and you thought your life was trippy

To be a congressional republican

"Who am I? Why am I here? Where am I going?"

I can't remember where I read this today. I think it was somewhere in the Washington Post. Nonetheless, it registered in my mind as very fitting.

classic

Bailout? Just Buyout

Brad Setser: How much is $350 billion?:

My colleagues at the Council’s Center for Geoeconomic Studies calculated that it was enough to buy most of the common equity of the US financial system – at least on January 21.

That isn’t the best use of the TARP’s funds, but it does illustrate just how little common equity is now supporting the financial sector’s large aggregate balance sheet.

"Arbitrage out the Arse"

Yes and Not Yes:

I’ve got three interesting arbitrage opportunities for you.

First are SPAC liquidations (via Dealsleuth).

Second is the recent Pfizer/Wyeth merger (via Dividend Growth Investor).

Third is one that I have been looking at for weeks, which is the acquisition of Image Entertainment (DISK) for $2.75 per share. Today there was a large sell-off without any news whatsoever. I purchased some shares. I can only assume that it was a hedgie selling off for other purposes.

$4500 bid on that $7200 sofa

NYTimes reports of haggling at ultra-high end furniture stores in lower Manhattan:

The sofa was made in the Netherlands, I was told. The designer, Bjorn Mulder, is a big shot in Europe, I was told. The price was $6,447, I was told — at which point I asked the obvious question: is the sofa part of the avalanche?

The saleswoman, tall, slim, a little hungry in the eyes, said it was not, but that she could give me the same 20 percent “to the trade” discount that she extends to decorators and architects. That brought the price to $5,158 before tax. At this point, I took a breath and steeled myself for something I had never tried before, or even thought to try, in a high-end furniture store: haggling.

There has been a lot of talk in the last year about shoppers taking advantage of the economic climate by bargaining with retailers, mostly on volume merchandise like TVs or mattresses. But Manhattan’s sanctums of new and vintage modern design were a different matter, it seemed to me. I’d always liked what they sold, but I found the gallery-like stillness of the showrooms intimidating, and the prices were generally too high for me. Until now, anyway, the idea of challenging those prices would have struck me as absurd.

But these days, the thinking goes that it’s a buyer’s market for anyone looking to buy anything. And, as it happens, I’m currently in the market for everything, having just moved into a new apartment where the sum total of my décor is two card tables and an old leather recliner. I may not be a regular customer of the design boutiques of SoHo and TriBeCa, but if there is ever going to be a time for me to furnish my home in high style, this would seem to be it.

"And now, for something completely different"

It appears the world's gathering of leading economists and top business leaders has the most horribly bizarre diversion running along side the conference:

It's no joke either. Bill Easterly:

Did the words “insensitive,” “dehumanizing,” or “disrespectful” (not to mention “ludicrous”) ever come up in discussing the plans for “Refugee Run”?

I hope such bad taste does not reflect some inability in UNHCR to see refugees as real people with their own dignity and rights.

Of course, I understand that there were good intentions here, that you really want rich people to have a consciousness of tragedies elsewhere in the world, and mobilize help for the victims. However, I think a Refugee Theme Park crosses a line that should not be crossed. Sensationalizing and dehumanizing and patronizing results in bad aid policy – if you have little respect for the dignity of individuals you are trying to help, you are not going to give THEM much say in what THEY want and need, and how you can help THEM help themselves?

Unfortunately, sensationalizing, patronizing, and dehumanizing attitudes are a real ongoing issue in foreign aid. David Rieff in his great book A Bed For the Night talks about how humanitarian agencies universally picture children in their publicity campaigns, as if the parents of these children are irrelevant. A classic Rieff quote: “There are two groups of people who like to be photographed with children: dictators and aid officials.”

child's play

watching bank after bank line up for TARP money hearkens back to childhood soccer matches when everybody was given a medal of participation, no matter how abysmal his performance.

60 Seat Majority

Excellent:

Roll Call reports that the Obama administration is floating Sen. Judd Gregg (R-NH) for Commerce Secretary. No decisions have been made, but Gregg and Symantec CEO John Thompson are both considered leading candidates.

Of course, Republicans will do everything they can to stop him from taking the job since they would be assured of the appointment of a Democrat by New Hampshire Gov. John Lynch (D).

If Democrats also prevail in the Minnesota recount, that would give them 60 seats.

Mortgage requirements tighten significantly

Genworth now considers entire states "distressed markets" and is demanding credit scores of 720 or better for any mortgage:

Underwriting Guideline Changes – Effective February 2, 2009
• Minimum Credit
Score = 680
• Maximum Debt to Income (DTI) = 41% regardless of AUS or
Submission Channel
• High Cost Loans (> $417,000) Minimum Credit Score = 740

o Loan amounts > $417,000 in CA – Ineligible

• Cash Out Refinance – Ineligible
• Second Homes – Ineligible
• Manufactured Homes – Ineligible
• Construction to Permanent – Ineligible

Declining/Distressed Markets Changes – Effective February 2,
2009
• Minimum Credit Score = 700

o AZ, CA, FL, NV = 720 (as per existing guidelines)

• Maximum Debt-to-Income = 41% regardless of AUS or submission
channel
• Additions to our Declining/Distressed Markets List

o 17 states added in their entirety
o 69 MSA/CBSA added
o Please see Attachment A for a complete list of new markets

The distressed markets list has now been expanded to include the entire states of: Arizona, California, Connecticut, Delaware, Florida, Michigan, Nevada, and New Jersey, Colorado, Maine, New Hampshire, Rhode Island, Wisconsin, Hawaii, Maryland, New Mexico, Utah, Idaho, Massachusetts, Ohio, Vermont, Kansas, Minnesota, Oregon, Washington.

Thanks to CalculatedRisk for catching this.

Obama's work habits

Political Wire:

With a week under his belt, the New York Times says some of President Obama's "work habits are already becoming clear. He shows up at the Oval Office shortly before 9 in the morning, roughly two hours later than his early-to-bed, early-to-rise predecessor. Mr. Obama likes to have his workout -- weights and cardio -- first thing in the morning, at 6:45. (Mr. Bush slipped away to exercise midday.)"

"He reads several papers, eats breakfast with his family and helps pack his daughters, Malia, 10, and Sasha, 7, off to school before making the 30-second commute downstairs -- a definite perk for a man trying to balance work and family life. He eats dinner with his family, then often returns to work; aides have seen him in the Oval Office as late as 10 p.m., reading briefing papers for the next day."

Obama is also "a bit of a wanderer. When Mr. Bush wanted to see a member of his staff, the aide was summoned to the Oval Office. But Mr. Obama tends to roam the halls."

And as we mentioned on his first full day as president, the dress code is less formal than during the Bush years.

the REAL M.I.A. break

Whats it to a business?

Ever wonder how much the grocery store has to pay to transact your payment by credit card? Now there is a website that can tell you exactly that and you may be surprised how much its costing them.

TrueCostofCredit.com

Quote of the day

"Economists who have spent their entire careers on equilibrium business cycle theory are now discovering, in effect, that they invested their savings with Bernie Madoff."

-Paul Krugman, 2008 Nobel Laureate criticizing Real Business Cycle Theorists (mostly of the Chicago school).

Drinking the Chicago Kool-Aid

The truce between the freshwater and salt-water economists has been broken and there is a war of words spinning across the blogosphere. Krugman's latest take:

There seems to be an amazing amount of misunderstanding of the basics of fiscal policy, even among people who should know better. Leave on one side the remarkable parade of economists who think that the savings-investment identity proves that government action can’t increase spending; PGL points us to a higher-level fallacy: the widespread belief that Ricardian equivalence doesn’t just say that tax cuts have no effect — which it does — it also says that private consumption automatically offsets any rise in government spending, which is just wrong.

Justin Wolfers suggests that this is because economists just haven’t been thinking and writing about fiscal policy. Maybe. But in my own neck of the woods, that isn’t true. In the New Open Economy Macroeconomics, which dates back to classic work by Obstfeld and Rogoff in the early 90s, both fiscal and monetary policy are usually analyzed.

And by the way: these are extremely buttoned-down models, with lots of intertemporal maximization, careful attention to budget constraints, and at most some assumption of temporary price rigidity. Nobody who was at all familiar with this literature could make the logic mistakes that are coming fast and furious from the fresh-water economists.

What this reveals, I think, is just how insular part of the macroeconomics profession has become. They just don’t read anything that doesn’t come from their cult circle; they just weren’t aware of major bodies of work that didn’t happen to be in their preferred style.

This insularity is asymmetric. Ask a PhD student at Princeton what a real business cycle theorist would say about something, and he or she can do that; ask a student at one of the freshwater schools what a new Keynesian would say, and I doubt that he or she could answer. They’ve been taught that there is one true faith, and have been carefully protected from heresy.

It’s a sad story.

In the land before time...

I posted economic commentary to my Facebook page. And last September I pointed out that WaMu was offering interest rates a full 130bps better than HSBC and 100bps better than ING Direct on their 12month CDs. Of course the reason for this was obvious then. WaMu knew their balance sheets were deep in the red and they need a fast injection of deposits to shore things up. Unfortunately for WaMu what ended up happening was a lot of their own customers simply transferred deposits out of their checking accounts and into high-yield CDs.

The moral hazzard here is that WaMu understood there was a very real risk of being arrested by the FDIC and that the FDIC had voluntarily honored the yields IndyMac was offering on their CDs (IndyMac was doling out high interest rates for the same reason). The thing is, no bank is going to make any money with those rates. The only reason a bank like WaMu would offer such rates given the circumstances would be to try to protect share and boldholders. But the protection is being financed by the implicit guarantee that the FDIC will insure customer CDs. Afterall, if WaMu is clearing struggling and on the brink of collapse, what customer is going to invest in their CDs unless they are confident the FDIC will insure the deposit?

So about that moral hazzard, seems the FDIC has taken notice and is beginning to act:

The Board of Directors of the Federal Deposit Insurance Corporation today proposed for comment a regulatory change in the way the FDIC administers its statutory restrictions on the deposit interest rates paid by banks that are less than Well Capitalized.

Prompt Corrective Action requires the FDIC to prevent banks that are less than Well Capitalized from soliciting deposits at interest rates that significantly exceed prevailing rates.

Continues:

Concerns about Moral Hazard. In the insurance context, the term "moral hazard" refers to the tendency of insured parties to take on more risk than they would if they had not been indemnified against losses. The argument is that deposit insurance reassures depositors that their money is safe and removes the incentive for depositors to critically evaluate the condition of their bank. With deposit insurance, unsound banks typically have little difficulty obtaining funds, and riskier banks can obtain funds at costs that are not commensurate with their levels of risk. Unless deposit insurance is properly priced to reflect risk, banks gain if they take on more risk because they need not pay creditors a fair risk–adjusted return. A truly risk–based assessment discourages such risky behavior. The moral hazard problem is particularly acute for insured depository institutions that are at or near insolvency but are allowed to operate freely because any losses are passed on to the insurer, whereas profits accrue to the owners. Thus problem institutions have an incentive to take excessive risks with insured deposits in the hope of returning to profitability.emphasis added

The problem is with our ethics exams

Now its all beginning to make sense. Take a look at the full exam here. A snippet:

Instructions: Please read the questions thoroughly, and circle the letter of your chosen response. And NO CHEATING!!

1. A mortgage broker known to you only as "Big Mo'" offers you a package of loans for your securitisation operations. Your wife is high maintenance, and your kids' Exeter fees are due next week. Select the statement that best identifies your first sentiments

(a) "AIG will insure it for WHAT?!?!"
(b) The spotty kid at S&P says they're AAA.
(c) "How close are we to our budgeted P&L"
(d) "Who did the property valuations, how were they compensated, what percentage of the purchasers actually have jobs, who will these be on-sold to, and what representations will be made?"
(e) "Has anyone aggregated the retrospective underlying values over the past decade?

4. You are a wealth manager. You discover that even when you're late putting in buy or sell orders for certain mutual funds, your orders are accepted - even AFTER the cutoff time which is meant to protect existing investors from being predated by new investors taking advantage of market-moving information. What is the best course of action?

(a)Set up a hedge fund to exploit the opportunity until it goes away.
(b) take advantage of the loophole infrequently, but in a big way, so you can profit but at the same time maintain plausible criminal deniability.
(c) trade frequently and in smaller size so as to not attract undue attention, but allow you to profit continuously.
(c) Anonymously inform the SEC to assuage your conscience, while simultaneously doing it from time to time.
(d) Just say No!, but don't be a whistle-blowing sissy.
(e) Call a reporter at the Wall Street Journal with a scoop.

(7) You are a senior trade-executor at a large buy-side money-manager. Your trades are often of significant size, and as such have enormous value to anyone apprised of them such as executing brokers who can front-run them or quietly pass the information to other hedge fund clients who pay premium commissions to the broker precisely for such information. Which statement best summarizes how you know your broker is being honest with your orders?

(a) He was a fraternity brother. He would NEVER do that.
(b) He allocated me lots of Hot Issues during the boom-times.
(c) He scored Miley Cyrus tickets for my daughter's birthday party in the Deluxe Box and even arranged pony rides for them IN THE BOX!.
(d) I've got dirt on him like the photos from that time he showed-up with those Russian hookers...
(e) We have our own post-trade analytics that factor-analyze the outcomes.

my brain hurts!

from Russia with love

Gregor:

The United States reached peak oil production in 1971, as forecasted by M. King Hubbert, the Shell geologist. Before that time the US attained a form of glory in its oil age with spectacular discoveries in Texas, a robust industry, strong exports to the rest of the world and lots of free wildcatting. The oil age in the US also gave rise to novels and films, like Upton Sinclair’s Oil and of course George Steven’s vehicle with James Dean, Giant.

Russia appears to have peaked now without enjoying any such glory. Perhaps the promise of Khodorkovsky’s Yukos, which charged out of the gate and looked to deliver on the dream of a modern, efficient corporation was doomed by the oligarchical terms of its founding. Large mega-projects like Sakhalin also succumbed to the vagaries of the State, and now the bloated Gazprom looks more like a portrait of decay than an instrument of power. It’s not just the volatility in the price of Oil and Gas that was the undoing of Russia. It was Russia’s historical propensity to eat itself.

2008 saw Russian oil exports fall by over 5.00% and the outlook is not pretty from here. The fall in oil prices not only hurt Russia economically. Current prices are simply way too low for great swaths of Russian production to carry on profitably. While GDP per capita is still much lower in Russia than in the OECD, Russia simply does not have the kind of dirt-cheap labor or materials advantage that it enjoyed just 10 years ago. Very few oil producers do. And as a general point, oil at 45.00 continues to set the stage for a supply collapse. Russia is vulnerable to a huge drop in production.

The old paradigm where oil producers both had the discretion to increase production as prices fell, and the ability to do so, is over. non-OPEC supply is on a severe downward path. Some are even calling for a global supply collapse. Randy Ollenberger, managing director of oil and gas research at BMO Capital Markets, said global oil supply could decline by as much as 20 million barrels a day over the next three years if the oil industry stops investing. That is grim.

good morning

photos by saumacus

"Time to bang my head against the wall (Pre-Elementary Monetary Economics Department)"

Brad DeLong:

Oh boy. John Cochrane does not know something that David Hume did--that the velocity of monetary circulation is an economic variable rather than a technological constant. Cochrane:

Fiscal Fallacies: First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out”...

Let us take this slowly.

Suppose that we have four agents: Alice, Beverly, Carol, and Deborah.

Suppose that Beverly has $500 in cash that she owes Carol, due in two months. Suppose that Alice and Carol are both unemployed and idle.

In one scenario in two months Beverly goes to Carol and pays her the $500. End of story.

In a second scenario Beverly says to Alice: "I have a house. Why don't you build a deck--I will pay you $500 after the work is done. Here is the contract." Alice takes the contract and goes to Carol. She shows the contract to Carol and says: "See. I will be good for the debt. Cook me meals so I will have the strength to build the deck--here's another contract in which I promise to pay you $500 within 90 days if you cook for me." Carol agrees.

Two months pass. Carol cooks and feeds Alice. Alice goes and builds the deck.

Alice then asks Beverly for payment. Beverly says: "Wait a minute." She goes to Carol and says: "Here is the the $500 cash I owe you." Beverly pays the money to Carol. Beverly then says: "But now could I borrow the cash back by offering you a long-term mortgage at an attractive interest rate secured with an interest in my newly more-valuable house?" Carol says: "Sure." Beverly files an amended deed showing Carol's mortgage lien with the town office. Carol gives Beverly back the $500. Beverly then goes to Alice and pays her the $500. Alice then goes to Carol and pays her the $500.

The net result? (a) Alice who would otherwise have been idle has been employed--has traded her labor for meals. (b) Carol who would otherwise have been idle has been employed--has traded her labor for a secured lien on Beverly's house. (c) Beverly has taken out a mortgage on her house and in exchange has gotten a deck built. (d) Carol has the $500 cash that Beverly owed her in the first place.

Alice has more income and consumption expenditure than if she hadn't taken Beverly's job offer. Carol has more income and saving than if she hadn't cooked for Alice and then invested her earnings with Beverly. Beverly has an extra capital asset (the deck) and an extra financial liability (the mortgage) than if she had never offered to hire Alice.

A deck has gotten built. Meals have been cooked and eaten. Two women have been employed. And all this has happened without printing any extra money.

John Cochrane would say that this is impossible. John Cochrane would say:

[I]f money is not going to be printed, it has to come from somewhere. If Beverly borrows a dollar from Carol, that is a dollar that Carol does not spend, or does not lend to Deborah to spend on new investment. Every dollar of increased Beverly spending must correspond to one less dollar of Carol or Deborah spending. Alice's job created by Beverly spending is offset by a job lost from the decline in Carol or Deborah spending. We can build decks instead of fountains, but Beverly stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out”...

John Cochrane is wrong.

You sometimes see this mistake in freshmen students in Economics 1, students who do not fully understand either the circular flow of economic activity or what a credit economy is. They think--like Cochrane--that the flow of spending must be constant unless somebody "prints money" because, you see, you need "money" in order to buy things.

The premise is true--you do need "money" to buy things--but the conclusion is false: the flow of spending is not necessarily constant. In the world in which Beverly does not hire Alice but instead pays the $500 directly to Carol, that $500 turns over only once--its velocity of circulation is equal to one. In the world in which Beverly does hire Alice, the velocity of circulation of the $500 is four--it goes from Beverly to Carol, from Carol to Beverly, from Beverly to Alice, and from Alice to Carol.

Cochrane's mistake--an elementary, freshman mistake--is because he has not thought enough about how a credit economy works to recognize that the velocity of circulation can be an economic variable and is not necessarily a technological constant. And as the velocity of circulation varies, the amount of the flow of spending varies as well: it is now longer the case that if Beverly borrows a dollar from Carol that is a dollar that Carol does not spend.

Milton Friedman knew this. Irving Fisher knew this. Simon Newcomb knew this. David Hume knew this. John Cochrane does not know this: does not know that the velocity of circulation is an economic variable rather than a technological constant.

I do want to pound my head against the wall.

I do not know what else to do...

from East Oakland, CA

Classic early 90's.

buehler? buehler?

How much TARP money should be spent on lobbying Congress to loosen the restrictions on getting TARP money in the first place?

"Because they'll screw it up!"

Yes and Not Yes:

One of the books I’m currently reading is The Partnership by Charles Ellis, which is basically a history of Goldman Sachs. The quote in the title comes from the chapter that describes the period of time in Goldman’s history where there were two leaders, John Whitehead and John Weinberg. After Gus Levy died, the two Johns agreed with each other to become co-senior partners of the firm.

As leaders of the firm, it was part of their job and duty to worry about competitors. One example was the commercial banks. According to Ellis, one of Whitehead’s major accomplishments “was his successful lobbying to extend the life of Glass-Steagal, the federal law that kept the commercial banks out of the securities business for decades.”

Of course, this was in the firm’s self-interest to prevent competitors from intruding upon their market, but there was also another reason that is extremely salient at this current stage of financial history.

“Why is the firm so worried about commercial banks getting into our investment banking business?” Weinberg supplied the answer to his own question, “Because they’ll screw it up!”

Now, can anyone argue that the repeal of Glass-Steagal was a good thing? Well, to put it in a Yogi Berra-type of description, I think the repeal of Glass-Steagal was good until it became bad. Certaintly, the financial problems we are experiencing today would be smaller if Glass-Steagal had not been repealed.

Amex profits decline 79%

WSJ:

"Our fourth-quarter results reflect an operating environment that was among the harshest we have seen in decades," Chief Executive Kenneth I. Chenault said in a statement. He noted overall cardmember spending fell 10% year-over-year, or 5% excluding the impact of foreign-exchange rates.

Chenault added that the credit-card issuer remains cautious about the economic outlook through 2009, with expectations for cardmember spending "to remain soft with past-due loans and write-offs rising from current levels."
...
Delinquencies of 90 days or more rose to 3.1% of American Express's managed U.S. lending portfolio, from 1.8% in the prior year. The portfolio's write-off rate climbed to 6.7% from 5.9% in the third quarter and 3.4% in the prior year.