Felix Salmon

Why bank deposits shouldn’t be an asset class

Felix Salmon
Jan 5, 2012 19:45 UTC

Amar Bhidé has responded to my piece about his proposal to guarantee all bank deposits.

First, he says that the real stupidity in Ireland wasn’t the blanket guarantee of bank deposits; after all, he says, “virtually all Western governments implicitly or explicitly guaranteed all bank deposits (and other forms of short term cash, such as money market funds) in 2008″. Instead, it was Ireland’s guarantee of bank bonds. “this was dumb”, says Bhidé, “but it has nothing to do with whether or not deposits should be guaranteed”.

I think the two are in fact intimately connnected. Deposits are a funding source for banks, as are bonds. If you take in more of the former, you’ll issue less of the latter; cheap deposits will quickly chase out expensive bonds. If investors start flocking into 1-year and 3-year certificates of deposit on the grounds that they’re federally guaranteed, it’s hard to see how investors would find 5-year or 10-year uninsured bonds particularly attractive, unless they yielded a lot more than the CDs. And it’s equally hard to see why the bank would feel the need to pay through the nose to issue expensive 10-year debt, when it had unlimited access to much cheaper short-term funding instead.

Bhidé says that capital requirements would force banks to issue bonds — but I don’t see it. If there’s one thing we learned during the financial crisis, it’s that no one really considers subordinated debt to be useful capital: no bank has ever defaulted on its bonds and survived. In other words the kind of capital you get by issuing bonds is the kind of capital no one particularly wants. Instead, investors and regulators are increasingly looking at pure equity, in the form of metrics like TCE. I would hope that we’ve moved away from the paradigm that when a bank wants to improve its capital ratios, it issues a bunch of new liabilities which mean certain death if they’re ever defaulted on. That doesn’t strengthen a bank at all, and everybody knows it.

Bhidé’s proposal wouldn’t just destroy price discovery in the bank-debt market. It would also have the effect of raising interest rates more broadly, and increase the US government’s cost of borrowing. After all, bank CDs are always going to yield more than Treasury notes. If they carry exactly the same government guarantee, then there will be a significant move out of Treasuries and into bank deposits. I can’t see why the government would want that.

And yes, a lot of governments did implicitly or explicitly guarantee all bank deposits during the crisis. But here’s the thing: implicit guarantees are better than explicit guarantees, and temporary guarantees are better than permanent guarantees. Bhidé wants a permanent explicit guarantee, which is the worst of all.

An explicit and permanent guarantee on bank deposits would, overnight, create a whole new risk-free asset class — in a world where we’ve learned time and time again that risk-free asset classes are a Really Bad Thing. Investors tend to put inordinate value on safety, when what we really want to encourage is risk-taking. And highly-regulated banks with massive government-guaranteed bank deposits are not the best mechanism for allocating risk capital. Markets might not be perfect, but they’re surely better at capital allocation than that.

As companies like Apple build up their cash reserves into the tens of billions of dollars, we’re already beginning to see a world where bank deposits are becoming something of an asset class. It’s not a world we should encourage — let alone one we should institutionalize with a blanket government guarantee. Money should be invested; the government has no business encouraging corporations and institutional investors to simply park it in a bank instead.


If it’s been said, it’s important to repeat: banks must make sufficient performing loans and from the interest and principal payments serving as a revenue stream, these become real operating cash flows so that banks do NOT have to do things like parasite on their depositors’ money or borrow in commercial paper or repo/borrowings markets or Fed funds purchased relying – on all of these for liquidity.

In the US the Fed examines banks, especially smaller banks and disciplines them if they have insufficient operating cash flows from performing loans and other typical commercial banking and cash financial instrument trading for fee revenue that realizes to cash in the reporting cycle. Accrual basis accounting is key and for revenues to realize to cash in the reporting cycle too is key.

There is a double standard however, the Fed exercises applying more safety and soundness discipline for the non ISDA (smaller) BHCs while for the ISDA cartel the Fed is complicit and facile to those bigFinancials’ interests and operating strategies of inflating their balance sheet with abusive contracting of OTC derivative contracts that when Fair Vauled in an upward or level market, the unrealized non cash gains from the FV is run thru the income statement to game it, manage earnings. The corruption of the unrealized non cash gains is a form of a fraud – it gives appearance of a revenue stream rising to the quality of revenues from performing loans or cash financial instrument trading, but not in that the fair valuing fails to produce revenues that realize to cash in the reporting cycle.

In a shrinking economy with less, fewer opportunities to make performing loans, without their abusive and agency self-dealing of proliforating OTC derivatives contracts, ISDA banks would not be profitable and would have to sell operating units and/or sell assets in order to summon liquidity. In a correcting market, this gives us difficulty to sell assets the prices of which the sellers expect to hold up while the market is correcting and other bigFinancials similarly are looking to sell assets or operating units.

The regulators which may be guilty aren’t that stupid and want it easier to separate what can be sold when a bigFinancial has to execute its ‘living will’.

Moreover, relying on borrowings and the fair valuing of the balance sheet inflated with OTC derivatives contracting, leaves the bank again at risk for having to execute its living will if and when the Fed stops QE and other liquidity programs that especially the ISDA cartel have needed in order to remain operating and appear profitable.

Managements relying on its depositors money gives us the risk of MF Global. Dirty secret is however that in that industry it wasn’t illegal for MF Global to use its customers’ money.

Regulators which find banks relying on using its depositors’ money puts that bank or thrift of BHC, or FHC under an MOU and if the reasons aren’t solved that management hasnt sufficient operating cash flows from its banking activities, the organ then goes under a cease & desist, and some one in senior management has to leave the company. Sadly in 2007-2010 we didnt see this with the ISDA banks, however there is precident for regulators to resume normal behavior.

Perhaps in the UK and EU a depository financial institution can ‘borrow’ its customers’ deposits, but that then is sick depository institution and its management is a hair away from being reprimanded or if caught in a market correction or another crisis, out of their jobs.

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Adventures with consumer lending, Missouri edition

Felix Salmon
Jan 5, 2012 16:34 UTC

When I wrote last month about payday lending in Missouri, I posed two questions to Stand Up Missouri, a lobbying group representing loan shops opposed to a 36% cap on interest rates in the state.

The first was with regard to a video on their site, where a college professor explains that when she approached her local credit union for a loan, they told her that her credit wasn’t good enough, and that she should go to a loan company instead in order to improve her credit. Name that credit union, I said:

Credit unions exist to serve precisely this kind of person: I simply don’t believe that any credit union would turn her away and deliberately send her to a usurious lender.

My second question was equally simple: what is the interest rate charged by the loan companies that Stand Up Missouri represents?

Well, Stand Up Missouri did get in touch with me — and offered to put me in touch not only with their CEO, Tom Hudgins, but also with the college professor in the video. That, in turn, set off an enormous number of emails and phone calls, where I talked at length with Stand Up Missouri, the professor in the video, and the CEO of her credit union. And frankly none of them come out of it looking all that great — although I have by far the greatest sympathy for the professor.

To put the standard terms of the debate into perspective, let’s turn to Jason Rosenbaum, of the St Louis Beacon:

“The question I have for people who are anti-payday loan — and I’m not pro-payday loan — is where are people going to borrow the money?” Lamping said. “Because somebody who needs to borrow $200 for 10 days, they need to borrow $200 for 10 days. If the demand for capital doesn’t go away, where do they get it?

“My answer is they’d probably go to the street,” Lamping added. “Or they have checks bounce and they have rent and utility bills shut off.”

Still disagreed, saying that people could use credit unions for small loans.

“There are too many (payday) lenders on every corner,” Still said. “People just get the impression that it’s easy money. People need really, really to evaluate whether they are in the position to pay back a loan. And they can go to a credit union. It will take a little effort, they’re not on every corner. But options are available for people that do not put them in this debt trap that they can never get out of.”

But the fact is that credit unions aren’t always wonderful places where you can waltz in and get a low-interest-rate loan which is clearly superior in all respects to what payday lenders and loan companies offer. Some of them are. But some of them aren’t.

The professor — I’m not using her name because it’s not fair for this story to be the most important thing about her as far as Google is concerned — is a longstanding member of Missouri Credit Union in Columbia. That’s her bank: it’s where she has her checking account, deposits her paycheck, everything. And it has been ever since she moved to the state fifteen years ago. You couldn’t ask for a more auspicious setup.

And when I first spoke to Hal James, Missouri CU’s CEO, he was clear about its policies. “We always try to make the loan,” he said: “I can’t imagine anybody in 30 years has told somebody to go to a loan company. It makes no sense to do that.”

James said that in no case would a low credit score disqualify a potential borrower from getting a loan: while the credit union does use credit scores in its underwriting, it does so only to set the term and the interest rate on its loans, and not to determine whether or not the loan should be extended in the first place.

But there were a couple of hints, too, that it wasn’t quite as simple as all that. “Signature loans are unsecured, we don’t promote those too much,” he said at one point. “We try and make sure to understand what the member’s asking for and what they want.” Later, he talked quite a lot about how the credit union’s procedure, where loans get escalated at least twice if they can’t get made on an initial pass, was reliant on the borrower having completed an application.

I then spoke to James a second time, after he’d had the opportunity to talk to the professor earlier this week. She’s still upset at the way that she was treated at the credit union, and there are a lot of discrepancies in their respective accounts. But it became increasingly clear to me that if you have bad credit, Missouri Credit Union is actually rather unlikely to give you a loan — even if you’re a long-time member in good standing.

The simple fact is that some lenders are more conservative than others, and James struck me as an extremely conservative lender. He doesn’t like making unsecured loans to people with bad credit — he’ll nearly always prefer to look at the person’s cashflow situation, and try to work on that instead. Maybe put together a budget, or a savings plan; maybe consolidate existing outstanding debt which was extended at high interest rates and free up cash that way.

I asked James if he had any kind of a product which would help people with bad credit improve their credit; he said no. “We help them build savings to cover short term needs,” he told me, adding that “we try to stay away from even overdraft protection.”

Instead, James works on changing “poor management of money that they’ve got”. The credit union, he said, will “work to get the savings started”, rather than add more debt: “if you think that you have to borrow more money to improve your credit score, that’s not a solution. It’s not going to work.”

Sadly, James is wrong about this. The information going in to your credit score includes absolutely nothing about your salary, or your savings rate, or any of your assets. Let’s say that I defaulted on a lot of loans five years ago, which ended up being charged off; since then, I’ve avoided all credit, got a high-paying job, lived within my means, built up my savings — and inherited a million dollars to boot. What happens to my credit score? Very little. As the bad loans on my credit report drift ever further into the past, they will have a slightly less negative effect on my credit score. But without anything positive on there, my score will remain abysmally low indefinitely.

James told me that “you can go from 500 to the mid-600s if your bad credit drifts far enough behind you”. I checked this with FICO, and it’s just not true. Once you have a bad credit score, the only way you can make a significant improvement to it is to borrow money and pay it back. The advice the professor says that she was given at the credit union was, in that sense, entirely accurate. And if the credit union wasn’t going to lend her the money she needed, then she really was left with only one alternative. She went to World Finance, and got the loan she needed.

I’m not entirely clear on what the interest rate was on that original loan. Right now, the professor is on her second loan with the company — a $3,000 loan which she’s repaying at $225 per month for 18 months. That means she’s going to repay $1,050 in simple interest over 1.5 years, or $700 per year, which works out to an interest rate of about 23%.

But simple interest is not the same as APR. Calculating the APR on an amortizing loan is non-trivial, because the principal amount is constantly shrinking, which reduces the denominator and therefore increases the interest rate. Happily, the internet can come to the rescue: if you plug in a $3,000 18-month loan at $225 per month into this calculator, it will tell you that the APR is 40.4%.

Which, I can tell you, is a number World Finance seems very keen to hide.

Is it a good idea for the professor to be taking out loans at 40% interest rates? Really, she didn’t have much of a choice. She needed the money, she got precious little help from her credit union, and the loan company was friendly and extended her the cash on terms she could afford.

What’s more, the professor’s relationship with World Finance has indeed improved her credit. Since taking out that first loan, she’s obtained two different credit cards, and also bought a brand-new BMW with 2.9% financing. All with essentially no help at all from her primary financial institution, which is Missouri Credit Union. The debt the professor is taking on may or may not be wise, given her unique individual circumstances. And the credit union could in theory be a valuable resource in terms of helping her work out whether, for instance, she can really afford that car. But the relationship there is broken, and I see no chance that it will be fixed.

James does admit that he let the professor down: “I think we did fail her,” he says, “and I don’t think we did what we should have done.” The credit union dropped the ball with respect to her loan application, which was left in limbo when she was in a time of need. But at the same time, he also admitted to me that the credit union would not have given her the unsecured loan she was looking for.

The professor’s credit score is now good enough that she qualifies for a mortgage; it wasn’t before. That’s the kind of help a credit union should be able to give, and it’s disappointing that Missouri Credit Union doesn’t seem to be able to bring itself to do that. If the professor (a) wanted credit and (b) wanted to improve her credit score, then the loan company was, sadly, the place she needed to go.

Which brings me to Stand Up Missouri, the lobbying group representing such lenders. They’ve been promising me information on the interest rates they charge for a couple of weeks now, which is information you think they would have to hand. But nothing yet: I’ll let you know if and when I get anything from them.

I did however speak to Stand Up Missouri’s CEO, Tom Hudgins; I don’t think anybody on the call would say that the conversation went particularly well. The key question here, of course, is interest rates: should they be capped, and if so, where. Hudgins is very keen on distinguishing loan companies from payday lenders, so I started with the payday lenders, who charge interest rates north of 400%. Do those loans count as predatory? No, he said: “I do not think that the payday loans in Missouri fall into that category.” The only loans he would characterize as predatory were illegal or unregulated loans.

But Hudgins also wanted to make the point that when you’re talking about short-term loans with a term less than one year, the APR can be a bit misleading: Stand Up Missouri likes to use the example of someone borrowing $100 today, paying back $101 tomorrow, and therefore paying an APR of 365% on their $100 loan.

OK, I said: if APR isn’t a good metric to use when judging how expensive a loan is, what is a good metric to use? Hudgins suggested that what we should do instead was look at the total amount of interest paid, in dollars, per $100 borrowed. That seemed like an interesting idea to me, so I asked him what would be reasonable, using that metric. “$15 per hundred,” he replied. “Is that a reasonable number? I would say that’s a reasonable number.”

I then asked Hudgins for an example of a loan from one of his companies, if they didn’t want to give me APR figures. He gave an example of someone who borrowed $500 for ten months, repaying the loan at $77.50 per month.

This confused me. The total repayment there is $775, which means the interest is $275, or $55 per $100 borrowed. And $55 is a lot more than $15. (As for the APR, that works out at a whopping 106%.)

So Hudgins gave another example, where somebody borrowing $100 repaid $125 over a shorter time period. But that’s still well over $15 per $100 borrowed.

Eventually, Hudgins declared that it’s not the total interest that we should be looking at, but rather the monthly interest. Borrowers, he said, shouldn’t have to pay more than $15 per $100 per month. At which point my jaw kinda hit the floor, the call came to a bit of a messy conclusion, and Stand Up Missouri’s spokesman sent a follow-up email:

I’m afraid Tom didn’t quite get the math right on the call. To be honest, it makes more sense on paper than in a conversation. I hope you will afford us the opportunity to provide you with the numbers / data for Missouri before you cover this issue again.

That was on December 28, over a week ago; as I say, if the numbers do arrive I’ll happily publish them, but I’m not going to wait indefinitely for numbers which might never come.

It seems to me, then, that Missouri’s loan companies can actually serve an important purpose: they are willing to extend loans to people who need them and who can’t borrow that money elsewhere. And if you go to a loan company rather than a payday lender, you can significantly improve your credit score, too. I’m not happy about it, but this, from Stand Up Missouri’s FAQ, is actually true, a lot of the time:

Aren’t there “cheaper” alternatives to these traditional installment loans?

No. Because of the “high touch” relationship required in traditional installment loans, there are simply no other options that provide the same service and disciplined and responsible loan repayment terms.

At the same time, however, the loan companies do themselves no favors at all by being incredibly opaque about the terms on their loans and the interest rates they’re charging; I’d never actually recommend that someone go to such a shop, since the entire business model seems to be based on exploiting sophistication asymmetries and charging as much interest as possible.

So two things are needed here, I think. The first is effective regulation, with teeth; I hope that Richard Cordray, newly installed at the head of the CFPB, will start providing that soon. There’s no time to waste.

But regulation isn’t enough: we also need alternatives — non-predatory financial products which allow people with bad credit to repair that credit and get back on their feet. Many credit unions provide such products, but as we’ve seen, many credit unions don’t. And credit unions are in any case often difficult institutions to navigate: it’s never entirely obvious who’s allowed to join any given one. Can someone set up a Kiva for America? Help is needed, here. And it’s very hard to find.


TFF, I am well aware that the stats I cite is the average credit card debt FOR HOUSEHOLDS WITH CREDIT CARD DEBT. being we are speaking of household debt here, why are you lumping in business debt.

A business owner would be using a business card with special rates as well as giveaways and rewards, so were he to also use his HOUSEHOLD CREDIT card that would not be wise.

Why not glom onto the fact that Americans are addicted to debt? The URL was added to show some pretty interesting statistics in the past few years.

That you and I live within out means and may not be in debt (ok me then =no debt, nada zero), guess where I am in the stats? The bar that isn’t visible) doesn’t mean we are not going to be affected by the ensuing debt crisis… so I wouldn’t make your own stats up about “many/most” people paying off their balances every month…when the stats on that page say it is more like 30%… from the last consumer survey, done well before the bubble burst… when people became even more reliant on debt and “credit”, bankruptsies and mortgage and loan defaults when sky high.

Some other info on there…

“36 percent of respondents said they didn’t know the interest rate on the card they use most often. (Source: FINRA Investor Education Foundation, “Financial Capability in the United States,” December 2009)”

“Total bankruptcy filings in 2009 reached 1.4 million in 2009, up from 1.09 million in 2008. The vast majority were personal bankruptcies — Chapter 7 and Chapter 13. Business bankruptcies made up 6 percent of all filings. (Source: AACER, the American Bankruptcy Institute, January 2010)”

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Nick Rizzo
Jan 5, 2012 00:31 UTC

Bill Gross thinks we’re beyond the new normal and into the “paranormal” — Pimco

“Exactly how does one forecast improved trading results?” — Ritholtz

Hallo! Quantitative easing does not create inflation — Business Insider

Yield-hungry investors are gobbling up “bond exotica” — Bloomberg

Americans make up (after taxes) half the global 1% — CNN Money

Obama will probably make recess appointments to the NLRB as well — Washington Post

Here’s a cool little story of American entrepreneurial ingenuity — NPR Planet Money

I’m a fan, but is Google Chrome worth over $1 billion? — The Street

And how Twitter accidentally verified the fake Wendi Deng account — AllThingsD

Find more links on our website and at our foreign friends’.


“The takeaway is you better have your own approach for investing and trading, rather than relying on 3rd party guesses . . .”

Either that or trade opposite whatever they recommend, figuring they know nothing yet their hot air powers blips in the market.

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There’s a 25% chance Santorum won Iowa

Nick Rizzo
Jan 5, 2012 00:30 UTC

Lost in all the press coverage of Mitt Romney’s victory in Iowa is that election results as close as these — indeed sometimes less close — are often overturned in a recount. For the Iowa Caucus, however, there will be no recount.

A recount is considered unnecessary because it wouldn’t change delegate counts. But Iowa’s importance lies in the campaign momentum that comes from winning or beating expectations there.

And while Santorum is being recognized for exceeding the conventional wisdom estimates of a few weeks ago, that doesn’t change the fact that Romney emerged as Iowa’s winner.

But here’s the thing: there’s roughly a one-in-four chance that Santorum actually received the most votes.

Romney’s margin of victory was 8 votes out of 122,255 cast, or 0.0065%. If you look at a number of recent recounts — Florida Presidential 2000, Ohio Presidential 2004, Washington Gubernatorial 2004, and four recounted Minnesota races in 2008 — the initial error margin in all but Ohio and one of the Minnesota races was greater than that. The Washington race underwent two different recounts, checking for different errors; one of them, and the sum of the two together, exceeded Romney’s victory percentage. The difference between the Florida election night vote count and just the 537 vote certified Bush margin is more than three-and-a-half times Romney’s winning percentage.

As you’d expect, the biggest percentage errors tend to come in the elections with the smallest number of total votes: Gail Kulick Jackson’s victory over Sondra Erickson in Minnesota House District 16A was reduced from 99 votes to 89 votes, out of 21,999 votes cast. That’s a 10-vote change from an electorate less than one fifth the size of the number of people who voted in Iowa, and it corresponds to an error of 0.0455%. And if you look at the relationship between the size of the error and the number of votes cast, you’d expect the error in Iowa to be 0.0183% — or about 19 votes.

None of this is highly scientific, of course. But assume that you can model the number of votes that Santorum got by taking his vote count of 30,007, and replacing it with a normal distribution where 95% of the area is within 0.0183% of that number. And you do the same thing for Romney, with a normal distribution centered on his vote count of 30,015. Then what is the probability that Santorum ends up with more votes than Romney? It turns out to be 24.2%.

That probably understates the true figure. The 95% confidence interval should probably be higher than 0.0183%, since that number represents the results of real-world recounts, rather than an indication of how big recount errors can be if you just ignore 5% of the outliers. And the recount figures are for machine-counted election night totals, which I suspect are more accurate than the Iowa Caucus’s haphazard hand-counting. We need to remember that election night totals are measuring bacteria with a yardstick. But to a first approximation, it’s fair to say that there’s actually a one-in-four chance that Santorum got more votes in Iowa than Romney did.

Santorum didn’t win in Iowa: he came second. That’s the official result, even if to all intents and purposes the result was a tie. And the official result matters: it’s Romney, not Santorum, who can head to New Hampshire claiming the win. But if you just counted the exact same votes all over again, there’s a good chance the result would be different, and Santorum would end up being declared the winner instead.


“Santorum didn’t win in Iowa: he came second. That’s the official result, even if to all intents and purposes the result was a tie. And the official result matters: it’s Romney, not Santorum, who can head to New Hampshire claiming the win.”

Not really, it wouldn’t have made much difference if the result had been in reverse with Santorum beating Romney by a handful of votes. First of all they both received 7 delegates, as did Ron Paul. More importantly however, the fact that Romney did exceedingly well in Iowa, and again it doesn’t matter if he won or tied for 1st, builds his momentum (which is all-important in primaries) and considering his huge lead in New Hampshire and front runner status in Florida (giving him a lock on 3 of the 4 first states), he now seems to be the inevitable candidate for the GOP; at the very least in perception if not in reality.

Most critical, however, in the results of the Iowa caucus is the fact that Romney and a hitherto minor conservative candidate dominated. Now that Santorum has gained momentum the anti-Romney vote is effectively split between the former senator from Pennsylvania, the last front runner Gingrich, and to a lesser extent Rick Perry. The very fact that Gingrich – the only candidate with the poll numbers to challenge Romney – and Perry – the only candidate with the money to challenge Romney – both tanked in Iowa is in and of itself a major Romney victory. The distinction between a clear-cut Romney win and a statistical tie would only be at all meaningful if the runner up had been Gingrich. In this case all matters is that A) Romney did extremely well in a state that initially he had little support in and B) the anti-Romney vote was hopelessly divided, which essentially ensures Romney as the nominee.

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Why we shouldn’t guarantee all bank deposits

Felix Salmon
Jan 4, 2012 15:59 UTC

Amar Bhidé is a smart man with a very stupid idea:

We need to take away the reason for any depositor to fear losing money through an explicit, comprehensive government guarantee. The government stands behind all paper currency regardless of whose wallet, till or safe it sits in. Why not also make all short-term deposits, which function much like currency, the explicit liability of the government?

Why not? I can answer that question in one word: Ireland. That country’s blanket government guarantee of all bank deposits was the single dumbest decision of the global financial crisis, and I can’t quite believe that anybody thinks it would be a good idea here. Yes, I understand that the US can print money while Ireland can’t. But that doesn’t mean it makes sense for the US government to take on untold trillions of dollars in extra contingent liabilities.

But let’s rewind to the beginning of Bhidé’s op-ed, and try to work out how on earth he arrived at this rather crazy notion. He begins by saying that “central bankers barely averted a financial panic before Christmas by replacing hundreds of billions of dollars of deposits fleeing European banks” — a statement which comes with no footnote or hyperlink, which makes it hard for me to know exactly what he’s referring to. I suspect it might be the coordinated liquidity operation which was announced on November 30, but I don’t recall anybody at the time talking about “hundreds of billions of dollars of deposits fleeing European banks”.

There was certainly a liquidity crisis in the European banking sector at the time, but there’s a world of difference between a liquidity crisis and a bank run. A liquidity crisis is when banks don’t lend to each other; a bank run is when depositors withdraw the money they have on deposit and move it elsewhere. And while deposits have certainly been flowing out of Greek banks in particular and the European periphery in general, I haven’t seen reports that European banks in toto are seeing massive deposit flight, or that deposit flight was in any way the reason for the November 30 move.

But Bhidé is convinced that there was a bank-run panic in Europe and that there might be one in the US as well:

The Federal Deposit Insurance Corporation now covers balances up to a $250,000 limit, but this does nothing to reassure large depositors, whose withdrawals could cause the system to collapse.

Again, I’d need a lot of argument to be persuaded that a bank run by large depositors in the US is a real danger. According to the FDIC’s Statistics on Depository Institutions, total deposits in the US, as of September 30, were pretty much exactly $10 trillion. Of that, $8.5 trillion was held domestically, and of that, $5.4 trillion is insured. Which means that there’s about $3.1 trillion of uninsured deposits in the US, and $4.6 trillion of uninsured deposits at US financial institutions. (Although some of those international deposits will be insured by the countries where they’re held.)

Certainly a $3.1 trillion bank run would cause the US banking system to collapse — there’s no doubt about that. But where does Bhidé think the money would go? And what makes him think that such a bank run is a real possibility? I can certainly see a run on some individual bank, if it looks like it might be in trouble — we saw that in 2008, at WaMu, although in the end there all depositors ended up with 100 cents on the dollar. But what I can’t envisage is a run on the whole system, where depositors move their money somewhere else entirely — partly because I have no idea where they might move it.

It’s worth noting here that the US differs from Europe in two crucial ways. The first is that companies can’t deposit their money directly with the central bank, in the way that Siemens for instance does. (The only exceptions are the handful of companies which own banks, like GE and Target.)

More importantly, deposits in the US are senior to banks’ bonds: depositors get their money back before bondholders get anything. In Europe, by contrast, depositors are often pari passu with other unsecured creditors. Which means that deposits are riskier in Europe than they are in the US.

All of which helps explain why the total amount of uninsured deposits in the US has continued to rise since the crisis hit: when I ran the numbers in September 2008, using July 2008 data, total domestic uninsured deposits were $2.1 trillion. Which seemed like a lot of money at the time, but it’s gone up by a full trillion dollars since then.

All evidence, then, points to the fact that US bank depositors aren’t worried about the safety of their deposits at all, and that they believe — correctly — that US banks, in general, are a perfectly safe place to park their funds.

But Bhidé’s not happy with that: he wants short-term deposits to be guaranteed just in the way that paper currency is guaranteed. But here’s the thing: the guarantee of paper currency is meaningless, because paper currency isn’t a government liability in the way that a deposit at a bank is a bank liability.

You can walk up to a bank and ask for the money you have on deposit to be converted into paper currency, and the bank has to give it to you in cash. But if you have cash and you walk up to Treasury, there’s nothing the government is obliged to give you in return. That’s the whole point of fiat currency: it is what it is. You can buy stuff with it — you can even buy a Treasury bill, and turn your cash into a US government obligation. But when that Treasury bill matures, it just becomes cash again.

And the fact is that we really don’t want a blanket guarantee of bank deposits in any event. Bank deposits are dangerous things — they’re informationally-insenstive assets which do a really good job of housing tail risk in an invisible and impossible-to-measure manner. If there were a blanket deposit guarantee, you can be quite sure that total domestic deposits would rise substantially from their current $8.5 trillion, and I’m not at all sure that I want to give trillions more dollars to the US banking sector, which has proved itself time and time again a very bad custodian of such funds. Bhidé seems to think that you could regulate away any risk: that’s naive in the extreme. If banks don’t take risk, they’re not banks any more.

Sometimes, banks will fail. That’s a feature, not a bug: it’s necessary to impose discipline on them. In Bhidé’s utopia, banks are so stringently regulated that they never fail. That places an impossible burden on regulators, and infantilizes the important capital-allocation function that banks provide in the economy.

“The next time a panic starts,” writes Bhidé, “markets may just not believe that the Treasury and Fed have the resources to stop it.” He’s right about that. So what makes him think that markets will believe a blanket deposit guarantee? If you guarantee everything, you guarantee nothing. Let’s keep private banks private. Because as Peter Thal Larsen says, the logical conclusion of what Bhidé wants is the nationalization of every bank in America. And even François Mitterrand never went that far.

Update: This page says there’s a total of $6.8 trillion in insured deposits, although it doesn’t say how many uninsured deposits there are. And it’s worth answering the point that Ireland guaranteed all bank debt, not just deposits. Which is true. But if there’s an unlimited government guarantee on bank deposits, then banks will simply fund themselves through deposits and not through bank debt at all.


Don’t you think that since banks are used by every person in society except nomads, there should be a bank (a very strict one which offers very low interest rates) but that would guarantee unlimited amounts?

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Nick Rizzo
Jan 4, 2012 08:28 UTC

Hi guys, it’s great to be back! I missed you. Apologies for the extremely late post: I’ve been blogging the Iowa Caucus, which was just like Florida in 2000 but ultimately meaningless. Onto the links!

Greece is threatening to leave the euro zone if the latest bailout isn’t approved — BBC

World’s largest hedge fund predicts a decade of “zombie” growth — WSJ

Minutes of the FOMC — Federal Reserve

We’re living in the age of the financial pawnbroker — FT Alphaville

Possibly small sample-size American migration data, visualized — Atlas Van Lines

The ethanol tax credit has ended, perhaps angering the Iowa corn gods — NYT

Inside the budding Youtube viral video studio system — Wired

2% of Americans think Mitt Romney’s first name is Mittens, 2% think it’s Gromit — VF

And some further reading from our salmon-tinged counterparties — FT Alphaville


Happy New Year to you, Mr. Rizzo. And that Mitt Romney name link really is quite stupendously wonderful.

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The richness of Twitter

Felix Salmon
Jan 4, 2012 01:37 UTC

I’m with Megan McArdle on the scourge that is infographics, especially ones where the sources are in tiny type at the bottom and basically impossible to follow. As Lloyd Alter says,

They take about ten times the space to convey information than a few words might, they are often all about graphic design over substance, they are almost impossible to use compared to conventional text with hyperlinking references, and in so many cases, just wrong.

So I don’t want to give too much attention to the Frugal Dad graphic about social media which has been doing the rounds. The whole point of it is to get inbound links from sites like Reuters, and now I’ve gone and done just that. But at the same time, I’ve been seeing this meme elsewhere, too: the idea that Twitter Makes You Stupid, or something like that.

According to Frugal Dad, “if Twitter were the news” then Beyoncé would be the most important event of the year, and Justin Bieber would be the most important person of the year. Meanwhile, “if Google Search were the news”, then Rebecca Black would be #1, and so on and so forth. Lots of comparisons between pop-culture fluff and important stuff like the death of Osama Bin Laden or the nationhood of South Sudan.

It’s all complete nonsense, on many levels.

For one thing, Twitter is not some massive news borg, broadcasting a firehose of information to a passive public. There are as many Twitter streams as there are Twitter users; some of them include lots of Beyoncé and Bieber, while others don’t. Mine, for instance, contains more news than any individual publication in the world — and it brings that news to me fast, in a witty and personalized way. It’s the single most valuable news source I have — and I work at a the world’s biggest news organization, with direct desktop access to a terminal which would cost you thousands of dollars a year.

On top of that, Twitter is a snapshot of life, not of the news. If you were to listen to all the conversations in your city right now, some of them would be about the news; most would not. Many of them would be about celebrities, because the purpose of celebrities is in large part to give everybody something to talk about — a shared cultural touchstone. It’s hardly a surprise, then, that celebrities are popular on Twitter. But that doesn’t mean in any sense that they’re supplanting the news.

And of course the key question is the degree to which Twitter helps or hinders news from being disseminated — and the answer is obviously that it helps. If you’re watching Beyoncé on the TV, that’s all you’re watching. If you’re tweeting Beyoncé on the TV, then most of your attention is still on Beyoncé, but a fair amount is on your Twitter feed, too — which might well include a bunch of non-Beyoncé news, some of it quite hard-hitting. You can turn off the news when it appears on the TV, and most Americans do. But you can’t turn off the news in your Twitter stream: it appears there whether you like it or not.

The fact is that Twitter is much richer and more fascinating than any news outlet. News is a very narrow slice of our lives; Twitter reflects much more than that. If I might be allowed a shameless plug, my wife, a/k/a @black_von, is showing her 100 Tweets project at the Dumbo Arts Center from Jan 5-15; you should come to the opening if you can on Thursday night. And if you want an idea of the real depth and meaning of Twitter, you’re much more likely to find it there than you are in Frugal Dad’s infographic.

The project comprises 100 tweets, in 100 colors, from 100 different people my wife follows, culled over a period of about nine months. Some are funny, some are newsy, some are banal. All have been laboriously hand-typeset on an antique press at The Arm in Brooklyn. And when you put all the tweets together in one place, you can see a lot about how Twitter works. You can see, for instance, how different tweets resonate serendipitously with each other; you can see the emergence of world events like the Arab Spring; you can see snark and wit; you can see snapshots of throwaway lines which the authors never imagined would be captured for posterity. And, of course, you can see Michelle Vaughan, the artist, herself: everybody’s timeline is a kind of self-portrait.

The point is that Twitter is a platform, and that it’s therefore not susceptible to analysis by aggregation. When you aggregate Twitter, you lose everything that’s important about it, in terms of how it’s used and received every day. My wife’s piece isn’t really about Twitter. But it’s still a much more accurate vision of Twitter-in-the-world than Frugal Dad’s infographic. Which by bundling up billions of tweets into one meaningless mass, effectively erases the very information it’s purporting to present.


Felix, I agree with you that Twitter is a rich experience and better than any news outlet. The comparison that people make between news from Twitter and news delivered via other media is frankly unfair. It’s a false dilemma that maybe sounds great in a headline, but has no basis in the consumer experience. Ultimately the emergence of new communication technologies influences how information is delivered in complimentary ways.

However, I disagree that there is no value in analyzing social or Twitter data in aggregate. And your point of view is evidence that these technology platforms have an obligation to bring improved analytics to the masses so we can all better understand what people are saying about topics and not just the top mentioned topics.

What do I mean? I work at Networked Insights and we analyze social data for networks, brands and agencies. When we look at social data in aggregate by topic, let’s say NFL Football, you can begin to ask questions (queries) about that audience and find out what TV shows they’re talking about. Or you can look in aggregate at a product category to understand the brands people discuss and the way they experience those products. Lastly, we examine audiences and discover what’s trending, let’s say with moms, so companies can make more informed marketing decisions, for example what celebrity to place in an upcoming advertising campaign.

I share these examples of how social data can inform media buying, product development, and brand marketing to illustrate one of the benefits in aggregating and analyzing data – the discovery of insights. What’s fascinating is the real-time element. You can imagine how real-time insights will start to inform decision making. The information could be so valuable that it will affect decision cycles converting them from static moments of conclusions to ongoing, real-time calibration.

Clearly, this is an emerging technology capability where today only a limited group have purview into the possibilities. Networked Insights is working on bringing this capability to many organizations and we’d enjoy the opportunity to show you more someday. Maybe we’d be able to sway Michelle’s feelings too. :-)

Hope to see you at the Dumbo Arts Center! Looks like a cool exhibit.

Jason Kapler

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Uber and the cognitive zone of discomfort

Felix Salmon
Jan 3, 2012 15:30 UTC

If you spend a fair amount of time among privileged dot-com types, you’ll probably be familiar with Uber, a kind of luxury car service for the smartphone era. The idea is that you pull out your iPhone, punch a couple of buttons, and in a few minutes a swanky black car pulls up to drive you to your next destination. You get out, no tipping, and the cost of the fare is automatically charged to the credit card you have on file. Elegant!

You do pay for that convenience. An Uber cab costs significantly more than you’d pay for a taxicab, and I’ve met a lot of people who suffer from Uber sticker shock. I’m one of them, truth be told: after getting charged $43 for my first Uber cab ride, last month, I haven’t used it since. I probably will at some point, when the trip is shorter or when it’s raining or when I’m stuck in the middle of nowhere and there’s no easy way to get a cab. But if you start getting into the habit of using these cars on a regular basis, that habit can get expensive fast.

Uber doesn’t seem to have worked out how it wants to deal with the central question of cost. On the one hand, it’s positioning itself as “everyone’s private driver”: it basically stands in relation to the chauffeur-driven car as NetJets does to the private jet. And compared with the cost of hiring a full-time car and driver, Uber is certainly dirt cheap.

On the other hand, Uber doesn’t like being told that it’s out of reach for people without a lot of disposable income. When Marlooz, a soi-disant “poor freelancer”, said that Uber was “too expensive” for her, the company responded with a 1,750-word data-filled blog post explaining how, even though Uber costs twice as much as a cab, it’s still a good deal. Especially if you’re calling for a cab in San Francisco on a weekend evening, when most of the time the cab you called won’t even turn up.

But the fact is that Uber is too expensive for most people. Hell, taxis are too expensive for most people. Uber is a luxury service, and they charge accordingly. Cab rates aren’t entirely apples-to-apples, but they generally have three components: a fixed base fare, and then a rate for time and a rate for mileage. The meter works out whichever is the higher, and charges you that. And if you compare Uber’s rates to the taxi rates in San Francisco, New York, Boston, Chicago, and Washington, you can see that Uber is a lot more.


San Francisco Base fare Per hour Per mile
Uber $8.00 $75 $4.90
Taxi $3.50 $33 $2.75


New York Base fare Per hour Per mile
Uber $7.00 $57 $3.90
Taxi $3.00* $24 $2


Boston Base fare Per hour Per mile
Uber $7.00 $51 $4.00
Taxi $2.60 $28 $2.80


Chicago Base fare Per hour Per mile
Uber $7.00 $51 $3.50
Taxi $2.25 $19.80 $1.80


Washington Base fare Per hour Per mile
Uber $7.00 $45 $3.25
Taxi $3.25* $15 $1.50

*includes $0.50 in surcharges

The other thing which becomes clear when you look at these prices is that Uber raises its prices pretty much in lockstep with local taxi rates. The cheapest Uber cabs — the ones in Washington — are still significantly more expensive than the most expensive yellow cabs — the ones in San Francisco. But on an absolute basis, it’s easy to see why people in Washington feel happier grabbing an Uber to get home than people in San Francisco do. If you get stuck in traffic and it takes 30 minutes to get home, that’s $29.50 in Washington; in San Francisco, it would be $45.50.

On top of that, Uber has dynamic GPS-based pricing which automatically charges you on a per-mile basis whenever the car is going faster than 11mph, even if it’s only for a brief period of time. And then of course there’s the fancy surge pricing that we saw on New Year’s Eve, when people started getting charged exorbitant rates — Brenden Mulligan, for example, got charged $75 for a ride which took just 136 seconds, and Dan Whaley got charged $135 to go 12 blocks.

Uber loves to explain its surge pricing with fancy supply-and-demand curves, but you could call it a “rip off drunk people” strategy too. Mulligan has ideas about how Uber’s software could be improved: at the very least, it should display the current minimum fare prominently, rather than just the current multiplier.

But this gets back to my disagreement with Jacob Goldstein and Matt Yglesias about the wisdom of deregulating taxi rates. They reckon that deregulated fares are a great idea, while I think they would be chaotically disastrous. And I think that the experience of Uber on New Year’s Eve — which has resulted in a significant number of refunds for unhappy customers — is important here. Uber’s customers are as savvy and sophisticated as cab passengers get, and Uber was genuinely trying hard to be transparent about pricing. After all, if surge pricing doesn’t reduce demand at peak times, it doesn’t really work. And it only reduces demand if people understand what they’re going to pay.

But Uber got a fair amount of bad press from its New Year’s experiment, and of course its fares 99.9% of the time — just like the fares of other deregulated companies like those in Stockholm — are set and fixed. That’s good business: Uber provides a valuable service by allowing people to know, when they’re out and about, that if they want to call an Uber cab, it will take them home for roughly twice the cost of a taxi.

If Uber pricing was continuously dynamic, prices might well come down during periods of light demand, especially in the early mornings. But our brains hate having to do dynamic cost/benefit calculations. Instead, we rely on simple heuristics: “I should always take the subway if I can”, “cabs in New York are cheap enough that I can take them when I want to”, “cabs in London always cost more than you think they will”, “I can afford Uber if it’s just a short ride”, that sort of thing. When we think about the costs and benefits of various different types of transportation, we don’t actually think in dollars, most of the time, just in terms of a vaguer cheap/expensive spectrum. Dynamic pricing like Uber’s New Year’s experiment takes us out of that comfort zone, and people hate being forced to re-think these things.

It’s nearly always a bad idea, then, for companies like Uber to implement variable pricing: it forces customers to think too much, and it invariably happens on nights when demand is high precisely because lots of customers are inebriated and therefore in no position to drive. Or overthink things.

But from the point of view of the passenger, Uber itself adds a whole new level of complexity to what used to be a relatively simple heuristic. Most of us understand pretty intuitively what the differences are, in terms of costs and benefits, between walking; taking public transport; and taking a cab. But then if you move to Stockholm, or if you start using Uber, things become much more complicated, since now you need to work out the tradeoffs between various different cab options. And those tradeoffs, as Bradley Voytek’s Uber blog post explains, get very complex very quickly, and involve things like whether you’re calling a cab or hailing it, your expected wait time, and the probability of a called cab turning up at all.

It takes a long time to turn all of that into an unthinking heuristic, and in the meantime Uber’s customers will always feel as though they’re ticking the “none of the above” box, rather than simply expanding the menu which is currently hard-wired into their decision-making apparatus. And that I think helps explain why many people remain uncomfortable with Uber, even if they’re exactly the kind of people who should love it.

Uber is a great idea in theory, and the mechanics of it tend to work well in practice. But Alex Rolfe has an important point: if Uber’s prices came down to the point at which they were vaguely the same as a taxi, then we could just lump Uber in with cabs as far as our mental heuristics are concerned. Because Uber’s prices are as high as they are, however, and because when they change they go up rather than down, customers react with snarky hostility.

Uber, in other words, is a car service for computers, who always do their sums every time they have to make a calculation. Humans don’t work that way. And the way that Uber is currently priced, it’s always going to find itself in a cognitive zone of discomfort as far as its passengers are concerned.

Update: Rocky Agrawal adds some very smart comments. A taster:

When people feel ripped off, they don’t want to hear about economic theory or the team of Ph.Ds you have developing optimal supply and demand mechanisms.

Most people have a sense of what is “fair”. Study after study has shown that people will make suboptimal economic decisions in the name of fairness. Product and pricing decisions have to take that into account…

I’m disappointed that Uber didn’t turn New Year’s Eve into a positive marketing opportunity. I would have strongly advocated subsidizing rides with some of the company’s $32 million in new funding (from Amazon CEO Jeff Bezos, Menlo Ventures and Goldman Sachs) to create a delightful customer experience. The company is young enough that it could benefit from positive customer feedback.


I think Uber should show the current Minimum Fare BEFORE the user confirms his/her pickup request… Then when the ride starts the user should see a running meter on his/her phone app to make the transaction fully transparent.

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Improbably unwalkable city of the day, Jerusalem edition

Felix Salmon
Jan 2, 2012 19:43 UTC


Remember the importance of counting intersections? Density alone is good, but not sufficient for a pleasant, walkable urban experience: you also need to be able to get from one place to another in a reasonably straightforward, noncircuitous manner. Cities did this naturally before the 1930s, but then urban planners started building cul-de-sacs and other ways of maximizing the effective distance between any two points.

Now, Michael Lewyn reports on some extremely unwalkable street design in a city which most emphatically predates 1930: Jerusalem, of all places. He was staying in a 32-storey residential building called Holyland Tower, whose official rendering shows lots of people on foot and just one car. But in reality, this is not a neighborhood for pedestrians:

To find the area, go to Google Maps and go to a street called Avraham Perrera. You will note that the street is in a section of looped streets that make the typical American cul-de-sac seem like a masterpiece of clarity. As a result, very little of interest is within walking distance, and what is within walking distance is hard to find unless you know the area really, really, really well.

One look at the map and you can tell this is not a walkable neighborhood. Yes, Jerusalem is hilly, but there are lots of walkable hilly cities: San Francisco and Lisbon spring to mind. This area, to the west of the city, is relatively new; it was clearly built with the idea that people would get around first and foremost using their own personal cars.

What’s more, the Holyland development seems to be targeted at Americans, who are used to the suburban lifestyle, like it a lot, and are attracted by developments which can claim to be “surrounded by 15 acres of green park”. Residential towers can be fine things, but they become very bad neighbors when they’re surrounded by nothing.

I suspect that what’s going on here is a classic case of Nimbyism: Jerusalem has a growing population, it needs a lot more residential square footage, but the locals in Jerusalem proper refuse to allow developers to build up. So those developers retreat to the hills, where, attempting to make a virtue out of necessity, they create luxury towers as removed as possible from the bustle of urban life.

I’d be interested to hear about growing cities which are getting this right, rather than wrong. There are lots of cities which predate 1930 and are very walkable. And there are lots of cities and suburbs which postdate 1930 and aren’t. But it’s now been 50 years since Jane Jacobs published The Death and Life of Great American Cities. Which new or growing cities have taken her lessons to heart, anywhere in the world?


Old towns were designed to have a handful of main clear avenues leading to the limited number of city gates so that horsemen could maneouver in defence. However, for defence purposes most towns were built on hills and the streets were set up based on the topography which could be very variable.

So you ended up with very convuluted street layouts that were often useful in local defences for individual streets or local parts of the town. The thing that makes many of those areas walkable, but not driveable, were the little alleyways that would get built to allow for pedestrian, but not horse, traffic. some of these cut throughs require steps to transition from one topohgraphic area to another. Modern automobile-based design often neglects putting those little cut-throughs in place that existed in the ancient and medieval towns, so the cars follow long windy roads tracking the contours of the land.

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