Opinion

Felix Salmon

Markets revert to common sense

Felix Salmon
Jun 20, 2013 22:33 UTC

John Abell has a good question for me: how could everything be selling off today? Aren’t the various different asset classes (stocks, bonds, gold) meant to be hedges against each other?

The simple answer is that although it would be great if that were the case, it isn’t — it never was. You do get a certain amount of diversification benefit by investing in a series of asset classes, but, as we all learned during the financial crisis, correlations have a tendency to go to 1 exactly when you don’t want them to. If you want to hedge your long stock exposure, you’re going to have to do that with some kind of short stock position: a long bond position, or long gold position, won’t help you when you most need help.

The interesting thing about today’s market action is not that the risk-off trade materialized in markets around the world, from the Australian dollar to local-currency emerging-market debt. Rather, it’s the lack of any flight to quality: Treasury bonds got whacked for a second successive day, with the yield on the 10-year rising more than 10bp to reach 2.42%. And gold fell almost 7% as well: the world’s oldest safe-haven trade wasn’t working today.

There’s something counterintuitive here: if money leaves one asset class, you’d think that it should turn up in another. You can’t have everything fall at once. But the fact is that you can. Volume was heavy today — but remember that, as always, the number of shares bought was exactly the same as the number of shares sold. What we really saw today was not a move out of stocks, or bonds, or gold, but rather a repricing within each asset class. Think of it this way: if the price of Damien Hirst paintings falls, that doesn’t mean lots of people are selling them. Quite the opposite. It just means that potential buyers aren’t willing to pay as much for such things as they used to.

Buy-and-hold investors can safely ignore everything that’s going on here, or possibly step up their buying pace if prices start looking increasingly attractive. Because the big picture here is that what we’re seeing is markets returning to normal — or, to be more precise, markets anticipating that, finally, almost five years after the crisis hit, a return to normal might be coming at some point in the foreseeable future.

“Normal”, here, just means a world where the Fed isn’t dropping money from helicopters; a world where global interest rates aren’t all stuck at zero; a world where real interest rates can’t happily sit in negative territory for years on end; a world where metals don’t have especial value just because they’re particularly shiny; a world, most broadly, where assets are valued based on fundamentals, rather than being based on capital flows.

At his press conference yesterday, Ben Bernanke reiterated his view that the way QE works is through simple supply and demand: since the Fed is buying up fixed-income assets, that means fewer such assets to go round for everybody else, and therefore higher prices on those assets and lower yields generally. In reality, however, the flow always mattered more than the stock: when the Fed is in the market every day, buying up assets, that supports prices more than the fact that they’re sitting on a large balance sheet. And even more important is the bigger message sent by those purchases: that we’re in a world of highly heterodox monetary policy, where the world’s central banks can help send asset prices, especially in the fixed-income world, to levels they would never be able to reach unaided.

Traders always try to skate to where the puck is going: if they see that the Fed is embarking on a round of QE, they’re going to start buying up assets so long as they’re cheaper than they will be at the end of that round. And similarly, once the Fed signals that it’s on its last round of QE and that from here on in monetary policy is only going to get tighter, they’re going to sell assets so long as they’re more expensive than they will be once money is no longer falling from helicopters.

As a result, the common thread which explains all of the different market moves over the past couple of days is that they’re all part of what you might call the “reversion to sensible” trade. If real rates are bizarrely low, they will rise. If the Australian currency is bizarrely strong, it will fall. If emerging-market debt has rallied to the point at which it no longer prices in all the idiosyncratic risks associated with buying assets governed by Ruritanian law and denominated in the Ruritanian currency, then it too will fall — a lot.

In the long term, this is a good thing: it means that markets are doing their primary job, which is price discovery. In the short term, of course, there will be disruption and volatility: it’s not going to be easy getting there from here. But if you’re an investor, rather than a trader, there’s nothing to worry about here. In fact, there’s a lot to welcome.

COMMENT

QE has had no impact on money growth; all of it is sitting at the Fed in the form of sterile excess reserves. Money growth, especially the broader aggregates, has been abysmal since 2008. This is due to credit contraction following the Minsky Moment. Money growth should pick up later this year if household credit starts to grow. QE is irrelevant to money growth and to economic growth.

Posted by nixonfan | Report as abusive

The minimum-wage stimulus

Felix Salmon
Jun 20, 2013 13:50 UTC

Nick Hanauer has a good idea today: raise the minimum wage to $15 per hour.

The minimum-wage intervention would kill a lot of birds with one stone: it’s a win-win-win-win-win-win.

First of all, most simply and most cleanly, it would immediately raise the incomes of millions of cash-strapped Americans — precisely the people who most need to be earning more than they’re making right now. A whopping 51 million people would benefit directly, along with 30 million who would benefit indirectly: these are enormous numbers.

Secondly, the cost to the government of putting billions of extra dollars into these workers’ hands would in fact be substantially negative: there’s a strong fiscal case for a $15 minimum wage. We currently spend $316 billion per year on programs designed to help the poor, with the lowest-income households receiving about $8,800 per year. Billions of those dollars would be saved as the workers in question saw their wages rise. And no longer would the likes of Walmart be able to take advantage of implicit government wage subsidies, whereby low-paid workers receive substantial top-up checks from Uncle Sam to supplement their direct income.

Thirdly, the move would constitute a huge economic stimulus program: Hanauer says that it would inject about $450 billion annually into the US economy every year. If you like massive stimulus but you don’t like the idea of the government paying for it, then a higher minimum wage is the program for you.

Fourthly, and crucially, a higher minimum wage would be good for employment. A $450 billion stimulus, delivered directly into the hands of the Americans most likely to spend it, can’t help but create jobs across the economy. Of course, as in any healthy economy, there will be a birth/death model: some employers will see demand soar, while others will see their costs rise and their margins shrink. But there’s empirical evidence to suggest that states which raise the minimum wage when unemployment is high — when there’s a lot of slack in the labor force — then you get faster job growth than in the country as a whole.

This is the particular genius of Hanauer’s suggestion: it’s especially effective right now, and we’re at the perfect point in the economic cycle to implement it. At the depths of a recession, a disruptive move like this can have unintended consequences. But the economy is growing now, albeit not as fast as anybody would like, which means the wind is behind our backs to a certain degree. The bigger economic problem is that employment hasn’t kept pace with economic growth: most of the gains in GDP have gone to capital, rather than to labor. A higher minimum wage would redress the balance somewhat.

Fifthly, insofar as a one-off hike in the minimum wage would be inflationary, that’s a good thing, and exactly what the economy needs. We’re well below the Fed’s target inflation rate right now, and the inflation which might result from this policy would give us a healthy short-term boost in the inflation rate, bringing down real interest rates in a world where the Fed is constrained by the zero lower bound. If you’re worried about the unintended consequences of heterodox monetary policy, then again, a rise in the minimum wage might be very helpful indeed in terms of weaning the Fed off QE.

Finally, there’s the global context. There are surely some US jobs which simply aren’t economic at $15 per hour, and those jobs will end up being lost. (In aggregate, as I say, raising the minimum wage is probably good for employment, but the extra jobs at employers taking advantage of all that extra spending aren’t going to be in the same places as the jobs lost at employers who can’t afford to pay that much.) But the point here is that the US has already done a spectacularly good job of exporting most of its exportable low-wage work. As Hanauer says, “virtually all of these low-wage jobs are service jobs that can neither be outsourced nor automated”. As a result, raising the minimum wage will result in many fewer job losses now than it would have done a couple of decades ago.

Of course, given Congressional dysfunction, there’s zero chance that this will happen. But I can easily imagine someone like Ben Bernanke reading Hanauer’s column and dreaming wistfully about how great it would be if we lived in a country where such things were possible. If we want economic stimulus, higher growth, higher employment, and higher inflation — which we do — then raising the minimum wage is exactly the kind of thing we should be doing.

COMMENT

The problem is that Felix, like a lot of people, are ivory tower folks on this. A $15 min MIGHT work in the Northeast and West Coast, but would cause catastrophic destruction in the rural Midwest and South. And, I wish anybody else who “expertly” comments on this issue would not do so until having lived in said areas themselves. (I’m assuming Felix hasn’t.)

This lack of informedness then carries elsewhere. I’ve had an Australian comment on my blog who simply doesn’t understand why this won’t work.

Posted by SocraticGadfly | Report as abusive

A new home for Counterparties

Felix Salmon
Jun 19, 2013 22:27 UTC

There are some of you, I know, who don’t subscribe to the Counterparties email newsletter, and read it instead on this blog. That’s OK, I don’t hold it against you. But we’ve moved the newsletter off this blog now: Counterparties now has its own blog, to complement the website. The blog features the newsletter, every day; the main Counterparties website is still updated continually over the course of the day.

If you go there, you’ll sometimes find juicy extras: today, for instance, alongside Ben Walsh’s letter on the subject of the Fed decision, you’ll also find Shane Ferro’s excellent explainer on oil-price fixing. Do check it out!

COMMENT

And What happens to the thousands of small business that collectively employ the majority of Americans and already run at thin 5%-10% net profit margins but make up the vast majority of service providers in our economy? Much of their cost is labor. Many small businesses out there that provide necessary services (i.e. Heating & Air Companies, Plumbing Companies, and other small service businesses)have narrow profit margins as it is. Imagine what it would do to their overall costs and margins if they had to pay all employees $15/hour. They would go out of business, and there would be no one left to pay the higher wages. This idea, while it sounds great theoretically, is ludicrous.

Posted by CasualEconomist | Report as abusive

Citibike: A victim of its own success

Felix Salmon
Jun 19, 2013 14:30 UTC

There’s good news on the CitiBike front. The big problem I wrote about on June 5 — the way in which entire stations would regularly go dark, refusing to dispense or accept bicycles — seems to have been solved. This is true anecdotally: I haven’t encountered it in the past few days, and neither has anybody I know. And WNYC has now published empirical data showing the same thing. Here’s their pretty interactive chart of stations which have been inactive for more than 4 hours straight between 8am and 8pm:

CitiBike isn’t talking — as WNYC puts it, “New York City continues its information blackout” on the subject of what on earth is going on with the scheme. Every so often it will release an upbeat statistic, but neither the press office nor the social-media presence is being remotely helpful when it comes to talking broadly and openly about what’s going on. Here’s the NYT, on June 11:

The Bloomberg administration has refused to quantify, or even elaborate on, the rash of problems plaguing its system, which has had technical errors of a magnitude never experienced by bike-share programs in other major American cities.

As a result, all we can do is hazard educated guesses. And my theory of what’s happening is actually the same as it was on June 5. My theory then was that the problem was the result of “some kind of failsafe mechanism which shuts down an entire station when some reasonably common thing happens”. Since then, not only do the stations seem to be much more reliable, but I’ve also — anecdotally — seen a significant rise in the number of docked bikes which feature a lit red LED, indicating that particular bike is not available to be rented.

In other words, it seems that when the system launched, a bad bike would cause a whole station to go dark; now, it just disables that particular bike. That’s a significant improvement in a short time, especially given that, as WNYC said on June 11, “it turns out the nation’s largest bike share is beta testing the entire software system”.

Which is not to say that everything is running perfectly. Here’s a screenshot of the official CitiBike map which I took yesterday late morning, showing all the empty bike stations in my neighborhood:

Not all of these fully-light-blue stations were completely empty: some of them, if you selected them individually, would show one or two bikes in them. But invariably those few bikes had red lights or were otherwise broken (flat tires, missing seats, that kind of thing).

This isn't a software problem. Rather, this is a problem common to all bikeshare schemes, but which is more extreme in NYC for various reasons. The East Village, for instance, is a largely residential neighborhood; lots of people want to bike from there, in the mornings, to go to work or just about their day, but few people want to bike to there, in the mornings. As a result, the bike stations empty out quickly.

This is a problem which can't be fixed by debugging software; indeed, it can't even be fixed by installing more bike stations. NYC's bikeshare scheme might not cover a huge amount of the city, but where it exists, it has the highest station density of any municipal bikeshare scheme in the world. And as station density increases, people are more likely to grab a convenient bike and ride it to somewhere more central -- even when they're just riding a few blocks to the nearest subway station.

In cities like London and Paris, that happens less frequently. In those cities, there's more of a distinction between the commercial center and the residential suburbs, and the bike stations are much more thinly scattered in residential neighborhoods than they are in NYC. As a result, they're less convenient, and you're unlikely to use them to travel to the nearest subway station, just because your closest bikeshare station is likely at your nearest subway station.

So while Paris might be able to get away with trucks bringing bikes back out to more distant stations from the center in the evenings, New York's CitiBike trucks are going to have to be much more active during the day, and especially during the mornings, shuttling bikes back to residential neighborhoods from commercial areas like Rockefeller Center where the bike racks fill up early on. That kind of thing is a significant ongoing expense, and it's unclear to what degree it's built into the CitiBike budget.

Citibank has signed its contract, now, and probably doesn't feel any particular need to throw more money at the scheme to make it better. But since the bike-share scheme is clearly extremely popular, maybe now's the time for the city itself to come in and provide a bit of cash to make things work as smoothly as possible. So far, CitiBike has cost NYC taxpayers nothing. It might be time for that to change.

Update: A tipster emails to say that the CitiBike server was crashing "several times per day" up until last week -- a problem which has now been solved. But the hardware is a different issue: apparently the batteries in the kiosks have all been replaced at least twice so far, and a lot of rides are failing to be closed out, forcing the operator to do so manually for all rides over an hour. (If you return your bike to the rack and it buzzes, but the light doesn't turn green, then it has not been properly returned, and anybody can just remove it from the station and pedal away.)

COMMENT

Every time I look at the map, all of the bikes are on the Lower East Side. Right now it looks like it would be hard to park a bike in Felix’s neighborhood.
Meanwhile, there’s nothing in Midtown between Lex and 7th.
Other bike shares periodically redistribute bikes. NYC better get savvy to that soon, or this is going to become the Lower East Side Commuter System.

Posted by RZ0 | Report as abusive

Why Detroit’s art must stay

Felix Salmon
Jun 18, 2013 20:35 UTC

Let me clear this up so that Donn Zaretsky can have no doubt. When I say that the Michigan attorney general is “absolutely right” that the art collection of the Detroit Institute of Arts cannot be sold to satisfy the city’s financial obligations, I mean that he’s right both legally and normatively.

Zaretsky is a longstanding critic of the laws and norms surrounding deaccessioning — the term of art for when museums sell off parts of their collections. Earlier this month, he gained a high-profile convert in the person of Virginia Postrel, who made the case that DIA should sell its paintings “to satisfy Detroit’s creditors”, just so long as the paintings remained in an American public museum somewhere. In the conversation which followed, Tyler Cowen had a certain amount of sympathy for Postrel while saying that such an action would essentially ratify the end of civilization in Detroit; he also worried that such an action might have a chilling effect on future art donations to museums. And Marion Maneker proposed that DIA should essentially become an art-lending library, making large sums of money from sending its masterpieces out on worldwide tours.

I’m a fan of the lending-library model, in principle — although no such lending institution really exists. Only Eli Broad ever really suggested it in a serious manner, and he ended up doing such a big U-turn on the idea that he’s basically now attempting to become a borrower, rather than a lender, of great art. In England, regional art museums are weaning themselves off government support by sending art on loan to China — but DIA has already faced the issue of receiving no government support, and managed to solve it in a particularly democratic and elegant manner. (Basically, it receives up to $23 million a year from three local counties, in return for giving those counties’ residents free admission to the museum.)

The point here is that decisions about selling art can and should only be made at the museum level. Back in 2008, for instance, after the University of Iowa was severely damaged by floods, there was a brief suggestion that maybe the university should sell off Mural, its masterpiece by Jackson Pollock. And while there might be arguments that this particular masterpiece belongs somewhere else, it was always clear (to me, at least) that any such decision should not be made by the Iowa legislature.

Even the threat that Detroit might attempt to sell the art in DIA is causing serious harm to the museum, which is now spending more management time on hiring bankruptcy lawyers than it is on programming — despite the fact that the museum’s finances and attendance are both pretty healthy.

The Michigan AG has declared that “the art collection is held in charitable trust for the people of Michigan and cannot be sold for purposes other than the acquisition of art”. That’s pretty unambiguous, legally.* As for the norms involved, the one thing which is conspicuous by its absence from Postrel’s argument (or anybody else’s, for that matter) is any explanation of why Detroit’s unsecured creditors should have more right to these paintings than the museum does, or than the people of Michigan do. There’s no lien on this art: the whole point of being an unsecured creditor is that you can not take ownership of any particular asset if there’s a default. It’s conceivable that there are certain assets a bankruptcy judge might force Detroit to liquidate in Chapter 9 proceedings — but it’s pretty much inconceivable that those assets would include paintings in DIA.

So why does Postrel think that a little local insolvency is both a necessary and sufficient condition to break up one of America’s great municipal art collections? When she advocates the voluntary sale of kidneys, I’m with her — everybody benefits, in that case. But what she’s proposing in Detroit is not voluntary at all: she’s proposing that DIA be forced, against its will, and against the clearly expressed will of its citizens, to part with deeply beloved art works. In return, it would get — well, nothing, really: all the proceeds would end up being pocketed by the insurance companies which wrapped Detroit’s municipal bonds.

It’s easy to see how art-market types like Zaretsky and Maneker love the idea of freeing up a lot of the art which is currently in museums. Most of the money in the art world comes from buying and selling art, but nearly all of the greatest art the world has ever seen is in museums, where it’s never going to get sold. Back in 2006, there was a case for creating a new norm, whereby museums could sell art only to other museums, so as to “allow for a more comfortable distribution of resources between cash poor asset rich institutions and asset poor cash rich ones, allowing them to trade to mutual advantage”. But since then we’ve seen dozens of major art collectors create their own museums, to the point at which the distinction between a museum and a private collection has become impossibly muddied.

And ultimately there’s something to be said for the idea that there are some things money can’t buy. Most of the discussion on this topic is highly respectful of international boundaries, interestingly enough — Postrel suggested that DIA’s works be sold to an American museum, rather than to, say, a cash-rich institution in the middle east. And I doubt she would support the idea that Greece should pay its debts by selling its antiquities to foreign collectors. But if we’re going to say that art should stay within the US — even when it was created in France — we’re basically saying that it should not, after all, go to the institution with the deepest pockets, and that national interests trump financial concerns. Well, there are municipal interests, too: the art was bought by Detroit, not by the federal government.

It’s fantastic that Detroit has a world-class art collection, and that its art doesn’t naturally gravitate towards the richest cities in the country. Postrel says that Los Angeles and Dallas-Fort Worth have institutions which fall under the general rubric of being “asset poor cash rich”, and which are natural homes to DIA’s collection — but the fact is that both cities have large amounts of great art already. Do you find the Getty’s collection a little thin? Just go down the hill to LACMA, and you’ll find enough world-class art to last you a month.

Putting restrictions on the sale of art will never have great appeal to libertarians like Postrel, or even Cowen — it’s the art-world equivalent of rent control. In that sense, Detroit being able to hold on to its art is a bit like poor San Franciscans being able to hold on to their Mission apartments. It might not be economically efficient, but it’s a sign that you won’t ever be able to buy a masterpiece through the tactical acquisition of distressed municipal debt. Detroit is not rich financially; it probably never will be again. But it’s rich in art. And no bankruptcy judge can take that away from it.

Update: Donn Zaretsky points out that my argument is a bit circular here: I’m quoting the Michigan AG to support my contention that the Michigan AG is right.

COMMENT

When a corporation defaults on its bonds, it assets become the property of its bondholders. I don’t care what Detroit “collected”, it’s not theirs anymore.

Posted by nixonfan | Report as abusive

Detroit takes aim at its pensioners

Felix Salmon
Jun 17, 2013 15:21 UTC

If you want to wade through some unutterably depressing reading on this Monday morning, you should spend some time with the official Detroit Proposal for Creditors. It starts by noting that the city’s per capita income, averaged over its 684,799 residents, is just $15,261 per year. (That’s less than half the income of neighboring Livonia.) Auto insurance alone eats up a good $4,000 of that, for residents with a car.

And then comes the litany of municipal woes: Detroit has the highest violent crime rate of any major US city, at five times the national average; there were 344 murders in 2011, of which just 39 were solved. Right now, the average response time, if you put in an emergency call to the Detroit Police Department, is 58 minutes.

Detroit’s infrastructure is crumbling: 40% of its street lights are out of order, and it has 78,000 abandoned and blighted structures, of which 38,000 are considered dangerous buildings. Those buildings account for a large proportion of the 12,000 fires Detroit has every year. At the moment, firefighters are instructed not to use the hydraulic ladders on their firetrucks unless there is an immediate threat to life, because the ladders have not received safety inspections for years. Detroit also has just 36 ambulances, of which generally no more than 14 are in operation at any given time. And in terms of the city’s IT infrastructure — well, you can probably guess; suffice to say that a recent IRS audit characterized the city’s income tax system as “catastrophic”.

As far as Detroit’s balance sheet is concerned, there is $9 billion of debt, excluding pension liabilities, and also excluding healthcare and life insurance obligations which are calculated at roughly $6 billion. Debt service in 2013 is projected at more than $240 million, or about 22% of total revenues. Worryingly, under the section of the proposal headed “Realization of Value of Assets”, one finds the priceless collection owned by the Detroit Institute of Arts:

Bill Schuette, the Michigan attorney general, has declared in no uncertain terms that DIA’s collection is off-limits when it comes to satisfying the obligations of the City of Detroit; he’s absolutely right. But you can be sure that there will be arm-twisting all the same: Detroit’s emergency manager, Kevyn Orr, doesn’t seem to think of DIA as anything beyond a store of recoverable value.

He wants to write down some of Detroit’s debt, as well — although far from all of it. Cate Long has a good round-up of how various bondholders will be treated under his proposal; she concludes that he’s treating bondholders in good faith, but that he’s behaving less fairly towards retirees. (It’s a combination you might expect, given that Orr was appointed by a Republican governor; it’s basically the opposite of how the Obama administration treated the bankrupt Chrysler and GM.)

It’s worth noting that even though Detroit is defaulting on millions of dollars of debt obligations, bondholders in general are not going to be hit, thanks to the wonders of third-party guarantees. For instance, Bloomberg reports that the 2028 general-obligation bond is currently trading at 96 cents on the dollar, “the lowest since March 2012″ (it’s backed by Assured Guaranty).

As a result, the real pain here is going to be felt by two main groups. The first is the companies who provide wraps for municipal debt — companies whose muni arms somehow managed to escape the financial crisis largely unscathed, and which had to expect some losses on all the debt they were insuring. It’s hard to feel any sympathy for them. But the second group — Detroit’s municipal retirees — had much less choice about taking on their unsecured exposure to the city’s finances. Looking at the straits Detroit is in, the bond default makes sense. But it’s not being driven by stratospheric pension costs, and the swipe at pensioners does look rather gratuitous.

As Long says, “this is merely an opening gambit by Orr”. Let’s hope that Detroit’s unions, as well as the people representing non-unionized workers, fight him aggressively. Because Detroit’s population is poor enough as it is. Those pension payments are needed — and what’s more, they will overwhelmingly be recycled straight back into the local economy. Unlike bond coupons.

COMMENT

Total chaos in Detroit. Obama is taking the nation down the very same path. And nobody seems to care. The art collection should be sold to help satisfy all claims.

Posted by willieloman | Report as abusive

Score the unscored!

Felix Salmon
Jun 17, 2013 07:02 UTC

I went to two conferences in the past couple of weeks: the Underbanked Financial Services Forum, in Miami, and the Clinton Global Initiative’s America conference, in Chicago. At the former, I was introduced to a company called Cognical, which pitched itself as a tool which will allow lenders to lend money to a much broader group of people than they currently accept.

Cognical was set up, at least in part, to address the Catch-22 built in to the US lending system: you can’t get credit if you don’t have a credit score, and you can’t get a credit score until you’ve been extended some credit. The result is a system where many borrowers, especially immigrants and the poor, find themselves forced to pay through the nose to loan sharks, pawn shops, payday lenders, installment lenders, and other institutions which range from the consumer-unfriendly to the downright predatory.

It’s hard to wade through the jargon on the Cognical website. Exempli gratia: “Leveraging our experience with machine learning algorithms and unstructured big data, we assess and transform application variables in specific ways to expand the data and its predictive value.” But the general idea is pretty simple: rather than just look at credit score, lenders can use Cognical to mine enormous quantities of data, in the hope and expectation that buried in there somewhere the firm will be able to find patterns which can predict whether or not any given individual is going to repay a loan.

Cognical claims spectacular results, but I’m not completely sold: with big data comes a massive rise in spurious correlations, and in any case it’s not like the borrowers in question are leaving a massive data trail behind them in the first place. On top of that, even if Cognical is doing amazing work, all of it will be for naught unless and until someone happens to apply for a loan from one of Cognical’s clients.

As a result, what you really want, it seems to me, is two things. First is a dataset which is obviously germane in terms of throwing light on an individual’s ability to pay her obligations in a timely manner. and second is a way to get that dataset into the hands of the institutions which really matter, when it comes to this particular game: the three big credit bureaus, as well as FICO.

Wonderfully, that is exactly what a bunch of us, including Sasha Orloff of LendUp, ended up talking about at the CGI conference the following week. At the moment, it’s only an idea, but I’m keeping my fingers crossed that the idea is so good, and so obvious, that it’s going to end up being put into effect at some point.

What’s the dataset? It’s not a bunch of Facebook likes and Twitter favorites, the kind of inchoate data only Max Levchin could love. Rather, it’s a big and simple obligation: rent payments. It’s pretty obvious that if you’re good at making your rent payments on time every month, you’re also more likely to pay other obligations in a timely manner. And so if rent payments were reported to the ratings agencies, that would give them valuable information about the group currently known as “thin files” — people about whom there’s too little data to make a determination as to creditworthiness.

The place to start is HUD, along with the enormous housing agencies in cities like New York and Chicago. As public agencies, they have every reason to want to improve the lives of the people they’re renting apartments to — and one easy way of doing that would be by improving those people’s access to affordable credit. (And there would be a financial benefit for the agencies, too: if tenants knew that their rent payments would be a part of their credit score, they might be more inclined to pay on time.)

The ratings bureaus are weirdly low-tech: they don’t exactly have convenient APIs which allow anybody to upload payment datasets. Instead, they use a clunky old thing called Metro 2, which was designed back when people were mainly worried about Y2K issues. Still, it’s possible to write a program which converts any structured data into Metro 2 and then uploads it to the ratings bureaus — Orloff has done it, and he says he would be happy to donate the code to any open service or housing agency which wanted to report rental information.

Of course, once the rental information was uploaded to Experian and Equifax and TransUnion, they would have to actually do something with it — as would FICO. That might take a while. But Experian says that it’s already incorporating rental data into its own scores, and certainly landlords would be very interested in a FICO score which included such data. The demand is out there, and if the information is just dropped into the companies’ laps, it would be hard for them to simply ignore it.

The goal here is, simply, to score the unscored. Such people might not have high FICO scores, at the beginning, especially if their history of rental payments is spotty. But score beats no score, and once you have one, you can start working to improve it. What’s more, people who have been diligently paying rent on time for years, and who have sensibly be avoiding debt, might actually end up with high FICO scores rather than none at all.

It doesn’t need to end with public housing agencies, of course. The government could set up a central system where all landlords could, if they wanted to, upload the rental information of their tenants. And once such a system was set up, it could conceivably be extended beyond rent payments, to include things like utility bills as well. The idea being that when a company like FICO attempts to ascertain creditworthiness, all information has to have some value. And the more information that can be obtained about people who haven’t formally borrowed much money in the past, the more likely it is that they’ll be able to get a score. Which is a very useful thing indeed, in today’s economy.

COMMENT

“As a result, what you really want, it seems to me, is two things. First is a dataset which is obviously germane in terms of throwing light on an individual’s ability to pay her obligations in a timely manner. and second is a way to get that dataset into the hands of the institutions which really matter, when it comes to this particular game: the three big credit bureaus, as well as FICO.”

ERRRRR

The institutions that really matter are BANKS! The ones who lend the money and face the risk! Giving it to credit bureaus means giving it to an intermediary; who will they finally give it to? BANKS. So giving it to credit bureaus is just adding an unnecessary rise in the cost by giving a mark-up to these intermediaries. The reason for Credit Bureaus to exist is the lack of information other than credit history; if we finally find alternative information that can replace or even better, outperform credit history, then Credit Bureaus have their days numbered as the de facto providers of information to assess credit risk of new applicants for banks.

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Counterparties: Unpaid internship

Ben Walsh
Jun 17, 2013 05:26 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.

Good news for America’s unpaid army of latte-fetchers and lunch-order-takers! A Federal district judge in Manhattan has ruled that Fox Searchlight Pictures violated state and federal labor laws by using unpaid production interns on “500 Days of Summer” and “Black Swan”.

The ruling in the “Black Swan” case could have a big impact for the estimated 1 million American college students who work in unpaid internships. Ross Perlin, author of the 2011’s “Intern Nation”, says the decision could end decades of what’s effectively “wage theft”:

At their peak following the 2008 crash, unpaid internships were increasingly crowding out paid ones and replacing regular positions altogether, in the process turning the entry-level job into an endangered species. It was “a capitalist’s dream,” as sociologist Andrew Ross put it: free white collar labor made to seem almost entirely normal.

Dylan Matthews — a former intern himself — writes that the ruling has the effect of turning a 2010 Department of Labor fact sheet into established law: the judge in the Black Swan case said Searchlight’s internships violated all six of that document’s criteria on what an internship should be. Rebecca Greenfield — whose LinkedIn profile suggest that, yes, she’s been an intern — talked with both of the plaintiffs. Both were well-off enough to afford to perform free labor: one got money from his mother to live in New York and work for free; the other lived off his savings from a previous job at AIG.

That unpaid internships favor the wealthy isn’t a new argument, but recent legal scrutiny hasn’t gotten rid of the practice. ProPublica is running an investigation into the intern economy — there’s even a Kickstarter campaign to help them hire an intern to cover interns. The organization’s research intern has held six internships, both paid and unpaid, and writes that she’s struggled financially since finishing grad school in 2011. She does, however, say that she’s both learning and getting paid at ProPublica.

Matt Yglesias, who earned valuable intern-ish experience getting coffee at Rolling Stone, worries that enforcing minimum wage labor laws for internships will just push people into expensive grad schools. “Erecting extremely sharp walls between ‘education,’ ‘training,’ and ‘work’” doesn’t make a ton of sense,” he writes. (Though it’s much easier to put scare quotes on “work” when you have it.) In the end,Yglesias nods approvingly at arrangements like Germany’s vocational training programs, where students do, in fact, get paid.

This won’t be the last intern lawsuit. Former Hearst interns filed their own suit last month. Yesterday, two former magazine interns at noted intern factory Conde Nast got in on the act. One former intern at W, Condé’s high-end fashion book, described her 10-hour days as being like “The Devil Wears Prada”, but worse. That could describe every internship ever. — Ryan McCarthy, who is not an intern, either paid or unpaid, but is a former intern, and, after a few beers, will probably tell you he’s probably still bitter about the whole thing.

On to today’s links:

Ugh
Detroit will default on its unsecured debt – Reuters
Some positive news about Detroit – BI

Alpha
Let’s all invest in San Francisco parking spots! – AP

Leaders
American CEOs remain “oblivious to political reality” – Bloomberg

Right On
The best response to the failed policies of austerity: full employment – Guardian

Fails
The 50 worst charities in America – Tampa Bay Times

Servicey
How to avoid tax avoidance – Reuters

Data Points
In 1956, Argentina’s annual per-capita beef consumption was 222 pounds – NYT

Oxpeckers
The BBC spent $152 million on a failed CMS – Economist

Hilarious
TheStreet.com says Yahoo might buy a company that doesn’t exist anymore – Valleywag

And, of course, there are many more links at Counterparties.

COMMENT

Hey, folks, not all quotes are “scare quotes”. Yglesias isn’t disparaging of education, work, or training; in the context, it’s pretty clear that he’s referring to the labels (and the idea that they are distinct), hence the quotes.

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Counterparties: Passing Abenomics

Jun 13, 2013 22:43 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.

The world is questioning the effectiveness of Abenomics — the economic policies advocated by Shinzō Abe, the prime minister of Japan. Abe’s plan to revitalize the country’s sluggish economy seemed to be working, as reflected in the Nikkei which soared to around 15,100 in May from 10,395 in December. That has changed: the Nikkei fell 7% yesterday and is down 20% since its May high, closing at 12,445 Thursday. Swiss hedge fund manager Felix Zulauf said Japan would  “cause the next big global crisis”.

The reality is it is probably too soon to tell whether Abenomics is working. The prime minister’s three-pronged plan is certainly ambitious. In order to do “whatever it takes” to hit a 2% inflation target, the Bank of Japan is flooding the markets with money and the government has implemented major fiscal stimulus. Last week, Abe proposed a growth strategy that includes a target to lift per-person income by 40% over 10 years and “a series of deregulated and lightly taxed zones around the country”. Abe has said this is the most important of the three prongs, but The Economist notes that the announcement “left many disappointed by its timidity”.

As far as growth goes, David Keohane points out that “it’s hard to escape the effects of demographic determinism.” Japan has an aging population, a very low fertility rate, and Abe has not yet proposed a great solution to fix this.

What Japan does have going for it is low unemployment, although as Noah Smith has pointed out, a lot of that has to do with falling real wages and women opting out of the labor force. But Joseph Stiglitz is still bullish on Japan, noting that “we see that even after two decades of ‘malaise,’ Japan’s performance is far superior to that of the United States”  – if you consider a broader range of factors like inequality and life expectancy. The Nikkei is still up almost 20% since the beginning of the year.  – Shane Ferro

On to today’s links:

The Fed
Ben Bernanke would very much like you to stop overreacting to what Ben Bernanke says – Jon Hilsenrath

Ugh
With 3 unemployed workers for every job opening, “the labor market is still pretty much murder” – The Atlantic

New Normal
The biggest economic mystery of 2013: What’s up with inflation? – Matthew O’Brien
Everyone gets a college degree! (sort of) – NYT

Reversals
Junk bonds and treasuries: negatively correlated no more – Sober Look

Comparisons
How the music industry explains American inequality – Alan Krueger

Alpha
The problem of investing in the US Postal Service – WSJ
Rival hedge funds are pretty excited about SAC’s problems – Reuters

Big Brother Inc.
Washington’s double standard: “Secrets are sacrosanct until officials find political expediency in leaking them” – Jack Shafer
The secrecy industrial complex – David Rohde

Takedowns
Josh Barro takes down CAP’s recommendations for the economy – Josh Barro

Charts
The geography of hunger in America – Atlantic Cities

Wonks
Fiscalists vs market monetarists, a bloggy taxonomy – Cardiff Garcia

Surveys
CEO’s aren’t that excited about the US economy – Business Roundtable

And, of course, there are many more links at Counterparties.

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