be long-dated and very cheap, countries would have every incentive to use them to fund their current deficits — and thereby lock in fiscal constraint for the next 30 years.

It’s an intriguing idea, but technically extremely difficult to put together — these things are a bit like reverse CoCo bonds, in that they actually punish the issuer when the issuer gets into trouble. And, of course, as such they’re extremely pro-cyclical, if they ever get triggered. If a country suffers a nasty recession and sees its tax revenues fall a lot, the Safeguard bonds would get triggered and it would have to find a lot of extra cash just when it could least afford it.

I’m reminded of a clever idea that the World Bank had in the between 1999 and 2001, called the Rolling Reinstatable Guarantee. It was meant to be a way for the countries that used it — Thailand, Argentina, and Colombia — to reduce their borrowing costs by putting in place a World Bank guarantee which would cover the next coupon payment. In the event of a default, the World Bank would have to make the coupon payment, the country would have to pay the World Bank (because the Bank is a preferred creditor), and then the guarantee would get reinstated. Rinse and repeat.

When put to the test in the Argentine default, however, the mechanism didn’t work. And in general whenever people attempt to solve deep economic problems with the application of clever financial ideas, they fail. The eurozone might break apart, or it might stay together. But either way, financial innovations like these are not going to make much of a difference.

I still like Suze Orman’s Approved Card — but maybe not as much as I liked it yesterday morning. The main reason is an interview she gave to GOOD:

The majority of people who have these cards are called the unbanked and the underbanked. They do not have a bank account at all—unbanked—and even if they do have a bank account, what’s then happening is that they’re not using all the services that the bank is providing…

The 99 % movement, the Occupiers, is a very valid movement. It’s a movement that is very necessary. By the way, this card was developed for them, because this card which I have now created is a way for you to carry a little bank in your pocket with you. I’m actually asking the 99 percenters, ‘you best join me with this movement, people.’ If you want to keep your money in big banks, if you want to continue to get fees, if you want to continue to get all those things, you leave it right where it is. If you want to make a difference in your own life, how you use money, the accounting of money, everything about it, I am telling you put your money on me.

Orman, here, is destigmatizing the idea of being unbanked, which is very much in keeping with her “people first” approach to finance. If you’re going to provide a prepaid card to the unbanked, then it’s silly to lecture your customers on how they really should have a bank account instead.

But Orman goes further than that, to the point at which she’s actually encouraging the banked to become the unbanked — to close out their bank accounts and use the Approved Card as a checking-account alternative.

And I don’t think that’s a good idea.

Now I can see where Orman is coming from: the “move your money” campaign makes perfect sense in the context of big, heartless banks which charge enormous fees to people who can’t afford them. But I haven’t seen any impartial financial advice saying that the best place to move your money is a prepaid card, as opposed to a community bank or a credit union. The whole Suze Orman brand is centered on giving good financial advice — but Orman is helplessly conflicted now, and she’s giving advice which looks very much as though it’s mainly serving Suze Orman’s interests, rather than the general public’s. If she wants to make the case that people with bank accounts should become unbanked, she’s going to have to do so very carefully, spelling out her argument explicitly, because that advice is decidedly out of the mainstream.

On top of that, I also remembered the Amex prepaid card this morning — which looks in many ways even better than Orman’s offering, not least because it has no monthly fee. I get the feeling that they’re targeting different populations, but if you’re choosing between the two, and especially if you want a prepaid card to supplement your checking account rather than to replace it, then the Amex card, it seems to me, is probably the superior choice.

And there’s an Approved Card fee that I missed, yesterday, when I was writing about it. I said that the Approved Card would have to have great customer support; I didn’t notice that it charges $2 per call if you’re forced to call more than once in any given calendar month.

Jeremy Quittner of American Banker, covering Orman’s card launch, does nothing to assuage my concerns:

“Younger people are not interested in traditional checking accounts, they don’t write checks, and their need to write them has diminished, particularly with fees on checking accounts,” says Patricia Sahm, managing director of Auriemma Consulting, of New York…

Neither Suze Orman nor her representatives made themselves available to comment.

If Orman is serious when she says that “I couldn’t be more proud of this card if I tried,” then she should be extremely transparent and responsive when rolling out this product. And she should be very clear about whether she’s encouraging people in general, and young women in particular, to use her prepaid card rather than opening up a bank account.

I still think that people should have bank accounts. If you decline overdraft protection and just use the debit card which comes with your account, that behaves much like a prepaid card but has much more flexibility: for one thing, you can deposit cash into a bank account for free, while putting cash onto a debit card is non-trivial and costs money.

Do young people need checks? No — and there’s probably a case to be made for a new kind of financial product, a no-monthly-fee bank account without checks. Basically, what the Brits call a “current account”. Such an account would be at a competitive disadvantage with respect to Orman’s Approved Card, since a normal debit card is subject to Durbin limits on interchange fees, but prepaid debt cards are exempt from those limits, meaning that Orman can charge merchants a lot of money when they accept her card as payment. But from the perspective of what people like Orman like to call “financial wellness”, a bank account is, over the long term, surely always a Good Thing. And Orman shouldn’t be doing anything which discourages people from having one.

The Greek economy is so bad that thousands of Greeks are taking up farming — NYT

Shocker: doubts grow about the Greek debt restructuring — Spiegel

While Romney was in charge of Bain, 22% of investments failed within 8 years — WSJ

Government jobs have declined further under Obama than any other President — NYT Economix

About 400 Goldman partners could see their pay cut this year — WSJ

The mathematics of Lego — Wired

And nearly 10% of the companies at CES have “Shenzhen” in their names — NYT Gadgetwise

Apologies to John Sides and Jack Citrin for dismissing their science out of hand on my Tumblr: they really are careful and sophisticated researchers, and Sides is well within his rights to give me a good slap.

On the other hand, when Sides talks about “the substance of my remarks about innumeracy”, he doesn’t get me exactly right — which is hardly surprising, given that he was going on just two throwaway sentences.

My point about innumeracy was not that people will always guess wrong when asked to estimate something. In fact, there are some things — especially very salient variables like gas prices — which people know to within a high degree of accuracy. But that doesn’t make them numerate.

Instead, I had in mind two broader points. Firstly, everybody is bad at estimating small or large numbers: the difference between a millionth and a billionth, for instance, or the difference between a billion and a trillion, is much smaller, in the human mind, than the difference between 1 and 1,000. So when you ask people to estimate things which are small in reality but high in perceived salience, like the percentage of the US budget going on foreign aid or the proportion of immigrants in the population as a whole, then you’re always going to end up with an overestimate.

And more generally, numeracy is about much more than estimating proportions and percentages. It’s about comfort with numbers and number lines, and having an intuitive feel for how they work. If I ask you what two thirds of three quarters is, do you have to work it out, or do you pretty much know that it’s one half without having to think about it? In my experience there are two kinds of people in the world: the ones who have to think about it and will probably get it wrong, and the ones who don’t have to think about it and will probably get it right. That’s what I mean by numeracy.

And what about my second point, that “generally you can’t argue people out of positions that they weren’t argued into”? I still think that’s true. Sides gives a couple of carefully-chosen counterexamples, which show that in certain circumstances it can be possible to influence some people’s opinions on certain subjects, at least for a limited period of time, if you provide them with clear information about those subjects first. (This is a well-known fact in political circles, and has given rise to the phenomenon of “push-polling”.)

And in other research Brendan Nyhan has shown that if you present information in graphical form, it’s more effective than if you just present it verbally. Again, this comes as little surprise.

But the big picture base case is still unchanged — indeed, Nyhan says that his results “underscore the challenges faced by those who hope to reduce misperceptions among the public”. The general public doesn’t want its mind changed, and any changes which do happen are always going to happen slowly. Which is why presidential debates are almost never about who won the argument on any particular point, much as people like myself would love it if they were. The goal in such debates isn’t to win some kind of intellectual argument: it’s to make as many people as possible think that you think the same thing that they think. People will vote for the person they agree with — not the person with the sharpest wit or the cleverest arguments or the most apposite facts.

Wouldn’t you agree?

I’m a big fan of Suze Orman, and I’m generally very mistrustful of prepaid debt cards. So what happens when Suze Orman launches her own prepaid card?

The answer, in a nutshell: it’s the best prepaid card out there. Its fees are clear, and refreshingly absent a lot of the time: no fees to buy anything, no fee to check your balance online or over the phone, no fee to transfer money to another card, no fee to make electronic bill payments, not even a fee to close your account and get a check for the balance. I also like the way that it will email or text you every time you use the card.

So if you have some other prepaid debit card, close it, and get this one instead. It’s clearly better.

Of course, there are questions associated with this product, too. Ron Lieber is worried about Orman’s journalistic integrity, on the grounds that she has a weekly show on CNBC: “if I tried to introduce my own card,” he writes, “the ethics editor would laugh me out of the New York Times building”. I’m not particularly bothered by this, although I am a little bit uncomfortable about her longstanding move into financial products more generally, which long predates the Approved Card. For instance, Suze Orman’s FICO® Kit Platinum will cost you $49.95 — a much worse deal than the Approved Card.

And Orman’s including something vaguely similar in the Approved Card: sign up for one of these cards, and you’ll get unlimited access to your TransUnion credit report, along with your TransUnion credit score. I don’t like the way that Orman sells this as an “opportunity to save yourself $143.40″ — this is a so-called “fako” score, rather than your FICO score, and you’d have to be an idiot to pay $11.95 to get it. Especially since exactly the same service can be found for free at CreditKarma. It seems that TransUnion is making a determined push into biz-dev deals which give consumers its scores for free; that’s fine, I guess, but I’m not going to get particularly excited about it.

There are two possible problems I see with the Approved Card, both of them surmountable. The first is that as far as I can tell, it isn’t actually sold anywhere; Orman desperately needs to get some retail presence for this thing, since that’s the way the overwhelming majority of prepaid cards are sold. And the second is the Achilles’ heel of most financial services, which is the quality of customer support. When people complain about their banks or their prepaid cards, the complaints nearly always come after a dreadful experience on hold with unsympathetic and unhelpful call-center operatives. If Orman can fix that, she’ll deserve an enormous amount of praise.

Megan McArdle responds to my post about consumer lending in Missouri by expressing skepticism that it’s possible to lend to people with bad credit unless you do so at extremely high interest rates. She gives a number of reasons why this might be the case, all of which are entirely plausible.

For one thing, she says, the risk of default is high — and particularly invidious when you’re lending money out for short periods of time. Think of it this way: what happens when you lend 100 people $500 each, for one year, at 10% interest, with a 10% default rate? You start the year with $50,000. You end it with 90% of the loans paid back — that’s $45,000 — and another $4,500 in interest on those loans, for a total of $49,500. And you also have $5,000 of defaulted loans, which are worth say 25 cents on the dollar. Which means you make a total profit of $750.

On the other hand, what if the term of the loan is six months, but the 10% default rate stays the same? Then after six months you’ve got $45,000 back, plus $2,250 in interest, for a loss of $2,750. And if you run the same program again in the second half of the year, you’ll lose another $2,750. Instead of being down $500, you’re down $5,500. Yes, you’ve now got $10,000 in defaulted loans rather than $5,000. But even so, you end the year with a loss of $3,000.

The point here is that defaults aren’t evenly distributed: instead, they’re highly front-loaded. If you haven’t defaulted in the first six months of a one-year loan, you’ll probably pay it off: the probability of default is always highest at the very beginning. And so if you lend for shorter periods rather than longer periods, you have to increase the interest rate you charge, just to make up for the fact that the default rate is not going to fall. Which is the opposite way round to how yield curves normally behave.

On top of that, notes Megan, small loans are labor-intensive: the fixed costs of processing such things are high as a percentage of the principal amount, and the kind of people who take out such loans are, in the parlance of retail banking, “high touch”. These are not the sort of customers who apply on line and repay their loans through online-banking balance transfers.

And so Megan comes to her conclusion. “Credit unions lack expertise and skill in this sort of loan”, she writes, and payday lenders tend not to be particularly profitable, which means that

the reason that the credit unions aren’t putting them into cheaper loans is that they can’t. The cost of an unsecured loan to someone with terrible credit is high because those loans go bad very frequently, resulting not only in the loss of funds, but in considerable overhead expended on collection.

All of this is perfectly reasonable. But I’d point out three arguments pointing in the other direction.

Firstly, what payday lenders are really selling is convenience, at least as much as it is loans. Check cashers, payday lenders, and the like do not keep typical banking hours: they’re open late, they’re open at weekends, and they are generally found in small storefront locations which would not be suitable for a fully-fledged bank branch.

This is entirely rational — you want to be where your customers are, and you need to be able to reach your customers when they’re not working any of their jobs. But at the same time, it’s expensive. And in general, credit unions are already paying for the cost of their overheads, before they start offering any kind of payday loan. So while payday lenders have to cover a lot of overhead from the proceeds of just one product, credit unions have to cover just the marginal cost of the payday loans, which is a great deal smaller. After all, their staff and real estate is already being paid for. If you went up to a payday lender and said that you’d cover the cost of their real estate and their labor, you can be sure that either their rates would come down or their profits would go up.

Secondly, credit unions have a significantly lower cost of funds than payday lenders do. Most importantly, they can take deposits, which pay little or no interest. Payday lenders, by contrast, tend to be small organizations which are largely unregulated. When they borrow money, they have to pay up for doing so.

And thirdly, credit unions are non-profits. There’s only one reason to set up a payday lending shop: to make as much money as possible. Credit unions, by contrast, exist to serve their shareholder-members. If those members need payday loans, then it behooves the credit union to find some way of giving them those loans, even if they’re not particularly profitable.

There’s a pretty strong argument that credit unions should offer payday loans at zero marginal profit — the customers who ask for them are among the credit union’s neediest members, and pretty much by definition they’re also least able to afford expensive financial products. A case could even be made for extending payday loans at a small loss, just because the cross-subsidy is attractive to the membership as a whole. Think of it like an insurance policy: if you join the credit union, then you know that if you ever do fall on very hard times, it’ll be there to help you through them.

Which brings me to the Salary Advance Loan offered by the North Carolina State Emloyees’ Credit Union. Megan wonders whether it’s only possible because state employees’ paychecks are particularly reliable, but the structure of payday loans makes them all relatively safe: they’re fully collateralized by the money coming at the next payday. You can only get one of these loans if you’re employed, and you can demonstrate how much your next paycheck is going to be.

The NCSECU product is very well put together. It involves financial counseling; the creation of a savings account; and a modest interest rate of either 5% or 7%. It lacks the convenience of most payday loans: the credit union surely has shorter office hours than most payday lenders, and the product is more complicated. But the interest charged is so much lower that taking out one of these loans is always going to be a better idea than going to a payday lender who might charge upwards off 400% APR.

And I can’t help but think that with a bit of goodwill, other credit unions across the land could follow suit — even (especially!) those which aren’t specifically designed to cater to a low-income or underserved population. The non-profit business model is a very powerful one in financial services: just look at Vanguard. And I suspect that a lot more credit unions could push the envelope of what they offer, if only they had the will to do so.

Are low-interest payday loans from credit unions “a game changer that will revolutionize payday loans”, in Megan’s words? Probably not — but if they’re not, I think it’s more about credit unions’ willingness to provide these things than it is about their ability to do so. The product exists, and it works. The problem is making it scale.

There’s very little good news forecast for the European economy — WSJ (paywall)

Just 3% of the 1.4 million net jobs added in the recovery went to women — NWLC

You know who the job recovery is bad news for? Mittens Romney — New Yorker

Why does the government consistently underestimate job creation? — Reuters

US manufacturing workers earn less than half as much as Canadians — WSJ (paywall)

The untold story of GE’s subprime debacle — I Watch News

Goolsbee: Washington isn’t spending too much now, but it will be later — WSJ (paywall)

And the political economy of wolf migration — Lawyers, Guns and Money

Yes, the Damien Hirst Complete Spot Challenge is a thing:

Visit all eleven Gagosian Gallery locations during the exhibition The Complete Spot Paintings 1986–2011 and receive a signed spot print by Damien Hirst, dedicated personally to you.

Carol Vogel, who says that the price of spot prints is somewhere in the $3,500 to $50,000 range, managed to get Hirst to explain the thinking:

Asked how he came up with the idea, Mr. Hirst responded in an e-mail: “I figured it would be pretty difficult to visit all the galleries, and totally admirable if anyone managed it, so admirable in fact that I thought they would deserve a work of art, so we came up with the idea to do the challenge. I’d love it if people manage it. I remember the golden tickets in Willy Wonka, maybe it’s a bit like that.”

And Greg Allen comments, calling the whole thing “a Black Friday riot for billionaires”:

How awesome that he invokes the utterly deranged Willy Wonka for this thing, which goes beyond difficult; I think it’d be positively hellish. Which is really perfect.

But does it have to be hellish? Even if you don’t have access to a private jet? I decided, with the help of Nick Rizzo, to put together an itinerary for an imaginary plutocrat — let’s call him Pictor Vinchuk — who wanted to curry favor with Hirst and take this bonkers challenge. The rules: he had to fly commercial all the way (I guess his jet’s in the shop), but he would travel first class and stay in the best rooms at the grandest hotels. And, just to make it a bit more interesting, he had to wait until after Davos to start his trip.

Mr Vinchuk’s itinerary starts in Geneva — an easy hop from Davos. We’re trying to make this trip as un-hellish as possible, so we’ve booked him in to the Beau Rivage hotel, arriving on Sunday January 29, where two nights in a lake-facing historical suite will run $10,471. Then on Tuesday January 31, we’ve booked Mr Vinchuk and his companion onto the short flight to Rome. Still, a pair of first-class tickets is $2,682. Another two nights in Rome, at the Hassler Roma Classic Suite, will cost $6,717.

And then comes the low point of the whole journey: there aren’t any flights with first-class seats from Rome to Athens! Poor Mr Vinchuk has to make do with business-class seats, at a minuscule $439.10 apiece. And then slum it at the King George Palace hotel, where his junior suite is a mere $469. All very low-rent. Fortunately we’re only spending one night there, before we hold our nose and get on the final business-class leg of the trip, two tickets at $655 each to Paris.

From here on in, things get much more familiar. There’s the premier suite at the George V hotel, which is $11,450 for two nights. There’s the pleasant train journey to London on Eurostar, $948 for two tickets in first class. And then there’s the lovely Linley Suite at Claridge’s in London, where we spend three nights, which is more than enough time to visit both the Britannia Street and Davies Street Gagosians. That stay will run us $7,288.

Then on February 8 we hop over the pond to New York. Those tickets are a pretty impressive $9,276 each. And we need to spend some time in New York, too, to catch up on friends and make sure to visit the three different Gagosians — on 21st Street, 24th Street, and Madison Avenue. So we’ve booked Mr Vinchuk in to a grand suite at the Pierre, which runs $16,077 for four nights.
On February 12 we leave for Los Angeles: a first-class ticket for that leg is $3,108, and three nights in a deluxe bungalow at the Beverly Hills Hotel is another $8,341. And finally on February 15 we hop a plane to Hong Kong — that’s $15,682 for two first-class tickets — in order to catch the show there before it closes on the 18th. We’ll spend two nights in the presidential suite at the Landmark Mandarin Oriental: that’s $2,524, checking out on the 17th.

Add it all up, and the trip comes to $108,572 for a 19-day itinerary, or about $5,700 per day. And of course there are incidentals, too: meals, cars, helicopters to Geneva, tchotchkes at Harry Winston, that kind of thing. But the main thing, of course, is that you end up spending more money touring the eleven different Gagosians than the value of the print you get for doing so. Otherwise, Damien might think you were taking advantage. And I think we’ve safely managed to do that.

Update: OK, back to the drawing board here: the eagle-eyed Greg Allen notes that the LA show ends on Feb 10, which means that if we get there on Feb 12, we’ll be too late. He also says that “the Spot Challenge is really a challenge to fill the vast emptiness of someone’s life, to provide purpose [sic of the biggest kind] to someone’s leisure time. It’s literally the answer for someone who doesn’t know what to do–not just with their money, but at all.” I feel offended on behalf of Mr Vinchuk!

Meanwhile, Jennifer Bostic reckons she can do the whole trip, for two people, for $13,206, including some pretty grand hotels at some decidedly cheap prices. Of course, the real cost here, as Allen says, is time rather than money. But I would be tickled very pink if a pair of underemployed hipsters did the whole tour for less than the value of the prints, sold them, and made a profit. Listen all y’all, it’s an arbitrage!

Economists Justin Wolfers and Betsey Stevenson have a problem with Grant Achatz’s pricing strategy at Next, where tickets are sold at a fixed price and are then free to be resold at an enormous markup on the secondary market. The restaurant is very clear why it won’t auction off tickets instead:

You should auction the tickets. Do a reverse, double blind, dutch auction and give the surplus profit to charity.

An auction would set pricing too high for our sense of value for the meal. One of the reasons that we have so many people trying to buy tickets is because we are trying to do something new, different, and delicious for a great price. We may institute more dynamic pricing in the future, but for now the system is fair precisely because it is blind to everyone – anyone who clicks to buy can buy.

But the Wharton economists aren’t convinced.

“It’s democratic in theory, but not in practice,” said Wolfers…

If a person can sell a ticket for $3,000, the true cost of going to the restaurant — what an economist would call the opportunity cost — is $3000, because that’s how much money the person is giving up for the meal.

Bloomberg’s Mark Whitehouse concludes that Next should “consider selling tickets to the highest bidder and giving the extra money to charity” — precisely the course of action which has been explicitly considered and rejected in the restaurant’s FAQ.

Is Next making a mistake here? Do Wolfers and Stevenson have a point?

My feeling is that the restaurant is the smart one, while the economists are being naive.

For one thing, real people don’t think in terms of opportunity cost — especially not when they’re the lucky winners of a restaurant-reservations lottery. Dan Ariely did research on this at Duke University: he found that once Duke students won the lottery giving them the opportunity to buy sought-after tickets to the university’s basketball game, they valued those tickets at ten times more than the students who lost the lottery.

What’s really going on here, I think, is that the vast majority of people who get tickets hold on to them, go to the restaurant, and eat a wonderful meal for which they paid a reasonable sum. And then there’s a tiny number of people who get tickets, and either discover they can’t use them for some reason, or decide that they’re going to try to flip them for profit.

Because that number is tiny, the supply of Next tickets in the secondary market is tiny — and because the secondary-market supply of Next tickets is tiny, the price of those tickets can become astronomically high. But I suspect that the high secondary-market prices for Next tickets are doing a very bad job of increasing supply — that there are people who can’t use their tickets, and there flippers who are always going to put their tickets up for auction if they win, but there are very few people indeed, and possibly zero, who put their tickets up for sale just because of how much money they might fetch.

As a result, the very few datapoints that we do have, with respect to the secondary-market price of Next tickets, tell us almost nothing about the amount of money that Next tickets would go for if they were auctioned. If Next decided to auction off all its tickets, the total supply of Next tickets in variable-price markets would skyrocket. Demand would probably rise too — but I very much doubt you’d ever see $3,000 tickets in a Dutch auction.

What you would see, on the other hand, would be a lot of semi-disgruntled diners worrying about whether they were suffering from the winner’s curse, and feeling much less chuffed about their meal than the current diners who are generally elated about having won the lottery.

The most important thing in being a restaurateur of a high-end establishment is exceeding expectations; if you auction off tickets, then the price of tickets will naturally gravitate to and possibly past the point at which you can’t do that any longer. That’s why Next is right to worry about “our sense of value for the meal” — because the chances are that their sense is going to be your sense too. If they think a meal isn’t worth more than say $200, and they start selling tickets to that meal at $400 apiece, then they’re setting their customers up for disappointment; I can’t imagine Achatz would ever want that.

Do the handful of people who currently buy tickets for $500 or $3,000 walk away disappointed? Maybe not: there’s a good chance those people aren’t particularly price-sensitive. But when you move away from those people and use the market to set prices for all your customers, big dangers lurk. As Alan Vanneman says, markets are largely foreign to the human imagination. And since restaurant-goers are human, we don’t want to upset them with market mechanisms if doing so is unnecessary.

In the past, I’ve advocated auctioning off restaurant meals in certain contexts, but never as the only way of selling tickets. Restaurant-reservation auctions should be rare things, applying to a minority of your total diners. Most of the time, prices should be fixed, and it’s always nice when demand outstrips supply. That’s how successful restaurants have always worked, and it’s hubristic to imagine that there’s an obviously better way.

Update: Next owner Nick Kokonas responds in the comments, happily demolishing a key part of the auction-happy crowd’s argument: it’s untrue that a $100 ticket ever sold for $3,000. In reality, he says,

a TABLE has sold for $ 3,000. That table was a kitchen table for 6 people that with wine pairings, service, and tax was nearly $ 2,500 face value. This was a case where one blogger got it wrong and EVERY news source since has reported it as if a $ 100 ticket sold for $ 3,000. Big difference.

What’s more, Kokonas confirms my suspicion that the overwhelming majority of tickets are not in fact resold: 99% of them are used by the people who manage to buy them, or their family and friends.

But he does add that there will be a Dutch auction for one two-top per night, with all proceeds going to the University of Chicago Cancer Center. I hope it raises lots of money!

Good news over at the Capital Bikeshare website, which has now been updated to make it perfectly clear that you can, after all, use your debit card to pay for a Bikeshare membership. The FAQ,which used to say that memberships require a credit card, now says “credit or debit card”; the signup page, which used to ask for your credit card details, now says “credit/debit card” at the top of that section. All of which means that although it was always technically possible to sign up for a membership with a debit card, now many more people are likely to actually do so.

On top of that, Bikeshare manager Josh Moskowitz tells me that some kind of installment plan should be in place “in the early half” of this year. It’s unclear whether that option will be open only to Bank on DC members, or whether it will be open to everyone.*

I still think that, in terms of getting the unbanked on bikes, the best approaches are always going to be ones which just get the unbanked on bikes, rather than ones which try to get the unbanked to open bank accounts which in turn will allow them to get onto bikes. But this is a move in the right direction — and a move which is probably going to cost some small amount of money for Bikeshare.

Remember that there’s a $1,000 fee charged to your card if your bike is lost or stolen. Now, what’s more likely: that your credit card has $1,000 of spare capacity on it before it’s maxed out, or that your checking account contains $1,000 in cash? I’d say the former, by a substantial margin. So the chances of Bikeshare having to chase down an individual when the $1,000 charge doesn’t go through are surely higher if that person signed up with a debit card than they are if they used a credit card.

So well done to Bikeshare for fixing its site and taking the risk that it might have to do more work chasing down the money for lost and stolen bikes. My gut feeling is that the marginal difference here is small. But government organizations like Capital Bikeshare are always overcautious and risk-averse, and I genuinely thought when I wrote my initial post on this that Bikeshare wouldn’t allow debit cards to be used for memberships at all. Now, let’s keep our fingers crossed in the hope that they come up with some way of being able to serve unbanked people without debit cards at all.

*Update: Moskowitz confirms that the installment plan will be available to everyone.