Felix Salmon

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The Supreme Court is holding off issuing a ruling on the constitutionality of Obamacare until next week.

The are four basic scenarios of what the Court can do and the decision has massive economic implications. The industry accounts for some 18% of US GDP; billions of dollars in federal spending and the future of hundreds of community healthcare centers are in play.

Only the justices and their staff of clerks know with any certainty where this is headed (sorry, Jeff Toobin). No matter how obsessively you check SCOTUSblog – your single best resource for all things Supreme – you won’t hear anything early. Unlike the rest of the branches of government, the Supreme Court is a leak-free machine. Until the official word comes, comfort yourself with the Vegas odds and courthouse gossip.

The decision likely hinges on Justice Kennedy: Dahlia Lithwick calls him “the original independent swing-state voter”. Or it could just as easily hinge on what the justices think of the mandated eating of broccoli, a vegetable Americans actually do like, it turns out.

And if you need to be hit over the head with the human importance of this issue, the NYT’s Annie Lowrey looks at an Oregon program that found providing health insurance to adults in poverty made them “healthier, happier and more financially stable”.

To help lead you through the twists and turns of the healthcare decision, we’ve compiled a Twitter list of the best people to follow. A huge thanks to Erin Geiger Smith and the Reuters Legal team for helping with this.

So have as relaxing a weekend as is possible when a decision affecting how we spend $2.5 trillion a year awaits your return. – Ben Walsh

On to today’s links:

Long Reads
How companies inject trillions of gallons of toxic liquid deep into the earth – ProPublica
Taibbi: How banks “systematically” stole from America by rigging muni bids – Rolling Stone

EU Mess
Monti: We have a week to save the EU and prevent “progressively greater speculative attacks on individual countries” – Guardian
“Like asking your children to grade their own homework”: Euro banks may be artificially inflating their health – WSJ
Krugman: When it comes to economic inequalities, the euro zone is no worse than the US – NYT

Shovel Readyish
Brazil’s massive, “pharaonic” stimulus program is now being compared to China’s – NYT

Banks
Investors respond to Moody’s bank downgrades with emphatic “meh” – Bloomberg
Moody’s slightly reduces its overrating of banks – Dealbreaker
Moody’s ratifies interbank mistrust – Felix

Alpha
Investing is more win-lose than win-win – Howard Marks

New Normal
Corporate profits hit an all-time high; wages just hit an all-time low – Business Insider
Nevada has had the highest employment in the nation for the last 27 months – WSJ
Superheroes aren’t immune to recessions – Imgur

Takedowns
Gawker’s amazing shredding of the NYT‘s Brant brothers profile – Gawker

Data Points
An interactive guide to rich folks’ private islands – Datablog

RIP
Economist Anna Schwartz dead at 96 – NYT

Near the beginning of Capital, the new novel from John Lanchester, we’re introduced to banker Roger Yount, and are treated to a wonderful three-page riff on the million-pound bonus he’s desperate to receive:

He wanted a million pounds because he had never earned it before and he felt it was his due and it was a proof of his masculine worth. But he also wanted it because he needed the money. The figure of £1,000,000 had started as a vague, semi-comic aspiration and had become an actual necessity.

Yount’s voice, as channeled by Lanchester, is one of the joys of this book: “Any flights would be taken business class, since Roger thought that the whole point of having money, if it had to be summed up in a single point, which it couldn’t, but if you had to, the whole point of having a bit of money was not to have to fly scum class”.

Lanchester is a real expert on banking and the global financial crisis: his book I.O.U. is a great one-stop guide to what went wrong. And having written that book, he had no need to try to explain the crisis all over again here. Instead, he has rolled out a much broader, novelistic canvas, stretching across creeds and classes and countries, which is a true pleasure to read, and which does an amazing job of evoking and showing what London has become. Anybody who loves London, or hates it, will love this book, and will find just as much detail in the descriptions of football agents and corner shops as there is on the trading floor.

Lanchester’s not the only Wall Street expert to have written a novel: The FT’s John Gapper has come out with one too. Called A Fatal Debt, and coming out on Tuesday, it’s a rollicking beach read, and loads of fun for anybody who prefers their bankers on the dead side. Gapper’s a friend, so I can’t claim to be objective here, but I devoured this one in no time. Lanchester’s book is long and complex and something to savor; Gapper’s is punchy and plot-driven and a guiltless pleasure.

Gapper’s book is set mostly in New York, and the Hamptons; I’m sure it’s going to be read around these parts a great deal over the next couple of months. It’s the perfect form of escapism for anybody with a summer place on the South Fork, especially if they have anything to do with finance. Which most of them do.

The financial thriller is becoming something of a genre these days: I also enjoyed The Fear Index, by Robert Harris, and Dead Bankers, by Philip Delves Broughton. It turns out that people who understand money also seem to be quite good at cunning and plot twists, a bit like mathematicians tend to be good musicians. And for those of us who read thousands of words of dry financial nonfiction every day, the opportunity to kick back with a book designed to be enjoyed, rather than something more didactic, is something to be savored and treasured. Now that we’re officially in summer, you can make some space for fiction. And you could do a lot worse than picking up any of these books.

Last week I explained why Wall Street prefers lower-priced stocks: they mean that bid-offer spreads are wider, in percentage terms, and when that happens, brokers make more money.

So it comes as little surprise to see that Wall Street is now agitating for some stocks to trade in increments of 5 cents or 10 cents, rather than the current 1 cent:

Brokerage firms often can’t afford to spend money developing reports on thinly traded companies because firms are less likely to make back that money through commissions linked to trades in such securities, said Healy. With less research available on small-cap companies, mutual funds and other institutions may not be inclined to invest in such stocks, he said.

Of course, there were lots of silly reasons put forward too: one executive even said that he was pushing the change for investors‘ sake, on the grounds that they “like round numbers”. But the real reason is the obvious one: the higher the bid-offer spread, the more money brokerages make. I, like Alex Tabarrok, am naturally suspicious when industry insiders say that higher tick sizes are in the public interest.

But there’s something else going on here, surrounding the semiotics of nominal share prices. The fact is that it’s pretty easy to choose a wide or a narrow bid-offer spread without changing tick sizes at all: if you want a wide spread have a low nominal share price, and if you want a narrow spread, have a high nominal share price. Anything over $50 or so will give you the narrowest possible spread, since bid-offer spreads almost never go lower than 2bp. On the other hand, if you want a spread of 30bp to allow Wall Street to make a killing, then just do a big share split which results in a share price of $3 or so.

Why don’t companies do this? Because nominal share prices matter, at least to retail investors. After I wrote my last post, a Wall Street veteran emailed me:

Trust me on this: Individual investors HATE HATE high-priced stocks. I know the logic makes no sense but you simply cannot sell a $70 stock to an individual unless it’s a very well-known blue chip. They hate it.

You would be surprised to hear how many people say that they’re looking for something “in the $23 range.”

This is weird, and irrational, but true. What’s more, individual investors are highly suspicious of very low-priced stocks, too. If Apple suddenly announced a 150-for-1 stock split, so that its shares started trading at $3.86 apiece, that would be bearish for the stock, the conventional wisdom that investors like stock splits notwithstanding. A company whose shares trade below $4 just feels as though it’s small, or struggling: certainly not a world-beating behemoth. (Incidentally, if Apple did do that 150-for-1 stock split, it would have 140 billion shares outstanding, and would trade on average 3.1 billion shares per day.)

The subtext of nominal share prices, beyond the obvious realm of penny stocks, is something I’ve never been good at understanding; if you know any good guides to it, I’d love it if you could point me in their direction. And even penny stocks don’t make a lot of sense to me: if you don’t want the stigma of being a penny stock, why don’t you just do a reverse stock split?

In any case, for reasons I don’t pretend to understand, it’s obviously a lot easier to try to change tick sizes than it is to change nominal pricing conventions. Some things are incredibly sticky, even if they don’t make any sense. I guess they’re a bit like that weird American love of pounds and miles and gallons.

On Tuesday I explained why it was silly to look at what markets do in the wake of ratings upgrades and downgrades; today, markets are providing a prime example. I normally hate those real-time stock tickers embedded in news stories whenever a public company is mentioned, but it’s worth checking out the WSJ article on the mass Moody’s bank downgrade today, just to see the sea of green. Every single downgraded bank is higher today, in a classic case of the market selling the rumor and buying on the news.

It’s easy — and wrong — to dismiss this move by Moody’s as a typical late-to-the-game ratings-agency move. After all, the spreads on banks’ debt have been much more consistent with these new lower ratings than they were with the old higher ratings ever since the financial crisis. Even the implicit government guarantee on TBTF banks hasn’t changed that. In general, ratings follow spreads, and so this move is in large part a capitulation to market reality.

But in fact there’s more to the downgrades than that. For one thing, they more or less kill any hope that the interbank market will ever be resuscitated. It’s been moribund since 2007, especially in Europe but also in the US, and the death of the interbank market is a very important and very worrying long-term phenomenon. It makes central banks much more important, and also much riskier. What’s more, because central banks don’t lend at different rates on the basis of perceived differences in credit risk, it hurts price discovery. And then of course there’s the trillions of dollars of loans and floating-rate bonds which are priced off Libor, which is an increasingly fictional construct.

The downgrades also institutionalize a great degree of uncertainty with regard to resolution mechanisms and what would happen if there was another banking crisis. The whole point of announcing all the downgrades at the same time is that they’re really not about idiosyncratic risk. While Citigroup is riskier than Goldman Sachs, for instance, they both got downgraded by two notches, and Goldman today has the same rating that Citigroup had yesterday. The point here is that the main credit risk facing banks’ bondholders is a broad banking crisis, rather than some localized blowup which could hurt one bank but leave everybody else unscathed. Moody’s is essentially saying that the risk of a big new banking crisis, at some point, is high. And if we have such a crisis, it’s likely that bondholders will take a hit.

That’s a good thing, from a systemic perspective: creditors, rather than taxpayers, should take the hit when banks fail. And if markets were efficient, the lower ratings and high spreads on banks’ debt would encourage them to raise more equity, carve off risky businesses, and basically become safer and more utility-like. But that is unlikely to happen, for two reasons.

Firstly there’s the collective action problem. Because a destabilizing global event would risk dinging all big banks’ bondholders, there’s no real incentive for any one big bank to become a lot safer. They need to all do it at the same time — at which point the whole system becomes safer, and there’s an incentive for any individual bank to free-ride by being the riskiest of the lot. It’s a knotty problem which regulators are doing their best to address, but it’s becoming increasingly clear that regulators’ best isn’t good enough.

Secondly, as we’ve seen, these markets are not efficient; instead, they’re increasingly reliant on central-bank liquidity and other forms of government support of the banking market. (There would be basically no mortgages at all being issued right now, for instance, if it weren’t for various government operations encouraging banks to continue making home loans.) The market has basically given up trying to make fine-grained credit distinctions between different big banks, since the banks’ disclosures are so impenetrable as to make doing so impossible. And in truth, the market never did really try to make such distinctions in the first place. We’ve just moved from a world where banks just assumed that all other banks were solid counterparties, to a world where banks just assume that they aren’t.

Which makes the banks’ protests against Moody’s actions quite ironic. Here’s the FT:

Senior staff at the banks have argued that their companies’ business models have already changed – for the better. In numerous meetings with the Moody’s analysts in charge of the downgrade, they have argued that their banks have raised billions of dollars worth of extra capital since the financial crisis.

This would be much more credible if the banks demonstrated that they believed it themselves — by starting to lend to each other again in large volume. Unless and until that happens — which means, for the foreseeable future — the global banking system is going to look sclerotic and fragile.

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Shadow banking has at least one component that non-financial types have actually heard of: money market funds. These are supposed to be low-risk investments, with accordingly low yields. MMFs are all about keeping your principal intact – a net asset value (NAV) below $1 is generally a mortal failure.

In the fall of 2008, the Reserve Primary Fund famously broke the buck after it was stuck with massive amounts of Lehman Brothers debt, unleashing any manner of craziness into a market that had been treated by many as a savings account.

In congressional testimony today, SEC Chairman Mary Schapiro said the nearly $2.5 trillion Americans have invested in money market funds are no safer than they were in 2008:

[Money market funds] still remain susceptible today to investor runs with potential systemic impacts on the financial system, as occurred during the financial crisis just four years ago. Unless money market fund regulation is reformed, taxpayers and markets will continue to be at risk that a money market fund can “break the buck” and transform a moderate financial shock into a destabilizing run. In such a scenario, policymakers would again be left with two unacceptable choices: a bailout or a crisis.

More than 300 times since 1970, Schaprio says, fund mangers have injected their own cash to keep NAVs above $1. Recently, they’ve supported their funds through “fee rebates“. That’s a particularly invidious way for funds to describe what is in effect life support and why Shapiro has called funds’ stable NAVs “fiction“. The alternative, floating asset values similar to short-term bond funds, is opposed by the industry. Vanguard said they would do “irreparable damage“. Corporate and municipal borrowers also may face higher costs, according to a recent study.

On the New York Fed’s blog, a group of Fed economists and officials make the case that much more is at stake than simply investor returns and borrowing rates: “MMFs’ vulnerability to runs not only puts their investors at risk, but also poses considerable systemic risk to the U.S. financial system”.

It may be tentative good news, then, that money market outflows hit $28.2 billion this week, the highest level in six months. And longer term, the trend is strongly in favor of insured savings accounts over money market funds. – Ben Walsh

On to today’s links:

Banks
Moody’s downgrades 15 financial institutions – Credit Writedowns

Charts
2,000 years of economic history, charted – Economist
Younger American families lost more than half their net worth between 2007 and 2010 – Economic Policy Institute

Alpha
“We are extremely lonely” – Meet the hedge fund manager who wants to invest in Greece – Bloomberg

Billionaire Whimsy
Larry Ellison just bought a Hawaiian Island – Businessweek

The Singularity
Why software is better at investing than 99% of active investors – Techcrunch

Facebook
Congress declares it’s looking into “substantial problems” in the IPO process – WSJ

New Normal
The US’s for-profit prison industry by the numbers – ProPublica

Must Watch
Syrian satirist: “They broke my hands to stop me drawing Assad” – Guardian

Oxpeckers
BBC’s Mark Thompson is in talks to be the next NYT CEO – Guardian

Long Reads
Why women still can’t have it all – The Atlantic

Crisis Retro
Banks have complex structured products that they’d love to sell to wealthy Asian clients – WSJ

It’s Academic
Famous economic theory may be backed up by, you know, what actually happens in the real world – MIT

Boondoggles
Why did the environmental movement send 40,000 people to a failed summit in Rio? – Foreign Policy

EU Mess
Greece is now being forced to sell a famous state-owned resort – Bloomberg

The Fed
The Fed has an inflation ceiling – The Atlantic

China
China’s factories are in their eighth month of contraction – Reuters

A couple of weeks ago, Matt Goldstein and Jenn Ablan had an intriguing story: Mortgage Resolution Partners, a politically well-connected firm in San Francisco, was shopping to municipalities the idea of using eminent domain to restructure mortgages. Then, on Tuesday, Cornell University’s Robert Hockett weighed in, saying that the idea was a compelling one. “To solve a collective action problem, we need a collective agent,” he wrote. “That’s what governments are.”

According to Imran Ghori of the Press-Enterprise in San Bernadino, where the idea seems to be furthest along, Hockett “has been working with Mortgage Resolution Partners” but “said he has no financial interest in the proposal”. I don’t really know what that means, but I think it’s fair to assume that if this happens, Hockett is very well placed to make a lot of money from it. So it’s worth approaching the idea with a skeptical eye.

In principle, I think I can like this idea. On Monday I met with Jorge Newbery of American Homeowner Preservation, whom I’ve written about a few times in the past; his company buys pools of defaulted underwater mortgages from banks, often for just $1 each, and then, having bought the mortgages at massive discounts to par value, can come up with any number of ways to successfully modify the mortgage, nearly all of which involve principal reduction. This is a very successful outcome for nearly everybody involved, but there’s a problem: while Newbery can buy pools of bank-owned mortgages, he can’t buy mortgages which have been securitized. And those mortgages represent the vast majority of defaulted subprime debt.

Newbery started buying pools of mortgages when his original idea didn’t work. That idea was elegant: investors would buy a house in a short sale at the market price, and then lease the home back to the homeowner until the homeowner had the ability to get a mortgage and buy it back at a pre-set price. The idea might have been elegant, but it didn’t work in practice, because the banks wouldn’t play ball: they (and Freddie Mac) simply hated the idea of a homeowner being able to stay in their house after a short sale, and often asked for an affidavit from the buyer saying that the former owner would certainly be kicked out.

The idea from Mortgage Resolution Partners and Robert Hockett basically does an end-run around the banks’ objections: they can’t object to the short sale, because they’re being forced to do the short sale. Clever.

But then things become extremely murky. Here’s Hockett:

Using their traditional eminent domain authority, municipalities can “take” – it’s a constitutional term of art – underwater mortgages from holders for fair market value. They can then write down the loans to just under the values of underlying homes, bringing these back above water. They can finance these takings with moneys supplied by investors, who then are repaid on the refinanced mortgages.

Got that? Me neither. Here’s Goldstein and Ablan, trying to explain the same idea:

Mortgage Resolution Partners would work with local governments to find institutional investors willing to provide tens of billions of dollars to finance the condemnation process to avoid using taxpayer dollars to acquire millions of distressed mortgages.

A local government entity takes title to the loans and pays the original mortgage owner the fair value with the money provided by institutional investors.

Mortgage Resolution Partners works to restructure the loans, enabling stressed homeowners to reduce their monthly mortgage payments. The restructured loans could then be sold to hedge funds, pension funds and other institutional investors with the proceeds paying back the outside financiers.

The key here — which is spelled out in much more detail in Hockett’s 56-page paper on the idea — is that the eminent domain powers are not being used to buy the actual houses in a short sale, as would have been the case under the original AHP scheme. Instead, they’re being used to buy the mortgage. Hockett doesn’t spend any time in his paper or his op-ed explaining why eminent domain should be used to buy mortgages rather than houses, and it’s here, I think, that his plan moves from something which could be a very good idea, to being something which is actually a pretty bad idea.

Here’s how a scheme like this should work. MRP, or a company like it, borrows short-dated money for a term of say three months at very low interest rates. Meanwhile, underwater homeowners in San Bernadino are invited to volunteer for the scheme. Once the money has been raised, it is used to buy those homeowners’ houses at the market rate. The homeowners then buy their houses back from MRP at say a 2% premium to the price paid, using a mortgage given to them either by MRP itself or by some other lender. MRP then repays the short-term loan. MRP’s profits come from that 2% premium, and from its separate mortgage-lending arm; if it wants, it can restrict the houses it buys to only the ones owned by people it would be willing to lend money to.

Under this scheme, the banks or investors who hold the mortgage would receive in return the fair market value of the home in question, just as they would in a short sale. That’s a very reasonable amount to receive for an underwater mortgage, so the banks can’t really complain. MRP would make a modest amount as a middleman and facilitator, and the homeowner would end up with a house mortgaged at its fair market value, rather than at some inflated old purchase price.

But that’s not what Hockett is proposing. Instead, Hockett wants MRP to be able to buy the mortgage, rather than the house. That’s very weird: while it might be legal under eminent-domain law (I have no idea about that), the spirit of the law is very much that the government can buy property, rather than liens. But after talking to Newbery, I understand what MRP is thinking here. His company, AHP, is buying up underwater mortgages for much less than the value of the underlying property — sometimes only 10% or so, and never more than about 25%. Admittedly, all of those mortgages have been in default for some time. But MRP clearly wants to be able to buy mortgages at a deep discount to the value of the home, and then “restructure” the mortgage so that the principal amount is very close to the value of the home. The result could be massive profits for MRP.

In both cases, the homeowner essentially ends up refinancing into a new mortgage with a principal amount just below the value of the home. But in the first case that money is essentially used to pay off the old mortgage holder, while in the second case — the one MRP is proposing — the money goes largely to MRP, the middleman, doing a job only really worth a percentage point or two of the deal.

What’s more, the market for liens is much more opaque than the market for houses, and as such MRP could probably make a colorable case that fair value for the mortgages it wanted to buy was extremely low. Since MRP would have all the important political relationships, the owners of the mortgage — especially if they’re just distant bondholders somewhere — would have very little ability to contest the valuation, and might end up getting paid much less than a genuinely reasonable price for it.

It seems to me that MRP is not adding a huge amount of value here — certainly nothing commensurate with the amount of money it’s likely to make. The real value is added by the use of eminent domain to buy the liens, and it’s the municipal government, rather than MRP, which has that power. So if anybody makes money from using eminent domain, it should be taxpayers: not some private-sector middleman.

If I represented the municipality of San Bernadino, I would respond to MRP’s proposal by giving them two choices. Either cut the city in to a very large proportion of MRP’s profits on these deals, or else force MRP to buy houses rather than liens. Both of those options seem fair to me. Hockett’s scheme, as it stands, doesn’t.

Update: I just had a long conversation with Steven Gluckstern, the chairman of Mortgage Resolution Partners. He explained that they were only interested in buying mortgages held by private-label securitizations, and not mortgages held by banks or by Frannie. Banks would put up too much of a fight in front of the judge, saying that their liens are worth more than the value of the house, even as MRP will never pay more for a mortgage than the house is worth. And Frannie-backed mortgages, of course, are worth par, because of that government guarantee. That alone seemed to me to be an excellent reason to buy homes rather than mortgages — but Gluckstern was adamant that transferring title was far too much work. He also admitted that it might be hard to make this scheme work at all in recourse states: it definitely works best in non-recourse states like California.

The financing for the scheme will come from investors putting up relatively short-term funds: the idea is very much that the homeowner will refinance their mortgage once they’re told they can do so at a much lower face value. MRP is only interested in buying underwater houses where the owner is current on their mortgage, partly because those owners shouldn’t find it too difficult to find a new mortgage for a lower amount. But still, owners in default, or owners whose mortgages are owned by the wrong kinds of institutions, won’t be eligible at all.

As for Hockett, he was paid an honorarium by MRP to write his paper; Gluckstern described him as a consultant to MRP, but definitely not one of MRP’s lawyers. MRP did not see the paper before Hockett published it, but seeing as how Hockett wrote “The Way Forward” with Dan Alpert, one of the key principals behind MRP’s scheme, there was surely no doubt about what his conclusions would be. The disclaimer in Hockett’s paper says only that “Readers should also be advised that the author is disinterested in what he is here recommending, but may subsequently undertake more legal, financial or expository work in connection with the proposals offered and advocated herein.”

I’m not sure which is more flattering: someone getting the Gaussian copula function tattooed across his arm, or Donald MacKenzie titling his latest paper after my Wired story on that function.

MacKenzie is a very smart sociologist, who understands quants and copula functions much more deeply than I ever did. (And, like most journalists, I forgot nearly all of what I ever knew about them within weeks of writing the article.) His paper is largely sociological, and I wouldn’t recommend reading it if you don’t like running across phrases like “the beginnings of a typology of mechanisms of counterperformativity”. But the good news is that if you want an English-language translation, Lisa Pollack has done an amazing job of extracting the interesting bits, and there’s no reason for me to try to replicate what she’s already done so well.

Here’s how Lisa sums it up:

The quant community also didn’t, and doesn’t, rate the Gaussian copula model highly at all. In fact, we’re putting that very mildly if the statements from quants interviewed by the researchers are anything to go by.

Furthermore, this was a view held by many before the financial crisis hit. But even in the face of this rejection, the model has stayed in use through multiple crises and is still in use.

I’m going to push back here a little bit. For one thing, although the “many” is implied, it’s never quite stated. Yes, MacKenzie interviewed 29 people before the crisis, including 24 quants. But all the interviews took place after the “correlation crisis” of 2005, when the weaknesses of the Gaussian copula function first became obvious. And in fact MacKenzie cites only one pre-crisis interview with a quant who was very skeptical of the function — and that was with “a quant who had contributed importantly to its technical development”.

My reaction to this is that of course anybody who contributed to the technical development of the Gaussian copula function was highly aware of its weaknesses. In fact, that was a theme running through my article, as summed up in the quote with which I ended it, from David Li, the inventor of the function. “The most dangerous part,” he said, “is when people believe everything coming out of it”.

What I suspect, here, but don’t know for sure because MacKenzie doesn’t really describe his interviewees, is that the people he talked to for this paper tended to be the most senior, worldly, introspective, and successful quants — not to mention the ones who spoke good English. Every bank has graybeards who love to talk about how tools like Gaussian copula functions or value-at-risk are massively inadequate. Those graybeards get a lot of lip-service. But in practice, both senior management and the traders in the trenches end up using the quick-and-dirty measures because they don’t have the time or the sophistication to do anything else.

MacKenzie doesn’t buy the idea of “F9 monkeys” — people who just input a security, press F9, and out pops a price. But he seems much more interested in making a broader sociological point:

In our research experience, the ‘model dope’ exists, but not as an actual person: rather (in the form of, e.g., ‘sheet monkey’ or ‘F9 model monkey’) it is a rhetorical device that actors deploy. It is a way of describing someone as different from oneself: a way of ‘othering’ them. There is no clear evidence in our research of model-dope behaviour or beliefs. (For example, none of the 29 interviews we conducted prior to the crisis contains anything approaching an unequivocal endorsement of Gaussian copula models.) Any satisfactory notion of ‘culture’, it seems to us, must treat the cultural dope and its local equivalents such as ‘sheet monkey’ as forms of othering, not adequate conceptualizations of the actor. Nor are ‘cultures’ equivalent to sets of meanings, symbols and values: they encompass practices, including the most material of practices. Ultimately, culture should be treated as a verb, not a noun (it is unfortunate that use of the verb is currently restricted to its biological sense): people do cultures, rather than culture existing as a thing causing them to act as they do.

I’ll leave the discussions of verbing culture and “othering” to MacKenzie, but I do still believe that on a day-to-day basis, banks were full of people who were happy to just accept whatever the model spit out — especially, as MacKenzie demonstrates, if doing so did wonders for their end-of-year bonus. And while MacKenzie draws distinctions between banks and investors, and between credit-based and asset-backed securitizations, even he admits that there were people managing enormous CDOs who didn’t even know what a correlation model was, let alone have a deeply skeptical attitude towards it.

The fact is, as MacKenzie demonstrates, that there were enormous numbers of people whose bonuses depended on believing that the numbers thrown out by the Gaussian copula function were accurate:

In the early years of the credit derivatives market it was not unusual for traders to sell a deal ‘at par’ – 100 cents in the dollar – when their ‘bank[‘s] system would have told them that this was worth about 70 cents’. A single trade ‘would make [$]20 million of P&L.’)

While it’s possible, in that context, for a determined researcher in an in-depth interview to elicit doubts about the utility of the function from relatively senior people, it’s really not possible for those doubts to get acted on, or even to really exist in the bank itself, as opposed to in discussions down the pub after work.

MacKenzie doesn’t like the way my article simplified the sociology of Wall Street:

The seventh section then returns to the question posed by Salmon’s article, enquiring into the extent to which the Gaussian copula family of models ‘killed Wall Street’. An adequate answer, we posit, demands both a differentiated understanding of that family of models and also, more importantly, a grasp of the fact that a model never has effects ‘in itself’ but only via the material cultures and organizational processes in which it is embedded.

I genuinely have no idea what a “material culture” might be; I’ll leave that kind of thing to MacKenzie. And I’ll admit that the “Wall Street” of my title was a broad church, including not only investment banks but basically anybody who might ever touch a CDO. If MacKenzie wants to make the case that Gaussian credulity was found much more on the buy side and at the credit rating agencies than at the sell side, I’ll happily give him that.

But the fact is that the Gaussian copula function was invidious, and did cause enormous losses all over the world. The way I like to think about it is that value-at-risk allowed banks to ignore tail risk, and the Gaussian copula function did a magnificent job in maximizing that tail risk. The two together were lethal. And while there are surely many other models which inhabit Wall Street in much the same way, I sincerely hope that none of them are remotely as dangerous as the Gaussian copula function turned out to be.

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The Fed announced action today! Here’s the full statement, which is mostly notable for what the Fed didn’t do: no QE3, no nominal GDP targeting and nothing like what Fed Vice-Chairman Janet Yellen recently teased us with.

In sum, the Fed is extending Operation Twist, selling short-term treasuries and buying longer-term bonds. (NPR has a nice explainer on Twist and why it mostly won’t do much.) Phil Izzo has a great tracker of how the Fed statement has evolved, inserting phrases like, “However, growth in employment has slowed.” As Bernanke said in his press conference, “the outlook has changed.”

The Fed actions, though, mostly haven’t. Which is why there’s a whole host of folks who’re clamoring for the Fed to do more. Greg Ip calls the Fed’s latest move “minimalist” and worries about moving Operation Twist 2.0′s expiration date to December, the same time America is set to fall off its “fiscal cliff“. Scott Sumner argues that Bernanke has actually overseen an excessively tight monetary policy, at least in terms of nominal GDP and inflation. And Justin Wolfers, looking at the Fed’s new forecast, tweeted that the Fed essentially admitted failure on both the inflation and full-employment front – the former being low and the latter being persistently high.

This explains why Binyamin Appelbaum called the Fed’s move a modest “placeholder” and why Felix wrote “it seems that unemployment, on its own, is incapable of persuading Bernanke to do more”. – Ryan McCarthy

And on to today’s links:

Compelling
A novel solution to underwater mortgages: Eminent domain – Reuters Opinion
Investors tout controversial “condemnation” for housing fix – Reuters

New Normal
The housing market recovery is basically just as uneven as our economy – WSJ
“Homeownership is weakly negatively associated with economic output per capita” – Richard Florida

Popular Myths
There’s still no good evidence “the creative class” drives a city’s economic growth – Thirty Two Magazine

JPMorgan
How JPMorgan’s “London Whale” is unloading his now infamous position – Lisa Pollack

Oxpeckers
The next Walter Cronkite is a “convincingly human” robot that writes 2 million Little League recaps a year – Fast Company
Nick Denton: There isn’t enough gossip on the Internet – Capital New York
How Jonah Lehrer should blog – Felix

Huh
Want to live longer? Move to New York – Wonkblog

Endorsements
Mark Ruffalo calls for a tax on Wall Street – DealBook

Cephalopods
In the race to succeed Lloyd Blankfein as CEO, Goldman’s Gary Cohn unveils his unique value proposition – Kevin Roose

I don’t think there’s all that much difference, in reality, between the Ben Bernanke we saw at today’s post-FOMC press conference, on the one hand, and Mohamed El-Erian, criticizing Bernanke’s decision, on the other. Both of them say that Fed action at this point is a second-best solution to the economic problems facing the US: what we really need — and aren’t going to get — is fiscal, not monetary, stimulus.

Bernanke got quite a few questions today asking why he wasn’t being more aggressive; certainly extending Operation Twist by a few months is unlikely in and of itself to make much of a noticeable difference to anything. As Joe Weisenthal points out, if the market thought that Operation Twist would actually boost US growth, then the announcement should have sent long bond yields up; instead, then went down.

That said, all markets are distorted right now by what you might call Global Zirp. El-Erian worries about the long-term implications, without quite coming out and saying that they’re unavoidable:

What this continued Fed activism will do is to continue altering the functioning of markets, contaminate price discovery and distort capital allocation. Already, the viability of several segments – from money markets to insurance and from pension provision to suppliers of daily market liquidity, all of whom provide financial services to companies and individuals – has been undermined. The Fed has also conditioned many market participants to believe in a policy put for both equities and bonds. And other government agencies are relieved to have the policy spotlight remain away from their damaging inactivity.

Of all the things to worry about right now, price discovery and capital-allocation distortions are pretty low down the list. I’d happily do enormous damage to both of them if I thought it would do any good in terms of creating jobs. I’d even come out and say I’d spend a trillion dollars buying broad stock-market index funds below a certain level. There’s no point in fetishizing market liquidity and shadow-banking institutions like money-market funds if they don’t actually help workers rather than savers.

On the other hand, if your non-standard techniques aren’t going to do any good anyway, there’s no point in hurting markets — and the less that the Fed does now, the more dry powder, at least in theory, it has to respond to a European meltdown or the fiscal cliff.

At one point in the press conference, a reporter from Nikkei asked Bernanke if the US is in a liquidity trap. Bernanke didn’t answer directly, but the indirect answer was yes: there are things that central banks can and should do to stimulate the economy even when interest rates are at zero, he said, and we’re doing them. Paul Krugman would disagree, of course. But it was clear from the press conference that Bernanke feels as though he has at least some extra ammunition in the back of his armory in case things get worse still. Which raises the obvious question: why isn’t he using that ammunition now?

Binyamin Appelbaum asked that question of Bernanke in April; here’s how Bernanke responded.

The view of the committee is that that would be very reckless. We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to an unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.

From today’s presser, my feeling is that Bernanke maybe doesn’t feel as strongly any more that he would be reckless to act more aggressively. But he does still feel that the upside from doing so is “doubtful”. If he’s forced by crisis to pull out the ammo, he’ll do so. But Bernanke clearly doesn’t consider the unemployment crisis to be a crisis in that sense. If something happens suddenly, then policymakers can act strongly and decisively. Years of high unemployment are in many ways more damaging than the sudden drop in government spending that risks arriving with the fiscal cliff. But because the damange is slow-acting and invidious, it seems that unemployment, on its own, is incapable of persuading Bernanke to do more.

Last year, I expressed some skepticism that Washington’s Capital Bikeshare program would have much if any success in getting the unbanked on bikes. And according to Capital Bikeshare’s latest member survey, it seems that I was right:

Out of 5,157 bikeshare members surveyed, all of them had been to college; 95% had graduated; and more than half had graduate degrees. Assuming that most of the 5% with “some college” are current undergrads, I think it’s fair to say that this is a very well educated demographic, and very much not the poor or unbanked.

The people at Reason think this chart is grounds to stop subsidizing the bikeshare program altogether, which is silly: the government subsidy for bikeshare is basically a rounding error in the grand transportation budget, and I’m sure that the amount of government funds spent on maintaining roads in affluent suburban communities is orders of magnitude greater than the amount spent on bikes.

But it definitely seems to be true that the Capital Bikeshare scheme has done very badly at reaching the poor, the unbanked, and people of color. (Bikeshare’s membership is 79% white, in a city that’s 34% white.) Bikeshare’s most successful membership drive came from a deal at Living Social, which reportedly almost doubled Bikeshare’s membership; it’s fair to say that Living Social’s Washington email list probably skews white as well. But the deal does demonstrate, I think, that price matters: drop the membership fee, and membership rises. Which is something New York should pay attention to.

Or, to put it another way: there are surely hundreds of reasons why well-educated whites flock to bikeshares while blacks who haven’t been to college avoid them. But cost is surely very high up on the list. And so if you want your bikeshare program to be broadly adopted across social classes, it’s a really good idea to make it cheap.

Update: Thanks to WashCycle for paying more attention to the survey methodology section than I did. This member survey, it turns out, is not representative: members were solicited for their responses only via email, and the only way that you could take the survey was online. Which might well explain a lot. Also, the survey took place in November, before the scheme to enlist the unbanked went live. Apologies for missing both of those things, and well done to WashCycle for picking up on them. Let’s just say there’s no disclaimer anywhere in the survey that its results are not representative of Capital Bikeshare’s membership as a whole.

In the wake of the revelations that Jonah Lehrer is a serial self-plagiarist, Josh Levin declares that if you’re an “ideas man”, you shouldn’t be a blogger:

For professional thinkers like Gladwell and Lehrer, the key to maintaining a remunerative career is to milk your best ideas until there’s no liquid left and pray you’ve bought yourself enough time to conjure up new ones.

Given that continuous cycle of creation and reuse, blogging seems to have been a bad idea for Jonah Lehrer. A blog is merciless, requiring constant bursts of insight. In populating his New Yorker blog with large swaths of his old work, Lehrer didn’t just break a rule of journalism. By repurposing an old post on why we don’t believe in science, he also unscrewed the cap on his brain, revealing that it’s currently running on the fumes emitted by back issues of Wired. For Lehrer and The New Yorker, the best prescription is to shut down Frontal Cortex and give him some time to come up with some fresh ideas. The man’s brain clearly needs a break.

While I’m sympathetic to Levin’s point here, I think his prescription is entirely wrong. The problem with Jonah Lehrer, like the problem with Zach Kouwe, is not that he was humbled by the insatiable demands of Blog. Instead, it’s that he made a category error, and tried to use a regular blog as a vehicle for the kind of writing that should not be done in blog format. Lehrer shouldn’t shut down Frontal Cortex; he should simply change it to become a real blog. And if he does that, he’s likely to find that blogs in fact are wonderful tools for generating ideas, rather than being places where your precious store of ideas gets used up in record-quick time.

If you look at the post which started the whole controversy, you’ll find a honed and self-contained 1,100-word meditation on science and intuition. It’s basically a mini-New Yorker article, and in that it’s very similar to all the other blog posts which Lehrer has written for TNY. Which is to say, none of them are very bloggish. There’s a formula to them, too: start with a news hook. Declare that it’s indicative of a deeper, broader phenomenon. Talk about some scientists who have studied that phenomenon, and what those scientists have found. Tie it all up with a neat conclusion.

Given that formula, it’s a bit easier to understand why Lehrer felt driven to self-plagiarism. The art of blogging is basically the art of glossing the news: finding something out there on the internet, and then saying something interesting about it. Lehrer has a collection of interesting-things-to-say, and at any given point it’s quite easy to apply one of those things to something going on somewhere. And if you’ve already said that thing in the best way that you can, it’s a bit silly to say it a worse way just for the sake of not repeating yourself.

But there’s an easy way out of this problem: break the formula, which isn’t very bloggish in the first place. For one thing, Lehrer’s posts seem designed to make you not want to click on his links — he’s not sharing his excitement at finding something new, so much as delivering a seminar on ideas he’s had for some time, and which he feels confident expounding upon.

So here, then, are some ideas for how Lehrer’s blog might become much better.

Firstly, think of it as reading, rather than writing. Lehrer is a wide-ranging polymath: he is sent, and stumbles across, all manner of interesting things every day. Right now, I suspect, he files those things away somewhere and wonders whether one day he might be able to use them for another Big Idea piece. Make the blog the place where you file them away. Those posts can be much shorter than the things Lehrer’s writing right now: basically, just an excited “hey look at this”, with maybe a short description of why it’s interesting. It’s OK if the meat of what you’re blogging is elsewhere, rather than on your own blog. In fact, that’s kind of the whole point.

Secondly, use links as shorthand. Kouwe and Lehrer were both brought down by the fact that they felt the need to re-write what had already been written elsewhere. On the web, you never need to do that. If you or someone else has already written something well, just link to that, rather than feeling the need to repeat it.

Thirdly, use the blog to interact with your peers, rather than just primary sources. There are hundreds of great science and ideas blogs out there already; start reading them, and be generous about linking to them. Your readers will thank you. When you see an article you wish you’d written, link to it and say so. When someone finds a fantastic paper and writes it up in a slightly incomplete way, credit them with the great find, and then fill in the blanks. When two or three people are all talking about the same thing, sum up what the debate is, and explain where you stand.

Fourthly, iterate. Lehrer is a big-name journalist at a major publication: when he writes stuff, people respond, often on their own blogs, and often with very keen intelligence. Link to those people, learn from them, converse with them via the medium of blog, and use that collaboration and conversation to hone and further develop your own ideas. Treat every blog post as the beginning of a process, rather than as the end of one.

As the editors of the American Chemical Society write, self-plagiarising is fraud, because it is “an intentional attempt to deceive a reader by implying that new information is being presented”. A blogger should never feel the need to do that, because blogging is not at heart about delivering new information, so much as it is about finding and linking and connecting and conversing. Once you internalize that, self-plagiarism becomes a non-issue.

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Jamie Dimon appeared before Congress once again today to talk about JPMorgan’s multibillion-dollar hedging losses. (Here’s our take on Dimon’s first round.) Appearing this time before the House Financial Services Committee, Dimon faced tougher, if equally confusing, questions.

The regulators came first, in the form of the heads of the CFTC, FDIC, OCC and SEC; you can read Reuters’ wrap of the hearing here. Then came Dimon. Here’s our own Q&A of his appearance, with all credit due to the twittersphere.

JPMorgan’s botched hedges could lose it up to $5 billion. Could the losses have been much bigger still? Like, two orders of magnitude bigger?

Dimon says only way JPM loses half a trillion dollars is if the earth “is hit by a moon.”

– Damian Paletta (@damianpaletta) June 19, 2012

Were those traders in London just gambling with JPMorgan’s money?

Ackerman: “Is gambling investing?” Dimon: “No, in gambling the house wins.” Ackerman: “That’s been my experience in investing” – David Dayen (@ddayen) June 19, 2012

Can Dimon justify the $14 billion per year that JPMorgan saves by having an ultra-low cost of funds thanks to its too-big-to-fail status?

Dimon: we pay the same for retail deposits as anybody else. But those are FDIC insured! That’s not where the cost-of-funds advantage lies. – felix salmon (@felixsalmon) June 19, 2012

Dimon: “No we are not too big to fail” – Counterparties (@counterparties) June 19, 2012

How did the regulators miss all this?

Wowzers. OCC can’t say name of person on site in charge of watching JPM’s CIO trades. – Ben White (@morningmoneyben) June 19, 2012

Couldn’t they have seen that whopping-great $100 billion derivatives position?

Big rant about how I can’t believe the regulators missed JPM’s CDXNAIG9 position out of my system… ftalphaville.ft.com/blog/2012/06/1… [exhales] – Lisa S Pollack (@LSPollack) June 19, 2012

Or is the problem that Dimon sits on the board of the NY Fed, one of his main regulators? That’s a conflict, no?

Good gig: Dimon says NY Fed board “basically sits around and talks about the economy.” – Pedro da Costa (@pdacosta) June 19, 2012

Did JPMorgan’s compensation structure push employees to take outsize risks? Ousted head of the CIO office Ina Drew earned more than $15 million last year, after all.

LOL.Dimon once again essentially claims that Ina Drew’s $15mm CIO salary influenced by recruitment and mentoring. – Neil Barofsky (@neilbarofsky) June 19, 2012

But at least the questions have been smart and well-informed, right?

Quote of the Day: Rep Gary Ackerman of NY to $JPM Jamie Dimon “What’s this hedging and wedging thing anyway?” – Adam Johnson (@AJInsight) June 19, 2012

Anything else you’d like to say, Mr. Dimon?

Jamie Dimon: “We want to get it right so it works for America” — Counterparties (@counterparties) June 19, 2012

Dimon: “Lobbying is a constitutional right”

— Counterparties (@counterparties) June 19, 2012

– Ryan McCarthy

On to today’s links:

EU Mess
Spain is doomed, in three charts – WashPo
EU official: It’s “delusional” to think we won’t need to renegotiate the terms of the Greek bailout – Reuters

Interesting
Austerity hasn’t really paid off – just ask the bond market – Bloomberg
Sovereign ratings aren’t very important – Felix

Economy
It’s time to stop using jobs data as a “month-by-month panic- or joy-inducing catalyst” – NYT
When the economy is “stuck in the mud, austerity just digs it in deeper” – Rolling Stone

The Fed
“If you don’t need the money, you can get it all day long. Thank you, Ben Bernanke.” – WSJ
What the Fed can do to save the US economy – Dean Baker

Gadgetry
“For the first time in its history, Microsoft is taking PC hardware as seriously as it does software” – Slate
How to write Microsoft Surface press release: Take an iPad press release and fill it with bland corporate-speak – Rex Hammock

Not That Reassuring
In the future, Spanish streets will be paved with coupons – Fast Company

Old Normal
Did medieval England have stronger economic incentives than modern high-income economies? – Marginal Revolution

New Normal
America’s “disconnected”: Families fall through the cracks as states slash welfare – Huffington Post

Profiles in Pessimism
The EU crisis has its own Dr Doom and his name is Mark Grant – NYT

Bubbly
Had his cake, didn’t want to tweet it too: Man has $1.4 million Marie Antoinette-themed party and tries to keep it secret – Business Insider

Oxpeckers
Woodward & Bernstein were no Woodward & Bernstein – Gawker

Tax Arcana
The IRS whistleblower program has paid out just 3 awards from 1,300 claims – Bloomberg

Bloomberg has another one of its meandering monsters today, this time under the headline “Austerity Doesn’t Pay as Debt Markets Ignore Rating Cuts”. The 3,300 words can be reduced quite easily to one sentence: Countries are implementing austerity measures in order to bolster their credit ratings and keep their borrowing costs low, but it turns out that credit ratings have no effect on borrowing costs after all.

Bloomberg put a lot of work into this piece: it looked at “314 upgrades, downgrades and outlook changes going back as far as 38 years”, and compared government bond yields on the day of the ratings action to the same government’s bond yields one month later — to allow “time for markets to adjust to assessment changes while minimizing the effects of subsequent unrelated events.” The results show that there’s no real correlation there: 53% of the time rates followed the ratings move, and 47% of the time they didn’t.

This comes as no surprise, for three reasons. Firstly, the news from ratings agencies which causes markets to move is normally when countries get put on watch for a possible ratings change, not when the change actually happens. Markets specialize in pricing in future events, and few if any ratings actions actually come as a surprise.

Secondly, the ratings agencies are, famously, lagging indicators when it comes to bond spreads and yields: a rise in spreads does a much better job of predicting a ratings downgrade than the other way around. The Bloomberg study would have been much more interesting if it looked at the change in spreads before the ratings action, rather than the change in spreads after it. After all, the whole thesis of the Bloomberg article is that governments are using the ratings agencies as a proxy for the bond vigilantes. And in that sense it doesn’t make any difference at all whether the ratings agencies or the bond vigilantes get there first.

And finally, the Bloomberg findings come as no surprise because they were already well known:

In a January analysis of Moody’s rating changes, researchers at the IMF used credit derivatives to show that prices moved in the expected direction 45 percent of the time for developed countries and 51 percent for emerging economies. For outlook changes, the ratios were 67 percent and 63 percent.

Why did Bloomberg feel the need to replicate the IMF study, which it cites, but doesn’t link to? That’s not clear. And it’s also unclear why Bloomberg doesn’t publish its results in a tractable form: for instance, they don’t give separate figures for the effect of outlook changes on bond spreads. Indeed, while bits and pieces of the methodology are sprinkled through the article, the actual results are confined to a single number — 47% — in the seventh paragraph; no more numbers can be found in the associated graphics, which give anecdotal examples of yields falling after downgrades but no aggregated numbers from the dataset as a whole.

More invidiously, Bloomberg talks about “the austerity policies prized by the rating companies”, without ever mentioning that to a significant degree the ratings agencies actually want less austerity, not more. For instance, here’s S&P in January, announcing a mass downgrade of European sovereigns:

We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.

And here’s S&P on Spain, in April:

We believe front-loaded fiscal austerity in Spain will likely exacerbate the numerous risks to growth over the medium term, highlighting the importance of offsetting stimulus through labour market and structural reform.

The fact is that austerity is a political decision more than it is an economic one: fears of bond vigilantes are ex-post justifications for political decisions, rather than genuine reasons for implementing those decisions.

Ultimately, the whole thesis here is a little silly. As former Moody’s sovereign chief Vincent Truglia says at the end of the article, ratings agencies are supposed to pay a lot of attention to governments, but governments really shouldn’t pay much attention to the ratings agencies. And neither, frankly, should market reporters, lest they massively oversensationalize the impact that downgrades can have. This, for instance, is pretty ludicrous:

S&P’s downgrade of the U.S. last year contributed to a global stock-market rout that erased $6.1 trillion in value between July 26 and Aug. 12.

The fact is that the press tends to care much more about ratings actions than the markets do. The bond markets were undoubtedly lulled into complacency by the dodgy triple-A ratings on structured bonds in the run-up to the financial crisis, but that had nothing to do with upgrades or downgrades. And frankly the idea that Europe’s austerity policies come in response to imprecations from Moody’s and S&P is pretty ridiculous as well.

Jon Hilsenrath, the Fed Whisperer, has a very good piece this morning on a key worry facing monetary policymakers as we go into the latest FOMC meeting: the Fed might be able to push long-term interest rates down, but as any fixed-income professional knows, there’s a huge difference between rates and credit. And something worrying is clearly happening in the mortgage market: rates are low, but credit is very, very hard to come by. Or, as millionaire homeowner Chris Hordan put it to Hilsenrath, “If you don’t need the money, you can get it all day long. Thank you, Ben Bernanke.”

This is a long-term trend, which has only been getting worse in the so-called recovery: fewer and fewer homeowners who could really use the savings are finding it possible to refinance their homes.

This is not entirely irrational on the part of banks. As Mary Umberger reports:

In recent years, when facing financial pressure, homeowners have been more likely to let the mortgage slide before they would fall behind on their credit card bills, researchers have found.

But it turns out that the mortgage is even less sacred than we thought: When times are tight, consumers put paying for their cars first. Then the credit cards will be paid.

The once-mighty mortgage has slipped to No. 3.

In other words, even as interest rates have fallen, default risk on mortgages continues to be high, especially for borrowers with less-than-stellar credit. According to Hilsenrath, mortgage rates for a household with a credit score of 650 are now just 4.04%; while that’s higher than the rates available to households with a score of 750, it’s still so incredibly low that banks will reasonably decide that it’s just not worth taking the credit risk, if all they’re getting is 4% in interest. Once upon a time, banks basically ignored credit risk on mortgages; now, they’re hyper-sensitive to it. And insofar as there’s a broadly-based societal trend whereby mortgage debt is moving from senior to junior status, then that’s all the more reason to stay on the sidelines for the time being.

Here’s how Hilsenrath puts it:

Credit is the most important and most direct channel through which Fed policies affect the economy. The problem for the Fed is that the pipes in the financial system through which its easy money travels are clogged.

It seems we don’t need Ben Bernanke any more, we need Super Mario to come in and unclog those pipes. It’s a hugely important job, but the problem is that no one knows how to do it, especially insofar as the clogs look like rational market pricing more than crisis-related market inefficiency. (Remember, the prepayable fixed-rate 30-year mortgage itself is something which is never found in a laissez-faire capitalist system: only government intervention can ever persuade banks to issue such things.)

All of which helps underscore my belief that we’ve more or less reached the limits of what the Fed can do. In order to get this economy back on track, what we need is fiscal, not monetary, stimulus. Don’t hold your breath.

Paul Krugman was not happy with the choice of Matthew Bishop to review his new book in the NYTBR, and the main locus of the disagreement seems to be, at heart, how much respect Krugman should give to people who disagree with him.

Here’s Bishop:

No opportunity to preach to the choir is missed by the populist Mr. Krugman, nor any chance to mock those he calls the “Very Serious People” who disagree with him. This is often entertaining: during a stern speech in 2010 by Germany’s finance minister, Krugman’s wife dismissed those who regard austerity as a sort of moral purification with the whispered aside, “As we leave the room, we’ll be given whips to scourge ourselves.” But the book’s preachiness gives those politicians and economists who most need to read this book an easy excuse to ignore it.

To this Moderately Serious Reviewer, Krugman’s habit of bashing anyone who does not share his conclusions is not merely stylistically irritating; it is flawed in substance… The austerians may be excessively fearful of so-called “bond vigilantes,” but that does not mean there is no need to worry about what investors think about the health of a government’s finances. Sure, ridicule those fundamentalists who believe it is theoretically impossible for an economy ever to suffer a shortage of demand, but does Krugman really need to take passing shots at Erskine Bowles and Alan Simpson, the chairmen of the widely respected bipartisan Bowles-Simpson Commission on deficit reduction appointed by President Obama? Maybe his case for stimulating the economy in the short run would be taken more seriously by those in power if it were offered along with a Bowles-­Simpson-style plan for improving America’s finances in the medium or long term. Instead, Krugman suggests cavalierly that any extra government borrowing probably “won’t have to be paid off quickly, or indeed at all.”

I can see why Krugman finds this annoying. Krugman’s whole point is that Bowles, Simpson, and the like are wrong and dangerous. And as he reminds us today, he was right and they were wrong, two years ago. He should get credit for that. But Bishop, the kind of person who loves nothing more than schmoozing important people at Davos, thinks that Krugman “would be taken more seriously” if he were more polite to “widely respected” people with the word “chairman” in their names.

This criticism is off-base for three different reasons, I think. Jared Bernstein deals with the substance very well:

Krugman has been consistently empirical on this point. His argument is not that investors’ sentiments don’t matter. It’s that they’re embedded in prices and can be followed on an hourly basis. Those numbers—the bond yields on sovereign debt—show that markets judge US debt to be safe and Spanish and Greek debt to be risky. If you want to criticize Krugman on this count, you need to explain what’s wrong with the markets themselves—why they’re giving the wrong signals. Otherwise, you’re into phantom-menace land, just across the way from where the confidence fairy hangs out.

This is a point I myself tried making to Bishop back in April, with no visible success: Bishop’s convinced that when it comes to gauging future inflation expectations, we should for some reason trust the volatile and largely-insane gold market at least as much as we should trust the most liquid and efficient market in the world, that for US Treasury bonds.

As for the style, there is no shortage of Serious liberals willing to do exactly what Bishop suggests. Indeed, Erskine Bowles probably counts as one himself, even as he sits on the board of Morgan Stanley. Pretty much the entire Obama administration deals constantly with calls for fiscal prudence and austerity, and takes them very seriously. There’s something of a bipartisan consensus on the issue — so if like Krugman you think that the consensus is bonkers, the only real way to get your point across is to be very clear that no matter how grand these people are, they’re simply wrong, and do not deserve to be taken seriously.

And then there’s the whole class-based undertone to the discussion, which I think if anything Krugman doesn’t make forcefully enough. The thing that Serious liberals and Serious conservatives have in common — the thing which in large part makes them “widely respected” in the first place — is that they’re rich. Usually, very rich. And rich people, as I said in my own review of Krugman’s book, don’t actually worry much about unemployment: it doesn’t really hurt them, even if they lose their jobs. What they do worry about is inflation, since that erodes the value of their dollars. And so when Krugman calls for a nice dose of inflation to help cure the economy’s ills, what he’s really calling for is for a significant chunk of the fixed-income portfolios of the rich to be devalued in real terms.

The rich don’t like that, and the austerity consensus is in large part a closing of ranks — one of the few areas where left and right can agree, at least at the upper end of the income spectrum. And that’s why my own review of Krugman’s book was a pessimistic one. When rich liberals and rich conservatives agree on something, that thing is going to happen. Especially when that thing is in their own self-interest.