Relevant and even prescient commentary on news, politics and the economy.

A different sort of crowding out


Money Central presents a dilemma for shareholders in goods and services:

The old notion that profitable companies with good growth prospects should have rising share prices — and that failures like GM should be gone, or at least trading in the pennies — is history.

Today, a hedge fund investing billions using a quantitative formula can stall a stock; a couple of hedge funds aligned can turn a profitable company into a Dow laggard. Toss in a few short sellers and you have the great Wall Street collapse of September 2008.

It wasn’t always this way. Before the machines and the shorts took over Wall Street, stocks were evaluated by an underlying company’s prospects. Buy-and-hold investing ruled the day. Investors such as Warren Buffett and Bill Miller were the models.

Those fellows are a far cry from this generation’s masters of the universe. Traders are in charge now. They rule the market. They dominate volume. That stock you bought because you thought the company was in good shape? It’s a pawn in the hands of a computer model or some supertrader like Steven Cohen at SAC Capital Partners or Bridgewater Associates’ Ray Dalio.

To move a security, they don’t need to own it. They can have a short position. They can put an order to sell 1 million shares in a dark pool, those anonymous marketplaces that operate outside the walls of the exchanges. They can own options or futures contracts. Buy enough GM puts and watch the price begin to fall under the pressure.

Obvious, but plays havoc with the investing side of the tax cut and savings equation meme.

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Federal pre-emption of bank regs curtailed by Supreme Court


Seeking Alpha notes a Supreme Court ruling on federal pre-emption of state regulation of banks. Google on Angry Bear OCC for posts on the issue.

In a surprising 5-4 vote, the Supreme Court ruled that national banks are still subject to the laws of the states they operate in. What made the ruling unusual is that Justice Scalia wrote the opinion and the other four conservative judges were in dissent (Roberts, Thomas, Alito and the normal swing vote Kennedy).

The ruling overturned an appeals court ruling that said that state attorneys general cannot investigate banks if they operate in more than one state.

The case in question involved the enforcement of fair lending laws in N.Y. State, specifically allegations that some banks were charging minorities higher interest rates. Instead, even though these are state laws, the appeals court had said that only the Office of the Comptroller of the Currency (OCC) had the power to investigate. In practice, this means that the laws were null and void, since the OCC has a lousy track record on such issues.

Enforcing state laws is simply not a priority for a division of the Treasury Department. While clearly there can be a problem if multiple agencies have jurisdiction in regulation, allowing things to slip through the cracks, there can also be problems when there is only one regulator and that regulator is in the pocket of the regulated. It is harder to capture all 50 state attorneys general and the OCC, than it is just the OCC alone. Make no mistake, the head of the OCC, John Dugan, a holdover from the last administration, is very much a creature of the big banks he is supposed to be overseeing. The OCC ranks just behind the OTS in being an ineffectual regulator during the bubble.

While the state attorneys general will not be able to issue subpoenas on their own authority (they need approval from a state judge), it does mean that they do not have to sit on their hands if they think the banks are breaking the law. It also will mean a more fair application of the law.

Update: Remember that John Dugan is the regulator who insisted it was the job of banks to validate their own risk models.

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Rumours of "Green Shoots" are Exaggerated: Illinois

After my previous posts on Georgia, it seems only fair to note the bank closings in Illinois today.

There have been 13 bank closings posted (as of right now, about 6:50pm) in the state of Illinois since last March. That alone is significant—but, even more interesting, six of them occurred today. This exceeds the previous record for a state, Georgia’s five last week.

Three (in Elizabeth, Oregon, and Danville) are in the NW part of the state. The other three are located near Chicago (Worth, in Cook County), Urbana (Clinton), and Springfield (Winchester).

Only two of those cities (Worth and Danville) are in the Top 200 cities by size in the state, so it’s difficult not to suspect that their location had a lot to do with the closing of at least four of the banks.

Again, the same as the Georgia question, why Illinois? And, most especially, given the past two weeks, why are there multiple state closings now?

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The Problem with Macro is Micro

John Quiggin makes the broad case (link fixed).

If you are then stuck with trying to present a Grand Unified Field Theory, you will inevitably lose (or, at best, reduce) the importance of all the agglomerations that follow from the presumption that the Rational Actor is the mean performer—ignoring that no one, including the economists themselves, believes that to be true in their own lives, let alone the lives of others.

Micromotives and Macro Behavior indeed. But no molecular biologist (or even biologists) would try to build on the Phlogiston Theory.

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Thinking on Health care funding. It’s getting wacky!

by Divorced one like Bush

So, American’s put an intellectual in the president’s seat. It’s been called pragmatism. We cheer the return of science and thus critical thinking to our politics. Yet, here we are at the cusp of the next great societal character development issue since we figured out after the depression there was class war in the US and we get this:
“If you establish a public option at the forefront that goes head-to-head and competes with the private health insurance market … the public option will have significant price advantages,” she said.
Yes, Maine’s finest: Olympia Snowe as she argues against making the public option available at the get go.

But, this concept is not new. It dates back to 2006 when the Council for Affordable Health Insurance presented a 17 page report suggesting the same thing. And!, now we have the Heritage foundation dittoing the same report. (More on that coming at AB by the other bloggers here.)

But, never fear, Sam’s got you covered. He explains the appropriateness of Olympia’s thinking.

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By Spencer

The June employment report sent a clear message to expect more of the same. It showed essentially no signs of improvement as payroll employment fell -467,000 and the unemployment rate rose to 9.5%

The average work week — considered a leading indicator of employment growth — dropped to 33.0 hours and the index of aggregate hours worked fell 0.8%. In the fourth quarter of last year hours worked fell at a -7.4% annual rate. In the first quarter they fell at an -8.9% rate and in the second quarter the index fell at a -7.9% rate.

Both hours worked and employment indicate that this is the worse recession since WW II and show few signs that the recession is ending.

Moreover, growth in average hourly earnings continue to slow sharply.

Consequently, average weekly earnings growth slipped to 0.36%, the smallest gain on record.

However, because of tax cuts and other government transfer payments total nominal income growth is rebounding strongly and providing essentially the only reason to expect economic growth.

But so far most of the tax cuts have gone into the rebound in the personal savings rate. This can be viewed several ways. One, there is normally a lag between income increases and spending growth. But this probably accounts for only a very small share of the savings growth as higher savings are dominated by individuals need to rebuild their balance sheets. Two, the tax cuts are financing the savings increase and preventing a much more severe drop in consumer spending. I personally favor this view and see it is part of the story that as in Japan’s lost decade this fiscal stimulous prevents the economy from sinking into a depression but does not stimulate much growth. I have believed for a long time that the US has slipped into an environment much like Japan’s lost decade and just continue to see developments reinforcing that belief.

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The second part of the trade deficit: oil



From 1995 to 2008, the annual US trade deficit with China grew from $34 to $266 billion, accounting for virtually all of the increase in the US non-oil deficit from $44 to $282 billon.

Imported oil petroleum contributes significantly to the US trade deficits. From 1995 to 2008, the petroleum deficit increased from $34 to $386 billion. This huge deficit is caused primarily by the failure to impose higher mileage standards on automobiles, implement other fossil-fuel saving technologies, and to develop US domestic oil and gas resources.

Together, imports of oil and from China account for 90 percent of the US trade deficit, and that deficit has averaged more than 5 percent of GDP over the last five years.

In theory, increased imports of manufacturers from China and petroleum should shift US employment from import-competing industries to export activities. Since export industries create about 10 percent more value added per employee and undertake more R&D than import-competing industries, this would raise US productivity and GDP growth. Those are the expected gains from expanding trade based on comparative advantage.

Instead, large trade deficits shift U.S. employment from trade-competing industries into nontrade-competing industries. Trade-competing industries create at least 50 percent more value added per employee, and spend more than three times as much R&D per dollar of value added, than nontrade-competing industries. By shifting labor and capital into nontrade-competing industries, chronic trade deficits have reduced U.S. economic growth by at least one percentage point a year, or about 25 percent of potential GDP growth.*

Lost growth is cumulative. Had trade deficits been significantly smaller over the last two decades, U.S. GDP would likely be $3 trillion or 20 percent greater than it is today.

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Morici and US trade deficits (China and oil)

Peter Morici gets to the point in this paper in Finfacts on the first half of what we need to face. I hear little from naysayers of ‘protectionism’ on this point of manipulating trade advantages.

Fixing credit markets and energy policy are largely domestic challenges, whereas recalibrating trade with China requires cooperation from Beijing. However, such cooperation requires fundamental changes in Chinese industrial policies and a departure from maintaining an undervalued yuan to spur industrial development.

The United States has engaged in high level talks with China since negotiations for its entry into the World Trade Organization. Most recently, the Strategic Economic Dialogue was launched in 2007.

Throughout this process the United States has encouraged China to more substantially raise the value of the yuan, which would require Beijing to purchase fewer dollars and other currencies to sustain its value. Instead, China has increased its foreign exchange market intervention as the gap between the official value of the yuan and its fundamental value has widened. This has exacerbated the damage to the U.S. economy and China’s other trading partners.

The United States has three broad policy options to leverage change.
First, the United States could bring a complaint in the World Trade Organization. China’s currency policy policies create a WTO illegal subsidy on exports, and subvert the benefits its trading partners expected when they acceded to China’s entry into the world trade body.

Were the United States to bring such a suit, other WTO members would likely join the petition. If they prevailed, either China would have to stop intervening in currency markets, or face tariffs–approved by the WTO and imposed by WTO members participating in the complaint–to redress the trade imbalance. Those tariffs would be strictly temporary and removed when China complied with the WTO decision, ended currency market intervention, and let the yuan rise in value.

Second, the United States, consistent with its WTO obligations may impose tariffs on imported goods that receive government subsidies, if those goods harm U.S. industries when they enter U.S. markets. Until 2006, the United States did not apply the subsidy and countervailing duty law to commerce with China, but in a case regarding imports of Chinese paper, the Bush Administration changed that policy. However, in addressing the domestic industry’s petition, the Bush Administration denied application of the subsidy and countervailing duty law to China’s undervalued currency.

Bills sponsored by Senators Jim Bunning (R-KY) and Debbie Stabenow (D-MI) in the Senate and by Representatives Tim Ryan (D-OH) and Tim Murphy (R-PA) would make more likely the subsidy implicit in an undervalued currency were included in the computation countervailing duties in both dumping and subsidy cases, when a “fundamental and actionable misalignment” is present. Such circumstances would be determined by a standard consistent with International Monetary Fund guidelines.
Third, Americans need to accommodate to the fact that China is much less a market economy, either by design or by policy, than North American and Western European economies.

Its financial system may not be able to sustain an unmanaged floating exchange rate; however, China can manage the value of the yuan at 4 as easily as it does 6.8. In fact, it would be a lot easier to manage a value closer to balance of payments equilibrium.

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Those Who Think the "Left of Center" is Too Tough on N. Gregory Mankiw

should read Sensible Centrist J. Bradford DeLong on the difference in forecasting between the current Administration and the CEA under N. Gregory Mankiw.

Romer/Bernstein/Kreuger et al., 2008-9 edition:

As I understand matters, last December the median private-sector forecast had the unemployment rate topping out at 9% in the second half of 2009. The incoming Obama administration simply adopted that forecast. At the time I thought that was a mistake: (I thought that was a mistake: I thought they should have made a bifurcated forecast with a “good case” 80th-percentile scenario and a “bad case” 20th-percentile scenario; they should then have stressed that in the bad case we would need a large stimulus indeed to prevent high unemployment, and that in the good case we could restrain inflation via monetary policy.)

Mankiw et al., 2003 edition:

it would make it extremely difficult for things to happen like what happened to the Mankiw CEA over the winter of 2003-2004, when high politics appears to have reached down into the forecast, changed the table for payroll employment (and only payroll employment: the rest of the forecast is not out of line with contemporary professional forecasts), and produced an estimate for December 2004 (a) inconsistent with the rest of the forecast, and (b) high by 2.3 million in its estimate of payroll employment–all because Karl Rove and company thought it important to avoid headlines like “Bush administration forecasts 2004 payroll employment to be less than when Bush took office.” (link from original)

The positive-spin version is that Mankiw plays politics better than the Obama Team.

UPDATE: Kauffman Foundation invitee Mark Thoma adds to the fun.

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