Felix Salmon

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

Saving money — everyone hates it. Americans spent the period between the early 1980s and the financial crisis failing miserably at saving. In 1982 Americans saved 10.9% of their income; by 2005 the savings rate had fallen to just 1.6%.

Since the financial crisis, personal savings have rebounded, hovering between 3% and 5% ever since. But this relatively new boost in Americans’ savings, it turns out, is not equal opportunity. Nearly 30% of households don’t have access to a savings account, according to a FDIC report released this week. Another recent report suggests 28% of Americans have not saved anything at all.

The IMF has a new paper which looks at the relationship between income inequality and savings in America. (The gap between America’s rich and poor hit a 40-year high in 2011). “Lower income growth,” the authors write, “was linked to the drop in saving rates and growing indebtedness of American families”. The authors argue that without higher home prices or growing incomes, Americans are still not saving enough to fix their post-crisis financial situations.

Keyu Jin, who looks at the differences between Chinese and US savings patterns, finds big generational gaps in US savings: “the fall in savings in the US is largely due to higher borrowing by the young (rather than a fall in middle-aged Americans’ savings rate)”. Middle-aged Americans, Jin writes, actually increased their savings, relative to GDP, from 1992 to 2009.

If you’re worried that you’re not saving enough to keep up, the bad news is that you’re probably right. The rule of thumb says that you need to save at least eight times your final annual income to pay for retirement.

The good news, however, is that saving more is pretty much all you have to do. James Saft points to a new study by Putnam, which has an interesting conclusion: simply saving more and funneling it into your retirement account earned better returns than magically trying to pick the best funds or perfectly allocating your assets. — Ryan McCarthy

The CFA Institute recently interviewed 1,259 of its members from all around the world and from every aspect of the financial-services industry to ask them about Libor. And the results are clear:

Clearly no one believes that Libor makes any sense the way it’s currently set up. Libor, CFAs are agreed, should reflect actual interbank borrowing rates, not some hypothetical estimated rate at which banks think they could probably borrow if they wanted to.

What’s more, Libor submission should be a regulated activity (70% agree, 18% disagree); and the regulator should have criminal sanctions available to it (82% agree, 9% disagree).

As for the key question of what should be used as an alternative benchmark, responses varied, with no one rate in particular standing out as popular. But only 7% of respondents said that there was no alternative viable rate. Libor should be regulated, phased out, and replaced with something else.

All of which will take a little bit of time, but not a lot: less than 10% of respondents think it could take more than 3 years.

In the next year or two, we are going to see a succession of gruesome headlines around Libor manipulation: Barclays was only the first. As a result, even the big banks who contribute to Libor are likely to be quite keen to put this tarnished measure behind them. First change it, then render it obsolete. As quickly as possible. Even the professionals agree.

The WSJ's Liz Rappaport and Julie Steinberg have the news that Goldman Sachs is dramatically changing its analyst program. The move is the result of a longstanding trend: fewer and fewer analysts in the investment banking and asset management divisions are staying at the firm past their initial two-year committment, and analysts are making exit plans earlier and earlier.

Since the 1980's, Goldman has hired undergraduates on two-year contracts, with analysts paid a base salary plus bonuses for those two years. Analysts get fairly continuous feedback from colleagues and participate in Goldman's fabled 360-degree review program throughout that time, so they have a good understanding of what their career trajectory (at least in the short term) looks like at Goldman. It's only with six months to go into their two-year commitment that analysts are allowed to begin looking for jobs outside GS or apply to grad school. At the same time, they can also look for other roles internally. Alternatively, if they want to stay in their role, they can make it clear that they want to stay and, if their manager approves, stay on as a third-year analyst.

The expectation from Goldman is that analysts will spend one and a half years with their heads down, working extremely hard, and then, with six months to go, start thinking about what to do next, while continuing to work extremely hard. Every so often, during the first 18 months, Goldman can start dropping strong hints that it would be better for all concerned if the analyst started looking for opportunities elsewhere. But generally, that takes major misbehavior or serious lack of fit.

The problem is that in the investment banking and asset management divisions, recruiters from private equity firms and hedge funds have been contacting analysts earlier and earlier into their time at Goldman. This is less of an issue in the securities (sales and trading) and research divisions. The skills learned by analysts in the banking and investing divisions are extremely valuable, and are directly applicable to entry-level roles at PE firms and hedge funds. That's less the case for analysts in the securities (where full, disclosure, I spent my first two of five years at Goldman) and research divisions .

So the analyst program is staying largely unchanged in securities and research. Over in investment banking and asset management, however, analysts will now look much more like the rest of their colleagues -- employment is year to year. Or month to month and week to week, depending on how you want to look at it. Goldman was clearly fed up with analysts spending less than a year at the firm, using that experience as a launching pad to a job somewhere else, all while collecting the luxury of another year's comp.

Now, Goldman analysts can leave whenever they want. Or they can stay forever, if Goldman will let them. And that's the same choice everyone at Goldman has.

Is simplicity the new new thing? The front page of the new issue of Global Risk Regulator — the trade mag for central bankers around the world — features an excellent article by David Keefe about Sheila Bair, Andrew Haldane, and calls for a “return to simplicity”. Bair tells Keefe that “we’re drowning in complexity”:

“The public is tired of rules they don’t understand,” she said, adding: “We should be simplifying the rules, we should be simplifying the institutions for which the rules are made, but it’s going in the opposite direction.” …

Bair said she was in “wholehearted agreement” with Haldane’s attack on the complexity of regulation.

“Regulation”, in this context, means one very specific thing: Basel III, the new code governing the world’s banks. No one is advocating that it be abolished: it’s clearly much more robust than its predecessor, Basel II.

But if Basel II was horribly complicated, Basel III is much more complex still — and, as I and others have been saying for the past couple of years, that’s a real problem. Ken Rogoff puts it well:

As finance has become more complicated, regulators have tried to keep up by adopting ever more complicated rules. It is an arms race that underfunded government agencies have no chance to win.

More recently, bankers themselves have started saying the same thing: yesterday, for instance, Sallie Krawcheck said that the complexity of financial institutions “makes you weep blood out of your eyes”.

So perhaps there’s a consensus emerging that regulation needs to be simplified, trusting heuristics more while spending less time and effort complying with thousands of pages of highly-detailed rules. What matters is not whether financial institutions dot every i and cross every t, so much as whether they are behaving in a safe and sensible manner. After all, one of the main reasons that we haven’t seen any high-profile criminal convictions of bankers for their roles in the financial crisis is just that their compliance officers were generally very good at staying within the letter of the law. Which didn’t really help the system as a whole one bit.

But there are lots of very good reasons why even if we are reaching a consensus on this, that doesn’t mean there’s much if any chance of some new simple system ever actually coming into place.

For one thing, the window of opportunity has closed. In the immediate wake of the financial crisis, regulators found agreement that they should get tough: that had never happened before, and it’s likely that it will never happen again. Even in the Basel III negotiation process, national regulators tended to push hardest for regulations which would be felt the most by banks in other countries, rather than their own. But at least everybody was in the vague vicinity of the same page. Without another major crisis, no one feels any real urgency to implement yet another round of major regulatory change, especially before Basel III has even been implemented. And without that sense of urgency, nothing is going to happen.

And more generally, there’s a ratchet system at play here. It’s easy to make a simple system complex; it’s pretty much impossible to make a complex system simple. All of us live in a world of contracts and lawyers — and the financial system much more than most. Financial regulation will become simpler the day that contracts become shorter and easier to understand, which is to say, never.

How has the financial-services sector managed to make an ever-greater proportion of total profits over time? By extracting rents from complexity. As a result, any attempt to radically simplify anything in the sector is going to run straight into unified and vehement opposition from pretty much every bank and financial-services company in the world. (Note that Sallie Krawcheck, like Sandy Weill, only started criticizing bank complexity after she left the industry.)

So while banks opposed Basel III, at least they got increased complexity out of it, which means that the barriers to entry in the industry were raised. Which is good for them, and bad for the rest of us. Why did Simple, for instance, take so long to launch? Because it’s very, very difficult to create anything simple in today’s banking system. Complexity is here to stay, whether the likes of Bair and Haldane and Krawcheck like it or not. And with complexity comes hidden risks. Which means we’ll never be as safe as any of these people would like.

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

The Federal Reserve today announced a third round of monetary stimulus, aka QE3, aimed rather directly at the housing market: the Fed will buy $40 billion of mortgage-backed securities a month indefinitely.

The Fed wants to lower yields on mortgage-backed securities and thereby lower mortgage rates for consumers. This is pretty darn close to “Uncle Ben’s Crazy Housing Sale” that Ezra Klein called for back in July. As the NYT’s Binyamin Appelbaum notes, QE3 has an open-ended timeline and variable targets: the Fed will buy mortgage-backed securities “until the outlook for the labor market improves”. For a close look at exactly what changed since the last Fed statement, the WSJ’s Phil Izzo has the tracked changes, which are significant.

The Fed says that its “highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens”. This, as Felix notes, is a big departure:

The job of monetary policy, in the famous words of Fed chairman William McChesney Martin, is “to take away the punch bowl just as the party gets going”. The Fed, here, is essentially disowning Martin, and saying that they’ll keep refilling that punch bowl with high-grade hooch even after the party is getting going.

Will it work in stimulating growth? Markets approved. Longer term, the picture is murkier. Matt Yglesias thinks the message that the Fed will keep rates low through a recovery is more important than the dollar figure. Tim Duy said before the announcement that the message would be more important than QE3 itself. In term’s of the policy itself, Mohamed El-Erian thinks the Fed is stuck in “policy purgatory: incapable of delivering the good economic outcomes it desires, yet unable to exit from an experimental policy stance that risks a widening array of collateral damage and unintended consequences“. — Ben Walsh

On to today’s links:

Charts
Why we need to worry that the US economy is very close to “stall speed” - FT Alphaville

Apple
The iPhone 5 is the greatest phone in the world, as well as cruelly boring and utterly amazing - Wired

Regulations
AIG is taking steps to avoid the Volcker Rule - Dealbook

Wonks
The mystery of why fewer women are looking for jobs - Matt Yglesias 
What official poverty rates miss: Widespread consumption inequality - Conversable Economist

Questionable
European banks just won’t stop palling around with Iran - WSJ

Bright Spots
The good news from a bad Census report: Obamacare is working – Mother Jones

Bad News
28% of US households conduct “financial transactions outside the mainstream banking system” - FDIC

Housing
How the government helps homebuyers in America’s richest communities - Reuters

Alpha
Full transcript of Ray Dalio’s interview - CFR

New Normal 
Non-shocking correlation of the day: fewer good jobs means more income inequality - The New Republic

HUH
“We do believe we are currently in a recession,” says guy nobody believes - Business Insider

Tim Kane, at the Hudson Institute, has a new paper out with a simple title: “The Collapse of Startups in Job Creation”. His paper is basically a slightly politicized version of the charts put out by the Bureau of Labor Statistics last month, under the headline “Entrepreneurship and the U.S. Economy”. The first two charts are particularly striking. The first one looks at the number of startups in America — companies less than one year old.

This shows a reasonably steady rise in entrepreneurship from 1994 to 2006, then a collapse as the housing bubble bursts, and — most worryingly of all — no recovery at all after the recession ends. Instead, we have significantly fewer startups right now than we did even at the depths of the recession.

If you look at the number of jobs at these startups, rather than the number of startups, the picture is equally bad, although the decline is older. This series peaked back in 2000, and has been declining ever since:

This doesn’t make a lot of intuitive sense. As Kane writes,

Economic theory suggests that the modern economy offers a better environment for even more entrepreneurship. First, there is a wider technology frontier to explore. Second, a wealthier society enables more individuals to explore rather than merely work to survive. Third, the shift to services requires less startup capital than manufacturing or agriculture. In other words, the downward trend in the rate of entrepreneurship should, in theory, have rebounded by now.

Kane thinks that it’s something to do with taxes and regulations; I don’t buy it. But he also has a globalization argument:

An American entrepreneur has zero tax or regulatory burden when hiring a consultant/contractor who resides abroad. But that same employer is subject to paperwork, taxation, and possible IRS harassment if employing U.S.-based contractors.

Are jobs at US startups effectively being offshored? I don’t know. But I do know that small business is where the jobs are, in this economy. Here’s the chart:

The green line, at the top, is the number of jobs at small businesses, with less than 50 employees. The red line, underneath it, is the number of jobs at medium-sized businesses, with somewhere between 50 and 500 employees. And the steadily-declining blue line, at the bottom, is the number of jobs at large businesses with more than 500 employees. Clearly, if we want to boost job creation, the best place to look is not the blue line but the green line. And equally clearly there has been an increase in the number of jobs at small firms overall, since the recession ended.

So if small firms in general are hiring again, what’s the problem with startups? Kane has run the numbers back to 1989, to come up with this chart:

There’s really nothing predictable about the dismal showing in the last three years of this chart — and especially not in the last two years, when we’ve had a recovery accompanied by record-low interest rates.

Admittedly, all of these numbers are low: at their peak, startups employed only a little more than 1% of the population, and now they employ a little less than 1% of the population. Concentrating on startups is not going to move the broader employment needle very much. But the dynamic here is surprising and troubling, all the same. Intuitively, if people can’t find work for an existing company, they should be more likely, not less likely, to go out and found a new company themselves, instead. But that doesn’t seem to be happening.

The only thing I can think of here is that for all that we think of startups as being largely high-tech things, in reality a huge number of them are in the construction industry, in one way or another. In a word, subcontractors. And no one’s starting new granite-countertop installation companies right now. But still, startups are a decent proxy for the dynamism of an economy. And these charts don’t bode at all well, on that front.

It’s basically the same thing that we’re used to at this point, but it’s got enough in the way of new bells and whistles to get people excited anyway — and boost economic growth. So, it’s a good thing, even if it’s not in any way revolutionary.

I’m talking about QE3, of course, although I could equally well be talking about the iPhone 5. You’ve heard more than enough already about the iPhone’s larger screen and new connector and so on and so forth, so let’s talk about monetary policy instead.

The main news isn’t the fact that the Fed is back in the market, buying bonds. Indeed, as Binyamin Appelbaum points out, QE3 in volume terms, at $40 billion per month, is significantly smaller than QE1 and QE2.

The innovation comes rather in the messaging. For instance, we haven’t seen anything like this before:

If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.

What this means is that QE3, unlike QE1 and QE2, has no set expiry date. The Fed’s not trying to kick-start the economy any more: instead, it’s promising a steady extra flow of monetary fuel for the foreseeable future — or at least until the labor market improves “substantially”. Which is likely to be a pretty long time.

That would be a big enough deal on its own, but the Fed went even further in the following paragraph, where they all but promised zero interest rates until mid-2015:

The Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.

The job of monetary policy, in the famous words of Fed chairman William McChesney Martin, is “to take away the punch bowl just as the party gets going”. The Fed, here, is essentially disowning Martin, and saying that they’ll keep refilling that punch bowl with high-grade hooch even after the party is getting going.

Of course, there’s wiggle room here, but the Fed has invested a lot in its own credibility, so it’s fair to believe that it’s going to do what it says it’s going to do.

And so while the headlines are all about QE3, the real innovation here is that the Fed is moving aggressively into the world of words rather than deeds. Buying bonds isn’t enough any more: the Fed is now trying to boost the economy by promising to continue buying bonds, in a zero-interest-rate environment, for many, many quarters to come. It’s the promise, rather than the purchases themselves, which is the main difference between QE3 and its predecessors.

In his Jackson Hole speech, Ben Bernanke had a whole section on “Communication Tools”, talking about the “use of forward guidance as a policy tool”, and saying that it has been pretty effective up until now. Today’s announcement is a huge bet on those tools, basically using them to a degree unprecedented in recent history.

The Fed is also specifically targeting mortgage bonds in particular, on the grounds that lower mortgage-bond yields will feed through into lower mortgage rates, which in turn will feed through into healthier housing prices. That’s a stretch: mortgage rates have not been falling in line with mortgage-bond yields, and in any case the relationship between mortgage rates and house prices is tenuous at best. But the Fed has to buy something, if it’s going to do QE operations, so mortgage bonds it is.

None of this is going to make any noticeable difference before the presidential election: it’s all marginal, really. But if it seems as though QE3 is having a bit more of a real-world effect than QE2 did — if, that is, it helps the job numbers rather than just the markets — then the lesson will be clear. The Fed’s balance sheet is a powerful tool to use — but its vocal chords might be even more powerful still.

Carl Swanson has a perfectly-pitched profile of Avenues, the new for-profit private school in Manhattan where, as he puts it, affluent parents steeped in “that inspirational-advertising way banks and oil companies have come to perfect” are “hoping the school will provide a secure future in the Davosphere for their children”.

The school has raised $75 million from investors, and sprawls over 215,000 square feet of very expensively fitted-out prime New York real estate; it even has a robotics lab. The idea is to educate tomorrow’s global elite, in a world where the cost difference between the very best and the merely excellent has never been greater. Given the parents and the kids that Avenues is designed to appeal to, it’s easy to see how the price tag for a year’s education could reach astonishing levels.

Think about it this way: if you live in a nearby apartment with a couple of kids, and you enjoy the same kind of light and space that can be found at Avenues it’s entirely possible that you have a $5 million mortgage — which, if it’s a 30-year loan at 4% interest, will cost you some $286,000 a year in mortgage payments. People with those kind of cashflows aren’t looking to save money on their school tuition bills: they’re just looking for the best school they can find. As ever, there’s no one quite as price-insensitive as a parent looking for a private school — and the richer the parent, the more price-insensitive they become.

At most high-end private schools, as described by Scott Asen, tuition rates in the $40,000 range “often cover only 70 to 80 percent of costs”. Which means that the actual cost of educating these kids is somewhere north of $50,000.

Avenues is being run on a for-profit basis, and has surely spent much more than most schools on real estate; if you include its rent or mortgage payments, and then add in a little something for profit margin, it’s easy to see how the school might charge somewhere in the $60,000 to $70,000 range per child per year. That would be weirdly handy as a signaling tool, too: often, at these levels, price is used as an indicator of quality and desirability.

And yet, for all the six-figure salaries paid to the staff at Avenues, tuition is a mere $39,750, plus mandatory fees of $2,000 to cover “lunch, snacks, athletic uniforms and annual investments in educational technology”. Avenues is glossy, but it’s also being run on the cheap:

Whittle has planned Avenues with a McKinsey-like focus on making the curriculum as lean and efficient as possible… his book is largely for the type of person who thinks principals should have M.B.A.’s and teachers should get commission, their bonuses dependent on improvements in test scores. Understandably, teachers unions weren’t happy about that idea, or his other big one, which is to free up money for raises by having fewer teachers…

Each kid gets a dedicated cubicle, since Whittle thinks they should spend half the day out of the classroom working independently (a pedagogic notion he pursued in Crash Course as a way to save money).

It’s easy to be able to afford an iPad for every student if the amount of time they actually spend interacting with well-paid teachers is cut in half. And I’m sure that the investors in Avenues aren’t expecting profits from day one, especially given that the school is starting out only at 50% of its capacity.

But the fact is that all schools are local, and for all that Avenues has lofty aspirations of being the world’s first genuinely international school, the realities of the private-education business are still steeped in extracting high fees from local parents who don’t make seven-figure salaries at Goldman Sachs. Swanson talked to actual parents at Avenues, rather than the hypothetical financial jet-setters that the school aspires to appeal to, and reports that “while tuition is typical for a private school, several parents pointed out to me that since the school is for-profit, they won’t be hounded for donations, too”.

It seems to me that Avenues has a pretty subtle two-level sales pitch. Ostensibly it’s all about being part of the global elite, hanging out with the Davos set, immersion in Mandarin, becoming the best of the best, and so forth. But underlying that is something much more mundane but just as effective when you’re dealing with New York’s harried parents: we’ll charge the same as everybody else, we won’t harry you for donations, and — crucially — we’re easier to get in to, just because we’re not as established as those other guys. Did you just move to New York in a hurry to get away from a controlling husband, and need a new school on short notice without being able to apply years in advance? Well, we’re perfect!

The world of education moves slowly, and is hard to disrupt. Avenues is a little bit further outside the mainstream than most schools, and it’s easy to get caught up in the ways that it’s different from the others. In reality, however, it’s just another private school in Manhattan, one which has the same kind of middle-class* parents as the others, and one with rather less in the way of student-teacher interactions than you find at most of its peers. The students will all be fine: they all come from supportive, affluent, well-educated households, and those students always do fine. But let’s not kid ourselves that they’ll be disproportionately represented at Davos 2040, or that any school, anywhere, could deliver such a class.

*Update: The irony in my use of “middle-class” wasn’t coming through, so I striked it out. The parents at Avenue and other NYC private schools are rich; they’re not middle class. But, at the same time, they’re highly ambitious and aspirational, and they are a long, long way from the global plutocracy which Avenues claims to be serving.

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

The financial crisis and subsequent recession hasn’t just chipped away at Americans’ net worth. A new Pew poll shows it has affected their economic self-image as well — 32% of all adults now consider themselves lower class, up from 25% in 2008.

Not only has the lower class grown, but its demographic profile also has shifted. People younger than 30 are disproportionately swelling the ranks of the self-defined lower classes. The shares of Hispanics and whites who place themselves in the lower class also are growing.

Specifically, 39% of 18 to 29 year-olds and 40% of Hispanics consider themselves lower class, increases of 14 and 10 percentage points, respectively, since 2008. Three-quarters of the lower class think “it’s harder now to get ahead than it was 10 years ago”.

In that gloomy sense, America’s burgeoning lower class has something in common with its shrinking middle class. An earlier Pew survey found “85% of self-described middle-class adults say it is more difficult now than it was a decade ago for middle-class people to maintain their standard of living”.

They’re right. Census Bureau data released today show that “real median household income in the United States in 2011 was $50,054, a 1.5 percent decline from the 2010 median and the second consecutive annual drop”. Dig deeper into the data, and things look worse: real income in 2011 is basically unchanged from 1990.

Post-crisis, lower and middle-income Americans are becoming more class aware. (The rich, on the other hand, still don’t think they’re that rich.) The Economic Policy Institute’s “State of Working America” asks the key question: “how well is the American economy providing acceptable growth in living standards for most households?” The conclusion: “not well at all”.   — Ben Walsh

On to today’s links:

New Normal
A handy guide to the arguments that we’ve reached the end of economic growth – WaPo

Alpha
Lawsuit says Bain, private equity firms colluded to keep acquisition prices down – NYT

Be Afraid
How the explosive growth of REITs could put the mortgage market at risk – Sober Look
Top REIT CEOs even more overpaid than other real estate CEOs – WSJ

Long Reads
Michael Lewis’s huge new Vanity Fair profile of President Obama – Vanity Fair

Financial Arcana
An argument that naked CDS will help lessen the fallout of sovereign debt defaults - WSJ

Politicking
Mitt Romney’s weaponized Keynesianism – Slate

Primary Sources
The full text of Moody’s latest grim warning on US debt – Reuters

EU Mess
Germany’s constitutional court backs euro rescue plans – Der Spiegel

TBTF
There’s a huge difference between what Citi thinks an asset is worth and what everyone else does – WSJ

Charts
How America is missing out on a huge investment opportunity – Ryan McCarthy and Ben Walsh

Cephalopods
“Why I left Goldman Sachs” hits stores in about a month – Dealbook

Eduardo Porter has a very good explanation, today, of why it makes much more sense, from an economic perspective, to simply start raising gasoline taxes than it does to implement ever-tougher fuel-efficiency standards. But before we get to the meat of his argument, it’s worth correcting his numbers. Here’s his conclusion:

In Britain, where gas and diesel are taxed at $3.95 a gallon, the American automaker Ford sells a compact Fiesta model that will go nearly 86 miles on a gallon. In the United States, where gas taxes average 49 cents, Ford’s Fiestas will carry you only 33 miles on a gallon of gas.

This is an apples-to-oranges comparison on not one but two different levels. I’m not sure about the gas taxes, I think they’re correct. But the mileage figures are misleading. Yes, UK Fiestas are more fuel-efficient than US Fiestas. But not by nearly as much as Porter suggests.

For one thing, the mileage tests are different. The test you use makes a huge difference, to the point at which the 2025 fuel-economy standard of 54.5 mpg actually corresponds in the real world to cars bearing window stickers advertising 36 mpg. The US Fiesta is already there, or extremely close. On top of that, UK gallons, also known as Imperial gallons, are significantly larger than US gallons. (Which is why a pint of beer in the UK is larger than a pint of beer in the US.) As a result, 85.6 miles per Imperial gallon is 71.3 mpg in American. And only one expensive “ECOnetic” Fiesta model gets that mileage in the UK; the other ones go as low as 42.8 miles per Imperial gallon, which is 35.6 mpg in the US.

I’s hard to say for sure which cars are more efficient, because the tests are different. To be sure, any UK fleet will be more efficient than any US fleet, for three main reasons: the UK has smaller cars, with more manual transmissions, a higher proportion of which are diesel. These are consumer choices driven by high gasoline taxes, and that really makes Porter’s point for him: raise taxes, and people will automatically start driving more efficient cars. But let’s not kid ourselves that Ford could simply import UK Fiestas into the US and overnight start shipping cars getting 86 mpg.

Porter’s central point is absolutely right: there are two ways to reduce the amount of fuel that people use. The first is to make cars more efficient; the second is to reduce the number of miles that people drive. Higher gasoline taxes work on both fronts, while higher fuel-economy standards only work on the first. Indeed, at the margin they increase the number of miles people drive: since more efficient cars cost less to drive per mile, people drive further when they get more efficient cars.

Porter is also right that in countries with higher gas taxes, fuel economy tends to be much higher. But he’s not necessarily right that the higher gas taxes alone are responsible. Porter implies that the US only has fuel-economy standards just because “a tax on gasoline doesn’t stand a chance” of being passed. But the fact is that even countries with very high gas taxes have fuel-economy standards as well. And, guess what, they’re significantly tougher than ours, and they always have been.

The fact is that the US has pretty much the lowest fuel-economy standards in the developed world, and it still will in 2025, even after the new standards are fully phased in. If US carmakers want to be internationally competitive, they’re going to need to develop more fuel-efficient cars anyway, no matter what happens in the US.

As a result, I really don’t buy Porter’s scaremongering about the cost of the higher standards:

According to the government’s analysis, the additional production and maintenance costs made necessary by the mileage rules will rise gradually to about $31.7 billion in 2025 — which will add about $1,900 to the average price of cars and light trucks. There are other costs, too. Some Americans will not be able to afford a new car. Profits of some automakers and dealers are likely to decline. Greater congestion will impose an added burden on health.

The idea here is that the average price of cars will go up over the next 13 years; it’s far from clear why that would decrease profits at automakers rather than increasing them. What’s more, it’s equally far from clear that the average price of cars would go up significantly less if the new standards were not put into place. The question isn’t how much cars in 2025 cost compared to cars in 2012; it’s how much cars in 2025 will cost under various possible future regimes.

And when Porter starts talking vaguely about the health burden of greater congestion, you know he’s grasping at straws. Auto emissions pollution was a problem in the 70s and 80s; it’s not a problem now, with today’s much cleaner cars.

The fact is that fuel-economy standards are a pretty good way of ensuring that carmakers can plan for a more fuel-efficient future, without worrying about competitors undercutting them with gas-guzzlers. If the US government ever comes to its senses and increases the gas tax, or if it — wonder of wonders — actually implements a broader carbon tax, then at that point you would have three different forces conspiring to make America’s fleet more efficient. You’d have the tax, you’d have the fuel-economy standards, and you’d have the general global increase in fuel efficiency.

Without new taxes, we’re down to two; and without new fuel-efficiency standards either, we’d be down to just one. And that’s dangerous, because the US market is big enough that at that point there’s always a risk that we could replay the era of SUVs and Hummers, with manufacturers of small, efficient cars running a risk that they might get crushed if oil prices fall.

Fuel-efficiency standards are a way of preventing car companies from being forced to hedge their bets by working on gas guzzlers as well as efficient runabouts. As a result, those companies can take the money they’d otherwise spend on developing six-ton monsters, and invest it instead in the efficient cars of the future. Everybody wins, and the cost — contra Porter — is negligible. He’s absolutely right that higher gas taxes are a very good idea. But that’s no reason at all not to implement higher fuel-economy standards as well.

The FT’s Dan McCrum has found an interesting nugget in the data of my corporate cousins at Lipper:

Mutual funds are not performing as badly as last year, when just 27 per cent offered better returns than the benchmark they choose to track, according to research group Lipper. But, again, the majority still trail in 2012.

This was crying out for a chart, so here you go, with many thanks to Matt Lemieux:

This is a bit noisy, however, and most people (I hope) hold their mutual funds for periods of a bit longer than a year. So here’s the chart looking at what percentage of active mutual funds beat their benchmarks over three years:

And if you’re the kind of sensible person who holds their mutual funds for five years, at that point things start becoming more predictable, and we can start overlaying lines:

This is pretty much in line with the latest Spiva analysis, as of year-end 2011, which shows just 16% of equity funds outperforming the S&P Composite 1500 over 1 year to end-2011, 43% outperforming over three years, and 38% outperforming over five years. For bond funds, the Spiva numbers are much worse: if you look at page 18 of the PDF, you’ll see that over five years it’s pretty much unheard-of for bond funds to beat their benchmark, especially those funds investing in long-dated bonds.

If we go back even further, the numbers, as you might at this point expect, just become worse. Over 10 years, the proportion of active mutual funds outperforming their benchmark never goes above 35%, and between 1981 and 1991, it was just 27%. Over 30 years, just 31.5% of active mutual funds outperformed their benchmark. And that’s before adjusting for survivorship bias, or the fact that investors tend to be late to the party, investing in high-performing mutual funds after they’ve had their period of outperformance, and just before they mean-revert.

All of which is to say that picking an outperforming mutual fund is at least as hard as picking stocks. And while there are some famously successful stock-pickers out there, I’ve never heard of a very successful mutual-fund picker. So, don’t bother. Throw all your money in a Vanguard target-date fund, and forget about it. It’s much easier, and you’ll end up with more money when you finally need it.

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

Financial reform was always going to be accompanied by unintended consequences. And Bloomberg’s Bradley Keoun has found a great one, in his piece on the rise of “collateral transformation” at big banks.

Under the Dodd-Frank Act, most derivatives deals — the things which sunk AIG, remember — are meant to be forced into public clearinghouses. The idea is to bring the opaque, hard-to-price derivatives onto an open forum, with each party setting aside safe collateral in case things go sour.

The problem is, good collateral, like those once-pristine sovereign bonds FT Alphaville has extensively cataloged, is in short supply. Enter banks like JPMorgan, BofA, Goldman Sachs and Barclays. Never ones to let an unintended consequence go unmonetized, they’re now offering clients services that take these assets and magically transmogrify them into safer ones:

The process allows investors who don’t have assets that meet a clearinghouse’s standards to pledge corporate bonds or non-government-backed mortgage-backed securities to a bank in exchange for a loan of Treasuries. The investor then posts the Treasuries — the transformed collateral — to the clearinghouse. The bank earns fees plus interest, and the investor is obliged at some point to return the Treasuries. In effect, the collateral is being rented.

This is pretty much the opposite of what was intended. Loaned collateral only serves to increase complexity of the derivatives market, and will likely make it harder to unwind contracts when things go bad. “The point of the initiatives on derivatives was that derivatives can hide a lot of risk,” finance and economics professor at Stanford told Bloomberg. “Now they’re going to just shuffle the risk around”.

A better regulatory approach, for people Harvard’s Kenneth Rogoff; John Kay; the Bank of England’s Mervyn King and Andy Haldane; and our own Felix Salmon, is that less is more. In a buzzy speech at Jackson Hole late last month, Haldane made the case for a financial regulatory regime ”which is less rules-focussed, more judgement-based”. As Haldane put it, “As you do not fight fire with fire, you do not fight complexity with complexity”:

Dodd-Frank rulemaking in the 12 months after its enactment covered thirty  new rules or less than 10% of the total.  A survey of the Federal Register showed that complying with these new rules would require an estimated 2,260,631 labour hours every year,equivalent to over 1,000 full-time jobs. Scaling this up, the compliance costs of Dodd-Frank will run to tens of thousands of full-time positions.

In this world, rather than adding things like layers of executive branch oversight, banks would be rewarded for simplicity. — Ryan McCarthy

On to today’s links:

Tax Arcana
All $1 trillion of America’s tax breaks, charted - WaPo
Barclays just doesn’t feel right making tons of money providing totally legal tax avoidance advice anymore - FT

The Fed
How low rates are crushing savers - NYT

Rebuttals
Yes, the AIG bailout worked and it is profitable – Sorkin

Must Read
The greatest GIF guide to the US jobs crisis and Fed policy you’ll ever see - Mike Konczal

China
Nothing to see here: China’s next President disappears from public view without explanation - NYT

Bubbly
Words spoken by a human: “We’re all about glocal right now” - Kevin Roose

EU Mess
Greece’s worst tax evaders? Its professional class - Guardian

Cut the Check
UBS whistleblower gets $104 million reward, while serving 40-month sentence for felony conviction - WSJ

Welcome to Adulthood
“Internships are pretty terrible” – Washignton Monthly

Today, September 11, is a day that all New Yorkers become hyper-aware of tail risk — of some monstrous and tragic disaster appearing out of nowhere to devastate our city. And so it’s interesting that the NYT has decided to splash across its front page today Mireya Navarro’s article about the risk of natural disaster — flooding — in New York.

Beyond the article’s publication date, Navarro doesn’t belabor the point. But in terms of the amount of death and destruction caused, a nasty storm hitting New York City could actually be significantly worse than 9/11. Ask anybody in the insurance industry: a hurricane hitting New York straight-on is the kind of thing which reinsurance nightmares are made of. And as sea levels rise in coming decades, the risks will become much worse: remember, it’s flooding from storm surges which causes the real devastation, rather than simply things blowing over in high winds.

So, what can or should be done? One option is to basically attempt to wall New York City off from the Atlantic Ocean:

A 2004 study by Mr. Hill and the Storm Surge Research Group at Stony Brook recommended installing movable barriers at the upper end of the East River, near the Throgs Neck Bridge; under the Verrazano-Narrows Bridge; and at the mouth of the Arthur Kill, between Staten Island and New Jersey. During hurricanes and northeasters, closing the barriers would block a huge tide from flooding Manhattan and parts of the Bronx, Brooklyn, Queens, Staten Island and New Jersey, they said.

Needless to say, this solution is insanely expensive: the stated price tag right now is $10 billion — well over $1,000 per New Yorker — and I’m sure that if such a project ever happened, the final cost would be much higher. And such barriers don’t last particularly long, either. London built the Thames Barrier in 1984, and there’s already talk about when and how it should be replaced. And building a single barrier across the Thames is conceptually and practically a great deal simpler than trying to hold back the many different ways in which the island of Manhattan is exposed to the water.

What’s more, there’s an environmental cost associated with barriers, as well as a financial cost. Which cuts against the kind of things which New York has been doing. They’re smaller, and much less robust. But they improve the environment, rather than making it worse. And they’re relatively cheap. For instance: installing more green roofs to absorb rainwater. Expanding wetlands, which can dampen a surging tide, even in highly-urban places like Brooklyn Bridge Park. Even “sidewalk bioswales”. (I’m a little bit unclear myself on exactly what those are, but they sound very green.)

Adam Freed, the outgoing deputy director of New York’s Office of Long-Term Planning and Sustainability, talks about making “a million small changes”, while always bearing in mind that “you can’t make a climate-proof city”. That’s a timely idea: we can’t make New York risk-free, and it’s not clear that it would make sense to do so even if we could. After all, as we all learned 11 years ago today, it’s impossible to protect against each and every source of possible devastation.

Other cities have similar ideas:

In Chicago, new bike lanes and parking spaces are made of permeable pavement that allows rainwater to filter through it. Charlotte, N.C., and Cedar Falls, Iowa, are restricting development in flood plains. Maryland is pressing shoreline property owners to plant marshland instead of building retaining walls.

Still, all of this green development does feel decidedly insufficient in comparison to the enormous risks that New York is facing. I like the idea of a “resilience strategy”, but there are still a lot of binary outcomes here, especially when it comes to tunnels. Either tunnels flood or they don’t — and if they do, the consequences can be really, really nasty. Imagine a big flood which took out all of the subway and road tunnels into Manhattan, or even just the subway tunnels across New York Bay as well as the Holland Tunnel. As such a flood becomes more likely, the cost of protecting against it with some big engineering work — insofar as such a thing is possible — becomes increasingly justifiable.

And this is just depressing:

Consolidated Edison, the utility that supplies electricity to most of the city, estimates that adaptations like installing submersible switches and moving high-voltage transformers above ground level would cost at least $250 million. Lacking the means, it is making gradual adjustments, with about $24 million spent in flood zones since 2007.

Lacking the means? What is that supposed to mean? New York City has a credit rating of Aa1 from Moody’s; ConEd has a crediting rating of A3. Interest rates are at all-time lows. There has never been a better time to invest a modest $250 million in helping to ensure that New York can continue to have power in the event of a storm. Doing lots of small things is all well and good, and I’m not convinced that the huge things are necessarily worthwhile — or even, in the case of moving people to higher ground, even possible. But the medium-sized things? Those should be a no-brainer right now.

First, go and check out Mike Konczal’s wondrous gift to the internet today, a fabulous GIF-filled guide to QE3 and monetary policy, where I found the GIF above. It neatly encapsulates the greatest problem facing America today: people can’t find work.

This is not an existential crisis on the order of the financial crisis of 2008-9: if we fail to solve it, the entire economy won’t grind to a halt. But it’s a crisis all the same, and it’s being tackled with much less urgency — and much less money — than was brought to bear on the financial crisis.

And so Deborah Solomon’s idea is, at least in principle, a good one. She notes that no one expected Treasury to recoup much if any of the money it spent on the various bailouts, and that TARP, in particular, was considered a permanent government expenditure rather than some kind of temporary loan to the financial system. Now that hundreds of billions of dollars of TARP funds have found their way back to Treasury, couldn’t they be recycled to help, not Wall Street this time, but the unemployed?

The four-year anniversary of the financial crisis should prompt policymakers to consider using some of the money — funds that were never expected to be returned to the government’s coffers — to assist those in need. Some 12.5 million Americans remain unemployed, and 40 percent have been out of work for six months or longer. Almost 15 percent of Americans rely on the government for food stamps. The 8.1 percent unemployment rate, while far better than its peak of 10 percent, crept down last month largely because so many people have given up looking for work.

That $353 billion could go a long way toward helping struggling Americans who would benefit from some type of relief — whether through tax cuts or the extension of benefits. The U.S. taxpayer stepped in to help Wall Street in its time of need. It’s time for Wall Street, albeit indirectly, to return the favor.

The distinction to bear in mind here, however, is not that between Wall Street and Main Street, but rather that between stocks and flows. TARP wasn’t a new income stream for Wall Street; it was a one-off injection of capital, which got Wall Street back onto its feet, to the point at which banks were pretty much the first companies to start becoming hugely profitable again after the recession hit.

So the condign use of TARP funds in an unemployment context would not be through things like tax cuts or benefit extensions. Instead, it would be a massive capital expenditure: we would build a job cannon, and a whole forest of jobies, and manufacture a huge pile of job helmets, and fire off the unemployed to the wonderful world known as jobland, where they could live happily ever after without any further government support.

Buying a bunch of long-dated agency securities — quantitative easing — is not that. Besides, we’re talking about fiscal policy, not monetary policy, here. But even fiscal policy can’t easily create permanent jobs with one-off expenditures. A dynamic economy is just that: it’s dynamic, and the number of people being hired and fired every week is enormous. The total number of jobs is going up, far too slowly. But permanent jobs don’t — and shouldn’t — exist. What we really want to create is an economy where for every person who gets fired, two people get hired. That would bring unemployment down sharply.

Which brings me to the major speech that Barack Obama gave on September 8. No, not his acceptance speech at the Democratic National Convention — that was September 6, in any case. But rather the speech he gave on September 8 2011, presenting — and costing out — the American Jobs Act. And it turns out that the cost of Obama’s jobs act, which he doesn’t seem to mention much any more, was $447 billion: very much in Deborah Solomon’s ballpark.

Would the jobs act create job cannons and job helmets and jobies? Of course not: there’s no simple Main Street corollary to TARP which can be implemented with the requisite political will and a few hundred billion dollars. Job creation is more of an art than a science, and there aren’t any real experts in it. But at least Obama has (or had) a real, detailed plan. And, as Treasury officials love to say, as a general rule, plan beats no plan.

Megan McArdle is on the cover of the new Newsweek, with a story asking whether college is still worth it, after decades of massive price inflation, and in it she makes a few good points.

Firstly, college is now insanely expensive: even if it made perfect financial sense for people of Megan’s generation (she’s 38), that doesn’t for a minute mean that it still makes sense today. Certainly at this point it’s pretty much impossible to (legally) work your way through college. If your parents can’t afford your tuition and you don’t get some kind of scholarship, you will graduate with a large amount of debt — as more than half of undergraduates now do.

On top of that, the supply of new and bigger student loans has been growing at least as fast as the price of college. No matter how much a college charges, it seems, some bright financial innovator somewhere, in either the public or the private sector, is going to be able to find a way to lend prospective students the money. As a result, colleges, especially when they’re in the private sector, can charge pretty much whatever they like — and, unsurprisingly, they end up doing exactly that.

At some point, by definition, college must become a bad deal, at least for some people. Even at a cost of $0, college is going to do you precious little good if you’re, say, illiterate: the opportunity cost alone is meaningful. And the more expensive that college gets, the less of a good deal it becomes. Especially for the large minority of students who end up dropping out: nearly all of them would have been better off never going to college in the first place.

But the math is complicated: the only thing which has been rising faster than college tuition costs is the wage premium that college graduates receive over those without a degree. A degree is becoming more important, not less, in our digital economy. And so while the cost of going to college is rising, the cost of not going to college is, arguably, rising even faster.

There’s no doubt that colleges do seem to be flabbier, when it comes to controlling costs, than they have been in the past: those ubiquitous climbing walls are indicative of a broader arms race in terms of non-academic amenities. There’s a real problem here, surrounding the way in which, at the margin, universities have very little incentive to control costs. Quite the opposite, in fact: in an area where outputs are incredibly hard to measure, there’s a huge temptation to just measure inputs instead, and work on the assumption that the more money you’re spending, the better the education your students are receiving.

But McArdle doesn’t spend much time wondering about how to change universities’ spending behavior: instead, she concentrates on students’ borrowing behavior. And of the two, it seems to me that the borrowing is more rational than the spending. “It’s very easy to spend four years majoring in English literature and beer pong and come out no more employable than you were before you went in,” McArdle writes — but that’s only true if you somehow contrive to drop out of college at the very last possible minute. McArdle talks a lot about the limits of credentialism, which are real, but the fact is that a college degree gets your foot in a lot of doors, these days, which would otherwise remain shut.

And even if you do work your way up the career ladder, that college degree is going to help you, years after you get it, in ways you probably don’t even realize — unless you don’t have one. I can think of two people, in particular, who work alongside college graduates in large organizations with deeply-established HR departments. Both of them are incredibly competent, and would naturally have risen much higher up within their organizations, were it not for the fact that they don’t have degrees. They’ve both been working for many years, to the point at which you’d think that whatever they did or didn’t learn at college would be irrelevant. But it’s not. Degrees don’t just get you in to certain jobs, they shatter a glass ceiling which is very much still in existence for those who don’t have them.

McArdle’s also wrong that credentialism is a zero-sum game. For one thing, we’re part of a global economy, where many employers will hire only college grads — and if they can’t find those college grads in the US, they’ll find them in Ireland or Israel or India instead. If you want lots of Americans to have lots of good jobs, it’s a simple fact that you want those Americans to have degrees: we can’t roll back the clock to a time when employers were happy giving career-track jobs to people without them.

The fact is that while this economy is undoubtedly tough for recent graduates, especially those with liberal-arts degrees, it’s much, much tougher for people who don’t have any degree at all. And as the economy recovers, the graduates will get better jobs, more quickly, than their non-college-educated peers. It’s a simple statistical fact.

The average amount of student debt per student in this country is large in absolute terms — about $30,000 — but is still a small price to pay for a lifetime of access to jobs and promotions which would otherwise be off-limits. It’s easy to rack up much larger debts than that, but most students don’t: they turn out to be rather more sensible, when it comes to debt, than many of the worriers give them credit for.

McArdle also seems unnecessarily worried about the public fisc:

A law passed in 2007 allows many students to cap their loan payment at 10 percent of their income and forgives any balance after 25 years. But of course, that doesn’t control the cost of education; it just shifts it to taxpayers. It also encourages graduates to choose lower-paying careers, which diminishes the financial return to education still further. “You’re subsidizing people to become priests and poets and so forth,” says Heckman. “You may think that’s a good thing, or you may not.” Either way it will be expensive for the government.

“Expensive”, here, is left undefined — but again, at the margin, what would really be expensive for the government would be to preside over an economy slipping ever further behind in terms of the proportion of young adults going off to college. We need more education, and better education, and cheaper education — we do not need less education. So when McArdle proposes apprenticeship programs in lieu of college, I worry, because they feel anachronistic to me. In theory, they might work. But in practice, they’re wholly unproven, and they’re incredibly hard to simply decree into existence.

So yes, college price inflation is something to worry about, as is the inexorable rise in student debt, both on a per-student basis and in aggregate. But the answer isn’t for people to start thinking that college is a bad deal. If you’re the kind of person who can read and understand McArdle’s article, and if you are reasonably confident that you can graduate from the undergrad program you’re applying to, then college is still very much a good deal. In fact, for most of the professions you likely aspire to, it’s downright necessary.