March 31, 2008 4:47
On TV: Retirement Revolution
PBS is airing a two-part documentary starting tonight (what time? check your local listings) called Retirement Revolution, and I'm in it. I'm pretty sure I'm not in tonight's episode, though it's possible that just I missed myself while fast-forwarding through the podcast. But that doesn't make it any less edifying.
The show is a pretty ambitious attempt both to explain how we ended up with our current messy retirement situation and give some personal finance advice on what to do about it. My role is to briefly and not-very-eloquently explain the origins of the 401(k), and then even more briefly warn viewers that, uh, investing can be risky.
Part II, in which I do all this, appears to be airing next Tuesday night in most places, although here in New York they're showing it Friday night. Or you can just watch it online here (warning: it can take a while to load).
March 31, 2008 1:23
More admiring press for the Nordic way of bank bailouts
You read it here first. Ambrose Evans-Pritchard now reports in the Telegraph (via Across the Curve) that the Federal Reserve thinks the Swedes (and Norwegians and Finns) might have something to teach us about financial bailouts:
A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region's economy to its knees.It is understood that Fed vice-chairman Don Kohn remains very concerned by the depth of the US crisis and is eyeing the Nordic approach for contingency options.
And a little further down in the story:
While the responses varied in each Nordic country, there a was major effort to avoid the sort of "moral hazard" that has bedevilled efforts by the Fed and the Bank of England in trying to stabilise their banking systems.Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country's top four banks - Christiania Bank and Fokus - were seized by force majeure.
"We were determined not to get caught in the game we've seen with Bear Stearns where shareholders make money out of the rescue," said one Norwegian adviser.
March 31, 2008 10:45
Don't be so sure Paulson's plan is a recipe for regulatory laxity
As I write this, Hank Paulson is finally giving his big speech on regulatory reform. But the great wave of reaction has been going on for a couple of days now. There are seven stories on the Paulson plan in today's WSJ alone.
My quick read of all the reactions is that Wall Street mostly likes the Paulson approach, while lots of Democrats and consumer-protection types are dubious. (So are the heads of regulatory agencies that Paulson wants to do away with, but that's to be expected.)
I guess, in the sense that the plan doesn't explicitly call for reining in hedge funds or new financial products, that split in reactions makes some sense. But not that much sense. As Paulson put it in the speech:
Those who want to quickly label the Blueprint as advocating "more" or "less" regulation are over-simplifying this critical and inevitable debate. The Blueprint is about structure and responsibilities – not the regulations each entity would write. The benefit of the structure we outline is the accountability that stems from having one agency responsible for each regulatory objective. Few, if any, will defend our current balkanized system as optimal.
The one truly new agency that would come out of Paulson blueprint would be what Treasury dubs the Conduct of Business Regulatory Agency. And my initial reading was that the CBRA could be--depending of course on how the law creating it was written and who happened to be running it--a far more aggressive regulator on matters of consumer protection than anything we've got now.
Law professor Larry Ribstein saw it the same way, although he's not thrilled at the prospect (via Dealbreaker):
[W]ith one regulatory agency we’re likely to get fewer new financial products. Harvard's Hal Scott is quoted in the WSJ article as saying that we don't want a competition in laxity between agencies. But what is the optimal amount of laxity? Can we assume that government are acting appropriately when, for example, they squelch new products?
No, we can't assume government is acting appropriately when it squelches new products. But neither can we assume that it's acting appropriately when--thanks to big gaps in the regulatory structure--it allows for the sale of wildly dangerous new products to gullible/greedy consumers. Like, say, teaser-rate mortgages with no money down.
Either we're okay with a purely buyer-beware approach to financial products, or we're going to have to rely on a government agency to stand between the financial wizards and consumers and say no to some new ideas. Sort of like the FDA does with drugs. For good or ill, that's what the CBRA could be.
March 29, 2008 9:29
The Paulson plan: Goodbye OTS, CFTC, and FDIC, hello FIGC, PFRA, and CBRA
Hank Paulson is going to make a speech Monday about what our financial regulatory system ought to look like. But the WSJ, NYT, WaPo, and LAT already have all the details. (Not a word yet in the FT, interestingly enough.)
This latest of several "Paulson plans" (the full "executive summary" is here) is not directly a response to the craziness of the past few weeks; it's part of a longer-term Treasury project aimed at making U.S. capital markets more competitive. And it proposes to do so by modeling our regulatory structure after those of fearsome capital markets juggernauts Australia and the Netherlands.
Actually, Australia and the Netherlands do probably qualify as capital markets juggernauts, given their size. And the sight of the Bush administration actually looking overseas to learn stuff is kinda mind-boggling, in a good way. Like Hank Paulson or not, he's certainly cut from a different and far-higher-quality cloth than your average Bush cabinet appointee.
The plan initially calls for things like merging the Office of Thrift Supervision into the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission into the Securities and Exchange Commission, and creating a federal insurance charter (insurance companies are currently all regulated by the states). But the longer-term idea is to meld almost all financial regulatory activities into two new agencies: the Prudential Financial Regulatory Agency, which would regulate all the depository institutions (let's just call them banks from now on) and insurance companies that get government insurance, and the Conduct of Business Regulatory Agency, which "would be responsible for business conduct regulation, including consumer protection issues" for banks, insurance companies, and all other financial services providers. Then there would be the market stability regulator, the Federal Reserve, which would have the power to snoop around any kind of financial institution it wants in search of risks to the financial system.
Now, I remain extremely dubious that we can rely on Fed staffers to be wise and strong-willed enough to identify looming problem areas and shut them down. Paulson apparently agrees: "I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every 5 to 10 years," he says in a draft of his speech obtained by the NYT. But if the Fed is going to be backstopping financial firms of all sorts in times of troubles, it does seem to make sense to give it some regulatory authority over all of them.
The most crucial element here might turn out to be the CBRA, the conduct-of-business agency, especially its consumer protection arm. What went wrong with mortgages was that sophisticated and ruthless financial markets interacted with unsophisticated consumers with no intermediation but that of mortgage brokers (whose incentive structure was all wrong) and minimal regulation.
Financial products, in particular loans, are useful but potentially dangerous things. Sort of like drugs. Or toasters. If the CBRA had an aggressive consumer arm--maybe something along the lines of Elizabeth Warren's Financial Products Safety Commission--the collateral damage of financial markets' inevitable episodes of insanity could be limited.
That's could, not would. It will always be really hard to get the balance of vigilance and flexibility right. But an agency like CBRA would certainly have a better shot at it than the current mish-mash of federal and state regulators, whose incentive structures mean they are often far more interested in maximizing the number and profitability of the companies under their charge than in protecting consumers.
One final note: The lobbying campaign to prevent Paulson's proposed reforms from happening, or tweaking them to favor particular sectors of the financial business, will be one of the most aggressive and expensive Washington has ever seen. So while the plans sure look like a step in the right direction, the final result may not be.
March 28, 2008 12:56
Obama's financial speech and the great regulation quandary
So, long after Ana got to it on Swampland, I've finally read Barack Obama's big financial regulation speech. His basic diagnosis of the problem is this:
A regulatory structure set up for banks in the 1930s needed to change because the nature of business has changed. But by the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework.Since then, we have overseen 21st century innovation – including the aggressive introduction of new and complex financial instruments like hedge funds and non-bank financial companies – with outdated 20th century regulatory tools.
So far, so good. But what would 21st century regulatory tools look like?
Obama's suggestions read like a somewhat bolder version of the recommendations put out a couple of weeks ago by the Hank-Paulson-run President's Working Committee on Financial Markets. They basically amount to making financial regulation more consistent across different kinds of institutions, and, uh, doing a better job of catching problems before they turn into crises.
March 28, 2008 12:07
More gratuitous Ben Stein bashing
This time from comedian/actress Julia Sweeney (via PZ Myers):
Ben Stein once did a Groundling show, an improv show, that I was a part of. I found him to be spectacularly ill-informed and narcissistic and weirdly devoted to his schtick and worst of all, hacky. He didn’t listen to his fellow performers and played everything outward to his friends in the audience who laughed (fake, forced) at every single thing he did.
He's not just anti-enlightenment. He's anti-comedy!
March 28, 2008 10:02
Unhelpful photo of Jeff Gordinier's book party
Here it is, the fourth in my world-changing series of unhelpful photos of book parties (it was previously lo-res photos of book parties, but this time the fault lies not with the device but the photographer). The party was for Jeff Gordinier's blockbuster X Saves the World: How Generation X Got the Shaft but Can Still Keep Everything From Sucking:
I used to live a few blocks from the famed writer hangout that is Elaine's, but had never actually dared enter before. I guess I was afraid Gay Talese might beat me up. This time I did go in (although I failed to get any photographic evidence of that fact) and didn't get beat up, but I also didn't stay long because I had to go home and cook dinner for (of course) some visiting Danes.
Anyway, no, I haven't read Jeff's book yet. But the Details article upon which it was based was brilliantly funny (I can't find the actual article online, but here's Peter Carlson's review). Plus Jeff is almost single-handedly responsible for me being employed in the magazine business. And while that perhaps seems a less unmitigated boon than it did 12 years ago (why couldn't he have steered me into the Internets? Or maybe collateralized debt obligations?), it still means that everybody in the world should buy his book.
And finally, since everybody always seems confused about how to pronounce his name, it's gore-din-ear. Or maybe gore-di-near.
March 27, 2008 4:19
Wall Street CEOs have no idea how their firms make money
Michael Lewis on investment banks:
To both their investors and their bosses, Wall Street firms have become shockingly opaque. But the problem isn't new. It dates back at least to the early 1980s when one firm, Salomon Brothers, suddenly began to make more money than all the other firms combined. (Go look at the numbers: They're incredible.)The profits came from financial innovation -- mainly in mortgage securities and interest-rate arbitrage. But its CEO, John Gutfreund, had only a vague idea what the bright young things dreaming up clever new securities were doing. Some of it was very smart, some of it was not so smart, but all of it was beyond his capacity to understand.
Ever since then, when extremely smart people have found extremely complicated ways to make huge sums of money, the typical Wall Street boss has seldom bothered to fully understand the matter, to challenge and question and argue.
This isn't because Wall Street CEOs are lazy, or stupid. It's because they are trapped. The Wall Street CEO can't interfere with the new new thing on Wall Street because the new new thing is the profit center, and the people who create it are mobile.
Anything he does to slow them down increases the risk that his most lucrative employees will quit and join another big firm, or start their own hedge fund. He isn't a boss in the conventional sense. He's a hostage of his cleverest employees. ...
March 27, 2008 10:20
The Popperian case against Ben Stein (and against Jann Wenner)
Felix Salmon has written an epic essay on just what makes Ben Stein such a threat to the republic. It's very good, and very Karl Popper. Felix's main complaint is that Stein is "anti-enlightenment." Rather than offering explanations for the market's behavior (or the evolution of the human race) that are falsifiable--that is, they could potentially be proved wrong as more evidence is amassed--Stein prefers to go with unverifiable assertions. Writes Felix:
Every so often I get comments on this blog saying that I'm an idiot because something I said has turned out to be wrong. But that just doesn't make sense to me. The real idiots, to me, are people like Ben Stein. Stein makes factual errors, but that doesn't make him an idiot. What makes him an idiot is his evident belief in his own infallibility, to the point at which he clearly doesn't allow the NYT's editors to do even a cursory fact-checking run over his copy before it's published.
This Steinian mode of discourse is actually pretty common on the cable-TV news channels, where there's no time or incentive to fact-check the claims of the guests (and on occasion hosts). It's just really jarring to run across it in the business pages of the New York Times. One of the main reasons I got into business journalism (and away from political coverage) was that the realities of business seemed far less friendly to the unverifiable assertions that permeate political debate.
One final thought: This is all John Hughes's doing, isn't it? Ben Stein never would have gotten an NYT column if it weren't for Ferris Bueller. Although, he probably wouldn't have landed the Bueller role if he hadn't first gotten a small part in Cameron Crowe's Fast Times at Ridgemont High sequel The Wild Life. And Crowe never would have been able to make those movies if Ben Fong-Torres hadn't hired him to write for Rolling Stone at age 15. And that couldn't have happened without Jann Wenner's approval. So there you have it: It's all Jann Wenner's fault!
Wait, is that a verifiable assertion?
March 27, 2008 8:08
On second thought, maybe McCain isn't so different from Clinton and Obama on housing
Upon reading the same speech that led the NYT to declare that John McCain had "draw[n] a sharp distinction between himself and the two Democratic presidential candidates" (which I wrote about Wednesday), James Pethokoukis of U.S. News came to the near opposite conclusion:
Based on that speech, I think it is pretty easy to see how McCain could/would go along with something remarkably similar to the bailout plan being offered in the House by Barney Frank. The Frank plan doesn't make everyone whole or hit some cosmic reset button. It applies only to owner-occupied homes, and lenders would have to accept a write-down of the principal of the loan. Plus, homeowners may have to fork over some share of the future appreciation of the home to the Department of Housing and Urban Development in order to have an existing bank loan replaced by one from Uncle Sammy.And with the language of the speech, McCain made it clear that he won't let small-government, free-market ideology get in the way of his support of government action that he deems necessary. This is also exactly the thing that one influential conservative economic activist told me he was praying that McCain wouldn't do because it further fuzzed the differences between him and Barack Obama and Hillary Clinton on spending—an issue many GOP-ers think helped cost them the 2006 congressional election.
Now I do think that anybody who believes that spending is what cost the GOP the 2006 election has a pretty deluded view of the American electorate. But the dubious view-from-the-right that McCain isn't really one of them on economic issues is probably closer to the truth than the view-from-the-left that he's just the reincarnation of George Bush. Scratch that. He may well be the reincarnation of George Bush on economic policy. But H.W., not W.
March 26, 2008 4:38
The housing bust, adjusted for inflation
The new Case-Shiller house price numbers (through January) came out yesterday. It was widely reported that they were ugly, and they were--the 20-city composite index was down 10.7% since January 2007 and 12.5% since its peak in July 2006.
I was curious how much worse things would look if adjusted for inflation. Here's what I found out, with help from Time graphics czar Jackson Dykman and his Time.com counterpart Feilding Cage in ugly Excel form because something was wrong with the pretty version:
What was interesting to me was that adjusting for inflation (I simply used headline CPI) didn't make the decline look dramatically worse; it just made it look different.
[Update: No, I don't know why the chart doesn't show up in Firefox. It's there in Safari. I'll see what I can do to fix.]
March 26, 2008 10:38
McCain's (not so crazy) bet on housing
The NYT has an article today contrasting John McCain's views on the housing crisis with those of Hillary Clinton and Barack Obama. It begins:
SANTA ANA, Calif. — Drawing a sharp distinction between himself and the two Democratic presidential candidates, Senator John McCain of Arizona warned Tuesday against vigorous government action to solve the deepening mortgage crisis and the market turmoil it has caused, saying that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”Mr. McCain’s comments came a day after Senator Hillary Rodham Clinton of New York called for direct federal intervention to help affected homeowners, including a $30 billion fund for states and communities to assist those at risk of foreclosure. Mrs. Clinton’s Democratic opponent, Senator Barack Obama of Illinois, has similarly called for greater federal involvement, including creation of a $10 billion relief package to prevent foreclosures. ...
Clinton's response to McCain's words: “It sounds remarkably like Herbert Hoover, and I don’t think that’s good economic policy.”
I dunno. Herbert Hoover's economic policies probably would have worked fine in 1924. They just weren't up to the greatest financial and economic crisis of the 20th century. And I wonder if McCain is simply making a calculated bet that this won't turn out to be one of the big crises of the 21st.
If the economy holds up well enough that a more or less status quo (on the economy) Republican candidate can still get elected in November, then McCain's hands-off approach will probably make more sense than the activism of Clinton or Obama. If things keep getting worse then, well, it's not going to be his job to deal with it.
March 25, 2008 9:32
Greetings from beautiful downtown Austin
This was the view from Congress Street this morning. I was a little surprised at the Hummer. Are they allowed here?
March 24, 2008 10:24
The Bear that would not die
Maybe it would have been simpler just to let Bear Stearns go bankrupt.
When the Fed swept in just over a week ago to arrange a shotgun marriage between JP Morgan Chase and Bear Stearns, the idea was to avert a sudden collapse of the investment bank that might have caused credit markets to completely freeze up, while at the same time avoiding anything that looked like a bailout of Bear's shareholders. The result was a fire sale at $2 a share, or about $250 million--less than Bear's stake in its midtown Manhattan headquarters building is worth.
After that deal was announced, though, the price of Bear's shares stayed in the $5 to $7 range. There were all sorts of theories as to why, but the one that was increasingly discounted as the week wore on--that speculators were betting that the deal wouldn't go through at $2 a share--turned out to have some truth to it. An apparent miswording in the original deal document opened a door for rival bids that JP Morgan Chase had meant to shut, Andrew Ross Sorkin reported in the NYT. Dealbreaker's John Carney is dubious of this explanation, but in any case, while the rest of us were at home eating eggs made of chocolate and giggling at Peeps dioramas, JPM executives were frantically renegotiating the deal. They've now upped their bid Their bid is now expected to rise to $10 a share, and the people at the Fed apparently aren't thrilled about developments.
So what are we to make of this?
1) There really was no good reason for the run on Bear Stearns--just a self-fulfilling panic. The people at JP Morgan Chase have had more than a week now to look through Bear's books, and they still want it, and are now willing to pay more than a token price (although it's still pretty cheap). The NY Post reported yesterday that SEC chairman Chris Cox said as much (the "fate of Bear Stearns was a lack of confidence, not a lack of capital") in a letter he wrote last week.
2) On the other hand, if there was no good reason for Bear to die, its management had to be pretty inept to let it reach a state where rumors were enough to kill it.
3) Fed arranged non-bailouts are always going to be ugly. The Federal Reserve can react and improvise with a speed (and a fat wallet) that no other government agency can. But the deeper it gets into the affairs of individual financial institutions, the worse the potential recriminations and lawsuits are going to be afterwards. One of the Fed's great strengths is that doesn't have to stick to any kind of strict rulebook. But we use rulebooks in government for a reason, and the folks at the Fed may be starting to find out why.
4) Wall Street's more fun when it's preoccupied with ugly, potentially lawsuit-filled merger battles than with the end of financial capitalism as we know it.
March 22, 2008 9:24
So do we want Fed governors to stick around for 14 years or not?
King Banaian points out something that Senate Banking Committee chairman Chris Dodd said back in November about why he was holding up confirmation of Randall Kroszner's re-nomination to the Federal Reserve Board:
“There’s one nomination here that would be for somebody [for] 14 years,” Dodd told reporters on a conference call. “We’re frankly getting down to less than a year away from the [November 2008] election. On nominations of that length, I’m fairly reluctant.”
This is interesting. Mark Thoma and I have both expressed concern that Fed governors don't stick around very long (apart from Alan Greenspan, only one other governor has served a full 14 years since the early 1970s), making it possible for one president to appoint the entire board--which was not Congress's intention when it recreated the Fed in its present form in 1935.
Kroszner is a 45-year-old former University of Chicago economist who's been at the Fed for all of two years. My bet--based not on any inside knowledge but a quick look at his bio--is that he'll stick around for two to four more years before returning to an academic job and a spectacularly lucrative consulting career. Should he have just told Chris Dodd that?
Kroszner's term expired Jan. 31, and the Senate Banking Committee does not appear to have acted yet on his nomination (or those of two new Bush appointees to the Fed). He's still voting in FOMC meetings, though.
March 21, 2008 8:14
In print: Bear trap
In the new issue of Time (with the Dalai Lama on the cover) is my attempt at explaining the Credit Crisis/The Big Unwind/Jenga to millions of people with better things to do than read the FT and WSJ:
It was, no question, one of the most dramatic episodes in American financial history. A famously scrappy Wall Street investment bank, Bear Stearns, went from seemingly healthy to dead meat in about five days. Federal Reserve Chairman Ben Bernanke, desperate to avoid a sudden collapse that might cause a full-fledged market panic, invoked a little-known 1930s legal provision to engineer a Sunday fire sale of Bear Stearns to banking giant JPMorgan Chase for a mere $2 a share. (Bear's stock price was $57 a week before, $171.51 in early 2007.)With Bear shareholders virtually wiped out, half the firm's employees slated to lose their jobs and no golden parachutes offered to the top executives, it wasn't a bailout. But it did take a $30 billion loan from the Fed to seal the deal. This was a truly extraordinary use of the central bank's powers and an indication that the subprime-mortgage crisis that erupted last summer has evolved into something bigger and more ominous--possibly the greatest challenge to the American way of financial capitalism since the Depression.
The immediate market reaction to the deal--and to the three-quarter-point interest-rate cut announced by the Fed two days later--was positive. Stocks rose nearly 4%; credit markets calmed a bit; the global financial system lived to fret another day. And fret it surely will, for the troubles that mauled Bear are far from over. Read more.
March 20, 2008 3:27
Why is the Federal Reserve Board made up entirely of Bush appointees? Because Fed governors don't serve out their terms
Mark Thoma points out that the Federal Reserve Board is now stocked entirely with Bush appointees, which isn't really how the Fed is supposed to work. But he doesn't go into why.
Fed governors serve staggered 14-year terms, so clearly the idea is to keep any one president from appointing the entire board. But nowadays Fed governors almost always leave before the end of their terms. Or they end up getting appointed for a term that only has two or three years to run. Other than longtime chairman Alan Greenspan, the only Fed governor since the early 1970s who actually stuck around for a full 14 years was Edward W. Kelley Jr., who served from 1987 to 2001. (Here's the full list of past board members.)
Why don't they stick around? Maybe it's the pay--$172,000 a year (the chairman makes $191,300). Which is surely a lot less than, for example, former Fed Vice Chairman Roger Ferguson (who quit in 2006) is making as a member of the executive committee and head of financial services products at Swiss Re. Still, Supreme Court justices make only modestly more ($208,100 a year) and they sure don't quit after four or five years.
So maybe it's the work. Much of what the Fed governors other than the chairman spend their time on is not monetary-policy glamor (such as it is) but regulatory drudgery. Also, in the Alan Greenspan era, the rest of the Fed governors were mostly just appendages when it came to the big decisions (former Vice Chairman Alan Blinder's frustration with his treatment by Greenspan is well documented).
Blinder's former Princeton colleague Ben Bernanke has been pursuing a consciously more collegial approach as chairman than Greenspan. I certainly can't imagine him treating Don Kohn or Rick Mishkin like underlings. So maybe they'll stick around for a while. And maybe Bernanke could think about offering free yoga classes and top-quality sushi in cafeteria. Or I've got it: Long-term incentive compensation! Fed governors could be given a stake in the performance of the Term Securities Lending Facility! Then again, maybe not.
Does the partisan makeup of the Fed matter? I agree with Felix Salmon that there is no clear partisan divide these days on some matters like monetary policy. Plus, half the current voting membership of the Federal Open Market Committee--which sets the all-important Federal Funds rate--is made up of regional Federal Reserve Bank presidents who are appointed not by the president of the United States but by local bankers and businesspeople.
Now that's weird enough in itself, and is occasionally decried by populist critics of the Fed. But you certainly can't call the bank presidents Bush appointees. They also get paid a lot more than Fed governors (as of Dec. 31, 2006, salaries ranged from $276,500 in Dallas and Philly to $381,000 in New York) and have swankier offices and more people they can order around, so they tend to stay on the job longer.
Where I guess partisan politics could matter most is in matters of regulation. The other three big banking regulatory agencies are more directly controlled by the administration in power (the Office of the Comptroller of the Currency and the Office of Thrift Supervision are part of the Treasury Department, and the FDIC is governed by a board consisting of the OCC and OTS chiefs plus three presidential appointees serving six-year terms). Long-serving Fed governors could presumably try to temper any radical changes in regulatory approach brought on by a new president.
Which brings to mind Ned Gramlich, a Bill Clinton appointee who urged tighter regulation of subprime lending. Except that he did this while Clinton was still in office, and was thwarted by another long-serving Fed governor--Greenspan.
In any case, though, Congress clearly intended in drafting the Federal Reserve Act Banking Act of 1935 for Fed governors to stick around longer than presidents. And now they hardly ever do. Which is mildly disturbing.
Oh, and by the way, can you tell I used to work for American Banker?
Update: More from Thoma.
March 20, 2008 1:03
It's a recession! Lakshman Achuthan finally pulls the trigger
He held off for a while in hopes that maybe Washington could come through with enough monetary and fiscal stimulus to stave it off, but now Mr. Business Cycle himself is saying it: We're in a recession. From CNNMoney:
Lakshman Achuthan, the managing director of the Economic Cycle Research Institute, said the economy has now fallen into what he calls "a recession of choice."He argues that the economic stimulus package passed by Congress this year is too late to help many consumers and businesses and that the Federal Reserve was too timid when it started trimming interest rates last fall.
... He said low business inventories at the end of last year gave policymakers a chance to avoid the recession, because any spur to spending by businesses or consumers would have resulted in a quick pick-up in production.
"There was an opportunity that was wasted by policymakers because they didn't understand those dynamics," he said. "That is one aspect of how the policymakers have goofed and why this recession is a choice, not something that happened by bad luck and chance."
He added that the more decisive action taken so far this year by Congress and the Fed has come too late to stop the economy from falling into recession.
Achuthan is a protege of economic-statistics-pioneer Geoffrey H. Moore, who used to more or less decide on his own whether the nation was in recession or not. He's got a very good record on recession calls, so I think this one's now about as close to official as it's going to get before the NBER's Business Cycle Dating Committee finally gets together for a meeting.
My one thought regarding his comments is that maybe preventing recession shouldn't always be the absolute No. 1 priority of monetary and fiscal policymakers. I may reconsider that, though, when I get laid off six months from now.
March 20, 2008 12:08
Bear Stearns employees own lots of company stock, but not in their 401ks
The news that something like one-third of Bear Stearns stock, which ain't worth what it used to be, is in the hands of employees has raised lots of hue and cry about the idiocy of putting your retirement savings in company stock. Writes Megan McArdle:
Unbelievable. Five years after Enron and WorldCom went down, taking not only thousands of jobs but most of their employees' retirement savings with them, we are hearing the same old song: Bear Stearns 401(k)s were crammed full of company stock....What is the proper amount of your investment portfolio to have in your company's stock? In my opinion, zero.
Agreed, if you're talking about retirement accounts for rank-and-file workers. But there's actually no evidence that the 401(k)s at Bear Stearns were crammed full of company stock. Writes friend-of-this-blog Corey Rosen of the National Center for Employee Ownership:
For the broad employee population, there was an employee stock ownership plan (ESOP) that held about $285 million in Bear Stearns stock in 2007. The plan was funded by the company. This was not, however, the sole, or even main, retirement plan at the company. In addition, there was a profit sharing plan funded by the company that had about $300 million in diversified investments and a 401(k) plan with $720 [million] in diversified investments. So from a retirement plan standpoint, Bear Stearns is not at all like Enron and some other companies several years ago where employees were heavily or primarily invested in company stock, generally in their 401(k) plans, and were left with limited or no retirement assets after their companies melted down. The ESOP accounted for about 3% of total Bear Stearns Stock.
So who were those employees who owned a third of Bear Stearns shares? For the most part, they were the top executives, investment bankers, traders and brokers who got shares via the company's capital appreciation, restricted stock, and stock option plans. According to Bear's 2007 proxy statement, the eight members of the firm's executive committee owned 9% of the stock. And given the way investment banks work, there were probably lots of bankers and traders who made close to as much as (or more than) some executive committee members, and owned similarly large amounts of stock. So Bear's employee stock ownership was almost certainly heavily concentrated among the top employees whose actions were most likely to affect the value of the stock.
The idea behind piling stock onto these top executives and top performers, and encouraging them to hold on to it and even buy more (which seems to have been the ethos at Bear), was to align their interests more closely with those of the firm and its outside shareholders. It was to get around the much-discussed problem of paying people now for deals that will likely sour later. It was to help make Bear's big moneymakers more cognizant of the long-run risks they were running.
Clearly, this didn't work in Bear's case. (Jimmy Cayne's 5.82% stake in particular doesn't seem to have succeeded in adequately diverting his attention from the bridge table.) But is it such a horrible idea? I don't think so.
March 20, 2008 9:44
The next economic disaster zone: High-priced business conferences
A reader writes:
I attended the FT’s (heavily advertised) “View from the Top” conference in New York on Tuesday, at the high-end Four Seasons Hotel, where the admission fee was $1,900 (I passed myself off as a journalist to secure admission for $0). Expecting a large conference hall, instead I was ushered into a rather small (and windowless) meeting room, which was only about half full. If you counted all the people who were speaking (and thus not paying to attend), and added them to the journalists in the room, I wonder if there were 25 people who paid the rack rate. Given the far-less-than-scintillating nature of many of the presentations – Niall Ferguson a notable exception – I questioned the value of spending a day holed up, even if I hadn’t paid to attend. Had I paid the rack rate, I almost certainly would have demanded a partial refund.
Horrors! Does this mean I have to scotch my plans for a $150-a-head Curious Capitalist View from the Circle Line booze cruise around Manhattan?
March 19, 2008 4:14
Naming the financial crisis, day three
So it turns out that Darren Gersh, Washington Bureau Chief for the Nightly Business Report, addressed the question of what we should call this financial crisis of ours way back in January. He even did some actual research on the subject. What a concept!
Anyway, Gersh shared my concern that any name with "subprime" in it is too limiting. He went on:
When many things are going wrong at the same time, TV people like me reach for an “umbrella lead,” the one phrase that ties it all together. So it is that we come to another contender for the title: “Credit Crisis” or the more evocative “Credit Squeeze.” The Journal trotted out “Credit Turmoil,’ a weak contender I would say. Turmoil is a mental state of confusion or agitation. In the stages of financial shock, we’ve gone past confusion and bargaining to actual pain.Martin Wolf at the FT is leader of the pack arguing we’re in the middle of a big event. In a column on 12/11/2007, headlined “Why the credit squeeze is a turning point for the world,” Wolf writes: “This ‘credit crunch’ may, I believe, be an . . . important turning point for financial markets and the world economy. . . . [W]hat is happening in credit markets today is a huge blow to the credibility of the Anglo-Saxon model of transactions-orientated financial capitalism.”
The problem with credit squeeze/crunch/crisis is the implication that average folks can’t get money. Yes, Jumbo loans are hard to come by, but credit cards and auto loans are flowing. So are loans to businesses. The real credit crisis is on Wall Street. ...
Another problem with “credit crisis” is that it’s boring, too plain vanilla. Fortune’s Allan Sloan offers up “debt debacle!” It’s alliterative, alive, and fun. It’s also a nice way to mock Wall Street’s hubris. That’s why I like it. But “debt debacle” is the Ron Paul/Mike Gravel of the race -- provocative, but unlikely to capture the prize.
Philip R. Perkins, co-manager of the Delaware Diversified Income Fund, tipped me off to the Obama of this race. It’s a fresh contender that unites and inspires. Perkins calls the current financial crisis “The Big Unwind.” Unwind refers to a global de-leveraging of hedge funds, banks, and everyone else. It’s also flight to simplicity, a return to assets that are easier to understand than the bundles of subprime loans parked in complex pools around the world.
The Big Unwind has gotten some support here too, although TomT worries that "it's a little too smart **s Atlantic magazine/Slate." Gersh also likes The Great Unwind, which he tracks down to some report on hedge funds by a couple of Dresdner Kleinwort Benson analysts. But he has concerns similar to TomT's:
“The Great Unwind” is elegant and sweeping, but I fear it is too inside to take hold of the popular imagination. The pros might like it, but a crisis this big requires a village. And so far, the clear front runners are subprime crisis and credit crisis.
Credit crisis is too generic. So is credit crunch. It's fine to use them now, but unless you add some kind of modifier in the future nobody will ever know which crunch or crisis you're referring to.
There are three potential modifiers that I can think of: Date, size, and source.
The difficulty with using a date for this credit crisis is that it already spans two years, and anything with Aughts or Aughties in it just sounds really weird. I guess if all financial activity comes to a halt sometime this year, we can call it the Panic of 2008, but if it's just a continuing succession of crises followed by periods of relative calm, that won't make sense.
As for size, great and big are the obvious ones. I guess long is a possibility, too, but an unlikely one.
Then there's the source. In this case it really did all start with subprime mortgages. But Subprime Crisis/Meltdown and Mortgage Crisis/Meltdown make it sound like it started and ended there. Mark Zandi's Subprime Financial Shock gets at the idea of waves emanating through the rest of the financial system, but is unwieldy.
So maybe Eric in Santa Fe, a commenter over at Ezra Klein's place, is right when he argues:
I fully expect "Subprime Meltdown" to carry the day.
It only conveys one facet of the mess, but I've seen it in too many contexts to dismiss it.
Me, I'm still torn. I like The Big Unwind (and The Great Retraction), but then I'm a smart **s who reads the Atlantic and Slate. And I love all the funny suggestions collecting in the comments here and at Swampland and Ezra's, and will do another roundup of my favorites tomorrow soon. But I was kind of hoping something transcendently obvious might emerge, and so far I don't think it has.
March 19, 2008 2:26
Visa goes public with a bang. Phew!
It was with a sigh of relief that I read that Visa went through with its record-breaking IPO and started trading on the New York Stock Exchange today. Not because I have any money at stake, but because the column I wrote a couple of weeks ago would have looked pretty silly if the IPO hadn't happened. An excerpt:
Giant IPOS are usually a sign of good, or at least frothy, times. The current record haul for a U.S. IPO, $10.6 billion, was reaped by AT&T Wireless in April 2000--just after the great tech-stock bubble began to deflate but before anybody realized it. (The world-record holder is and apparently will remain the Industrial & Commercial Bank of China, which raised $21.6 billion in an IPO in 2006.)What gives with Visa? One possibility is that the company and its investment bankers are deluded and the IPO will crash and burn--but the current thinking on the Street is that it won't have trouble finding buyers. Another is that the financial types who've been crying crisis have been crying wolf. But the housing market is in its worst slump since the Depression. Some debt markets have completely stopped functioning. The overindebted American consumer is showing signs of great stress.
So there must be other explanations for why the company that is perhaps the greatest enabler of American (and, increasingly, global) consumption, born in 1958 as BankAmericard and rechristened Visa in 1976, has chosen now of all times to go public. One is that Visa makes its money (a $424 million profit in the last quarter of 2007, up 70% from a year earlier) from transaction fees, not lending, so it doesn't have to worry nearly as much as banks do about people making their credit-card payments. Another is that the banks that own Visa stand to make more than $10 billion from the IPO--JPMorgan Chase alone should clear $1 billion--and they need the money.
The main reason Visa can contemplate an IPO now is that, for all the troubles, large parts of the global financial system continue to function just fine. If you have bad credit and want a mortgage or you run a private-equity firm and want to finance a $15 billion takeover, forget it. But if your credit's O.K. and you want to charge a trip to Hawaii or you're the profitable, growing leader of the global electronic-payments business and you want to raise $15-plus billion, go for it!
In the column, I gave credit to Ben Bernanke and the activist Fed. That certainly holds true this week.
Update: More on the subject from Time's Anita Hamilton.
March 19, 2008 12:23
Stop complaining, people! We live in a bounteous land ruled by brilliant intellectuals
New Delhi-based economist Ajay Shah has a fascinating column in India's Business Standard (via Bayesian Heresy) in which he makes the case that the current financial troubles in the U.S. may bring a recession, but can't really be called a crisis. I recommend reading the whole thing, but here are a couple of key passages:
In such difficult times, why is the US economy still rolling with the punches? Why has the US economy not collapsed in a mire of failed firms, finger-pointing by government agencies, morchas in the streets, and JPC inquiries? Understanding how this shock is being absorbed, and the equilibriating forces in play, is important in making a call on whether this is a crisis or a mere recession.In the idealised world of securitisation, a parcel of home loans is converted into securities, which are then sold into the broad market. The ownership of these securities is dispersed amidst international hedge funds, pension funds, etc. The originator of the home loan is largely immune to the outcome : if a default takes place, the losses are borne by the owners of the securities.
Many critics of securitisation have pointed out that this theory has not quite panned out as expected. However, at the same time, there is no doubting the fact that securitisation has given a substantial dispersion of the $400 billion loss. For this reason, the impact of the massive loss on the US financial system is not as large as it might otherwise have been.
A JPC appears to be a Joint Parliamentary Committee, a morcha is a "public demonstration for conveying a protest or making a demand." I'd say we've already had the equivalent of a few JPC inquiries in the U.S., with many more yet to come. As for morchas, those are probably coming, too--although they'll remain pretty calm affairs unless the economy gets really bad.
The point about securitization is really interesting. As lots of smart folks have been saying lately, we've got an insolvency problem. But it may be dispersed so widely that relatively few financial institutions are in fact insolvent.
Then there's this gem from Shah:
Unlike many countries which have experienced crises, monetary policy in the US is manned by brilliant intellectuals like Ben Bernanke and Fred Mishkin. Few people in the world understand the interplay between monetary policy and financial sector difficulties as well as them.
Fed governor Mishkin goes by Rick, not Fred (his full name is Frederic). But whatever--he is really smart, and Bernanke (whom I don't know nearly as well) seems to be too. I'm generally hesitant to place all too much trust in smarts. But I guess it's better than putting trust in dumbs.