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Bloomberg and CNN webcasting financial reform conference

A conference on financial reform has just begun at 8:00 AM today 3/3 with some major names in the lineup. It is hosted by the Roosevelt Institute and will be webcast in full from 8:00 AM to 11:00 AM at by CNN. Bloomberg will cover the 9:30-11:00 AM segment live.

Participants include George Soros, Elizabeth Warren, Joe Stiglitz, Jim Chanos, Lynn Turner, Simon Johnson, Judge Stanley Sporkin, Peter Solomon, Frank Partnoy, Larry White, Rick Carnell, Michael Greenberger.

For more information, please check the website, Make Markets Be Markets.

Due to last minute complications Angry Bear will not have a representative covering the conference.

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Health Care Reform is Already Happening

by Tom aka “Rusty Rustbelt”

Health Care Reform is Already Happening

Ohio State University Medical Center has built an affiliated physician group of more than 600 physicians. Effective by January 1, 2011, the physicians will be merged into OSUMC (not as medical school faculty) and will be full employees of OSUMC.

OSUMC will do all billing under a consolidated provider number and create a system wide electronic medical record.

This is an “integrated delivery system” (IDS), the strongest trend in health care delivery reform these days.

This is not new, the health care reform discussion in the early 90s created the first major wave of integration. Many of these efforts were massive flops, some worked well and other just cripple along.

Hospitals are not always able to properly manage physician practices, like the skilled driver of an 18-wheeler cannot jump into NASCAR, same concept, much different execution.

An IDS will presumably have much great bargaining power with health insurers, and there is a school of thought that health care costs could actually be driven up.

Without or without action in Washington, health care reform is moving ahead.

HT: Columbus Dispatch
Tom aka “Rusty Rustbelt”

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Speculation and Finance: Good for you? (part III)

by Linda Beale
Speculation and Finance: Good for you? (part III)

In a couple of prior postings (Part 1 and Part 2), I considered (1) Darrell Duffie’s op-ed in the Wall St. Journal asserting that financial institution speculation in the markets is “good” for us and (2) the question of financial institution speculation in credit default swaps on Greek debt as a possible factor in the worsening of Greece’s financial situation.

Speculation seems to be on everybody’s mind these days. The Economist, for example, is running a debate on the question of the value of financial innovation, here. Volcker famously has commented that about the only financial innovation of the last century that was really worth anything was the ATM, as the moderator noted inher opening remarks.

A few years ago America’s sophisticated financial system was hailed as a pillar of its economic prowess. The geeks on Wall Street and their whizzy new products symbolised the success of American capitalism just as much as the geeks in Silicon Valley. Today things look very different. After the worst financial crisis and deepest recession since the 1930s, Wall Street has become synonymous with greed and irresponsibility in the public mind. And while no one doubts that financial innovation made a lot of financiers extremely rich, a growing number of people question whether it did much, if any, good for the broader economy. Paul Volcker, former chairman of the Federal Reserve and an advisor to President Obama, has famously claimed that he can find “very little evidence” that massive financial innovation in recent years has done anything to boost the economy. The most important recent innovation in finance, he argues, is the ATM. Id.

The debate is about cutting edge financial innovation as came into style in the 1980s–mortgage-backed securities, collateralized debt obligations, credit default swaps and other financially engineered derivative instruments and innovations like exchange-traded funds and inflation-protected bonds. So who are the voices for the Con and Pro side on “love that speculation and financial innovation” at The Economist? It’s Joe Stiglitz, Nobel prizewinning neo-Keynesian (who should, in my opinion, have been appointed to the position that Larry Summers holds in the Obama administration) arguing against the value of most financial innovation–the “right kind” he says, could help financial institutions fulfill their core functions more efficiently, saving money and therefore contributing to economic growth. “But for the most part, that’s not the kind of financial innovation we have had.” Most of the recent financial innovations have been primarily accounting gimmicks and inventions designed to game the tax system–In my terms, those are not productive investments that move technological innovation, but shell games to fool regulators and pocket the windfall for the wealthy few. Een the inventions that had the potential to stablize the financial system actually ended up destabilizing it, because of their abuse in the furtherance of greed. And in the other corner, it’s Ross Levine, Professor of Economics at Brown, who thinks financial innovation is “crucial, indeed indispensable” for economic growth.

Not surprisingly, I think Stiglitz has the winning argument here about the questionable value of most of the late 20th century financial innovation.

We should not be surprised that the so-called innovation did not yield the real growth benefits promised. The financial sector is rife with incentives (at both the organisational and individual levels) for excessive risk-taking and short-sighted behaviour. There are major misalignments between private rewards and social returns. There are pervasive externalities and agency problems. We have seen the consequences in the Great Recession which the financial sector brought upon the world’s economy. But the consequences are also reflected in the nature of innovation, which, for the most part, was not directed at enhancing the ability of the financial sector to perform its social functions, even though the innovations may have enhanced the private rewards of finance executives. (Indeed, it is not even clear that shareholders and bondholders benefited; we do know that the rest of society—homeowners, taxpayers and workers—suffered.)

Some of the innovations, had they been appropriately used, might have enabled the better management of risk. But, as Warren Buffett has pointed out, the derivatives were financial weapons of mass destruction. They were easier to abuse than to use well. And there were incentives for abuse.

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M1 growth in charts: the Majors vs. the BIICs

by Rebecca Wilder

This is expansionary monetary policy…

… this is expansionary monetary policy on drugs

Note: Japan’s M1 growth is labeled on the RHS, with range -1.5% to 1.5%.

Any questions?

I know, kind of corny; and I did grapple over which set of economies should be labeled “on drugs”, the BIICs or the Majors.

And BIICs is NOT a typo. I’m going with BIICs now – Brazil, Indonesia, India, and China. This is a modified version of Jim O’Neill’s famous cohort, the BRICs (Brazil, Russia, India, and China), whose economies in $ terms are expected to jointly transcend the G6 by 2050. Russia’s been ousted for reasons that I will discuss at a later time.

Soon to come: Indonesia vs. Russia.

Rebecca Wildercrossposted with Newsneconomics

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More on speculation: Banks, Credit Default Swaps, and Greece’s Debt

by Linda Beale

More on speculation: Banks, Credit Default Swaps, and Greece’s Debt (Part 2)

Yesterday, I commented on Darrell Duffie’s defense of speculation in the Wall Street Journal, here. I noted that the idea that speculation is a positive because it absorbs risk others don’t want and helps reveal the “true price” by providing more information about the speculated item seems more of a stretch in the midst of this crisis than we might have thought before. Absorption of risk only works if there is a more or less even playing field, with some long and some short, but that adds little to information or price. If there is an abundance of information on price–because traders are shorting the stock or rushing for credit default swaps, then that information will tend to swing the price and make it much more difficult for speculators to absorb the risk, as the market teeters offbalance on that item and pushes the item more and more to the cliff that the speculators have predicted.

Whatever the underlying problem in Greece, financial speculation has been a factor in tilting the balance towards disaster. The price of credit default swaps has gone up, and each time that Greece tries to borrow to pay its debt, it has to pay more and the CDS cost goes up and Greece looks riskier in a vicious cycle threatening illiquidity. Thus, one commentator notes that “credit default swaps give the illusion of safety, but actually increase systemic risk. See Banks Bet Greece Defaults on Debt They Helped Hide, NY Times, Feb 25, 2010.
crossposted with ataxingmatter

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More Detail on Working the Refs

So there are several comments to my previous post. Ignoring the a good one from Dr. DeLong, several people are taking umbrage at my unsubtle suggestion that the effect on employment being suggested is, to be polite about it, rather creative.

kharris begins, “So let me see if I have this right. If anybody tries to figure out what the impact of snow on economic data might be, they are big fat liars? But those who know that the economy is in bad shape, without reference to actual events, is a stand-up kind of hack?”

Following is an expansion of my comment in that thread, with data:

To the second question, well, I may be a hack, but my stand-up days are in the past. But given the choice between believing that the recovery is in full swing and that long-term unemployment is getting worse and jobs are not and will not be created, well, I’ll take the CBO projection as the baseline:

CBO expects the unemployment rate to average a little over 10 percent for the first half of 2010, and it will probably not dip below 9 percent until 2012.

and note that if we’re calling that a recovery, our definitions have become Very Generous. So bold claims of recovery need to be tempered by the prospect of worse headline unemployment (U-3) for the next five months (including February) and no significant recovery for the eighteen after all.

Sorry I’m not doing handstands that GDP might be slightly positive for a few quarters of sub-replacement level employment increases, but I didn’t cheer the “recovery” of 2002 either, so at least I’m a consistent hack.

To the first: Not at all; trying to figure out the effect is fair game and perfectly reasonable. But the declarations so far are all running in one direction: we believe the economy is better than the data will be, so we need to wait if it looks bad. (See Ms. Caldwell as quoted by CR or Catherine Rampell, for example.) Rampell:

That report will probably be very, very ugly. I have seen some forecasters project job losses as high as 100,000.

The main culprit behind the expected jobs plunge is the blizzard, which closed businesses and kept people from going to work or even seeking work for days and sometimes weeks. These work stoppages probably occurred precisely when the government was collecting data for its February jobs report.

So the current estimates are all that (1) demand was down and (2) employment was down.

And (3) deliveries were down: see the ISM data.

Put it all together, and you can tell a story of heavy snow snarling shipments to and from manufacturers, slowing down production growth.

But at least in this case, we have a clear indicator: the increase in backlogged orders.

Finally, (4)savings.

The reasons for the stall are twofold: For one, rebounding wealth since the recession’s depths has helped provide some support for consumer spending. Secondly, weak income growth has left other consumers with little choice but to spend proportionally more of their incomes, particularly in light of [5] still-tight credit conditions.

So demand, supply, savings, credit, and employment are all down. The first and second are aberrations of snow (and equilibrium), the second and third abide.

Which leaves employment, which is discussed in more detail than most sane people would want below the fold.

Now, it is clear that people who are employed did not work in the week. But they are not likely to have reported themselves as “unemployed” or (except in a very literal sense) “out of work.” True, they did not produce—but what they would have produced was not bought, and hence there is a backlog of orders.

But companies that now have backlogs of orders know that this was because they did not have their current workforce. Accept an order to produce, say, 200 units (which takes a month to produce) and lose five to eight business days and you’ll be 50-80 units behind.

But you’re not going to go out and hire a new person to fill the backlog.

Yes, there was an effect on production and sales. But the idea that 100-200K jobs went unfulfilled solely because of weather conditions that were aberrant primarily in the mid-Continent is either (1) rather optimistic or (2) ignoring that the excess snow effect was mostly in the areas that are least underemployed. (See this nice map from Catherine Rampell)

So in the best case scenario, the recovery was muted because things were not delivered or sold—though money (savings) was (were) spent. And the only reason firms didn’t hire was the snowstorm that closed D.C. and delayed Philadelphia. (Though there was no snow in NYC and, as noted, nothing unusual about the fallings in the Midwest.)

The worst case scenario is that demand wasn’t filled solely because supply wasn’t available because existing workers could not produce. Working on the “nine women pregnant for a month don’t produce a baby and you have a real problem eight months thereafter” rule, employers will (generally correctly) view their February backlog as a result of existing labor not working, not as a need to hire new workers.

If you’re balancing the effects of those two—standard Slutsky analysis, as it were—there is a high likelihood that hiring will be dampened going forward by the snowstorm as firms underestimate actual demand. It is less likely that actual hiring was significantly reduced by it.

But that’s not the way the discussion is going. So a bad (negative) number has excuses, a poor number (positive, but less than replacement rate) has excuses and should be seen as “good,” and a good number (replacement rate or better) will mean “all ahead full.”

So I tried looking at ancillary data. Looking at power usage, for instance, indicates a major decline that would correspond to less activity(Table 1.6.b; Commercial usage YOY down 3.6%; Industrial usage YOY down 5.6% with declines in all areas; total usage down 4.3% YOY [Table 1.1])—but that’s only through November.

Maybe the past three months have been part of a miraculous recovery. But it’s not in employment, its not in the available energy usage data, and it doesn’t follow from the ISM data, which indicates slow growth at best.

Those who want to claim the economy is recovered have been, as noted, “working the refs.” So a bad number (by Rampell’s apparent reasoning) will kill health care reform, but not mean that we need a second stimulus—even though the states are hemorrhaging money and, soon, jobs. (Teachers, police and fire–you know, all the nonessential personnel.)

It’s a heads-we-win-tails-we-win-more situation being set up.

If we pretend that all of the argument are true: that the snowstorm was a once-in-a-lifetime event and that it really did produce a major skew though, we might want to look at what happened the last time a “once-in-a-lifetime event” occurred near the end of a recession.

The vertical lines are at September and December of 2001. For a week in September, everyone—and this time I mean everyone, not just the bottom third of the Bos-Wash corridor—stopped shopping for a week. As predicted above, the employment effects abided for at least the next few months. (Recall, after all, that that recession officially ended in November.)

Given the choice between (1) assuming that there will be a one-off decline in employment due to the snow and that everything will return to recovery next month or (2) that there will be a lingering, negative employment effect from the snowstorm and attendant business slowdowns, there appears to be only one way to bet, given the data and the history.

Yet the calls right now—absent evidence—are going the other way.

If we’re working from anecdotal evidence, then certainly there is a recovery. It’s the extant data that doesn’t support any recovery that is not also described as “jobless and uncertain.” That may change on Friday. But it’s not the way to bet, no matter how much the refs are worked.

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Politics vs. the Economy: Turkey edition

Turkey’s on my mind. Let me sum up my point – that the outlook for the Turkish economy hangs very much in the balance – from the following news excerpts.

From the Hürriyet Daily News and Economic Review on February 8 :

the Legislation for the [fiscal] rule, which will limit the size of the budget deficit as a proportion of gross domestic product, will be submitted to Parliament in the next few months, Babacan said. The government has announced a formula setting the framework for annual budget preparations. Elements in the formula, such as the target level of the deficit and variables that define the speed at which the country will reach its target for the debt stock, have not been set.

From BusinessWeek, via Bloomberg, on February 19:

S&P lifted the country’s sovereign credit rating to BB with a positive outlook, two levels below investment grade, from BB-, according to an e-mailed statement today. Reductions in government debt and a “solid” banking system were cited as two of the reasons for lifting the rating. “The upgrade reflects our view of the Turkish government’s improving economic policy flexibility as a result of its strong track record in steadily reducing the debt burden,” said S&P analysts including Frank Gill in London.

And then from the Hürriyet Daily News and Economic Review on March 1:

A constitutional reform package is at the center of Turkey’s ruling party’s attention after the recent crisis between the judiciary and the government. With a long list of to-do items, the ruling party is likely to seek consensus from opposition parties first before presenting its suggestions to Parliament and may have to barter for progress

The AKP (majority party) made a 180-degree turn from tackling economic reform in a country with twin deficits to potentially very contentious constitutional reform. (IHS Global Insight, subscription required, forecasts Turkey’s current account deficit to be 3.3% of GDP in 2010 and the fiscal deficit to be 5.1% of GDP). Constitutional reform is difficult and necessary, given that the current version was imposed after the 1980 military coup. However, it does put the economic recovery at risk.

Confidence, and thus the recovery, is on the line. Currently, Turkey has the highest misery index across 16 O.E.C.D. countries selected by yours truly.

Turkey’s misery index was 18.6% in November 2009: 13.1% unemployment plus 5.5% inflation. Inflation has since risen to 8.2% in January, so the misery index likely worsened. (It wouldn’t be too crazy to claim that Turkey’s misery index is setting world records, but I did not construct indexes for the world.)

Rising misery drags consumer confidence, and thus demand, with near-certainty. I don’t think that it’s a stretch to expect recent political volatility to drag the consumer confidence even further.

Misery and waning consumer confidence has already driven a wedge between demand and supply (industrial productions), suggesting that recent gains in the production sector are most likely unsustainable.

But business confidence is also on the line. Emre Deliveli (please see his blog for updates on Turkey) points me to the survey results of the American Business Forum in Turkey. An excerpt from the 2009 report:

65% of US company executives are concerned about receiving fair treatment when bidding on government contracts and find commercial courts to be unresponsive to the needs of business. The transparency and efficiency of decision-making in the public sector remains a key concern as in previous years. High electricity costs are a negative factor, and personal and corporate income taxes are considered to be complicated and not competitive with other countries. There are also concerns regarding credit costs and financing opportunities. Only 30% of executives find that there is adequate protection of intellectual property rights, including patents, trademarks and copyrights.

It’s obvious that reform is necessary. But whether or not constitutional reform leads to productive microeconomic reform is a serious question, in my view. One thing is for certain: if constitutional reform supplants economic reform over the near-term, the economic prospects are less sanguine. In fact, the medium-term fiscal metrics are at risk as well.

Rebecca Wilder

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