Archive for January, 2009

The rubbers hit the road

30 January 2009

Yesterday (28 Jan. 2009) the House of Representatives passed an $825 billion stimulus bill on an almost-perfect party line vote (about 95% of Democrats voting yes, 100% of Republicans voting no).  For a breakdown of the $825 billion, which is about two-thirds new spending and one-third tax cuts, go here.  Absent from the new spending was an originally proposed plan to make contraceptive services reimbursable by the federal Medicaid program.  (President Obama asked House Democrats to remove it after Republican leaders singled it out for ridicule.)  My understanding is that the proposal did not have a specific price tag but was estimated to cost about $200 – $300 million.

House Minority Leader John Boehner (R-Ohio) was widely quoted as asking, “How can you spend hundreds of millions of dollars on contraceptives?  How does that stimulate the economy?”

Methinks Rep. Boehner has a problem with contraception (or that some of his constituents and benefactors do), but just in case this was a serious question, here’s a serious answer: (more…)

“You might be an economist . . .

29 January 2009

. . . if you sing the praises of free markets while working for a public university.”

I forget who said that (Yoram Bauman?), but I thought of it again after seeing the Cato Institute’s full-page ad in today’s (Jan. 28 ) New York Times, against a fiscal stimulus package.   It was signed by a few hundred economists, the overwhelming majority of whom teach at state schools (as do I).  I didn’t have time to get an exact count, but the first ten were all at state schools, as were about eighty percent of those above the fold.  Given that the gist of the ad was that we need to reduce the “burden of government,” maybe they could offer to help shrink or privatize their schools?

At least one person on the list, Jeffrey Miron, is consistent in opposing state-funded higher education (which he has done in past op-eds) while teaching at a private university.  For most of the rest, I think the Disposable Heroes of Hiphoprisy said it better than I can.)


26 January 2009

A deluge of things to write about — the Democratic fiscal stimulus plan and reactions, the deepening recession worldwide, the apparent easing of the credit crunch, President Obama’s proposed new financial regulations, and perhaps most of all the continued woes of the big banks and the search for a solution — but only a droplet of time to write.  That’s the start of the semester for you.

Full posts to come.  Soon, I hope.

Shock therapy for the banks?

19 January 2009

Thomas Friedman has a thought-provoking column in Sunday’s New York Times, titled “Time for (Self) Shock Therapy.”  Unfortunately, one of the thoughts provoked is “A lot of this is oversimplified,” but there are still some good ideas and some good exposition in it.  On the eve of the inauguration, Friedman suggests that President Obama’s first White House meeting should be with the presidents of the 300 biggest banks, and he should tell them there’s a new sheriff in town.  The first paragraph of Obama’s imaginary indictment of the bankers is nicely put, especially the heart metaphor:

“Ladies and gentlemen, this crisis started with you, the bankers, engaging in reckless practices, and it will only end when we clean up your mess and start afresh. The banking system is the heart of our economy. It pumps blood to our industrial muscles, and right now it’s not pumping. We all know that in the past six months you’ve gone from one extreme to another. You’ve gone from lending money to anyone who could fog up a knife to now treating all potential borrowers, no matter how healthy, as bankrupt until proven innocent. And, therefore, you’re either not lending to them or lending under such onerous terms that the economy can’t get any liftoff. No amount of stimulus will work without a healthy banking system.”

Friedman then has Obama announcing a thinning of the herd, kind of like FDR’s bank holiday of 1933, whereby the healthy banks would be recapitalized and the sick banks liquidated: (more…)

Don’t eat anything that your grandmother wouldn’t recognize as food

17 January 2009

The title is courtesy of Michael Pollan and his back-to-basics food manifesto. I’d been thinking that there’s an analogous tip for personal investing:  Don’t invest in anything that you can’t understand.  So I was pleased to see award-winning writer Bethany McLean (co-author of Enron: The Smartest Guys in the Room), in a terrific interview on last night’s “Daily Show,” make just the same point:

“If you don’t understand how it’s making money, maybe it’s not making money.”

Had Bernie Madoff’s investors followed this advice, they might be $50 billion richer.  (Had all the buyers of securitized subprime mortgages followed this advice, the world might be several trillion dollars richer.)  One thing about the Madoff scandal that has me wondering was the comment from an industry participant about how it was obviously a Ponzi scheme, based on Madoff’s claim that his fund returned 8 to 12 % every year, come rain or come shine.  The participant said that was impossible, given the volatility of the markets.  Which has me thinking a few things:

(1) Isn’t that what hedge funds attempt to do — earn high returns while hedging away most of the risk?  8-12% is about what the stock market averages, and it seems like a fund could find a way, by setting excess gains aside or using put options or something much fancier (which, yes, I wouldn’t understand) to deliver a strong, steady return.  It would probably average a couple points less than the stock market averages (say, 8% versus 10%), but investors would surely flock to such high risk-adjusted returns.

(2) If, in fact, this is near-impossible to do, as the market participant said, then what sort of returns are hedge funds actually earning?  How much of that information is made public?  (Not too much, I’m guessing, since hedge funds are basically unregulated.)  How many of these funds are actually Madoff-type Ponzi schemes that haven’t been exposed yet?  Even if they’re not engaged in anything terribly crooked, shouldn’t there be more transparency as regards their holdings and returns?  Even five of the world’s biggest hedge fund managers seem to think so, based on their appearance before Congress last November.

(3) I need to learn a lot more about hedge funds.  Next on my reading list:  Roger Lowenstein’s When Genius Failed: The Rise and Fall of Long-Term Capital Management.

Geithner’s tax problem, Goolsbee’s solution?

14 January 2009

I’d been expecting Treasury Secretary-designate Tim Geithner to come up for some grilling in his confirmation hearing, over his role in the TARP bailout and in the orgy of deregulation of the late 1990s.  (Neither of those things is necessarily disqualifying in my eyes, as long as he can show that he’s learned from his and other people’s mistakes.)  But as with past nominees, from John Tower to Zoe Baird and Kimba Wood, it’s the small stuff of dubious relevance that tends to blow up — and distract Congress, the media, and the public from issues of actual substance.   The main distraction this time: Geithner failed to pay $43,000 in federal taxes.

On the surface, this looks pretty bad:  the guy who would be the head of the agency that oversees the IRS, failing to pay his Social Security and Medicare taxes for four years in a row (2001-2004).  But not so fast.   Most of us have those taxes withheld directly from our paychecks and don’t think about them otherwise.   Geithner, by contrast, was working for the International Monetary Fund (IMF), where employees don’t pay federal income tax.  Several of my grad school friends went to work for the IMF, and I distinctly remember them saying, it’s great, we don’t pay taxes.  The incoming administration’s talking points on the matter (take them with a grain of salt if you want) note that this confusion is very common among IMF employees.


What’s going on vis-a-vis the Visa

11 January 2009

ned_flandersTo many, the nation’s credit card debt seems a perfect symbol of America’s bubble economy.  Business Week even speculated this past fall that credit cards might follow housing as the next meltdown in our financial system. It seems logical enough:  just as securitized subprime mortgages wreaked financial havoc, revolving credit-card loans are almost inherently subprime, as credit cards are easy to get, charge high interest rates, and have much higher default rates than regular bank loans.  And a good deal of credit-card debt has also been securitized into collateralized debt obligations and other such lipstick-on-a-pig formulations.  Some of them may still even carry bogus AAA ratings.

Business Week‘s article has a graphic that indicates that the amount of bad credit card debt that banks had to charge off was steady at about 25% from 2001 to 2007 and then shot up in 2008, to an estimated 40%, and is projected to go to 90% in 2009.  A Jan. 1 article from Reuters echoes the gloomy assessment, saying that U.S. credit card companies are anticipating possibly their worst year ever.

By the most recent measure, for Nov. 2008, total revolving credit-card debt in the U.S. was just under $1 trillion — granted, less than 10% of total mortgage debt and about 7% of GDP — but, like gas prices, credit-card bills are among the most visible reminders of one’s personal finances.  And according to the Federal Reserve, nearly half of consumers have some credit-card debt, which averages $2,200.   (Those numbers are from at least a year ago; very likely they’ve since gone up.)

My hunch is that in tough times, an unpaid credit-card balance weighs on a person a lot more heavily, even if that person is still gainfully employed.  So credit-card debt could be a major inhibitor of consumer spending, and yet another rock in the ongoing economic landslide.

New York to self: Drop dead

10 January 2009

President-elect Obama and Congress are talking about a federal stimulus package that includes a substantial though as-yet-undetermined amount of aid to states and, possibly, localities.  Earlier this month Ohio Gov. Ted Strickland made an eloquent case for still more federal aid, to make up for more of the huge shortfall in revenues that normally go to education:

“It doesn’t make a lot of sense … to put huge resources into creating jobs with these infrastructure projects, while at the same time the states are having to lay off teachers, and to underfund education and to allow college tuition to explode.”

According to the Associated Press, Strickland and four other Democratic governors, including David Paterson of New York, presented Obama’s transition team and Congressional leaders with a request for $1 trillion in state aid, including $250 billion for education, $250 billion for social services such as Medicaid, and $150 billion in middle-class tax cuts.   The article mentions that Paterson said New York has a $15.4 billion deficit, but that’s it from him.  New York, as possibly the hardest-hit state in the union in this financial and economic crisis, has a compelling case for why the states have recession-related revenue shortfalls and could use federal aid.  Maybe Paterson made that case, but if so it didn’t make the article.


11 million unemployed, 21 million out of work

9 January 2009

People it’s bad.  And the December 2008 unemployment report was worse.

11.1 million unemployed.  But only if you go by the traditional definition.  Add in the 8 million involuntary part-time workers (who say they’d be working full time if full-time work were available) and the 1.9 million discouraged job-seekers (who say they didn’t look for work in the past month because it looked hopeless), and you get an astonishing 21 million people wanting but not having full-time work.

This measure, sometimes called “underemployment” or “U-6 unemployment,” corresponds to a U-6 unemployment rate of 13.5%. That’s the highest in the short time the Bureau of Labor Statistics (BLS) has been keeping track of that statistic (1994-).

It gets worse.  Back to regular (U-3) unemployment, today’s news articles have said the 2.6 million jobs lost in 2008 were the most in a year since 1945, when the economy shedded 2.8 million jobs.  But but but — most of those 1945 jobs must have been in the active military, as World War II ended that summer and the BLS says civilian employment fell by only 1.1 million that year.  (And, as economic historian Robert Higgs has eloquently pointed out in numerous papers, overall U.S. economic well being was much higher after the war, despite the end of “full employment.”  The returning veterans surely preferred being victorious but temporarily out of work to continued combat.)  So you’d have to go back even farther to find a year with as much U.S. job loss as in 2008.  How far?


Blagojevich-Burris-free zone!

8 January 2009

I don’t have time to write anything much this morning, but I did want to not write anything about this political sideshow in Illinois and the U.S. Senate.  So here it isn’t.

The closest I’ll get is to excoriate the media for ignoring everything else about President-elect Obama’s press conference yesterday about the economy.  Toward the end he took one off-topic question about his Senate heir apparent, and the MSNBC talking heads talked about virtually nothing else for the rest of the day.  (Or at least until I turned the TV off, which was not soon enough.)