A public-private auto industry

Jeffrey Sachs:

The auto industry has been widely vilified in recent months... There has been an insistence on “letting free markets work”...

The critics have no doubt felt their frustrations building—justifiably—for decades. ... Still, the scorn for the industry misses four crucial points. First, a collapse of the Big Three ... would add another economic calamity to the crisis-roiled economy. ... Second, the ... Big Three were financially weak, to be sure, but they would not be at the precipice of bankruptcy were it not for the worst recession since the Great Depression. Conversely, with an overall economic recovery, the Big Three can be viable. Third, the public and political leadership bear huge co-responsibility with industry for the misguided SUV era, with its flagrant neglect of energy security, climate risks and unsustainable household borrowing.

Fourth, and most crucially, the changeover to high-mileage automobiles must be a public-private effort. To wait for the “free market” to bring it about is to wait forever. Major technological change, such as from internal combustion engines to electric vehicles recharged on a clean power grid..., requires a massive infusion of public policy and public funding. Research and development depend on huge outlays, and many of the fruits of R&D ... will become public goods rather than private intellectual property. That’s why public financing for R&D is so vital, and has been widely recognized and practiced by the U.S. government for a century in many industries, including aviation, computers, telephony, the Internet, drug development, advanced plant breeding, satellites, GPS and much, much more.

To ... bemoan the fact that the forthcoming Chevy Volt plug-in hybrid will have a first-year price tag of $40,000 is to miss the point. The costs of early-stage ... deployment are inevitably far above those that companies can realize in the long run. Public policy should help to promote this transition...

U.S. financing of sustainable energy technologies ... has been dreadfully small ever since President Ronald Reagan reversed the energy investments started by President Jimmy Carter. ...U.S. federal spending on all energy R&D ... amounted to just $3 billion or so per year in recent years—less than two days of Pentagon spending, and roughly a tenth of ... outlays for health technologies at the National Institutes of Health. ...

The move to high-mileage automobiles is real, and the effort will shape U.S. international economic competitiveness for decades. The U.S. needs a public-private technology policy, not merely finger-pointing at the private sector. GM’s Chevy Volt, Chrysler’s new Extended Range Electric Vehicles and the large-scale efforts of GM and others to produce a fuel-cell vehicle within a decade, all require public backing... This is the future of the auto industry. It would be a mistake of historic proportions to let the industry die on the threshold of vital transformative change.

"Deep Thought"

"It's cool how if you cut apart a big unprofitable company all the new little parts become profitable."
-
Josh Marshall

When a car is more than a car

Kate Galbraith of the NYTimes:

The Prius has a new use, and it does not involve driving. The Harvard Press — which serves the Massachusetts town of Harvard as opposed to the university — reported that the car’s battery helped keep the lights on for some locals during the recent ice storms.

The newspaper reports that John Sweeney, a resident who lost power, “ran his refrigerator, freezer, TV, woodstove fan and several lights through his Prius, for three days, on roughly five gallons of gas.”

Said Mr. Sweeney, in an e-mail message to The Press: “When it looked like we were going to be without power for awhile, I dug out an inverter (which takes 12v DC and creates 120v AC from it) and wired it into our Prius.”

NYTimes Co. goes subprime

Duncan Black:

The New York Times Company said Monday it had reached an agreement with the Mexican billionaire Carlos Slim Helú for a $250 million loan intended to help the newspaper company finance its businesses.

Under the terms of the deal, Mr. Slim, who already owns 6.9 percent of the Times Company, would invest $250 million in the form of six-year notes with warrants that are convertible into common shares, the company said in a statement. The notes also carry a 14 percent interest rate, with 11 percent paid in cash and 3 percent in additional bonds.

Not bad! If they'd let me I'd scrape together the pennies under my couch cushions and lend it to them for 14%.

A good reason not to join the Euro

Krugman "The Pain in Spain...":

… isn’t hard to explain. Spain was basically Florida, with a housing bubble inflated by both resident and holiday purchases, and now the bubble has burst.

But Spain is in worse shape than Florida, for two reasons — reasons familiar to anyone who was involved in the great debate about whether the euro was a good idea.

First, Europe doesn’t have a central government; Spain, unlike Florida, can’t draw on Social Security and Medicare checks from Washington. So the burden of recession falls entirely on the local budget — hence the country’s declining credit rating.

Second, the United States has a more or less geographically integrated labor market: workers move from distressed regions to those with better prospects. (The housing bust has, however, reduced mobility because people can’t sell their houses.) Europe does not: yes, there’s a fair bit of mobility both among the elite and among low-wage workers at the bottom, but nothing like the US level.

So what can Spain do? It needs to become more competitive — but it can’t have a devaluation, because it’s a euro country. So the only alternative is wage cuts, which are desperately hard to achieve (and create big problems for debtors.)

Contrary to what everyone seemed to be saying even a few weeks ago, being a member of the eurozone doesn’t immunize countries against crisis. In Spain’s case (and Italy’s, and Ireland’s, and Greece’s) the euro may well be making things worse.

And Britain’s plunging pound, unpopular though it is, may turn out to have been a very good thing.

Mr. President

Change we can believe in

A reader at TPM writes:

Well, here's one pre-inauguration take.

It's all about hope, on a lot of different levels. I'm a policy wonk, and one of my deepest hopes is that Obama will be able to get Americans to believe again in the basic project of American government -- the idea that competent public servants, pursuing progressive policies, can actually advance the common good and make all of our lives better. It's such a momentous moment: for the first time, a Democratic president has a _progressive_ Democratic majority in Congress (as opposed to a posse of Dems interlaced with Southern ex-Segregationists, which was unfortunately the best we could do over the past half century). It's an unprecedented, once-in-a-lifetime, maybe once-in-a-century opportunity to make good policy so that Americans can _see_ the change, and believe in it.

I see in Barack Obama all the best that America has to offer. I trust him more than I would trust anyone to nimbly navigate the daunting political and policy challenges ahead. It's not just that he is a brilliantly competent political thinker and leader. His is the particular kind of brilliance that involves a lot of listening and questioning -- a flexible kind of brilliance that requires humility as well as confidence. Obama the law professor, the community organizer, the son of a Kenyan as well as a Kansan, is exactly what America and the world need right now. The question is whether even he will be able to dig us out of the mess we're in, and do it quickly enough and forcefully enough that people start to believe in the progressive project once again.

Fiat takes Chrysler

As of 6:00am this is a developing story first reported in the WSJ. It appears Fiat will receive a 35% stake in Chrysler simply for retooling factories to build Fiats. So the 35% stake is basically free, no?

"Yes we can, Mr Geithner"

University of Chicago professor Luigi Zingales has advice for Geithner.

Penny Protest

Greg Mankiw:

My regular readers know that I favor eliminating the penny, and that Barack Obama is sympathetic to the idea. Professor Robert Whaples of Wake Forest alerts me to a blog posting that suggests the following:

Retailers should simply round down the total checkout tally for cash purchasers and not handle pennies at all. There will be no need for pennies in change and anyone who wants to use pennies to pay, can put them in a charity jar instead. The first retailer to do this will reap a PR bonanza and others will quickly follow. Within a couple of years, retailers who don’t round down will be as rare as those who don’t accept credit cards. Not getting pennies in change, like being able to pay with credit cards, will be considered a birthright.

And then later in the comments section the following update is added:

Concord Teacakes found this posting and is going to DO IT.

In Concord, MA (The birthplace of Civil Disobedience), on February 12 (LIncoln’s 200th birthday) they are going to refuse pennies, starting at (time subject to change) 9:00 AM. Be there — it’s opposite the West Concord train station.

State of the debate

Krugman on "Economists, ideology, and stimulus":

Mark Thoma and Brad DeLong are both, in slightly different ways, perturbed by the state of debate over fiscal stimulus. So am I. This has not been one of the profession’s finest hours.

There are certainly legitimate arguments against spending-based fiscal stimulus. You can worry about the burden of debt; you can argue that the government will spend money so badly that the jobs created are not worth having; and I’m sure there are other arguments worth taking seriously.

What’s been disturbing, however, is the parade of first-rate economists making totally non-serious arguments against fiscal expansion. You’ve got John Taylor arguing for permanent tax cuts as a response to temporary shocks, apparently oblivious to the logical problems. You’ve got John Cochrane going all Andrew-Mellon-liquidationist on us. You’ve got Eugene Fama reinventing the long-discredited Treasury View. You’ve got Gary Becker apparently unaware that monetary policy has hit the zero lower bound. And you’ve got Greg Mankiw — well, I don’t know what Greg actually believes, he just seems to be approvingly linking to anyone opposed to stimulus, regardless of the quality of their argument.

Needless to say, everyone I’ve mentioned is politically conservative. That’s their right: economists are citizens too. But it’s hard to avoid the conclusion that all of them have decided on political grounds that they don’t want a spending-based fiscal stimulus — and that these political considerations have led them to drop their usual quality-control standards when it comes to economic analysis.

Has there been any comparable outbreak of mass bad economics from good liberal economists? I can’t think of one, although maybe that’s my own politics showing. In any case, what’s happening now is pretty disturbing.

MLK

Matthew Yglesias:

I think I’ve written some variation on this ever year now for several years, but I do always wish that praise and attention for Martin Luther King, Jr. would pay more attention to his teachings on violence and non-violence. Not that the calls for racial justice are unimportant. On the contrary. But from the standpoint of 2008, these are pretty easy lessons to take to heart. We’ve by no means conquered bias and prejudice or overcome the lingering scars of the major injustices of the past, but on the level of message nowadays you don’t see anyone within a thousand miles of mainstream politics denying the desirability of racial equality.

On violence, we’re in another world entirely. By the standards of today’s discourse, King would be considered deeply unserious. Serious people understand that if you think something is important, the serious way to go about expressing that is by voicing support for having other people go kill other people. Doubts about the ethics of such action are loathesome moral equivalence and doubts about their wisdom demonstrate naïveté. King wouldn’t qualify as a “civil rights Democrat”—not enough bloodshed.

The irony is that adherence to nonviolence is one of the main reasons King is such an admired and mainstream figure today. If he’d decided à la Tom Friedman that the white south needed a “suck on this” moment, or followed the lead of Hamas or Shimon Peres in deciding the best way to teach the population a lesson was to terrorize them, he’d be a jailed or executed despised criminal. And the ethic of nonviolence that King appealed to has deep roots in the Christian tradition that unites the majority of black and white Americans. And yet even though this Christian nonviolence is in many ways the most mainstream aspect of this radical figure who’s become a mainstream icon, it’s something that none dare take seriously today

The Phillips Curve

This is actually one of those serious YouTubes:

The Secret City

Frank Rich writes about childhood growing up in DC. Much has changed, much is still the same:

My mother, a public school teacher, decreed that her children would instead enroll in the public system that had been desegregated a half-dozen years earlier, after Brown v. Board of Education. In reality de facto segregation remained in place. Though a few African-Americans and embassy Africans provided the window dressing of “integration,” my mostly white elementary, junior high and high schools had roughly the same diversity as, say, today’s G.O.P.

I wish I could say we were all outraged at this apartheid. But we were kids — privileged kids at that — and out of sight was out of mind. Except as household help, black Washington was generally as invisible to us as it was to the tourists who were rigidly segregated from the real Washington while visiting its many ivory marble shrines to democratic ideals.

Gradually we would learn more — from our parents and teachers, from televised incidents of violent racial confrontations far away, and from odd cultural phenomena like the 1961 best seller “Black Like Me.” In that book, a white novelist darkened his skin for undercover travels through deepest Dixie, whose bigotry he then described in morbid firsthand detail to shocked adolescents like me.

Surely such horrific injustices could not occur in our nation’s capital.

But as an unintended consequence of Washington’s particular brand of Jim Crow, white public school students got a tiny taste of what racially mandated second-class citizenship could mean. In those days, the city didn’t even have the bastardized form of “self-government” it has now; it was run as a plantation by Congressional District panels led by racist white Southerners (then Democrats). These overseers didn’t want to lavish money on an overwhelmingly black school system, and they didn’t. By the early 1960s, per-student spending in Washington was less than that of any state, impoverished West Virginia and Mississippi included.

If Washington’s white schools received a larger share of that meager budget, as they no doubt did, it was still obvious that our teachers had far fewer resources than their suburban and private school counterparts. Extracurricular activities could be curtailed by the costs of light and heat. The curriculum was also abridged, lest anyone get too agitated by America’s racial inequities. In my history class, the Civil War was downsized to a passing speed bump. In English, we read “Tom Sawyer,” not “Huckleberry Finn.”

Now that we were teenagers, we had both the curiosity and mobility to investigate the strangely undemocratic city that dealt us this hand. In the words of Constance McLaughlin Green, a Pulitzer Prize-winning urban historian, the District’s black population had long occupied “a secret city all but unknown to the white world round about.” We wanted in on the secrets.

There was so much we didn’t know, so much Americans still don’t know. Take the Lincoln Memorial, to which the Obama family paid so poignant a nocturnal visit this month. If you look up coverage of the memorial’s 1922 dedication ceremonies in The Times, you can read of President Harding’s forceful oration commemorating the demise of slavery. You also learn that Dr. Robert R. Moton, the president of the Tuskegee Institute, was invited to pay tribute to Lincoln “in the name of 12,000,000 Negroes.”

Here’s what The Times did not report about Moton: “Instead of being placed on the speaker’s platform, he was relegated along with other distinguished colored people to an all-Negro section separated by a road from the rest of the audience.” So wrote Green in “The Secret City,” her landmark history of race relations in Washington. This was no anomaly. A local Ku Klux Klan had been formed months earlier, with no protests from either Congress or the white press, and the young Harding administration had toughened the exclusion of blacks from the city’s public recreation facilities.

The eye-opening “Secret City” recounting this secret history was not published until 1967, some four years after the Lincoln Memorial served as a backdrop for “I Have a Dream.” It was also in 1967 that I graduated from Woodrow Wilson High. As a valedictory, a bunch of us on the school paper voted to publish an editorial in favor of home rule for D.C. “Washingtonians have to beg, plead and cajole members of Congress for funds to renovate slums and slum schools,” it read. That was putting it mildly; we still had much to learn. But the editorial was enough of an irritant that our principal tried to censor it, which prompted a brief civic kerfuffle (“Student Editorial Banned at Wilson” read the headline in The Washington Post) and jump-started a few starry-eyed careers in journalism and political activism.

It was one year later that the Rev. Dr. Martin Luther King Jr. was assassinated and Washington’s secret city exploded. The fires and riotscame within a block of the building where the Obama transition set up shop.

One would like to say in the aftermath of the 2008 election that everyone lived happily ever after. But the American drama, especially when it involves race, is always more complicated than that.

Looking back at my high school years, I’m struck by how slowly history can move. The great civil rights legislation of the Johnson administration had been accomplished in 1964 and 1965, but by the time of my graduation the impact was minimal — even in the city where the laws were written and passed. Today the nation’s capital still has no voting representation in Congress and is still a ward of the federal government, reduced to begging, pleading and cajoling for basic needs. Some 19 percent of the population lives below the poverty line, and that 19 percent remains a secret city to many who work within the Beltway.

Washington is its own special American case, but only up to a point. For all our huge progress, we are not “post-racial,” whatever that means. The world doesn’t change in a day, and the racial frictions that emerged in both the Democratic primary campaign and the general election didn’t end on Nov. 4. As Obama himself said in his great speech on race, liberals couldn’t “purchase racial reconciliation on the cheap” simply by voting for him. And conservatives? The so-called party of Lincoln has spent much of the past month in spirited debate about whether a white candidate for the party’s chairmanship did the right thing by sending out a “humorous” recording of “Barack the Magic Negro” as a holiday gift.

how to create an angry american

A good-bye to the last 8 years:

"Good-bye to your rip-offs, your malice, your arrogance, your ignorance, your outlawry, your denial, your deceit, your cronyism and your stubborn refusal to cease pushing the envelope in the department of shameless villainy. Goodbye to the administration you constructed of turdiness and explained with truthiness. To your smirk and your snarl. To your conscienceless cruelty. Good-bye to your corruption, your vanity, your world without grays. Good-bye, good-bye, good-bye, you insufferable despots, and good riddance.

But never farewell. "
-Meteor Blades, Daily Kos

One man's vacation, another's nightmare

"Minimum number of times that Frederick Douglass was beaten in what is now Donald Rumsfeld’s vacation home: 25"
-January 2009 Harper's Index

Paul doesn't get it

Krugman:

The idea of setting up a “bad bank” or “aggregator bank” to take over the financial system’s troubled assets seems to be gaining steam. So let me go on record as saying that I don’t understand the proposal.

It comes back to the original questions about the TARP. Financial institutions that want to “get bad assets off their balance sheets” can do that any time they like, by writing those assets down to zero — or by selling them at whatever price they can. If we create a new institution to take over those assets, the $700 billion question is, at what price? And I still haven’t seen anything that explains how the price will be determined.

I suspect, though I’m not certain, that policymakers are once more coming around to the view that mortgage-backed securities are being systematically underpriced. But do we really know this? And how are we going to ensure that this doesn’t end up being a huge giveaway to financial firms?

I’m not dead set against this proposal — but I’m still waiting for some explanation of why this is supposed to be more

Paul, you just answered your own question. This IS a HUGE giveaway to undeserving financial firms.

No gas tax anytime soon

Ok, so no gas tax increase anytime soon. So reports the Washington Post.

Goodness knows, President-elect Obama has his legislative hands full. Maybe that explains why he has taken the idea of increasing gasoline taxes off the table, saying that Americans had enough economic burdens at the moment. Nominees like Steven Chu, the Nobel Prize winning physicist who will become Energy Secretary, dutifully echoed Obama's view even though in Chu's case he has long supported higher fuel taxes.

But by failing to raise the gasoline tax, the president-elect risks complicating another problem: Fixing the U.S. automobile industry.

Here's the problem. Obama and leading members of Congress keep saying they want ailing automakers to make more fuel-efficient vehicles. But the automakers in the past made more money on the guzzlers; in the future, they will have trouble charging enough to make money on new cars using costly new technologies for plug-in or hybrid cars. So the car company of the future may be a money-losing operation, just like the car company of the present.

Raising the gasoline tax would increase consumer demand for more fuel-efficient vehicles. That could help automakers charge more for them and make more money on sales of plug-ins, hybrids or more efficient conventional engines. Not surprisingly, Ford and General Motors both belong to the U.S. Climate Action Partnership, which this week proposed a detailed blueprint for a cap-and-trade system for carbon dioxide emissions. Such a system would put a price on carbon and would effectively tax gasoline and all other fossil fuels.

After being burned last summer by sky-high gasoline prices, do Americans really need higher gasoline taxes to get them to buy fuel-efficient cars? Yes, actually. Americans have an astonishingly short memory about gasoline prices. Sales of the Toyota Prius have hit the skids now that gasoline prices are back below $2 a gallon. And sales of SUVs are relatively strong compared to many other models.

If Obama did want to raise gasoline taxes without imposing a hardship on Americans at a time of economic duress, there are (at least) two ways of going about it other than throwing it out the car window. First, he could cut other taxes to compensate people for the fuel tax. Second, he could delay the effective date of the tax, or increase it in small steps over time. A phased-in tax increase would still have a big impact on the choices people make when purchasing cars, which tend to stay on the road for 10 years or so.

A gasoline tax has a variety of other benefits. Harvard economics professor and former chairman of the Council of Economic Advisers under President George W. Bush, Greg Mankiw, listed them in an October 2006 Wall Street Journal article. (Full disclosure: I have known Mankiw since grade school.) The other benefits include: helping the environment by reducing fuel use; reducing road congestion by encouraging mass transit or car pooling; boosting government revenues and shrinking the deficit (unless other taxes are cut by equal amounts); reducing crude oil prices by reducing demand (as a result, the increase in retail pump prices would be less than the increase in the tax); and bolstering national security. If the United States cut consumption, it would also help the trade deficit; oil imports make up a huge share of the imbalance.

The list is more timely than ever. But the gasoline tax, while popular among economists and some columnists, remains one of Washington's most feared issues. Ever since President Clinton was burned for trying to raise it, the gasoline tax has been frozen in time, becoming smaller and smaller in inflation-adjusted terms. For Republicans who claim to rely on market mechanisms rather than regulation, the tax should be attractive because it might be more effective than the complicated CAFÉ regulations for fuel efficiency. For Democrats, it should be attractive for environmental reasons. Members of both parties should be worried about the deficit.

But for the moment, this is one good idea that seems destined to die yet again.

The banking song and dance routine

FreeExchange:

The bank song and dance routine has grown intensely wearisome. Financial institutions beg for money, receive it, and then come back and beg for more. Willem Buiter offers a simple solution to banks' woes—nationalise them all:

By throwing cheap money with little conditionality at the banks, the Fed and the US Treasury may get bank lending going again. By subsidizing new capital injections, they reward bad porfolio choices by the existing shareholders. By letting the executive leadership and the board stay on, they further increase moral hazard, by rewarding failed managers and boards that have failed in their fiduciary duties. All this strengthens the incentives for future excessive risk taking.

There is a better alternative. The alternative is to inject additional capital into the banks by taking all the banks into full public ownership. With the state as sole owner, the existing top executives and the existing board members can be fired without any golden handshakes. That takes care of one important form of moral hazard. Although publicly owned, the banks would be mandated to operate on ordinary commercial principles. Managers could be incentivised by linking remuneration to multi-year profitability. The incentives for excessive liquidity accumulation and for excessively cautious lending policies that exist for partially nationalised banks and for banks fearing nationalisation would, however, be eliminated.

.75cents for every dollar

Econospeak:

The CBO blog has a very useful discussion of how to measure the cost of TARP:

Through December 31, 2008, the Treasury disbursed $247 billion to acquire assets under that program. CBO valued those assets using discounted present-value calculations similar to those generally applied to federal loans and loan guarantees, but adjusting for market risk as specified in the legislation that established the TARP. On that basis, CBO estimates that the net cost of the TARP’s transactions (broadly speaking, the difference between what the Treasury paid for the investments or lent to the firms and the market value of those transactions) amounts to $64 billion—that is, measured in 2008 dollars, we expect the government to recover about three quarters of its initial investment. The Office of Management and Budget’s (OMB’s) report on the TARP, issued in early December, only addressed the first $115 billion distributed under the program. CBO and OMB do not differ significantly in their assessments of the net cost of those transactions (between $21 billion and $26 billion), but they vary in their judgments as to how the transactions should be reported in the federal budget. Thus far, the Administration is accounting for capital purchases made under the TARP on a cash basis rather than on such a present-value basis—that is, the Administration is recording the full amount of the cash outlays up front and will record future recoveries in the year in which they occur. That treatment will show more outlays for the TARP this year and then show receipts in future years.

One view – popular among certain economists including yours truly – is that the deals under TARP are nothing more than asset trades. If the government exchanges $100 in cash for $100 in other assets, there is no expenditure and no deficit cost. As the Administration uses this cash basis for deficit accounting, it overstates the deficit by ignoring the present value of future recoveries.

But this view is an extreme one if what the government gets back for its $100 in cash outflows is actually assets worth less than $100. CBO is saying here that the government may be getting back $75 in present value terms for every $100 in cash outlays. If this holds up for the rest of the $700 billion in TARP funds, then taxpayers will have spent $175 billion on net to bail out these troubled financial institutions. Not as shocking as $700 billion but still a hefty price for the laissez faire policy of letting these institutions walk away with the upside of risk taking but having the rest of us bear the downside risk.

Keeping Fit

HSBC Are Thugs:

HSBC has gotten a little aggro lately – an analyst dispute widely reported in the FT and other places. By the standards of the story I am about to tell you the behaviour is quite genteel.

I know relatively little about HSBC. I thought they paid an absurd amount for a Taiwanese bank I understood really well. I later met the guy who was responsible for the purchase and decided that I knew far more about the target than him. Fortunately I was not short the target.

I never much liked Household (indeed I lost money betting that HSBC might come to its senses and not consummate the Household deal.)

I also had a fairly aggressive argument once with a colleague who wanted to buy HSBC. But realistically I only knew about a few cockroaches and I wasn’t sure whether the place was infested.

This post is about a really nasty cockroach. I will leave determination as to whether this is an infestation up to my readers.

The Bally Total Fitness scam

Bally Total Fitness was a favourite of shortsellers. I sold it short myself and made good coin. It was a simple scam.

The company ran gyms which had seemingly attractively priced memberships. Running fitness centres is a notoriously tough business. Anyway these seemed to work – at least in an accounting sense.

In fact the company scammed the customer. Customers thought they were signing a month-to-month gym membership – but – and I am not joking here – they were signing a loan document – and there were huge penalties for not paying. The documents were often non-cancellable. The customers were misled.

There was a website called ballysucks.com (now defunct) which told the story. They were sued by Bally and lost. The story can still be found here and here amongst dozens of consumer rip-off reports on the web.

Bally managed to report not only overdue fees (for which the customer had falsely been induced to agree) as receivables – but they included penalties as per credit cards.

Obviously collection was a problem. Bally filed bankruptcy.

So what has this got to do with HSBC?

Well the Bally scam required a collection process. It required thugs to go chase the delinquent “loans”.

HSBC provided the thugs – and surprisingly – given the thuggish nature of the activity they have never been pulled apart in the financial press for it. They didn’t doing it using the glamorous HSBC name. No it was Orchard Bank. They used to ring up the customers and say they were a partner of Bally. Sometimes HSBC purchased this debt (according to Bally at par) which suggests that their due-diligence was lacking.

They were the debt collectors for Bally’s fraudulently obtained loans. Standover men if you will.

But I will use the word of the HSBC/Orchard debt collectors. They were “partners”. Indeed the partnership extended more widely and there were over 100 thousand credit cards issued by Orchard to Bally customers.

Do you judge someone by their partner? In this case it was Bally’s customers who were "consummated" in the relationship.

The breadwinner returns home

Its happening in India:

THE lush state of Kerala in the south of India generates most of its foreign exchange either by exporting people or importing them. It earned almost 20 billion rupees ($500m) from foreign tourists in 2006 (the latest year for which figures are available) and about 245 billion (in the same year) in remittances from Keralites working abroad, 89% of whom go to the Gulf.

The state has an astonishing 24.5 emigrants per 100 households. Kerala’s per capita output is one of the lowest in India, but its per capita expenditure is one of the highest. (Gopinath Pillai, a Singaporean diplomat of Keralite descent, describes the situation like this: one poor fellow works three shifts in Dubai, saving every penny to send home, where there will be eight guys reading two newspapers a day and discussing politics.)

Kerala’s emigration policy has been a model for the rest of India. It was the first state to set up a department for non-residents. It has started offering non-resident Keralites (NRKs) identity cards, which also provide social insurance, covering accidents and repatriation of the dead.

But the Gulf economies where most of these NRKs work are slowing. Some construction projects are on hold. As a result, Kerala may have to brace itself for a wave of reverse migration. At the recent Indian diaspora conference in Chennai, several speakers called on the government to set up a department for returnees.

Densely populated states like Kerala may hope that internal migration will replace international migration. But in many ways, the flow of goods and labour across India’s borders is now more impressive than the movement within the country itself. Mr Pillai remembers asking a returning labourer, “Why do you go back to your village in Tamil Nadu? I’m sure there’s a job waiting for you in Gujarat”. His answer? “It’s too far away”. The capital of Gujarat is 851 miles (1370km) from the capital of Tamil Nadu, which is 1,000 miles closer than Singapore.

Dow 36000 Award

EconoSpeak: Hassett and the Paradox of Thrift::

I nominate Kevin Hassett for the worse argument yet against the Obama fiscal stimulus:

We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the U.S. government to borrow too much money.

Financial institutions lend money to those who wish to invest more than they save. Our current problem is not that there is too much private investment – rather it is that there is too little private investment. OK, financial institutions may have made certain loans that defaulted – to which they are now lending less. But that is not the same thing as “financial institutions borrowing too much money”.

As Keynes noted – when the private sector invests less than it saves, an insufficiency of aggregate demand may lead to a recession unless the public sector decides to engage in fiscal stimulus. Yet, Hassert is advocating fiscal restraint which would further increase the national savings schedule leading to the well known paradox of thrift. Herbert Hoover would be proud!

On top of this silliness, we get:

How could the deficit increase so much, so fast? Part of the story is the decline in revenue, which the CBO forecasts will be $166 billion less than it was in 2008, a 6.6 percent decline. But relative to 2000, revenue has actually increased from $2 trillion to a scheduled $2.4 trillion in 2009. The deficit has skyrocketed because spending has grown from $1.8 trillion in 2000 to a projected $3.5 trillion in 2009, fully 95 percent higher. Of course, all that happened mostly on a Republican watch.

Nominal revenues will have risen by 20%! Wow! Oh wait – the price-level will have risen by about 25% so real revenues will have declined even in absolute terms. Real revenues per capita or revenues as a percent of GDP – you know the drill! While it may be true that Federal spending relative to GDP increased during the Bush Administration – any suggestion that real Federal spending per capita doubled would be laughable in the extreme.

To which Brad Delong comments:

Any arguments that the American Enterprise Institute should not be shut down, the building razed, the rubble plowed under, and the furrows then sown with salt? Anyone? Anyone? Bueller?

Bloomberg take note as well: you have some credibility, but this type of thing burns it rapidly.

Saving The World

Paul Krugman writes a letter full of advice to the President-elect. Actually, I encourage you to read it in full here.

The last president to face a similar mess was Franklin Delano Roosevelt, and you can learn a lot from his example. That doesn't mean, however, that you should do everything FDR did. On the contrary, you have to take care to emulate his successes, but avoid repeating his mistakes.

About those successes: The way FDR dealt with his own era's financial mess offers a very good model. Then, as now, the government had to deploy taxpayer money in order to rescue the financial system. In particular, the Reconstruction Finance Corporation initially played a role similar to that of the Bush administration's Troubled Assets Relief Program (the $700 billion program everyone knows about). Like the TARP, the RFC bulked up the cash position of troubled banks by using public funds to buy up stock in those banks.

There was, however, a big difference between FDR's approach to taxpayer-subsidized financial rescue and that of the Bush administration: Namely, FDR wasn't shy about demanding that the public's money be used to serve the public good. By 1935 the U.S. government owned about a third of the banking system, and the Roosevelt administration used that ownership stake to insist that banks actually help the economy, pressuring them to lend out the money they were getting from Washington. Beyond that, the New Deal went out and lent a lot of money directly to businesses, to home buyers and to people who already owned homes, helping them restructure their mortgages so they could stay in their houses.

Can you do anything like that today? Yes, you can. The Bush administration may have refused to attach any strings to the aid it has provided to financial firms, but you can change all that. If banks need federal funds to survive, provide them — but demand that the banks do their part by lending those funds out to the rest of the economy. Provide more help to homeowners. Use Fannie Mae and Freddie Mac, the home-lending agencies, to pass the government's low borrowing costs on to qualified home buyers. (Fannie and Freddie were seized by federal regulators in September, but the Bush administration, bizarrely, has kept their borrowing costs high by refusing to declare that their bonds are backed by the full faith and credit of the taxpayer.)

Conservatives will accuse you of nationalizing the financial system, and some will call you a Marxist. (It happens to me all the time.) And the truth is that you will, in a way, be engaging in temporary nationalization. But that's OK: In the long run we don't want the government running financial institutions, but for now we need to do whatever it takes to get credit flowing again.

All of this will help — but not enough. By all means you should try to fix the problems of banks and other financial institutions. But to pull the economy out of its slide, you need to go beyond funneling money to banks and other financial institutions. You need to give the real economy of work and wages a boost. In other words, you have to get job creation right — which FDR never did.

This may sound like a strange thing to say. After all, what we remember from the 1930s is the Works Progress Administration, which at its peak employed millions of Americans building roads, schools and dams. But the New Deal's job-creation programs, while they certainly helped, were neither big enough nor sustained enough to end the Great Depression. When the economy is deeply depressed, you have to put normal concerns about budget deficits aside; FDR never managed to do that. As a result, he was too cautious: The boost he gave the economy between 1933 and 1936 was enough to get unemployment down, but not back to pre-Depression levels. And in 1937 he let the deficit worriers get to him: Even though the economy was still weak, he let himself be talked into slashing spending while raising taxes. This led to a severe recession that undid much of the progress the economy had made to that point. It took the giant public works project known as World War II — a project that finally silenced the penny pinchers — to bring the Depression to an end.

The lesson from FDR's limited success on the employment front, then, is that you have to be really bold in your job-creation plans. Basically, businesses and consumers are cutting way back on spending, leaving the economy with a huge shortfall in demand, which will lead to a huge fall in employment — unless you stop it. To stop it, however, you have to spend enough to fill the hole left by the private sector's retrenchment.

How much spending are we talking about? You might want to be seated before you read this. OK, here goes: "Full employment" means a jobless rate of five percent at most, and probably less. Meanwhile, we're currently on a trajectory that will push the unemployment rate to nine percent or more. Even the most optimistic estimates suggest that it takes at least $200 billion a year in government spending to cut the unemployment rate by one percentage point. Do the math: You probably have to spend $800 billion a year to achieve a full economic recovery. Anything less than $500 billion a year will be much too little to produce an economic turnaround.

Spending on that scale, at a time when the weakening economy is driving down tax collection, will produce some really scary deficit numbers. But the consequences of too much caution — of a failure on your part to do enough to stop the economy's nose dive — will be even scarier than the coming ocean of red ink.

In fact, the biggest problem you're going to face as you try to rescue the economy will be finding enough job-creation projects that can be started quickly. Traditional WPA-type programs — spending on roads, government buildings, ports and other infrastructure — are a very effective tool for creating employment. But America probably has less than $150 billion worth of such projects that are "shovel-ready" right now, projects that can be started in six months or less. So you'll have to be creative: You'll have to find lots of other ways to push funds into the economy.

As much as possible, you should spend on things of lasting value, things that, like roads and bridges, will make us a richer nation. Upgrade the infrastructure behind the Internet; upgrade the electrical grid; improve information technology in the health care sector, a crucial part of any health care reform. Provide aid to state and local governments, to prevent them from cutting investment spending at precisely the wrong moment. And remember, as you do this, that all this spending does double duty: It serves the future, but it also helps in the present, by providing jobs and income to offset the slump.

You can also do well by doing good. The Americans hit hardest by the slump — the long-term unemployed, families without health insurance — are also the Americans most likely to spend any aid they receive, and thereby help sustain the economy as a whole. So aid to the distressed — enhanced unemployment insurance, food stamps, health-insurance subsidies — is both the fair thing to do and a desirable part of your short-term economic plan.

Even if you do all this, however, it won't be enough to offset the awesome slump in private spending. So yes, it also makes sense to cut taxes on a temporary basis. The tax cuts should go primarily to lower- and middle-income Americans — again, both because that's the fair thing to do, and because they're more likely to spend their windfall than the affluent. The tax break for working families you outlined in your campaign plan looks like a reasonable vehicle.

But let's be clear: Tax cuts are not the tool of choice for fighting an economic slump. For one thing, they deliver less bang for the buck than infrastructure spending, because there's no guarantee that consumers will spend their tax cuts or rebates. As a result, it probably takes more than $300 billion of tax cuts, compared with $200 billion of public works, to shave a point off the unemployment rate. Furthermore, in the long run you're going to need more tax revenue, not less, to pay for health care reform. So tax cuts shouldn't be the core of your economic recovery program. They should, instead, be a way to "bulk up" your job-creation program, which otherwise won't be big enough.

Now my honest opinion is that even with all this, you won't be able to prevent 2009 from being a very bad year. If you manage to keep the unemployment rate from going above eight percent, I'll consider that a major success. But by 2010 you should be able to have the economy on the road to recovery. What should you do to prepare for that recovery?

Read the rest here.

Love in a backward world