Opinion

Felix Salmon

The Europe debate

Felix Salmon
Apr 9, 2012 21:00 EDT

Remember the Krugman vs Summers debate last year? That was fun, in its own way. But this year’s Munk Debate looks set to be simply depressing. The invitation has the details: the motion is “be it resolved that the European experiment has failed”. And I’m reasonably confident that the “pro” side — Niall Ferguson and Josef Joffe — is going to win.

That’s partly because Ferguson has the public-speaking chops to dismantle his meeker opponents, Peter Mandelson and Daniel Cohn-Bendit. Ferguson is likely to go strongly for the jugular, while Mandelson and Cohn-Bendit will noodle around ineffectually, hedging their conclusions and sacrificing rhetorical dominance for the sake of intellectual honesty.

You can see this, already, in the invite. Each speaker is introduced with a one-liner; Ferguson says that Europe is conducting “an experiment in the impossible”, while Mandelson says that Europe is, um, “getting there” and that the world is “very impatient”. Cohn-Bendit is weaker still: his quote, “We need a true democratic process for the renewal of Europe, in which the European Parliament has to play a central role,” seems to imply that Europe really is doomed, since there’s no way that the European Parliament is going to play a central role in anything, except perhaps an expenses scandal.

It wasn’t all that long ago that public intellectuals could make a coherent case that European union, both political and monetary, was and would be a great success story. In the wake of Greece’s default, however, and credible beliefs that Portugal is likely to follow suit, disillusionment and pessimism is the order of the day. The era of great European statesmen is over; in their place, we have David Cameron.

I was a believer in the European experiment; indeed, I thought it had a kind of grand historical inevitability to it, and that a strong whole could be made up of vibrant and disparate parts. And from a big-picture historical perspective, Europe is indeed a success: a bloody and war-torn continent has transformed itself into a political union where it’s unthinkable and impossible for one member state to invade another. But if by “the European experiment” we mean the euro, that’s been a disaster, and virtually everybody in Europe would have been better off had it never existed.

In this, curiously, the broad European population was much more prescient than the educated and political elites, who in large part imposed the euro on their unthankful and unwilling countries. Mandelson is a key member of that elite, and he was wrong about the euro and about the advisability of the UK joining it. It’s going to be very hard indeed for him to persuade an audience of Canadians that this time he’s right. Or, for that matter, that they should in any way welcome the prospect of a monetary union with Iceland.

COMMENT

Agreed, Fifth, that was PART of the subprime problem. Only the tip of the iceberg, though.

That Paul Mason report cites legitimate suffering, but consider the cause? Unemployment, divorce, unemployment. You can add medical bills to that list if you like. This story, at least, didn’t blame any of it on foreclosure. Rather, it is part and parcel of the greater recession/depression.

Europe definitely embraces a greater degree of socialism than the US — that is both your strength and your weakness.

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Counterparties: Should we fear Voldemort?

Ben Walsh
Apr 9, 2012 18:08 EDT

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Yes, a billion dollars is cool. But what about a team led by a mysterious trader nicknamed “Voldemort” making potentially market-distorting bets at the nation’s largest bank by assets? That’s really cool.

In Bruno Iksil, a JPMorgan trader also known as the “white whale,” Paul Volcker – and the regulation that bears his name – finally has the nemesis he deserves.

Bloomberg reported on Iksil last week, noting that he reportedly earned $100 million a year for the bank in recent years, which has rival traders claiming that Iksil’s bets could violate the Volcker Rule. The WSJ also wrote a piece on Iksil. Additional details and an improved pseudonym in a follow-up by Bloomberg vaulted him back into the headlines today:

JPMorgan Chase & Co. (JPM) trader Bruno Iksil’s outsized bets in credit derivatives are drawing attention to a little-known division that invests the company’s reserves and fueling a debate over whether banks are taking excessive risks with federally insured and subsidized money.

Iksil’s influence in the market has spurred some counterparts to dub him Voldemort, after the Harry Potter villain. He works in London in the bank’s chief investment office, which has assembled traders from across Wall Street to its staff of 400 who help oversee $350 billion in investments. While the firm describes the unit’s main task as hedging risks and investing excess cash, four hedge-fund managers and dealers say the trades are big enough to move indexes and resemble proprietary bets, or wagers made with the bank’s own money.

Lisa Pollack tries to unpack two crucial pieces of this story, the motivations of the sources and whether indeed Iksil is distorting the CDS market in question. Sober Look argues that the most likely scenario is that JPMorgan is hedging its exposure to its own debt, rather than setting up a proprietary trade, which would be banned under the Volcker Rule.

It’s a bit ironic that it was initially a small group of hedge fund traders who complained to the media about how Iksil’s trades were warping the free market.

But however market-distorting, it does seem likely that the trades are hedges, albeit massive and increasingly public ones. These are probably trades JPMorgan’s rivals in this particular CDS market just don’t like being on the other side of.

If the facts of the trades as now reported are true, we’re left with the same uncertainty regarding the Volcker Rule that we’ve had since it was proposed. How much harm does prop trading by deposit-taking institutions cause to the global financial system? How do you define prop trading? How do you enforce a ban on it? When does a hedge become a systemic risk?

To help think through these questions, we put together the best pieces on the still vague and hotly contested Volcker Rule:

We need a new Volcker rule for banks (Sheila Bair)
The Volcker Rule and ‘Flipping the Presumption’ (Economics of Contempt)
Financial Reform (Unfinished Business)
Attack on Volcker Rule Seen Exaggerating Cost of Disorder (Businessweek)
The Volcker Rule, Made Bloated and Weak (Jesse Essinger)
The Volcker Rule Is Still a Bad Idea (Brookings)
Bank Lobby’s Onslaught Shifts Debate on Volcker Rule (Bloomberg)

And on to today’s links.

Deals
Facebook just bought all of your artfully sepia-toned cellphone pics – All Things D

Right before acquisition, Instagram closed a $500 million funding round – TechCrunch

AOL sells $1 billion in patents to Microsoft – Tech Crunch

Rites of Spring
How the mild winter made the economy look better than it actually is – WashPo

Politicking
Obama’s BFF (“best friend in finance”) has unenviable task of calmly defending him to Wall Street – WSJ

Post-Mortems
Return of the (John) Mack – NYMag

Gray Areas
Obscure banks are charging big fees to do (legal) trades with Iran – WSJ

Oxpeckers
We don’t need publishing anymore, “editing, we need, desperately” – Findings

Since ’05 publishers lost $26.7 billion in print advertising revenue and gained only $1.2 billion in new digital revenue – Reflections of a Newsosaur

Fallacies
Mr. Market doesn’t exist – Math Babe

Size Matters
Large companies recovering more quickly from the recession than small businesses – WSJ

Defenestrations
Sony is cutting 6 percent of its workforce – Bloomberg

Wonks
Jim Yong Kim says he “had no idea what a hedge fund was” until three years ago – WSJ

You’re On Your Own
Money for job training has nearly been cut in half – NYT

TBTF
Bank of America is so hot right now – NYT

Be Afraid
Ikea is going to build an entire neighborhood in London – Design Taxi

Foreign spies are now lurking in U.S. universities, experts warn – Bloomberg

Wonks
Consumption inequality has risen about as fast as income inequality – Slate

 

COMMENT

MrRFox, when you actually know what you are talking about feel free to engage again, otherwise can I suggest a career in financial “journalism”.

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Why Jim Yong Kim won’t change the World Bank

Felix Salmon
Apr 9, 2012 08:31 EDT

Thomas Bollyky has a subtle and slightly confusing op-ed in the NYT today, entitled “How to Fix the World Bank”. Worldbankpresident.org, your one-stop shop for all news on the race, calls it “an important endorsement for Jim Kim, and for change at the World Bank”. But while it’s the latter — Bollyky’s case for change is strong and compelling — it’s by no means the former. Indeed, Kim in many ways represents the status quo ante, and a vote against change at the Bank.

The heart of Bollyky’s argument is the undeniable case that since the world has changed, the Bank needs to change too.

An election based on American citizenship, as opposed to a vision for institutional leadership, limits the support from shareholders that the president of the World Bank needs to enact bold reforms.

As a result, the World Bank remains largely stuck in an operational model of providing country-specific loans and grants that are increasingly irrelevant to its institutional mission of reducing global poverty…

The pressing challenges in international development have changed. While fewer countries are very poor, many of their citizens remain so. The number of people living on less than $2 per day has declined as a share of the world’s population but has stayed around 2.5 billion since 1981. Income disparities have increased. More than two-thirds of the world’s poorest people now live in middle-income countries, where health care, education and environmental regulations lag far behind economic growth. Persistent poverty, when combined with limited governance and unprecedented rates of urbanization, has produced huge slums, which now house nearly one billion people in developing countries. Many of the emerging threats to global prosperity are collective problems that no government alone can solve: climate change, water shortages, inadequate agricultural productivity.

The World Bank is designed along simplistic lines, even if the problems it faces are anything but. The world’s poor live in poor countries, is the implied syllogism, so we should lend those countries money to help them develop and become richer. If we solve the problem of poor countries, we’ll solve the problem of poverty.

This approach became outdated somewhere around the millennium. In 1990, 93% of the world’s poor lived in low-income countries. By 2007, three-quarters of the world’s poor lived in middle-income countries. So if the World Bank is still focused on lending money to low-income countries, it’s by definition missing most of the world’s poor.

Bollyky says that Kim’s inexperience in government will be damning “only if he is forced to lead an institution largely devoted to providing the country-by-country loans and grants that fewer and fewer governments need.” But that is the US vision of the World Bank. Moreover, precisely because he’s unfamiliar with World Bank bureaucracy, Kim is the least qualified candidate if you want someone who is going to radically revamp the way the Bank works.

If you want to understand what the Obama administration thinks the job of the World Bank is, all you need to do is read Barack Obama’s own remarks when he nominated Jim Kim to lead the institution. First, he said that Bob Zoellick “has been a strong and effective leader at the bank for the last five years” — which gives you an idea of what the US considers “strong and effective” in this context. Then, we got this:

The World Bank is more than just a bank. It’s one of the most powerful tools we have to reduce poverty and raise standards of living in some of the poorest countries on the planet…

Ultimately, when a nation goes from poverty to prosperity, it makes the world stronger and more secure for everybody.

Obama here is talking very explicitly in the old language, where the Bank targets the poorest countries on the planet, and tries to help them from poverty to prosperity. That’s sad, because if you look at the the history of the World Bank, it has been quite bad at shepherding countries from poverty to prosperity: it’s been most active in countries where that hasn’t happened, and meanwhile the countries which have managed the change have done so largely on their own, without much in the way of World Bank assistance.

As Bollyky says, what the Bank should do is revamp its architecture so that it can target poverty wherever it is found around the world, rather than working mainly in the world’s poorest countries. And at the same time, it must play a coordinating role in addressing cross-border issues, especially in a world where one country’s necessary crop irrigation looks to its neighbor very much like the theft of precious water.

But the World Bank won’t move far in that direction so long as its president is imposed by fiat of the US. In order to work effectively at the sub-national and international level, the World Bank needs to be a genuinely international organization, run by and for the whole world, rather than being viewed as a means for the US to project “soft power” in Africa and elsewhere. For that reason alone the president of the World Bank should not be a US citizen, and in fact it would probably be helpful if the US didn’t put forward an official nominee at all. After all, as Bollyky notes, the US already has a veto over the Bank’s presidency: that should be more than enough.

More to the point, if the president of the World Bank is going to come in with a mandate to fundamentally change the way that the organization works, then that person really has to be very clear about what they want to achieve before the decision to appoint them is made. Both Okonjo-Iweala and Ocampo are happy to answer detailed questions, in public, about their vision for the Bank; Kim isn’t. And he can’t be vague now if he wants to be decisive once in office.

Bollyky concludes by saying, quite rightly, that “Kim needs to be candid and specific with shareholders and the public about his agenda for revitalizing the World Bank”. Another way of putting that is to say that if Kim is not candid and specific with shareholders and the public about his agenda, then he should not become president of the organization. The time for “listening tours” is over. He needs to start talking, now. Because you can’t have a mandate if the electorate has no idea what it’s voting for.

COMMENT

@PerKurowski – Are you familiar with this Anglo-Saxon turn of phrase –

“He who pays the piper gets to call the tune.”

The biggest chunk of WB money comes to it from the pockets of US taxpayers. Whatever they want is, by definition, the right thing to do, isn’t it?

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Counterparties

Apr 6, 2012 15:10 EDT

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 full March jobs report is here if you’re interested in perusing a bad, but not entirely horrible, set of numbers before a holiday weekend. The consensus prediction was somewhere around 200,000 new jobs, and the U.S. added 120,000.

This led Paul Krugman to write that we’re still in a “lesser depression,” Mohamed El-Erian to fret about a “mid-year slowdown“, and Jared Bernstein to detect hints of downtrend in private job gains. (For context, we need something like 125,000 new jobs per month just to keep up with population growth.)

A slightly more sunny way to put it: After a few good months, we’re seeing subtle shades of mediocrity in the job market. Like Felix, the NYT’s Catherine Rampell sees March’s job numbers as rather weak, with some worrisome trends:

The average length of the workweek ticked down slightly, to 34.5 hours in March from 34.6 hours in February. The unemployment rate fell to 8.2 percent from 8.3 percent, but that’s primarily because people dropped out of the labor force. (Only people actively looking for work are counted as unemployed.)

The White House spin was muted, but generally positive. Council of Economic Advisers Chairman Alan Krueger, in a statement, said it was all about the manufacturing sector:

Manufacturing continues to be a bright spot and added 37,000 jobs in March. After losing millions of good manufacturing jobs in the years before and during the recession, the economy has added 466,000 manufacturing jobs in the past 25 months – the strongest growth for any 25 month period since September 1995. To continue the revival in manufacturing jobs and output, the President has proposed tax incentives for manufacturers, enhanced training for the workforce, and measures to create manufacturing hubs.

All of those manufactured products will be sold by Amazon, apparently – Matt Yglesias suggests we’re seeing “the end of retail”:

…we have 10,000 fewer people working in general merchandise stores. We have 20,000 fewer people working in electronics and appliance stores. We have 17,000 fewer people working in “sporting goods, hobby, book, and music stores.”

Nouriel Roubini warns, in a tweet, that we should watch out for Okun’s Law:

Is the “over-hiring”, after the “over-firing” in 2008-09, now over? Okun’s Law may start to reassert itself as growth stays below potential

And The Conference Board seems to agree:

Job increases at only 120,000 in March shows that while expectations have been tempered, the labor market has repeatedly proved disappointing. This latest jobs report fails to live up to expectations again. This is most evident in the retail sector where we have now seen two consecutive months of declines. Employers spent a great deal of time and attention reducing costs over the past few years and apparently do not yet see enough solid evidence to sharply reverse course on hiring. This could presage more disappointing job counts later this spring.

All that said, Ryan Avent reminds us that we don’t really know anything anyway:

There is a 90% chance that employment rose by between 20,000 and 220,000 jobs. The change in the number of unemployed from February to March was probably between (roughly) -400,000 and 150,000, and there’s a good chance that the unemployment rate is between 8.1% and 8.5%.

And with that epistemological note we’ll move on to today’s links:

Regulations
The biggest Groupon scandal is what was legal before the JOBS Act – Jonathan Weil at Bloomberg
Groupon just got hit with its first shareholder lawsuit – Paid Content

Alpha
Meet the trader called the “London whale” whose huge bets are distorting the credit markets – WSJ

Politicking
Romney’s disclosures of his Bain financial holdings are as opaque as experts have ever seen – WashPost

Wonks
Obama’s blunder at the World Bank – Jagdish Bhagwati, Project Syndicate

Red Tape
Thanks to “virtually no competition,” HAMP refinancing is sticking some homeowners with higher interest rates – ProPublica
Just 3 percent of eligible homeowners actually apply for a government mortgage audit – HuffPost

Denied
Former Tyco chief Kozlowski denied parole – Bloomberg

Legalese
Twitter finally files lawsuits against spammers – Wired

Oxpeckers
Arianna Huffington no longer runs AOL’s tech sites – TechCrunch

Comparisons
America’s debt struggles are as old as, well, America – NPR

Legends
Whit Stillman: What I read – The Atlantic

Everybody Hurts
The NYC commute, a lament in 16 photos – NYT

Why is Jonathan Sobel suing William Eggleston?

Felix Salmon
Apr 6, 2012 14:39 EDT

Both Kelly Crow, at the WSJ, and PDN have interviews with Jonathan Sobel, a photography collector who is now suing the legendary color photographer William Eggleston. Neither of them actually posts the suit itself, however; you can find it here.

At first glance this looks like what it is: one of the silliest lawsuits the art world has seen in a very long time. In order to win, Sobel will need to demonstrate two things, neither of which is true. Firstly, he’ll have to show that the value of his vintage Eggleston prints has been diminished as a result of Eggleston making a new series of much larger digital prints. And secondly, he’ll have to show that Eggleston had no right to make the new prints.

In reality, however, Sobel’s prints have probably gone up in value, not down, as a result of Eggleston’s splashy reintroduction to the contemporary art market, in the form of a Christie’s sale which raised $5.9 million and set a new record price for the artist. And in any case, Eggleston has every right to create new editions of his work. Sobel owns vintage 16″x20″ dye-transfer prints; Eggleston can’t make more of those. But creating a brand-new series of 44″x60″ digital prints is perfectly fine.

As Daniel Grant explains, print disclosure laws make explicit exceptions for prints of different sizes, or even just series which have different numbering. And Josh Holdeman, Christie’s international director of 20th century art, goes so far as to say that “I don’t know of any photographers who haven’t produced multiple editions of the same images”: this is undoubtedly standard practice in the art and photography world.

So what’s really going on here? Sobel is no naif, and it’s hard to imagine he thinks he really has much of a case. This suit is brought not for money, but out of a sense of being angry and aggrieved; of having his ownership violated

I haven’t talked to Sobel myself, but my feeling is that the motivation behind the suit comes from a few different feelings about what’s going on with the Eggleston market.

First of all, as PDN’s Conor Risch explained in a great article last month, the Christie’s auction was more or less an explicit attempt to wrest the Eggleston market away from photography collectors like Sobel, and reorient it towards deeper-pocketed contemporary art collectors. Here’s Holdeman again:

According to Joshua Holdeman, international director of the Christie’s photography department, the point of the sale was to establish a new market for Eggleston’s photography in the contemporary art world. “Eggleston has been kind of stuck in the old school world of the photography collectors for a long time, whose primary concerns are about process, print type, print date, etcetera,” says Holdeman.

Whereas the type of print and the exact date a print was made is “a huge deal” for photography collectors, Holdeman says, “for contemporary art collectors it’s much more about the object itself—they couldn’t care if it’s a dye transfer or a pigment print or whatever, as long as the object itself is totally amazing, that’s what they care about.”

“This is an attempt to start a migration of Eggleston from the quote unquote confines of the photography world into the larger context of the art world,” Holdeman adds.

This kind of talk is basically a slap in the face to collectors like Sobel — people who are used to being a big fish in the small photography pond, and who now find themselves small fish in the much bigger art pond. The writing has been on the wall since November 2011, when Eggleston officially joined Gagosian in Los Angeles, but the Christie’s auction was probably enough to tip Sobel over the edge.

It’s often a sad day, for photography collectors, when photographers join high-end art galleries and thereby become much more expensive. I can add a personal datapoint here: I’ve long loved Todd Eberle’s photographs of Donald Judd’s art in Marfa, Texas, and there’s one photograph in particular which I was interested in buying. But when I got in touch with Eberle, he told me to talk to Gagosian, since they’re in charge of selling his prints. And Gagosian, in turn, was perfectly happy to sell me a whopping great 50″x60″ print (plus frame) for $15,000. Even if I could afford that kind of money, I don’t have anywhere to put a photograph that big. But Gagosian isn’t selling the prints in the smaller sizes that photography collectors generally like.

The Gagosian announcement and the Christie’s sale, then, were a sign to Sobel that he wasn’t really wanted in the Eggleston world any more. But what’s going on here is not just a question of whether Eggleston is owned by the photography world or by the contemporary-art world. There’s another issue, too: are Eggleston’s images owned by Eggleston, or did he sell them, in some sense, to the people who bought his photographs?

The legal and moral answer to that question is clear: Eggleston’s images are owned by Eggleston. Sobel owns physical photographs, which have some kind of value. But Sobel, unlike Eggleston, has no right to reproduce those images. But after Sobel shelled out $250,000 for “his” photograph, it’s pretty easy to see how he felt some kind of ownership of what he was looking at, and felt that Eggleston had no right to start creating lots more versions of the same image. (In fact, Eggleston didn’t do that: while Sobel’s prints are generally in editions of 20, the new digital prints are in editions of just 2.) Of course, Sobel’s feelings are neither here nor there when it comes to the merits of his lawsuit, but they probably explain why he brought the suit in the first place.

I suspect that what was most galling to Sobel, however, was the fact that Eggleston had simply managed to conjure up $5.9 million for himself (or rather, for his foundation), without going out and shooting a single new photograph. Eggleston is quite explicitly following in the footsteps of Damien Hirst, here: Hirst was the first artist to shamelessly make millions of dollars by consigning new work directly to auction, much to the displeasure of the art world. And as a result, Hirst has gotten to a point where he, Hirst, captures most of the increase in the value of the global Hirst market — and Hirst’s collectors don’t.

What Sobel sees, when he looks at the Christie’s Eggleston auction, is a serious increase in the value of the Eggleston market, with the overwhelming majority of that increase accruing to Eggleston himself, rather than to collectors who were prescient enough to buy early. You can hear the whine quite explicitly in Crow’s article: Sobel used to own the most valuable Egglestons in the world, and he was very proud of that. And now he doesn’t. And he’s upset.

This is all very childish, of course — which is par for the course when it comes to the art world. And somewhere underneath it all, Sobel might even have a legitimate beef. Eggleston is 72 years old, and suddenly, after decades of being a photographic eminence, he’s deserting the photography community and throwing his lot in with Larry Gagosian and the contemporary-art crowd, just because that’s where the money is. Eggleston has had a devoted following in the photography community for a very long time, and his latest move seems designed to annoy his base, which is never a particularly wise thing to do. There might be lots of money in the contemporary world right now, but that world is fickle.

Here’s the thing, though: if the fine-art crowd ever gets sick of Eggleston, the photography crowd will always be there for him. They’re going to keep the Eggleston faith no matter what he does in his old age. Even if they act out sometimes by filing frivolous lawsuits.

COMMENT

W Eggleston is 80 +, living in sheltered accommodation. He is frail and elderly. Any recent decision to reprint images was probably made by his foundation/estate management.
They are doing what our capitalist society determines they should, capitalise on their asset. This has nothing to do with art, everything to do with art brokers.
An infinite number of copies of an image is exactly what modern technology allows which is why B & W prints made by Ansell Adams can command the prices they do.

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An unpleasant employment surprise

Felix Salmon
Apr 6, 2012 09:19 EDT

So that was unpleasant: I guess we’ve all just become so used to healthy jobs report that a weak one like this comes as a nasty shock. And it is a bad report: for all that the margin of error is high, and the unemployment rate (which, remember, is basically the one number which matters politically) fell, the Establishment Survey was riddled through with weakness, both in terms of February’s numbers and in terms of revisions to December and January. Even weekly earnings fell.

So there’s bad news here, which is that judging by this one report, some of the steam might have gone out of the recovery. And there’s a little bit of good news too, which is that it’s just one report, not a trend, and that it has a very wide margin of error; that the economy’s still creating jobs, even if it’s not creating them as fast as we had hoped; and that it wasn’t all that long ago that a +120,000 headline figure would have been taken as something decidedly encouraging. So the expectations baseline has moved significantly upwards, and in many ways it’s the expectations baseline, rather than the numbers themselves, which drives investment.

The markets always care a lot about the non-farm payroll figures, but this report will ultimately have almost no effect on either politics or policy. Politics because the Household Survey showed unemployment falling, and policy because it’s actually pretty much what the Federal Reserve expected. As far as the real-world ramifications of this are concerned, they’re small and mainly related to the fact that long-dated Treasury bonds now yield about 0.1% less than they did yesterday. Which is important if you’re a fixed-income trader, and isn’t if you’re not.

So if you’re taking today off, there’s not a whole lot to worry about here. Go off and enjoy your long weekend. But be sure to go back to work next week!

COMMENT

Bush and Obama did well to prevent financial system collapse but otherwise both follow the failed policies of the nanny state: we shall create jobs by destroying the value of savings and investment, by making the future of currencies, international prices, and public regulations as uncertain as possible, by demonizing the productive, by taxing the successful, by showering money on worthless projects on failing and irrelevant public and quasi public institutions and, incidentally, funneling a little cash towards those who will doubtless be glad to use it to meet their existing obligations. What a way to generate growth.

We may get some anyway, perhaps enough to re-elect Bush-Obama.

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Counterparties

Ben Walsh
Apr 5, 2012 20:22 EDT

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

Jamie Dimon’s annual letter to shareholders was released late yesterday, capping a year when the JPMorgan Chairman and CEO seamlessly transitioned from reveling in his status as the White House’sfavorite banker to a self-appointed role as a critic of both bank regulation and anti-bank rhetoric.

The letter itself is remarkable, not just for its ability to inspire Jim Cramer to break into a fit of sober rationality, but also for the precision of its hubris. The first sentences mirror the arc of the full 39 pages:

Your company earned a record $19.0 billion in 2011, up 9% from the record earnings of $17.4 billion in 2010.

Our return on tangible equity for 2011 was 15% — the same as last year. Relative to our competitors and given the prevailing economic environment, this is a good result. On an absolute and static basis, we believe that our earnings should be $23 billion – $24 billion. The main reason for the difference between what we are earning and what we should be earning continues to be high costs and losses in mortgage and mortgage-related issues.

What defines the letter is the whiplash it imparts as it moves from reciting the bank’s record financial performance (for which Dimon got paid $23 million last year) to detailing how much better things would be if the government just left JPMorgan alone:

As a result of Dodd-Frank, we now have multiple regulatory agencies with overlapping rules and oversight responsibilities. Although the [Financial Stability Oversight Council] was created, it is proving to be too weak to effectively manage the overlap and complexity. We have hundreds of rules, many of which are uncoordinated and inconsistent with each other. While legislation obviously is political, we now have allowed regulation to become politicized, which we believe will likely lead to some bad outcomes.

This paragraph precedes the defining chart of the letter, which is meant to demonstrate the “complexity and confusion” of regulatory reform and shows each of JPMorgan’s business units connected to their former regulators and new regulators. It is accurate to say that the regulation of systemically-important financial institutions is complex, but JPMorgan, America’s largest bank by assets, is facing this complexity quite profitably. As Dimon himself writes, any profit left untapped is due to the self-inflicted wounds of the mortgage crisis. — Ben Walsh

With that, on to today’s links.

Regulations
How opinions scooped the news on the JOBS Act’s problems - Reuters
Ex-Con Man Says JOBS Law Makes Guys Like Him Rich - Bloomberg

Politcking
“Friends of Traditional Banking” Super PAC wants to stop Congress from “kicking traditional banks in the teeth” - American Banker

EU Mess
Rogoff: without “profound” economic and political changes, the euro will be gone by the end of the decade - Project Syndicate

Quotable
Jamie Dimon: We had a “collective brain freeze” on housing - WSJ

Home Ec
The American Century in consumer spending - The Atlantic

Wonks
The importance of fiscal, not monetary, policy to a US recovery - New Economic Perspectives

Facebook
Facebook will not be going public on the NYSE - NYT

TBTF
Berkshire Hathaway may not be deemed “systemically important” - Bloomberg

Easing Ain’t Easy
Why QE is being mis-sold - FT Alphaville

Old Normal
“Until the early 20th century, holding a mortgage came with a stigma.” - WSJ

Your Retirement Plans
30 years after the 401(k) was created, Americans aren’t prepared to manage their money - WashPost

Takedowns
NYT journalist “totally wastes chance to live like a billionaire for a day” - Gawker

Calm Down
Ezra Klein: Why I’m not particularly worried about the budget deficit - Bloomberg

Shrinking Endowments
Whither the Yale model? - Reuters

Hackgate
Murdoch’s Sky News admits to hacking man’s emails in “the public interest” - The Guardian

Horrible
Greek protesters clash with police after protester kills himself outside of parliament - BBC

Be Afraid
Google begins testing its new “augmented reality” glasses - NYTimes

Growth Industries
America’s heavily-fortified compound business is booming  - WSJ

Remuneration
Morgan Stanley’s CEO got paid about the same as a dead lady’s cat - Marketwatch

Reuters Opinion
Statecraft via Twitter - Chrystia Freeland
For Europe, it doesn’t get better - John Lloyd

Wonks
Stiglitz: The U.S. should stop trying to control the World Bank selection process - Project Syndicate

It’s Academic
“The Book That Drove Them Crazy” – Remembering Allan Bloom’s “The Closing of the American Mind” - Weekly Standard

Housing
If asking prices are any indication, home prices are about to rise - Trulia

COMMENT

We need to build a memorial to unbridled greed and hubris – five heads on sticks outside the NY Fed: Greenspan’s, Geithner’s, Paulson’s, Blankfein’s and Dimon’s.

Posted by Woltmann | Report as abusive

Jim Yong Kim’s depressing tactical silence

Felix Salmon
Apr 5, 2012 12:37 EDT

When Barack Obama nominated Jim Yong Kim to be the president of the World Bank, the most notable thing that he said was about Trayvon Martin. And since then, Kim has disappeared. Jesse Griffiths put up a post on Sunday starting a Kim-watch, but so far nothing; it’s increasingly obvious that he’s not going to turn up, for instance, for the CGD/World Bank Q&A sessions next week. (They’re being webcast; Okonjo-Iweala is up at 3pm on Monday, while Ocampo is scheduled for 4pm on Tuesday.)

(*Update: Kim has actually given a handful of on-the-record interviews, which make it very clear that giving on-the-record interviews is not a great way for him to get the job. Indeed, the most striking thing about them is his propensity to flat-out lie. “I am very proud to be part of what is the first contested, merit based, open election ever for presidency of the World Bank,” he told Capital Ethiopia. “I am proud of being part of the first transparent, merit-based election in the World Bank history,” he said to the Hindustan Times. “I’m coming into this election and not asking people to support me because I’m an American,” he told Nikkei. “I ask people to support me because of my experience.” But of course it goes without saying that this election is not transparent, and is not merit-based. If it were merit-based, the Canadians and the Japanese would probably have met with Okonjo-Iweala and Ocampo before declaring their support for Kim. It’s bad enough that Kim is being installed in the presidency of the World Bank by the divine right of POTUS. But it’s much worse that he thinks that if he wins, he’s going to have done so fair and square.)

Kim is unlikely to make a public appearance at the UN, where both Okonjo-Iweala and Ocampo are due to moderate panels on Wednesday on the subject of whether financial speculation is raising global food prices. (Interestingly, one of the panelists in Ocampo’s session is Jeff Sachs, who was himself nominated for the job of World Bank president.)

This makes perfect narrow tactical sense, if Kim’s sole aim right now is to clinch the presidency at any cost. He has already quietly received the official support of both Canada and Japan; all he needs now is to make no waves, sew up the European vote, and report for work in a couple of months. Engaging in any kind of public statement or debate has only downside and no upside for him, especially as the first question he’d get would surely be whether or not he thinks that the selection process should be an open one designed to choose the best candidate for the job.

But does Treasury really want to impose its candidate in such a heavy-handed manner? Joe Stiglitz is absolutely right that America’s best interests might not in fact be served by having an American in charge:

Should America continue to insist on controlling the selection process, it is the Bank itself that would suffer. For years, the Bank’s effectiveness was compromised because it was seen, in part, as a tool of Western governments and their countries’ financial and corporate sectors. Ironically, even America’s long-term interests would be best served by a commitment – not just in words, but also in deeds – to a merit-based system and good governance.

This is pretty much the unanimous view within the World Bank itself, where the new president is going to have to have significant support from the rank and file if any substantive changes are ever going to happen.

No heavyweights have come out and said that Kim is better qualified than either Okonjo-Iweala or Ocampo; certainly Kim has nothing like the intellectual weight of the petition in favor of Ocampo behind him.

It seems to me, then, that the US government in general, and the Geithner-Clinton axis in particular, doesn’t actually want any real change at the World Bank. Change can only come from a strong president who is strongly supported by the US, which has veto power over any real changes. Kim will be a weak president. If Treasury wanted change at the Bank, then the US should have thrown its weight behind Okonjo-Iweala, who has the bureaucratic chops to make it happen. Or, if it wanted to keep the presidency in the Americas, it could have nominated someone like Michele Bachelet or even Paul Martin.

Instead, the Obama administration opted to nominate someone with a narrow health focus, who as far as anybody can tell has no big vision for the Bank at all, and whose ability to steer this particular supertanker is almost certainly going to be very limited. The World Bank, under Kim, will decline in relevance, as the new creditor nations, especially Brazil and China, demonstrate understandable reluctance to fund an organization in which they have distressingly little voice.

Barack Obama, here, had the opportunity to nominate a Bank president who comes from a recipient of World Bank funds, rather than a representative of the lenders. That would have been a truly revolutionary and welcome move. Instead, he opted for a continuation of the status quo. Which means that once Kim gets the job, he’ll basically be restricted to tinkering around the edges.

The World Bank can and should be a force for effective change and poverty reduction around the world. But the US nominee is clearly much more interested in simply filling the position than he is in laying out a vision for what he thinks the Bank should do, or engaging in any public debate at all about whether he should get the job that he’s applying for. And if he doesn’t want to be open about such things, it’s very hard to see why the world should give him the benefit of the doubt. Here’s hoping that the Bank’s board grows itself a backbone and chooses the best candidate, rather than the one they’re being strong-armed into simply accepting.

COMMENT

Felix, like the others I very much enjoy your writing and regularly read your blog. However, I find your dogmatic attachment to this issue puzzling — to the point that it makes me question your motives. As Chris08 stated, it *really* doesn’t become you.

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Why was the JOBS Act so hard to cover?

Felix Salmon
Apr 5, 2012 10:52 EDT

Bloomberg, yesterday, and the NYT, today, have come out with big news articles about the dangers and complications inherent in the JOBS Act. The NYT has found a Davis Polk note to clients saying that the JOBS Act represents “the most significant legislative loosening in memory of restrictions around the IPO process and public company reporting obligations”. As Ben Walsh documents, this is something which was well known to the opinion side of most news organizations weeks ago, but only seems to be dawning on the news side right now, after it’s too late.

The obvious conclusion to draw here is that lobbyists are better at influencing journalists than journalists are. When a bill is contested by powerful lobbyists, you can be quite sure that there will be a lot of coverage, in the press, of what the bill does and who opposes it and why. On the other hand, when a bill like the JOBS Act is opposed merely by regulators and op-ed journalists and a handful of politicians, its inherent problems can end up being ignored by the “straight” side of the news media until it’s already comfortably passed both houses of Congress.

Ben makes a geographical point, too, about the divide between New York journalists, who cover financial issues, and Washington journalists, who cover legislative issues; the former were probably more qualified to cover the JOBS Act than the latter, but they seem to have let Washington take care of things until now. I’d add that a lot of the impetus for the act actually came from Silicon Valley rather than anywhere on the east coast at all, and that journalists in San Francisco generally have very little experience of covering legislative issues, and even less ability to effectively insert themselves into such coverage. And that’s assuming that they would have the cynicism necessary to cover the act skeptically.

More generally, I think that there are certain stories which are simply easier to tell if the journalist writing them is allowed to have an opinion. Today’s NYT story is quite hard on the JOBS Act, if you read the whole thing, but you first need to get past five paragraphs of introductory scene-setting and a headline (“Wall Street Examines Fine Print in a Bill for Start-Ups”) which betrays nothing about how generous the act is or the degree to which it dismantles longstanding investor protections.

And of course, being impartial journalism, it has to be larded with on-the-other-hand quotes from people like the former head of the NASD, including this classic:

One Wall Street executive familiar with the JOBS Act but who declined to be named said the law would give firms “more flexibility” in covering emerging companies.

Is it now NYT policy to grant anonymity to sources who are simply asserting what seems to be a simple checkable fact?

Opinion journalists don’t need to worry about this kind of thing, and can come out and say what they mean, without having to ensure that any opinions in the piece are attributed to named or anonymous sources. And I fear that when opinion journalists are covering a story quite closely, as they did in this case, the news side sometimes feels that they don’t need to duplicate what the opinion side has already done. Until they can find some kind of new angle, even if it’s just the fact that Wall Street banks get lawyers to read a new law before they change their ways.

COMMENT

Bucket Shops here we come. Because we haven’t seen enough fraud yet, and there is still money to extract before the second leg of the crash down starts… Still that backlog of 10 million homes that need to hit the market, and whose mortgages’ values need to be adjusted.

Posted by Foppe | Report as abusive

The gold price tells us nothing about inflation

Felix Salmon
Apr 5, 2012 02:06 EDT

Matthew Bishop and I have a fundamental disagreement when it comes to gold. There’s a “canary in a gold mine,” says Matthew: when the price of gold goes up, “it tells you we should worry about why it’s going up, and what it tells you about the value of paper currency.”

Whereas I think it tells you no such thing.

Essentially, we’re looking at two different things. Here’s a chart of the gold price, in green, versus the 30-year bond yield, in orange, over the past five years.

chart.tiff

The long bond currently yields just 3.36%, which is the clearest way that the market knows of saying that there’s not going to be any nasty inflation in the future. If you want, you can even get an exact number, by subtracting the 30-year TIPS yield of 0.94%: the market is saying that over the next 30 years, inflation is going to work out at just 2.42%, on average. Which is not anything to get worried about.

Now TIPS are not a foolproof guide to future inflation, but gold certainly isn’t. Indeed, the bond market does more than undermine the gold price as a guide to future inflation: it actually provides a much more credible explanation for the gold price than an inchoate fear of future price increases. After all, if you want to protect yourself against inflation, you buy assets which throw off income which goes up when prices go up, like TIPS, or companies, in the form of stocks. Gold, on the other hand, throws off no income at all, and its price is just as crazy and volatile in real terms as it is in nominal terms.

And if you think that prices in the Treasury market represent an idiosyncratic flight to quality rather than a reliable guide to future inflation, then you can look at an even broader market indicator. As Peter Rudegeair notes, if you look at the $1.246 trillion in the 100 largest US corporate pension funds, more of it is invested in bonds than in stocks. And retail investors, too, are moving their money out of stock funds and into bond funds. Essentially, everywhere you look, the market is showing that it trusts the dollar and that it has no fear of inflation.

Of course, the market might be wrong. But Bishop isn’t telling us to mistrust the market, he’s telling us to trust the market — albeit just one tiny slice of it, in the form of the gold market. That’s silly. If you’re going to trust market signals, you should trust the big market signals which are sending a clear message, rather than the noisy and volatile ones which mean whatever you want them to mean.

Why is the price of gold going up? Simple: when interest rates are this low, bonds are increasingly unattractive as a source of yield, so you might as well just buy stuff — call it SWAG — instead. SWAG doesn’t have any yield, but then again, neither does cash, really. And when there aren’t attractive investments out there, then it becomes more attractive to spend money rather than to invest it. As a result, people spend their money on SWAG, and some of them even kid themselves while doing so that by buying their SWAG they’re making some kind of investment. They’re not. And they’re certainly not producing a reliable guide to the future status of the US dollar.

COMMENT

Thanks……. Have a look on
fashion jewellry

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Why Google, and Simple, love TxVia

Felix Salmon
Apr 4, 2012 17:59 EDT

Google’s announcement yesterday that it was buying a company called TxVia was a bit like Barack Obama’s announcement that he was nominating Jim Yong Kim as World Bank president: it caused a very large number of journalists to say “who?” and rush to find out what on earth TxVia was. It wasn’t easy: they were likely to find a lot of meaningless jargon about “platform as a service”. And the Google post certainly wasn’t much help.

So while we know that Google bought TxVia to beef up its Google Wallet offering, it’s less clear why TxVia would help on that front. Sean Sposito had a good attempt in American Banker, saying that Google was worried about the security of Google Wallet and that TxVia has a very secure platform. That’s true. But there’s more here than just a question of security.

Go back to one of the smartest things ever written about Google, Daniel Soar’s essay It knows in the LRB. Essentially, Google is insatiable in its desire for as much information as it can possibly get. TxVia is a company which powers roughly 100 million prepaid debit cards. And here’s the thing: the amount of data that TxVia collects from every single one of its prepaid debit cards simply dwarfs the amount of data that banks collect with normal debit cards linked directly to a bank account.

I learned this yesterday over the course of a fascinating conversation with Josh Reich and Shamir Karkal of Simple. When you open an account with Simple (if you open an account with Simple — there’s a monster waiting list, and right now it’s only working for people with iPhones, and it’s still pretty much in friends-and-family mode for the time being), the main thing you get is the Simple Visa card. And the Simple Visa card, it turns out, is actually a prepaid card built on TxVia.

Now you get a bank account too, with your name on it, insured up to $250,000 by the FDIC. Prepaid cards are clever things, but they can’t fully replace a bank account. But what they can do is provide Simple with vastly more information about transactions than any normal debit card.

The reason is basically just one of historical accident: when banks first introduced debit cards, they didn’t need any information beyond just the name of the merchant and the amount being debited, so they ignored and discarded everything else. More recently, when TxVia introduced a prepaid-card platform, data storage and manipulation was much cheaper, so they kept all the data they could find instead of throwing it away.

And more generally, prepaid-card operators think in real time, about money coming in and going out over the course of the day. Whereas banks, to this day, still batch-process most of their transactions: they accumulate a pile of them, and then put them all through at the end of the day. That transaction-oriented mindset makes gathering rich data — even really basic stuff like the zip code of the merchant — something no bank is set up to do.

At Simple, they’re taking the steps which have already been made by TxVia with its prepaid operators, and adding lots of custom special sauce on top, mostly around the mobile-banking functionality in their iPhone and Android apps. What’s more, the Simple card is in an important sense not a prepaid card: your account balance always remains in the bank, rather than on the card, and the card itself always has a zero balance. In that respect, it’s a bit like an old-fashioned American Express charge card, which gets paid off daily rather than monthly. And because all Simple customers will have gone through the process of opening a bank account, which is a lot more laborious than simply buying a prepaid debit card, Simple knows those customers well and can allow them to spend much more money on their cards than most prepaid cards allow.

What I’m not clear on is how much of the information about my Simple transactions will now be available to Google, if only in some kind of aggregated and anonymized form. It’s possible that if I somehow link my Simple account to my Google account — or if, as is certainly possible, Google ends up buying Simple — then Google will have access to a very great deal of my very private financial information. That could allow it to provide me with incredibly well personalized services — and would almost certainly cause a firestorm from privacy advocates at the same time.

But for the time being, I want my bank to know lots of information about me, because that enables the sophisticated and data-rich applications that Simple is rolling out. The difference between private banking and the service that the rest of us get is, at heart, simply personalization. If Simple, TxVia, and Google can provide that kind of personalization on a mass scale, that’s surely something to welcome.

COMMENT

Felix, any chance you can explain how a Simple Visa card, while structured as a Prepaid card, has EXACTLY the same functionality as a traditional debit card. You’re article is based on the fact that somehow the two products are different. You assert that the Simple Visa card is can be designed to allow more flexible purchase rules but I don’t know how its different than a traditional debit card. Moreover, now why does google want a bank account linked debit card of a sub-scale bank ?

Try thinking of Google’s Txvia move as a counter to Paypal and you’ll get closer to ‘strategic insight’

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Counterparties

Apr 4, 2012 17:18 EDT

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

In the latest version of the Atlantic’s “What I Read,” Buzzfeed’s Ben Smith bemoans the end of The Great Blog Era of the Early Aughts:

“I still read some bloggers but it’s sort of a lost art. There aren’t new great bloggers. It’s not the next thing. But the generation of Choire Sicha, Micky Kaus, Andrew Sullivan and Josh Marshall are great and they never stopped being great. Andrew is no longer the conservative he once was but he and Josh are masters of the medium.”

It’s easy to understand why Smith would say “there aren’t new great bloggers.” The era defined by a few influential voice-heavy bloggers has been declared over by Nick Denton (“I’m out of blogs”), the New York Times (“Former bloggers said they were too busy to write lengthy posts…”) Jason Calcannis (“Blogging is largely dead”) and Felix (“…dying, even if it’s not quite dead”).

For a brief, heady few years blogs were supposed to be the future of media. What happened instead, besides book deals, was that, as Felix suggested last year, the tools bloggers use were co-opted by media companies.

Suddenly, Andrew Sullivan and Choire Sicha weren’t the only people who could pull out great quotes from otherwise dry news copy: everybody could, and did, on Twitter. Meanwhile, places like the Huffington Post and Business Insider moved the focus of blogging away from engaging with the blogosphere and towards the art of headline writing. And thus did the great blogging tradition of analysis and back-and-forth-argument get lost, amid a thousand rewriters, blockquoters and aggregators.

But the good old days argument of the Internet doesn’t completely hold up.The finance and econoblogosphere for one, is rich, varied, frequently contemptuous and not in any way dead.

Keeping in mind that the blogs-are-dead meme is largely an issue of semantics, here’s a list of new and not-so-new-ish bloggers that you should absolutely start reading.

Mathbabe
Sober Look
The Reformed Broker
The New York Fed
MuniLand
The Bonddad Blog
Derek Thompson
The Atlantic Cities
Josh Barro
Dan Alpert
Matt O’Brien
Neil Collins
Matt DeBord
ISDA Media Comment
Bloomberg View – The Ticker
And, definitely, Huffington Post Divorce.

What else are we missing? Email us suggestions at Counterparties.Reuters@gmail.com

And on to today’s links:

Be Afraid
Gooogle begins testing its new “augmented reality” glasses – NYTimes

Long Reads
Why exports will “resurrect the United States as a global economic power” – American Interest

Welcome to Adulthood
Student loan interest rates are set to double this summer unless Congress acts – Politico

Penalties
Regulators just penalized JPMorgan for actions tied to Lehman’s demise – NYT
JPMorgan, Citi, UBS move prop traders to asset management to skirt Volcker Rule – Reuters

EU Mess
Spain’s fate is the hands of the ECB, natch – WSJ
Spain, como se dice “contagion”? – MacroScope
Greece is now too broke to field a track and field team – AP

Alpha
“Winner” and “loser” hedge funds are more likely to stay that way – Sober Look

Investigations
Regulators proving “Hide Not Slide” HFT that could allow investors to game exchanges – WSJ
The U.K. trader known for a $300k bar tab has been arrested – CityAm

Marketing Costs
Buy your CEO a profile in Chinese Esquire for $20,000 a page – NYT

Cognitive Dissonance
China’s premier is now complaining about the banking monopolies his country owns – Reuters

Regulations
It will soon be easier for Wall Street analysts to talk up companies their employers do business with – Bloomberg

Tinker/Tailor/Curator/Spy
The CIA secretly promoted Pollock, de Kooning and Rothko for more than 20 years - The Independent
Annals of art world skullduggery, Larry Gagosian edition – Felix

Wonks
Laura Tyson: U.S. multinationals are not abandoning America - Project Syndicate

Indicators
CoreLogic: Home prices fell to a new post-bubble low in Feb. - Calculated Risk

Remuneration
Ex-Thomson Reuters CEO gets a pay package worth $20 million – Reuters

IPOs
Burger King is about to go public again – Bloomberg

Studies
Young Americans are money-crazed organ harvesting zombies – Reason

COMMENT

Hey guys – we all know what the kewllest blog site on the web is, don’t we?

Posted by MrRFox | Report as abusive

How high-frequency traders benefit us all

Felix Salmon
Apr 4, 2012 12:17 EDT

File under “unexpected societal benefits of high frequency trading”: it’s doing wonders for building IT infrastructure. Sebastian Anthony and Jeff Hecht both have good overviews of the three — count ‘em — fiber-optic cables being laid deep below the arctic sea floor, all in a $1.5 billion attempt to shave 60 milliseconds, or less, off the amount of time it takes to get digital information from London to Tokyo.

None of this would be possible without global warming, of course:

Each cable will be laid by a pair of ships: an ice breaker that leads the way, and a cable ship. Until now it has been impossible to lay cables in the Arctic Ocean, but the retreat of the Arctic sea ice means that the Northwest Passage is now generally ice-free from August to October; a big enough window that cable can be laid fairly safely.

But global warming alone isn’t enough to make the economics make sense: standard cable ships aren’t rated for icy waters, so polar-rated ships have to be retrofitted for the job instead, at vast expense.

And yet three different companies have managed to make the economics work, even while offering only tiny decreases in latency: according to Arctic Fibre, the speed of the London-Tokyo connection is going to be reduced from 188ms to 168ms, a reduction of just 20ms.

Everybody will benefit from these cables, not least because they will bypass the current “choke points” in the Middle East and in the Luzon Strait between the Philippine and South China seas. But most of us are unwilling to pay for insurance against a ship dragging an anchor in an inopportune location. High-frequency traders, on the other hand, are willing to pay a lot.

The leaders of the project will need to persuade telecommunications companies to buy a piece of the capacity created by the cable. Telecom companies will make that decision largely based on demand from financial companies.

“What we’ve seen is just because you have a diverse path does not mean that you can necessarily sell that capacity for much more than the current market price,” Mauldin said.

I’m a little bit unclear on exactly how these cables are financed, and what the mechanism is whereby telecommunications companies sell ultra-fast connections to financial-services companies. But clearly it’s advanced and predictable enough that the economics make perfect sense for more than one player.

It’s lucky, then, that laying cable under the arctic makes a key financial connection noticeably faster. That cable would serve a very valuable purpose even if was a little bit slower than current connections — but in that event, no one would have any incentive to lay it. Are there any examples of people spending a lot of money to lay big fat pipes which are slower than what already exists but which simply expand the total amount of bandwidth available? I suspect the economics in that case would be much more difficult.

COMMENT

To actually respond to Felix’s questions:

“I’m a little bit unclear on exactly how these cables are financed, and what the mechanism is whereby telecommunications companies sell ultra-fast connections to financial-services companies.”

Usually what happens is that a company or consortium announces plans to build a cable and then drums up enough pre-commitments from customers to convince banks or other sources to stump up the cash.

Very few financial companies operate at the scale to buy direct from the fiber operator so instead telecoms buy capacity and resell it, usually with some of their own network to offer more convenient interconnections than the landing stations at either end.

“Are there any examples of people spending a lot of money to lay big fat pipes which are slower than what already exists but which simply expand the total amount of bandwidth available?”

Of course. Most cable builds are primarily to add capacity and/or redundancy (Hibernia Atlantic’s “Project Express” is a notable exception). Their latency quite often doesn’t differ much from existing cables but nor will the builder spend extra money optimising for latency.

And to all those wondering about HFT’s use of these cables, it’s actually a really big market. You really think humans are doing all that inter-market arbitrage?

Posted by MartinBarry | Report as abusive

Does anybody at all think Kim’s a better candidate than Ngozi?

Felix Salmon
Apr 3, 2012 18:28 EDT

If you want to get a great feel for the difference between Jim Yong Kim and Ngozi Okonjo-Iweala, just check out what they’ve said in public about what they want to do with the presidency of the World Bank.

Here’s Kim:

We live in a time of historic opportunity… We can imagine a world in which billions of people in developing countries enjoy increases in their incomes and living standards… My own life and work have led me to believe that inclusive development – investing in human beings – is an economic and moral imperative… economic growth is vital to generate resources… for change to happen, we need partnerships between governments, the private sector and civil society to build systems that can deliver sustainable, scalable solutions… we must draw on ideas and experience from around the globe… A more responsive World Bank must meet the challenges of the moment but also foresee those of the future. The World Bank serves all countries… I will ensure that the World Bank provides a platform for the exchange of ideas.

And here’s just one of Ngozi’s answers, in a Q&A with Annie Lowrey:

We need to move faster. The bank has to be quick, nimble and responsive in this global environment. I would like it to be much faster to get aid on the ground, and faster giving policy advice and help to ministers looking for it. I’d look to do things in days and weeks rather than months and years, and I have the bureaucratic knowledge, the knowledge of the institution, to make that happen.

But the premier goal should be helping developing countries with the problem of job creation. In country after country, the single most important challenge is how to create good jobs – in developing countries as well as developed countries. And a big challenge is youth unemployment, which I want to tackle very fast because of the other problems it creates.

There is an opportunity for a demographic dividend for developing countries if they address this issue. In my country, about 70 percent of the citizens are 30 years old or younger, and there are similar demographics in many other developing countries. The rest of the developed world is looking at a gerontocracy, but we’re looking at a youth bulge.

The World Bank is the premier institution to support young people, with all of its instruments to create jobs, build infrastructure and invest in human infrastructure. Also, green growth and climate change – that’s another issue I see as an opportunity for investment. And the World Bank has the knowledge and financial resources to help.

Okonjo-Iweala knows what the Bank was set up to do, knows what it’s capable of, and has a real vision for how it billions can be used to create growth and prosperity around the world and specifically in Africa. Here’s how Jagdish Bhagwati puts it:

The Obama administration mistakenly believes that “development” consists of healthcare, microfinance and other such projects, and not the big high-pay-off “macro-level” policies such as trade. The insidious notion that the former constitutes “development economics” and the latter does not is both wrong and glorifies the less important at the expense of the more important…

Dr Okonjo-Iweala will do both “macro” and “micro” projects. But Dr Kim’s healthcare expertise comes with an uncritical embrace of the charges against “neoliberalism”, betraying susceptibility to the anti-reform, anti-growth rhetoric of the 1990s.

The fact is that Kim, if you take his FT op-ed at face value, seems to be utterly clueless, and mostly interested in distancing himself from the opinions in his book (which was blurbed by Noam Chomsky) on inequality and health. There’s certainly no indication that he understands exactly what it is that the Bank is uniquely capable of achieving.

What’s more, Kim seems to have no appetite for a contest. Okonjo-Iweala is perfectly willing to say, quite explicitly, why she’s a better candidate than Kim. She’s not a narrow expert on health, as Kim is; she’s expert in many subject areas, from education to agriculture to manufacturing, and also the differences between the world’s developing regions. And her experience as Nigeria’s economy minister is surely much more germane than Kim’s as president of Dartmouth College.

Meanwhile, I’ve done quite a lot of searching, and asked Treasury to help me out, and so far I’ve managed to come up with exactly zero endorsements of Kim which explicitly say that he’s a better candidate than Ngozi. Even Kim himself hasn’t said, as far as I can tell, that he’s a better candidate than Ngozi. And he has notably failed to RSVP to the Center for Global Development and the Washington Post, which are running public sessions where the candidates can explain their vision for the bank’s future and be questioned by the media and members of the international development community.

Yes, it’s true that Okonjo-Iweala is in many ways the “establishment choice” for the job. But that’s no reason not to give it to her — quite the opposite. When you’re talking about a massive bureaucracy like the World Bank, only an establishmentarian has a chance of being able to steer it, rather than simply being steered by it or completely marginalized.

Conventional wisdom has it that the NYT has endorsed Kim; it hasn’t. The editorial is here; while it says nice things about Kim, it concludes by saying that the best outcome for the bank would be a “truly competitive and fully transparent” process for choosing the next president — and everybody knows that in such a process, Okonjo-Iweala would win. Similarly, Todd Moss, in an op-ed headlined “Why Obama Should Keep Control of the World Bank”, says quite explicitly that Okonjo-Iweala is “the candidate most qualified for the job”; the main reason for choosing Kim instead is that he will have “access to the corridors of American power”.

Does Moss explain why he thinks that Kim will have more access to the corridors of American power than Okonjo-Iweala? Not as far as I can tell. And as an Ngozi observer of many years’ standing, I’m quite confident in saying that should she become president of the World Bank, she will have a surprisingly large degree of access to the White House.

It seems to me that it’s incumbent on the White House to at the very least attempt to explain why Kim would be better in the job than Okonjo-Iweala. If they can’t or won’t do that, then they should forfeit their anachronistic droit du seigneur, at least this time around when the alternative is so strong. Ngozi Okonjo-Iweala is the best candidate for the job, and Barack Obama knows it. He should meet with her, and then do the right thing by freeing up the Bank’s board to vote for whomever they think most qualified.

COMMENT

Let me play a single point as mentioned, why hasn’t Jim Kim replied to the CGD/WPost interview-audience discussion? Instead, he, with the support of State and Treasury, is touring the world, asking for support. Sounds like the old agenda doesn’t it?

Nogzi has failures. It may apply that she’s also a neoliberal–she stated that she hates that word. Well, Obama is also a neoliberal.

The point is, do you want transparent global economic governance institution or the same old game? And if you want the same old game, why hasn’t your candidate at least talked?

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Counterparties

Ben Walsh
Apr 3, 2012 17:18 EDT

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

Groupon’s first set of financial statements as a public company did not go well: The company is being examined by the SEC in the wake of its restatement of revenue. And Andrew Ross Sorkin is using the news to ask President Obama why he supports weaker protections for investors. The bill, Sorkin writes, could open the door for companies like Groupon to conceal information from investors. If you bought Groupon when it opened, he notes, you’d have already lost 41 percent of your investment in just five months:

Its goal is noble: start-ups and small businesses are the lifeblood of our economy, and it is hard to argue with helping entrepreneurs build businesses and hire employees.

However, the legislation, in the name of creating jobs, dismantles some of the most basic protections for the most susceptible investors apt to be drawn into get-rich-quick scams and too-good-to-be-true investment “opportunities.”

Henry Blodget said Sorkin was confusing investor protections with the investors’ well-established tendency to overvalue stocks. Investor emptor, in other words.

The Harvard Business Review‘s Justin Fox smartly triangulated between these positions:

Most of the money lost by individual investors in financial markets is lost to bad luck and poor decision-making, not inadequate accounting rules or financial regulation. Individual investors should be disabused of the notion that investing in IPOs like Groupon’s is a safe and responsible path to financial security. So is the way to do that with more rules and disclosure, or by offering fewer regulatory assurances and cultivating more of a caveat emptor attitude among investors?

So, depending on how you look at it, investor protections are either crucial to the public interest or a potentially misleading stamp of approval from regulators. Confused? There’s more here on the good and bad of the JOBS Act.

Beyond Groupon, today was the day the econoblogosphere got its version of a cute baby animal GIF: this encouraging entry for the Wolfson Economics Prize, made by an 11-year-old from the Netherlands, complete with a hand-drawn chart showing a pizza currency-exchange mechanism. If that doesn’t warm your heart, well…

On to today’s links.

Takedowns
Will Wilkinson tears into Weisenthal’s Romney-is-good-for-the-economy argument – The Economist

Wonks
Reinhart and Rogoff: The U.S. may not return to trend growth after the crisis – Bloomberg
“The cost of too little growth far outweighs the cost of too much” – Bloomberg

Cephalopods
I am quitting Goldman Sachs and despite what you have may heard, it was fantastic – Wall Street Oasis

Billionaire Whimsy
Jim Dolan accuses Mort Zuckerman of extortion – Forbes

Financial Arcana
Muni CDS now one step closer to being exchange-traded – WSJ

Old Normal
U.S. child miners from the 1900s – Retronaut

Eye of the Beholder
Meet the Utah man whose anti-Obama art is selling for six figures – Buzzfeed

Primary Sources
RBC charged in multi-hundred-million-dollar tax-evasion trading scheme – CFTC
Full FOMC minutes: Economy “a bit stronger overall,” unemployment still “elevated” – Federal Reserve

Firsthand Accounts
Quant prop trader: “I wouldn’t try to raise the price of rice and starve China” – The Guardian

Warnings
You absolutely do not want Carl Icahn to run your company – Harvard Business Review

New Normal
America has seen no increase in college graduation rates in the last 30 years – Middle Class Political Economist

Boondoggles
GSA chief resigns over Las Vegas conference that featured “a clown, a mind reader and a $31,208 reception” – WashPost

Long Reads
Why exports will “resurrect the United States as a dominant global economic power” – American Interest

Defenestrations
James Murdoch steps down as chairman of BSkyB – Reuters

Close Encounters
What happens when Joe Nocera meets Jamie Dimon in an elevator – NYT

 

COMMENT

Investor Emptor? The investor is the buyer? Does anyone have any idea of what Latin phrases mean or do they just make them up as they go along? O tempora, o morons

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