Sunday, September 29, 2013

Miron and Rigol go after a classic

Jeff Miron and Natalia Rigol have a provocative working paper, "Bank Failures and Output During the Great Depression." They take on one of Ben Bernanke's most famous papers.

Bernanke concluded that the great depression was severe not because of a lack of money-- medium of exchange -- but because of the credit effects of so many bank failures.

You may say, "duh," but it's not so easy. If bank A fails, what stops you from going and getting a loan from bank B? Well, if your ability to get a loan is wrapped up in the knowledge that employees of bank A have about you. And if, as a result of some sort of friction, Bank B doesn't hire those people for their knowledge. And if, as a result of another friction, someone can't come buy the assets of Bank A, including people and knowledge, and continue to operate the bank. In the great depression, restrictions on branches and interstate banking did that. The process is, fortunately, much swifter now that the assets of a small local bank can be swiftly bought up by other banks even out of state.

Bernanke's paper was - and is -- enormously influential. It was part of a movement to put credit rather than money at the heart of monetary economics and understanding of Fed policy.

But, as Jeff and Natalia point out, what if the banks fell because output was going down, not the other way around? How strong was Bernanke's actual evidence?

Source: Jeff Miron and Natalia Rigol

The graph, from the paper, makes the basic point. We can argue about the "bank holiday" but you see that even the other failures came rather late in the game. It's not at all obvious that bank failures cause output declines and not the other way around.

And of course, "the economy will tank if banks go under" is the mantra that produced the bailouts. Jeff and Natalia's closing words:
To the extent U.S. experience during the Great Depression – and especially the view that bank  failures played a significant, independent role during that period – formed the intellectual foundation for  Treasury and Fed actions, however, our results suggest a hint of caution. If the Great Depression does not constitute evidence for Too-Big-to-Fail, then what historical episodes do provide that evidence? We leave  that question for another day
There are lots of important unsettled issues, justifying Jeff and Natlia's cautious tone in the paper.  How about regional evidence -- didn't  towns whose banks failed suffer more than others, and had lower loan volumes? (I vaguely remember seeing that.  I don't pretend to be an expert on empirical great depression work. If someone has the cross-sectional evidence, add a comment.)

Still, given how the "credit channel" view underlies most of Fed thinking, even though inequalities by definition don't always bind, and how deeply the "we can't let banks fail or there won't be any new lending" view underlies so much crisis policy, I salute a careful reexamination of even classic "facts."


On the cross-sectional point, Hanno Lustig found Hal Cole and Lee Ohanian's "Reexamining the contributions of money and banking shocks to the U.S. great depression" and suggests this graph as a summary. Not even in the cross section. Thanks Hanno!

Source Hal Cole and Lee Ohanian

Is QE contractionary?

I ran across a fascinating blog post by Peter Stella at Vox-Eu on exit strategies and QE. 

Peter points out that only banks can hold reserves, while anyone can hold short term Treasuries. And you can easily use Treasuries for collateral.  That means that short term Treasuries are in some sense more liquid than reserves, and that by buying huge amounts of Treasuries and issuing reserves, the Fed may be actually contracting. 

In Peter's words:
Large Scale Asset Purchases (LSAPs) have inadvertently caused a significant change in the composition of assets available in the open market.
  • The stock of marketable, highly liquid, AA+ collateral fell by trillions (disappearing into the Fed’s portfolio, i.e. System Open Market Account).
  • The stock of assets available only for interbank trade (bank reserve deposits at the Fed) rose by trillions.
..Treasuries and Fed deposits are equally safe. But they differ significantly in their marketability. Anyone can trade Treasury securities; only banks can exchange Fed deposits. ... 
  • Banking and money creation has not worked for at least two decades in the way that most people learned in school.
The old system was rather simple in the textbooks. The basic assumptions were (i) all credit was provided by banks; (ii) all bank credit (assets) were funded by the issuance, or creation, of depository liabilities (money) subject to a reserve requirement; and (iii) central banks controlled credit/money/inflation by rationing bank reserves. A stable 'money multiplier' was hypothesised to allow central banks to accurately predict the eventual impact of changes in bank reserves on money and credit. 
The problem with the old theory of monetary operations is that none of the three assumptions has been true for at least a generation. 
Most credit in the US is created by nonbanks; virtually all bank lending is funded by the creation of liabilities that are not subject to reserve requirements,3 and central banks do not ration reserves. In fact they take great pains to provide banks with the amount of reserves they desire. Central banks influence credit not by rationing the quantity of reserves but by altering the interest rate that banks must pay to obtain the quantity of reserves they desire.
  • Today, credit creation in general and money creation in particular are no longer tied to the stock of reserves (i.e. the stock of banks’ deposits at the Fed).
Today, bank deposits at the Fed have only one real role – to facilitate management of the payments system. They are used to settle transactions among banks. Thus:
  • The old notion that the quantity of bank reserves constrains lending in a fiat money world is completely erroneous.
  • Traditional monetary policy has virtually nothing to do with money.4
....Plainly the stock of reserves is no longer connected to credit or meaningful measures of “money” via the old-notion of a reserve-ratio-based money multiplier. 
I don't buy it all, and I think some of the magic properties of treasuries as collateral and money are a bit overstated. But I'm collecting interesting stories by which it might be the case that current monetary policy has the opposite of the intended sign or other unexpected effects.  Peter certainly offers an interesting example.

He also points out that simply raising interest paid on vast reserves may have different effects than conventional policy which rations reserves. At a minimum he corrects my frequent assertion that reserves and Treasuries are perfect substitutes. No, Treasuries might be more "liquid''!

(Thanks to Thorvald Moe for pointing me to this interesting post.)


Friday, September 27, 2013

Major Firms to be Sued over Libor Manipulation

JPMorgan Chase & Co., Barclays Plc, Credit Suisse Group AG and 10 other international lenders were sued by a U.S. credit union regulator alleging they illegally manipulated benchmark Libor interest rates.

The National Credit Union Administration, sued the banks in Kansas. According to press reports, the alleged manipulation “resulted in a loss of income from investments and other assets held by five failed corporate credit unions: U.S. Central, WesCorp, Members United, Southwest and Constitution.”

The banks are accused of giving false information in response to a daily survey by the British Bankers’ Association, which asks lenders how much it would cost to borrow money from each other for various intervals in 10 different currencies. Libor, the London interbank offered rate, is a key metric to set interest rates for trillions of dollars in financial instruments.

The misinformation allowed them to “benefit their investments that were tied to LIBOR, to reduce their borrowing costs, to deceive the marketplace as to the true state of their creditworthiness, and to deprive investors of the interest rate payments to which they were entitled,” according to the NCUA.

For more information, see JPMorgan Chase, 12 More Banks Said to Be Sued Over Libor

Thursday, September 26, 2013

Qualcomm Exec and Merrill Lynch Broker Charged with Insider Trading

The SEC has charged a former Qualcomm executive and his Merrill Lynch broker with insider trading in an elaborate scheme involving family members and off shore brokerage accounts.

The Securities and Exchange Commission said that former Qualcomm executive Jing Wang and his advisor, Gary Yin, made illegal trades in his company’s stock and that of a company purchased by Qualcomm. From 2006 to 2012, Yin and Wang both set up offshore entities to disguise their trades and hide some $271,644 in total profit, according to a complaint filed in U.S. District Court for the Southern District of California.

According to the SEC, Yin helped Wang set up “sham brokerage accounts,” which were registered in the British Virgin Islands under family members’ names to disguise ownership. The complaint also alleges that Yin created his own offshore account in the British Virgin Islands under the name of his mother-in-law.

The two funneled money into those accounts in order to make trades based on information such as the announcement of a Qualcomm revenue revision and the company’s 2011 acquisition of Atheros Communications, the SEC alleges.

His Financial Advisor With Insider Trading For more information, see | SEC Charges Former Qualcomm Executive and His Financial Advisor With Insider Trading Through Secret Offshore Accounts

CFB Board to Offer Amnesty For Web Violators

The CFP Board extended a broad amnesty to hundreds of advisors who had been breaking its rules by calling themselves fee-only on the board’s website.

Last week the Board removed profiles of thousands of advisors at its web site who claimed to be fee-only. The move created an uproar because many (most? all?) of the advisors are in fact "fee only." The problem is that the CFP Board does not consider an advisor to be fee only if he is associated with an entity that charges commissions - for anything - even if the particular advisor does not use or recommend the commissioned product.

That definition makes it impossible for any advisor who is registered with a wire house to say he is "fee only." There has been no statement as to why the CFP Board created such an odd definition,and no explanation as to why it permitted thousands of advisors to state they were "fee only" when they were not, according to the Board's definition.

The entire mess came to a head when the Board unilaterally changed thousands of its certificants’ profiles -- removing “fee only,” regardless of the circumstances, and inserting “none provided” – it became temporarily impossible to definitively identify advisors based on their compensation. In addition, resetting the profiles without any forewarning also insulated the board from the prospect that it might receive thousands of complaints about rule-breakers.

The board made the changes on its website last week just hours after Financial Planning reported that 486 wirehouse advisors – and hundreds more at banks, insurance companies and other firms –were calling themselves fee-only against the board’s rules on its Find a CFP Practitioner search tool.

Seems to me that if anyone should be fined, it should be the CFP Board for misleading its own advisors with an odd definition and lax enforcement of that definition on its own web site.


For more information, see CFP Board Offers Broad Amnesty to Rule-Breaking Advisors 

JP Morgan Chase In $11 Billion Settlement Talks.

According to Reuters, JPMorgan Chase & Co is in talks with government officials to settle federal and state mortgage probes for $11 billion.
The sum could include $7 billion in cash and $4 billion for consumers.  The discussions include the U.S. Department of Justice, the Securities and Exchange Commission, the U.S. Department of Housing and Urban Development and the New York State Attorney General, the sources said.

For more information, see JPMorgan in talks to settle government probes for $11 billion: sources
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Wednesday, September 25, 2013

New $100 Bills Worth up to $15,000

A different type of "investment." The government is issuing new $100 bills, and collectors are out looking for specific bills. It seems that if a bill has a "fancy" serial number, like 87654321, or 22222222, collectors want them. According to the article, a bill with the serial number 00000001 can be worth up to $15,000 to a collector.

Now, if we only had enough $100 bills to increase the odds of getting one of these "fancy" ones.

For more information, see New $100 Bills Worth up to $15,000 

"Massive Fraud" At Center of Bank of America Trial

The trial against Bank of America Corp's Countrywide unit has begun and the prosecutor has stated that the company placed profits over quality in a "massive fraud" selling shoddy mortgages to Fannie Mae and Freddie Mac.

The claim came at the start of the first case by the government to go to trial against a major bank over defective mortgage practices leading up to the 2008 financial crisis. Pierre Armand, a lawyer in the civil division of the U.S. Attorney's Office in Manhattan, said Countrywide made $165 million selling loans that it promised were investment quality to Fannie and Freddie. "What documents and witnesses will show is that the promise of quality was largely a joke," Armand said.

We will post any important or interesting pieces of information that are reported from the trial. For more information, see 'Massive fraud' at center of trial against BofA over U.S. mortgages 

Monday, September 23, 2013

Asset Pricing MOOC Open

My Coursera Asset Pricing MOOC is now open. The direct link is here -- but you may need to register to see it. 

I recommend browsing the week 1 videos, especially the theory preview videos, if you want a sense of what it's all about. Week 0 is background material on continuous time math.

Week 0 (background) and week 1 are up now, 2 and 3 should be up later this week.

Warning, this is a PhD level asset pricing class, designed to get you in to the theory used for research-level asset pricing. It pretty much follows my textbook "Asset Pricing" (and supplementary material) You don't have to buy the text to take the Coursera class. People who just want to watch the videos are also welcome.

Thursday, September 19, 2013

The New-Keynesian Liquidity Trap

I just finished a draft of an academic article, "The New-Keynesian Liquidity Trap"  that might be of interest to blog readers, especially those of you who follow the stimulus wars. 

New-Keynesian models produce some stunning predictions of what happens in a "liquidity trap" when interest rates are stuck at zero.  They predict a deep recession. They predict that promises work: "forward guidance," and commitments to keep interest rates low for long periods, with no current action, stimulate the current level of consumption.  Fully-expected future inflation is a good thing. Growth is bad. Deliberate destruction of output, capital, and productivity raise GDP. Throw away the bulldozers, let them use shovels. Or, better, spoons. Hurricanes are good. Government spending, even if financed by current taxation, and even if completely wasted, of the digging ditches and filling them up type, can have huge output multipliers.

Even more puzzling, new-Keynesian models predict that all of this gets worse as prices become more flexible.  Thus, although price stickiness is the central friction keeping the economy from achieving its optimal output, policies that reduce price stickiness would make matters worse.

In short, every law of economics seems to change sign at the zero bound. If gravity itself changed sign and we all started floating away, it would be no less surprising.

And of course, if you read the New York Times, people like me who have any doubts about all this are morons, evil, corrupt, and paid off by some vast right-wing conspiracy to transfer wealth from the poor to the secret conspiracy of hedge fund billionaires.

So I spent some time looking at all this.

It's true, the models do make these predictions. However, there is a crucial step along the way, where they choose one particular equilibrium. There is another equilibirum choice, where all of normal economics works again: no huge recession, no huge deflation, and policies work just as they ought to.

I took a setup from Ivan Werning's really nice 2012 paper: There is a negative "natural rate" from time 0 to time T, and the interest rate is stuck at zero. After that, the natural rate becomes positive again, and everyone expects the actual interest rate to follow. I solved the standard new-Keynesian model in this circumstance -- forward-looking "IS" and Phillips curves.

This is Werning's "standard" equilibrium choice, which shows all the new-Keynesian predictions. The liquidity trap lasts until T=5, shown as the vertical line in the middle of the graph.

The thick red line is inflation. As you see, there is huge deflation during the liquidity trap, though deflation is steadily decreasing.

The dashed blue line is output (deviation from  "potential".) As you see, there is a huge output gap, though strong expected output growth as it comes back to "trend" at the end of the trap. This is why growth is bad -- in these models you always come back to trend, so if you can lower growth, that raises today's level.

The thin red dashed lines marching toward the vertical axis show what happens as you reduce price stickiness. (I only showed inflation, output does the same thing.) As you reduce price stickiness, it all gets worse -- output at any given date falls dramatically. For price stickiness epsilon away from a frictionless market, output falls to zero and inflation to negative infinity.

I verify in the paper that all the claimed policy magic works in this equilibrium.  Even a small amount of "forward guidance" can dramatically raise output, wasted-spending multipliers can be as large as you like, and those policies get more effective as price stickiness gets smaller.

However, for the same interest rate path, there are lots and lots of equilibria.

This graph shows a different equilibrium. I call it the "local-to-frictionless" equilibrium. Again, the thick  red line is inflation. Now, during the liquidity trap, there is steady, mild inflation. The inflation pretty much matches the negative natural rate, so the zero interest rate during the trap (from t=0 to t=T=5) produces a the real interest rate near the natural rate.

As the trap ends, inflation slowly declines and then takes a "glide path" to zero -- i.e. zero deviation from trend, or back to the Fed's long-run target.

In this equilibrium, there is a small increase in potential output, shown in the dashed blue output line. The new-Keynesian Phillips curve says that when inflation today is higher than inflation tomorrow, output is above potential.

As we turn down price stickiness, the thin red lines show that inflation smoothly approaches the totally frictionless case, positive inflation from 0 to T and zero inflation immediately thereafter. I didn't have room to show it, but  output smoothly approaches a flat line as well.

The paper shows that all the magical policies are absent in this equilibrium: The multiplier is always negative, announcements about the far off future do no good, and deliberately making prices sticker doesn't help.

These are not different models. These are not different policies or different expected policies. Interest rates follow exactly the same path in each case, zero from t until T=5, and following the natural rate thereafter. These are different equilibrium choices of the same model. Each choice is completely valid by the rules of new-Keynesian models. I don't here challenge any of the assumptions, any of the model ingredients, any of the rules of the game for computation. Which outcome you choose is completely arbitrary.

The difference between the calamitous equilibrium and the mild local-to-frictionless equilibirum, in this model, is just expectational mulitple equilibria (with an implicit Ricardian regime.) If people expect the inflation glide path, we get the benign equilibrium. If they expect inflation to be zero the minute the trap ends, we get the disaster.

The paper goes on to compute all the magical policies, consider Taylor rules, and every other objection I can think of. So far.

What do I make of all this? Well obviously, maybe one isn't so dumb, evil, or corrupt for having doubts about changing the sign of all economic principles when interest rates hit zero.

Let me just quote from the conclusion
At a minimum, this analysis shows that equilibrium selection, rather than just interest rate policy, is vitally important for understanding these models' predictions for a liquidity trap and the effectiveness of stimulative policies. In usual interpretations of new-Keynesian model results, authors feel that interest rate policy is central, and equilibrium-selection policy by the Fed, or equilibrium-selection criteria, are details relegated to technical footnotes (as in Werning 2012), game-theoretic foundations, or philosophical debates, which can all safely be ignored in applied research. These results deny that interpretation.

....there really are multiple equilibria and choosing one vs. another is simply an arbitrary choice. Since there is an equilibrium with no depression and deflation, and no magical policy predictions, one cannot say that the new-Keynesian model makes a definite prediction of depression and policy impact.

I have not advocated a specific alternative equilibrium selection criterion. Obviously, the local-to-frictionless equilibrium has some points to commend it: It is bounded in both directions, it produces normal policy predictions, it has a smooth limit as price stickiness is reduced, and it does not presume an enormous fiscal support for deflation. But this is not yet economic proof that it is the "right" equilibrium choice.

We might consider which equilibrium choice is more consistent with the data. The US economy 2009-2013 features steady but slow growth, a level of output stuck about 6-7% below the previous trendline and the CBO's assessment of "potential," a stagnant employment-population ratio, and steady positive 2-2.5% inflation.

The local-to-frictionless equilibrium as shown in my second Figure can produce this stagnant outcome, but only if one thinks that current output is about equal to potential, i.e. that the problem is "supply" rather than "demand," and that the CBO and other calculations of "potential" or non-inflationary output and employment are optimistic, as they were in the 1970s, and do not reflect new structural impediments to output.

The standard equilibrium choice as shown in my first Figure cannot produce stagnation. It counterfactually predicts deflation, and it counterfactually predicts strong growth. One would have imagine a steady stream of unexpected negative shocks -- that each year, the expected duration of the negative natural rate increases unexpectedly by one more year -- to rescue the model. But five tails in a row is pretty unlikely.

The problem in generating stagnation is central to the new-Keynesian model. The "IS" curve and the assumption that we return to trend means that we can only have a low level of output and consumption if we expect strong growth. The Phillips curve says that to have a large output gap, we must have inflation today much below expected inflation tomorrow and thus growing inflation (or declining deflation). Thus if we are to return to a low-inflation steady state, we must experience sharp deflation today.  If one wants a model with stagnation resulting from perpetual lack of "demand," this model isn't it. Static old-Keynesian models produce slumps, but dynamic intertemporal new-Keynesian models do not.
I close with a few kinds words for the new-Keynesian model. This paper is really an argument to save the core of the new-Keynesian model -- proper, forward-looking intertemporal behavior in its IS and price-setting equations -- rather than to attack it. Inaccurate predictions for data (deflation, depression, strong growth), crazy-sounding policy predictions, a paradoxical limit as price stickiness declines, and explosive off-equilibrium expectations, are not essential results of the model's core ingredients.  A model with the core ingredients can give a very conventional view of the world, if one only picks the local-to-frictionless equilibrium. That model will build neatly on a stochastic growth model, represented here in part by the forward-looking "IS" equation and changes in "potential." Its price stickiness will modify dynamics in small but sensible ways and allow a description of the effects of monetary policy. This was the initial vision for new-Keynesian models, and it remains true.

Really, the fault is not in the core of the new-Keynesian model. The fault is in its application, which failed to take seriously the fundamental problem of nominal indeterminacy.... Interest rate targets, even those that vary with output and inflation, or money supply control with interest-elastic demand, simply do not determine the price level or inflation.  In a model with price stickiness, nominal indeterminacy spills over in to real indeterminacy.

In that context, this paper shows there is an equilibrium choice that leads to sensible results. Alas, those sensible results are non-intoxicating. In that equilibrium, our present (2013) economic troubles cannot be chalked up to one big simple story, a "negative natural rate" (whatever that means) facing a lower bound on short term nominal rates; and our economic troubles cannot be solved by promises, or a sign reversal of all the dismal parts of our dismal science. Technical regress, wasted government spending, and deliberate capital destruction do not work. Growth is good, not bad. That outcome is bad news for those who found magical policies an intoxicating possibility, but good news for a realistic and sober macroeconomics.
If all this just whets your appetite, I hope you will read the paper. Similarly, if you're brimming with objections, take a look at my attempts to anticipate most objections -- what about the Taylor rule, etc. -- in the paper.

(This follows an earlier paper in the JPE (online appendix) looking deeply at multiple equilibria in new-Keynesian models. In that paper, I questioned whether ruling out multiple explosive equilibria made sense. In this paper, I accept that part of the rules of the game, and think about the mulitple non-explosive equilibria.)

McDonalds and the minimum wage

Recently, on a long car trip returning from a glider contest, I did something unusual among our liberal elite: I actually went to a McDonalds and ate there.

The lady who took my order must have been about 19, as were all the other employees I could see, and pretty clearly new on the job.  Getting the order right took some effort.  I made the mistake of paying cash. The bill was something like $7.62. I first offered a $10, and she rang it up. Then I found 12 cents in my pocket, and offered it. This was a big mistake, as the cash register had already computed my change, and adjusting to my offer of 12 cents was beyond her abilities.

Most people might have been annoyed, but as an economist and an educator, I'm happy to see human capital building. OK, I was a little annoyed.

Which brings me, of course, to the proposals for a sharply increased minimum wage.

In the end, there really isn't much argument about what a substantially higher minimum wage will do.

Let us not deny the benefit. For the few people who work at minimum wage, but have worked their way up the ladder enough that they will keep their hours; who are actually trying to support themselves and a few children on these meager wages, it will mean a modest rise in income. The rise may be more modest once you account for taxes and reductions in transfers.  There weren't any such people at my McDonalds, but NPR and the New York Times seem able to find them.

That transfer comes from somewhere. Some of it comes from a wealth levy on existing McDonalds shareholders. If a regulation lowers a company's profits, the stock price declines. Then the rate of return going forward is the same as always. So it's a one-time wealth tax on the existing shareholders. Economists are supposed to like wealth taxes, with an asterisk that it makes future investors a bit skittish.

Some of it comes from higher prices. I read estimates that a big mac might go up from about $3.00 to about $3.50, and dismissed those price increases as a small burden to bear.  Looking around my McDonalds, I found this argument less persuasive. Because, of course, the kind of people who work at McDonalds are also the same kind of people who eat at McDonalds. If you're working at minimum wage in the middle of Oklahoma, you don't go out to a nice Greenwich Village restaurant to sample organic free range locally grown non-GMO gluten-free artisanal nuts and berries. McDonalds is a treat. And a pretty nice one at that. It's clean, healthy -- yes, some offerings are  full of sugar and fat, but not of e coli, and you can get the grilled chicken if you want -- and reasonably tasty. Raising prices from $3.00 to $3.50 is not a small matter if you earn under $10 per hour and you're feeding a few kids too.

Still, that is the benefit.

The cost is just as easy to forecast. McDonalds cuts hours, and uses its most experienced and efficient workers more, and fewer people like my hapless server. And they don't get the oh-so-needed on-the-job training. The biggest impact of minimum wages is not so much on existing workers, but on new workers entering the labor force. (See a nice new NBER working paper by Jonathan Meer and Jeremy West.)

The effects fall heaviest on low-skill teenagers, especially minorities. Tom Sowell is eloquent on this point, for example in a recent New York Post OpEd. I was unaware until reading it that minimum wage laws were initially backed in part as conscious efforts to discriminate against minorities and preserve jobs for white people. Sometimes, I guess, policies do have their intended effects.

This much is pretty obvious. Looking around my McDonalds, though, I could see a deeper possibility -- an unexplored avenue for substitution away from low-skill labor.

Why, I wondered, after 10 minutes in line and the third effort to get my simple order right, did I not simply enter my order on my iphone, and then it's ready for me when I step up to the counter? Or why not enter it on a tablet provided right there? Why should ordering at McDonalds be any different than getting money from a bank, or getting a boarding pass at an airport? High end restaurants answer this question by saying they think their customers value the personal attention of a waiter. Maybe, but certainly not at McDonalds.

The answer, for now, is certainly that it's cheaper the way it is. But not for long.. At the left is the first image that popped up when I googled "restaurant ordering app."

And McDonalds is also reportedly testing an ordering and cellphone payment app. "Currently being tested at locations in Salt Lake City and in Austin, Texas, the app lets users order a meal remotely then collect it in person from a store or drive-thru window." My server's job days are already numbered.

Looking more inquisitively behind the counter, it struck me that the technology overall has changed little since the 1960s when my parents took me there as a child. The fry-o-lator beeps,  a teenager picks the basket up and dumps it out, sprinkles salt, and uses a cute little piece of aluminum to neatly line them up in bags, just as they did back then. The main change I could see is that they annoyingly don't let you put your own sugar in your coffee any more.

It's clearly only a matter of time before this whole thing is automated.  Industrial robots can assemble cars; designing a robot to operate the fry-o-lator, or even to cook and assemble the whole hamburger doesn't look that hard. Mechanization usually increases quality: your burger and fries could easily be cooked to order. Swipe your phone or card to pay and off you go. Or, a little drone helicopter delivers it automatically to your table.

(Update: The machine is here already. And planning a new chain to use it, rather than sell to McDonalds, as predicted. Thanks to Michael Ward for pointing it out.)

Reflecting on it, though, it's unlikely to be McDonalds. McDonalds has an amazing technology when you look hard at it: They have figured out how to run restaurants in a way that dramatically conserves on the world's scarcest resource, human capital. To run a McDonalds, you don't have to know how to cook, how to order food, how to buy kitchen equipment, or all the other hundreds of bits of tough knowledge and skill that it takes to run a restaurant. Hamburger U trains the rest.

The whole operation is about taking low-skill teenagers living typically unstructured lives, and training them to what it takes to work.  Peering around the side of the cash register at an earlier trip, I noticed there were pictures on the buttons! You can work at McDonalds and operate its cash registers even if you're functionally illiterate! To say nothing of not knowing what to do when offered $10.12 to pay a $7.62 bill. And McDonalds has a big investment in that technology.

In the face of technical change, it is seldom the successful incumbents who adapt, even when they innovate. Kodak did not bring us digital cameras, trying to protect their film advantage. Print media did not bring us the internet, and are floundering at it. Walmart tries to go online, but is displacing it. The major airlines flop in every attempt to imitate Southwest.

So, as I gaze around the familiar golden arches, it strikes me that the automated fast food restaurant -- and the rapid decline in low-skill employment that it implies --  will likely not come from McDonalds itself. Rather, new competitors will arise that perfect the automated, people-less technology. In the same way that McDonalds displaced the previous era of fast-food restaurants, by perfecting a technology that brilliantly used lots of low-skill people and conserves on scarce human capital. For McDonalds to go automatic would be for it to throw away the key innovation that defines it and has made it such a success.

So we may be past the point that McDonalds sticks with 1950s technology because it's still cheaper to use people. We may just be waiting for the tipping point.

But robot repair technician is a high skill job. McDonalds provided a positive social externality -- it gave young people their first experience of work, of showing up on time, in a uniform, of learning to be pleasant to customers, to work within a heirarchical organization, and so on. Young people who work at McDonalds don't get internships at NPR, the New York Times, or Goldman Sachs to to develop work experience. As McDonalds goes, so will that process. All that will be left is cleaning.

A sturdy hike in the minimum wage, in today's economy, is basically an industrial policy subsidizing the transition to low-skill service industry automation.

Monday, September 16, 2013

SEC Charges RIA For False Statements to Investors and Investigators - Parallel Criminal Charges Filed.

Why don't these defendants learn? When confronted by government investigators, either tell the truth or don't talk. Simple. But this basic concept seems to elude them.Case in point - the Securities and Exchange Commission charged the owner of a New York-based investment advisory firm with defrauding investors while grossly exaggerating the amount of assets under his management, and announced that the defendant has pled guilty to criminal charges which included charges that he lied to investigators.  

The SEC alleges that Fredrick D. Scott registered his firm ACI Capital Group as an investment adviser and then embarked on a series of fraudulent schemes targeting individual investors and small businesses.  Scott repeatedly touted ACI’s registration under the securities laws and falsely claimed the firm’s assets under management to be as high as $3.7 billion to bolster his credibility when offering too-good-to-be-true investment opportunities.  As Scott solicited funds from investors after promising them very high rates of return, he simply stole their money almost as soon as they deposited it with ACI.  Scott paid no returns to investors and illegally used their money to fund such personal expenses as his children’s private school tuition, air travel and hotels, department store purchases, and several thousand dollars in dental bills.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York announced Scott has pleaded guilty to criminal charges.  Among the charges to which Scott has pleaded guilty is making false statements to SEC examiners when they questioned whether Scott and ACI had accepted loans from investors. 

SEC examiners notified the agency’s Enforcement Division, which began investigating and referred the matter to criminal authorities. “Scott told brazen lies about the value of ACI’s assets under management and its ability to deliver huge returns on various investments,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Our examination and enforcement staff aggressively pursue investment advisers who flout the registration provisions of the securities laws for their personal gain, especially those who attempt to cover up their misdeeds by flat-out lying to our examiners.”

According to the SEC’s complaint filed in federal court in Brooklyn, one variation of Scott’s fraud was a so-called advance fee scheme – Scott promised investors that ACI would provide multi-million dollar loans to people seeking bank financing.  But investors were told that they first needed to advance ACI a percentage of the loan amount, and once they did so they would receive the remaining balance of the amount that Scott promised to pay.  Scott had no intention of ever returning the money, nor did he repay it.

The SEC alleges that in another iteration of his fraud, Scott offered investors the opportunity to make a bridge loan to a third-party entity.  The investor was told to fund one portion of the loan, and ACI would supposedly fund the remaining balance.  In exchange, the investor would supposedly receive a substantial return on his initial investment.  In this scheme as with each of his others, investors never received returns and Scott stole the money.

The SEC’s complaint charges Scott with violating Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5, Section 207 of the Investment Advisers Act for filing a false Form ADV, and aiding and abetting ACI’s improper registration in violation of Section 203A of the Advisers Act.

More information is available at the SEC's site and the complaint is also online.

Sunday, September 15, 2013

Summers withdraws

You have undoubtedly seen the news by now. Chicago Tribune, and Wall Street Journal

I'm sad, actually. A Summers confirmation would have been a great focus for a national debate on the role of the Federal Reserve, the role and character of its Chair, proper relations between the Fed and Wall Street, where we are going with financial regulation, whether bailouts and stimulus are a good idea, and how macroeconomic and monetary policy should be conducted.

I mean that as a totally honest statement -- don't read any coded pro- or anti- Summers implications in it.

I don't see that happening with any of the remaining candidates. We are at a good moment to attract some lightning, and I'm sorry to see the lightning rod bow out.

Thursday, September 12, 2013

SEC Files Charges in Florida Prime Bank Case

The SEC announced charges and an emergency asset freeze against a Miami-based attorney and others in a prime bank investment scheme that promised exorbitant returns from a purported international trading program.

Prime bank schemes lure investors to participate in a sham international investing opportunity with phony promises of exclusivity and enormous profits.  The SEC alleges that attorney Bernard H. Butts, Jr. has acted as an escrow agent to enable Fotios Geivelis, Jr. and his purported financial services firm Worldwide Funding III Limited to defraud approximately 45 investors out of more than $3.5 million they invested in a trading program that doesn’t actually exist. 

According to the complaint, Geivelis, who lives in Tampa and uses the alias “Frank Anastasio” with investors, touted returns of 6.6 million Euros (approximately $8.7 million converted to U.S. dollars) for investors within 15 to 45 business days on an initial investment of $60,000 to $90,000 in U.S. dollars.  Geivelis and Butts assured investors that their funds would remain with Butts in an escrow account until Worldwide Funding acquired the bank instruments necessary to generate the promised returns.  Butts instead has been doling out investor funds almost as soon as they’re received to enrich himself, sales agents, and Geivelis, who has been spending the money on such personal expenses as travel and gambling.

The SEC’s complaint, filed under seal on August 29 in federal court in Miami, also charged three sales agents who Geivelis and Butts paid to sell interests in the scheme: Douglas J. Anisky of Delray Beach, Fla., James Baggs of Lake Forest, Calif., and Sidney Banner of Delray Beach, Fla., and his company Express Commercial Capital.  The court granted the SEC’s request for an asset freeze on August 30, and the case was unsealed late Friday, September 6.

For more information, see | SEC Halts Florida-Based Prime Bank Investment Scheme

The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including recovering losses for investors in a wide variety of investment schemes. We represent investors, financial professionals and investment firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at email us

Wednesday, September 11, 2013

Morgan Stanley Seeks to Increase Loans to 70% of Deposits

Morgan Stanley, which is set to receive another $57 billion of deposits from Citigroup Inc. as part of its Smith Barney purchase, plans to accelerate lending to put those funds to use. Morgan Stanley targets a loan-to-deposit ratio of about 70% in 2015, compared with about 55% last year, Chief Financial Officer Ruth Porat said that interest income has the highest incremental profit margin of any revenue in wealth management.

Morgan Stanley Seeks to Increase Loans to 70% of Deposits | Financial Planning

Tuesday, September 10, 2013

Banking news

There are two interesting tidbits of banking news in today's (9/10/2013) papers.

The Wall Street Journal has a long page 1 article, "Life on Wall Street Gets Less Risky" describing what it's like at Morgan Stanley under the new regulatory regime. Two bits caught my eye

Your No. 1 client is the government," John J. Mack, Morgan Stanley's chairman and chief executive from 2005 to 2009, told current CEO James Gorman in a recent phone call. Mr. Gorman, who was visiting Washington that day, agreed

....regulators prowl the office floor looking for land mines, and Mr. Gorman phones Washington before making major decisions...

About 50 full-time government regulators are now stationed at Morgan Stanley. There were none before 2008, when it was regulated as a brokerage firm instead of a bank.
This is a useful anecdote to remind people what "regulation" means. I get asked all the time, "doesn't the financial crisis mean we need more regulation?" They seem to think "regulation" is something you pour in like gas in the tank. Or maybe they envision "regulation" as a simple set of impartial rules. You know, there is a 50 mph speed limit, which everyone routinely violates, a huge crash, so we enact a 30 mph speed limit and put a lot of cops on the road.

No, we put 50 cops in your car. And how long can this possibly go on before the cops start asking where you're going and why? How long can 50 regulators sit in the bank approving every decision, before "you know, you haven't made any green energy loans in a long time" starts coming up? But contrariwise, how long before those 50 regulators come to the view that Morgan Stanley's survival and prosperity is their job? 50 full-time government employees calling the shots on every deal at a supposedly private bank is a good picture to keep in mind of what "regulation" means.

It also means bureacracy and a return to the cozy banking world of the 1950s.
There now are 3,000 different limits that restrict such things as how much capital traders can put at risk, up from 30 before the crisis....  
Wall Street culture has long valued grueling hours, lunches at desks and late nights in the office. In 2011 and 2012, Morgan Stanley's fourth-floor capital markets division overlooking Times Square, where several hundred bankers help arrange stock and bond deals, started emptying out earlier in the day, according to two former employees who worked there at the time.....
The three-martini lunch, 2-pm tee time and "mad men" suits can't be far behind.

But there is good news in this too.
..go-go trading businesses once hailed as its future are gone or curtailed. In their place, the storied investment bank has embraced the retail-brokerage business—peddling stocks and doling out financial advice to ordinary investors

For the high-rolling traders who used to make more than $10 million a year, Mr. Gorman has had a simple message: Take fewer risks or take their act to a hedge fund, where failure doesn't threaten the financial system as much.... Traders and others have left for hedge funds and private-equity firms.

...Michael Reed, who worked at the PDT desk for 16 years before leaving in 2010, laments the decline of the firm's trading culture. "Personally, I find it sad," he says. "They used to be a peer of Goldman Sachs. Now, they're just another retail brokerage." 
This is great!  The Volcker rule, which seemed awfully hard to define and implement as regulatoin, seems to be happening in spirit. Trading is moving out of big government-subsidized, too big to fail, commercial banks. Free marketers, cheer. This function is not dying. It is moving to hedge funds, where it belongs. And which everyone knows can fail.

You know, like LTCM.

Oh wait, maybe this isn't so great. "Systemic" never had any limits. How long until regulators decide the new hedge funds are "systemic?" The "intermediated finance" view gaining more and more popularity at the Fed says that leveraged intermediaries willing to buy are they lynchpin of the financial system. "Fire sales" will break out just as much if they fail...

Well, maybe I worry too much.

The other heartwarming big picture: Banks have figured out that maybe the Modigilani-Miller theorem works after all. You can operate with lower risk, lower beta, lower return on equity. That's what's going on, basically, at Morgan Stanley. And made even clearer in the Financial Times:
Credit Suisse’s chief executive has laid out a vision for a banking industry with lower but more sustainable returns and has vowed to never again make losses. 
Brady Dougan... said Credit Suisse’s aim of an average 15 per cent after-tax return on equity was a much more dependable promise over the long term than the sector’s pre-crisis 20 to 30 per cent targets.
Lower risk, lower beta, less chance of failure, lower return on equity. So much for the claim banks had to give shareholders an absolute ROE independent of beta and volatility. 

Friday, September 6, 2013

A Chicago economist runs a central bank

Raghu Rajan celebrated his first day on the job running India's central bank. Coverage from Financial Times and Wall Street Journal.

Did he.. Find the coffee machine? Test the sofas in his office? Dust off his desk? Tour the printing press? Or...

Raghuram Rajan unveiled moves to liberalise banking and spread services across the nation of 1.3bn people... 

“There are so many low-hanging fruit in the economy that if we only pluck them we can accelerate growth substantially"...

The measures announced by Mr Rajan...are aimed at freeing India’s banks from the web of state controls that have stifled the sector since independence in 1947. ...

Indian banks will no longer have to receive RBI permission for each branch they want to open, though they will still be obliged to open branches in underserved rural areas in proportion to their expansion in the cities, Mr Rajan said....

He also suggested an easing of “priority sector lending requirements” that oblige banks to lend to farmers and small businesses, and said there was a need to reduce the requirement for banks to invest in government bonds so as to free credit for productive parts of the economy.
To say nothing of the wisdom of  forcing banks to buy shady sovereign debt, which turns sovereign troubles into banking crises, but he can't say that...
...foreign banks would be encouraged to operate in India as wholly owned subsidiaries that would enjoy “near national” treatment on a reciprocal basis.

“The Indian public would benefit from more competition between banks, and banks would benefit from more freedom in decision-making,” he said.
Competition a good thing in the financial sector? Heresy!
Other planned measures included the easing of restrictions on overseas borrowing by banks and on position-taking in financial markets, the introduction of new interest rate futures contracts, and the establishment of new mobile payments systems and “mini-ATMs” run by non-bank financial companies.

Indians who have traditionally turned to gold imports as a hedge against inflation will from the end of November be able to buy government savings certificates linked to a consumer price index, Mr Rajan said.
What will he do on his second day on the job? FT says he "will make his first substantial statement on monetary policy in two weeks." I'm looking forward to it.

Sargent online

Tom Sargent and John Stachurski go online with a fascinating web based course in quantitative economic modeling.

Two thoughts.  The education world is going online, but we're all in version 1.0 at best. Tom and John's website is an interestingly different paradigm than the online courses such as the Coursera platform that I'm using for an online asset pricing course.  I'll be curious to see which elements of which paradigm survive. Or perhaps the Toms' webiste will become the "textbook" for Coursera type courses, which can then add videos, forums, a structured environment for plowing through the material, and  the carrot of certification at the end.

The website is just gorgeous. Producing economic (and scientific) articles for viewing online has so far been a headache. Our journals produce beautiful pdf representations of.. printed pages. They might as well show 3-d images of a papyrus scroll. Math and tables in html as presented on most journal websites is just pathetically ugly. As I looked through this website, I'm enthused that 1) I need to learn python and 2) I need to learn to write my papers and textbooks in this gorgeous format.

Thursday, September 5, 2013

Fed Chair

My pick for Fed chair below. I don't have much to say on the choice between Janet Yellen and Larry Summers. Both are worthy economists, with well-discussed pluses and minuses on which I have no particular insight.

So, this post is about who else one might want to look at, and much more importantly the broader question about what makes a good Fed chair.

The press mostly  wants a soothsayer, who will foresee events the market does not see and calm the waters -- in practice,  basically operating the worlds largest contrarian hedge fund, or the commissariat of macroeconomic central planning. Such people don't exist, so that's a self-defeating job description. Let's talk about reality.

The Fed chair will not just have to pick the right course, but will also have to wade through the cacophony of advice and pressure he or she will receive, from politicians, powerful banks and businesses, outside critics – people like me – and the crosswinds of contradictory advice from Fed board members, staff and regions. And then guide a headstrong committee and a ponderous bureaucracy to those ends.

To do that, a chair needs a clear intellectual framework and a core set of principles.

He or she must deeply understand modern macroeconomics, finance, and banking. Too many policy-oriented people are mired in simpleminded 1970-era Keynesian story-telling that they learned as undergraduates, and a similarly simplistic understanding of finance. Too many academic economists are too deep into modern work, take equations at face value and do not know how to distill and apply their essential lessons, and what lessons are robust from the inevitable simplifcations of all formal models. Too many bankers have little understanding at all of cause and effect. Long practical experience in a system produces little experience of how to guide that system.

The FOMC (Federal Open Market Committee) of bank presidents and governors is now as high-powered a group as you could imagine. The academics have taken over. They know their stuff, and so does their staff. When the staff brings in or a governor cites “unique locally bounded equilibria” of the latest "new-Keynesian DSGE model," or distills the tea leaves of interest rates in “three factor affine models,” a chair must find the nuggets of gold, the grains of salt, and the remains of horses. All three are present.

There is a tendency in many quarters, reflected well in the New York Times opinion pages, to dismiss modern macro as hogwash. (Except, of course, when particular equilibria of particular new-Keynesian models produce pleasing multipliers.) Dismissing all modern thinking is as dangerous as accepting it all uncritically. If for no other reason, this is the language the FOMC and its staff speak, so a chair who doesn't understand it will simply be bamboozled.

We are at a crossroads in monetary policy,  with deeply different intellectual frameworks bounding the discussion, from monetarists, old-fashioned IS-LM Keynesians, Minnesota/Chicago dynamic equilibrium, new-Keynesian DSGE all talking past each other in essentially different languages. And I haven't started on financial views, even more disparate. The chair must be literate! And this stuff is hard. Well, I think it's hard. It's going to be hard to find someone who has not been actively contributing to this thinking who really understands what's going on.

An ideal chair has the universal admiration and respect of all in the room -- they may disagree, but everyone knows the chair deeply understands all the modeling points of view. An ideal chair also has the rare talent to explain and apply modern macroeconomics, not just push the equations around correctly.

More deeply, the fundamentals of modern macro -- thinking intertemporally, thinking about expectations, rules, institutions, moral hazards, precommitment vs. discretion, not in static terms of this year's stimulus and this year's GDP, really are important guides to a successful central bank.

That intellectual framework should be broad as well as deep. Some people have one great idea and to Washington to  implement their pet idea. Such people do not often do well when asked to guide a large institution through, inevitably, uncharted waters. Great military theorists do not make great battlefield generals.

A great Fed chair also understands history, and the legal and institutional structure of the Federal Reserve and previous central banks. Too many academics, (I include myself, though I'm trying to repair the damage)  are steeped in theory and quantitative evidence, but pretty light on the simple facts of what happened in past crises.

Nobody can know everything, however, so the Fed chair needs a few core principles. Paul Volcker had them, when the cacophony of experts said we couldn’t stop inflation. Ronald Reagan had them, when he said “tear down this wall” over the cacophony of experts. And those principles need to be right.

So, a great Fed chair is not so much smart as wise. There is a big difference. Humility is a bedrock of wisdom. The chair needs clearly to understand the limits of our knowledge, how imperfectly we understand cause and effect of the Fed’s policy tools.  A wise chair remembers how much consensus views on those matters have changed in the past, and knows how much they will change in the future.  If the Chair does a good job, ideas will change in response to the slow accumulation of experience and not in the wake of some new disaster borne of overconfidence in wrong ideas.

Above all, a successful chair will avoid screwing up! The Fed is a defensive institution. Like oil in the car, you don't notice it when it's doing its job well, and it mainly is in the news when it fails. It is not an institution that succeeds by leading great charges to direct the economy.

The big past screwups came when old ideas met new events, as they did in the banking crises of the great depression and the unleashing of the great inflation of the 1970s, just as on the 1914 western front and Maginot line.

An ideal chair has thought a lot about issues which are likely to be the next great crisis. Ben Bernanke was one of the great scholars of the bank runs of the Great Depression, and in part as a result the Fed did not repeat many of the mistakes of that event.

But we never fight the last war, at least right away. The chance of us having another real estate boom, a huge increase in shadow banking, a run in short term debt linked to mortgages in the next 10 years is next to zero.  So what are the challenges going forward, and what special expertise would one want in a Fed chair?

It seems obvious to me that sovereign debt, sovereign promises, an emerging period of sclerotic growth (rather than "lack of demand" recession) and how monetary policy is fundamentally affected by this set of circumstances is going to be a big issue for the Fed going forward. A chair who relies only on rules of thumb or correlations that held in a time of high trend growth and small sovereign debts is going to be taken by surprise.

An ideal Fed chair has spent a lot of time thinking about, and surveying the wide historical and cross-country experience on, the link between monetary policy, sovereign finances, and large-scale economic fluctuations. When California and Illinois default, Spain can't roll its debts, Germany refuses to recapitalize the ECB, and US long rates spike, a chair armed only with shifting around IS and LM curves and bailing out creditors will fall flat.

It also seems obvious to me that financial regulation, the temptations to financial micromanagement, and the forces of capture by the financial industry, are going to fill the Fed's plate as much or more than the mundane question of whether to raise or lower short term interest rates by a few basis points.

Financial regulation is even more about moral hazard, rules, institutions and perceptions than regular monetary policy. Chair William McChesney Martin, referring to rising interest rates, once sad the job of the Federal Reserve was to take away the punch bowl just as the party gets going. Now that the Fed is managing "financial stability,"  the chair’s job is to more to stop putting out fires soon enough that the underbrush burns out, people don’t build their houses too close to trees, and keep their own fire extinguishers loaded. At some point, you  let Bear Stearns go to send a message to Lehman Brothers.  A Fed chair that spends a lot of his time clarifying what the Fed's role will be in the next crisis rather than one who just ammasses larger and larger discretionary power, will weather that crisis much better.

Resisting capture will be a full time job. When billions of dollars are on the line for powerful Wall Street firms, the chair needs to be someone who can say no -- and who everyone knows will say no. From before the Fed’s inception, people have wanted to manipulate monetary policy and financial regulation to their ends.  They will steer subsidies and protection their way, they will use regulation to block competition, and they will steer credit their way.

We didn't have a central bank for a century, mostly because of this fear. The argument over having a central bank at all focused on the concentration of financial power and its marriage to political power, not inflation and unemployment. Now that the Fed is squarely running the financial system, and not just setting interest rates, we will start that discussion again.

Ideally it would not matter at all who the Fed chair is. Our government works well when the institutions work, not when we await the right benevolent aristocrat to run things with great power and no accountability. So a wise central banker is not one in the news every day, spouting a frenzy of new ideas. The wise central banker works within and buttresses well codified rules of behavior, thinks hard about what those rules should be, and slowly moves them over time.

Oh, and politics matter. Pick a Democrat.

So who fills that bill? I've pretty much described Tom Sargent. If you want a taste, go to his website. His latest paper "Fiscal discrimination in three wars" with George Hall is just what I would want a Fed Chair to be thinking about with state and local defaults looming. His Nobel Prize speech "US Then, Europe now" is one of the wisest set of thoughts on the Euro crisis I've seen. Some of my favorite classics: "The macroeconomics of the French Revolution" with Francois Velde. There you see how Tom can put modern macro into action, to understand real-world events. Of course his studies of the fiscal roots of hyperinflations are fundamental. He knows macroeconomic theory of all stripes inside and out. He knows the history and institutions inside and out.  He is one guy who could command hushed awe in the FOMC.

There are a few other candidates who fit the bill similarly. I don't want to get too deep in to personalities, it's the job posting that counts. You could make a similar case for, among others Ken Rogoff, David Romer, John Taylor, Mike Woodford, Greg Mankiw, and many others. (Just examples; I don't mean to insult anyone by omission). The interesting observation is that none of these are on the agenda reported in the papers.

There is perhaps two good reasons why such candidates are not on the table. First,  the Fed chair runs a large organization. The talents of corralling a bureaucracy, herding the opinionated cats on the board of governors, keeping the staff in line, working within the legal and institutional structure of the Fed, keeping one’s mouth shut so as not to roil markets and cause scandals, (or perhaps talking so much that markets stop paying attention? That's what would happen if I were Fed chair!) while furthering the Fed’s admirable quest of transparency are crucial.

Second, the chair has to make hard decisions in real time. This is incredibly hard.

Most academics don't have these skills. I don't know if Tom does. Perhaps some trial of running a large organization is a needed requirement.

And of course, the chair needs to persuade one person he or she will be good at the job, the president. Ben Bernanke served on George Bush's council of economic advisers, and undoubtedly impressed Bush. Tom impresses me, but I'm not in charge.

You may object that I'm thinking too narrowly. I'm a university academic, so I'm pushing other university academics. But in this case, I think that's warranted. The academics really have thought long and hard about central banking, and they have taken over from the bankers. The FOMC is a great debating club of monetary and financial policy. An industry economist or banker will get eaten alive.

By the way, I think when the dust has settled, history will be kind to Ben Bernanke. He fits most of my job description. Inflation is stuck at 2%, the world did not melt down, and we’re all gradually coming to the realization that if $2 trillion bucks of stimulus and zero interest rates didn’t bring our economy out of the doldrums, there really is nothing more that a central bank could do. The Phillips curve has been screaming "this is supply, not demand" for a few years now. Like any great general, we can argue with specific decisions, and much of the direction of Fed policy, and I have. But we have not lost the war.

Yet. The next chair could easily make Mr. Bernanke’s term look even better.

Money Manager Charged With Defrauding Investors and Firms

The SEC has charged a purported money manager in New York with conducting a free-riding scheme to defraud three brokerage firms, and then bilking several investors out of nearly a half-million dollars that he stole to fund his luxurious lifestyle that included a Bentley automobile, summers in the Hamptons, and casino junkets.
The SEC alleges that Ronald Feldstein caused more than $2 million in losses for the brokerage firms that he victimized in the free-riding scheme, which occurs when customers buy or sell securities in their brokerage accounts without having the money or shares to actually pay for them.  Feldstein opened three separate brokerage accounts in the names of two purported investment funds that he created.  He had no intention to pay for the stocks that he purchased if they resulted in big losses.  Feldstein planned to walk away from any transactions where the price declined substantially after the trade date, and planned to use sales proceeds to pay for the purchases if the price of a stock increased.
The SEC further alleges that Feldstein later began soliciting investments by targeting owners of businesses that he had frequented for decades, including a dry cleaner and a car leasing and servicing company.  Feldstein convinced them to provide funds for him to invest on their behalf, promising such profitable opportunities as a successful hedge fund, a promising penny stock, and an initial public offering (IPO) of a fashion company.  However, Feldstein never invested this money, instead converting it for his personal use without their knowledge.
“Without sufficient assets to pay for his stock purchases, Feldstein illegally arranged trades in which he got the profits if he won and left brokerage firms holding the bag if he lost.”
-Andrew M. Calamari, Director of the SEC’s New York Regional Office. 
The complaint does not address how this scheme was discovered, or why the free-riding scheme went undetected for any period of time. Brokerage firms have the obligation to detect free-riding and to take steps to prevent such activities. My firm has the experience to assist firms in creating such compliance systems, as well as assisting firms, and investors, in recovering losses from fraudulent investment practices.
Give us a call at 212-509-6544. We represent all market participants, nationwide. | SEC Charges Purported Money Manager With Defrauding Investors and Brokerage Firms

Wednesday, September 4, 2013

Ronald Coase

Ronald Coase has died, inspiration and hope for those of us who don't write 10 papers a year. But they have to be good ones.

Two insightful retrospectives:

David Henderson, in the Wall Street Journal, also here at Hoover (no paywall)

Dylan Matthews in the Washington Post "Wonkblog" "Here are five of his papers you need to read"

When I got to Chicago, it seemed that people, especially graduate students, would shout "Coase theorem" at totally random moments. The pattern has since started to make some sense.

Tuesday, September 3, 2013

Investing is Complex - 10 Tax Mistakes

I am certainly not a tax expert, but agree witht this article - "Investing is a complex undertaking. The supply of investment alternatives is seemingly endless. Evaluating various alternatives can be quite difficult and very time consuming."

If you are investing on your own, without a tax advisor and an a financial advisor, please make sure that you are able to sort all of this out on your own.

Top 10 Tax Mistakes Made by Investors | Financial Planning