Felix Salmon

Elliott vs Argentina: 3 possible resolutions

Felix Salmon
Feb 19, 2014 23:05 UTC

Argentina, as everybody knew it would, has gone to the Supreme Court to appeal the bad (and ignoble) ruling against the country by New York’s Second Circuit. The most likely final outcome, still, is that Argentina will default, for the reasons (but not with the timing) I gave last year. But, with this petition, Argentina now has three possible outs.

Call them sovereign immunity, pari passu, and the bondholders’ ransom. None of them is particularly likely to happen — but add them all together, and there’s still a glimmer of hope for Argentina.

1. Sovereign Immunity

The first one is, in a sense, the obvious one. Argentina has appealed the lower court ruling to the Supreme Court, and it is possible that the Supreme Court will accept the case, hear it, and find in favor of Argentina. (If that happens, the decision would come down some time between October 2014 and June 2015.)

The Supreme Court needs to rule on a matter of federal law, and Argentina has just such a matter: the Foreign Sovereign Immunities Act (FSIA). Sovereigns by their nature can’t be bound by US courts — and there’s federal legislation to that effect. Argentina has a long list of legal arguments surrounding FSIA, but at heart its case is simple: the judge in New York is trying to force Argentina to use its reserves to pay its holdout creditors. But the judge can’t legally do that, because Argentina’s reserves are immune assets. And if such assets can’t be attached directly, they can’t be requisitioned indirectly, either. As the petition says,

The whole point of the FSIA’s two-part immunity scheme is that a foreign sovereign may “refuse to pay” immune assets to satisfy a money judgment, even when the sovereign is subject to a court’s jurisdiction. That is the basic structure of the FSIA, not a defect that justifies an injunctive remedy.

(Emphasis, wonderfully, in the original.)

The sovereign-immunity argument has been well rehearsed in lower courts. Elliott will say that Argentina explicitly waived sovereign immunity in its bond documentation, and that the injunctions are, on their face, quite agnostic as to where Argentina finds the money to pay the holdouts — or even whether Argentina finds the money to pay the holdouts. They just want to put the holdouts on an equal footing (pari passu, you might say) with the existing bondholders, so that if the holdouts aren’t being paid, then the bondholders won’t be paid either.

Are the finer details of sovereign immunity and district-court discretion really something the Supreme Court wants to litigate? It’s certainly possible that the Supremes will accept the case, especially since the US government supports Argentina on this narrow issue. Over the next few weeks we’ll see a series of amici file briefs for and against Argentina in this case; if the US is one of them, along with other major international powers like the IMF and France, then that might persuade the Supremes to hear the case. That said, however, there’s no very clear constitutional issue at stake — and neither has there been any disagreement between lower courts. At heart, this is a commercial issue, and the Southern District generally covers commercial issues very well. It’s not clear that the Supreme Court has any particular need or appetite to strike the Southern District down.

2. Pari passu

The second out for Argentina is a kind of backup plan, in case the Supreme Court doesn’t see anything it particularly wants to hear, but is still sympathetic to Argentina’s cause. The bond documentation being litigated here — the notorious pari passu clause — was written under New York law, but so far all the judges interpreting it have been federal judges, not New York judges.

Argentina says — rightly, I think — that the federal courts’ interpretation of the pari passu clause “is deeply flawed”. What’s more, it says, “no New York court has ever interpreted a pari passu clause in a sovereign debt contract”. The federal courts have certainly been clear about what they think the clause means, but they’re not in charge of New York law:

The New York Court of Appeals should have the final word on whether the pari passu clause prohibits a sovereign from continuing to service performing debt without servicing defaulted debt. If New York courts want New York law to upset settled expectations, impede restructurings, and endanger New York’s status as the law of choice for sovereign debt, that is their prerogative. But they should not have those consequences thrust upon them.

Argentina is therefore giving the Supremes another out: if they don’t want to hear the case themselves, they can send it down to the New York Court of Appeals, in the form of something called a certified question. (Basically, the Supreme Court would be asking the New York court to settle a question of New York law, rather than deciding the issue itself.) If the New York court then found that the federal courts’ interpretation of the clause was indeed deeply flawed, then they would have the power to overrule it, and thereby vacate the federal court order. Clever!

This seems like a good idea to me. The interpretation of the law should not be done by people who are the victims of the law — and in many ways the federal courts here are the victims of what they consider to be Argentina’s “contumacious” behavior. Basically, the federal courts have consistently awarded money judgments against Argentina, and Argentina has consistently ignored those judgments, and the federal courts have become highly annoyed and frustrated with Argentina as a result. And you don’t want annoyed and frustrated judges making law; you want the law to be interpreted dispassionately. As Argentina puts it:

In reacting to the district court’s injunctions, Argentina thus has not behaved like a contumacious litigant—it acted like a sovereign, displaying exactly the affront that Congress intended for the FSIA to prevent. Any sovereign would protest if a foreign court issued an extraterritorial order threatening its creditors and citizens and coercing it into turning over billions of dollars from its immune reserves.

By sending the case to the New York court, the Supremes would basically be appointing an impartial set of judges, who hadn’t had their noses tweaked for a decade by an affronted sovereign, to decide the meaning of the pari passu clause. It’s a clever idea, on the part of Argentina — but it’s also, sadly, by all accounts, very unlikely to happen.

3. Bondholders’ ransom

Which leaves just one other option for Argentina — and it’s an option which doesn’t involve the Supreme Court at all. The holdout creditors, led by Elliott Associates, say that they want a “negotiated settlement” — and it turns out that the bondholders want exactly the same thing. In public, they’ve called for “an inter-creditor transaction”. In practice, what that means is that they’re willing to give up some of their future coupon payments, if doing so will make the holdouts go away.

The idea is that over the next five years, Argentina is scheduled to pay its bondholders some $7.5 billion in coupon payments. The bondholders — or at least 23 of the biggest bondholders — are willing to see that number reduced by 20%, to $6 billion. And they would be willing to let the holdout creditors, led by Elliott Associates, pocket the other $1.5 billion, if it would help end this whole litigation nightmare.

I spoke to one of the bondholders last month, who said that “this is a hostage crisis, and we’re asking to pay the ransom”. And it’s easy to see why. Argentina’s bonds are trading at about 65 cents on the dollar right now. If Elliott forces a default, then those bonds will plunge in value to about 30 cents. If, on the other hand, the Elliott issue is resolved, then Argentina’s bonds would probably start trading at well over par. So whatever the bondholders lose in terms of future coupon payments, they more than gain in terms of the increased value of their bonds. As the bondholder told me, “I will pay five cents to have a hundred-cent bond rather than a thirty-cent bond”.

If you do the math on this proposal, it all makes a certain amount of sense. The bondholders, as we’ve seen, would make a substantial mark-to-market profit — while the holdout creditors would make even more. Take as an example a holdout creditor with $300 million, face value, of bonds. That creditor is asking, today, for some $700 million in principal and past-due interest. Argentina’s official offer, which is to simply reopen the terms of the old restructuring, would give that creditor bonds worth about $225 million — that’s less than face value.

But if the existing bondholders gave up 20% of their future coupons for the next five years, that would add a sweetener of about $150 million, in present value. On top of that, thanks to the rising tide of spread compression which would lift all the boats, the value of the exchange bonds would rise from $225 million to about $280 million. Add it all up, and the holdout is now being offered bonds worth $430 million or so — which is an extremely good deal, if those bonds were bought for about 25% of par, or $75 million.

The mechanics of such a deal would be complicated, to say the least. First, there would have to be a consent solicitation, where Argentina proposed a deal to all of its bondholders, asking them whether they would be willing to give 20% of their next five years’ coupon payments to the holdouts. Such a deal would be contingent, of course, on the holdouts accepting the offer. The threshold here would be 75%: under Argentina’s collective action clauses, 75% of its bondholders can, in principle, agree to do such a thing, and thereby bind everybody else.

Could Argentina, as well as Argentina’s big bondholders, persuade 75% of the existing bondholder base to accept such a coupon reduction? Nothing like it has ever been tried in the past, and the whole thing does smell of rewarding the very vultures who have made bondholders’ lives so tough for so long. So it wouldn’t be easy. What’s more, it’s not even clear that Argentina wants to attempt such a thing. The country’s powerful finance minister, Axel Kicillof, has come out against the idea, as part of his political infighting with Hernán Lorenzino, who’s nominally in charge of the restructuring, and who likes the idea.

The next step would be to get the holdouts to accept the deal — and that step would, if anything, be even harder. Elliott has said that the idea is “beyond bizarre” and “a stunt” — and even if Elliott were persuaded to change its mind, there are other holdouts, too, like Ken Dart, who might be even harder to bring around.

I suspect that a negotiated deal between the holdouts, Argentina, and the bondholders is exactly what the Second Circuit wanted all along. My impression is that they hoped that if they were very tough, that would bring the various sides together and make a negotiated resolution more likely. But when you’re dealing with individuals like Cristina Kirchner, Paul Singer, and Ken Dart, no one ever wants to budge. So even though many bondholders are willing to grease the negotiations to the tune of $1.5 billion, the chances are that a negotiated settlement is still not going to happen.

Despite the fact that there are now three ways out of this mess, then, I still reckon it’s going to end in tears — that is, in Argentina defaulting on its bonds. The only real question is when.


Cross out Argentina and substitute Puerto Rico, with a 2015 dateline.

Posted by nixonfan | Report as abusive

Is there opportunity in art history?

Felix Salmon
Feb 18, 2014 23:40 UTC

Last month, at an appearance in Wisconsin, Barack Obama made a mild dig at art history graduates like myself. “A lot of young people no longer see the trades and skilled manufacturing as a viable career,” he said, “but I promise you, folks can make a lot more potentially with skilled manufacturing or the trades than they might with an art history degree.”

It took Obama roughly 1.5 seconds to backtrack — or at least to emphasize that he loves art history. “I’m just saying,” he clarified, that “you can make a really good living and have a great career without getting a four-year college education, as long as you get the skills and training that you need.”

This is a really important point. We’re living in a world where the cost of college education is rising much faster than inflation, and saddling graduates with enormous debts which can’t even be discharged in bankruptcy. The result is that an art history degree has never been more expensive — and that you’ll be better off, in terms of total lifetime earnings, getting a vocational qualification in the trades than spending four years and a six-figure sum learning about the influence of Piero della Francesca on Jacques-Louis David.

Which is not to say that getting an art history degree is a bad idea. Virginia Postrel is the queen of this beat, and points out that even though art history graduates account for only 0.2% of adults with college degrees, a very impressive 5.9% of them are in the top 1% of incomes. In other words, someone with an art history degree is more likely to be in the top 1% than someone with a finance degree.

As Postrel says, the causation here is probably backwards, from family wealth to the decision to get a degree in art history — but still, an art history degree is nothing to sneeze at, which is possibly why Obama has apologized more formally for his remarks, in a (lovely) handwritten letter to an art history professor at UT.

I’m very sympathetic to the art historians here, and not only because that’s what I studied. The subject is almost ideal for teaching the kind of abstract-thinking skills that the next generation of graduates are going to need, in a world where a lot of number-crunching jobs are becoming rapidly automated. Studying art history means moving back and forth between words and ideas and images all the time, putting them together in novel ways while building on the work of countless smart people who came before you. I can hardly imagine a better qualification for much of the high-level knowledge work and ideation which will power the 21st Century economy.

But at the same time, the qualification is an expensive one, and (as I can tell you from my own experience, circa 1995) it’s not exactly easy to get a job as a fresh-faced graduate armed with nothing but an art history degree. The gamble is big, especially if you’re going into debt to get the degree, and frankly it’s not worth it. I wouldn’t have done it, if I had to borrow tens of thousands of dollars in order to get that degree. It’s much more sensible to pursue a vocational qualification which takes less time, costs less money, and gives you a much higher chance of getting a good job once you’ve earned it.

One of the big tasks facing the US economy is the challenge of reducing the cost of not getting a four-year degree. Not everybody can go to college, or should. The very small number of people who study art history are an elite minority; they’ll largely be fine no matter what. It’s the people who don’t go to a four-year college who need economic opportunities. And so it’s excellent news, as Obama says, that those opportunities exist. And that, on an economic level, they’re significantly more attractive than an art history degree.


I think that a lot of the problem is that people are treating a Bachelor’s degree in the Arts & Humanities like a technical degree. Studying Art History/Art/Creative Writing/Whatever does not mean that it’s the only thing that you can apply those skills towards. The auxiliary skills are what will get you a job.

Art History isn’t a degree for lazy people (I am an art professor, so I see this firsthand.). I’ve found that Art History majors tend to be the most organized, curious, and dedicated students in the classroom. It requires a lot of reading, writing, memorization, and analyzation. Many art students are scared to take art history courses because of how difficult it is to memorize 16+ things about 150+ works of art, to then only be tested on 10 of them.

Education is not just about learning a specific technical skill set, but also is learning how to THINK. Learning how to think critically and solve problems creatively is an invaluable skill that can be used in many occupations that are not directly related to degree field. Arts and Humanities majors are hungry for constructive feedback. They aren’t just interested in being told that they got the “right answer,” but instead they want to know how to improve their work.

There are more options than you think, and just because they aren’t directly arts related doesn’t mean that their degree has somehow failed them. (if this is the case, college has failed most people)

It’s a very disciplined degree, and an art historian could easily tackle law school. …Or a spreadsheet. Whatever they want.

Posted by biffy | Report as abusive

Monopolizing bandwidth

Felix Salmon
Feb 17, 2014 19:04 UTC

Paul Krugman makes a simple but powerful point about Comcast’s acquisition of Time Warner Cable:

One puzzle about recent U.S. experience has been the disconnect between profits and investment. Profits are at a record high as a share of G.D.P., yet corporations aren’t reinvesting their returns in their businesses. Instead, they’re buying back shares, or accumulating huge piles of cash. This is exactly what you’d expect to see if a lot of those record profits represent monopoly rents.

Broadband is the area which Krugman, and most other opponents of the Comcast-Time Warner tie-up, are most worried about. It can’t be a good idea to give a single company 37% of the market in broadband, especially when its real monopoly power would be much stronger still:

The reason this deal is scary is that for the vast majority of businesses in 19 of the 20 largest metropolitan areas in the country, their only choice for a high-capacity wired connection will be Comcast. Comcast, in turn, has its own built-in conflicts of interest: It will be serving the interests of its shareholders by keeping investments in its network as low as possible — in particular, making no move to provide the world-class fiber-optic connections that are now standard and cheap in other countries — and extracting as much rent as it can, in all kinds of ways. Comcast, for purposes of today’s public , is calling itself a “cable company.” It no longer is. Comcast sells infrastructure subject to neither competition nor a cop on the beat.

The argument from Comcast is, essentially, that it doesn’t matter whether it has a national monopoly, because it (and Time Warner Cable) already have local monopolies. If individuals and businesses don’t have any choice of broadband providers right now, then what difference does it make if the existing providers consolidate?

The argument does have a little bit of merit, if you believe that the main reason not to have monopolies is to encourage competition. But take a step back, and it’s abundantly clear that the US has something approaching a national broadband crisis on its hands.


In comparison with the rest of the developed world, the US has slower broadband speeds and higher broadband prices than just about anybody. When you do find exceptions, they always turn out to be cases of a very clear monopoly: Carlos Slim more or less owns broadband in Mexico, for instance, while a company called Southern Cross controls all of the bandwidth into New Zealand.

What’s more, in cases like Mexico and New Zealand, the rule of supply and demand at least still obtains. Broadband prices are high — but in large part that’s because the supply is constrained. The supply is constrained mainly because the monopolist sees no particular reason to increase it: they’re already charging monopoly prices, which means that they wouldn’t make more money by providing better service.

The US, by contrast, is unique in that it has very high broadband prices and an abundance of bandwidth. The country as a whole — or at least its urban centers — has no shortage of bandwidth at all. But if you want to connect your home or business to the major internet backbones, the cable-company gatekeepers will charge you an arm and a leg for doing so.

Farhad Manjoo has the explanation for why this should be. Internet service is very cheap for the cable companies to provide, and it’s also price-sensitive: if you reduce the price, more people will sign up. As a result, the cable companies would make more money from their broadband offerings if they reduced the price. So why don’t they? Because right now, 91% of Americans with broadband also have cable TV (I think, I can’t find the link for that right now), and the cable companies make their real money from TV, not broadband. The cable companies therefore have every incentive to price broadband as high as possible, so as to make the marginal extra cost of getting TV as well as small as possible.

In the US, cable TV rates are very high; as such, the best way to prevent cord-cutting is to ensure that broadband rates are also very high. That’s bad for broadband adoption, but it’s reasonably effective at keeping people paying very large sums for TV every month. In other words, high broadband rates are a bit like most newspaper paywalls: they’re not so much a way of making lots of money themselves, as they are a way of persuading you to pay lots of money for something else. (Physical newspaper delivery, or cable TV.)

If Comcast is allowed to buy Time Warner Cable, that model won’t change — but it will be reinforced. The cable companies will continue to price broadband at uneconomically high rates, in order to protect their cable TV cash cows. And as Krugman notes, they will have essentially no incentive to improve their own broadband infrastructure, since providing high-quality broadband is not how they make money. Instead, they will just continue to extract monopoly rents, which is good for their shareholders, but bad for everybody else.

There isn’t a market solution, here: there’s only a regulatory solution. The US government regulates the amount that the post office can charge, so that everybody has access to the mail; it also regulates the maximum amount that phone companies can charge for basic landline telephone service. Both of those regulations are beginning to look increasingly anachronistic, in an era where the internet has replaced both mail and telephony. But the obvious regulatory response — to mandate that utilities provide universal access to low-price, high-quality broadband — seems as far away as ever. If Comcast is allowed to buy Time Warner Cable, the current model will become even more entrenched. And the USA will slide ever further backwards in the global connectivity race.



Ah, but they wouldn’t be providing broadband. They would be providing wires/fibers/cables (OSI Layer 1). The stuff that goes on the wires (OSI Layer 2+) would be provided by some sufficiently corrupt capitalist entity.

Posted by Zdneal | Report as abusive

How should John Arnold approach pension reform?

Felix Salmon
Feb 16, 2014 00:23 UTC

The other shoe has dropped in the case of the $3.5 million which the Laura and John Arnold Foundation donated to a PBS series on “pensions in peril”. The recipient of the money, New York PBS affiliate WNET, has given it back. Understanding what’s really going on here, however, isn’t easy, so bear with me on this one.

If you go to the WNET website to learn more about the Arnold funding, you won’t find any announcement about the station giving the money back. There is a statement, but it’s not easy to find: it seems to have been emailed to news organizations as a PDF. Tellingly, the filename on the PDF is STATEMENTFINALFINAL2: it clearly went through a lot of revisions.

The one web page I can find with the statement is at the PBS ombudsman’s post on the subject, which was mostly written before the decision to return the money had been announced. As far as the WNET website is concerned, the only post is their original, defensive one — their initial high-dudgeon response to David Sirota’s original article.

At this point, it’s important to make a distinction between PBS, on the one hand, and WNET, on the other. I’ll quote the ombudsman:

This is more an issue of what the New York station, the well-known Channel Thirteen, did than what PBS or even the PBS NewsHour did. PBS does not produce television programs. It distributes programs produced by member stations, all of which are independent, or by independent filmmakers. The PBS NewsHour is produced at WETA just outside Washington, D.C. For all of its almost 40-year history, the NewsHour has been a five weekday-night program. In September of last year, it added a Saturday and Sunday night weekend edition. That program comes under the PBS NewsHour rubric but it is produced by WNET in New York and, as far as I can tell, none of the “Pension Peril” segments have been aired by the weeknight NewsHour.

In light of this distinction, the joint statement from PBS and WNET makes a bit more sense: the statement from the mothership is just that “PBS stands by WNET’s reporting in this series”, while the apologies and sword-falling are confined to the New York affiliate.

“We made a mistake, pure and simple,” said Stephen Segaller, Vice President of Programming at WNET. “The PBS NewsHour Weekend is a new production and while we thought we were following the guidelines and the correct vetting processes, we were incorrect.”

There’s a whole world of subtext in that phrase, “we thought we were following the guidelines” — a lot of which my former boss Jim Ledbetter teased out in his 1997 book Made Possible By…: The Death of Public Broadcasting in the United States. The big problem is that public broadcasting has become dependent on corporate financing — and has become very good at coming up with programming which represents corporate interests. The issue with the Arnold Foundation deal, in today’s PBS, was not that the content of the Pensions in Peril series was too aligned with corporate interests. Rather it was — well, let’s go back to what WNET’s Segaller told the NYT:

On Thursday, before the statement came out, he said in a telephone interview that WNET believed the funding did not violate PBS’s “perception” rule, because the foundation’s goals of encouraging public discussion were separate from Mr. and Mrs. Arnold’s desire for reform.

By telephone Friday, he said WNET officials reversed course after discussions with PBS “about both the facts and the optics. We all take very, very seriously any suggestion that there’s a perception problem about the integrity of our work or the sources of our funding, and we came to the conclusion that it’s better to err on the side of caution.”

He added that the grant had been solicited with “absolute conviction” that the foundation was an acceptable funder.

In other words, WNET still doesn’t believe that there was any actual conflict here — it just believes that there’s “a perception problem”. He’s returning the money because of “the optics” — which is to say, because Sirota’s article came out, and it made PBS look bad.

What Segaller told the NYT on Friday is surely closer to his real beliefs than the words put into his mouth in version “final final 2″ of the official PBS/WNET statement. And yet, the conflict here is, in reality, clear as day.

Firstly, The Laura and John Arnold Foundation was the only sponsor of the Pensions in Peril series. (This despite the fact that, as LJAF spokeswoman Leila Walsh told me, “the grant to WNET was made with the explicit understanding that WNET would secure multiple funders for the project”.) Secondly, the Pensions in Peril series covered a California ballot initiative on pensions being run by San Jose mayor Chuck Reed. Thirdly, the ballot initiative was directly funded by John Arnold, and Reed himself thanked “people from the Arnold Foundation” for putting him in touch with other funders. In other words, the TV program covering the initiative got all of its funding from someone with an unapologetic dog in the fight. It’s hard to come up with a clearer conflict than that.

And yet WNET and LJAF are both convinced that there was no real conflict. WNET’s Segaller draws a distinction between the Arnold Foundation, on the one hand, and “Mr. and Mrs. Arnold’s desire for reform”, on the other: it seems that taking money from the Arnolds themselves would have been a clear no-no, but that taking money from their foundation was quite different. Similarly, the foundation’s Walsh was at pains to tell me that “LJAF is not funding the California ballot initiative. We are a 501(c)(3) private foundation. As such, we do not participate in political activities, make political contributions, or advocate for the passage or defeat of legislation.”

This invisible-to-the-naked eye distinction, between John Arnold, on the one hand, and John Arnold’s foundation, on the other, was all that WNET needed to go after the foundation for funding. And it was all that the foundation needed to convince itself that there was no conflict involved and that it could happily write a $3.5 million check to WNET. No one seems to have stopped to ask whether such Clintonian niceties created, in words that pension reformers might understand, a substantial, if contingent, reputational liability. Even though similar concerns have been raised in the past.

That said, the Arnold Foundation has a do-over now: it has its $3.5 million back, and says that “we are going to keep working to educate the public” about pension reform. And after speaking to Josh McGee, the Arnold Foundation’s policy guy on the subject, I’m convinced that there’s more to the foundation’s policy stance than a cackling, plutocratic desire to impoverish the elderly. McGee’s “solution paper” on the subject lays out four goals for pension reform, all of which are laudable:

Sound pension reform meets four general criteria: (1) establish transparency with respect to the true cost of the benefits promised to public employees; (2) mandate that the pension plan sponsor pay the full cost of accrued benefits each year; (3) mandate that the pension plan sponsor pay down the unfunded accrued liability over a reasonable time horizon and (4) improve the generational equity, portability and security of benefits for public employees.

I don’t love the paper as a whole, which happily enumerates all the problems with defined-beneft pensions, without going into any detail about the equally big problems with defined-contribution pensions. The paper concentrates on state and local pensions, for instance, yet ignores the fact that those governments are still responsible for their elderly citizens’ wellbeing, even (especially) if they’re paying those retired citizens very little.

Pension reform is a bit like education reform: the facile solutions are not the correct solutions. In education, reformers tend to point to bad teachers, complain about how difficult they are to fire, and then propose that the necessary course of action is to test those teachers, evaluate them, and fire them at will if they’re not performing up to snuff. With pensions, reformers tend to point to firefighters or policemen who retired at age 50 with a fat pension after 25 years’ service, and who then happily work elsewhere for another couple of decades while simultaneously drawing a pension for much longer than they were actually working. On this view, the necessary reform is to roll back the plans which allow such behavior.

Take a step back, however, and what really needs to be done, in both cases, is a much bigger project — a project where there’s no need to take aim right now at public-sector employees. Start at the top, with the way the schools and the pension funds are structured; once you’ve fixed that, then maybe start moving down the ladder a little, if it’s still necessary — which it might not be.

In the case of pensions, McGee’s criteria are a good place to start. Insofar as there’s a pensions problem, it’s in large part a function of how labor negotiations work in the real world. Local governments, operating on a tight budget, can’t offer the kind of pay rises that the unions demand — and so the unions accept juicier pension benefits in lieu. The present value of the pension benefits is invariably larger than the amount of money the unions would accept as a simple raise — but so long as the current government doesn’t need to pay anything, both the government and the unions are happy. The unions get valuable rights for life, while the government gets to leave for its successors the question of how to pay for them.

So before we start talking about allowing governments to default on their pension obligations (which is the goal of the California ballot initiative being supported by Arnold), let’s start by shoring up the pensions system as a whole. Make sure firstly that pension plans are funded, or on a path to get that way, and secondly that any future pension promises are funded as well — that an actuarially-derived sum of cash is put into pension funds whenever a local-government employer makes a pension promise. (The federal government is a bit different, since it has a lot more latitude in terms of being able to find the money to service future pension obligations.) Finally, start working on making local-government pension plans more portable, so that people don’t feel forced to stay in the same town and the same job for decades, and so that people who work for local government for five or six years can leave their jobs with some improved retirement security.

None of this will be easy: the whole reason why pension obligations started ballooning in the first place was that local governments didn’t have the money to hand out pay raises. So the unions will push back against these ideas: they like any system which makes it easier for them to accrue valuable benefits at negligible up-front cost to the government. But if you want to guarantee vocal opposition which is almost impossible to overcome, then your best way of doing that is to combine or replace these kind of reforms with an attempt to renege on governments’ existing pension obligations.

Again, it’s easy to draw attention to outliers — the handful of municipalities which have literally gone bankrupt, and where pensioners are reduced to the status of unsecured creditors. The argument you hear from the pension reformers is that if we don’t take relatively modest action now, there will be a much more drastic reckoning — involving a spate of bankruptcies — down the road. They might be right, but this is the point at which they start to sound like Meredith Whitney.

Most municipal bonds are still trading at very low yields, and there’s no reason to consider pension obligations to be any less, well, obligatory than bond obligations. Governments have to make good on them, so let’s push hard to increase the degree to which pension plans in general are being funded. If the Arnold Foundation confined itself to that, and didn’t simultaneously support plans making it easier for governments to default on existing promises, it would still face opposition. But there would be much less of it, and the foundation’s chances of achieving real legislative success would surely rise substantially.


Something has to give, eventually. TFF make’s, IMO, a very salient point. Plan funding growth assumptions are a large part of this problem.

Rosy plan return assumptions wallpaper over outsized promised benefits. Which as you point out Felix, are often granted in lieu of current compensation.

I argue that again in this case the issue is that as a society we place very little emphasis on personal responsibility and even less on a delay of gratification. We want it all and we want it now for the most part. Don’t give it up now and you’ll pay dearly.

I’m fortunate to participate in a private pension plan (with COLA’s) that is fully funded and always has been. My previous employer drummed into the staff that retirement finances were a “three legged stool”. One leg pension, one leg social security and one leg…..are you ready? Personal savings. Wow, how radical.

Those of us who listened are doing quite well in spite of all the financial angst.

Posted by Missinginaction | Report as abusive

Pension politics

Felix Salmon
Feb 13, 2014 00:12 UTC

David Sirota has a very important scoop today: the PBS series “Pension Peril” has secretly* been funded by John Arnold, a billionaire powerbroker with an aggressively anti-pensions political agenda. This looks very bad for PBS — but it’s also bad for Arnold, who generally gets glowing press, and who would seem to have no good reason to have insisted on secrecy when writing the $3.5 million check that made the series possible.

The PBS series in question seems to fall uncritically into line with the beliefs of Arnold and other Very Serious People — that pension liabilities are a huge problem, and that the only way to fix them is to reduce the amount that pensioners get paid. But of course it’s not nearly as simple as that.

The John Arnolds of this world tend to assume that three things are always true:

  • Defined-contribution pensions are better than defined-benefit pensions;
  • Funded pensions are better than unfunded pensions;
  • Individual pensions are better than group pensions.

It’s easy to see why people think this way. If there’s no money, then what assurance do you have — really — that you’ll be paid? If you have to share your pension with others, how can you be sure that they won’t end up with more than their fair share? Isn’t it better to just keep all your money for yourself, and make sure to save enough that you can live well in retirement?

This is a pretty libertarian, every-man-for-himself view of retirement: it makes few concessions to the idea that there’s a societal obligation to the elderly, or that groups can achieve more together than they can individually. At heart, it’s a view which benefits people like John Arnold, who pay a lot of taxes, at the expense of the poorest members of society, who might take out more than they put in. And, of course, it’s a view which benefits successful investors, like John Arnold, over schmucks who have no idea how to best invest their paltry 401(k) funds.

In reality, big pooled pension funds are much more efficient — and generate much higher returns — than anything an individual is likely to be able to manage. And in the specific realm of public finance, the case for group-funded defined-benefit schemes is even stronger. That’s because public servants — police officers, elementary school teachers, you name it — tend to have much longer tenure at their jobs than, say, hot-shot fund managers. They are also willing to work for relatively low salaries precisely because they know that their pension benefits are good: that they don’t need to worry about how they’re going to make ends meet in retirement. That peace of mind is hugely valuable, and rarely factors in to the calculations of the pension opponents, who seem to think that worrying about your individual retirement investments is a good thing.

Around the world, indeed, in places like Hungary and Poland, the roll-your-own pension plan model is being, reversed, and governments are reverting to the “trust us” model. The mechanism has been particularly drastic in Poland, where the government recently confiscated some 150bn zlotys (€36bn) of Polish government bonds and government-backed securities, seizing them from private pension-fund managers. The Poles then cancelled those bonds entirely, which had the effect of reducing Poland’s national debt overnight, by a substantial 8 percentage points. Given debt-ceiling rules, that gives the Polish government a lot more room to run deficits than it had before. In return, the Poles who were counting on the retirement income which was going to be generated by those bonds are just going to have to make do with a standard pay-as-you-go system, where they’ll receive a state pension which is paid for out of general tax revenues.

This is not as dreadful as it necessarily looks at first blush. Governments can always find a way to reduce pensioners’ incomes, through taxes or any other means. And now, at least, those incomes will be less tied to the vagaries of market returns. Indeed, Poland isn’t all that far from the United States: although we do put a lot of government bonds into the Social Security trust fund, it’s entirely up to the government how much money pensioners take out of that fund. It can be less than the fund is earning, or more: the decision is political, and doesn’t bear much relation to the income being generated, or even whether the trust fund has any money in it at all.

Still, the Polish move is a pretty bad one. The pension funds still exist, but now they’ve lost most of their fixed-income component, so they’ve become a lot more volatile. The playing around with the national-debt figures is a silly, and dangerous, trick. And without strong domestic pension funds, Poland has now lost an important source of investment flows — the kind of money that helps to keep an economy innovative and productive.

So pension funds are, generally, a good thing. And when you have a pension fund, it’s a good idea to fund it well. But they’re not a panacea, and in general the answer to the problem of underfunded pensions is just to fund them better, rather than to start cutting benefits.

The John Arnolds of this world should remember one thing: it’s just as easy to tax retirement funds as it is to cut defined pension benefits. If America really needs to start taking money from future retirees, then maybe the politicians will start looking at a much juicier target — the massive tax expenditures being spent on things like IRAs and 401(k) plans. Those tax breaks are not fair — they benefit the rich much more than the poor. Maybe the sensible thing to do is to take those tax expenditures, and use them instead to shore up distressed public pension plans. If indeed those plans are in as much peril as John Arnold says they are.

*Update: Leila Walsh, the director of communications at the Laura and John Arnold Foundation (which also responded to Sirota’s article), emails:

You stated that the “PBS series ‘Pension Peril’ has secretly been funded by John Arnold.” This statement is entirely inaccurate. Information about the grant is available on the LJAF website. We have nothing to hide and have publicly disclosed the amount, term, and purpose of the grant.

WNET also issued a statement this afternoon that says, “The Arnold Foundation is a supporter of this initiative, which has been clearly disclosed on the three PBS NewsHour Weekend broadcasts (produced by WNET) that have included segments funded through this project.”

“poorest members of society, who might take out more than they put in”

It is dishonest to use a word like “might” in a sentence like this. You “might” be hit by lightening; or you “might” win $100 million in the lottery; or John Arnolds “might” go and sell all his possessions and give the money to the poor (Matthew 19:21) – ie highly unlikely possibilities compared to the almost certainty that the poorest members of society will take out more than they put in. And then there is this: “the United States: although we do put a lot of government bonds into the Social Security trust fund”.
Here is what Social Security says about the SS trust funds that receive SS taxes:

http://www.ssa.gov/oact/progdata/fundFAQ .html

“How are the trust funds invested?”

“By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are “special issues” of the United States Treasury. Such securities are available only to the trust funds.”

“What happens to the taxes that go into the trust funds?”

“Tax income is deposited on a daily basis and is invested in “special-issue” securities. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund.”

In other words, SS Trust money is treated just like ordinary tax revenue except that the government promises to repay these monies plus interest to the SS as needed. These trust funds are government debt obligations and can only be repaid by raising taxes (unlikely) or increasing overall government deficits.

http://www.salon.com/life/life_stories/i ndex.html?story=/mwt/feature/2011/04/02/ late_in_life_excerpt

“the first recipient of Social Security, a bookkeeper named Ida May Fuller, started to collect her checks in 1940. She proceeded to live another thirty-five years, long enough to witness the ascent and disbanding of the Beatles and the landing of the man on the moon. For her total $24.75 contribution, she received $22,888.92 in benefits”

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Content economics, part 5: news

Felix Salmon
Feb 11, 2014 16:53 UTC

Have you heard the news? Janet’s pregnant!

There’s a reason that the first thing you see when you log in to Facebook — the product around which everything else on Facebook revolves — is called the News Feed. And yet, only a relatively small proportion of what you see in your News Feed can really be considered journalism.

It is almost impossible to exaggerate the degree to which Facebook has changed the news business. For centuries, news has been based on a broadcasting paradigm: a small group of journalists creates a product — a self-contained news bundle — which is then consumed by a very large group of viewers or readers or listeners. Various different bundles competed for your attention: you might get your news from the New York Times, or the Economist, or NPR, or the NBC Nightly News, or Newsweek, or any of a thousand other outlets. In any case, the atomic unit of news, from the consumer’s perspective, was the bundle, not the story. Any given individual would get her news from only a handful of outlets in any given week — quite frequently, only one or two.

The result was a mentality perfectly summed up in the NYT slogan of “all the news that’s fit to print”. News outlets could not assume that their readers were getting any news elsewhere, so they had to aspire to being comprehensive. They also had to appeal to a very broad audience: every story in a prime-time newscast, for instance, had to be understood by nearly everybody watching it.

Finally, the news had to be new. If you published a story yesterday, you couldn’t republish the same story today. The news was therefore incremental: the bundle informed you of how the world had changed in the past day, or week. The daily bundles were therefore at their best covering events which happened over the course of a single day, and the weekly bundles were best at covering bigger events which happened over the course of a single week. Longer-duration stories were harder to cover — wars, for instance, or the civil rights movement. On the one hand, you didn’t want to bore your readers with old news; on the other hand, you didn’t want to assume that they knew everything that had previously been reported on the subject. It was a hard line to walk. In general, the more heavily-covered the story, the more that the public would be forced to piece together the big picture from a long series of incremental developments. If you hadn’t been following the story from the beginning, you would feel a bit like someone starting a TV series on season 3, episode 5.

In the early days of the web, these constraints were not serious handicaps. The web wasn’t (yet) replacing the old bundles as the main place where people got their news. And, in any case, the portals were recreating the bundle strategy of trying to be all things to all people. But then the dot-com bust arrived, and in its wake the web became atomized. Where once there were portals, now there was search — along with a new phenomenon called blogs.

Search and blogs, between them, helped to usher in a huge change in how we consume news, and turned the atomic unit of news from the bundle to the story. New outlets, like the Huffington Post, still aspired to bundle the news, but the bundling was no longer the top priority. Instead, such sites put enormous amounts of effort into ensuring that their stories — on an individual level — would get lots of traffic from Google. Later, outfits like Demand Media gave up on the bundle idea entirely, and just tried to manufacture the kind of stories that people were searching for. And all the while, blogs were acting as rebundlers, linking to the best content from all over the web. The special value of the bundle — the whole point of a news product, and something only a major media company could ever put together — was starting to die. Simultaneously, the value of the individual story, which might attract hundreds or even thousands of inbound links, started to rise substantially.

The rise of the blogs also meant the erosion of what Ezra Klein calls “the constraint of newness”. Some blogs, especially in the tech space, competed hard on speed. But almost all of them found a huge audience of people who wanted them to take content which had already been published elsewhere, and then republish it in their own voice, on their own site. A punchier headline here, a snarkier take there; often the copy proved more popular than the original.

With this change, the economics of the news business started shifting dramatically. Before, the locus of value creation was fundamentally corporate: only big media companies could hire hundreds of journalists and put their work together into a comprehensive and valuable bundle. But online, bundling is cheap. Any blogger can start finding and linking to the best content out there, and many did. The real value, now, started being pushed down a couple of levels, to the individuals who were writing the content which would garner those all-important inbound links. What’s more, as we saw in part 2 of this series, those individuals tend to command more reader loyalty than their corporate owners do.

It was never going to be easy for legacy media companies to adjust to these new realities. But then came social, which accelerated everything, and sent the whole news ecosystem spiraling out of the old publishers’ control.

The main reason why the blogosphere never managed to overtake legacy media was the fact that it required quite a lot of work on the part of readers, who had to put significant effort into seeking out the blogs, or the set of blogs, which best reflected their own interests. The most avid news consumers would do that work, and be well rewarded for doing so. But most people aren’t particularly avid news consumers, and so they never bothered.

Similarly, the “daily me” products which were occasionally launched by big media companies tended to need a lot of laborious personalization effort up front, in return for dubious benefits down the road. Even if you went to the trouble of customizing one of these sites so that it would deliver personalized content, you’d still end up being served only material produced by a single media company. After many years of trying, only one personalization product got any mass traction at all, and eventually that one too — iGoogle — got killed.

But then social media arrived. Twitter and Facebook take a very basic bloggy format — the reverse-chronological news feed — and serve it up in as many different flavors as they have users. Personalization isn’t a way of taking an existing product and refining it; it is the product. This is personal personalization, too. Rather than trying to refine what you see by specifying subject headings like “dance” or “Miami Dolphins” or the tickers in your stock portfolio, social websites are based in the first instance on the real-life human beings you care about the most.

In the era of blogs, if a certain blogger shared a news story you were interested in, that would help increase the attention you paid to the blogger. In the era of social media, if one of your friends shares a news story, that helps increase the attention you pay to the news story. People started caring more about the news, not because the news had suddenly become more interesting, but just because they saw that their friends cared about it, and it’s only human to care about what your friends care about.

Social media didn’t just create newly-engaged readers; it also created millions of newly-engaged aggregators. The most enjoyable part of blogging, in the early days, was putting things up on the internet and seeing people respond to them — by clicking on your links, or linking to you, or engaging you in the comments section. But it wasn’t easy. Twitter and Facebook — and Pinterest, for that matter, and the rest of the social media universe — did two important things. Firstly they made publishing incredibly easy; and secondly they rewarded publishing by giving contributors immediate likes and replies and favs and other evidence that people really cared about what you were publishing. It was the endorphin rush familiar to old-school bloggers, democratized and accelerated.

Now, everybody is a journalist, or at least a contributor to other people’s news feeds. There are still a few individuals whose links matter a lot — Matt Drudge, most obviously, or John Gruber. They have an ability to provide the kind of links that millions of people want to follow. But the traffic they drive is dwarfed by the aggregated power of Facebook, where millions of links, and other snippets of information, are shared every minute.

The result is that Twitter and Facebook have become the new indispensable bundles — and in doing so have changed the nature of what news is. Imagine opening up the New York Times and seeing pictures of your friend’s birthday party: that would be personalization. And that’s exactly what Facebook provides, with the help of millions of unpaid editors. Those editors might care a little bit about stuff being new — but they don’t care nearly as much as journalists do. They do care a lot about interests which have historically been too narrow for mass-media outlets to cover. And they also care about stuff which is silly, or cute, or funny, or all of the above.

This might come as depressing news to high-minded editors who extol the wonders of investigative journalism and who disdain cat videos as being beneath them. But most news bundles have always included their fair share of fluff, and in a disaggregated world, there’s no need for the investigative journalists to work for the same employer as the people curating cat videos. (Although, they can.)

The new dominance of social media in the news business is not depressing at all: it’s excellent news. Just as most news consumers were never avid enough to seek out blogs, most Americans were never avid enough to seek out news at all. They didn’t buy newspapers; they didn’t watch the nightly news on TV; it just wasn’t something which interested them. But now the news comes at them directly, from their friends, which means that the total news audience has grown massively, even just within the relatively stagnant US population. Globally, of course, it’s growing faster still — the ubiquitous smartphone is a worldwide phenomenon.

We’re at an excitingly early stage in working out how to best produce and provide news in a social world. There are lots of business models that might work; there are also editorial models that look like they work until they don’t. But if you look at the news business as a whole, rather than at individual companies, it’s almost impossible not to be incredibly optimistic. Media used to be carved up along geographic grounds, because of the physical limitations of distributing newspapers or broadcasting TV signals. Now, there are thousands of communities and interest groups that gather together on Twitter and Facebook and share news with each other, which means there are thousands of new ways to build an audience.

Meanwhile, on the back end, technology is evolving fast, and giving individual journalists astonishing power to tell stories in compelling and highly visual ways. Posts like this one — wordy strings of paragraphs, without much structure or narrative — are inherently off-putting; there are much more efficient and effective ways for people like me to communicate what we want to say, and there are dozens of new-media companies devoted to giving us the tools to do just that.

Now is a particularly exciting time in the news business. One journalist recently told me that it has changed more in the past eight months than it changed in the previous five years, and I think he’s right about that. One big reason is that the technologists are getting involved: people like Vox Media and Medium and BuzzFeed and First Look Media are making multi-million-dollar bets that they can build the CMS of the future, and that they can use their software advantage to win the battle for consumer attention. David Carr says that it costs about $25 million these days to compete in the digital media space — that’s a lot lower than the $50 million cost of launching a magazine, or the $200 million cost of launching a cable network. And it’s lower still than the billions of dollars that newspaper companies — including the New York Times Company — spent on color printing presses. In other words, the barriers to entry have never been lower, while the potential rewards have never been higher.

Right now might also be a very brief window of opportunity for roll-up strategies. The idea behind such things is simple: if you have a powerful CMS, then it makes sense to take existing sites (like, say, the Curbed Network) and move them onto a more powerful system (like, say, Vox Media’s Chorus). Everybody wins. But as web technology becomes increasingly sophisticated, and sites start looking very different depending on the device used to view them, it becomes increasingly difficult to port an entire website over to a brand-new platform. You can’t just import the HTML and tweak the CSS any more. Up until very recently, there hasn’t been the money available to prosecute such a strategy; it won’t be all that long before such a strategy becomes technically much more difficult. (I can’t imagine, for instance, merging the Vox Media and BuzzFeed back ends without enormous headaches and difficulty.) So if you’re going to do it, then you should waste no time.

On the other hand, journalists themselves are becoming much more portable than they ever used to be. It used to be that if you left the NYT or WSJ or ABC News or some other storied news brand, you lost a lot of power and reach. But as the media universe fragments, that’s not nearly as true any more. Just in the past few months, Nate Silver and David Pogue have left the NYT; Walt Mossberg and Kara Swisher have left the WSJ; Katie Couric has left ABC; Ezra Klein has left the Washington Post; Glenn Greenwald has left the Guardian; and so on and so forth. All of those were high-profile, big-dollar deals, but there are lots of other journalists moving around right now too, and it has never been less obvious that if you get a job offer from a big legacy-media company then you should take it.

The reflected glory of the established brand is still there, to be sure — “I’m calling from the New York Times” still gets your calls returned a lot faster than “I’m calling from Medium”. But legacy companies tend to move more slowly, and have more cumbersome technology, and are less likely to win the technology arms race, if only because their editorial technology has to support not only digital publishing but also the old-media formats. The result is what you might call the journalist arb: a digital company can pay its journalists significantly more than (say) the NYT, while still having a significantly lower total editorial budget per journalist. The journalists get more money, more freedom, more tools to tell their story, and get to work for a more nimble employer which isn’t burdened with a massive legacy cost basis. They might lose a certain amount of reputational capital, but the loss involved there has never been smaller, and is decreasing by the week.

So even if it’s soon going to be difficult for digital media companies to aggregate websites onto a single platform, it is only going to get easier to aggregate journalists. The most efficient platforms, with the greatest reach and the best tools, will have a natural advantage in terms of talent acquisition and retention. Which in turn is going to make life more difficult still for legacy media companies.

We’re only just beginning to get an idea of the kind of journalism — and the kind of news — these new platforms are going to produce. Certainly, the conception of what counts as news is going to get broader. It will include living articles of the kind that Klein is talking about; it will include personal stories of the kind that do so well on Medium; it will include discursive conversations and opinionated video; it will be fast, and slow, and funny, and serious, and personal, and universal, and hyper-local, and global, and everything in between. And, for the companies which get it right, it will be extremely profitable.

(This is part 5 of an irregular series; it comes in the wake of part 1: advertising, part 2: payments, part 3: costs, and part 4: scale.)

Be happy that Stan Fischer worked at Citi

Felix Salmon
Feb 10, 2014 18:30 UTC

Last week, Justin Fox had a great post entitled “How Economics PhDs Took Over the Federal Reserve”. The first Fed chairman of the modern era was a banker, Marriner Eccles; he was succeeded by Thomas McCabe, who had a bachelor’s degree in economics but whose main qualification was having been the CEO of Scott Paper. Then William McChesney Martin moved over to the Fed from Treasury; he was a former stockbroker and New York Stock Exchange president, and ushered in a new era:

Under Martin, regulating the economy through monetary policy pushed aside bank regulation to become the central bank’s No. 1 job. So hiring economists, and bringing people with serious economics backgrounds onto the FOMC, became a priority…

The new Fed Board of Governors (assuming the Senate confirms the latest nominees) will include veteran economics professors Yellen, Stanley Fischer, and Jeremy Stein, plus Lael Brainard, an economics PhD who has spent most of her career in Washington but did teach at MIT for a few years early in her career. The other three members are lawyers who have spent much or most of their careers in government. As for the Federal Reserve Bank presidents, eight of the 12 have economics PhDs and seven of those have spent much or all of their careers at the Fed. Two of the non-PhDs have spent their careers at the banks they lead, while only two bank presidents — Atlanta’s Dennis Lockhart and Richard Fisher of the Dallas Fed — fit the pre-1950 Fed mold of successful bankers/businessmen doing a stint as central bankers.

The ascendancy of the professoriat didn’t serve the Fed particularly well: without real-world business or banking experience, the FOMC ignored the problems of growing leverage, particularly in the financial sector, for far too long. Alan Greenspan’s Fed was run on laissez-faire principles: the market is a self-correcting mechanism which doesn’t allow banks and shadow banks to become too leveraged. Or, to put it another way, if investors are happy buying structured credit products at razor-tight spreads over Treasuries, then who are we at the Fed to spoil their party.

When the credit crisis first hit, in 2007, worries spread out from Wall Street: mortgage bankers first, then banks more generally, then the New York Fed, which is very plugged in to real-world concerns in the financial sector. The problem was the final leg, from the New York Fed to the Federal Reserve Board: for all that there might be a problem in practice, the economists in Washington couldn’t see how it would be a big problem in theory. And so they convinced themselves, in the notorious words of Ben Bernanke, that the subprime problem was going to be “contained”.

It’s therefore a real problem that the American central bank — which is, after all, a bank, and an incredibly profitable one, at that — has precious few actual bankers on its governing board. I’m all in favor of having a significant number of monetary economists who can think deeply about the effect of short-term interest rates on employment and inflation. But at the same time, it would be nice to have a few people who understand financial markets, and the pass-through mechanisms which define them. Not to mention a relatively sophisticated understanding of what banks actually do, on a day-to-day basis. After all, the Fed is the main prudential regulator of the banking system, and its board needs to understand where the stresses are.

All of which serves to underscore what an excellent nominee Stanley Fischer is as vice-chair of the Federal Reserve. Yes, he’s a professor — indeed, he wrote the definitive macroeconomics textbook, which is now in its twelfth edition and still going strong. He’s also a deeply experienced central banker and international policymaker. But he also has some real-world banking experience, having worked in a senior level at Citigroup from 2002 to 2005.

According to Pedro da Costa, however, Fischer’s years at Citi will count against him when he appears at his confirmation hearing:

The nominee for Fed vice chairman is likely to face questions at his confirmation hearing about whether he would be a tough regulator of big banks after earning several million dollars at one.

This is, let’s say, unhelpful. Yes, Fischer earned good money when he was at Citi. But the reports about his financial disclosure form I think draw too much of a causal connection between his Citi tenure and his wealth. Here, for instance, is Bloomberg’s Joshua Zumbrun:

While Fischer has spent much of his career as an academic and government official, he served as vice chairman of Citigroup Inc. from 2002 to 2005 and amassed a personal fortune of between $14.6 million and $56.3 million, a sum that would make him one of the wealthiest Fed officials.

The implication here is that Fischer had a modestly-remunerated public-service career before he joined Citi and cashed in. Which really isn’t true. Fischer’s tax-free income at the World Bank and IMF was substantial, and he surely made just as much money when he was at MIT. But the real money, I’m quite sure, came from that textbook, which he co-wrote with Rudi Dornbusch. It was the macroeconomics textbook of the late 1970s, and, like all standard textbooks, became something of a license to print money. (The trick is to keep on updating the textbook with new editions, making old second-hand versions useless and forcing students to pay three-digit sums for the version being used in class.) If Fischer took his textbook proceeds and invested them conservatively into the great bull market of the 1980s and 1990s, that alone would make him a very wealthy man today.

Fischer left Citi before it imploded, but he was there while it was manufacturing many of the toxic subprime products which ended up proving all but fatal. Mortgage products weren’t Fischer’s area, but he did work very closely with Robert Rubin, who was blithely unconcerned about the risks being built up. That’s an incredibly important and valuable lesson to learn: you can’t trust wise men like Rubin to see what’s going on in front of their face. And when bank CEOs tell the Fed board that they have everything under control, Fischer will know better than most just how little those statements can be trusted.

I doubt that Fischer will have any real problems being confirmed. Any senators who want to cause mischief can certainly do so — they can point to his private-sector experience, or they can bellyache about how he has various different nationalities rather than being “100% American”. But Fischer is probably the best central banker in the world; it would be completely insane for the Senate to block him. Especially given that he brings some of the actual banking experience that the Fed so desperately needs.


LOL Felix ascribes to the “Great Man” theory of history, which is largely not true and anachronistic after-the-fact rationalizing. Does Felix really think that the Fed has influence over the economy? Another Fischer, Fischer Black, who won the Nobel in 1997, thought not. And the Fed has staff that does the hard work behind the scenes; the chair is largely a figurehead. As for voting, it’s been found that most of the players follow the lead of the head, that would be Yellen. I doubt therefore that nixing Fischer would be so bad, and, like the posters say before me, might send a message that rich fat cats from Citi are not to be rewarded.

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Those noisy payrolls figures

Felix Salmon
Feb 7, 2014 16:13 UTC


The chart of the day comes from Betsey Stevenson, and helps to show just how noisy the payrolls data really are. The big headline figures of the day, 113,000 is ostensibly the increase that we saw, in January, in the number of people on American payrolls. It’s a disappointing number, while a print of say 200,000 would have been decidedly encouraging.

But just look at how we got to that 113,000 figure. We took January’s workforce, of 135,396,000 people, and then subtracted December’s workforce, of 138,266,000 people — for a total decrease of 2,870,000 jobs. But we know that the number of jobs in America always decreases in January — even when the economy is surging. It’s cold out, making outdoor jobs very difficult to do, and the Christmas seasonal jobs are all in the past. So the BLS institutes some seasonal adjustments. In this case, it subtracted 880,000 jobs from the December number, and it added 2,103,000 jobs to the January figure.

All of which means that the 113,000 headline figure is, in fact, 135,396,000 + 2,103,000 – 138,266,000 – 880,000.

You want to trade on that being 70,000 jobs lower than you thought it would be?

But wait: we’re not even close to being done. This month’s payrolls release is much longer than normal — 2,465 words — because it has to explain a lot of changes. As it says in a big box at the very top of the page:

Changes to the Employment Situation Data

Establishment survey data have been revised as a result of the annual benchmarking process and the updating of seasonal adjustment factors. Also, household survey data for January 2014 reflect updated population estimates.

These changes are not small: last month’s preliminary number, for instance, was revised up — on a seasonally adjusted basis — to 137,386,000 workers from 136,877,000. That’s a difference of more than half a million people.

The noisiness of the payrolls report is good news, truth be told. Now that the taper is well under way, there’s very little doubt about the direction of monetary policy for the next year or so. We’ll taper all the way to zero, QE will be over, and then we’ll look at where we are and start wondering whether and when rates might actually start rising. The employment situation when QE is finally over will have almost nothing to do with what happened this month, or next month, or the month after that. Most importantly, it will have to do with the number of people actively looking for work: as the unemployment rate comes down, and the economy continues to grow, will discouraged workers start returning to the workforce, or at least start looking for work again?

There are a lot of unemployed and underemployed workers on the sidelines of the economy, who would work much more if work was available. The Fed’s full-employment mandate means that it’s Janet Yellen’s job to find work for those people. How she’s going to interpret that mandate is something we’re not going to get a real hint of for a long time yet. But one thing’s for sure: we’re not going to be able to guess anything useful by looking at today’s payrolls report.


Felix, great that you’re pointing this out. The press release also discloses the margin of error which tells the same story. It’s sad that the mainstream press is ignoring this.
We really shouldn’t be dumbfounded by why Wall Street trades on the “noise”, it isn’t that surprising. You need variability (i.e. “noise”) to make money. If it’s easy to predict what the number is, then the profits would disappear.

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Why bitcoin won’t disrupt digital transactions

Felix Salmon
Feb 7, 2014 04:12 UTC

I like to keep my feet warm, and so I’m very glad that in five years’ time, Ben Horowitz, the co-founder of Andreessen Horowitz, is going to be sending me a pair of luxurious alpaca socks. The bet, which originated on RapGenius, is now a reality, thanks to Planet Money. And while NPR has written the broadcast up as a story, it falls to RapGenius, again, to annotate it. And it’s in the RapGenius annotations where things start getting interesting.

Horowitz expands on his statement that bitcoin is a “computer science breakthrough” by saying this:

Bitcoin is the first scaled network where you can transfer (not copy, transfer) a piece of digital property from one person to another with no central authority. This paves the way for a dizzying number of super high value applications such as a fee free stock exchanges, smart contracts that can programmatically be executed and enforced, and many other awesome things.

Horowitz, here, is looking forward to a world where bitcoin provides the rails upon which all manner of commercial transactions can run: potentially, it’s much larger than payments alone. In recent columns, both Dan Primack and John Gapper have also made this point.

There’s something else that the Primack and Gapper columns have in common: they’re both behind a paywall. Essentially, they’re digital goods which are non-rivalrous (if you read Gapper’s column, that doesn’t prevent me from reading it too), but also excludable (the FT can prevent certain people from reading the column, on the grounds that they haven’t paid enough money).

The incredible growth of the internet can be attributed in large part to the fact that most of the content on the web is both non-rivalrous and non-excludable: this blog post, for instance, can be read by any number of people, and is freely accessible to all. But now Horowitz is looking forward to expanding the web to include what he calls “digital property”: essentially, digital goods which are not only excludable but are rivalrous as well.

A good example might be shares of a company’s stock: such things haven’t existed in physical form for many years, but they’re still highly rivalrous. After all, the entire basis of the stock market would fall apart if I could somehow give you a copy of my stock while holding onto that same stock myself. A large part of the technology underpinning stock exchanges is the way in which they have to ensure that once you sell a share, you no longer own it, and you can’t sell it a second time. That’s also the technology which underpins bitcoin, except bitcoin transactions take many orders of magnitude more time to clear than stock transactions do.

In theory, there are all manner of clever things which can be traded in a distributed manner, using the open-source bitcoin protocol; most of them involve “coloring” coins in some manner, so that a bitcoin serves as a token of ownership of something else. There is a lot of valuable rivalrous digital property out there, and a lot of companies, including Thomson Reuters, make a lot of money by helping to manage it. The technology involved tends to be tried and tested (to the point at which any failures are very big news), and the players involved tend to be extremely conservative. On top of that, the costs are often extremely low: the simple transaction costs involved in trading stocks, or large quantities of foreign exchange, are very close to zero these days.

So while in theory there is the possibility of disruption in this space, I’m not holding my breath. The Race to Topple Bloomberg, as the headline of Aaron Timms’s recent Institutional Investor article puts it, has been going on for the best part of 20 years now, with no visible success. (I first asked Mike Bloomberg whether he was worried about competition from the open internet for an article I wrote back in 1996.) I’m happy that Satoshi Nakamoto managed to solve the Byzantine Generals Problem — but while that might be a necessary condition for these particular walls to start falling, it’s far from a sufficient one.

The internet has been an amazing and revolutionary force, which has brought entire industries to their knees, and which has created a huge amount of wealth for Silicon Valley venture capitalists. But what Horowitz and Primack and Gapper are talking about here is the hope that a whole new protocol — bitcoin — will essentially do for digital transactions what the internet did for communications, just by dint of being cheap and open-source. I wish it luck, but it’s going to need it. Because it’s up against formidable incumbents, in the form of both huge corporations and entrenched government interests. My bet is on Goliath, not David.


Bitcoins stolen from Silk Road. Site manager is “really, really sorry”.

There are good reasons why most people use cash only for trivial transactions that are too small to be worth the bookkeeping required for other forms of payment.

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