Felix Salmon

Counterparties: Bernanke’s hedonic dabbling

Ben Walsh
Aug 7, 2012 21:58 UTC

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Five days after Businessweek gave him the Bob Dylan treatment on its cover, Ben Bernanke has gotten existential. Or at least relatively so for a former academic economist and current central banker. On Monday, he supported including well-being and quality of life in “economic measurement“:

Economics as the study of the allocation of scarce resources… may indeed be the “what,” but it certainly is not the “why.” The ultimate purpose of economics, of course, is to understand and promote the enhancement of well-being. Economic measurement accordingly must encompass measures of well-being and its determinants…

Aggregate statistics can sometimes mask important information. For example, even though some key aggregate metrics – including consumer spending, disposable income, household net worth, and debt service payments – have moved in the direction of recovery, it is clear that many individuals and households continue to struggle with difficult economic and financial conditions.

Bernanke isn’t necessarily covering new ground here, and admitted as much, citing Bhutan’s National Happiness Index and the work of Nobel laureate Daniel Kahneman, along with current research in the field of the “economics of happiness”.

Mark Thoma thinks Bernanke’s speech only deepens this question: why isn’t the Fed chairman “pushing the Fed to do more at every opportunity?” Conflicting comments from the presidents of the Boston and Dallas Fed over the need for new action  ”underscore the extent of divisions among Fed officials that have been obscured by the central bank’s efforts to maintain a united public face”, Binyamin Appelbaum writes in the NYT. Tim Duy sees public comments from proponents of new action as “[signals of] the strength of the resistance to further easing” within the Fed.

The minutiae of Fed-watching aside, David Leonhardt points out that Bernanke’s comments on happiness and well-being come in the context of the “slowest 10-year average growth rates since the Commerce Department began keeping statistics in 1947 … In addition to slow growth, the bounty from the economy’s growth has largely flowed to a small slice of the population: the affluent”.

Brendan Greeley thinks Bernanke is adapting to a post-crisis reality, in the pattern of John Stuart Mill and Karl Marx. Greeley notes Bernanke would be joining esteemed current company: Robert Shiller a year ago wrote that economics has at its core a “broad moral purpose of improving human welfare”. Bernanke’s policies are already seemingly in disagreement with his former academic self. With the economy stalling, if he agrees with Shiller but takes no further action, he’ll be in disagreement with himself as a “moral scientist”. How many conundrums can we afford in one central banker? – Ben Walsh

On to today’s links:

Bold Rationality
SHOCKING: The monthly jobs report is “overhyped, overanalyzed, and overvalued by the markets” – Barron’s

“Standard Chartered strongly rejects the position and portrayal of facts made by the New York Department of Financial Services” – Standard Chartered

Say hello to the lowest level of US public-sector employment in more than 30 years – Hamilton Project

Hospital chain performed unnecessary, dangerous, and profitable cardiac procedures – NYT

Gary Gensler: It’s time to replace Libor with a “new or revised benchmark” – NYT

Data Points
Papa John’s CEO says the price of Obamacare is an extra 11 cents to 14 cents per pizza – Politico

Plutocracy Now
“Twice a week, 6- to 11-year-old scions of wealthy families take classes on being rich” – Bloomberg

Welcome to Adulthood
“Please explain your rationale for the rainbow” – a job applicant’s confused attempt to “[add] color to the message” – Business Insider

Right On
Americans, increase national and personal productivity by leaving the office asap – The Atlantic

Stuff We’re Not Linking To
Another person who is not Bill Gates is now richer than Warren Buffett – Bloomberg



“Greeley notes Bernanke would be joining esteemed current company:….” (BW)

What is there that is truly “esteemable” about economists who have spent their entire careers in academia/government, and yet purport to speak with authority about how the real economy functions in real life?

There’s a place in this world for the academic bullshit-artists among us. That place properly has nothing to do with IRL policy-making IMO.

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Dubious statistics of the day, cybercrime edition

Felix Salmon
Aug 7, 2012 21:40 UTC

I feel for Peter Maass and Megha Rajagopalan of ProPublica, who have spent 3,700 words and some enormous amount of time trying to track down the source of dubious cybercrime statistics. I went through something similar in 2005, looking at counterfeiting statistics: I can attest to how frustrating and thankless it is trying to follow footnote after footnote in a futile attempt to find something substantive amidst the exaggerated rhetoric.

The short story here: the US government loves to say that the cost of cybercrime in the US is $250 billion per year, while the cost of cybercrime globally is $1 trillion per year. The government loves to say that because it’s in the business of fighting cybercrime, and it loves to feel important. But in reality, those figures are more or less picked out of thin air, and have very little in the way of solid scientific basis. What’s more, they’re all sourced from for-profit companies with a lot of skin in the game: Symantec and McAfee, manufacturers of anti-cybercrime software.

The most interesting thing, to me, about the ProPublica report is that the $1 trillion number ostensibly comes from a scientific survey, but in fact comes from a press release which accompanied that survey. The survey itself never said anything of the sort. In that, it’s just like the $5 trillion which hedge funds are supposed to be managing in five years’ time. (Thanks, Citigroup, for inventing that figure and placing it in the WSJ and elsewhere.)

Is this something they teach at PR school? Commission a scholarly report, and then distribute it with a press release featuring eye-popping assertions to be found nowhere in the report? I suspect that it happens much more than most journalists would like to admit.

What’s worse, once public institutions have officially cited these bogus stats, they feel that it would be shameful to ever distance themselves from them — hence the unedifying responses in the ProPublica piece from US spokespeople, which basically amount to “hey, it’s not our job to check facts, if McAfee puts something in a press release, that’s good enough for us”.

The reason that PR types do this, of course, is that it works. They know that most journalists are much more comfortable working off a press release than putting the work into reading and understanding a long report; they also know that even if most journalists do read the report and steer clear of the story, that doesn’t matter so long as some journalists wind up falling for the bogus numbers. And most importantly, they know that they’ll never get punished in any way for putting out false or misleading information: while journalists are expected to check facts, PR people are shameless.

Which means that the conclusion to my 2005 piece is as true today as it was back then: if you ever see seemingly authoritative statistics being bandied around by journalists or politicians, always bear in mind that there’s a good chance they’re utter bullshit. Especially if they’re particularly striking, or don’t pass the smell test.

Small investors vs high-speed traders

Felix Salmon
Aug 7, 2012 15:02 UTC

One of the problems with financial journalism is its rather kludgy attempts to appeal to a general audience. If something bad happens, for instance, it has to be presented as being bad for the little guy. This was a huge problem with the Libor scandal, since anybody with a mortgage or other loan tied to Libor ended up saving money as a result of it being marked too low.

But don’t underestimate the imagination of the financial press. For instance, what if there was a New York county which put on Libor-linked interest rate swaps to hedge its bond issuance? In that case, if Libor was understated, then the hedges would have paid out less money than they should have done — and presto, the Libor scandal is directly responsible for municipal layoffs and cuts in “programs for some of the needy”.

This is all a bit silly. The Libor understatements actually brought it closer to prevailing interest rates; the fudging basically just served to minimize the degree to which the unsecured credit risk of international banks was embedded in the rate. And in any case, the whole point of a hedge is that it offsets risks elsewhere: it’s intellectually dishonest to talk about losses on the hedge without talking about the lower rates that the municipality was paying on its debt program as a whole.

We’re seeing the same thing with the fiasco at Knight Capital, where a highly-sophisticated high-frequency stock-trading shop lost an enormous amount of money in a very small amount of time, and small investors lost absolutely nothing. On the grounds that we can’t present this as news without somehow determining that it’s bad for the little guy, it took no time at all for grandees to weigh in explaining why this really was bad for the little guy after all, and/or demonstrates the need for strong new regulation, in order to protect, um, someone, or something. It’s never really spelled out.

The markets version of the Confidence Fairy certainly gets invoked: Arthur Levitt, for instance, said that recent events “have scared the hell out of investors”. And Dennis Kelleher of Better Markets goes even further: I was on a TV show with him last night, where he tried to make a distinction between “high-frequency trading” and “high-speed trading”, and said that shops like Knight rip off small investors. He’s wrong about that: they absolutely do not. Yes, Knight and its ilk pay good money for the opportunity to take the other side of the trade from small investors. But those investors always get filled at NBBO — the best possible price in the market — and they do so immediately. Small retail investors literally get the best execution in the markets right now, thanks to Knight and other HFTs. And those investors want companies like Knight to compete with each other to fill their trades as quickly and cheaply as possible. If Knight loses money while doing so, that’s no skin off their nose.

So Andrew Ross Sorkin is right to treat such pronouncements with skepticism. The argument that “investors are worried about high-frequency trading, therefore they’re leaving the market, therefore stocks are lower than they would otherwise be, therefore we all have less wealth than we should have” just doesn’t hold water at all. Sorkin has his own theories for why the stock market doesn’t seem to be particularly popular these days, which are better ones, but the fact is — he doesn’t mention this — that the market is approaching new post-crash highs, and that if investors follow standard personal-finance advice and rebalance their portfolios every so often, they should probably be rotating out of stocks right now, just to keep their equity holdings at the desired percentage of their total holdings.

The calls for more regulation are a bit silly, too. Bloomberg View says that “if any good comes out of the Knight episode, it will be a commitment by Wall Street’s trading firms to help regulators design systems that can track lightning-speed transactions” — but regulators will always be one step behind state-of-the-art traders, and shouldn’t try to get into some kind of arms race with them. More regulation of HFT is not going to do any good, especially since no one can agree on the goals the increased regulation would be trying to achieve. If what we want is less HFT, then a financial-transactions tax, rather than a regulatory response, is the way to go.

I do think that the amount of HFT we’re seeing today is excessive, and I do think that we’ve created a large-scale, highly-complex system which is out of anybody’s control and therefore extremely dangerous. Making it simpler and dumber would be a good thing. But you can’t do that with regulation. And let’s not kid ourselves that up until now, small investors have been damaged by HFT. They haven’t. The reasons to rein it in are systemic; they’re nothing to do with individuals being ripped off. Sad as that might be for the financial press.


I agree with another post futher up the thread,HFT’s do not always hold on to postions for just seconds scalping the market ,it can be minutes ,it all depends on the trading system they are using.Some traders open between 15-20 position at a time and can remain open for hours if the market volumes are low. Nidal Saadeh UK

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Counterparties: “You f—ing Americans. Who are you to tell us that we’re not going to deal with Iranians.”

Peter Rudegeair
Aug 6, 2012 22:13 UTC

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Just over a month ago, Standard Chartered’s CEO urged bankers to regain their “social legitimacy” and asserted that “good banking is never needed more than now”. That message was in line with the bank’s image as “boring but good“, as one FT headline put it.

Standard Chartered now stands accused of helping Iranian banks – including the central bank – circumvent US sanctions by concealing roughly 60,000 transactions involving at least $250 billion from US regulators, and having reaped “hundreds of millions of dollars in fees” for itself over a decade. The whole damning complaint is here, and Business Insider pulled the choicest bits here.

In this section, a StanChart Group Executive Director provides a great example of banker braggadocio, now destined to rank among the industry’s all-time PR lows:

In short, SCB [Standard Chartered Bank] operated as a rogue institution. By 2006, even the New York branch was acutely concerned about the bank’s Iran dollar-clearing program. In October 2006, SCB’s CEO for the Americas sent a panicked message to the Group Executive Director in London. “Firstly,” he wrote, “we believe [the Iranian business] needs urgent reviewing at the Group level to evaluate if its returns and strategic benefits are … still commensurate with the potential to cause very serious or even catastrophic reputational damage to the Group.” His plea to the home office continued: “[s]econdly, there is equally importantly potential of risk of subjecting management in US and London (e.g. you and I) and elsewhere to personal reputational damages and/or serious criminal liability.”

Lest there be any doubt, SCB’s obvious contempt for U.S. banking regulations was succinctly and unambiguously communicated by SCB’s Group Executive Director in response. As quoted by an SCB New York branch officer, the Group Director caustically replied: “You f—ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.”

The complaint also alleges that Deloitte & Touche aided StanChart, saying the consultancy “intentionally omitted critical information in its ‘independent report’ to regulators”. And a footnote reveals further investigations into whether StanChart was involved in similar schemes with other countries under US sanctions, such as Libya, Myanmar and Sudan.

If nothing else, perhaps this episode will make bank executives think twice before signing off on sanctimonious ad campaigns while they’re allegedly simultaneously leaving the “US financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes”. The voice-over from this 2010 Standard Chartered commercial has now been pushed painfully beyond absurdity:

Can a bank really stand for something?
Can it balance its ambition with its conscience?
To do what it must. Not what it can.
As not everything in life that counts can be counted.
Can it look not only at the profit it makes but how it makes that profit?
And stand beside people, not above them.
Where every solution depends on each person.
Simply by doing good, can a bank in fact be great?
In the many places we call home, our purpose remains the same.
To be here for people. Here for progress. Here for the long run.
Here for good.

– Peter Rudegeair

On to today’s links:

Good Points
Should hospitals be more like the Cheesecake Factory? – New Yorker

Knight Capital raises $400 million in preferred shares, convertible into a 70% stake in the company – CNBC

Old Normal
Lack of copyright may have powered Germany’s 19th-century industrialization – Der Spiegel

Study finds that the revolving door actually toughens enforcement results at the SEC – NYT and American Accounting Association

EU Mess
Spain’s prime minister would ask for an economy-wide bailout, but first the ECB has to let him know what he’d be asking for – WSJ
Consumer austerity hits Europe: Even the French aren’t going to Disneyland Paris – WSJ

After Bain made $1 billion there, Mitt Romney isn’t too popular in Italy – Bloomberg

To minimize settlements, banks compete to show regulators they’re “not as bad as the next guy” – Dealbook

Golden Elephant No. 38, yielding 7.2% annually, “not fundamentally different from a Ponzi scheme” – Reuters

Love Equity, Hate Disclosure
Little known, marginally successful Manchester United to use start-up disclosure exemptions in IPO – ESPN

Time Warner buys Bleacher Report for less than $200 million – Bloomberg

Stuff We’re Not Linking To
Trend: increased Botox use on Wall St – Bloomberg TV



This “article” only highlights the old proverb: “those who forget the past are condemned to repeat it.”

These same people are the ones who in the 1930s said “who are you to tell us not to deal with Nazi Germany?”

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Facebook’s Faustian bargain

Felix Salmon
Aug 6, 2012 19:35 UTC

In the run-up to Facebook’s IPO in May, Henry Blodget explained just what it was that made Mark Zuckerberg a great CEO: his ultra-long-term time horizon. “It often takes decades to build the sort of companies that the best executives and entrepreneurs hope to create,” wrote Blodget, explaining that Facebook’s dual-class share structure, and Zuckerberg’s control of the company, would allow the young CEO to build a company for the ages, rather than one which hurt itself by chasing short-term profits.

When talking about Zuckerberg’s most valuable personality trait, a colleague jokingly invokes the famous Stanford marshmallow tests, in which researchers found a correlation between a young child’s ability to delay gratification—devour one treat right away, or wait and be rewarded with two—with high achievement later in life. If Zuckerberg had been one of the Stanford scientists’ subjects, the colleague jokes, Facebook would never have been created: He’d still be sitting in a room somewhere, not eating marshmallows…

Companies are a lot more than ticker symbols. They create jobs that employ people. They create products that help people. They devote resources to ensure that they’ll keep creating this value for decades, despite the fact that these investments reduce their near-term profits. In other words, these companies create societal value. As Warren Buffett and a handful of other investors have often observed, this balanced approach allows such companies to create huge value for some shareholders: the ones who stay put for the long term.

But where are we now, just three months after Facebook went public? Dalton Caldwell’s blog post about Facebook has gone viral this week because it seems to depict a company which, having gone public, is doing the exact opposite of the kind of things that Blodget so admires. Caldwell built a Facebook app, but was then told by Facebook that because it had embarked upon a similar project internally, he basically had two choices: be taken over and shut down by Facebook, or just be shut down by Facebook. Dalton wrote, in an open letter to Zuckerberg:

Mark, I don’t believe that the humans working at Facebook or Twitter want to do the wrong thing. The problem is, employees at Facebook and Twitter are watching your stock price fall, and that is causing them to freak out. Your company, and Twitter, have demonstrably proven that they are willing to screw with users and 3rd-party developer ecosystems, all in the name of ad-revenue. Once you start down the slippery-slope of messing with developers and users, I don’t have any confidence you will stop.

The point here is that although Facebook might be controlled by Zuckerberg individually, it’s still nothing without its thousands of employees. And those thousands of employees have entered into a bargain with Zuckerberg: they’ll accept relatively modest salaries, and work hard, because Zuckerberg is giving them substantial amounts of equity in the company. Once Facebook went public, every single Facebook employee became acutely aware of the company’s share price, what direction it was going in, what that move was doing to their net worth, and what public investors wanted to see from the company (revenues, and profits, rising sharply).

As such, despite his voting control at board level, it’s actually really hard for Zuckerberg to keep his employees focused on long-term platform-building, rather than short-term obsession over the share price. For one thing, they don’t own the company; many of them are going to leave, at some point, and so their time horizon is necessarily going to be shorter than Zuckerberg’s. And at any company with broad share ownership and a public share price, employees are always going to pay a huge amount of attention to whether it’s going up or going down.

On top of that is the classic Silicon Valley problem — which is that employees are always searching for the new new thing, the company where they can get early-stage equity and make themselves a fortune. Or, at the very least, join a mature company like Apple where the stock can still rise enormously. If Facebook’s stock is going down rather than up, its employees will start looking for other opportunities, and the company will find it much harder to attract talent.

Facebook has a lot of money and a lot of great employees, and so should by rights have the luxury of spending both money and its employees’ time in the service of building a platform for the ages. In practice, however, now that Facebook has gone public, it doesn’t work like that. The markets want to see quarterly results — and the employees’ incentives are aligned more with the markets than they are with Zuckerberg. He might have been a very good CEO of a private company. But trying to run a public company, as he’s discovering, is very different.


@TFF – fair point that some of their cash is offshore. According to Google’s 10-K, as of 12/31/11 just under half (48%) of its cash is held by foreign subsidiaries. That actually makes sense, as in recent years Google says that it’s revenue is split roughly 50/50 between the U.S. and the rest of the world. There would be additional tax to bring this money back to the U.S. I can see that the tax impact of bringing cash back to the U.S. impacts how much money Google returns to shareholders, but it doesn’t set the answer as zero.

Plenty of multinational U.S. corporations with large foreign operations face similar tax issues regarding repatriating foreign profits to the U.S. – e.g., GE, Honeywell, IBM, ExxonMobil, etc. All of these, however, find ways to work through the issue, through some combination of tax strategies (loopholes, if one prefers that term) and paying the difference between U.S. and foreign tax rates, without building up a Google-like net cash position. If Google management is using that as a rationale, it is really just an excuse for them doing what they want to do.

In searching Google’s 10K for this number, I ran across the following quote in reference to Google’s foreign cash – “our intent is to permanently reinvest these funds outside of the U.S.” – which is quite a whopper unless they are using “invest” so broadly as to include parking funds in short-term cash equivalents such as commercial paper. I cannot believe that Google has plans to reinvest anything like $15 billion in its foreign operations – remember that these foreign operations are generating lots of additional cash each year.

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Chart of the day, HFT edition

Felix Salmon
Aug 6, 2012 15:37 UTC


This astonishing GIF comes from Nanex, and shows the amount of high-frequency trading in the stock market from January 2007 to January 2012. (Which means that the Knightmare craziness of last week is not included.)

The various colors, as identified in the legend on the right, are all the different US stock exchanges. You might think there are only two stock exchanges in the US, but you’d be wrong: there are only two exchanges where stocks are listed. There are many, many more exchanges where stocks are traded.

What we see here is relatively low levels of high-frequency trading through all of 2007. Then, in 2008, a pattern starts to emerge: a big spike right at the close, at 4pm, which is soon mirrored by another spike at the open. This is the era of traders going off to play golf in the middle of the day, because nothing interesting happens except at the beginning and the end of the trading day. But it doesn’t last long.

By the end of 2008, odd spikes in trading activity show up in the middle of the day, and of course there’s a huge flurry of activity around the time of the financial crisis. And then, after that, things just become completely unpredictable. There’s still a morning spike for most of 2009, but even that goes away eventually, to be replaced with sheer noise. Sometimes, like at the end of 2010, high-frequency trading activity is very low. At other times, like at the end of 2011, it’s incredibly high. Intraday spikes can happen at any time of day, and volumes can surge and fall back in pretty much random fashion.

It’s certainly fair to say that if you take a long, five-year view, then you can see a clear rise in trading activity. But it’s also fair to say that there’s something quite literally out of control going on here. Just as the quants at Knight found themselves unable to turn off their machines for 30 long minutes last week, the HFT world in aggregate seemingly has a mind of its own when it comes to trading patterns. Or, to put it another way, if there’s a pattern here, it’s one incomprehensible to human minds.

Back in 2007, I wasn’t a fan of a financial-transactions tax; today, I am. And this chart shows better than anything why my opinion has changed. The stock market is clearly more dangerous than it was in 2007, with much greater tail risk; meanwhile, in return for facing that danger, society as a whole has received precious little utility. Are spreads a tiny bit tighter than they might be otherwise? Perhaps. But that has no effect on stock-market returns for long-term or even medium-term investors.

The stock market today is a war zone, where algobots fight each other over pennies, millions of times a second. Sometimes, the casualties are merely companies like Knight, and few people have much sympathy for them. But inevitably, at some point in the future, significant losses will end up being borne by investors with no direct connection to the HFT world, which is so complex that its potential systemic repercussions are literally unknowable. The potential cost is huge; the short-term benefits are minuscule. Let’s give HFT the funeral it deserves.


This and other topics that are relevant for speed traders and institutional investors will be discussed at High-Frequency Trading Leaders Forum 2013 London, next Thursday March 21.

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The danger of repo

Felix Salmon
Aug 6, 2012 14:28 UTC

Remember how there’s a very good chance that Treasury’s new floating-rate notes are going to be linked to some kind of repo benchmark? Well, here’s another reason that’s a bad idea: the repo market is shrinking fast, at least in Europe — and if it can shrink in Europe, it can do so in the US, as well.

What’s more, we want the repo market to shrink. Gillian Tett, in her latest column, explains that as rules about collateral tighten up, they create what Manmohan Singh calls a “second deleveraging”. But weirdly, Tett thinks that an increased focus and reliance on the repo markets is a good thing in the long term: “a financial system in which transactions are secured on assets is likely to be a healthier system than one which is largely – or patchily – unsecured,” she says, “particularly if that collateral is valued in a regular, disciplined basis”.

This is exactly wrong. Repos are a form of informationally-insensitive asset: they epitomize the paradoxical and ultimately destructive desire on the part of people with money to lend out money but to take no credit risk while doing so. Informationally-insensitive assets are a bad idea in general, for reasons which are probably familiar at this point to most readers of this blog: they breed complacency, tail risk, and deluded, magical thinking. But repos are a particularly bad species of the genus, because they are a direct replacement for old-fashioned unsecured credit.

Lending money in return for interest on that money is a form of investing: one entity, with money to spare, invests that money in a venture which can put it to good use and profit from it. If all goes according to plan, both win. The borrower might be poor but has ideas, and the ability to make money in the future; the investor makes such profits possible.

When you move from a credit-based system to a repo-based system, however, all that changes. At that point, future profitability isn’t enough to get you cash: instead, you need to be rich already, and you need to be able to hypothecate your existing assets to some lender. If we’re talking about the banking system, here, we’re talking about a world in which banks simply cease to trust each other at all, and the answer to all interbank credit questions is “no”. The only way for banks to lend to each other is to either go through some central counterparty, hub-and-spoke style, or else to retreat to the world of repo, where banking prowess counts for nothing and all that matters is collateral quality.

The implications of such a world are already being seen: Tett says that “collateral arbitrage” has now become a profit center at some banks. Far from trying to lend out money to creditworthy borrowers, banks are beginning to make money by gaming inconsistent repo rules. No good can come of this.

And in times of crisis, a reliance on repo markets makes all banks incredibly fragile, and vastly increases the risk to taxpayers should a bank fail. Once upon a time, banks had equity, they had debt, and then they had deposits. If a bank failed, the bank’s equity would be wiped out first, and then its debt. The depositors were senior, which meant there was relatively little chance that the FDIC would have to bail them out.

Now, however, bank debts are shrinking, replaced with repo operations. As a result, when a bank fails, the equity gets wiped out first — and then there’s no cushion any more before the depositors start losing money and need to be bailed out. The rest of the finance world is senior to depositors: they have repo collateral, which makes them secured creditors, and secured creditors are senior to unsecured creditors, even when the unsecured creditors are just mom-and-pop depositors.

The more that the world of finance relies upon repo, the less it relies upon relationships and trust and underwriting and all the other ties which bind. The financial sector can’t afford those ties to be severed: the cost of breaking them, in terms of foregone growth and profit, is far too great. But we seem to be doing exactly that.

Update: See also Carolyn Sissoko, from February,  a great post. h/t Waldman.


Re “bill of exchange”, two quite different ideas are being conflated here. A bill of exchange is not a “secured loan” because it is not a loan of any type whatsoever; it is a payment instrument, consisting of instructions to a third-party bank to pay the bearer (or a named party.) The modern American will be more familiar with a “bill of exchange” as a “check.”

Bills of exchange are substitutes for currency and were widely used in 19th century America because the private currencies issued by its myriad banks were not accepted or were heavily discounted in locations far removed from the issuer.

It is true that bills of exchange were often paired with financing, because the people who wanted to make such payments did not possess the means to pay on their own account. The loans were separate transactions, though, ans as noted by realist50 were secured by the goods they financed.

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Why it’s not OK for cyclists to run red lights

Felix Salmon
Aug 5, 2012 17:33 UTC

Randy Cohen, the NYT’s former Ethicist columnist, has now attempted an ethical defense of running red lights on his bicycle. “I flout the law when I’m on my bike,” he writes; “you do it when you are on foot, at least if you are like most New Yorkers.”

This, of course, is one of the weakest ethical defenses imaginable: if lots of other people are flouting the law, that doesn’t give anybody else the ethical right to do so, let alone the legal right. But Cohen continues:

I roll through a red light if and only if no pedestrian is in the crosswalk and no car is in the intersection — that is, if it will not endanger myself or anybody else. To put it another way, I treat red lights and stop signs as if they were yield signs. A fundamental concern of ethics is the effect of our actions on others. My actions harm no one. This moral reasoning may not sway the police officer writing me a ticket, but it would pass the test of Kant’s categorical imperative: I think all cyclists could — and should — ride like me.

The “should” at the end of this passage is utterly indefensible. At best, Cohen has demonstrated that he’s causing no harm to others (although I’ll take issue with that in a moment). But if Cohen is doing something illegal — which, by his own admission he is — then he needs something much stronger than “no harm to others” before he urges such behavior on all other cyclists.

There are cases where flouting the law can be the ethical thing to do, but those are generally cases where following the law, or standing idly by in the face of something which is clearly wrong, cannot be ethically justified. In this case, stopping at a red light and waiting for it to turn green does no harm to anybody, and there’s no morality I know of which would frown on such behavior.

It is important to cyclists that we get the full respect of drivers as fellow road users, with just as much right to be riding down the street as they have. The biggest danger facing cyclists is when drivers get annoyed if we slow them down, or drive as though we’re simply not there. Developing a relationship of mutual respect between drivers and cyclists is the most important thing we can do to improve cyclists’ safety, and to reduce the number of injuries and fatalities on the streets. And cyclists will find it much harder to earn that respect if they visibly flout the law every time they reach a red light.

Do pedestrians flout red-light laws all the time? Yes, of course they do. But they also fear cars, and respect the fact that the roadway is built for the purposes of cars and not for themselves. No pedestrian insists on the right to walk down the middle of the road at any time of day or night, and to be respected by drivers while doing so.

Similarly, Cohen — quite rightly — saying that cyclists “are a third thing, a distinct mode of transportation, requiring different practices and different rules”. I wrote as much myself, in my unified theory of New York biking. But that theory was based on the idea that the tragedy of New York cycling is that everybody — pedestrians, drivers, and cyclists — treat cyclists too much like pedestrians. Cohen, by contrast, says that “most of the resentment of rule-breaking riders like me, I suspect, derives from a false analogy: conceiving of bicycles as akin to cars”. I wish that New Yorkers would conceive of bicycles as akin to cars: pedestrians would look first before stepping out in front of us; cars would respect our right to be on the road; and fellow cyclists wouldn’t endanger everybody by riding the wrong way down the street.

One of the weirder parts of Cohen’s essay is that he extols Amsterdam and Copenhagen, which are cities where, to a first approximation, all cyclists always stop at all red lights, and don’t go again until the light turns green. Doesn’t he understand that in order for New York to work as a cycling city, cyclists will have to stop taking the law into their own hands? “Uninterrupted motion,” he writes, “gliding silently and swiftly, is a joy.” Well, yes, it is. Uninterrupted motion is quite nice for car drivers, too, but they stop at red lights. And even pedestrians generally wait until the way is clear before they cross the street.

More to the point, I simply don’t believe Cohen when he writes that he only breaks the red-light rule “if and only if no pedestrian is in the crosswalk and no car is in the intersection”. What about when there’s a pedestrian in the crosswalk who’s walking away from the bike? I’ll bet he does it then, too. The point is, when you can make up your own rules, you can also make up when to bend them. I can understand that Cohen would prefer it if New York had rules like Idaho’s. But whatever the rules are, we should obey them. If Cohen wants to agitate for a change in the rules, I’ll join him and support him. But I’m not going to pretend that it’s OK to break the rules just because you think the rules should be changed.

It’s quite common for pedestrians to thank me when I stop at a red light behind the crosswalk. That’s nice of them, I guess — but it’s also a bit depressing: it shows that most pedestrians expect most cyclists to flout the law. And that makes them afraid and resentful of cyclists in general. That’s the last thing anybody wants. And so for the time being it behooves all cyclists to adhere to the law as it stands, even if they’re convinced that they’re doing no harm. Running red lights is highly visible behavior, and every time a pedestrian or a driver seen Cohen do it, that only confirms in them their prejudice that cyclists are lawless people with no respect for the rules of the road. They can’t see the counterfactual case where Cohen would have stopped had there been a pedestrian in the way: all they see is the law-flouter.

I’m no angel on this front: I’ve done, on my bike, everything Cohen has done on his. I just don’t kid myself that I’m behaving ethically when I do so. And I’m trying to set a good example, even if I don’t always succeed. If you ever see me run a red light on my bike, feel free to tell me off. I’ll deserve it.


Well in some cities it is legal to ride a bike through a red light. And where I live I would NEVER get through red light. Why…because they only change for a car…not a bike. In some cites when a bicycle stops over the bicycle symbol that is on the street the light changes just as if they were a car. That is what needs to be done but most cities won’t because they just don’t care…period. I am in the street when I approach a stop light and if I were to stop all the time I would have cars mad at me because they feel I am in the way. I could use the crosswalk at a red light, but that is infinitely more dangerous. Why…because cars making a right-hand turn do not care one bit if they hit me and will cut in front of me all the time. Then when I am in the middle of the intersection about to get to the other side, those cars making a turn, either a left going the same direction as me, or those making a right in front of me will ALWAYS cut in front of me. You have to stay in the street and you have to run a red light at least part of the time. Those that don’t ride in the city should not comment as they have NO clue.

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Counterparties: The true cost of Amtrak’s burgers

Ben Walsh
Aug 3, 2012 21:43 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

Over the last decade, Amtrak has lost $834 million selling food and drinks, its president and CEO admitted Thursday in front of the House Transportation and Infrastructure Committee. The NYT reports that those losses were “largely because of waste, employee theft and lack of proper oversight”.

All of this comes on top of Amtrak’s complex status as perennial political football, anecdote fodder for pundits aiming to outdo their own previous attempts at self-parody, and of course vital national infrastructure. But never mind that: losing more than $80 million on food an beverage service a year is offensive to “anybody who’s ever boarded a train hungry and been forced to cough up the better part of $20 for a burger and a beer”.

Meanwhile, burgers have hidden costs of their own, among them greenhouse gas emissions, overuse of land, water and energy, environmental contamination, and health impacts. Consumers are protected from directly paying those costs by a myriad of agriculture, energy and health policies and subsidies. As a result, a quarter pounder at a fast food joint costs almost nothing, and in any case far less than its true cost to society.

An industrialized hamburger is a cruel combination of subsidies and externalities. By increasing the price to the individual and adding to the cost paid by society, Amtrak has remarkably managed to turn the hamburger into an even worse deal for us all. – Ben Walsh

On to today’s links:

Goldman unwinds Knight’s trades for $440 million – Knight is “scrambling for extra cash” to settle by Wednesday – CNBC
Knight is in talks to sell its futures brokerage unit with potential buyers – DealBook

Crisis Retro
US selling $4.5 billion in AIG stock… and AIG plans to buy $3 billion of it – Bloomberg

Primary Sources
US economy adds 163,000 jobs in July, beating expectations; unemployment “essentially unchanged” at 8.3% – BLS

New Normal
The scary depth and duration of the current jobs crisis in one, updated chart – Calculated Risk
“It was like we were in a funeral home”: unemployment workers get pink slips of their own – Huffington Post
“The true backdrop for Friday’s jobs report: an epic, decade-long stall in the national Jobs Machine.” – National Journal

Your Daily Outrage
“The existence of mass unemployment has stopped being something the economic powers that be even pretend to regard as a crisis.” – Jonathan Chait

Bruno Iksil was pushed by the CIO’s head of credit trading to inflate the value of his positions – WSJ

Ezra Klein: “I can describe Mitt Romney’s tax policy promises in two words: mathematically impossible”.  – Bloomberg

Iceland, pioneer in banking reform – Bloomberg

Data Points
Pimco’s Mohamed El-Erian literally (figuratively) wears the same thing after every (three) good jobs reports – Business Insider


How is fraud so rampant on the longhaul routes at Amtrak? Where is the culpability?

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