Felix Salmon

Judging Treasury

Felix Salmon
Sep 16, 2013 15:56 UTC

There’s a fascinating heavyweight fight going on when it comes to writing what you might consider the official narrative of the financial crisis. The White House released its own 49-page report this morning, talking in glowing terms of the successes that the Obama Administration has made on the financial-reform front. Meanwhile, this week’s issue of Time magazine takes the opposite tack in a tough cover story by Rana Foroohar, headlined “How Wall Street Won”.

The interesting thing about this fight is that it has actually been engaged: Treasury responded to Foroohar on its website, and she of course replied to them. (If the first link to her cover story steers you into a paywall, then try going from her blog post: that might work.)

It’s also worth noting Foroohar’s “to be sure” sentence, in her introduction: “The truth is,” she writes, “Washington did a great job saving the banking system in ’08 and ’09 with swift bailouts that averted even worse damage to the economy.” She’s right about that — but neither side of the debate dwells for long on that fact, partly because most of the emergency actions which saved the banking system were put in place by the George W Bush administration, rather than the current lot.

If you think of the economy as a ship, then what the Obama administration inherited was a crippled vessel, still afloat, but badly damaged from a serious fire in the boiler room. It had fallen to the Bush administration to actually put out the fire, which they did. And so the Obama administration set to work trying to fix the ship, with things like the original stimulus package. And they also had to fix up the damaged boiler room, and ensure that it would never again explode in such a devastating manner. That was the job of Dodd-Frank, as well as Basel III.

Foroohar’s point is pretty simple. The US economy is far from ship-shape right now — just look at the unemployment rate, or the employment-to-population ratio, or the median wage, or any other measure of how the broad mass of Americans is faring. The 2009 stimulus might have done a bit of good at the margin, but here we are, five years after the crisis, and the Federal Reserve still feels the need to pump $85 billion a month into the economy in its latest round of QE, on the grounds that interest rates are at zero and can’t be lowered any further. The economy, in other words, finds it hard to stay afloat without artificial aid.

And then, when you go down into the boiler room, it has been patched up here and there, and people are still working on some of the more damaged areas — but if you look at the whole thing, it’s not exactly explosion-proof. Sure, it’s safer than it was in 2007, but that’s not saying very much. And when people like Gary Gensler try to come in and add some crucial regulators to highly dangerous parts of the system, they get stymied — by none other than Treasury itself!

Treasury’s take, by contrast, is more granular. Look at TARP — it made money! Look at the stress tests — they worked! Look at the first derivatives on measures like house prices, credit flows, and total household wealth — they’re positive!

Neither take tells the whole truth, although the Obama administration is probably the more disingenuous of the two: “as a matter of law,” writes Treasury’s Anthony Coley, “Dodd-Frank ended the notion that any firm is ‘too big to fail.’” Er, no, it didn’t. Lots of us still have the notion that there are dozens of firms which are too big to fail — and other entities, too, like the state of California. It might be less likely, now, that any given firm will fail. What’s more, if and when a big firm does fail, there’s now a semblance of a procedure to follow, which — if everything goes according to plan — might even involve zero federal dollars. But still, too big to fail is too big to fail, and ultimately, if push comes to shove, the implicit government backstop is still there.

The thing is, the TBTF problem is endemic to modern finance — there was no realistic way that the Obama administration or any other government could ever stop it from being the case. In theory, we could have let the entire boiler room melt down, to the point at which it could no longer inflict any more damage. That’s what Michael Lewis thinks we should have done: “I don’t feel, oh, how sad that Lehman went down,” he says. “I feel, how sad that Goldman Sachs and Morgan Stanley didn’t follow. I would’ve liked to have seen the crisis play itself out more.” But if that had happened, the whole ship would have sunk — and would have taken the entire global economy down with it. Yes, there’s moral hazard in bailing out banks. But the time to deal with moral hazard is before the crisis hits. Once the boiler room is ablaze, the first job of the stewards of the ship is, always, to put out the fire. Even if — especially if — that means protecting parts of the system which are inherently dangerous.

Ultimately, I think that both the White House and Foroohar are far too invested in a narrative where the government is in control, and can effectively determine the state of not only the US financial system but also the entire US economy as a whole. When in fact, of course, it can’t even nominate its preferred candidate to become the chairman of the Federal Reserve. The Obama administration could have done better, both in terms of bank regulation and in terms of broader macro policy. But it was operating within real constraints, both nationally and internationally. And the prospect of fireproofing the engine room so that no crisis would ever happen again — well, that was always impossible, for any government, in any country bigger than, say, Bhutan.

Overall, if Treasury is giving itself an A for its post-crisis actions, and Foroohar is handing out a C, then I’d duck the question and point to the bigger truth — that the quality of Treasury’s actions is not nearly as consequential as most people think. We live in a path-dependent liberal democracy, and the older our democracy gets, the more entrenched it becomes, and the harder it is to change anything truly fundamental. Treasury’s tinkering was, at the margin, a positive force, and I’m glad they did what they did, even as I wish they had done more. But I don’t kid myself that if they had done more, it would have made all that much of a difference. Or, for that matter, that if they had done less, things would have been noticeably worse than they are right now.


You forgot something, Felix. The Obama Administration inherited a crippled ship with a damaged boiler, AND FIVE MILLION PASSENGERS THROWN OVERBOARD into unemployment, plus another 4 million hanging onto the side of the ship about to fall in. Oh, and half the crew was planning a mutiny and refused to help the captain right the sh.

A bit hard to replace the boiler when you are trying to fish the survivors out of the water. And when half the crew is planning a mutiny and refusing to help the captain right the ship.

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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.


This poster sounds a whole lot like one of several people that I argue against just about every day on the MSNBC Newsvine Blog. Either this poster is Roy Wilson, Pro Business, or one of the other regular Republican shills there!

[quote]It impacts a huge swath of the workforce – per the BLS, the median hourly U.S. wage is $16.71 per hour. The 25th percentile is $10.81 per hour. So what we’ll see is a massive cost increase for labor that constitutes something on the order of 25% to 35%. The increase is significant enough that employers will try to pass on higher labor costs and, if unable to do so, try to find ways to reduce labor hours. For businesses that use large amounts of low-wage labor – large swaths of the restaurant industry, for example – the increased labor costs are enough that their businesses are unprofitable overnight unless they raise prices or reduce labor[end quote].

Isn’t that interesting! The median hourly wage is now 20% BELOW 1968 MINIMUM WAGE BUYING POWER against the average cost of food, fuel, rent and the average combined cost of owning a car or riding public transit!!! And you want to try to defend such a proposition???

Moreover, WHY should American taxpayers be forced to subsidize marginal businesses that pay the current minimum wage to the tune of half what those businesses currently pay in wages, in extra social service costs?

[quote]Some combination of 3 things will happen.

Unemployment will increase because there will be a class of low-skill, low-wage workers who are basically unemployable because the minimum wage has priced them out of the labor market. (Multiple mechanisms for this to happen – some will be process improvements or capital investments that remove labor, some will just be that people no longer purchase certain services.)

Against the cost of the average basket of goods and services that includes food, fuel, utility costs, health insurance, rent, and the average cost of transportation, minimum wage buying power is DOWN BY OVER 65% SINCE 1968 when the minimum wage was $1.60 per hour.

Massive inflation will inflate away the impact of the minimum wage increase, so in real terms $15 per hour drops back to something like $8 or $10 per hour in current dollars and thus there’s no increase in living standards for those at or near the minimum wage[end quote]

Roy, since the total wage cost for the average business is about 25%, then a 40% jump in wage costs will only force prices up by 10%, plus the additional half of Social Security and Medicare, which comes to another 7.65% of wages, for a total of 17.65%. If we were to double the minimum wage to $14.50/hour, doing so would result in a 32.65% rise in prices, which would still leave the minimum wage worker with a net pay increase of 67.35%, and a rate of $14.50 per hour would still be 25% BELOW the 1968 minimum wage in terms of buying power.

There will also be an increased sales tax to pay at the retail level, which will cost a minimum wage worker an extra 32.65% against whatever their local sales tax rate is. For example, a sales tax rate of 6% would yield an extra hit to income of 1.96% too. 67.35 – 1.96 = 65.39%, which would still be a healthy increase in minimum wage spending power.

[quote]The third alternative, if that inflation doesn’t happen, is that off the books work will increase to the level of southern Europe and Latin America as employers and employees conspire to pay for work below the minimum wage[end quote]

And if they get caught, they GO TO JAIL.

[quote]*I am well aware of the debate among labor economists about whether increased minimum wages do or do not reduce employment. These studies, however, have focused on changes that are relatively modest in terms of the number of workers impacted and where the minimum wage is set compared to the median wage. $15 per hour is 90% of the US median hourly wage, and a massive increase from the current federal minimum wage of $7.25 per hour. Some states are higher, but the highest state is $9.19 (Washington state). There are a handful of cities higher than that, with the highest being San Francisco at $10.55[end quote]

*In Colorado, where I have lived for the last 22 years, our minimum wage is currently $8.03, and that fact doesn’t seem to be destroying minimum wage businesses either.

Frankly, if we were to double our minimum wage we would also have to raise other bottom 80% or 90% wages too, most likely by some declining percentage below double too, which would also increase prices by less than the rate of inflation caused by a minimum wage increase too.

If we were to double our minimum wage I would personally like to see a couple of other legal changes in the offshoring of capital and both income and capital gains taxation too.

#1: We must return both income taxes and capital gains taxes to their respective 1960s-1970s rates, as doing so will force wealthy Americans, wealthy investors, and profitable corporations to reinvest the income and profit in profit-generating business and equipment at home, rather than sending such income and profit offshore, which low tax rates encourage. Doing this would also greatly increase charitable giving too.

#2: We must also enact a stiff penalty for attempting to offshore more than a certain amount of capital too. I personally don’t care if you want to buy a beach house in Aruba or even a designer yacht from Italy, within certain cost boundaries, nothing terribly limiting at all. So how about we enact a 15% tax on offshoring more than $1 million, a 25% tax on any amount offshored that exceeds $10 million, and a 50% tax on any amount of capital offshored that exceeds $25 million too?

#3: While doubling our minimum wage will also greatly increase contributions to fund Social Security and Medicare, my own feeling is that it is way past time to increase the taxable income ceiling subject to FICA taxation to $1 million instead of $113K where it is today. I also think that capital gains largess should also contribute some small percentage of their windfall too. So how about we tack-on a 2% extra FICA tax on capital gains of over $1 million and a 3% extra FICA tax on capital gains of over $10 million, for a total of an extra 5% against windfall profits, just to ensure that such people do not escape contributing their fair share to fund these critical retirement and disability programs that benefit all Americans.

So Roy, there are two sides to every story, and I strongly felt that it was my civic duty to poke a few more gigantic holes in your Republican shill argument again. Moreover, if every wealthy American flees before such laws are enacted there will still be several more wanna-be wealthy Americans waiting in the wings for their chance to work really hard to accomplish their dreams too, so another of your shill talking points is full of holes too.

Perhaps what has been wrong with America over the past 40 years is that wealth addiction has increasingly destroyed the ability of the average Americans family to survive economically? If so, wouldn’t the vast majority of us be better-off without our wealth addict crowd?

What is worse for America, a dope addict who might steal your purse or burglarize your house to feed his addiction, or a wealth addict who might destroy the local economy of dozens of cities and towns, as well as grossly misuse taxpayer-provided bailout funds, to buyout and move an entire industry offshore, just to marginally increase the value of his stock holdings, without a care in the world as to the additional human misery that his addiction causes?

And Mitt Romney also tried to launder his 9-figure profit on offshoring Delphi through his wife’s and kid’s offshore trusts, and you view him as some kind of hero for doing so???

If a kid that sticks-up a liquor store for $100 can get 10 years in the joint, what penalty would you feel appropriate for some wealth addict who destroys over 100,000 jobs in America and not only earns 9 figures doing it, but also rapes the US taxpayer for a huge bailout too, and then attempts to circumvent our tax laws by attempting to illegally offshore his profit too?

I personally feel that America would be far better off without people like this endlessly trying to destroy our standard of living for their own personal gain.

Old Timer – 88224 (MSNBC Newsvine)

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Counterparties: Passing Abenomics

Jun 13, 2013 22:43 UTC

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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

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

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

How the music industry explains American inequality – Alan Krueger

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

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

The geography of hunger in America – Atlantic Cities

Fiscalists vs market monetarists, a bloggy taxonomy – Cardiff Garcia

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

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

Counterparties: Why Europe wants to be more Austrian

May 28, 2013 22:32 UTC

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European leaders convened at Sciences Po in Paris today to tackle the continent’s increasingly scary youth unemployment crisis. They did a great job of delivering concerned rhetoric (“We have to rescue an entire generation of young people who are scared,” said Italian labor minister Enrico Giovannini). They weren’t quite as good at nailing down specifics.

However, there is some evidence that leaders are slowly becoming motivated to do something. Their clear incentive: the political ramifications of inaction could look something like last week’s riots in Stockholm, if not much worse.

Joe Weisenthal points to the below chart, showing Germany (DE) and Austria (AT) both with youth unemployment rates below 8%, Greece (EL) and Spain (ES) well above 50%, and Italy (IT) and Portugal (PT) each approaching 40%. Far more countries in Europe are above 20% youth unemployment than are below it.

The most serious step toward reducing unemployment is the Youth Guarantee, adopted last month by the EU’s council of ministers (though implementation is left to the member states, so the plan’s fate is far from certain). The plan would ensure a job or training program to anyone under the age of 25 within four months of leaving school or becoming unemployed. This is all based on programs already in place in Finland and Austria, which have youth unemployment rates of 20% and 8%, respectively. The plan is estimated to cost a total of €21 billion, a fraction of the €150 billion youth unemployment is currently costing the economic union annually. Euro zone countries have already set aside €6 billion for the guarantee over the next six years.

The Italian government announced last week it was considering a job-sharing program between older and younger workers. While this neo-apprenticeship model is a way to get more young people into the workforce, “it wouldn’t create any new jobs, and taxpayers would have to pick up the tab for pension contributions for the older workers who choose to participate,” according to the WSJ– Shane Ferro

On today’s links:

The Fed
The Fed’s latest obsession: managing our expectations – Jon Hilsenrath

Finally, a financial innovation that helps investors – Tadas Viskanta

Fiscally Speaking
A handful of states are slowly approaching budget surplus territory – Calculated Risk

Sony makes money on music and movies, not electronics – NYT

Home prices up 10.9% over March – Case-Shiller
The housing recovery visualized – Matthew Phillips

“Dear Dumb VC: You don’t realize you are going out of business” – Andy Dunn
“Finally, someone who deals with VCs writes a long, angry post about how shitty they all are” – Sam Biddle

Health Care
Walmart is flying employees to top hospitals to have surgery — and saving money – National Journal
Obama’s Cadillac tax is working – Matt Yglesias

Bad Data
A happiness study that only samples bloggers – The Atlantic

“Hot Money”
Criminals need non-bank financial intermediaries too – WSJ

EU Mess
Why a German exit from the euro zone would be disastrous — even for Germany – Pedro da Costa
Angela Merkel is reversing her stance on austerity in a fashion that’s possibly entirely symbolic – Der Spiegel

What if quantitative easing is actually deflationary? – Frances Coppola

“We’re starting the Uber of organ transplants” – McSweeney’s

Big Government
How Washington is dealing with the food truck lobby – Bloomberg

Streaming video is slowly killing cable – Pando Daily

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


Exactly, FifthDecade. Too many people confuse college with job education. College isn’t a terribly good structure for learning job skills, and job skills aren’t the central purpose of going to college.

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Counterparties: Meaningless plunge

Ben Walsh
May 23, 2013 22:00 UTC

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Japan’s Nikkei index plunged more than 7% on Thursday. Investors and economists spent the last 12 hours obsessing over possible explanations. Weak Chinese manufacturing data and comments from the Fed were both identified as possible culprits. Most likely Neil Irwin is right and there “wasn’t really any news overnight that would justify a swing of that magnitude”.

To put the fall in perspective, the Nikkei is now back at the level it was merely two weeks ago. And it is still up over 68% in the last year. That performance did not stop the WSJ from calling investors’ enthusiasm for Prime Minister Abe’s plan to boost Japan’s economy “brittle”. Paul Krugman thinks it may all of a sudden be reasonable to doubt the Bank of Japan’s commitment to monetary stimulus.

Following the vein of Bernanke’s comments and the possibility of curtailed stimulus, Tim Duy thinks the Fed could start slowing the pace of QE as early as September. However, Duy writes that the Fed should more directly communicate its intentions, rather than expecting market participants to divine specifics from opaque statements. Pointing to a shift in the Treasury yield-curve, Sober Look sees a preview of what may happen if the Fed tapers its monetary stimulus — declining value across multiple asset classes.

At times like this, analysts will recommend a lot of things, sometimes written in all caps to demonstrate conviction (which should be a warning sign in and of itself): “buy the dollar, sell EM FX and sell carry”; “long USD against the CHF, AUD and CAD”; “long USD/JPY and long Japanese stocks are the most crowded trades out there”; “the dollar rally is expected to gain momentum”; go long Herbalife. That last one has nothing to do with Japan or the Fed, but hey, why not. — Ben Walsh

On today’s links:

“The Too Big to Fail subsidy is negative ten billion dollars, says Goldman Sachs” – Matt Levine

Corporate America’s hoarding more and more cash, even as the economy improves – Bloomberg

EU Mess
Fixing the eurozone crisis will require massive writedowns of debt – Kenneth Rogoff
Greek youth unemployment is close to 75% in some areas – Telegraph

Dairy farmers are drowning in Greek yogurt’s acidic byproduct – Modern Farmer

Paul Tudor Jones: In macro trading, babies are “killer” to a woman’s focus – WaPo

Congress quietly watered down a new law on Congressional insider trading – NPR
The Department of Justice is actually not too sure if this whole “too big to jail” thing exists – Shahien Nasiripour

Second Acts
Meet the guy who helps hedge funders cope with prison – Hedge Fund Intelligence

“The view that ‘we have to pay a price for past sins’ is nearly always wrong” - Reuters

Things We Don’t Need
New rifle allows uses “user to stream live video and audio to an iPad” – Neil Irwin

Crisis Retro
Ratings agencies are not rating RMBS high enough, so investors are ignoring them – FT

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


All daily market movements are meaningless, yet their total sum over many years makes a coherent story line.

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Have we solved our fiscal problems?

Felix Salmon
May 15, 2013 18:00 UTC

Ezra Klein has a good summary of the latest CBO budget projections, which show that the national debt really isn’t going to be a problem at any point in the foreseeable future. The deficit isn’t going away, of course: the smallest it’s likely to get, according to the CBO, is $378 billion, or 2.1% of GDP, in 2015. But that’s entirely manageable, and puts the national debt-to-GDP ratio on a pretty flat trajectory over the medium term.

Of course, in the real world, none of this is actually going to happen as forecast. It’s hard enough to forecast what’s going to happen in 2013, let alone what’s going to happen in 2023: the CBO projection for this year’s deficit has fallen from $845 billion to $642 billion just in the past three months, so it’s worth taking all future forecasts with a large pinch of salt — especially since the one thing that’s certain is that there will be substantial changes to US fiscal policy between now and 2023.

This chart contrasts quite dramatically with the bipartisan consensus that America’s national debt — and especially the way that it is built up by the entitlement programs of Medicare, Medicaid, and Social Security — are serious problems. As Paul Krugman explains wonderfully in his latest essay for the NYRB, America’s social safety net was actually a key channel through which countercyclical government stimulus entered the economy in the wake of the financial crisis. And given how difficult it is to legislate expansionary fiscal policy on the fly, there’s a strong purely economic case for keeping such programs.

With any luck, then, this chart will help us to stop bellyaching about the debt, and create a bit of space where we can try to work out how to really get the debt-to-GDP ratio down over the long term, by concentrating on increasing the denominator rather than decreasing the numerator. But don’t hold your breath. Even the CBO takes pains to warn of debt problems in the future, saying that a debt-to-GDP ratio around 75% “would have serious negative consequences” in terms of interest expenses, lower wages, and worse:

A large debt increases the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.

In the USA, this risk is de minimis, barely even worth mentioning: not only do we print our own currency, but in general US government bonds are universally considered the safest assets on the planet. So what’s the CBO playing at, here?

Krugman has a fascinating explanation for what might be going on:

Pre-Keynesian business cycle theorists loved to dwell on the lurid excesses that take place in good times, while having relatively little to say about exactly why these give rise to bad times or what you should do when they do. Keynes reversed this priority; almost all his focus was on how economies stay depressed, and what can be done to make them less depressed.

I’d argue that Keynes was overwhelmingly right in his approach, but there’s no question that it’s an approach many people find deeply unsatisfying as an emotional matter. And so we shouldn’t find it surprising that many popular interpretations of our current troubles return, whether the authors know it or not, to the instinctive, pre-Keynesian style of dwelling on the excesses of the boom rather than on the failures of the slump.

My opinion is that it’s even simpler than that. Krugman naturally sees macroeconomic problems in terms of cycles: there are booms and busts, and there are emotional reasons why economists prefer to concentrate on the problems with booms, and apply the solutions to those problems (spend less money) even during busts where they are contraindicated.

But I think the general view of the public, and of our mainstream elected representatives, is even simpler. These people aren’t economists, and don’t think in terms of cycles; they certainly can’t clearly articulate the difference between a financial crisis and a fiscal crisis. Everything just reduces to “we spent too much, we should spend less”, which makes intuitive sense: the biggest problem with Keynes is that, just like Ricardo, a lot of what he discovered is deeply counterintuitive.

In which case, Krugman’s cyclical arguments are not going to carry the day politically: it’s hard to explain that the right thing to do changes according to various measures of resource utilization. Instead, it might be best, on a tactical political level, just to point at the CBO’s debt-to-GDP chart and say look, we’ve solved this problem now. Even if the CBO wouldn’t really agree with that interpretation.


@ Felix,

Come on man, you’re way to good a policy wonk to use the CBO forecasts unmodified. Please correct me if I’m mistaken but the baseline budget forecast assumes that:

the annual medicare fix doesn’t happen next year (as it does every year) I think that’s almost a 300B 10 year delta by itself at this point.

I think the CBO projections also assume that we’re going to drop back to only 36 weeks of unemployment insurance next year… dubious to the tune of 10 – 20 billion annually.

Also I think the earned income tax credit sunsets in 5 years which pad the back half of the forecast.

Plus we are assuming that accelerated depreciation on capital investment (which we have patched every year since 2008) ends next year.. I think that’s like 25 billion annually.

The unavoidable issue is that the standard of living for the working class in 1st world nations must continue to fall if we are wedded to the idea of a 15 year average government funded retirement. As the ratio of workers to non-workers continues to worsen taxes on workers must rise and benefits to non-workers must fall. The math is the math.

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Understanding the painfully slow jobs recovery

Felix Salmon
May 3, 2013 18:29 UTC

Today’s jobs report was a solid one, and shows that the recovery, while not exactly strong, is at least not slowing down: Neil Irwin calls it “amazingly consistent”. Whether you look at the past 1 month, 12 months, 24 months, or 36 months, you’ll see the same thing: average payrolls growth of roughly 170,000 jobs per month. That’s not enough to bring unemployment down very quickly, given the natural growth in the workforce. But unemployment is coming down slowly. And at the rate we’re going, at some point in the second half of 2014 we should see total payrolls reach their pre-crisis levels, and the headline unemployment rate hit the key 6.5% level.

There’s a real human cost to the fact that unemployment is coming down so slowly, but there are lots of reasons why it’s very hard to bring it down more quickly. First and foremost, of course, is the fact that US GDP growth is mediocre, coming in at less than 2% per year over the past few years. That’s not the kind of V-shaped recovery which creates jobs. Calculated Risk’s justly-famous jobs chart shows just how bad the recession was for employment, and just how painfully slowly we’re scratching our way back: we’re more than five years into this jobs recession, and we’re still at the worst levels seen in the wake of the dot-com bust.

One of the reasons is the undisputed conclusion of Reinhart and Rogoff: that recoveries from financial crises are much slower than recoveries from other crises. But there’s something bigger going on, too, which Joe Stiglitz writes about today in a very wonky blog post for the IMF.

This is more than just a balance sheet crisis. There is a deeper cause: The United States and Europe are going through a structural transformation. There is a structural transformation associated with the move from manufacturing to a service sector economy. Additionally, changing comparative advantages requires massive adjustments in the structure of the North Atlantic countries.

To put it another way: what looks like a broad economic recovery is actually a combination of many trends, including the end of what turned out to be a very short and weak recovery in manufacturing employment. Here’s Irwin:

The fact that the overall job growth numbers have been extraordinarily stable does not mean there isn’t some real churn going on in the U.S. workforce. In the earliest phase of the recovery, manufacturing jobs was a major driver of job creation, but that turned out to be not a longer-term trend but a partial reversal of the steep declines of the recession. Now, job creation is entirely confined to the services sector: Manufacturing had no net change in employment, construction lost 6,000 jobs, and even mining and logging was a net negative.

Government employment, meanwhile, continued its long swoon… That leaves one sector to drive the train of job creation: private sector services. This particular month, there were strong gains in leisure and hospitality, retail jobs, and professional and business services, and health care has been a mainstay of the expansion.

Stiglitz makes the case that in a recovery with so many moving parts, the single blunt instrument of setting short-term interest rates at the Fed will never be enough, and that “there needs to be close coordination between monetary and fiscal policy.”

What’s more, as Mohamed El-Erian says, policymakers should ideally be able to use job growth not just as a goal, but also as a tool for achieving other ends.

Robust employment growth would – and, let us hope, will – play a critical role in helping the US pivot to a better place… It would do this by maintaining consumption and allowing for a more sustainable savings rate; by countering an excessive upfront fall in public spending that increases the risk of a recession; by enabling the Fed to slowly and gradually normalise monetary policy before it breaks too many things; and by reducing the risk of financial bubbles.

The US economy is a highly complex machine, with many moving parts which ought to be working with each other rather than against each other. Stiglitz makes a strong case that the financial sector broadly is right now part of the problem rather than part of the solution: it’s not directing funding to help the economy grow and create jobs, even as it continues to represent a serious systemic risk. It should go without saying at this point that fiscal policy broadly is part of the problem as well: you don’t create jobs by firing people, and the government should be borrowing if and when the private sector won’t. And as for monetary policy — well, it’s probably too early to tell. It’s done a great job of making people with money richer, but it has had a much less obvious effect on creating jobs for those who want them and don’t have them.

And yet there’s real room for optimism in today’s jobs report. Look at the revised numbers for February: an incredibly heartening 332,000 jobs created, in one short month. Look at the number of people unemployed for 27 weeks or more: that unhappy cohort shrank by 5.6% in April alone, to 4.3 million people. It’s still far too high, but this time last year it was over 5 million, so we’re making a significant dent in what has been the toughest nut to crack.

We can — and should, and could, and must — do better than this. But doing so will require a thaw in the Washington gridlock. When Jack Lew became Treasury secretary, it was understood that the most crucial thing he could deliver would be greater cooperation between the White House, Treasury, and Capitol Hill. That hasn’t happened yet. I hope and trust that he’s been working very hard behind the scenes to make it happen — partly because he doesn’t seem to have achieved anything else, but mainly because it’s by far the most important thing that he could be doing right now. Behind the jobs numbers there are some powerful forces driving real recovery in large parts of the US economy. It’s Lew’s job to work with Congress to identify those forces, and to give them all the support the government can muster.


It is really disappointing to see all this commentary and no mention of 1) China and 2) predatory capitalism. There are two causes of the declining role of employment in our economy: outsourcing to lower wage geographies and a persistent culture of cutting all FTEs from corporations. The Great Recession merely accelerated these trends and legitimated massive cost cutting across all corporations in the US.

There really is no end to these trends. We would need a complete reengineering of the motivations of businesses and governmental policies to even slow down these trends. And note that not a single politician is wlling to tackle either one of these monsters.

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Counterparties: The economics of flying blind

Apr 19, 2013 21:56 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 leaders of the G20 met in Washington today; their official communique was sent out, like any grand pronouncement, as a Word document posted on a Russian website.

The world’s most powerful finance ministers and central bankers appeared to be working through some serious confusion today. Even India’s finance minister seemed a bit puzzled by all the talk of Europe: “It was supposed to be a G20 meeting, but for a moment I thought it was a G7 meeting”, he said.

Three days after a grad student dismantled the widely-held idea of a 90%-of-GDP tipping point for national debt, the G20 agreed to move away from the idea of setting specific national debt targets. This a big change — just three years ago, the G20’s richest nations pledged to cut their deficits in half by this year. Now, as Reuters notes, Europe is not just re-thinking austerity, but promising to slow it down.

The IMF, which previously endorsed Britain’s austerity program, has now changed its stance on debt. That may augur a direct confrontation with the Cameron government. Just today, the UK had its credit outlook downgraded by Fitch, in part because of a “weaker fiscal and economic outlook”.

Mohamed El-Erian blames the IMF for some of the global policy confusion. While he admires the Fund’s “highly respected” analysis and “world class insight”, he says that policy implementation “frequently falls hostage to pressure from its political masters in advanced economies.”

His case in point: during the Cyprus crisis, the IMF signed on to a flawed rescue plan, then quickly retracted its support. The “IMF felt it had no choice but to succumb to pressure by European politicians,” El-Erian writes. Neil Irwin, on the other hand, applauds the IMF for changing its mind on debt and says that the IMF has now become the kind of friend who urges you to work less and drink more. (At the end of a long week, we at Counterparties appreciate those kind of friends.)

The G20 bigwigs also seemed unsure about the effectiveness central banks’ easy monetary policy. On Friday, there were no G20 objections to Japan’s two-year $1.4 trillion monetary stimulus program. But the FT’s Chris Giles says that, after years of low rates and stimulus, the world’s central bankers feel they’re effectively flying blind, in an “environment of uncertainty about the way economies work and how to influence recoveries with policy”.

Ex-ECB executive board member Lorenzo Bini Smaghi summed up the meetings. “We don’t fully understand what is happening in advanced economies,” he said. – Ryan McCarthy

On to today’s links:

The SEC is moving past the financial crisis and onto a “bold and unrelenting” enforcement program – Bloomberg

Even More TBTF
Mortgage REITs, the latest systemic threat to the US financial system – WSJ

Data Points
Canadians surpass Americans in net worth – WSJ

If at first you don’t succeed: Simpson and Bowles are back with another deficit plan – Bloomberg
The new Simpson-Bowles plan in full (pdf) – Moment of Truth

Is there a new tech “rust belt”? – WSJ

Generational attitudes on sushi and gay marriage – Mother Jones

Abe’s growth plan for Japan includes getting more women to lean in – FT

Dude, Blackstone isn’t getting a Dell – WSJ

The European Spreadsheet Risks Interest Group exists, and is predictably awesome – EuSpRiG

“Two traders with a Bloomberg terminal” no longer guarantees hedge fund prosperity – Economist

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


“Mortgage REITs, the latest systemic threat to the US financial system”

Yikes! When you get a chance, please debunk that brain dead vapid article. mREITs are less than 10% of the agency mortgage market, certainly no larger than the Banks, Brokers, Institutions and Pensions in them as well. Agency mREITs are even a smaller player in the repo market.

Annaly had no problem getting repo financing during 2007 -2008 because their desirable collateral was backed by the US Treasury. They’re hedged with repo with terms as long as 4 years, so any short term spikes aren’t gonna be felt too much.

Agency mREIT leverage is about 30% less than the Banks and Brokers as well, and if there’s to be new rules and regulations it’ll have to apply also to the Banks and Brokers. Any chance of that? I don’t think so either.

Agency mREITs assets grew rapidly last year thanks to the Europocalypse which along with the Fed, scared a lot of investors out of the sector. Their shares were trading below asset value so that was an ideal time for secondary offerings, which aren’t dilutive and the only way mREITs get larger.

WIth the Fed’s foot on the throat of both long and short term rates for at least 2 years, most mREITs are in a sweet spot of stable net interest spreads.

Nothing to see here, move along. . .

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Counterparties: A surplus of cuts

Ben Walsh
Apr 11, 2013 22:05 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.

President Obama’s 2014 budget was released yesterday; Wonkblog has a concise rundown of its winners and losers. The plan aims to cut $1.8 trillion in spending while raising $580 billion in revenue over ten years. To the considerable dismay of liberals, it includes cuts to Medicare and a reduction in Social Security cost-of-living increases.

Despite these cuts, Annie Lowrey writes that the President’s budget zeroes in on the twin problems of inequality and wage stagnation by increasing the federal minimum wage, instituting free preschool, and making the five-year extension of the earned income tax credit permanent. Sam Stein and Ryan Grim, however, see a budget full of old stimulus ideas that likely won’t pass.

The deficit is already shrinking rapidly. Bill McBride points to a Goldman Sachs research report estimating that in the first three months of 2013, the federal deficit was 4.5% of GDP — less than half its 2009 level. Dan Gross thinks that even though current policy is “nobody’s idea of optimal”, we are experiencing a “golden age of deficit reduction”.

The budget also includes several major changes to the tax code, including the often discussed “Buffett Tax”, which would impose a 30% minimum tax on household income over $1 million. Private equity managers won’t be pleased either: the budget would kill the “carried interest” tax break. John Carney says this is futile; Dan Primack has a good rebuttal.

Simon Johnson isn’t pleased. He sees a president who “has allowed the debate to become dominated by excessive paranoia about deficits and by extremist demands to shrink government”. As Derek Thompson writes, the President is proposing between $200 billion and $380 billion more in Social Security and Medicare cuts than Republicans are asking for. Jonathan Chait thinks the reason Obama is proposing these cuts has everything to do with politics: the president wants to beat Republicans to the punch on spending cuts and deficit reduction. – Ben Walsh

On to today’s links:

EU Mess
Buiter on Europe: It’s “extraordinary that so much political power rests with unelected technocrats” – Euromoney
Of course, Cyprus is a template for the future of Europe – Pawel Morski

How the Feds caught a former KPMG exec giving out inside info: A golf course sting – DealBook

Big bank details just how much more valuable big banks would be if they were broken up – Bloomberg

Financial Arcana
The latest hot trade on Wall Street: swaps that lower banks’ capital requirements – Susanne Craig
Regulators are starting to fight back against “needless corporate complexity” in the banking sector – WSJ

The problem with America’s schools isn’t about spending – Josh Barro
From ’93-’09, US universities added bureaucrats 10 times faster than they added tenured faculty – Businessweek

“Accountants are cowboys of information”: David Foster Wallace on accounting – Zach Seward

Billionaire Whimsy
Collect art or keep control of your family’s company? – Ben Walsh

The state of financial services: generally so so, unless you work in equities – eFinancial Careers

“I’m not an economist…” – Choire Sicha

JP Morgan
Was Ina Drew “heinously greedy or heinously incompetent”? – Cathy O’Neil
Dimon calls the London Whale trades “stupid” in annual letter to shareholders – JP Morgan

“Google Glass: a cure for rogue traders” – American Banker

Foursquare, with just $2 million in revenue, raises $41 million from top VCs – Businessweek

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


The google glasses idea seems to be that we could find more needles if we dumped a bunch more hay on the stack. There is nothing they would catch that current monitoring techniques do not already implicitly capture; the problem is that the data currently being monitored is already so expansive that the valuable parts are buried amongst the quotidian.

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