Felix Salmon

Occupy’s amazing Volcker Rule letter

Felix Salmon
Feb 14, 2012 14:57 UTC

One of the saddest aspects of the financialization of the US economy is the way in which America’s best and brightest found themselves working on Wall Street, rather than in jobs which improved the state of the world. Proof of this comes from the absolutely astonishing 325-page comment letter on the Volcker Rule which has been put together by Occupy the SEC; it’s pretty clear, from reading the letter, that the people who wrote it are whip-smart and extremely talented.

Occupy the SEC is the wonky finreg arm of Occupy Wall Street, and its main authors are worth naming and celebrating: Akshat Tewary, Alexis Goldstein, Corley Miller, George Bailey, Caitlin Kline, Elizabeth Friedrich, and Eric Taylor. If you can’t read the whole thing, at least read the introductory comments, on pages 3-6, both for their substance and for the panache of their delivery. A taster:

During the legislative process, the Volcker Rule was woefully enfeebled by the addition of numerous loopholes and exceptions. The banking lobby exerted inordinate influence on Congress and succeeded in diluting the statute, despite the catastrophic failures that bank policies have produced and continue to produce…

The Proposed Rule also evinces a remarkable solicitude for the interests of banking corporations over those of investors, consumers, taxpayers and other human beings. In their Overview of the Proposed Rule, “the Agencies request comment on the potential impacts the proposed approach may have on banking entities and the businesses in which they engage,” but curiously fail to solicit comment on the potential impact on consumers, depositors, or taxpayers. The Administrative Procedure Act requires that, prior to the enactment of a substantive regulation, an agency must give “interested persons” an opportunity to comment. The Agencies seem to have lost sight of the fact that “interested persons” could include human beings, and not just banking corporations.

There’s lots more where that comes from, including the indelible vision of how “the Volcker Rule simply removes the government’s all-too-visible hand from underneath the pampered haunches of banking conglomerates”. But the real substance is in the following hundreds of pages, where the authors go through the Volcker Rule line by line, explaining where it’s useless and where it can and should be improved.

For instance, there’s a massive repo loophole in the proposed rule, which basically allows banks to move all their prop trading to their repo desks.

And then there’s the even bigger market-making loophole, which, unlike the repo loophole, actually exists in the original statute. Still, Occupy the SEC does a great job in glossing why it’s a bad idea:

Market making is an indispensable component of liquid, efficient markets. This service, however, simply does not belong in banks…

The bank lobbying effort is certainly understandable: market making is a profitable business and one that banking entities certainly do not want to lose. It is well-known that the major dealers have always fiercely guarded their dominance of market making, particularly in the less regulated OTC markets. Firms that attempt to enter this business are regularly strong-armed through anti-competitive arrangements with inter-broker dealers… Despite the banks’ desire to continue reaping such profits, their contention— that banking entities alone are able and willing to provide this valuable service to the market, and that regulation will cause irreparable damage to the financial system at large—is unfounded and nonsensical.

In the proposed rule, banks can claim to be “making a market” in illiquid instruments when they’re only on one side: buying and not selling, or selling and not bying. They’re even allowed to claim to be making a market when they’re unwilling to provide executable bids or offers at all. (After all, if such situations never occurred, then the market wouldn’t be illiquid in the first place.) It’s pretty easy to see how a market-maker’s inventory can morph into a proprietary trade, under such circumstances.

As the letter says, “an unfortunate consequence of the generalized language throughout the Proposed Rule may be the shift of risky practices out of liquid and transparent markets into the less regulated illiquid and OTC products” — there’s a real risk, here, that the Volcker rule could actually make bank trading more risky, rather than less.

The letter also picks up on the Volcker Rule’s proposed treatment of carried interest. As we all know from following the Romney campaign, carried interest is treated as capital gains for income tax purposes. But in the Volcker Rule, it’s treated as fee earnings. As the letter says, “carried interest should not provide loopholes to banking entities and to covered funds in both the realm of taxation and the realm of regulation”. Carried interest is income, yes, but it’s also an ownership stake — but under the proposed rule, it’s exempt from the definition of “ownership interest”. Which seems silly.

Very well done, then, to Occupy the SEC — a clear example of how the Occupy movement is making incredibly detailed and substantive demands of our legislators and regulators. This letter is many things, but inchoate it is not. Let’s hope that the SEC gives it the full attention it deserves.


@mantisny Are you f*&cking joking? Every single thing you cite as the product of our financial system (and implicitly, part of Wall Street’s bounty rained down on us little peons) is largely or entirely the product of government-funded basic research and development. Google is a creature of the internet, in whose creation Wall Street had a role that was marginal at best. While many antibiotics and other medical advances are developed by pharmaceutical companies, their understanding of human biology is largely based on research funded by the NIH, universities, and other government bodies. And to then cite roads and bridges as somehow a product of Wall Street? All your post demonstrates is how necessary the work Occupy the SEC and other Occupy-related initiatives are – you’re not the only one who needs this sort of reality-distorting free market idolatry washed out of their brain with a firehose.

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Remuneration datapoint of the day, Pimco edition

Felix Salmon
Feb 13, 2012 22:33 UTC

Jenn Ablan and Matt Goldstein report on the mind-boggling amounts of money being made at Pimco (Note, as per the update below, that Pimco says that the numbers here are “wildly inaccurate”):

The aggressive culture has minted millionaire traders and portfolio managers. The top 30 partners have pulled down an average $33 million a year in compensation in recent years, say people familiar with the firm.

Never mind the $2.2 billion net worth of Bill Gross, the founder of the company; nowadays, people like Neel Kashkari can come in and immediately start making millions of dollars a month. Kashkari, remember, is still in his 30s: had he stayed at Goldman Sachs, he’d be doing fine for himself but making nothing remotely approaching this kind of money. Taking a pay cut to follow Hank Paulson to Treasury turns out to have been arguably the most lucrative decision of his life.

Indeed, it might be true to say that no one on the sell side of Wall Street — no one who works for a bank — is making the kind of money that the average Pimco partner is pulling down. There are 53 of them altogether — they’re called managing directors, now — and the amount of wealth they’re accumulating is simply astonishing. It also helps explain why so many long-time Pimco fund managers leave to set up their own companies: they’ve already become dynastically wealthy, and they have more than enough capital to found their own shop, where they can keep everything for themselves.

And when you get to Pimco’s size, the amount of money rolling in is so enormous that it’s easy to see how you can get to these kind of sums. Pimco has some $1.4 trillion in assets under management, and won’t tell anybody how much it charges to manage that money. If a big sovereign wealth fund is handing over tens of billions of dollars to manage, you can be sure they’re driving a hard bargain in terms of fees. On the other hand, look at the public fees for Pimco’s flagship Total Return Fund: the total expense ratio ranges from 0.9% to 1.65%, with customers having to pay an up-front 3.75% sales load to get that lowest fee.

And we know that in 2010, New York City paid Pimco $15.3 million in fees on an investment of $220 million, split between a $1.3 million management fee and a $14 million incentive fee. That’s a total fee of 7% of assets.

Pimco’s been expanding quite aggressively into areas like hedge funds and equities where it gets to charge much more than the fees it normally charges for its bond funds. But let’s be conservative, and say that overall it pulls in 1% of assets every year. That would give Pimco annual revenues of $14 billion. (As per Update 2 below, this number doesn’t square with Allianz’s asset-management revenues.) Let’s say that 60% of that goes to Pimco’s owner, Allianz, as profits on its investment. That leaves $5.6 billion to pay for overhead and salaries.

Pimco’s small, in terms of employees: it has maybe 2,000 altogether. Let’s say that it costs an average of $100,000 per employee to give them nice offices and benefits and the like. And let’s say they all get $100,000 a year just for being Pimco employees. Then that’s $400 million a year to cover overhead and support staff. That still leaves $5.2 billion or so to pay the 750-odd investment professionals in the firm — which works out to an average of roughly $7 million each.

Or, to put it another way, if you’re an investment professional at Pimco and you’re not making seven figures after tax, you’re probably way down the totem pole.

We know one datapoint for sure, thanks to documents that Pimco had to file at Companies House in London: the firm’s highest-paid director in the UK — almost certainly Joseph McDevitt — got paid £25.6 million in 2010. That’s $40 million.

All of which means that if you’re upset about the monster pay packages at the big banks, you’re looking in the wrong place: the buy-side is paying the kind of salaries the sell-side can barely even dream of.

As for the amount that Pimco’s paying Alan Greenspan to be an adviser to the firm, or the amount that CEO Mohamed El-Erian is pulling down, I hazard to even guess. But I suspect he earned more today than I’m going to make all year.

Update: A Pimco spokesman emails:

“The numbers cited in your blog post today are wildly inaccurate.”

Update 2: In the wake of the Pimco statement and other feedback, I’m taking a second look at the numbers. Specifically, Allianz said in its 2010 annual report that total 2010 revenues in its asset-management arm — which includes Pimco — were €4.986 billion, or about $6.6 billion. They probably went up in 2011, but that also includes various non-Pimco asset managers, so it’s probably reasonable to consider $6 billion an upper bound for Pimco’s revenues.

The two numbers we can be pretty sure of, in this post, are the $1.4 trillion in total AUM, and the $40 million paid to one London-based partner in 2010. (Who may or may not be Joseph McDevitt.) Everything else is speculative, and some of it is surely wrong, although Jenn stands by her reporting.


“Mwwaters the claim commercial banks invest in safe boring assets would hold more water not for the fact they regularly fail.”

Danny_Black, the **assets** are too safe and boring to be of interest to anybody. So the commercial banks buy them up by the trillions and leverage them 97-3.

Pretty much any investment becomes exciting when leveraged 97-3. Just ask homeowners who bought at that leverage ratio in the bubble.

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Why art isn’t a commodity, Cady Noland edition

Felix Salmon
Feb 13, 2012 21:32 UTC

Dan Duray had the news on Friday of the latest big-money lawsuit in the New York art world: dealer Marc Jancou is suing Sotheby’s and artist Cady Noland for $26 million.

The lawsuit is here, and there’s absolutely no indication whatsoever of where the $26 million number comes from; I suspect it’s just an attempt to make a splash in the press. Jancou had consigned a Noland work to Sotheby’s, which slapped an estimate of $250,000 to $350,000 on it. But then Noland “apparently disavowed the work,” according to Baer Faxt — and as a result, Sotheby’s pulled it from their auction. Jancou’s upset, and is on the legal warpath.

I see no fault of Sotheby’s here — if I were in their shoes, I’d do the exact same thing. Sotheby’s clearly has — or had — a good relationship with Jancou: according to the consignment agreement attached to the complaint, they were charging him zero seller’s commission, and neither were they charging him for things like insurance, catalogue illustration, packing, and shipping, which they normally charge sellers.

But in terms of art-world importance, Cady Noland trumps Marc Jancou — and it’s easy to see why, when her piece Oozewald just sold for $6.6 million. As Daniel Grant explains at some length, so long as an artist is alive, and especially if that artist is producing expensive work, the art world tends to bend over backwards to honor that artist’s wishes.

As a general rule, it’s pretty important, when buying or selling work by a living artist, that the artist be reasonably happy about the deal. If the artist is dead, then you need to be on good terms with the estate. It’s a significant risk, in contemporary art, especially given the fact that artists, by their nature, can be mercurial and temperamental.

All of which is yet another reason why art isn’t a commodity which can simply be bought and sold at a market price. It’s always encrusted in various egos, none more than that of the artist. They might have sold the work, but it’s still theirs, on some level, and that does give them certain rights of authorship. The artist nearly always retains copyright in the work, for instance (which is why you’ll never see images of Richard Prince works from the mid-70s), and increasingly the institution of resale royalties is being enforced, at least in California and the UK.

Marc Jancou has no real excuse: he should have known, before consigning Noland’s work to a very public auction, if she was OK with that. It’s not like he’s some kind of art-world naïf. It’s very unclear what Noland did; Jancou’s suit says only that she “tortiously interfered with the consignment agreement by persuading Sotheby’s to breach the agreement by refusing to put the work up for auction”. Jancou does say — or at least imply — that even after Noland’s complaint there was no doubt as to the authenticity of the work; she doesn’t seem to have denied making it.

But the art world is a fuzzy place, and there can be a big difference between a work made by Cady Noland, on the one hand, and a Cady Noland work, on the other. And Jancou’s being incredibly disingenuous if he’s pretending he didn’t know that.


Hugh, you can contact the artist and either become partners/joint venturers, or negotiate the purchase of the copyright from the artist and take the risk of loss from manufacturing and marketing the cards yourself. A copyright can be bought and sold, but as you say, it does not transfer automatically with the purchase of an original work of art. Even a commissioned work might not transfer the copyright. It’s all negotiable.

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Annals of private equity, Tamara Mellon edition

Felix Salmon
Feb 13, 2012 14:13 UTC

When Tony Hsieh sold Zappos to Amazon, there were lots of glowing stories about his monster success. Only later did it emerge that he never wanted to sell at all, but felt forced to do so by his VC backers.

It now seems that a similar narrative is likely to emerge from Jimmy Choo president Tamara Mellon. The woman who famously said that “at the end of the day, the person who has the money has the control” is now changing her tune somewhat:

In the New Year – I will give interviews and talk about the MONSTER Private Equity has become and the VULTURES that operate in it.
Dec 15 11 via Twitter for BlackBerry® Favorite Retweet Reply

Remember – Its entrepreneurs that create jobs, not Private Equity or Investment bankers.
Jan 17 via Twitter for BlackBerry® Favorite Retweet Reply

It’s always love and kisses when a private-equity company takes control of your firm: they promise investment, and growth, and riches beyond your wildest dreams. All of which came true for Mellon (who acquired her surname by marrying a man with 14 trust funds, but that’s another story). But then the clock strikes midnight, and your eager backers are forced — they have LPs to answer to, after all — to sell your company out from under you.

Mellon’s blaming the GPs here, and I don’t blame her — they’re the people who make all the promises and the decisions. But she’s a financial sophisticate who knows full well how private equity works: it always needs an exit. And when it exits, it will always sell to the highest bidder, rather than to some potential buyer who might be more likely to preserve value over the long term.

It’s going to be fascinating to hear what Mellon has to say about the way that private-equity professionals behave. Most of the time, the beef with such firms is that they do well by themselves and by senior management, but can fatally damage the company while doing so, and don’t care at all about rank-and-file employees. Mellon is rare in that she’s a member of senior management and she’s upset.

But once you have Mellon’s money, a few extra millions tend not to have the mollifying effect that they might have on a less affluent founder. Mellon made a fortune when she (or her backers) sold Jimmy Choo — but she had a fortune already, at that point. What she really valued, it seems, was her company, and her career. And it’s easy to see how her backers might have stripped her of both those things, in their big and profitable exit.


She thought she was clever and connected. So did most of the people with Madoff.

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Quality vs quantity online

Felix Salmon
Feb 12, 2012 07:21 UTC

At about the same time that Michael Kinsley’s hilarious response to a blog post of mine hit the web, The Atlantic also uploaded to its website Kathleen McAuliffe’s excellent story about how parasites shape our behavior.

McAuliffe’s 5,873-word feature was written for the magazine, and went through multiple layers of commissioning, copy-editing, top-editing, fact-checking, and the like. It’s not, by any means, an easy read; it includes quite a few passages like this.

The neurotransmitter is known to be jacked up in people with schizophrenia—another one of those strange observations about the disease, like its tendency to erode gray matter, that have long puzzled medical researchers. Antipsychotic medicine designed to quell schizophrenic delusions apparently blocks the action of dopamine, which had suggested to Webster that what it might really be doing is thwarting the parasite.

And yet, within 36 hours of being uploaded to the Atlantic’s website, the story had already amassed half a million pageviews — and was “well on its way to becoming the most visited piece ever” in the history of the site, in the words of Alexis Madrigal.

Meanwhile, earlier in the week, Salon editor Kerry Lauerman had revealed some traffic stats of his own:

We ended 2011 on a remarkable high note, with over 7 million unique visitors for the first time, without any giant, viral hits that could be outliers. And now we’ve finished January in similar fashion, at 7.23 million.

There are concrete reasons for this… We’ve — completely against the trend — slowed down our process. We’ve tried to work longer on stories for greater impact, and publish fewer quick-takes that we know you can consume elsewhere. We’re actually publishing, on average, roughly one-third fewer posts on Salon than we were a year ago (from 848 to 572 in December; 943 to 602 in January). So: 33 percent fewer posts; 40 percent greater traffic.

All of which would seem to imply that Kinsley is right, and that there’s something amiss with my more-is-more thesis of online journalism. Have we really — finally — reached the point at which quality is asserting itself in the form of monster pageviews? Especially given the fact that the New York Observer, the subject of my original post, is getting fewer pageviews now than it was in its much more assiduously edited days at the end of 2007.

If we have reached that point — and I hope that we have — it’s a function of the way that the world of the web is moving from search to social. Companies like Demand Media were created to game search — to take what people are genuinely interested in, and then exploit those interests to get undeserved traffic and ad revenues. Gaming social media, by contrast, is much harder: people tend not to share things  they don’t genuinely like.

The one thing that Kinsley got undeniably wrong in his piece was his assertion that I find the “more is more” formula to be “a wonderful development”. I don’t. Yes, I said that the Observer threw out the old and did something brave and new; I also said that I preferred things the way they were before.

What I do find to be a wonderful development is the way in which social discovery engines like Summify and Percolate surface much more relevant and much higher-quality content than search ever did. (Although I do worry, a lot, about the way in which Twitter seems to have bought Summify just to shut it down.) The more that we share stories and use such tools, the better the chance that great content will get an audience commensurate with its quality — even if it doesn’t have a web-friendly headlines like “How Your Cat Is Making You Crazy”.

That said, the downside to publishing subpar content is certainly shrinking. Once upon a time, if you read a bad story in a certain publication, that would color your view of the whole enterprise. That’s no longer the case: in a world where websites are insatiable, there are precious few publications of consistent excellence. As Kinsley says, almost no one achieves good writing most of the time — but once upon a time, editors could and did simply spike material which wasn’t good enough. Nowadays, less-than-great copy tends to get published anyway, since websites have no space constraints and the old excuse about how “we ran out of pages” doesn’t hold water any more.

The real cost of publishing dull content is not that readers will be put off your brand. Instead, it’s an opportunity cost: rather than getting Norman to churn out ill-informed blog posts on ostrich farming and fracking, might it not be better to put him to work honing and editing the work of someone else, helping to create the next viral story about how your cat might be turning  you into a schizophrenic?

The economics, however, still don’t add up. For reasons I don’t fully understand, high-quality edited journalism is not a little but rather a lot more expensive than more-is-more blogging. McAuliffe probably got paid somewhere in the region of $1.50 a word for her piece, which works out at $8,800; by the time you add in the cost of salary and benefits for everybody who worked on it, plus the expenses involved in flying her to Prague to report it, you’re talking enough money to get a thousand blog posts out of Norman. Ex post, McAuliffe’s article is worth it. But it takes a bold cash-strapped publisher indeed (and all publishers are cash-strapped, these days) to choose a single heavily-reported feature over a thousand blog posts.

We still live in a world where the brand value of a venerable print publication has clout on the web. McAuliffe’s piece would never have garnered 500,000 pageviews in 36 hours had she published it on her personal website; instead, it both benefited from and helped to burnish the reputation of the Atlantic more generally. That’s a nice virtuous circle. On the other hand, a boring blog post which would never get attention on a random blog can get a decent four-figure number of pageviews just by dint of being published on the website of a print publication like the New York Times or the New York Observer. As a result, such publications are faced with a constant temptation to put up as much content as they can and monetize those pageviews, even if doing so slowly erodes their brand. Immediate cashflows, these days, tend to trump impossible-to-measure concepts like the degree to which brand value might be going up or down.

My expectation, then, is that we’re likely to see a lot of more-is-more journalism from established names like the Observer, even as the most successful online franchises, such as the Atlantic, increasingly invest in expensive, high-quality content. It’s the difference between managing decline and managing for growth. In an industry which is undoubtedly in secular decline, the former makes a lot of sense. And the latter, if it doesn’t work, can be incredibly expensive.

So while I’m extremely happy to see high-quality journalism reach a very large audience online, I’m far from convinced that we’re about to enter a golden age where publishers get rewarded for spending lots of effort and money on commissioning, editing, and publishing extraordinary content. The web is still a mass medium, and cats-make-you-crazy stories are hard to scale, while commodity content is much easier to replicate. If you want to get to half a million pageviews, you’re always much more likely to get there with a thousand blog posts than you are with a single swing for the fences.


Content discovery engines will indeed promote quality content. And don’t worry, there are plenty of content discovery engines to take Summify’s place. Percolate is most similar, in that it only delivers daily summaries, but there are also discovery engines that provide a continuous stream of content. These are best for deeper dives into topics.

Perhaps the best known is Zite, which is available only as an iOS app. It is basically a smarter Flipboard. As you thumb articles up and down, it learns what you like. It works very well. If you need to follow specific topics from a computer, I recommend Trapit, the company I work for.

Trapit (http://trap.it/) is like Zite, only it allows you to follow any topic at all. You tell it which topics you want to follow, then it suggests relevant content. Thumb content up and down, and watch the recommendations improve.

I have compiled an overview of discovery engines here:
http://colemanfoley.com/post/17722454460  /discovery-engine-roundup

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Why Mark Zuckerberg shouldn’t listen to management gurus

Felix Salmon
Feb 10, 2012 20:54 UTC

This is why Mark Zuckerberg was smart to stay in complete control of Facebook and not listen to anybody telling him that a multi-billion-dollar company needed a seasoned, professional CEO in charge.

Jack and Suzy Welch are onto something when they diagnose a potential class problem at Facebook, post-IPO.

After its IPO, Facebook is going to have two classes of citizens. That’s just reality. Some of its 3,000 or so employees — several hundred in number by some counts — will have significant riches in the hand. Newer hires, though — well, they’ll mostly have options in the bush.

Where they go hilariously wrong is in their proposed solution to the problem. There’s a carrot, which as far as I can tell involves Silicon Valley manager-geeks suddenly transforming themselves into motivational speakers. And then there’s a stick:

With all this exultant “barking,” there also needs be bite — in the form of frequent, rigorous performance reviews. The facts are, if Facebook wants urgency, speed and intensity around its mission, those behaviors must be explicit values that, when demonstrated, result in bonus money and upward mobility — or not.

Any company, in the wake of an IPO, finds itself growing new and previously-unnecessary layers of management, especially in areas like the general counsel’s office, investor relations, and public relations. But for the Welches, that’s not enough: extra management also has to be marbled throughout the organization, to be found everywhere as “frequent, rigorous performance reviews”.

There is absolutely zero evidence that frequent, rigorous performance reviews ever do any good, and quite a lot of reason to believe that they actually do harm. And what’s true of business professionals in general is especially true of Silicon Valley engineers — a culture where pretty much everybody knows exactly who’s hot and who’s not, without any need for formal, frequent, or rigorous performance reviews.

What’s more, it’s far from clear that the best way to motivate a Silicon Valley engineer is to dangle an annual bonus in front of his face and tell him that if he works hard he could get an extra couple of months’ salary at the end of the year. Rather, the best way to get the most out of engineers is to surround them with other great engineers, in a collegial atmosphere where everybody works hard and everybody does really well building great products that everybody is proud of.

Performance reviews are horrible, divisive things which create a whole other set of class distinctions within a company, between the “high performers” who get money and promotions and the grunts who live in fear that their review will be used to punish or fire them. (And of course if bonus-greed isn’t a great motivator of computer engineers, fear is even worse, especially in the context of Silicon Valley, where there are multiple jobs permanently being dangled in front of just about anybody who can code.)

Managing a company like Facebook is all about creating a magnetic culture — a place where employees love to work, and where they’ll tell their friends that they’re having a great time and that they should come join them. Meanwhile, there has never been a company in the history of capitalism where managers really love the performance-review process and tell all their friends that they would hugely enjoy going through it themselves on a frequent and rigorous basis.

In other words, the mere existence of such things would probably be enough to put off many talented potential employees with a wide choice of possible employers. At a company like GE, a CEO like Jack Welch tends not to worry about such things. But at Facebook, the ability to continue to attract Silicon Valley’s best coders is very high up Mark Zuckerberg’s list of priorities and concerns.

Which is reason number 1,452 that all of Facebook’s shareholders should be very happy indeed that the company is being run by Mark Zuckerberg and not by Jack Welch.


You’re absolutely right!

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Where Obama’s economic policy went wrong

Felix Salmon
Feb 10, 2012 14:55 UTC

In one of his biggest errors as economic advisor to the president, Larry Summers told Barack Obama that “It is easier to add down the road to insufficient fiscal stimulus than to subtract from excessive fiscal stimulus. We can if necessary take further steps.”

He was absolutely wrong, of course, as Obama himself realized as early as the summer of 2009. Noam Scheiber reports:

A play for more stimulus, on the other hand, would be a defiant action, and Obama clearly recognized this. When Romer later urged him to double-down, he groused, “The American people don’t think it worked, so I can’t do it.”

This makes it seem as though the administration tried to get America to see the effects of the stimulus, and failed. But in fact, the opposite is true: a large part of the stimulus — the payroll-tax cut — was specifically designed to be invisible.

The tax cut was, by design, hard to notice. Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack: it arranged for less tax money to be withheld from people’s paychecks.

They reasoned that people would be more likely to spend a small, recurring extra bit of money that they might not even notice, and that the quicker the money was spent, the faster it would cycle through the economy.

All of which makes it seem as though Summers was almost sabotaging his own plan. It makes some amount of conceptual sense to do a smaller stimulus up front, with the option of enlarging it later on if necessary. But it makes no conceptual sense to do that if you’re then going to construct a stimulus which provides zero political momentum for a re-up.

There’s evidence that the Obama economic team wasn’t entirely unhappy with the lack of a second stimulus:

By January 2011, two months after Democrats suffered a rout in the congressional midterm elections, the West Wing again faced a critical choice… Should they tackle the trillion-dollar deficit, co-opting the anti-government zeal that Republicans had ridden to power? Or should they try to lower the stubbornly high unemployment rate, which had exceeded 9 percent for 20 straight months?

The president’s team quickly concluded that the deficit was the higher priority.

Scheiber is sympathetic. He says that the decision to concentrate on unemployment would constitute “playing partisan hardball”, and adds:

The decision to focus on the deficit in 2011 was defensible at the time. It wasn’t until much later that the economy’s weakness became clear.

This is simply bonkers: I was describing the stubbornly-high unemployment rate as “Obama’s Katrina” as early as June 2010, when unemployment stood at 9.6%. By January 2011, nothing much had changed: the unemployment rate was still 9.4%. It’s hard to see what’s happened since then which has made the economy’s weakness any clearer.

Scheiber saves his harshest words for the White House political tacticians who ignored the debt ceiling issue for too long and overestimated the tractability of the House Republicans. But the truth is that Obama’s economic strategy has been a victim of political miscalculations more or less since day one. Obama’s economic team has been consistently modest in what it considers politically possible. Summers, in his memo, for instance, noted that Ken Rogoff, who he described as a “widely respected macroeconomist, former chief economist of the IMF, former McCain adviser”, wanted a trillion-dollar stimulus. Summers also consistently said that the risks of doing too little were greater than the risks of doing too much. But even so, the stimulus came in much lower than that, shrunk by second-guessing what was politically possible.

It’s almost as though the Obama economic team — with the notable exception of Christy Romer — was consistently looking for excuses to do less rather than more. Much of the team first got to know each other in the Clinton administration, and Scheiber talks a lot about how they didn’t grok the way that the Republican party has changed since those years. But the same can be said of their attitude to the economy. Clinton’s economic success, especially when Summers was at Treasury, was achieved with a less-is-more approach: his fiscal policy was conservative, and he let the Fed take care of the gas pedal. That doesn’t work in a crisis, and it certainly doesn’t work in this crisis, where the Fed has long since run up against the zero bound for interest rates. The problem is that no one on Obama’s economic team, and especially not Peter Orszag, seems to have had much of an appetite for anything else.


At the beginning of the Obama presidency, Summers offered a 50+ page memo on his economic forecast and 3 different policy proposals. All offered predictions that were wrong by half in terms of economic performance and unemployment. He offered 3 stimulus proposals and Roamer argued that the most generous should be increased to approximately 12% of GDP. Summers disagreed and Orszag never believed that stimulus was needed. The Summers’ memo is cited in Ryan Lizza’s, “The Obama Memos,” New Yorker and is readily available online for those interested in reading the pathos of a megalomaniac.

The economic conditions required more than Obama assembling a posse of Pseudo-Randian free-marketeers. The presumption of Friedman economics, which is a propaganda tool for conservative political ideology, has made mush of economic brainpower over the last 30 years. Too little stimulus is assuredly a loser and to overdue a stimulus plan surely will not result in anything close to the economic malaise caused by an under aggressive economic policy. It’s brainless or should be. It’s painful to read about this stuff anymore.

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Rubber ducks explain the Greek negotiations

Felix Salmon
Feb 10, 2012 01:40 UTC

Is there really a done deal in Greece? I hope so — but it’s pretty clear that nothing’s in the bag quite yet. In terms of my video above, the Greeks consider themselves in the boat at this point — but the Europeans worry that the Greeks might go back on their promises, so they want not only the Greek executive but also the Greek legislature to sign on. (I didn’t even have a duck for the Greek legislature, I thought the only legislatures we needed to worry about were in Germany and Finland.)

And the IMF duck isn’t in the boat either — Christine Lagarde, too, is demanding further “assurances Greece would stick to the agreed policies whatever the outcome of looming elections”.

It seems that the bondholders are in the boat, however — or as far in the boat as they can credibly get absent a formal bond exchange offer. And that’s why I’m not sold on Floyd Norris’s idea that the money Europe is providing for Greece will instead end up in an escrow account, to be used first to pay bondholders and only second to cover the Greek budget deficit.

If that were the case, the value of the exchange offer would rise markedly: the new bonds would certainly be repaid, and would be worth 100 cents on the dollar, rather than the 60 cents or less that everybody’s expecting right now. It would be a multi-billion-dollar gift to bondholders who expect much less than that, in a context where a few billion dollars could well make the difference between a successful deal and a failed one. If there’s effectively going to be an EU/IMF guarantee of the new Greek bonds, then the nominal haircut would surely be bigger than 50%, and I haven’t heard anything along those lines.

Basically, what’s going on here is that because the bondholders are already in the boat, no one needs to do them any favors. What’s needed is an agreement between Greece and the Troika — something acceptable to both sides, and which the Troika believes that Greece will hold to. Even as sensible people like Mohamed El-Erian can see clearly that that’s not going to happen. “I suspect all three parties to the negotiations know in their heart that their latest agreement, brave as it is, will only last a few months at best,” he writes. “Within a few months, the negotiating parties are likely to be back at the table bickering while Greece continues to stare into the abyss.”

Or, to put it another way, that overloaded pirate ship is very precarious. And even if it manages to get everybody on board now — which is far from certain — it could still easily capsize a few months down the road.


TFF, which is why in a democracy no one ever votes for it….

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Charts of the day, US legal immigration edition

Felix Salmon
Feb 9, 2012 22:21 UTC

In general, immigration is incredibly healthy for any economy. Immigrants tend to work hard, boost GDP, fill jobs which would otherwise be hard to fill, and also create jobs of their own. But whatever’s true of immigrants in general is much more true of legal immigrants. And whatever’s true of legal immigrants in general is much more true of smart, high-qualified legal immigrants.

The US has various visas specifically designed to encourage the kind of skilled, legal immigration which has driven its economy for nearly all of its history. The three main ones are the O visa, the H visa, and the L visa. The O visa is a small program for “aliens of extraordinary ability”, and the H visa all but suffocated under its own popularity in 2007 and 2008. But the L visa kept on allowing people in. It’s given to employees of foreign companies, who have spent at least a year working for that company abroad, and who are only allowed to work for that company when they’re in the US. And historically it’s been quite easy to get, with Customs Immigration rejecting fewer than one in ten applicants. Until:


This is bad, but it gets worse — the spike in denials seems to target specific countries over others. In 2008 the L-1B denial rate stood between 2% and 3% for India, Canada, Mexico, and the UK. In 2009, it rose: to 2.9% in Canada, and 4.1% in the UK. And 15.1% in Mexico. And 22.5% in India.

Meanwhile, in order to make things even harder, Customs Immigration didn’t just approve the applications that they didn’t deny. Instead, they increasingly sent them back with RFEs, or “requests for evidence” — a layer of bureaucracy which at best adds months to the visa-application process and makes it much harder for global companies to move employees to where they might be urgently needed. If you think the rise in denial rates is bad, just check this out:


It really does look as though Customs Immigration is in the middle of a massive crackdown on L-1B applications here. Now, why would they do that? Maybe because the number of applications was suddenly very high? No — it turns out that the drop in L-1B applications for Indians, the people who suffered the brunt of the crackdown, preceded the crackdown by a couple of years.


If you look at this last chart, what you’re seeing is just the number of L-1B visa applications from Indians. It’s falling sharply enough on its own — but then on top of that an increasing number of those petitions is being denied, and most of the rest are being sent back with an RFE.

All too often, the questions in the RFE, or the reasons for rejection, seem to imply rules which simply don’t exist:

Employers say that at times they believe applicants are rejected for L-1B status if a particular consular officer or an adjudicator believes a company could not possibly have more than three to five people with specialized knowledge in a particular area. Nothing in the statute or regulations indicates “specialized knowledge” need be restricted to a handful of people in a company. In fact, in companies employing thousands of people in highly specialized fields and product lines, it would not even be feasible to operate in most circumstances if specialized knowledge was restricted to three or four people at a time in a specific subject area, product or service.

Another type of denial, employers say, comes from USCIS adjudicators and consular officers requiring a standard of “extraordinary ability” be met to permit the transfer of employees into the United States with specialized knowledge. Requests for Evidence for L-1B have included asking whether the individual received a patent. And companies note that even patent holders have been denied L-1B petitions under the new, arbitrary standards.

Of course, Customs Immigration has discretion to reject anybody for any or no reason. No one has the right to immigrate to the US. But it does seem here that the US is rejecting far too many people — as though their job is to keep them out, rather than welcome them in.

Thanks to the National Foundation for American Policy for putting these charts together. As they note, everybody rejected has had a huge amount of money and effort put into their application. And so it does seem as though something bad is going on here.

Given the resources involved, employers are selective about who they sponsor. The high rate of denials (and Requests for Evidence) is from a pool of applicants selected by employers because they believe the foreign nationals meet the standard for approval, making the increase in denials difficult to defend. Denying employers the ability to transfer in key personnel or gain entry for a skilled professional or researcher harms innovation and job creation in the United States, encouraging employers to keep more resources outside the country to ensure predictability.

American cities won’t win the global competition for talent if federal officials keep on behaving like this. Canada can do this stuff well; why can’t the US?


Felix – I am not sure you can infer anything from the charts you show, without knowing the back story. But note:

– it is not quite correct to say that the spike in applications predates the crackdown by several years. In fact, the first crackdown seems to have occurred right at the peak of the application spike, and was probably a reaction to the spike. (And it seems to have worked, though maybe now they could relent a bit.)

– the list of top companies for L-1 on Wikipedia does suggest companies were using it as an end run around the H-1B visa system. You very often have spillover effects from on category to another (H to L, or H to O) that change the mix and quality of applications you get, resulting in changes in the approval rate.

I have been on an H1-B in the past, so I am hardly anti-immigrant. But some fixes are needed in some of the programs. In cases such as H1-B, the solution is to just raise the minimum salary requirements — this way Google, MSFT, Facebook, and other high-paying companies get the people they need, and the bottom feeders go away. Win win.
So, use salary requirements, rather than first-come first-serve with a too tight quota, to control the flow.

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