Felix Salmon

America’s rental crisis

Felix Salmon
Dec 10, 2013 00:13 UTC

Earlier today, a union organizer from Oakland named Max Bell Alper successfully (if briefly) trolled the internet with a stunt showing him shouting at a protestor. The protest was against Google’s buses: they use municipal infrastructure, but don’t giving anything back in return. Alper’s monologue, delivered in character as an obnoxious Google employee, went like this:

I can pay my rent. Can you pay your rent? … Well then, you know what? Why don’t you go to a city where you can afford it? This is a city for the right people. Who can afford it. If you can’t afford it, it’s time for you to leave. I’m sorry, I’m sorry. It’s time for you to leave. If you can’t pay your rent, I’m sorry. Get a better job.

OK, it’s not exactly Tony Award-winning stuff. But the attitude being skewered here — the idea that people who can’t pay their rent deserve no sympathy and should just move out of sight and out of mind — is actually deeply American.

The problem is simple arithmetic, as laid out in a sobering new report from Harvard University:

In 2011, 11.8 million renters with extremely low incomes (less than 30 percent of area median income, or about $19,000 nationally) competed for just 6.9 million rentals affordable at that income cutoff—a shortfall of 4.9 million units. The supply gap worsened substantially in 2001–11 as the number of extremely low-income renters climbed by 3.0 million while the number of affordable rentals was unchanged. Making matters worse, 2.6 million of these affordable rentals were occupied by higher-income households.

When you have 11.8 million households chasing 4.3 million affordable rental units, no amount of moving out of town is going to solve the problem, which is only getting worse, thanks to the way in which inequality is getting worse in America. Here’s the chart, which shows the inexorable rise of rents, even as the median income of renters has declined dramatically since 2000:

The result is the next chart: half of all renters now spend 30% of their income on rent, and a quarter spend more than 50%. This is an unprecedented squeeze on the people who can least afford the shelter they need.

The squeeze hits all non-rent expenses, naturally, including food: households in the lowest expenditure quartile spend $350 per month on food if they’re in affordable housing, but just $200 per month if they’re part of the group with severe rent-cost burdens. That works out to about $6.50 per day — and we’re talking millions of households, here. Overall, there are 21.1 million cost-burdened renters in America, including 83% of people with incomes under $15,000 per year.

In general, renting is a good thing: it improves labor mobility, and avoids forcing cash-strapped households to put an enormous proportion of their net worth into a single unreliable asset. But even as the number of renters has increased in recent years, the proportion of renters receiving any kind of government assistance has steadily declined. The result is that America as a whole is turning into a version of San Francisco — a place where the privileged rent expensive apartments, and not-so-secretly wish that everybody else would just go away. Annie Lowrey’s story today says it all:

“We’ve seen a huge loss of affordable housing stock,” said Jenny Reed, the policy director at the D.C. Fiscal Policy Institute. “We have lost 50 percent of our low-cost units over the past 10 years, and at the same time, the number of high-cost apartments, the ones going for more than $1,500 a month, more than tripled.”…

“Builders always are aiming at that higher end,” said Jed Kolko, the chief economist at Trulia. “And eventually, as those new units age, they trickle down to lower-income borrowers.”

But not now. With demand surging, inventories are shrinking, vacancy rates are falling and rents are rising at the low end.

The government, of course, is part of the problem, rather than part of the solution: sequestration, in particular, has hit housing programs (which weren’t exactly ubiquitous to begin with) very hard indeed. But if the government won’t step in here, the market is going to be no help for the foreseeable future. The economic recovery of the past five years has left millions of Americans behind — Americans who, increasingly, simply can’t afford to make rent any more. Those Americans are never going to be a source of great profits for private-sector developers. But getting them safely housed isn’t just a moral issue. Failure to find them affordable housing will, in the long term, cost us even more.


This is a pretty awesome article. One of those articles that you find after weeks of searching. And I am grateful that all of that searching was worth it. Because this article is pretty damn awesome. luis souto

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Adventures in art-market commodification, James Stewart edition

Felix Salmon
Dec 9, 2013 06:50 UTC

When I wrote my piece last week about art-market reporting, I didn’t name names, I was just trying to lay out some basic rules. And while I’m happy to engage in the occasional snarky tweet about some of the bad reporting out there, I generally won’t make an entire blog post out of such complaining. Because it’s boring, and also because it’s invidious to pick out just one bad article from hundreds or even thousands.

And yet, I’m going to make an exception for James Stewart. Mainly because anything I say about him is going to be water off a duck’s back: he’s one of the greatest financial journalists alive, and and will suffer no harm from this post. But also because the assumptions underlying his latest column are worth exposing: they speak volumes about the way in which the perception of art and the art market has changed — and has deteriorated — in recent years.

The headline on Stewart’s column is “Record Prices Mask a Tepid Market for Fine Art”, and there’s an accompanying chart which comes with the headline “Art Market in the Doldrums”. This, I guess, is what a tepid market is supposed to look like:

Screen Shot 2013-12-08 at 2.00.46 AM.png

This is a pretty crazy chart, on a number of different levels. Firstly, it shows the S&P 500 as gaining 175% since the end of 2002, which it didn’t. There are various different ways of calculating the number — this S&P 500 return calculator puts it at 148%, for instance, while the S&P 500 Total Return Index rose 156% over the period in question. But I can’t see how you get to 175%. (The nominal S&P 500 index rose almost exactly 100% over this period.) What’s more, measuring stock prices from the end of 2002 is itself a way of putting a pretty heavy thumb on the scales: that’s the very bottom of the dot-com bust.

Against the problematic S&P 500 line, Stewart has charted the even more problematic Mei Moses index, a creature of massive survivorship bias. The Mei Moses index looks at auction pairs: works of art which have been sold at auction twice. This method gives a very good idea of what has happened to the value of any given work of art over time, but it’s a very bad way of determining what has happened to the art market as a whole, since the kind of works which get auctioned multiple times are decidedly not representative of the broader art world. The auction houses tend to want only the hottest art, and then on top of that the index is going to be massively weighted towards the kind of work which gets bought and sold quite frequently — exactly the areas where you might find a speculative bubble.

Still, if you have to try to quantify what’s happening to the value of art, the Mei Moses index is one of the least bad ways of doing so. The real problem here is the way in which Stewart directly compares the Mei Moses index with the S&P 500. If you just saw the red line on its own, you would be quite impressed: it shows prices doubling over the course of a decade, which is (or should be) pretty amazing for art. After all, we’re talking about objects which haven’t changed for, in some cases, centuries: why should they double in value now? Very few other physical objects can be expected to do such a thing; if houses do it, then that’s prima facie evidence to start getting worried about a nasty bubble.

More to the point, the S&P 500 is an investable index of publicly-traded stocks, representing trillions of dollars of wealth. It’s designed as an investment vehicle, and millions of people around the world put their money into it just because they think that’s the best purely financial investment decision they can make. The Mei Moses index, by contrast, is not investable at all, and simply represents the degree to which art-lovers’ art collections might have appreciated in value over time. Art is not an investment in the way that the S&P 500 is, and all direct comparisons of the two have a way of invidiously changing the way we look at and think about art in general. Aesthetic value becomes subsumed into financial value, and the act of buying art becomes a subset of investing, which it never should be.

In any event, it’s pretty hard to see how a market which has doubled in a decade can be considered to be “tepid” and “in a doldrums”. So, how does Stewart do it? First, he says that “many works are selling near or below their low estimates or failing to sell at all”. This is a statement which is always true. After all, the estimates claim to be the auction house’s best guess of what a piece is worth, in today’s market; they’re also a way in which the auction houses try to persuade sellers to give up works for auction, and try to persuade buyers that the art in question is worth lots of money. In other words, there’s a strong upward bias to auction estimates.

Here’s Randy Kennedy, for instance, reporting on the way in which Christie’s is estimating the value of the works in the Detroit Institute of Arts: it’s a rare explicit admission, by the auction house, that its estimates are generally significantly higher than fair market value.*

The auction house determined the fair market value of the works, comparing them to similar ones that have sold recently. But Christie’s emphasized that auction estimates for the Detroit works — which auction houses use “to attract maximum bidding interest” — could be far different; such estimates would most likely be higher.

The inevitable result of setting estimates so high is that quite a lot of works will always sell at the low end of the estimated range, or not at all. What’s more, selling art is hard: we’re talking about unique objects, here, and an attempt to match each of those objects, individually, with the person who wants it the most and is willing to spend the most money to acquire it. An auction is one way of trying to do that, but it’s far from perfect. If the ideal buyer doesn’t hear about the auction, or doesn’t have the money on the day of the auction, then the resulting difference in price can be substantial.

Stewart, of course, never even tries to demonstrate that an increasing number of artworks are selling below their estimates, or not selling at all. I haven’t run those numbers myself, but I’d be prepared to wager that the proportion of auction lots falling into those categories is very stable, over time, or possibly even going down. Which means it can hardly be evidence of a “doldrums”.

Stewart’s next attempt is to look at the last two datapoints on the red line in his chart: the Mei Moses index “declined 3.3 percent in 2012,” he says, “and gained 2.2 percent through November”. Which is another way of saying that after surging to an all-time high in 2011, art prices have managed to remain at those all-time highs for the last two years, on massive (indeed, unprecedented) volume. Some doldrums that.

What we’ve seen over the past few years is ever-increasing quantities of art being sold at levels which would have been exceptional at any other point in history. We’re also seeing an explosion in the number of art dealers, the number of art fairs, and in general the size of the global art market. There’s nothing here to suggest a doldrums — unless you’re the kind of person who thinks that even the most extreme valuations for artworks will constitute a “tepid” market unless those prices are not only high but also rising rapidly.

Finally, Stewart wheels out the S&P 500, saying that stocks have increased in value more than art has. Well, yes — so has bitcoin. But even now it’s incredibly rare for anybody at all to buy art with the intention of selling it in a year or two’s time, and making a profit. Collectors are happy that the stock market is surging: they tend to have a lot of money in stocks, and so a rising market means they’re richer, and can spend more money on art. No one ever grumbles that they would have been better off putting their money in stocks instead.

So far, so unimpressive. But Stewart then starts getting into individual datapoints: maybe there’s something here! He notes that a Warhol car crash painting “sold for barely over $7 million”, bewails the fact that a Warhol portrait of Liz Taylor went for a mere $18 million, and all but gloats that a Norman Rockwell painting, “Walking to Church,” sold for “just” $2.8 million.

In fact, the prices paid for these works were $7.3 million, $20.3 million, and $3.2 million respectively; Stewart for some reason has decided to switch to hammer prices halfway through his column. No reporter should ever report hammer prices, because they mean very little. What matters is the total amount the buyer pays. The only reason to report hammer prices is to make the total amount paid seem significantly lower than it actually is.

But in this case, the numbers are enormous either way — all of the paintings Stewart mentions are worth multiple millions of dollars, even a Norman Rockwell which was designed in the first instance for mass reproduction on the cover of the Saturday Evening Post. When a magazine cover illustration — and a particularly silly one at that — sells for $3.2 million, that’s a sign to me that the art market is in fact perfectly healthy. (Rockwell was paid $3,500 apiece for his paintings, back when they were at the height of their popularity.)

Similarly, when Stewart bemoans the fact that Sanford Robinson Gifford’s “Sunday Morning in the Camp of the Seventh Regiment” went unsold against a low estimate of $3 million, he doesn’t consider that maybe that’s just because the sellers — New York’s Union League Club — were simply asking for too much money. After all, as Christie’s itself said, if the painting had sold, it would have set a new auction record for Gifford. I’d also note that the painting has more historical value than aesthetic value (just look at the thing), and that at 16 ½ x 30 inches, it’s a pretty small trophy for any well-heeled collector of Americana. A “masterpiece”, in Stewarts words, it isn’t. If you wanted a Gifford this week, you could have picked up a much more beautiful one at Sotheby’s for a six-figure sum — which implies that the Christie’s painting was simply overpriced, in the hope that someone would pay through the nose for it just because it had once hung in the Oval Office.

And when Stewart turns to a Dallas-based art market consultant to explain the high prices being fetched by contemporary art, we find this:

“Contemporary is so popular with this set of very rich, newly rich collectors,” Mr. Kusin said. “They can hang anything they want in their Manhattan co-ops or in Aspen and nobody can say that’s ugly because contemporary art has not been subjected to sustained critical appraisal. There are no markers of good or bad taste that have yet been laid down. It’s a safe place to park your money.”

This is just weird. Contemporary art is much more likely to be called ugly than anything which has withstood the test of time. The markers of good and bad taste in the contemporary-art market are being laid down all the time, at every party at every art fair in the world. And of course whatever else it might be, contemporary art is most definitely not “a safe place to park your money”. Not long ago, I accompanied a group of artists to an auction at Stair Galleries, in Hudson, NY. This is where art gets sold that the likes of Sotheby’s and Christie’s won’t touch — not even in their day sales. It was a depressing experience: lot after lot of once-celebrated artists, works which were originally sold for five- or even six-figure sums, getting hammered down for a couple of hundred bucks, maybe a couple of thousand. This is the fate of most art, and all collectors know it: to be forgotten, lost to history. There’s nothing safe about buying art, especially not when it’s brand new.

The most infuriating part of Stewart’s article, however, comes towards the end, where we find this:

The upshot is that the art market may not be nearly as inaccessible for people of more limited means as the headline prices suggest. Even at auction, most lots sell for under $100,000, and there are many that sell for less than $10,000.

This, rather than any sophomoric comparisons of a Warhol yellow to “the color of your urine”, was the passage which actually made me angry. Firstly, of course, it’s pretty disgusting for a popular, mass-market newspaper to suggest that “people of more limited means” might be able to pick up a few art-market bargains when they get sold for “under $100,000″. Who exactly does Stewart think he’s writing for?

All the way up to this point, Stewart had the ability to redeem his column. He could have ended it simply, by saying that the existence of lots of art which doesn’t sell for multi-million-dollar sums is wonderful news for the rest of us, who can buy great art at just about any price point. He could have said that if you’re not worried about whether or not the art you buy is going to go up in value, then the world is your oyster. He could even have mentioned places like Etsy, or arttwo50, or even the newly-relaunched 20×200, as places which are democratizing art and making it accessible to people who only want to pay two- or three-digit sums.

But he didn’t. Instead, Stewart chose to paint the art world as an elitist and inaccessible place, where art costing less than $100,000 counts as cheap. In Stewart’s art world, it seems, if you find something for less than $10,000 then you’ve got yourself a veritable bargain. And so he chose to end his column with a recommendation from that Texas consultant about where you can find “stable stores of value”, along with a warning from Michael Moses, of Mei Moses fame, that “buyers shouldn’t expect to recoup their money”.

In other words, Stewart has swallowed, unquestioningly, hook, line, and sinker, the downright poisonous idea that art is and should be an investment, rather than something bought out of love for something intrinsic in the art itself. That idea has persuaded millions of middle-class Americans that art is not for them — that if they want to be buying art, they should be spending tens of thousands of dollars and worrying about which parts of the market are most likely to hold their value. It has also persuaded thousands of art collectors, especially in the area of contemporary art, that they should buy only from auction houses or highly-respected galleries, because that’s perceived to be the financially safer route. Better to spend $100,000 at a blue-chip gallery than to spend $1,000 on a no-name artist: in the former case you’re making an investment, goes the thinking, while in the latter case you’re just throwing your money away.

This mindset has turned the art world into a Hobbesian winner-takes-all competition where a small number of highly-successful artists and galleries luxuriate in multi-million-dollar incomes, while thousands of equally admirable artists and dealers struggle mightily, and generally fail to make any money at all. And it’s so deeply woven into Stewart’s article that he doesn’t even notice that it’s there, let alone question it.

So here’s my investment advice, for anybody coming to me wanting to know what art to buy. It’s very simple: buy art you love, and which will grow on you as you live with it for many years to come. Buy from people whom you trust and admire, be they dealers or artists themselves. Assume that all the art you buy will have zero financial value the minute it goes up on your wall, and will stay at zero in perpetuity: if you still want to buy it, under those conditions, then do so with pride and gusto. And never, ever, let anybody shame you into thinking that you’re not rich enough, or not cultured enough, to buy art.

If anybody should have an inferiority complex, in this business, it’s the people who judge art by its price tag, and who think that anything inexpensive is therefore worth ignoring or scorning. If they need to pay thousands or millions of dollars just to reassure themselves that the art they’re buying is good, then leave them to their art-market analyses and their ever-present FOMO. They’re opening up the easiest and cheapest arbitrage in the world: the rest of us can get much more pleasure from our art than they do, even as we spend less than the cost of a high-end Miami hotel room.

Art doesn’t need to be expensive to be good. Let let the billionaires amass their vulgar trophies, outsourcing their taste to the market. The best collectors look for art which enriches their lives — art which will likely improve over time. Not art which will appreciate in price.

*Update: Christies emails with the wording of their letter, in which they do not say that auction estimates “would most likely be higher” than fair market value. That wording comes from Kennedy. The official Christies letter says only that “the individual values provided are not auction estimates”; it doesn’t explicitly say that they’re lower than the auction estimates would be.


Nope, just the word which came to mind.

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The truth about Blackstone and Codere

Felix Salmon
Dec 6, 2013 23:19 UTC

I’ve always felt that the Daily Show should do more financial stuff, and there’s no doubt that Wednesday’s piece on Blackstone was funny. But it was also extremely credulous about a single Bloomberg article from October.

Jon Stewart — a man who, according to the NYT, might be “the most trusted man in America” — said that the Bloomberg piece was “unbelievable story” of how Blackstone engaged in “incredibly egregious behavior” which “should be illegal” — strong words, which elicited smart reactions from both Matt Levine and Dan Primack.

In a sign of the degree to which Bloomberg is implicitly trusted, however, all concerned — Bloomberg View, the Daily Show, Fortune — take at face value the core assertion made by Bloomberg News: that Blackstone made a profit of “from 11.4 million euros to as much as 13.7 million” on its Codere trade.

The article attributes those numbers simply to “data compiled by Bloomberg”, but in fact it’s quite easy to see where they came from. Blackstone, according to Bloomberg, “held 25 million to 30 million euros” of credit default swaps on Codere. It then forced Codere into a technical default (repaying a loan two days late) — which triggered those swaps and forced a payout at 45.5 cents on the dollar. Therefore, the amount that Blackstone received on its CDS position was somewhere between €11.375 million and €13.65 million.

But that number is gross revenue, not profit. The profit on Blackstone’s CDS position can be looked at as being the difference between that payout, on the one hand, and the amount that it spent buying the CDS in the first place, on the other. (Although in fact, as we’ll see, it’s more complicated than that.) Unless we have some idea of Blackstone’s cost basis on this trade, we have no idea what its profit was. Bloomberg, however, seems to simply assume that Blackstone’s cost basis for the CDS was zero — that it managed to accumulate all that insurance without paying anything for it whatsoever.

To be sure, Blackstone are smart operators, and I don’t doubt that they’re making a profit on this trade. But we really have no idea how big that profit was.

And in any case the whole thing was part of a much bigger trade, which has yet to be unwound. Primack explains that “in the first half of 2013, Blackstone affiliate GSO Capital Partners purchased debt and credit default swaps in Codere” — in other words, it entered into a basis trade, where it bought debt in a troubled company and also bought insurance on that debt. But Codere was already a deeply troubled company in the first half of 2013, which means that Blackstone would have had to pay some nontrivial amount of money to buy its CDS position in the first place.

So before we take Levine’s lead and admire the “majestic beauty” of the Blackstone deal, let’s wait and see just how profitable it was. We’re not going to know that for a while, since Blackstone is now a major creditor of Codere, which is (still) at very high risk of defaulting on its debt: when the original Bloomberg article was published in October, Codere’s bonds were trading at a mere 53 cents on the dollar.

The way that Blackstone made some unknown amount of money on the CDS leg of its trade, then, was to take a huge direct exposure to Codere on the other side of its trade. It’s still entirely plausible that Blackstone’s current exposure to Codere could be written down sharply, and could even end up being bigger than the profits on its CDS trade.

Two other points are worth making, here. The first is, as Primack points out, that absent new money from Blackstone, Codere was pretty certain to default in any event. As a result, Blackstone can credibly be painted as the white knight here — as the company which managed to find a way to funnel money from the CDS market back into Codere, thereby avoiding a bankruptcy filing. That’s certainly Blackstone’s view: spokesman Pete Rose says that the trade saved jobs at Codere, as well as lots of money for Codere’s supplier-creditors.

What’s more, it’s worth stopping to ask who Blackstone bought the CDS from, in the first place. Not many people are in the business of writing single-name CDS on a troubled company like Codere, and the people who do engage in such transactions tend to be highly sophisticated investors — and indeed are probably engaging in some kind of relative-value trade of their own.

Add it all up, and I really don’t think that what Blackstone did was particularly egregious; there’s certainly no reason to believe that it should be illegal. The Daily Show basically accuses Blackstone of setting fire to Codere so that it could collect the insurance proceeds — but in fact Blackstone’s actions were a large part of the reason why Codere managed to survive. Far from being a pile of ashes, Codere now has a real chance of avoiding liquidation. For a piece of clever financial engineering, that’s an uncommonly positive societal outcome.


Every contract, in the US at least, includes an implied covenant of good faith and fair dealing. Blackstone’s actions as described appear to violate that covenant. Moreover, I wouldn’t be surprised if a motivated prosecutor could find a criminal violation here. It’s disturbing that the article focused on the amount of profit Blackstone made, and not the allegation that the company created the default it collected on. If that is business as usual in the derivative markets, something has to change. Get your moral compass fixed, Felix! Then ask the counter-party how it feels about paying off after Blackstone’s manipulation.

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Tidings of comfort and joy

Felix Salmon
Dec 6, 2013 15:47 UTC

It’s the season of good cheer, and the BLS is doing its bit to make econowonks happy in December. The last jobs report of 2013 is a great one; it now looks as though Fed chair Ben Bernanke is going to be able to go out on a high note, having brought the unemployment rate down to the key 7% level.

Even more happily, the news that we’ve finally reached that level has not sent the markets into a panic. The number is important because at one point the Fed was saying that it wanted QE to be finished by the time that the unemployment rate reached 7%; in reality, it turns out, the taper hasn’t even begun yet. Of course, the 7% number was only ever a ballpark — and it had to be a “good” 7% number, due to fewer unemployed people, rather than a “bad” 7% figure, due to discouraged workers simply dropping out of the labor force.

Still, today’s 7% is a good number: the employment-to-population ratio rose, by a heartening 0.3 points, to 58.6%, even as the unemployment rate saw that big drop to 7.0% from 7.3%. And the rest of the report was good as well: the broad U-6 unemployment rate, for instance, fell a whopping 0.6 points to 13.2%. Still too high, of course — but moving sharply in the right direction. There were more than 650,000 full-time jobs created last month, the number of employed people rose by more than 800,000, the number of unemployed people fell by 365,000, and even the amount of money that people earn each week rose by 0.7%. Just about everything, in this report, was as good as could realistically be hoped.

That said, it’s important not to extrapolate too much from a single jobs report, and especially not from month-on-month comparisons with October, the notorious garbage in, garbage out report which covered the period of (and was delayed by) the government shutdown. And if the BLS is going to be nice enough as to cheer us all up on December 6, I’m still reasonably confident that the Fed will continue the good news by keeping QE in place, at its current rate, on December 18. The taper, if and when it happens, is going to fundamentally change the government bond market: the Fed is by far the world’s largest buyer of Treasuries right now, and no one on the Fed board seems to be in any rush to start tapering by the end of the year. As Justin Wolfers says, looking at this chart, there’s no particular reason to start tapering right now.

The more important chart, however, is this one, which shows the 10-year Treasury yield over the course of this week. What it shows is that the market’s knee-jerk reaction to an unexpectedly strong jobs report was pretty much exactly what you’d expect — but there were a lot of buyers at those higher yields, and a couple of minutes after the report was released, yields were right back to where they were ex ante. Indeed, the amount that the 10-year Treasury yield moved on Wednesday is going to turn out to be much greater than the amount it’s going to move today.

My reading of these particular tea leaves, then, is that the market is comfortable at its current levels, and that it has also made peace with the inevitability of the taper in 2014. My guess is that the taper will start on March 19, at the first open market committee meeting chaired by Janet Yellen, and that 10-year yields will be then more or less where they are currently, in the 3% range. Right now, given the almost insatiable demand for high-quality collateral, I’m reasonably sanguine about all this, and I suspect that the market will be able to step in to buy Treasuries at these levels even as the Fed steps out. Maybe this is just the short term effects of the good mood that the BLS put me in this morning. But I’m determined to try to keep smiling at least through the rest of the holidays.

Three cheers for small banks

Felix Salmon
Dec 5, 2013 22:55 UTC

Earlier this week, Matt Yglesias wrote a post about what he calls “America’s Microbank Problem”: this country has far too many banks, he says, and they’re far too small. A rebuttal soon came from Rob Blackwell of American Banker, who called Yglesias “dead wrong”. This is an argument which clearly needs to be adjudicated! And in this case, I’m afraid, Blackwell wins.

It’s undeniably true that for various reasons, most of them regulatory, America has way more banks than any other country. Take away that history of regulations, and we’d have the “dozens” of banks Yglesias wants, rather than the thousands we actually have. But, would that be a good thing or a bad thing?

Yglesias says it would be a good thing, on the grounds that America’s existing “microbanks” are poorly managed; can’t be regulated; and can’t compete with the big banks. But Blackwell is absolutely right that none of these arguments really stands up to scrutiny.

Taking them in turn, Yglesias starts — without citing any evidence — by saying that smaller banks are poorly managed:

You know how the best and brightest of Wall Street royally screw up sometimes? This doesn’t get better when you drill down to the less-bright and not-as-good guys. It gets worse. And since small banks finance themselves almost entirely with loans from FDIC-ensured depositors, nobody is watching the store.

Actually, you do get less in the way of royal screw-ups as banks get smaller. Small banks are lenders, at heart: they take depositors’ money, and lend it out to their customers. If the customers prove creditworthy, then the bank makes money. Big banks, by contrast, are much more complex institutions, larded up with derivatives and Central Investment Offices and leveraged super-senior tranches of synthetic collateralized debt obligations, and so on and so forth. What’s more, all of those things can generate multi-million-dollar bonuses almost overnight for the wizards dreaming them up: no one waits until maturity. It’s that kind of opacity and complexity which produces the real disasters, not the simple business of lending money to borrowers.

As for the idea that FDIC insurance makes small banks riskier — well, that’s just bizarre. The FDIC crawls all over small banks, precisely because it has so much at risk. And because small banks have simple operations which are easy to understand, the FDIC can and does step in early when they start getting into trouble. Effectively, small banks have the better of two management teams: the in-house one, or the FDIC. And the FDIC knows what it’s doing.

Ygelsias’s second argument is equally weird: that small banks can’t be regulated, since they get carve-outs from lots of bank regulation. Again, this misses the big picture, which is that they are regulated, and regulated well, by the FDIC. What’s more, if the FDIC ever has any difficulty regulating these banks, all it needs to do is raise its dues to make up for the extra risk that it’s facing. Essentially, the US banking system regulates itself: the dues from profitable banks go towards rescuing troubled banks. The rest of us never need to worry. Except, of course, when the bank is so big that the FDIC can’t afford to let it go bust. It’s the too-big-to-fail banks which are the real problem, not the little ones.

What’s more, the carve-outs, such as they are, tend to make perfect sense, for banks which as a rule aren’t even allowed to engage in the relevant activities in the first place. (When I was on the board of a small credit union, for instance, we briefly talked about using interest-rate swaps to hedge our interest-rate exposure, before finding out that our regulator would never allow a credit union of our size to do such a thing.)

Besides, as Blackwell notes, small banks in fact are governed by nearly all the regulations which apply to big banks — including Basel III.

Finally, Yglesias says that small banks can’t just compete with big banks: “Having a large share of America’s banking sector tied up in tiny firms only makes it easier for a handful of big boys to monopolize big-time finance.” Well, yes — the small banks don’t do big-time finance. That, as they say, is a feature, not a bug. The fact is that the second-tier banks that Yglesias has his eyes on — banks like Fifth Third or PNC — would be insane to try to compete with Goldman Sachs in the big-time finance leagues. The international capital markets have seen dozens of second-tier banks attempt that move; they all end up losing billions of dollars and retreating with their tales between their legs. There big-time finance league is actually highly competitive: it includes not only US banks like Goldman and Morgan Stanley and JP Morgan and Citigroup and Bank of America, but also international banks like Deutsche and UBS and Barclays and Credit Suisse. We don’t need more banks in that league: the one thing they all have in common, after all, is that they’re too big to fail. That’s the table stakes.

Blackwell also notes that smaller banks are actually more profitable than the behemoths: if you have assets of between $1 billion and $10 billion, your return on equity is 9.9%, on average. That’s better than the TBTF contingent: there might be economies of scale at the low end, but they completely disappear by the time you get to $100 billion, even as the biggest banks have balance sheets measured in the trillions.

And taking a step back from the original Yglesias blog post, in general it’s always a good thing for banks to be small rather than big. If you’re a small bank, you know your local economy really well. The biggest difference, for me, between talking to a small-town banker and a big international banker is that big international bankers tend to know a lot about banking. Small-town bankers, on the other hand, often know surprisingly little about banking: they don’t need to. Instead, they know about agriculture, or manufacturing, or whatever the local industry might be.

The main role of banks in an economy is to allocate capital to places where it can be most productively used. In international finance, that role is played by the capital markets — which is one reason why big banks aren’t as necessary as small banks. But at the local level, what we really need is bankers who know their neighborhood and can help it grow by funding the best businesses. And small banks are better at that than big banks, where underwriting decisions tend to be automated, with local branch managers having very little discretion.

Smaller banks can pose a systemic risk, as we saw in the S&L crisis. They still need to be assiduously regulated. But give me small banks over big banks, any day. I feel that one of the hidden strengths of America is precisely that it has such a richly diversified banking system. And as web-based banking platforms start becoming available at reasonable cost to banks of all sizes, I suspect that community banks are only going to increase their market share going forwards. Good for them.


It’s amazing how banking has evolved today. Financial services such as interest-free credit finance solutions are now being marketed online. This includes personal loans and business loans as well.

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When the 2-and-20 crowd drives economic research

Felix Salmon
Dec 5, 2013 00:42 UTC

Elizabeth Warren sent a letter to the CEOs of America’s biggest banks today, telling them to reveal how much money they give to Washington think tanks — policymakers and the public, she says, should know when they’re being fed a corporate-lobbying line, and when they’re getting valuable information from a genuinely independent think tank.

Matt Yglesias says that Warren’s letter is little more than “legislative subtweeting”, but she does have a point: the more that think tanks become beholden to vested interests, the less useful they become. If a think tank is working from an ideology and everything that it concludes is in line with that ideology, it’s really little more than a derp tank. On the other hand, if a think tank has a reputation for intellectual independence but is in fact secretly being controlled by ideologues or other people with a certain agenda, then more transparency is definitely in order.

But if you’re worried about Washington think tanks falling under the influence of the finance crowd, it’s not the bank CEOs you should really be concentrating on. Instead, it’s the 2-and-20 crowd, who are giving quite astonishing amounts of money to fund economic research in such places. Last year, for instance, Bill Janeway gave $25 million and George Soros gave another $50 million to The Institute for New Economic Thinking, which gifts spurred INET to announce that it was going to try to raise another $75 million on top of that.

Janeway and Soros were in their own way just following the lead of Pete Peterson, who contributed $1 billion to the Peter G. Peterson foundation, and has pledged to spend the vast majority of it on fiscal and economic issues. And today, Glenn Hutchins announced that he was spending $10 million to create the Hutchins Center on Fiscal and Monetary Policy within the Brookings Institution. The WSJ adds that as vice chairman of the Brookings board, he has also given himself the job of raising another $600 million for the think tank — the kind of money which will pay for an almost unlimited number of distinguished economics commentators. (WSJ columnist David Wessel is leaving the paper to head the new center.)

All of this rich-people money is making a real difference in policymaking circles. Wessel, in the WSJ, is quoted as saying that “there are few forums outside Fed-sponsored events” for questions about monetary policy to be discussed, and that he wants the new Hutchins Center to be the main such forum. This is great for Hutchins, who clearly wants to get his fingerprints on any institution where monetary policy is studied or practiced — he is, after all, already on the board of directors of the NY Fed.

The result is that the people who study monetary policy — academics and technocrats and career central bankers — are increasingly being funded not by the state, or by the academy, but rather by a small number of very rich individuals, most of whom made their fortune in finance. And while it can’t necessarily be identified with either the Democratic or the Republican party, there is a rich-people consensus on economic issues. Tax hikes are bad, first of all, while cuts to programs which serve the poor are much more acceptable. As Hutchins himself puts it, “the big problem is the political failure in this town associated with the inability to solve our government debt problems.”

It’s not news that people spend their money in a self-serving manner, of course, or that rich people in particular tend to be very sure that their own way of looking at the world is the true and right way of looking at the world. It’s not even news that rich people have a disproportionate amount of influence in public life. And different donors require very different degrees of fealty to their own economic vision. INET is a highly heterodox institution: it has no particular point of view, except to broaden the debate, and it has a natural economic curiosity which is in line with Soros himself, without necessarily mirroring Soros’s own opinions. If anything, I should imagine that Soros values INET not as a vehicle for his own ideas, but rather as a source for them. The Peterson Foundation, meanwhile, is at the other extreme: Peterson knows exactly what he thinks, and wants to propagate his ideas as effectively as possible. Hutchins is probably somewhere in the middle.

In many ways I’m glad that his center will now exist. The connection between fiscal and monetary policy is not well understood, but is absolutely central to the way the global economy currently works; if Wessel and Hutchins can help central bankers now, when they need all the smart analysis they can get, that is probably a good thing. (Academics are also studying these things, of course, but they tend to work at a much slower pace and be less policy-focused.)

Still, this is just another step in the Davos-ization of the world — just another way in which rich financiers are managing to institutionalize an astonishing degree of access to central bankers and other key economic policymakers. Hutchins chose Brookings for his millions because it is very good at influencing government, and driving the terms of wonkish debate. Influence is at heart a zero-sum game: if the financial sector has a lot of it, that means the rest of us have less. And given what the financial sector wrought in the 2000s, I don’t particularly trust it to get things right this time around.


Ok. Fine. I googled it. It relates to a quote by Warren Buffet in 2006 where he accuses hedge funds of taking 2% of you principal investment if they fail and 20% of your profits if they succeed.

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The four rules of writing about art auctions

Felix Salmon
Dec 4, 2013 06:12 UTC

A loyal reader asks my advice for writing about art auctions. It’s pretty simple, and boils down to four rules:

  1. It isn’t a market for masterpieces.
  2. Ignore auction records.
  3. Adjust for inflation.
  4. Make judgments.

The best way to illustrate the first rule is via a chart, which I generated from data given to me by the good people art Artnet:

What you’re seeing here is a pretty volatile six years in the history of art auctions. (The figures for 2013 are to November 30.) Artnet took all the lots sold at Sotheby’s and Christie’s in each year, and separated them into the top 20% and the bottom 80%. They then measured how much money the top 20% of lots brought in, as a fraction of the total.

In absolute terms, the ranges were big: the top 20% of lots brought in $6.8 billion so far this year, compared to just $3.2 billion in 2009. But in percentage terms, the numbers are astonishingly constant, right around the 90% level: they never dipped below 89%, or rose above 92%.

In other words, no matter what the market, the top quintile of art works will always accounts for 90% of the value of the art sold.

This is a fact every art reporter should know — because the minute you start interviewing self-appointed art-market experts, they’re all going to say exactly the same thing. It’s a quote found in auction report after auction report, and it generally comes from some dealer or other: “the very best art is in high demand and getting amazing prices,” he’ll say, or words to that effect, “but anything less than the very best is going to be very hard to sell”.

The astonishing thing is that art-market reporters fall for this every season, even though it’s exactly the same thing they’ve heard in every other season. In today’s market, they write, it’s all about the masterpieces — the truly amazing works which sell for jaw-dropping megabucks. Everything else is an also-ran. (It’s taken for granted that the most expensive works are masterpieces; we’ll come back to that in a bit.)

But the fact is, statistically speaking, that the distribution of art-market values never really changes at all. What’s true today was true yesterday, and was true a decade ago as well. The only difference is the way in which the art-market caravan has moved on and anointed a new set of art works as being the “masterpieces” worth spending insane amounts of money on.

Similarly, every season there’s breathless coverage of new auction records — a long list of artists, all of whom just saw a work sell for more money than that artist has ever received at auction before. The auction houses love to present those auction records as a sign that the market is particularly healthy. But in fact, it’s more of a sign of how fickle both the auction houses and the art market are. Each season, a new artist is hot, and sells for high prices; the superstars of yesteryear, by contrast, aren’t even accepted for auction at all, much of the time. Today’s masterpiece is tomorrow’s mildly embarrassing reminder of how bad our taste used to be.

And then, of course, there’s the simple act of adjusting for inflation, which seemingly no art-market reporter is capable of. For instance, that record-busting Francis Bacon triptych is not “the Most Expensive Artwork Ever Sold at an Auction” if you follow the sensible rule that all prices should be adjusted for inflation. The record still belongs to Vincent van Gogh’s Portrait of Dr. Gachet, which was sold for $147 million, in today’s money, back in 1990.

So what should you do, if you want to cover the art auctions? Here’s one idea: try to spot the artists who aren’t selling, or who are quietly being moved to the day sales. The auction houses do a very good job of expectations management, in setting public estimates for the paintings they’re selling: if the estimate is low, and the price realized is equally low, it’s easy to think there’s nothing newsworthy going on — even if, a few years ago, the same piece might have sold for multiples of what it’s now able to fetch.

But the best art-auction reports go further than that, and talk in detail about the ever-present gap between price and quality. Inside an auction house, it’s in everybody’s interest to pretend that the most expensive art is the best art. But no one actually believes that. So: which works are faddishly overvalued? Which ones look like they’re selling for a (relative) song?

A little bit of connoisseurship, in an auction report, goes a long way. Maybe that should be the first rule of covering such events: don’t leave your critical faculties at the door. Without them, indeed, you’re unlikely to be able to say anything particularly insightful at all.


Two more: avoid generalising from tiny samples, and adjust for the premium. Journalists often report that a lot sold for ‘low estimate’ when the sale price includes an extra 1/3 premium. These are great rules. I’ve elaborated and applied here: http://grumpyarthistorian.blogspot.co.uk  /2013/12/how-to-write-about-auctions-ol d-master.html

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The $5 trillion dilemma facing banking regulators

Felix Salmon
Dec 3, 2013 17:16 UTC

Last month, I wrote about bond-market illiquidity — the problem that it’s incredibly difficult to buy and sell bonds in any kind of volume, especially if they’re not Treasuries. That’s a big issue — but it turns out there’s an even bigger issue hiding in the same vicinity.

The problem is that there’s only a certain amount of liquidity to go around — and under Dodd-Frank rules, a huge proportion of that liquidity has to be available to exchanges and clearinghouses, the hubs which sit in the middle of the derivatives market and act as an insulating buffer, making sure that the failure of one entity doesn’t cascade through the entire system.

Craig Pirrong has a good overview of what’s going on, and I’m glad to say that Thomson Reuters is leading the charge in terms of reporting about all this: see, for instance, recent pieces by Karen Brettell, Christopher Whittall, and Helen Bartholomew. The problem is that it’s not an easy subject to understand, and most of the coverage of the issue tends to assume a lot of background knowledge. So, let me try to (over)simplify a little.

During the financial crisis, everybody became familiar with the idea that a bank could be “too interconnected to fail”. The problem arises from the way that derivatives tend to accumulate: if you have a certain position with a certain counterparty, and you want to unwind that position, then you can try to negotiate with your original counterparty — but they might not be particularly inclined to give you the best price. So instead you enter into an offsetting position with a different counterparty. You now have two derivatives positions, rather than one. The profits on one should offset any losses on the other — but your counterparty risk has doubled. As a result, total counterparty risk only ever goes up, and when a bank like Lehman Brothers fails, the entire financial system gets put at risk.

There are two solutions to this problem. One is bilateral netting — a system whereby banks look at the various contracts they have outstanding with each of their counterparties, and simply tear them up where they offset each other. That can be quite effective, especially in credit derivatives. The second solution is to force banks to move more of their derivatives business to centralized exchanges. If there’s a single central counterparty who faces everyone, then the problem of ever-growing derivatives books goes away naturally.

Of course, if everybody faces a central counterparty, then it’s of paramount importance to ensure that the clearinghouse in question will itself never fail. Naturally, the clearinghouse doesn’t own any positions, but on top of that it has to be able to cope with its own counterparties failing. Typically, the way it does that — and we saw this during MF Global’s collapse — is to demand ever-increasing amounts of collateral whenever there’s a sign of trouble.

Such demands have two effects of their own. The first, and most important, effect is that they really do protect the central clearinghouse from going bust. But the secondary effect is that they increase the amount of stress everywhere else in the system. (MF Global might have ended up going bust anyway, but all those extra collateral demands certainly served to accelerate its downfall.) Pirrong calls this “the levee effect”:

Just as making the levee higher at one point does not reduce flooding risk throughout a river system, but redistributes it, strengthening a central counterparty (CCP) can redistribute shocks elsewhere in the system in a highly destabilizing way. CCP managers focus on CCP survival, not on the survival of the entire system, and this is quite dangerous when as is almost certainly the case, their decisions have external effects. Indeed, greater reliance on CCPs increases the tightness of the coupling of the financial system, which can be highly problematic under stressed conditions.

Essentially, when markets start getting stressed, liquidity and collateral will start flowing in very large quantities from banks to clearinghouses. Indeed, to be on the safe side, central clearinghouses are likely to demand very large amounts of collateral — as much as $5 trillion, according to some estimates — even during relatively benign market conditions. That is good for the clearinghouses, and bad for the banks. And while it’s important that the clearinghouses don’t go bust, it’s equally important that the banks don’t all end up forced into a massive liquidity crunch as a result of the clearinghouses’ attempts at self-preservation.

The banks, of course, will look after themselves first — especially as the new Basel III liquidity requirements start to bite. If they need to retain a lot of liquid assets for themselves, and they also need to ship a lot of liquid assets over to clearinghouses, then there won’t be anything left for their clients. Historically, when clients have needed to post collateral, they’ve been able to get it from the banks. But under Basel III, the banks are likely to be unable or unwilling to provide that collateral.

So where will clients turn? These are truly enormous businesses which might need to be replaced: Barclays has cleared some $26.5 trillion of client trades, while JP Morgan sees an extra half a billion dollars a year in revenue from clearing and collateral management.

Just as in the bond markets, one option is that the clients — the buy-side investors — will turn to each other for collateral, instead of always turning to intermediary banks. That’s already beginning to happen: some 10% to 15% of collateral trades already involve non-banking counterparties. But it’s still very unclear how far this trend can be pushed:

While corporates and buysiders might be comfortable sharing confidential information with their banking counterparties, shifting to a customer-to-customer model is a big step.

“The problem is that buyside firms have to open up their credit credentials to each other to get a credit line in place. I always felt that was an impediment to customer-to-customer business, but the combined impact of new rules changed that,” said Osborne.

Osborne, here, is Newedge’s Angela Osborne; her job is to start replacing banks in the collateral-management business. Once you adjust for Osborne talking her own book, it’s clear that there’s still a very long way to go before the banks will realistically be able to step back from this market.

After all, it’s not as though the banks’ buy-side clients themselves have unlimited amounts of collateral which they can happily post at a moment’s notice. It’s true that they aren’t as leveraged as the banks are. But they themselves have investors, who can generally ask for their money back at any time — normally, when doing so is most inconvenient for the fund in question. If they tie up assets posting collateral for themselves or others, that makes it much harder for them to meet potential redemption requests.

All of which means that as we move to a system of central clearinghouses, a new systemic risk is emerging: “fire sale risk” is the term of art. If a market becomes stressed, and the clearinghouses raise their margin requirements, then the consequences can be huge. In the bond market, the death spiral is all too well known: a sovereign starts looking risky, the margin on its bonds is hiked, which in turn triggers a sell-off in that country’s bonds, which makes them seem even riskier, which triggers another margin hike, and so on. This can happen in any asset class, but derivatives are in many ways the most dangerous, just because they’re inherently leveraged, and the amount of leverage that the clearinghouses allow can be changed at a moment’s notice.

Do the world’s macroprudential regulators have a clear plan to stop this from happening? Do they have any plan to resolve the inherent tension involved in demanding that banks retain large amounts of ready liquidity, even as they also allow clearinghouses to demand unlimited amounts of liquidity from the very same banks? The answers to those questions are — at least for the time being — very unclear. But the risk is very real, and it makes sense that regulators should do something to try to mitigate it.


Maybe I am missing something but this pretty much seems to be a made up risk to me. It would make sense for the banks to push this story so they can keep screwing over their costumers with OTC derivatives.

Is there any example in history of a clearing house causing a financial crisis? Collateral calls add stability to the system by lowering leverage before it gets to levels where systematic default is a danger. If a collateral shortage leads to the credit derivative market shrinking that is a positive in my book.

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Philanthropy, stock-picking, and Presbyterian frugality

Felix Salmon
Dec 2, 2013 18:50 UTC

I love the story of Jack MacDonald, which is only becoming public now, after his death. The short version: MacDonald inherited a substantial fortune from his parents, the proprietors of MacDonald Meat Co. in Seattle. But he made the classic promise to himself, that he wasn’t going to let the money change his life — and he kept it. He worked as a government lawyer for 30 years, he clipped coupons, he wore tatty sweaters, and even at the end of his life he was imploring his doctor to treat him only with generic drugs. He died a happy man, and bequeathed his fortune to three charities: the law school from which he graduated in 1940; Seattle Children’s, a pediatric research institute beloved of his mother; and the Salvation Army, in memory of his father.

Or rather, he bequeathed the income from his fortune equally to all three charities. The fortune itself — valued at $188 million — will remain fully invested.

MacDonald did not like to spend his money, but he loved to invest it:

When it came to picking stocks, “he was amazing,” said his stepdaughter, Regen Dennis, of Utah. “He didn’t trust a lot of other people to do his research; he directed what he wanted bought, and he really knew what he wanted.” …

MacDonald and his wife moved in 1997 to the Horizon House retirement community, where Mary died in 1999. In the retirement home, MacDonald continued to keep his hand in the stock market while nurturing his image as a man without means, even wearing sweaters with holes in the elbows…

Picha, of Children’s, often visited MacDonald at Horizon House, where copies of The Wall Street Journal and Forbes magazine were stacked on both sides of his favorite chair. His routine included an early-morning workout, a visit to the grocery store and a walk to his stockbroker to check on his accounts, Picha said.

There are three things going on here of note. Firstly, there’s the idea of stock-picking as a hobby for men. MacDonald was a devotee of this particular hobby, and clearly loved it. His stepdaughter says that he was very good at it, too — but without knowing how much money he started with, or when the inheritance took place, it’s hard to tell exactly how good he was. MacDonald might not have been spending his money on consumption, but he was still getting pleasure from it.

Secondly, there’s the deeply Scottish/Presbyterian idea that saving is something you do in perpetuity — an idea which lies at the heart of the thousands of endowments which dominate the non-profit sector in the US. MacDonald was a steward for his parents’ savings, and, at the end of his life, he created a structure which attempted to ensure that those savings would remain intact for generations to come. This is, at heart, a deeply futile stance, a little bit like hoarding bitcoins and never spending them. I’m reminded of the story told by Mary Ann Glendon:

Bostonians still tell the story of the respectable society matron who was crossing the Common one day and ran into an old college chum she hadn’t seen for years. The matron was dismayed to see that her friend was obviously engaged in the world’s oldest profession. “My dear,” she said, “whatever has happened to you?” “Well,” said her friend, “it was either this or dip into capital.”

From a philanthropic perspective, the point here is that as a rule it makes sense to front-load donations, not to back-load them. I don’t know when MacDonald first inherited his fortune, but it might well have been 50 years ago. That’s 50 years’ worth of children who haven’t received the benefit of his generosity. What’s more, the world and Seattle have been getting richer and healthier all the while, which means that the future recipients of MacDonald’s money will be less needy than the hypothetical past recipients would have been.

And yet, even now that MacDonald has died, Seattle Children’s Research Institute will receive, annually, just 5% of its share of the bequest. That’s the bare minimum, under US law, that MacDonald can give away and still be counted as a charitable trust. I’m sure that if the law allowed the trust to give away even less than 5% per year, MacDonald would have chosen an even lower number. There’s lots of self-congratulatory back-slapping going on around this bequest, but the fact is that MacDonald isn’t really giving his money away: he’s controlling it, to the maximal extent possible, from beyond the grave.

Finally, it’s worth noting that Doug Picha, president of the Seattle Children’s Foundation, cultivated MacDonald for 30 years before finally achieving this donation. I’m sure that his motives weren’t entirely mercenary, and that the two men were genuine friends. But if you’re in the fundraising business, and you’re looking for really big donations from incredibly rich individuals, that means you’re going to be playing a very, very long game — and, quite possibly, having to wait until those individuals die.

MacDonald reportedly said he “wanted to be remembered as a philanthropist” — and he’s certainly less self-effacing now that he’s dead, slapping his name all over the central square of Elora, Canada, as well as the Jack MacDonald Endowed Chair at the University of Washington. But the fact is that if he were really philanthropically inclined, he would have given much more money away many decades ago. And he wouldn’t be giving away only the barest minimum now that he’s dead.


You really need to preface that whole piece with an introduction that you are about to flyspeck the relative virtues of various kinds of exceptional generosity. In life (maybe yachting) or death (maybe a colossal statue of himself), Mr. MacDonald could have just spent all of his money, and we have no reason to expect otherwise of people generally. Also, even while investing, he was giving society the benefit of his resources, instead of calling in his chips for personal consumption. “If he were really” more “philanthropically inclined” than almost everyone else, he might well have done exactly what he did.

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