Tuesday, July 31, 2012
Economists know that levels matter, and that long-run growth matters more than anything else. I made a few graphs to emphasize these points.
Start with the level (in logs) of real GDP. (This is an update of a graph I saw on John Taylor's blog.)
If you distrust trend lines, you are wise. But this one reflects a solid historical pattern. Here is real GDP and the 1965-2007 trend through postwar history.
You can see that the economy has quite reliably returned to the trend line after recessions.The 1950s had a steeper trend, but there too the small recessions were followed by catchup growth.
Here is what the recovery is supposed to look like (Again, idea stolen from John Taylor, except I'm using trends rather than "potential GDP'' which I distrust.)
To be fair, I fit the trend through 1980, so I would not use ex-post information. You see that after the severe 1980 recession at the even more severe 1982 recession, the economy recovered to trend, by posting a few years of 6% growth.
The tragedy is poorly expressed in growth rates. By 1987, the economy was back on the prior trend line. We are now 14.5% below the trendline, and each year that goes by like this we lose another half a percent. The average person in the economy is producing 14.5% less, and earning 14.5% less, than if we had followed the path following the 1982 recession.
That's a lot -- and a lot more than the litany of quarterly growth rates suggest.
I used trends, rather than the CBO potential output. If you read how they make it, you're likely to do that too. But here is the same graph contrasting my trend and the CBO's potential
This is tragic. The CBO is giving up on us. The CBO potential, which goes towards a 2.35% long run growth rate, says that what we are seeing now is the new normal. All we can hope for is a modest recovery, and then anemic, sclerotic growth forever after that. The difference between 2.3% and 3.0% adds up fast as the years go by. (And the CBO has been bending the trend line down steadily as the recession goes on. Back in 2005, it's "potential" looked like my "trend." They didn't see a permanent downward shift in level or reduction in growth rates. Look for "potential" to keep declining.)
Well, perhaps the CBO is doing its job as forecasters, saying "here is what will happen if you continue down the present policy path," not "here is where the economy would be if you adopted growth-oriented policies."
What about employment? I find employment more significant than unemployment. Unemployment means job search. It means people answer a survey saying they don't have a job, and are actively searching for a job. It does not count all the people who gave up, or went on disability (effectively ending their careers), early retirement, or are just living in Mom's basement and playing video games. (I don't mean to make light of it. That may be the most tragic, as the chance to accumulate skills is lost.)
Here's a good summary measure, the ratio of employed people to the population
The link between employment and output is productivity. To keep the numbers simple here, I made plots of output per worker. Output per hour, and corrections for demographics and capital use are better, but this is simpler and works about as well. Here is a graph of productivity.
In the short run, capital doesn't change much, so as a rough guide you make more output when you hire more workers (or increase hours) and vice versa. So, GDP = Productivity x workers. To get more workers, we need to make a lot more GDP. The lackluster GDP growth is the other side of the terrible employment coin.
There's more in the graph. In the long run, rising productivity is behind everything good in the economy. It's what gives more income per capita. Rising productivity is the only hope for paying for entitlements and getting out of our deficit trap. It's the main hope for long-run GDP growth, after the empolyment-population ratio reverts to where it should be. Rising productivity comes from new ideas, new companies, new ways of doing business. It isn't all pleasant. Lots of incumbents lose out. Rising productivity is the core of a "growth" agenda as economists understand the word.
You see in the graph that something terrible happened in the 1970s. Productivity, which was behind the large postwar boom, slowed down to a glacial 1% per year. 1982 marked a break in that as well. Productivity started growing 1.69% per year, producing the boom of the late 1980s and 1990s, and incidentally producing large Federal surpluses.
OK, but the far right of the graph doesn't look so good does it. Here it is, blown up, with a 2003-today trend marked in as well.
This is an economists' horror movie. Yes, productivity did rebound. But it seems to be growing slowly as well.
The trends are an economists' horror movie. Real GDP seems not to be recovering at all -- no period of swift growth to go back to a trend. We seem stuck at 2.4% growth forever. The CBO is giving up on us too. Employment will not recover as a fraction of population until the economy recovers. We seem stuck at low employment forever. And now we seem headed to a 1970s productivity slowdown as well.
I don't view this as contentious, outside of Presidential politics. Paul Krugman thinks the economy is pretty awful too.
What to do? If only it were so simple as to have the Fed print up another two trillion dollars, or have the Treasury borrow another $5 trillion and blow it on stimulus boondoggles. We're stuck in sclerotic growth, and to everyone but a few die-hard extremists, that means growth-oriented policies are the only way out.
Disclaimer. Yes, I know there are better ways to measure all this, especially productivity. This is an attempt to paint the basic picture using the simplest numbers. The message is, look at the levels and look at the trends. If you do that with better data, you will have gotten the message.
Data are from the St. Louis Fed's wonderful Fred database, series GDPC96, GDPPOT, EMRATIO.
On the defense side, we do not have that luxury, and cannot force a regulator to litigate a case - or can we?
In recent years there has been an anecdotal trend towards fighting FINRA and the SEC. Years ago when the NASD changed the structure of its hearing panels, we think we saw an increase in decisions in favor of the broker or firm. We never seem to have a full set of statistics, but over recent years, we have seen evidence of FINRA and the SEC losing more often.
Just a few months ago I successfully represented a broker in a FINRA enforcement proceeding. For a variety of reasons we had to go to a hearing, and we did. FINRA came at my client with all the vigor it could muster, for a case that did not warrant half the time and effort. My client was accused of mis-marking order tickets - to the benefit of his customers, with the knowledge of his firm.
A silly case, it truly was, but FINRA would not back off, and there was a risk for my client. If FINRA had prevailed my client would have received a significant suspension, a fine, a regulatory mark on his license, and other collateral damage. But it was a winnable case for us.
And we did win. After two days of hearing, and multiple submissions, the Hearing Panel dismissed the complaint against my client. My new colleague, Jim Sallah in Florida represented a client in an SEC insider trading case last year, and won - case dismissed, and earlier last year took a FINRA enforcement to trial and won.
- 15% of all litigated SEC and FINRA charges were dismissed. When represented by counsel, FINRA respondents were successful almost 20% of the time.
- Nearly 1/3 of the time, the administrative law judge (ALJ) or the Hearing Panel imposed lower monetary sanctions than the SEC or FINRA prosecutors sought.
- In FINRA hearings, 50% of the time Hearing Panels imposed shorter suspensions and 33% of the time Hearing Panels imposed lower monetary sanctions than those sought by FINRA staff.
- Nearly 43% of SEC respondents were successful in getting charges dismissed or sanctions reduced when they appealed to the Commission from an Administrative Law Judge decision.
Friday, July 27, 2012
While many people believe the United States should adopt a gold standard to guard against inflation or deflation, and stabilize the economy, there are several reasons why this reform would not work. However, there is a modern adaptation of the gold standard that could achieve a stable price level and avoid the many disruptions brought upon the economy by monetary instability.
Let's start by clearing up some common misconceptions. Congressman Ron Paul's attraction to gold, and Federal Reserve Chairman Ben Bernanke's biggest criticism, is that a gold standard implies an end to monetary policy and the Federal Reserve. It does not.
Under a gold standard, the U.S. Treasury could exchange dollars for gold at a price of, say, $1,000 per ounce. In practice, that means banks would freely exchange their dollar accounts at the Fed for electronic claims to gold.
Nevertheless, the Fed could still buy government debt or other securities in exchange for newly created reserves, lend its reserves to banks, and set interest rates on its loans to banks. A gold standard would not stop the Fed from being the lender of last resort, bank regulator and financial crisis firehouse. For better or for worse.
This isn't theory. It's history. The Bank of England operated an active monetary policy under a gold standard for two and a half centuries. And the U.S. Federal Reserve was founded under the gold standard in 1914.
Moreover, the history of the gold standard is not just happy centuries of price-level stability. It is also a long history of crises, devaluations, suspensions of convertibility, and defaults on sovereign debt.
Debauching the currency—the great bugaboo of gold-standard champions—will always remain a temptation: If the government promises $1,000 per ounce and a recession comes along, it can say "we need to stimulate. Now it's $1,100 per ounce." In fact, such devaluation would be a much more effective way of deliberately causing inflation than today's zero interest rates, twists, and QEs. The left should be advocating a gold standard so they can devalue it! The success of a gold standard in achieving stable prices depends heavily on its rules and commitments against devaluation—rules honored in the past, until they weren't.
A gold standard also does not eliminate debt crises or debt-induced inflation. No monetary system can absolve a nation of its fiscal sins.
Imagine a government with $15 trillion of debt, $2 trillion of money outstanding, and $2 trillion of gold reserves. Then its debt comes due. If the government can't raise tax revenues, cut spending, or persuade investors to lend against credible future budget surpluses, it must print $15 trillion of cash not backed by gold, devalue the currency, or default on the debt. Worse, if people see that outcome looming, they will run to change their money for gold ahead of time, causing a crisis as the government's gold stocks run out.
A successful gold standard needs a clear way to deal with such crises. Here is one plan: Instead of printing unbacked cash, the government lowers the coupon payments on its bonds and notes—similar to the way corporations can cut dividend payments. Of course, this is effectively a gentle "default" in times of stress. But at least a fiscal impasse would not lead to a devaluation of the currency. Other plans are possible. Some clear expectations of how sovereign fiscal stress will be resolved is vital. Europe is now paying the price for its absence.
Yet if you don't expect magic, you are not disappointed by its absence. With these warnings, a modern version of the gold standard is attractive.
Why not the old version? Most of all because the value of gold is poorly linked to other prices in the economy, which is what we want to stabilize. Fixing the price of gold today would do little to control the general price level. There are two big reasons for the disconnection between gold and other prices.
First, in the past, inventory demand for gold coins linked the value of gold to other goods. If prices rose, people needed to hold more gold coins to make transactions. They would spend less on other goods and services, which brought prices down again. But that channel is absent in a modern economy. Since people could buy and transfer gold deposits with a click of a mouse, nobody would have to hold substantial inventories. And we are not going back to a 19th-century payments system based on lugging around gold coins.
Second, features that made gold such good money in the past—it is hard to produce and has few other uses—make its price especially badly connected to other prices. The relative price of gold has skyrocketed, yet few of us abandon our jobs to go mine gold, and few of us substitute buying gold to buy other things. These economic pressures to realign gold and other prices are nearly absent.
The solution is pretty simple. A gold standard is ultimately a commitment to exchange each dollar for something real. An inflation-indexed bond also has a constant, real value. If the Consumer Price Index (CPI) rises to 120 from 100, the bond pays 20% more, so your real purchasing power is protected. CPI futures work in much the same way. In place of gold, the Fed or the Treasury could freely buy and sell such inflation-linked securities at fixed prices. This policy would protect against deflation as well as inflation, automatically providing more money when there is a true demand for it, as in the financial crisis.
The Fed currently interprets "price stability" to mean 2% inflation forever. A CPI standard could enforce 2% inflation. But why not establish a price-level target instead? The CPI could be the same 30 years from now as it is today, and long-term contracts could carry no inflation risk. That is the real spirit of the Gold standard.
The Fed's main objection to a price-level target has been that 2% inflation gives it more stimulating power. With 2% inflation, setting a nominal interest rate of zero allows the Fed to achieve a negative 2% real interest rate, which may encourage people to borrow even more than at a zero real rate. Whether such interest-rate stimulation is needed, wise, successful on average, and worth its cost of perpetual inflation is the key question. I think not.
More deeply, the history of discretionary, shoot-from-the-hip monetary policy is one misstep after another, and of turbulence induced by guessing what the Fed will do. Since the demise of the gold standard, thoughtful economists have been searching for a replacement rule—Milton Friedman's money-growth rule, for example, John Taylor's interest-rate rule, and inflation or nominal GDP targets. Rules advocates understand that the economy works better overall with stable units, rather than the government manipulating units to trick us into buying more or less. A price-level standard is a firm rule.
In sum, a rule like the CPI standard could achieve the price-level stability that motivates the longing for a return to gold, avoiding the limitations of an actual gold standard in the modern financial system.
Mr. Cochrane is a professor of finance at the University of Chicago Booth School of Business, an adjunct scholar at the Cato Institution, and a senior fellow at Stanford University's Hoover Institution.
Update: A few comments, such as John Tamny in Forbes interpreted
Nevertheless, the Fed could still buy government debt or other securities in exchange for newly created reserves, lend its reserves to banks, and set interest rates on its loans to banks. A gold standard would not stop the Fed from being the lender of last resort, bank regulator and financial crisis firehouse. For better or for worse.to be a full-throated endorsement that we need a Fed to do all these things. Alas, the WSJ cut the "for better or for worse," which clarified that. But even without, I'm just saying gold won't stop the Fed, not that that the Fed must fulfill these functions. Actually, I'm quite a skeptic of the idea that the Fed must fulfill all these functions -- the first draft said "Gargantuan financial regulator" too, the Fed's main new function about which I'm really skeptical. Words are at a premium in opeds, alas.
The big point here, though, is that the question of monetary standard is 99% distinct from these other activities of the Fed. Both are worth discussing. But they are separate issues.
Whether you are running a small business, or a financial advisor managing your practice, you need an attorney. You don't need one every day, and in fact you might go months without needing him at all, but you need one. This article has some very good advice for what to look for, and what to ask, when hiring an attorney.
One mistake in the article - do not limit yourself to an attorney who is geographically nearby. While some business owners might need physical meetings on a regular basis, most do not. We do not meet in person with most of our clients, even the ones where we are in litigation. Personal meetings are fine, but they are also a waste of time. Today, with cellphones, email, fax and WebEx, the in-person meeting is less important than hiring the best attorney you can hire.
Thursday, July 26, 2012
Yes, I've been worried for some time that our current debt could lead to inflation. And yes, that inflation has so far not happened, and US government interest rates remain low.
Well, they made fun of Friedman when he said in 1968 that inflation was coming. They made fun of Greenspan when he said in 1996 that stocks seemed awfully high, and stocks went up for a few more years. They made fun of Shiller when he said in 2005 that house prices looked awfully high, and they went up for a few more years. Greek interest rates were really low in 2007.
Krugman asks whether I have realized I have the "wrong model." My model is arithmetic.
The Federal Government has about $15 trillion of formal Federal debt outstanding. It has uncountable trillions more unfunded promises and credit guarantees. Right now it takes in about $1.5 trillion and spends about $3 trillion a year.
We must, by arithmetic, either pay off this debt, default on it, or inflate it away. Which will we do?
I hope we pay it off. The only hope for paying it off is to return promptly to strong long-run growth, and to reform entitlements. Doubling Federal revenues by raising income tax rates on "the rich," or by cutting discretionary spending by more than $1.5 trillion per year, forever, seem unlikely. That's arithmetic too.
But I'm not optimistic. Growth economics is unanimous: You get such growth only from higher productivity, and from letting new innovative competitors dethrone established interests. That's not where our economy is going. Keynesian stimulus doesn't give 10 or 20 years of sustained growth, even in Krugman's "model."
Defaulting on the debt means financial catastrophe.* And it doesn't solve the entitlement problem. Bad as our past debts are, our projected deficits are worse.
I happen to dislike inflation. Krugman and DeLong are all for it. They must have been smoking better weed in the 1970s. But I notice that lots of people seem to agree with them. So, it seems to me that inflate it away, and print money to pay the bills, remains a decent possibility.
That's arithmetic. I wonder which part of arithmetic Krugman would have me abandon.
What Chicago does "know" is scholarship. DeLong cites a transcription from discussion at a long ago conference. Krugman doesn't even bother to have an RA dig up a direct link so he can pretend he's reading anything but DeLong. At Chicago, we take a little time to research what people actually have to say before calling them "numbskulls" on the New York Times' website (Krugman) or less than "half-intelligent" (DeLong). You know what I think of that. Why you continue to read these guys is a mystery to me.
For those of you infected with that old-fashioned spirit who want to read what I really wrote on the subject, let me suggest Inflation and Debt in National Affairs, Understanding Policy in the Great Recession in the European Economic Review, or even an accessible Wall Street Journal OpEd as a good starting place.
All these sources make it quite clear that I view inflation is a danger, not a forecast. The popping of "bubbles" is hard to predict. We're sitting on an earthquake fault. When or if it goes is anyone's guess.
I also pointed out that inflation can come quickly, as it surprised the Keyensians of the 1970s, and as its quick disappearance surprised them again in the 1980s when the US returned to growth-oriented policies.
You can't repeal arithmetic. That which is unsustainable cannot last.
Update 2: A correspondent reminded me that I forgot the obvious zinger, from Alex Tabarrok.
Paul Krugman (March 11, 2003): …I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits. …we’re looking at a fiscal crisis that will drive interest rates sky-high….But what’s really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government’s solvency. …How will the train wreck play itself out? ….my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt...See Alex's post for more, including the Krugman response. I'll promise to hammer away at Romney's budgets just as hard, if his promises do not materialize.
*Update: I was trying to keep it short (for once), and focused on the Krugman/DeLong affair, but a few commenters pointed out that in my own writing I equate inflation and default, that I've argued that Greece should default, and I've argued for forms of debt that make it easier for the US to default. So.. what's this calamity with default?
At issue here is really what our leaders will choose to do. When they have not chosen to grow, so it's down to default or inflation, will they choose default or inflation? Now, though I've been arguing for a Greek default for almost 3 years now, European leaders clearly consider that a "catastrophe." Yesterday's announcement that the ECB will do anything to "save the euro" -- swallowing the trope that sovereign default means the end of the euro -- is essentially an announcement they'll choose inflation over even Greek default. Let alone France. Or Germany.
Evean a Greek default will not be painless. A large (we need tens of trillions) and unexpected US default will be financially much more chaotic. All those too big to fail banks holding treasuries go under. The US loses all its "reserve currency" status. It's a big deal. The Fed is talking about printing money again to buy mortgages because it doesn't like the current once in a century deal on mortgage rates (for those who can get them). Will the Fed really refuse to monetize in a rollover crisis and force the US to default? In my view, not a chance.
Finally, as I did point out briefly, a default might help Greece, but our big fiscal problem is the looming entitlements not (just) paying off our stock of existing debt. Defaulting on all the debt doesn't solve that problem. And after a default, the US will have a lot of trouble borrowing, so it will have to pay for entitlements by just printing more money. So the default won't even stop inflation.
All this is a long way down the road, remember. And a return to growth means none of it has to happen.
To Mr. Krugman, we are sailing in smooth waters, nobody has seen an iceberg yet, so it must be safe, so stoke the boilers. All I am saying is, there are icebergs out there in the middle of the night. Let's distinguish forecasts from risk management.
Wednesday, July 25, 2012
Just over a decade ago, Napoleon Tsanis set out from Sydney with 11 million euros and a dream to build a shrimp farm in his ancestral homeland... What he got was years of wrestling Greek bureaucracy and a court battle with a civil servant...
it's the civil servants that are throwing you into this labyrinth on purpose," Tsanis, 44, said. "The law gives them the latitude to delay you or punish you."
...A process that would take just two or three months to complete in Australia got stuck in a maze of official opinions and permits across several ministries. Greek politicians assured him that the paperwork would be done in 18 months, but that date came and went with no progress.
... then, though, another law change that sought to keep aquaculture projects small meant Tsanis had to break up his farm into sections to go ahead.
...One of the main obstacles to more investment is the legal jumble that dictates how Greek businesses work. Even government officials admit the lack of clear laws and the endless requests for opinions, studies and permits are there to give work to unionized specialists.
"There are whole businesses and technical offices employing engineers and experts specifically for the purpose of licensing," said Tsakanikas at the IOBE think tank.
Red tape often leads to corruption.
Tsanis said he steadfastly refused to bribe anyone. In one incident, in 2005, he appealed to a minister in Athens to get a permit unstuck. "The minister called in the public servant who was refusing to give us the permit and ordered him to issue it the next morning," he said, declining to specify the minister or ministry involved. "When we went back to get it, the civil servant told me: 'Australian, that guy is a politician and he'll be gone tomorrow, but I'll be here waiting for you.
The only European Union country not to have a fully functioning land registry - despite collecting EU funds to set it up and then paying penalties when it failed to do so - Greece still lacks a comprehensive zoning law and building rules.
"Several interests prefer a fuzzy system they can manipulate," Papaconstantinou said. "We must simplify building permits, which are a hub of corruption."
After his shrimp farm opened, Tsanis had hoped to build a 120 million euro golf resort. But when the local authorities decided they didn't want it, he opted not to fight.
This story rings with several of the themes on this blog, and I can't resist hitting you over the head a bit.
The nature of "regulation." In the popular discussion "regulation" means a wise system of rules that keep order in markets. Here is regulation in action.
There are different kinds of regulation. This is "regulation" by a deliberately vague forest of laws and rules, which give great discretionary power to the functionaries who administer those regulations. And clearly, they and their cronies like to keep it that way.
This is not "regulation" by clear rules, which you can quickly appeal in court if they are misapplied. The lack of title, zoning, and property rights falls in the same bucket.
Let us not feel superior, fellow Americans. This is the system of regulation to which we are crashing. Dodd Frank and Obamacare look a lot like Greek zoning laws, as far as the power of appointed officials vs. the rule of law are concerned.
Currency. Many of my macroeconomics colleagues think the main problem with the Greek economy is an "overvalued" exchange rate and thus too high wages. Rather than see high unemployment drive down wages that are "sticky" by some magic mechanism (even Paul Krugman admits he doesn't really know why wages are "sticky"), they would like to see Greece have a Drachma to devalue, or what the heck, devalue the whole euorozone, as even Anil Kashyap and Martin Feldstein have recently argued, along with Austan Goolsbee and more reliable liberals.
How much of Mr. Tsanis' troubles does this analysis describe? Not zero, in fact. The article says
He survived, he said, thanks to the 30 percent appreciation of the Australian dollar versus the euro in recent yearsHe doesn't even mention wages. I guess you have to open a factory before you have to start paying people.
You assign a percentage. Add up whether, faced with this story, the first thing you want to do is devalue the currency, or maybe if as economists we should be writing opeds about "shock liberalization" instead. Decide if this economy will liberalize on its own, given time, and "breathing space" by more German subsidies.
Micro vs. macro. In Greece's slump, as in ours, how much is this, "microeconomic" problems solveable only by micro liberalization, and how much is "macroeconomic," solveable by central banks, "stimulus" programs and the like?
Tuesday, July 24, 2012
The New York Times has picked up the story, and urges the Justice Department to consider the record of the Swiss banking giant. UBS is one of more than a dozen banks being investigated for manipulating interest rates for their own benefit. As the NYT correctly points out, at UBS, a series of immunity, nonprosecution and deferred prosecution agreements in recent years seems to have had scant, if any, deterrent effect.
As the article points out, UBS is not alone in its seemly never ending string of violations and charges, but in many ways, UBS is in a league of its own given its track record for scandals. UBS was deemed "too big to fail" in the financial crisis and had to be bailed out after a $50 BILLION write-down on mortgage backed securities.
The NYT has summarized its ability to escape criminal prosecution, presumably because of its status. However, the continued impact of its conduct on the investing public, its own brokers and employees, and the markets in general, cannot, and should not be ignored.
- UBS obtained a deferred prosecution agreement in 2009 for conspiring to defraud the United States of tax revenue by creating more than 17,000 secret Swiss accounts for United States taxpayers who failed to declare income and committed tax fraud. UBS bankers trolled for wealthy clients susceptible to tax evasion schemes at professional tennis matches, polo tournaments and celebrity events. One UBS banker smuggled diamonds in a toothpaste tube to accommodate a client. In return for the deferred prosecution agreement, UBS agreed to pay $780 million in fines and penalties and disclose the identities of many of its United States clients. At the same time it settled Securities and Exchange Commission charges that it acted as an unregistered broker-dealer and investment adviser to American clients and paid a $200 million fine. In October 2010 the government dropped the charges, saying UBS had fully complied with its obligations under the agreement.
- In May 2011, UBS admitted that its employees had repeatedly conspired to rig bids in the municipal bond derivatives market over a five-year period, defrauding more than 100 municipalities and nonprofit organizations, and agreed to pay $160 million in fines and restitution. An S.E.C. official called UBS’s conduct “a ‘how to’ primer for bid-rigging and securities fraud.” UBS landed a nonprosecution agreement for that behavior, and the Justice Department lauded the bank’s “remedial efforts” to curb anticompetitive practices.
- In what the S.E.C. called at the time the largest settlement in its history, in 2008 UBS agreed to reimburse clients $22.7 billion to resolve charges that it defrauded customers who purchased auction-rate securities, which were sold by UBS as ultrasafe cash equivalents even though top UBS executives knew the market for the securities was collapsing. Seven of UBS’s top executives were said to have dumped their own holdings, totaling $21 million, even as they told the bank’s brokers to “mobilize the troops” and unload the securities on unsuspecting clients. As Andrew M. Cuomo, who was New York’s attorney general then, put it: “While thousands of UBS customers received no warning about the auction-rate securities market’s serious distress, David Shulman — one of the company’s top executives — used insider information to take the money and run.” Besides reimbursing clients and settling with the S.E.C., UBS paid a $150 million fine to settle consumer and securities fraud charges filed by New York and other states. It again escaped prosecution.
UBS’s Track Record of Averting Prosecution
The Planet Money team got together a group of economists from widely differing political backgrounds, and came up with this very nice list of policies the economists all agreed on--which are all regarded as hopeless in the standard political debate.
- Eliminate the mortgage tax deduction.
- End the tax deduction companies get for providing health-care to employees.
- Eliminate the corporate income tax. Completely.
- Eliminate all income and payroll taxes. ... Instead, impose a consumption tax.
- Tax carbon emissions.
- Legalize marijuana.
(I quoted the proposals as above. In fact, the health tax exemption applies to individuals, and it's for employer-provided group health insurance, not care. Hat tip, I found the NPR story in a nice post on econlog)
The SEC charged the chairman and CEO of a Santa Ana, Calif.-based computer storage device company with insider trading in a secondary offering of his stock shares with knowledge of confidential information that a major customer’s demand for one of its most profitable products was turning out to be less than expected.
The SEC alleges that Manouchehr Moshayedi sought to take advantage of a dramatically upward trend in the stock price of STEC Inc. by deciding to sell a significant portion of his stock holdings as well as shares owned by his brother, a company co-founder. The secondary offering was set to coincide with the release of the company’s financial results for the second quarter of 2009 and its revenue guidance for the third quarter. However, in the days leading up to the secondary offering, Moshayedi learned critical nonpublic information that was likely to have a detrimental impact on the stock price. Moshayedi did not call off the offering and abstain from selling his shares once he possessed the negative information unbeknownst to the investing public. Instead, he engaged in a fraudulent scheme to hide the truth through a secret side deal, and proceeded with the sale of 9 million shares from which he and his brother reaped gross proceeds of approximately $134 million each.
Monday, July 23, 2012
I love his litany of ways that the government subsidizes and taxes the same activity. Hmm, I wonder what maximizes the need of all sides to come ask for favors. It's a great list for those of you who think that regulation in practice achieves much of anything coherent:
Government is actually a big bureaucracy run amuck, a vast tangle of contradictions that often have harmful consequences. For instance:
- Politicians scold citizens for consuming too much sugar, but the government provides subsidies for producing high fructose corn syrup that’s widely used in sodas, cookies and other sweets.
- Taxes are higher because government subsidizes some farmers to grow crops and subsidizes other farmers not to grow crops.
- Government subsidizes home ownership and restricts the number of homes that can be built.
- Politicians criticize business executives who take on too much debt, but government encourages debt by providing tax deductions for interest (no deductions for equity capital), and of course the government itself is deeper in debt than anybody else.
- Politicians complain that companies invest so much money overseas, but the government imposes a 35 percent tax on earnings brought back to the United States.
- Politicians bemoan our dependence on foreign oil, while restricting oil drilling on public lands and offshore.
- Businesses can be prosecuted for (1) “predatory price cutting” if they charge too little, (2) “price gouging” if they charge too much or (3) “price fixing” if they charge the same as their competitors.
- By providing billions of dollars of federal aid for attending college, government subsidizes demand, which has had the effect of making college more expensive and more difficult to pay for than it otherwise would be for everybody who doesn’t get federal aid.
- Politicians promote the virtues of small, high-mileage cars, and they enforce laws that make it hard to produce such cars profitably in the United States.
- There are laws that make it harder for employers to hire people and laws that provide income for the unemployed.
- The government shuts off water in California, intensifying a drought and leading to higher unemployment, all to save small fish, while proposing thousands of square miles of windmills that kill birds.
- Politicians encourage more couples to get married, but there have been higher taxes on married people than on single people, providing incentives not to get married.
- Politicians say they want more doctors, while enforcing laws that limit the number of students who can enter medical schools.
- Government promotes health care inflation by channeling hundreds of billions of dollars a year into the health care sector, enabling people to bid up health care prices – and then the government tries to limit health care price increases with health care rationing, such as excluding more treatments from coverage.
- Government provides subsidies for growing tobacco and enforces prohibitions on smoking
My only complaint is that Jim tied the article to President Obama's unfortunate "you didn't build it" gaffe. I find that whole business sad, and sad that his opponents can't seem to find a better way to express their serious disagreements with the administration's policies. We complain about politicians who stick to teleprompters, but when the slightest little misstep will be taken out of context and flung around for weeks, well, you know why the candidates largely stick to a boring script of 5-second soundbites. I also don't find our quadrennial habit of personalizing profound policy disagreements that useful. It's pointless to blame Obama for policies -- like the above -- that three quarters of the Democratic party and at least half the Republicans endorse.
Sunday, July 22, 2012
...make America the launching pad where everyone everywhere should want to come to launch their own moon shot, their own start-up, their own social movement. We can’t stimulate or tax-cut our way to growth. We have to invent our way there....
...we should aspire to be the world’s best launching pad because our work force is so productive; our markets the freest and most trusted; our infrastructure and Internet bandwidth the most advanced; our openness to foreign talent second to none; our funding for basic research the most generous; our rule of law, patent protection and investment-friendly tax code the envy of the world; our education system unrivaled; our currency and interest rates the most stable; our environment the most pristine; our health care system the most efficient; and our energy supplies the most secure, clean and cost-effective.Ok, quiz time. Is this
No, we are not all those things today...
- Some zany free-marketer pushing the Romney campaign to give some teeth to its "pro-growth" rhetoric?
- Advice to Ron Paul on a speech to rouse the Republican convention?
- Thomas Friedman, New York Times columnist extraordinaire, in its Sunday pages advising the Obama campaign?
Is there an integrated set of policies, and a narrative, that could animate, inspire and tie together an Obama second term? I think there is.... Obama should aspire to make America the launching pad..Which gives me hope. Friedman is obviously much better connected than I. If he thinks there is even a ghost of a chance that the Obama campaign would adopt such a strategy, or that the administration would follow anything vaguely like this policy, that is tremendously good news. I thought these sorts of positions, while middle-of-the-road growth economics, were, in the political sphere, too wildly free-market to hope for from the Romney campaign.
Think of what they mean.
- "We can’t stimulate our way to growth" is a remarkable admission for anyone in the New York Times orbit. Ok, it included "or tax cut," but an "investment-friendly tax code" has to mean low marginal rates on investment, which means low marginal rates on investment income. No way around it, lower marginal rates, broaden the base.
- "Our currency and interest rates the most stable" means likewise abandoning hope that endless rounds of Fed "stimulus" or devaluation as the key to success. Both statements are a repudiation of discretionary shoot-from-the-hip macroeconomic policy.
- A "productive" work force is not composed of protected unions and government workers, on federal boondoggle contracts.
- "Openness to foreign talent" means we have to let people in.
- "Rule of law" means that health, energy and financial regulation cannot be run by powerful regulators and their crony-capitalist protected industries.
- All of Friedman's startups succeed by undercutting and putting out of business old ossified but politically well connected companies, yes creating net new jobs but destroying a lot of old ones in the process.
- If you've been reading this blog at all, you know the likelihood that the current health care law and expansion of medicare will deliver anything like "efficiency."
(OK, but the moon shot analogy is just weird. What does spending about 3 percent of GDP to send two guys to the moon have to do with unleashing the innovation of thousands of new entrepreneurs? )
Thursday, July 19, 2012
Update (Friday AM). Bloomberg article on it. They have no idea either, beyond suspecting an algorithm has a bug in it. But why can one trader move a large market so much?
Update 2 (Friday 10 am) Better coverage and better graphs in the Wall Street Journal, suspecting " a computer algorithm known as a time-weighted algorithmic program, or a TWAP. These programs are designed to parse trades out over a set period of time, helping explain the clockwork-like consistency of the trading. “I think some large institutional buyer is using a new algorithm,” mused Eric Hunsader, chief executive of market data service Nanex.
Translation, I think: this is a "fundamental buyer" (known as "liquidity trader" or "mark") trying to parcel a big position out by spreading the trade out through the day, using an algorithm to do so, and not really watching the results. Still... a puzzle to me why people use such algorithms. Randomizing is the only way not to get front run. And a bigger puzzle that markets for coke and IBM are effectively so illiquid in the middle of the day that even big mistakes can move prices. Stay tuned....
A few tidbits with comment
Contrary to what is claimed daily in the media by politicians and many economists, there is no "euro crisis." The single currency doesn't have to be "saved" or else explode.
The present crisis is not a European monetary problem at all, but rather a debt problem in some countries—Greece, Spain and some others—that happen to be members of the euro zone. ... there is no logical link between these countries' fiscal situations and the functioning of the euro system.A currency union can work just fine without fiscal union.
..the deficits now plaguing these countries were, in large part, justified only a few years ago as necessary to initiate so-called "recovery policies." But it is always an illusion to believe that governments could increase total demand and thereby induce producers to produce more....The present state of affairs in countries that engaged in stimulus blowouts in 2008 and 2009 should serve as proof of the failure of the Keynesian model.A letter from Europe that rejects the confusion between common currency and sovereign default, and sees the abject failure of stimulus? There is still hope.
I found Prof. Salin's view of the political situation most interesting:
The "euro crisis" is a pure political construction without any economic content. It could even be said that the crisis is a splendid opportunity for many politicians to impose some of their longstanding goals on everyone else. For instance, before the introduction of the euro, many politicians who called themselves Europeans considered monetary union a stepping stone to political union....So, in Prof. Salin's view, the Euro worthies are deliberately linking sovereign default to breaking up the euro zone in a deliberate effort to scare wary voters into accepting fiscal union.
This process has begun and continues to develop. Politicians now argue that "saving the euro" will require not only propping up Europe's irresponsible governments, but also reinforcing and centralizing decision-making. This is now the dominant opinion of politicians in Europe, France in particular.It's really the "centralizing decision-making" that is the problem not "political union." The US at least historically had a political union without requiring the rules on provenance of prosciutto to be written by bureacrats in Brussels.
There are a few reasons why politicians in Paris might take that view. They might see themselves as being in a similar situation as Greece in the near future, so all the schemes to "save the euro" could also be helpful to them shortly....Yeah, but the Germans may not have any money left by then!
What to do instead? Someone else likes "shock liberalization:"
The real solutions to Europe's debt problems lie in tax cuts and deregulation, and it's here that national politicians should turn their attention. Pan-European cooperation won't deliver any government from its fiscal or economic crises. Only national governments, each working independently to implement the best possible policies, can hope to achieve that.What a breath of fresh air.
I can't wait to read Prof. Salin's next letter on France's 75% tax -- especially in the face of the UK's disastrous and quickly repealed experience with a 50% tax. (16 billion pounds forecast revenue turned in to two.)
SEC rules require short sellers to locate shares to borrow before selling them short, and they must purchase securities to close out their failures to deliver by a specified date.
According to the press release, the Wolfsons made approximately $9.5 million in illegal profits from their naked short selling transactions.
The SEC has more details in its press release.
Monday, July 16, 2012
Thursday, July 12, 2012
On June 28, the Supreme Court upheld President Barack Obama’s health-care law. Opponents and supporters are still sparring over whether its mandate is a tax. It’s time to get over this debate. The mandate’s mild penalty was never this law’s central economic and policy flaw.
The distinctions among a mandate, a tax, a penalty, or a credit, and between federal and state powers, are important legally and constitutionally. But they are irrelevant in economic terms for this law.
To commentators who are apoplectic that the federal government is using taxes to nudge us to buy health insurance, I say this: Hello? The tax deduction for buying an electric car, or the mortgage-interest deduction for buying a house, is economically equivalent to a tax for not buying health insurance. Maybe all are bad, but did you really expect the Supreme Court to rule the mortgage-interest deduction unconstitutional in a case brought against the health-care law?
Let’s stop playing lawyer and get back to economics and policy. Opponents: Return to articulating the disastrous economic and health-care effects of this law. And articulate better ways to solve the mess. Supporters: Try to make this Rube Goldberg contraption work. Good luck.
On the July 1 “Meet the Press,” House Minority Leader Nancy Pelosi said: “If you are a person who has a child with diabetes, no longer will they be discriminated against because of a pre- existing condition. If you’re a woman, no longer will you have to pay more. No longer will being a woman be a pre-existing medical condition,” and “if you are senior, you pay less for your prescription drugs and nothing for a preventative check.”
She added: “And for everybody, no more lifetime limits on the coverage.” And young people will be covered by their parents’ policies.
A message to opponents: If all you (OK, we) can marshal in response is that you don’t like the legalities of a $1,000 penalty/tax for not buying insurance, we’re going to lose. And we should.
Let’s start with the obvious question: Who is going to pay for all this? Someone has to pay for every expanded benefit, whether through higher premiums, higher prices or higher taxes. And tapping “the rich,” reducing administrative costs or executive pay would just be a drop in the bucket.
The more important fact is that the law won’t work.
Health care is a complex service, in which each person’s needs are blurry, and the line between “need” and “want” blurrier still. Imagine if the government decreed that law firms, car-repair shops, or home contractors had to charge everyone the same price, and couldn’t turn anyone away. “House fix,” for example, would be $1,000 per year, no matter how large the house or what shape it’s in. Why do we think this will work for medical services?
Health care will be rationed. Period. If we don’t ration by price, we will ration directly.
The Patient Protection and Affordable Care Act is a bureaucratic nightmare. About 2,700 pages of law, 13,000 pages of regulations and counting, 180 boards, commissions and bureaus, according to one media report.
It’s an invitation to crony capitalism. Thousands of companies have already asked for, and won, exemptions. They had better be in the good graces of the Department of Health and Human Services.
Enough. There are plenty of analyses of all the ways this law won’t work.
But one cannot complain without alternatives. “Repeal and replace?” OK, but with what? Pelosi’s promises address serious concerns. It isn’t enough to say “that costs too much,” or “it should be unconstitutional.”
Sensible alternatives exist. This need not be a choice between the Obamacare mess and the mess we had before.
Fix health care, not just health insurance. Where are the health-care equivalents of Southwest Airlines, Wal-Mart, and Apple -- innovating, dramatically lowering costs and bringing everyday low prices to health care? They have been kept out of the market by anti-competitive regulation. As one small example, in my state of Illinois, every new hospital, expansion of an existing facility or major equipment purchase must obtain a “certificate of need” from a state board. “Need” explicitly means that it doesn’t undermine incumbents’ profits.
Insurance should be insurance, reserved for unpredictable and catastrophic expenses. Car insurance doesn’t pay for oil changes, and you shouldn’t pay for checkups through health- insurance premiums. Such insurance would be a lot cheaper, and more people would buy it.
Insurance should be individual, portable from job to job and state to state, and guaranteed renewable for people who get sick. That neatly solves the pre-existing-condition nightmare. Insurance companies would be happy to sell such coverage. The government stands in the way, by subsidizing employer-based group plans at the expense of individual insurance. (My “Health status insurance” (see here and here) proposal is one example among many that describe functional private health insurance.)
Cost control is achieved in only one way. Competition. Not price controls.
Innovation comes from competition, too, and from innovators’ ability to initially charge rich people more -- and their ability to pay it -- make great profits, and then commoditize. You cannot have innovation in a government cost- controlled system.
It takes courage these days to have any trust in markets, or for politicians to oppose handouts to voters. Without that courage, our health-care system, and our economy, will fall apart.
Thursday, July 5, 2012
Ken Griffin and my colleague Anil Kashyap have a big OpEd on the Euro in the New York Times. They want Germany to leave the Euro, followed by quick euro depreciation relative to the Mark and Dollar.
Martin Feldstein, writing in the Wall Street Journal, echoes this faith in devaluation
The only way to prevent the dissolution of the euro zone might be a sharp decline in the value of the euro relative to the dollar and to other currenciesAs you might have guessed, I think it's a terrible idea.
The biggest reason is the vanity that you can do it just once. "Devalue and inflate the currency" is hardly a new idea. Portugal, Italy, Spain, and Greece lived on a cycle of continual devaluation and inflation until they joined the Euro. Going on the Euro was a hard won transformation to precommit to get off this cycle.
Imagine that your brother in law had been drinking too much for 40 years, perpetually on and off the sauce, never really able to give it up. He went through a painful 12 step program and rehab, and finally quits the sauce for 10 years. He threw away all the liquor in the house. Then he loses his job. Is "one more big night out to soothe the pain, and then I'll really really never do it again" at all a credible plan? That's exactly what my normally sensible colleagues are advocating.
Kashyap and Griffin make some sharp predictions.
Reintroducing the mark [and devaluing the Euro] would not solve the debt burdens of southern European countries, but it would give them needed breathing room to restructure their economies, reform labor markets, collect more taxes and reassure investorsWhen in human affairs has "breathing room" ever led to expeditious "reform," especially when such reform meant stepping on the toes of very powerful interests?
Witness: The Germans gave Greece three years of "breathing room" already, repeatedly bailing out and rolling over its debts. And look at the great progress Greece has made on "structural reform." Not. Italy just backed off its effort to repeal its stultifying labor law. Heck, look at the "breathing room" of the forty previous years of perpetual devaluation when all the "structural rigidities" were enacted.
With the "breathing room" of currency depreciation and inflation, won't the unions and other powers arrayed against reform just reassert themselves?
A crisis is indeed a terrible thing to waste. Nobody ever reforms in good times. Heck, look at how well the US is doing -- we have the same entitlement disaster heading our way, we just have a few more years of "breathing room." And we're really putting the pedal to the metal on tax and entitlement reform, aren't we? We advocate "structural reform" in Greece, yet where is the deregulation effort here?
Kashyap and Griffin make some more interesting cause-and-effect predictions
a weaker euro would give a boost in competitiveness to all members of the monetary union, including France and the Netherlands,
A weaker euro would also encourage greater foreign investment. For example, Spain’s distressed real estate market would become far more attractive.Let's see if they come true. The first: Is there any exchange rate at which France ships Citroens to Stuttgart? Are Europe's "compeititiveness" problems really all about some mysterious exchange rate misalignment and not pervasive sand in the gears? Would Detroit roar back if it could only introduce a Detroit dollar and finagle its monetary policy?
The second: When Germany goes its own way, and Spain has embarked on a let's-all-inflate-our-way-out-of-this-mess along with its neighbors, will this really be the signal of great times to invest?
My prediction -- investment runs to Germany anyway. Even faster, Why? Ken and Anil recognize
Although repeated currency devaluations are not the path to prosperity,Right. Just this once. But how do you sin just once? How do you devalue once, then convince the rest of the world that the rump euro is now a hard-money area, determined for structural reform, and not back to its pre-euro history of repeated and continual devaluations?
Investmet and growth are about expectations, institutions, rules, commitments, not one-time devaluations with empty promises not to do it again. That's what the euro was about. You can't throw out the euro and have anyone believe a devaluation is just this once, and not back to the perpetual stagnation of the 70s and 80s.
Kashyap and Griffin go on twice to argue that devaluation will lead to greater "dignity" for Southern workers. We know a little about how printing money devaules a currency and inflates. We know a tiny bit about whether that effort can give a one time boost to exports, and sets up poor expectations about another bender. This is the first time I've heard serious economists adduce that we know a cause and effect relationship from monetary policy to "dignity," and that depreciating the currency promotes more of the latter.
Doesn't devaluation automatically mean inflation, at least eventually? Kashyap and Griffin are silent. Feldstein goes on to
Although a decline of the euro would mean higher import prices in euro-zone countries, it need not mean higher inflation or even a higher overall price level. The ECB could in principle continue to aim at a 2% inflation rate with lower prices of domestic goods and services offsetting the higher prices of imports from outside the euro zone. At worst, the ECB could allow a one-time pass-through of the higher import costs but prevent any further increases in inflation rates.I thought the one thing we all agreed on is that money is neutral in the long run. Certainly the repeated devaluations of the 70s and 80s were almost perfectly matched with extra inflation. Why would this time be different? We might as well hope that the Physicists at CERN will repeal conservation of energy with the new Higgs Boson.
OK, one point of agreement:
What is essential is the preservation of the European Union’s greatest accomplishment: the free movement of labor, goods and services.Yes. Keep the euro, and all its comitments against devaluation and inflation. [Update to clarify in response to comments: the most important commitments are that the South, as part of the euro, does not resort once again to devaluation and then inflation relative to the North. The second most important commitement is that the ECB was once set up as a central bank with a pure inflation target. This is a precommitment against deliberate devaluation and inflation relative to the rest of the world.] Recognize that a currency union, without fiscal union, works only if you countenance sovereign default and default of banks who invest in sovereign debt.
In the end, the devaulation idea is this: In the warmth of summer, the crickets of Europe voted in laws that you can't fire people, can't lower wages, and they will only work 35 hours, with long paid vacations. Now those structures are no longer tenable. In winter, der ants don't want to buy stuff that crickets are producing with those huge labor costs. What to do? Let's devalue the hour! Pass a law that the hour is 75 minutes.
Really. The euro is the unit of value, as the hour is the unit of time and the meter is the unit of value. You could engineer a one-time boost by fiddling with the hour, the meter, the kilo and the euro. Until people catch on and rewrite contracts. And then they are aware you will do it again, since you throw out all the precommitments not to devaule built in to the current system of units.
Anyone for a drink?
Monday, July 2, 2012
Everyone knew that Bernard Madoff did not work alone. That would have been impossible.
The SEC has charged Peter Madoff, the brother of Bernie Madoff, with committing fraud, making false statements to regulators, and falsifying books and records in order to create the false appearance of a functioning compliance program over Madoff’s fraudulent investment advisory operations.
The SEC alleges that Peter Madoff, who served as Chief Compliance Officer and Senior Managing Director at Bernard L. Madoff Investment Securities LLC (BMIS) from 1969 to December 2008, created stacks of compliance documents setting out supposedly robust policies and procedures over BMIS’s investment advisory operations. However, Peter Madoff created these compliance manuals, written supervisory procedures, reports of annual compliance reviews, and compliance certifications to merely paper the file. No policies and procedures were ever implemented, and none of the reviews were actually performed even though Peter Madoff represented that he personally completed the reviews.
The U.S. Attorney’s Office for the Southern District of New York today announced parallel criminal charges against Peter Madoff. “Peter Madoff helped Bernie Madoff create the image of a functioning compliance program purportedly overseen by sophisticated financial professionals,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Tragically, the image was merely an illusion supported by Peter’s sham paperwork and false filings for which he was rewarded with tens of millions of dollars in stolen investor funds.”