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

Disappearing inconvenient data

Via Barry Rithotz at The Big Picture comes Bruce Bartlett’s take on
:

Bruce Bartlett and the dangers of Republican know-nothingism 

Bruce Bartlett goes off on some of the denialist behavior from the GOP. Bartlett writes: When a study doesn’t support their dogma, the GOP censors it: Nonpartisan Tax Report Withdrawn After G.O.P. Protest

Original study still available here: Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 (PDF)

Bartlett discussed how Republicans destroyed much of Congress’s analytical ability when they took over in 1995: Gingrich and the Destruction of Congressional Expertise
He adds “This is part and parcel with poll denialism, global warming denialism, and the general right wing disdain for facts and reality.”

Note: Before making any kneejerk partisan reaction to this, note that Bartlett — Like Stockman and others — sre not trying to mske a pro-Democrat argument; rather, they are acknowledging a major societal concern when one of the 2 major political parties have foresaken science and reality and facts when they disagree with their agenda.

(Dan here…I am willing to bet this is a non-partisan issue to some extent and age old way of supporting agendas…but if data cannot be trusted to have a bit of independence, where does that leave us?)

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It is in the interests of bankers and landlords to masquerade as capitalists

An comment worth noting on an  interesting post Where Are You in the Economic Strata? by Barry Ritholtz is the following (hat tip Mike K.):

In my opinion, aspirational voting is the consequence of a rational
dedication to ethics based upon false assumptions of what is ethical.
As I see it, there are two forms of income. The first type of income
is generated through productive achievement that benefits others and
grows the economic pie – this is the symbiotic relationship between
labor and capital. The second type of income is generated through
rent-seeking behavior that simply alters the flow of money, but does
not grow the economic pie – examples of this include
fractional-reserve banking and the land increment of rent. It is in
the interests of bankers and landlords to masquerade as capitalists,
but they are not capitalists (since they don’t grow the capital stock)
– they are rent-seekers.

Republicans are people who correctly see the benefits of capitalism
(the expansion of the capital stock that adds value to labor), but
they are fooled into thinking bankers and landlords are capitalists.
Democrats are people who correctly see the evils of wealthy
rent-seeking individuals, but they incorrectly attribute rent-seeking
to capitalism. In my opinion, Democrats would be wise to change their
target from “the 1%”, which may include capitalists that help others
(Apple is not the problem), and focus their attention specifically on
the rent-seekers (banking is the problem). By using this strategy,
Democrats can align themselves with Republican voters who support
productive capitalist activities, while at the same time exposing the
rent-seekers who masquerade as capitalists. In my experience,
Republicans are increasingly skeptical of banking. They are starting
to get that banking is different from other capitalist activities.
There is a real opportunity for Democrats, but they’ve got to be sure
they select the correct bogeyman.

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And So Happy Xmas…Now with Canadian Content

A couple of days ago, James Bianco, chez Ritholtz, noted a WSJ article entitled “Dividend Stocks Become the Heroes”:

This year, the 100 stocks in the Standard & Poor’s 500-stock index with the highest dividend yields are up an average of 3.7% before dividend payouts, according to Birinyi Associates. The 100 lowest-yielding stocks are down an average of 10%.

Is this a good idea? I understand the move to dividend-paying stocks—companies that admit they don’t know what to do with their excess cash are almost by definition better-run than those that hoard it without announcing future plans for its use (hi, MSFT!). And some companies have a lot of excess cash right now.

But there is a difference between paying a dividend because it’s the best use of funds for your investors and having a high dividend yield. Don’t believe me? Ask Bank of America shareholders ($2.56 Annual Dividend, just under an 8% yield) ca. 2008:



Or those who bought The Big C for its $2.08-cents-per share Annual Dividend (around 6-7% yield) in late 2007*:

Of course, banks might be the except. But here’s the past five years of Toronto Dominion, which was paying around a 3% p.a. Dividend** around the same time period:

What would have happened to your overall investment if you had gone for the higher-paying firms? It’s not pretty:

I like dividends; they’re an admission from a firm that it doesn’t know better than its owners what to do with some of its cash. But high-yielding dividends are often a sign of bad management giving away “excess” cash in good times.***

The first rule of finance: when something appears too good to be true, it probably is. Caveat emptor and may all your investments for 2012 be good ones.

*The graphic scale and dividend amounts were distorted somewhat by the 10:1 reverse split earlier this year.

**An annual dividend of US$2.28, with the stock trading around US$70-75 per share.

***This is not an unusual story, sadly. The collapse of LTCM, for instance, occurred after the fund gave much of its investment monies back to investors and then count not remain solvent for so long as the market remained irrational. (The contemporary equivalent is MF Global.)

(cross-posted from skippy the bush kangaroo)

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Hank Paulson and Some Animals Are More Equal than Others

byMike Kimel

Barry Ritholtz points us to a Bloomberg article showing, once again, that when it came to measures to prop up the economy in 2008, some animals are more equal than others:

Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said.

The fund manager says he was shocked that Paulson would furnish such specific information — to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information.

There’s no evidence that they did so after the meeting; tracking firm-specific short stock sales isn’t possible using public documents.

And law professors say that Paulson himself broke no law by disclosing what amounted to inside information.

The article goes on:

At the time Paulson privately addressed the fund managers at Eton Park, he had given the market some positive signals — and the GSEs’ shares were rallying, with Fannie Mae’s nearly doubling in four days.

William Black, associate professor of economics and law at the University of Missouri-Kansas City, can’t understand why Paulson felt impelled to share the Treasury Department’s plan with the fund managers.

“You just never ever do that as a government regulator — transmit nonpublic market information to market participants,” says Black, who’s a former general counsel at the Federal Home Loan Bank of San Francisco. “There were no legitimate reasons for those disclosures.”

Janet Tavakoli, founder of Chicago-based financial consulting firm Tavakoli Structured Finance Inc., says the meeting fits a pattern.

“What is this but crony capitalism?” she asks. “Most people have had their fill of it.”

The Bloomberg article is worth reading in its entirety.

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Barry Ritholtz Eviscerates the Big Lie

by Mike Kimel

Barry Ritholtz looks at the Big Lie.

The big lie of the financial crisis, of course, is that troubling technique used to try to change the narrative history and shift blame from the bad ideas and terrible policies that created it.

In particular, Barry is interested in this:

Take for example New York Mayor Michael Bloomberg’s statement that it was Congress that forced banks to make ill-advised loans to people who could not afford them and defaulted in large numbers. He and others claim that caused the crisis. Others have suggested these were to blame: the home mortgage interest deduction, the Community Reinvestment Act of 1977, the 1994 Housing and Urban Development memo, Fannie Mae and Freddie Mac, Rep. Barney Frank (D-Mass.) and homeownership targets set by both the Clinton and Bush administrations.

He then goes on to a very exhaustive look at the evidence. Read the whole thing at Barry’s place.

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Wall St Borrowed $1.2 Trillion from Fed…

Barry Ritholtz points us to how essential US government intervention was for the banking system and in particular existing banks and the management at The Big Picture. It has links worth pursuing as well.

I continue to be of the mind that the Wall Street Bailouts were misguided, and that a massive Swedish style reorg would have been the best thing for the nation and the economy in the long run. Both Uncle Sam and the Fed would have provided the broad based debtor in possession financing required, and the losses would have fallen where they belonged — on the Shareholders and Bond Holders — and not the taxpayers.

The latest evidence of this: Data obtained by Bloomberg News through Freedom of Information Act requests, followed by months of litigation, and eventually, an act of Congress. (Wall Street Aristocracy Got $1.2T in Loans)

Note these are not ideas come about with the benefit of hindsight, but what a small band of insightful people were saying at the time.

An honest broker of the situation would have:

1. Fire the senior management of the banks (see this)

2. Banned all lobbying activity as a condition of any aid (see this)

3. Forced a Swedish style prepackaged bankruptcy (see this and this)

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Spot Effing On, as The Mainstreamers Edge Leftward

We have just printed the eleventh (11th) straight week in which new jobless claims have exceeded 400,000 people. As Krugman notes, “The Fed predicts disastrously high unemployment as far as the eye can see(pdf) [a]nd, in response to this dire prospect, it declares its work done.”

So this it is almost palliative that Barry Ritholtz writes the Quote of the Day, or perhaps the Decade:

The sooner we recognize that the field of economics is a branch of Sociology and not Mathematics, the better off we will all be.

Anyone who has looked at the CF that Microeconomic doctrine has created over the past twenty years will not be surprised by Ritholtz’s conclusion. The question would almost be why he waited so long to say so explicitly.

Other signs that people are coming around to the positions taken at this blog:

  1. The gracious, even-tempered Mark Thoma has been driven to pointing out that the math, let alone the social issues, don’t work:

    I had hoped to see more acknowledgement that the current soft patch may turn out to be something more significant than a temporary aberration in the numbers, and some hint of willingness to ease further should those worries come true. But the Fed shows no such willingness, in fact as Neil Irwin notes, the “employ its policy tools as necessary to support the economic recovery” language is gone, and the main question at this point is when the Fed might begin tightening policy by reversing QE1 and QE2 rather than when they might ease further.

  2. Brad DeLong channels Bruce Webb or me in talking about Diane Lim Rogers:

    Get out of the defensive crouch, Diane. If you and your peers won’t stand up and say that every single Republican presidential candidate is talking hogwash and that every economist who wants high federal office in the next Republican administration is acting like a craven coward, then you are giving them every incentive to do so.

  3. The NYT—Gretchen Morgenson, of all people—notices that Executive Pay is not aligned with optimal company management, let alone shareholders:

    WHEN does big become excessive? If the question involves executive pay, the answer is “often.” …just how this paycheck stacks up against, say, a company’s earnings or stock market performance is rarely laid out.

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David Streitfeld Knows Better than This

The NYT moves deeply into delusion:

The rolling real estate crash that ravaged Florida and the Southwest is delivering a new wave of distress to communities once thought to be immune— economically diversified cities where the boom was relatively restrained.

In the last year, home prices in Seattle had a bigger decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix. [emphasis mine]

Putting it politely, that is h*rs*sh*t. Anyone who was paying attention in the Atlanta area—or who has been paying attention to Georgia Bank Failures—has described the Greater Metro Area’s housing prices (let alone Atlanta itself) as a bubble. (As I noted at the link above, one of our commenters, Nancy Ortiz, was all over this in June of 2009; and the old Business Week covered it in an article published in October of that year. Does the NYT believe that local banks fail for no reason? As Peter Carbonara wrote in the BusinessWeek piece:

One Material Loss Review released today, for example, describes the death throes of FirstCity Bank, which had $297 million in assets and was based in Stockbridge, Georgia, a town not far southeast of Atlanta. FirstCity, like many other banks in the metro Atlanta area, partook of the state’s late, lamented enormous real estate boom, making a large number of loans to local builders. When the boom turned into a crash in 2007, those loans turned bad. The bank failed on March 20. [emphasis mine]

Minneapolis is another clear case where the locals were talking about a bubble back in late 2006/early 2007. Commenter TrickStar was all over Minneapolis at Barry Ritholtz’s place it in November of 2008. (Indeed, by March of 2010, the S&P/Case-Shiller Index was claiming a “recovery” for Minneapolis [link is PDF]. Talk about “green shoots.”)

That same PDF&again, from 11 months ago, using January 2010 data—discusses Seattle, which had the fifth-largest drop in housing prices during 2009. And that was over a year ago. As the Seattle Bubble blog noted, things only got worse last year.

SEATTLE UPDATE: Even David Leonhardt piles on. Hint to the NYT: Institutional Memory is an Asset only when used. If you need someone to run your Knowledge Management division, give me a call and we’ll talk.

In short, anyone who was paying attention knew that all three cities were prime examples of housing bubbles. The idea that the NYT’s best economics writer doesn’t is frightening at best.

To riff on a phrase from Brad DeLong, Why Can’t We Have a Better-Informed Press Corps?

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The Meaning of "Monty Python and the Meaning of Life"

Robert Waldmann

Barry Ritholtz argues that the problem with mortgages was underwriting standards and not securitization. He appeals to the very great authority of Monty Python. Click the link.

Ritholtz seems not to be familiar with this new idea in economic theory called “Nash equilibrium”. Over -rated yes. Totally irrelevant not so much. One can not assume that underwriting standards are exogenous. If there had been no MBS, no firm would have underwritten those mortgages. It was exactly because it was possible to blend them, and then sell them to people who didn’t spin the mortgage tapes before buying, that the mortgages existed in the first place.

Let me work with his analogy. First, while I have great respect for the Monty Python team, few people have been killed by canned Salmon. Even blended into mousse, it kills fairly quickly and can be tracked back to the canner. The way bacteria work is that if you mix some contaminated stuff with other stuff you have trouble for sure. It doesn’t work that things seem fine until people notice.

At a way lower cultural level than Ritholtz I appeal to road runner cartoons. Wile E. Coyote runs along in mid air until he notices. Then he falls. As noted by everyone, this is the way financial markets really work. The non Monty Python quality humor is based on the fact that gravity doesn’t really work that way. Neither do bacteria. Analogies between rotten mortgages and rotten Salmon fail for this reason.

Notably, the ingredients in the Salmon mousse are few enough that the dead diners immediately know what went wrong when death points at the mousse. That’s not the way MBS work let alone CDOs of MBSs or CDOS of tranches of CDOS.

A better analogy would be making hamburger. Bits from hundreds of steers end up in the same package at the supermarket. If one bit has E. coli on it, you can get sick. If they tried to sell you that bit, you wouldn’t buy it because it would stink. However, mixed in with hundreds of uncontaminated bits of beef, it doesn’t stink.

Is there a hamburger problem? Yes there is. One is much more likely to get food poisoning from hamburger than from unprocessed meat. Is the solution special regulation of hamburger? It sure is.

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