Kevin Drum - March 2012

Stock Exchange Trades Its Own Shares, Plunges Into the Abyss

| Fri Mar. 23, 2012 11:36 PM EDT

BATS, based in Kansas City, is the third-largest stock exchange in the country. This morning they went public, offering shares in BATS to the public for the first time. Naturally, shares in BATS were traded on BATS itself.

So what happened? At 10:45 AM trading opened and was halted immediately because of a software glitch. At 11:14:18 trading resumed. At 11:14:19:850 — that is, less than two seconds later — the stock had crashed to one-hundredth of a cent. That is not a typo. Via Zero Hedge, here's a chart showing the first two seconds of trading:

From the Wall Street Journal's report:

The day's events may rekindle questions about the reliability of the stock-market's plumbing, questions that came into sharp focus almost two years ago when the broader market plunged hundreds of points within minutes in what came to be known as the "flash crash."

....BATS, which stands for Better Alternative Trading System, was launched in 2005 by Dave Cummings, a pioneer in high-frequency trading, to compete with more traditional markets such as the NYSE and Nasdaq. It was designed for speed and gained favor with sophisticated trading firms, in part because it rarely had technical glitches.

Take your pick: (a) This is just a software glitch. It could happen to anyone. (b) This is what happens when the financial market is controlled by computer algorithms, not human beings. It may be "just a glitch," but it's a telling one. Next time it could end up being more than just an embarrassing moment.

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Friday Cat Blogging - 23 March 2012

| Fri Mar. 23, 2012 1:41 PM EDT

This week's feline melodrama: Inkblot decided yesterday morning that Domino had possession of the only place in the entire backyard that was suitable for a post-breakfast snooze. THE. ONLY. PLACE. Much hissing ensued and Domino ceded the territory. Inkblot moved in, sniffed the flowers with a smug look on his face, then wandered off after a minute or so. Domino took up residence a few feet away and pretended to be a rabbit. The End.

(For now.)

Feds Sue AT&T for Aiding and Abetting Nigerian Scammers

| Fri Mar. 23, 2012 1:30 PM EDT

From the National Law Journal:

AT&T Corp. is accused of wrongly collecting millions of dollars from a government fund intended to bankroll telephone service for hearing and speech-impaired people, but was instead overwhelmingly used by Nigerian scammers, the Department of Justice alleged in a False Claims Act suit announced March 22.

Say what? Did AT&T get scammed itself? If DOJ — and the whistleblower who exposed AT&T's involvement — are to be believed, no. They were making lots of money from a program that was designed to help the hearing-impaired make phone calls by typing text that was then relayed as voice communication by an AT&T operator. But it turns out that because the service is anonymous, it became a favorite for Nigerian scammers too. What's more, AT&T knew it:

On April 6, 2010, an AT&T Inc. manager pondered a drop in volume in the company's government-subsidized service for hearing-impaired callers. Reassuring a colleague in an email, the manager said she was "not ready to throw up flags" because "it was Easter Monday yesterday, which is celebrated in Nigeria."

....The government alleges that scammers operating out of Nigeria used the service to defraud U.S. merchants by ordering goods with stolen credit cards and counterfeit checks. In essence, the government alleges, AT&T's operators became mouthpieces for the scam artists.

AT&T got reimbursed $1.30 per minute for these calls, and the government says as many as 95% of them originated with scammers outside the U.S. A new registration program was put in place in 2008, but DOJ says AT&T did its best to undermine it. Bloomberg summarizes:

“We are expecting a serious decline in [internet relay] traffic because fraud will go to zero (at least temporarily) and we haven’t registered nearly enough customers to pick up the slack,” Burt Bossi, a manager of AT&T’s technical team, said to other managers on Sept. 22, 2009, according to the complaint.

The following month, AT&T changed its registration system from a postcard one to an Internet one where users’ addresses are compared to those on a database called DASH to determine whether the address provided exists. Registrations immediately increased to 40 to 100 a day, the government alleges.

By the end of October 2009, AT&T managers were aware that credit card scams were being conducted by new users, the lawsuit alleges. “This is a consequence of easing registration restrictions,” Dave Claus, a technical manager, said in an e- mail to colleagues cited in the complaint.

Needless to say, AT&T says it did nothing wrong. I expect a settlement soon.

Paul Ryan's 2012 Budget Slightly Less Appalling Toward the Poor

| Fri Mar. 23, 2012 12:52 PM EDT

Sorry. Turns out I was totally wrong about Paul Ryan's budget. It really is different from last year's.

As you can see from the chart on the right, his 2012 budget gets 62% of its cuts from programs intended to help those with low-incomes. According to CBPP, this includes $2.4 trillion in reductions from Medicaid and other health care program; $134 billion in cuts to SNAP (food stamps); at least $463 billion in cuts to mandatory programs serving low-income Americans; and at least $291 billion in cuts in low-income discretionary programs.

But here's the thing: last year's Ryan budget got 65% of its cuts from programs for the poor. Progress! Who says Paul Ryan doesn't care about America's non-rich?

Paul Krugman is Uncharacteristically Optimistic Today

| Fri Mar. 23, 2012 10:53 AM EDT

Paul Krugman says he misjudged the way Paul Ryan's latest budget proposal would be received:

Where I was at least somewhat wrong was in my expectations about how the Very Serious People would treat his latest outing. I thought they would still treat him as a heroic deficit hawk, never mind the fact that his plan is really about transferring money from the poor to the rich, with no credible deficit reduction at all. That, after all, is what they did last year — he even received an award for fiscal responsibility.

But I’m not seeing that this time. Overall, the response seems muted, maybe out of embarrassment. But leaving aside the predictable right-wing cheerleaders, it looks as if the emperor’s nakedness is now common knowledge.

This is an uncharacteristically optimistic view. I don't think the reaction to Ryan was muted because everyone suddenly realized he was a fraud. Reaction was muted because this year's Ryan budget is pretty much the same as last year's Ryan budget. That made it boring, and that's the punditocracy's greatest sin. News outlets don't cover boring stuff. Beyond that, though, I see no reason to think that general attitudes toward Ryan have changed. Liberals still think he's a charlatan; conservatives still think he's the second coming of Ronald Reagan; and the Beltway VSPs still think he's a VSP.

Ironically, there really was one part of Ryan's plan that was different this year: his approach to Medicare reform. But virtually no one outside the wonkosphere seems to have noticed. I guess that's the price of being a bore.

California Cracking Down on Latest Health Insurance Scam

| Fri Mar. 23, 2012 10:30 AM EDT

As you may recall, the health insurance market doesn't work well if companies are allowed to cherry pick their customers. If that's allowed, companies will all chase after the youngest, healthiest customers, leaving the older ones high and dry — and there are plenty of ways of doing this. It's not a matter of only signing up companies that can prove their workforce has an average age of 28; it's a matter of targeting certain kinds of companies, or shaping your plans so they appeal to a younger cohort. Apparently the latest version of this scam involves selling group health policies to small companies that are supposedly self-insured:

Some insurers are chasing after much smaller customers with new plans designed to limit employer payouts for big claims using what's called stop-loss policies. This guarantees that businesses won't be responsible for anything over a certain amount per employee, perhaps as low as $10,000 or $20,000, with the rest paid by an insurer. Regulators and health-policy experts say this arrangement undercuts the notion of self-insurance since employers aren't bearing much of the risk, and it allows companies to circumvent some state insurance rules.

"This is not real self-insurance. This is clearly a sham," said Mark Hall, a professor of law and public health at Wake Forest University who has studied the small-business insurance market. "Regulators have good reason to be concerned about the potential harm to the market."

Self-insurance is attractive for many reasons, particularly the prospect of lower costs. It's exempt from state insurance regulations such as mandated benefits, granting employers the flexibility to design their own benefit package and the opportunity to reap some of the savings from employee wellness programs. A federal law, the Employee Retirement Income Security Act, or ERISA, governs self-funded plans. Some aspects of the Affordable Care Act do apply to self-insurance, such as the elimination of caps on lifetime benefits and some preventive care at no cost.

Yeah, it's a scam. Self-insurance is for companies big enough that they can count on losses evening out. Small companies can't do it because a single million-dollar cancer could wipe them out.

So what's the answer? Easy! Sell small companies on the idea of "self insuring," but only up to $10,000 per employee. After that, the insurance company pays the bill. The advantage to employers is that they get to evade the usual insurance regulations. The advantage to insurers is that small companies tend to be young companies.

Needless to say, an insurance policy with a $10,000 deductible is still an insurance policy. Likewise, these shiny new self-insurance plans are still insurance policies. They look, walk, and quack like ducks. They're ducks. An HHS spokesman says they will "provide more clarity" about their legality soon. Hopefully that clarity will be an outright ban.

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Quote of the Day: Rick Santorum Annoys the Powers-That-Be

| Fri Mar. 23, 2012 9:43 AM EDT

From Rick Santorum, telling a campaign crowd that a vote for Mitt Romney is no better than a vote for Barack Obama:

If you’re going to be a little different, we might as well stay with what we have instead of taking a risk with what may be the Etch A Sketch candidate of the future.

Did Santorum really mean this? Or did he mean that voters will perceive Romney as an Obama-lite? Given the context, I suspect the former, but it doesn't really matter. What matters, yet again, is that Santorum is taking a beating from conservatives over this remark. The same people who mostly gave Eric Fehrnstrom a pass for the original Etch A Sketch comment are now going after Santorum for taking advantage of it. The clear message is: we're now in general election mode. No serious criticism of Romney from the right is allowed. It's over.

See also the sort-of-endorsement of Romney from conservative icon Jim DeMint and the tepid-but-real endorsement from Jeb Bush. The establishment is speaking. It's over.

Which is great! Unlike all those mythical campaign reporters who are supposedly so riveted by this year's Republican spectacle that they want it to go on forever — who are these people, anyway? — I've had way more than enough. It's over, and I'm glad it's over. Maybe we can actually talk about something other than candidate gaffes and other assorted campaign atrocities for a few months. Please?

From the Annals of Bad Political Spin

| Thu Mar. 22, 2012 5:18 PM EDT

Mitt Romney aide Eric Fehrnstrom is getting knocked around pretty badly for his ill-conceived Etch A Sketch comment. And it was pretty ill-conceived! But if you want an example of truly wretched political spinning, check out Meghan Snyder, press secretary for Rep. Jim Jordan of the Republican Study Group. Yesterday, after about the millionth congressional hearing on Solyndra, Jordan said, "What I hope happens is we stop doing these kind of things ... this whole cronyism approach to the marketplace. Ultimately, we'll stop it on Election Day, hopefully. And bringing attention to these things helps the voters and citizens of the country make the kind of decision that I hope helps them as they evaluate who they are going to vote for in November."

Steve Benen pounced: "In other words, Republicans haven't uncovered a 'scandal'; they've uncovered a game to play. For those who figured out months ago that this was a manufactured outrage, Jim Jordan just confirmed it."

I was all ready to think that Steve was being unfair. What Jordan meant was that the "whole cronyism approach to the marketplace" would end on election day because Republicans would win and put an end to it. Nothing wrong with that! But then I clicked the link and read Meghan Snyder's attempt to put her boss's remarks into context:

If you step back a little bit and look at the quote, he's discussing how these Oversight investigations are bringing to light things like, especially in this one, the cronyism of the market place. How he intended it and I believe maybe if you flip the coin you can kind of see, is he's explaining the purpose of Oversight Committee, which is bringing this to light for Americans. A lot of these people vote, and therein maybe lies the mix-up of how it was perceived by your story and maybe another one.

We're just saying this is our purpose and voters see it. Maybe they'll put an end to it on Election Day. But to say that elections drive the Oversight Committee, we believe is incorrect. It's the purpose of the Oversight Committee to conduct these investigations.

Has Snyder been taking lessons from Sarah Palin? Holy cow.

Chevrolet Desperately Wants You to Think They Get It

| Thu Mar. 22, 2012 5:03 PM EDT

The New York Times reports that young people don't really lust after cars anymore. So Chevrolet has hired MTV Scratch, a consulting subsidiary of Viacom, that helps companies connect with kids:

The five-year strategic vision that Scratch has developed for Chevrolet, kept quiet until now, stretches beyond marketing to a rethinking of the company’s corporate culture. The strategy is to infuse General Motors with the same insights that made MTV reality shows like “Jersey Shore” and “Teen Mom” breakout hits.

OK. But in the entire story, this is the only concrete example of what MTV Scratch has brought to the table:

Last summer, Mr. Martin and his team temporarily transformed part of the G.M. lobby into a loftlike space reminiscent of a coffee shop in Austin or Seattle, with graffiti on the walls and skateboards and throw pillows scattered around.

....On a recent Tuesday morning...a couple of car executives huddled around a “persona board” in the color and trim laboratory. They studied a collage loaded with images of hip products like headphones designed by Dr. Dre, a tablet computer and a chunky watch. The board inspired new Chevrolet colors, like “techno pink,” “lemonade” and “denim,” aimed at “a 23-year-old who shops at H&M and Target and listens to Wale with Beats headphones,” said Rebecca Waldmeir, a color and trim designer for Chevrolet. This rainbow of youthful hues will be available on the Spark this summer.

In fairness, the story does mention in passing possible changes to dashboard technology (you need MTV Scratch for that?) and dealership structure (good luck!). But it's all pretty hazy except for the new colors. I dunno. I'm 53 years old, and even I'm not feeling the hipness. More like the stink of fear.

Equation of the Day: Spend Money Now to Reduce Deficits in the Future

| Thu Mar. 22, 2012 2:07 PM EDT

From Brad DeLong and Larry Summers in "Fiscal Policy in a Depressed Economy":

Even without hysteresis effects—even with η = 0—expansionary fiscal policy still might be a good idea in a depressed economy. With η = 0, (9) becomes:

(10) ΔV = [μ - ξ(1 - μτ)]ΔG

For a multiplier μ = 1, then expansionary fiscal policy is a good idea unless ξ ≥ 1.5, unless raising $1.00 in extra tax revenue reduces incomes by more than $1.50.

In English, they're asking whether running a big deficit is good not just for the economy today, but also for the economy in the future. The usual view is that it's not: stimulus might get you back to trendline growth faster, but that's all. DeLong and Summers, however, suggest that staying in a recession too long can have permanent effects on the long-term trendline thanks to "the shadow cast by the downturn through discouraged workers, lost skills, broken organizations, and missing investment on future productivity." If so, then a stimulus that gets us out of a recession faster might improve long-term growth and therefore pay for itself.

But it all depends on the famous Keynesian multiplier, which tells us whether a dollar of government spending produces more than a dollar of total spending in the national economy. In normal times, they say, government spending has no net effect. The multiplier is usually around zero because the Fed will push monetary policy in a tighter direction if it sees the government goosing the economy too hard. But these aren't normal times. The Fed has made it clear that monetary policy will stay loose for at least the next couple of years. There will be no countervailing action, and the Keynesian multiplier won't be zero. It will be perhaps 1.0, or more pessimistically, 0.5.

If the multiplier is 1.0, "The long-run Treasury borrowing rate needs to be above [] 9.5%/year in nominal terms for fiscal expansion to be a bad deal." And even if the multiplier is only 0.5, treasury rates would need to be above 5.75% for deficit spending to be a bad deal. Right now, of course, treasury rates are far lower than either of these numbers, which means that federal deficit spending is self-financing. "There are no costs. No future tax increases are needed to amortize the extra debt, because economic growth does it on its own." Put another way: "Expansionary fiscal policy passes its benefit-cost test as long as raising $1.00 in extra [future] tax revenue reduces incomes by less than $10.00." And even the most rabid supply-sider doesn't think that raising taxes has an effect anywhere near that big.

In fact — and this is equation 10 above — even if you assume the multiplier is zero, additional spending is a good idea unless $1 in future taxes reduces incomes by more than $1.50. This is highly unlikely. So spending money now is a good deal for both the present economy and for the trajectory of the future economy:

How could this argument go wrong?

The fear is that expansionary fiscal policy will lead to a collapse in confidence in the government and a spiking of interest and inflation rates to previously-unseen values: that larger deficits this year will cause Alfred Marshall’s Confidence Fairy to flee and the Bond Market Vigilantes to arrive.

Since austerity is more likely to erode the government's fiscal room to maneuver than temporary expansion, this seems backward. If the logic of this argument is correct, then it is a failure to engage in expansionary fiscal policy right now—a failure to speed recovery and so reduce the long-term shadow cast on future productivity by the downturn—that is the real threat to long-run fiscal stability.

I'm left with only one question: how much spending? Surely the multiplier isn't a constant, but declines as spending increases. So where does it cross the line into being counterproductive? What's the point at which current-year spending starts to increase the long-term deficit instead of reducing it?