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

Marginal benefits

by cactus

How much are all those folks at the various TARP corporate welfare recipients worth? We’re being deluged with stories about how many executives at such institutions are leaving because the big bad gubmint is limiting their pay, and how that’s going to hurt us in the long run. Worse, we’re told that this process is going to hurt us – after all, these are the rain-makers, the guys who bring in the money. Do we want the best people working for us, or do we want to pinch pennies and get a band of oafchucks who don’t know their butts from a hole in the ground.

There are a few problems I see with this. First is that most of the companies that are getting corporate welfare are not doing so because they’re run by people who know what they’re doing, at least in general. Sure, not everyone at BofA is a cretin, but its clear that some disastrous decisions were made there over the past few years by some very high paid people. Keeping people like that onboard is not good for the taxpayer.

But the question of value – how much value individuals bring to an organization – is more general. Essentially its a marginal benefits issue. It is the amount of money that a person can bring into the corporation above and beyond what someone else in that same position would bring in. If a person brings in hundreds of millions of dollars, but they’re able to do so only because they work for that corporation, and anyone else in the same position could bring in the same amount, than that person is not really worth very much to the corporation.

Think of it this way… by virtue of pressing the “print” button at the publishing company that puts out the latest Dan Brown book, someone at the company is allowing that company to sell a heck of a lot of books. But just about anyone could have pressed that button.

That brings up two points:

1. The relevant question, when it comes to a person’s pay, is what are the marginal benefits a person brings to an organization. Off the top of my head, I don’t see how to measure that. And perhaps not all the information necessary to reach that figure is available all at once. Destroying a company takes years (as a number of chief executives have demonstrated, some on multiple occasions), and in the meanwhile, the folks in charge continue getting paid a lot.

2. Its hard to see how the combined marginal benefits of the top twenty five individuals or so in a company that made a serious of disastrous decisions resulting in the loss of tens of billions of dollars – an outcome that would surely lead to bankruptcy if not for the intervention of the government – are positive. For some of them, yes, but on the whole they have to not only be negative, but extremely negative. As per point one, I’m not sure how to measure the contribution of each individual, but, speaking as a shareholder (via Uncle Sam) the fact that folks are leaving in droves from BofA or Citi or AIG doesn’t bother me at all. In fact, I’d feel better about the prospects of those companies if more of them left.
by cactus

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Big week for currency intervention measures

by Rebecca

Policymakers across Latin America are announcing measures to stem currency appreciation against the $US. Since March 2009, the $US depreciated 25% against the Colombian peso, 28% against the Brazilian real, 14% against the Mexican peso, 12% against the Peruvian nuevo sol, and 11% against the Chilean peso.

Much of the $US’s lost value is due to a renewed risk appetite as the “flight to (US) quality” unwinds somewhat. Even so, emerging market policymakers are worried; and governments across the region are stepping up to halt the appreciation either directly (Peru) or with quasi-capital controls (Brazil).

The Brazilian government announced a 2% tax on foreign capital flows into the domestic fixed income and equity markets. And to Brazil’s northwest, the Colombian central bank on Friday announced plans for direct intervention in the foreign exchange market to the tune of 3 trillion pesos (only after lesser and indirect measures announced the previous week proved only transiently effective). And Peru’s central bank has been purchasing $US on a regular basis since September 2009.

As the chart above illustrates, the Banco Central de Reserva del Perú has been very successful in stemming the appreciation. Colombia’s initial efforts (like halting the repatriation of foreign dollar holdings) were successful but only to a point – the peso fell almost 4% against the $US; but since then, the peso has settled to around 1917 Peso/$US. Brazil’s efforts, however, did little to break the trend of the real: the $US appreciated roughly 2% in the wake of the capital tax announcement, but the BRL (the real) gained back every bit of value that it lost in about 2.5 days. As one of my colleagues said, “you can’t submerge a beach ball”.

I suspect that Colombia’s direct intervention announced on Friday will successfully drive down the value of the peso, as the foreign capital inflows are primarily from $US-denominated government bond issues (little equity flows). It’s kind of interesting that the government is concerned about the appreciation of the peso but issuing debt denominated in $US…….

Brazil’s capital markets are too big and too enticing to foreigners right now (see charts below) – more direct measures are needed to stop the BRL’s appreciation. We will see if the Banco Central do Brasil goes there – Asia’s certainly doing it!

Text added: The charts illustrate the EXTERNAL bond and equity issuance by country as a share of total issuance in Latin America from the IMF Global Financial Stability Report.

Rebecca Wilder

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The Newest “Hot Thing”

Tom aka Rusty Rustbelt

The Newest “Hot Thing”

As promised, after an eight day swing of health care conferences (speaking and listening) I am back in action. So what is the new hot thing among providers?

Integrated Delivery Systems (IDS)

This is hot, but not really new. IDS became hot in the 90s when it appeared capitation would be the new dominant payment model (capitation failed to catch on for a number of reasons). Many systems use varieties and level of IDS models.

IDS is hot both in anticipation of reform legislation and also because of the economics of medicine. I suspect it will remain hot regardless of whether or not there is reform.

IDS presents in many models, but the key is a central hub (hospital or hospitals) integrating the spokes (physicians, ancillaries) via various methods and structures; affiliation, ownership, networking, etc. The IDS may or may not be linked with an insurance product.

The purpose is better coordination, leading to better care and lower (or slower climbing) costs. In my experience, this works better in larger urban markets than smaller or rural markets, but a lot of really smart people are working on this concept.

Specialists, and especially surgeons, have often been hesitant to embrace IDS structures, seeing only more work and less compensation, offset only by a little less financial risk. I suspect the surgeons will be throwing in the towel and joining up in larger numbers, again, with or without reform.

I have about 1200 pages to read before I make more detailed comments, but this appears to be the wave of the future.

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What it means to be a Conservative Economist Today

Bruce Bartlett posts a note that could have come from me (but, for reasons that will become obvious, did not:

During the 8 Reagan years, when marginal [tax] rates were sharply cut (but deficits were substantial), equities on the NYSE and the S & P 500 about doubled.

During the 4 Bush 41 years, when the top MTR was increased (only slightly), equities rose about 50%.

During the 8 Clinton Years, when MTRs were substantially increased, equities tripled, deficits turned into large surpluses (as far as the eye could see, leading some to fear that the Fed would be unable to conduct monetary policy if the public debt was redeemed).

The market today is roughly where it was (a bit higher) when Bush 43 took over, who cut MTRs, but ballooned the deficit.

So, Bush 41 and Clinton raised MTRs without tanking the economy, and Clinton left Bush 43 with a fabulous fiscal situation.

So much for the Republican argument that reducing MTRs is the nirvana of tax/economic policy and raising MTRs its death knell.

The e-mail was from “a person well known in conservative economic circles” who “asked that [Mr. Bartlett] not use his or her name if I used this information.”

We’re not talking about proprietary information here. And it is saddening that a prominent economist would not be able to discuss such elementary data in public without the promise of anonymity.

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Lender of Only Resort?

Ken Houghton, having realized there is still a Commercial Paper market, looks at one implication of it.

One of the things that gets ignored in all the fussing about government debt is how small it is by comparison to corporate debt.

The shortest-term debt, Commercial Paper, can be very interesting. With a maturity that is by definition nine months (270 days) or less—and often for financial institutions overnight, for others rolled over weekly—Commercial Paper can be the lifeblood of an institution.

For Financial Institutions, it’s even more extreme. The prime example is Drexel Burnham Lambert, which failed in large part due to its CP being downgraded, leaving it to turn to the Fed as its Lender of Last Resort. Wikipedia tells the story, using James B. Stewart’s Den of Thieves as its source:

Unfortunately for Drexel, one of first hostile deals came back to haunt it at this point. Unocal’s investment bank at the time of Pickens’ raid on it was the establishment firm of Dillon, Read—and its former chairman, Nicholas F. Brady, was now Secretary of the Treasury. Brady had never forgiven Drexel for its role in the Unocal deal, and would not even consider signing off on a bailout. Accordingly, he, the SEC, the NYSE and the Fed strongly advised Joseph to file for bankruptcy. Later the next day, Drexel officially filed for Chapter 11 bankruptcy protection.

Financial Institutions live and die by their CP sales. Or at least they did before the Greenspan Put. Here’s a chart of Domestic Financial CP Outstanding and Excessive Reserves over the past twelvemonth:

It certainly appears that the banks are using their “excess reserves” to make up for an inability to issue Commercial Paper in the amounts they did before. Perhaps the Fed Governors who are talking up recovery (h/t David Wessel’s Twitter feed) should wait until the debt markets strengthen a bit as well.

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Never Blame on Hyperoptimism what can be attributed to malfeisance

Dr. Black starts digging into the question why so many Georgia-based banks fail. The picture painted isn’t pretty:

The review also contains a photo of a planned 238 townhouse project that the bank financed for $5.6 million in 2007 even as the real estate market was softening. By September 2008 about three quarters of the loan had been disbursed. The photo taken in 2009 shows an empty lot with no construction on it. The FDIC now appraises the property’s value at $1 million.

By my current count, 25 of the 129 bank failures of 2008—seven more than Illinois and ten more than California. (Only Florida is also in double-digits, with 11 failures, three of which came yesterday.)

AB Commenter Nancy Ortiz was all over this possibility back at the end of June:

I wonder if the GA phenomenon isn’t some sort of scam. If I have some money to invest, why can’t I open a bank, solicit customers, provide basic services with high fees, sell stock, etc. Then I can use the resulting cash to give loans to people, getting high interest on various real estate or commercial ventures. Or, in GA, I might want to bribe state politicians by means of loans on overvalued assets. I could make loans like that to the governor, for example, in exchange for tax advantages, specific favorable legislative measures (income tax exemptions on other enterprises I own, for example) water rights, state contracts, you name it. I could make a lot of money that way, and the FDIC would pick up the individual depositers losses, or not, if I have sold them uninsured CD’s. Another small bank bites the dust, and I go on an extended cruise to….um, Argentina. It’s cold down there at this time of year, but later, I hear the weather’s quite nice.

while Guest followed with a possible point of salience:

Georgia has too many banks — one bank for every 28,000 residents. Georgia also had a big surge of commercial lending for risky real estate deals. This seems more like the savings and loan crisis of the 1980s than the sub-prime crisis.

I admire the optimism of Guest (and the Atlanta Journal-Constitution).

Also noted for the record, in the interest of full disclosure: the Business Week piece cited by Dr. Black was written by my neighbor and former editor, Peter Carbonara.

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A reader’s note


Reader donald sent this note for consideration:

Sunday night while slogging back up to Burlington from Hartford, CT (460 miles round trip as it turns out) we were listening to NPR. I didn’t think to make a note of what show, but it was discussing health care and brought up a point I wasn’t aware of that explains a lot of the rational part of the current controversy.

The story is that a decade ago Aetna was in trouble in the health insurance field. They returned to profitability not by greater efficiency or any of the other things one might expect, but by dumping hundreds of thousands of customers in markets where they were weak relative to other providers.

Why would showing customers the door be a money making move? Because insurance companies negotiate rates with providers, and the bigger the company in any given market, the more clout it has to negotiate lower rates. Costs are shifted to weaker players in the local market and to their customers.

I think this explains one reason why the health insurance companies fear a government option. The government would likely be a strong player in many (most) markets, and will negotiate good deals. Costs will be shifted to the health insurance companies by the free marketplace with no subsidies of other unfair competitive tactics. The insurance companies are not afraid of unfair competition exactly. They are afraid of being “Walmarted”

Is there a way to avoid this? The NPR program claims there is. According to them Maryland sets the price for all medical procedures so that all insurance companies are reimbursed at the same rate for the same procedure. That (purportedly) means that health insurance companies in Maryland have a leveller playing field than the rest of the country and have to compete on the basis of factors other than the deals they can negotiate with healthcare providers.

I believe that similar practices exist in countries with health care systems that actually work. Perhaps we should consider something similar nationwide in the US.

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Humor, grammar, and logic and wobegone attitudes


This American Psychological Association study is a follow up to Robert’s Wobegone economics post. Taken from comments by reader rd.

The abstract is quoted:

People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overestimated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacognitive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of participants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities.

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