Kevin Drum

The Investment Drought

| Tue Apr. 13, 2010 2:58 PM EDT

Via Tyler Cowen, a guy who goes by the handle "Phone Booth" offers this take on the global savings glut and the great financial meltdown:

It wasn't that the world was saving too much relative to the past and the uncertainties of the present. Instead, low long-term interest rates were caused by the lack of demand for savings. This lack of demand for capital is, of course explained by the lack of investment opportunities.

....The whole crisis makes perfect sense if you start with lack of high [return on equity] investment opportunities in the world as a whole, with local markets struggling to incorporate this information appropriately. To institutional investors, ranging from pension funds to insurance companies, fixed income investments appear disproportionately attractive in this environment, driving long-term interest rates low. Consequently, mortgage rates drop, making equity investment in housing attractive for homeowners....This temporarily cushions the blow to the economy of not having high ROE investment opportunities, by becoming the high ROE investment opportunity itself.

....[But these] investment opportunities turn out to have been illusory and cause significant losses for whoever in the supply chain is stuck with the excess inventory. The growth in supply of housing uncovers the illusion and the resulting price volatility causes a credit crisis and a severe economic downturn, as the economy faces both the temporary shock of price volatility and the long term shock of lack of high ROE investment opportunities.

And what explains the lack of high ROE investment opportunities in the first place? There are many places to look, but the biggest is the supply bottleneck in energy. While the growth in information technology has been impressive, as is the consequent potential for increase in productivity, none of this can increase return on capital against the backdrop of energy supply bottleneck. 

Years and years ago, this was the very first thing that got me worried about the U.S. economy. I hadn't even heard of the infamous savings glut at the time (it was before Ben Bernanke invented the idea, I think) but the flip side of a savings glut is an investment drought and that sure seemed to increasingly describe an ongoing phenomenon. Corporations were hoarding cash and buying back stock instead of making investments in the real world, and that was pretty worrisome. Sure, we were just coming off the dotcom boom and everyone was a little nervous, but during an economic expansion there ought to be plenty of good opportunities to expand business and attract new customers. So why weren't companies more bullish?

Like Tyler, I'm not sure that energy is the answer here, but then again, it's not a bad guess either. The steady rise in oil prices during the aughts, followed by the spike in 2007-08, probably deserves more blame for the financial crisis than it usually gets. But whatever the reason, certainly one of the reasons for the housing bubble was the simple fact that real-world investment opportunites in goods and service just didn't look very attractive. Figuring out why really ought to get more study than it has.

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Chart of the Day: Bankers Back in the Saddle

| Tue Apr. 13, 2010 1:57 PM EDT

This Bloomberg chart on financial industry profits prompts Paul Kedrosky to snark that it just goes to show that "even the worst bankers struggle to find ways to lose money when short rates are zero, the yield curve is steep, and credit is tight."

But I think that's mistaken. Wall Street is only full of bad bankers if you think the role of bankers is to provide efficient financial services to the rest of the economy. If you adopt the more correct attitude that the role of bankers is to make lots of money for bankers, then America has the best bankers in the world. And they're proving it yet again.

The $16 Billion Dots

| Tue Apr. 13, 2010 1:41 PM EDT

Felix Salmon picks up today on the computer security paper by Cormac Herley of Microsoft that I wrote about a few weeks ago, and after quoting Herley's estimate that one wasted minute per day among online users comes to $16 billion per year, says:

I think it's reasonable to assume that the idiotic practice of masking passwords by turning them into dots takes up a good minute of people's time each day, and saves much less than $16 billion a year if it saves anything at all.

That took me aback. I'd never even considered the thought that password masking might be a bad idea. Felix links to an Alertbox column by Jakob Nielsen which suggests that (a) password masking causes more errors and prompts users to choose simple passwords and (b) usually no one is looking over your shoulder anyway so it doesn't do any good. Maybe for banking sites it's OK, but we should skip it everywhere else.

I guess I'm not sure about this. The great divide in computing these days isn't between PC and Mac users (spare me, please), it's between the deskbound and the mobile. The problem is that password masking cuts both ways. I'm deskbound myself, which means that it really is true that no one is ever looking over my shoulder. On the other hand, it also largely means that password masking doesn't cause me any problems.1 Conversely, if I were mobile I might make more mistakes typing in my passwords, but then again, there's also a greater chance that someone really might be looking over my shoulder.

I guess my feeling is that password masking probably doesn't provide a ton of protection, but then again, I don't really believe it costs $16 billion a year either. Trying to do cost accounting on tiny snippets of personal time is a mug's game, and kind of a dumb one even if I've been known to do it myself from time to time.

But I dunno. Maybe password masking causes more problems than I think. What says the hive mind?

1Though in an office, even the deskbound ought to be careful. Coworkers are probably more likely to try and steal a password than some random guy in a bus station.

Subway Bombers vs. Airplane Bombers

| Tue Apr. 13, 2010 12:59 PM EDT

Ever since he pled guilty to terrorism charges a few weeks ago, would-be subway bomber Najibullah Zazi has been cooperating with authorities. The New York Daily News brings us up to speed:

Chilling new details about the foiled Al Qaeda plot to blow up the city's busiest subways have emerged as a fourth suspect was quietly arrested in Pakistan, the Daily News has learned.

The unidentified man, who helped plan the plot, is expected to be extradited to the U.S. to be tried in Brooklyn Federal Court with Adis Medunjanin and Zarein Ahmedzay of Flushing, Queens, sources said.

Am I missing something here? Because I don't remember Fox News putting Zazi on a 24/7 loop and insisting that trial in a civilian court was basically a surrender to al-Qaeda. The right wing world doesn't seem to be objecting to this latest development, either. Why? Is blowing up an airplane somehow different from blowing up a subway? Are civilian courts and Miranda rights OK if the terrorist plot is broken up before it can be carried out, but not after? Or what? I'm a little confused about the conservative position on this stuff. Help me out.

Justice for Little Guys

| Tue Apr. 13, 2010 12:11 PM EDT

Jonah Goldberg complains today about President Obama's standards for picking Supreme Court justices:

In his run for the presidency, Obama said in 2007, "We need somebody who's got the heart — the empathy — to recognize what it's like to be a young teenage mom. The empathy to understand what it's like to be poor or African American or gay or disabled or old — and that's the criteria by which I'll be selecting my judges."

....Last week, the president offered a more populist spin, saying he wants a nominee who "knows that in a democracy, powerful interests must not be allowed to drown out the voices of ordinary citizens." The Associated Press calls this a "fight-for-the-little-guy sensibility." According to Obama and countless other liberals, this sort of compassion in the law is "pragmatic" because it pays heed to the real world and real people as opposed to legalistic abstractions such as impartial justice.

....The empathy-for-the-little-guy standard is simply a Trojan horse for an approach just as abstract as any endorsed by the right. In fact, I would say it's more abstract because at least there's a text conservatives invoke — the Constitution — rather than the indefinable feeling of "empathy."

I'm not the biggest fan in the world of arguments about the genius of conservative "framing," but I have to say that this is one case in which their framing truly has a touch of it. Everyone with a pulse knows exactly who conservatives want running our courts: judges who are pro-business and oppose abortion. But even though this is so plain that it's not even controversial to say so, they'll never admit it. They just want whatever the founders wanted. Balls and strikes. Interpret the law, don't create it. Etc.

Which is genius, for sure. And if their version of originalism just happens to favor corporate interests and traditional values 90% of the time? Just a big 'ol coincidence, my friend. The text is the text.

It's a bald enough strategy that you really wouldn't think it had much chance of working outside the true believer base. After all, trying to divine the original intent of the founders is at least as difficult and as fraught with problems of interpretation as any other judicial philosophy. More so, I'd say, since the historical record is patchy and difficult, and trying to apply 18th century values to 21st century society is as thorny a problem as you could imagine. And yet, work it has. They've somehow convinced the chattering classes that judicial impartiality is a conservative value, the same way that they hijacked patriotism several decades ago and associated it with unswerving support for big military budgets and foreign wars.

But you know what? Sometimes impartial justice really is on the side of the little guy. At least half the time, you'd think. In fact, that's as good a yardstick as any: I'd be fine with a judge who, over the years, ruled against corporate interests half the time. Can conservatives say the same?

The Truth in Propaganda Act

| Tue Apr. 13, 2010 11:18 AM EDT

Barack Obama has apparently decided on a plan to fight back against the Citizens United decision that allows corporations a nearly unlimited ability to spend money in political campaigns:

The White House and leading Democrats in Congress are close to proposing legislation that would force private companies and groups to disclose their behind-the-scenes financial involvement in political campaigns and advertising, officials involved in the discussions said Monday. One provision would require the chief executive of any company or group that is the main backer of a campaign advertisement to personally appear in television and radio spots to acknowledge the sponsorship, the officials said.

Well, corporations can already spend unlimited sums on initiative campaigns in California, and I wouldn't mind seeing a law like this in place here. Sort of a corporate version of the "I approve this message" that we require from actual human candidates.

My current bête noire is Proposition 16, a slimy little initiative called the "Taxpayers Right to Vote Act." (Great name, isn't it?) It's the brainchild of Pacific Gas & Electric, which is outraged by the effrontery of public utilities that compete with it and wants to require a two-thirds vote before any public utility would be allowed to launch or expand its public power service. You probably couldn't get a two-thirds vote in most places to pass a Mothers Day resolution, so Prop 16 effectively shuts down PG&E's competitors completely.

Their current ad is narrated by the most reasonable looking soccer mom you've ever laid eyes on, and it's in heavy rotation financed by PG&E's millions. The opposition, ironically, isn't allowed to really oppose the measure at all since public utilities aren't allowed to spend public money on political campaigns. Sweet, isn't it? There's nothing much to be done about that, but it would be nice to even the scales just a wee bit by requiring Peter Darbee to append his corporate mug to the end of every one of those ads and say "I'm the chairman of PG&E and I approve this message." People ought to know just whose pocketbook is being lined here, after all.

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Quote of the Day: Election Time in Britain

| Mon Apr. 12, 2010 8:04 PM EDT

From the Guardian's Jonathan Glancey, who concludes that it's hard not to get the feeling that "both parties are sending themselves up" after seeing the manifestos released ahead of Britain's May 6 election:

The Tories' starchy blue "Invitation to Join the Government of Britain" reminds me of a book of trusty, well-established hymns. One can easily imagine I Vow to Thee my Country alongside Blake's Jerusalem....Labour's image of a heroic Soviet-style family, circa 1950, seems to be an in-house joke by someone who enjoys Private Eye's lampoon of Gordon Brown as the Supreme Leader of a half-cock, Soviet-style state.

I don't have a huge dog in this fight, but I will say this: David Cameron's pledge to offer "California-style referendums on any local issue if residents can win the support of 5% of the population" is the most willfully wrongheaded idea I've heard in a long time. I mean, have you checked out the Golden State lately, David? "California-style referendums" have not exactly done California any favors.

When Did the Great Recession End?

| Mon Apr. 12, 2010 7:06 PM EDT

Is the Great Recession over? NBER is the official dater of recessions, and last week they declined to say that this one was officially done. Bruce Bartlett comments:

I'm rather astounded at all the ill-informed commentary I have read today in normally responsible places such as the Financial Times to the effect that the National Bureau of Economic Research is not sure that the recession is over. That is not at all the case. I am 100% certain that every member of the Business Cycle Dating Committee knows perfectly well that the recession ended some time ago. What the committee is unsure about is precisely when the recession ended.

By coincidence, I happened be over at the NBER site yesterday because I was wondering how long it usually took to officially call the end of a recession, and the answer is right on the main business cycle dating page for the last four downturns:

  • The November 2001 trough was announced July 17, 2003.
  • The March 1991 trough was announced December 22, 1992.
  • The November 1982 trough was announced July 8, 1983.
  • The July 1980 trough was announced July 8, 1981.

So that's 20 months, 22 months, 8 months, and 13 months. And since the current recession is sort of broadly U-shaped, not V-shaped, it would hardly be surprising if the waiting time for NBER's official call is toward the high end of this range. In any case, if the recession did officially end in mid-2009, as most analysts think, that was only 11 months ago and it would be perfectly normal for NBER to take another few months to get its numerical ducks in a row regardless of its shape. More here from Robert Gordon, a member of the NBER recession dating committee.

Taming the Derivatives Bankers

| Mon Apr. 12, 2010 2:10 PM EDT

If you're a big bank, how do you make money? Consumer deposits? That was great back in the 50s, not so great now. Stock broking? It was a money machine until 1975, now it's for chumps. Bond underwriting? Bor-r-r-r-ing.

Basically, anything that's liquid and transparent and openly traded is hard to make a buck on. What you need are things that are opaque and hard for customers to understand. That's why, for example, credit cards with lots of hidden charges are more profitable than credit cards that just assess a simple annual fee. And it's why over-the-counter credit derivatives became so lucrative in the aughts. Each one is custom made, their structure is rocket science complicated, and instead of being traded on an exchange they're bought and sold directly by dealer-banks that can charge fat fees because it's next to impossible for customers to know if they're being fleeced or not. And because OTC credit derivatives tend to be very large securities, it makes sense for people to want to deal only with very large banks that are likely to make good in case of a big payout. Bob Litan of Brookings explains how this evolved into an oligopoly which is going to be very resistant to reform:

There are parties with a significant presence in derivatives markets — indeed, some would say a dominant presence — for whom central clearing, and certainly exchange trading and greater price transparency, is not in their economic interest. Here, of course, I refer to the major derivatives dealers — the top 5 dealer-banks that control virtually all of the dealer-to-dealer trades in CDS.

....Market-makers make the most profit, however, as long as they can operate as much in the dark as is possible — so that customers don’t know the true going prices, only the dealers do. This opacity allows the dealers to keep spreads high....Central clearing and other steps to which it could and should lead — exchange trading and greater price transparency — would threaten these revenues, potentially in a big way, for several reasons.

[Reasons given, and potential outcomes listed.]

....All of these outcomes are good for investors, the buy-side and end-users of derivatives, but not necessarily for dealers as a group if the buy-side and end-users are able to directly access exchanges and clearinghouses....It is understandable, of course, why the main dealer-banks would not want such a world to come about, and thus individually each of them has reasons to slow or resist change, their commitments to clear virtually all new “eligible” derivatives notwithstanding. For reasons spelled out earlier, those commitments fall far short of the kind of cleared, exchange traded, and transparent environment that would be in the best interest of the financial system and the economy as a whole.

Long story short, Litan basically says that even if we pass regulatory reform, the dealer-banks that currently control the market in OTC derivatives have a ton of incentive to slow-walk anything that creates genuine transparency. This all comes via Mike Konczal, who adds this:

If you thought we’d at least get our arms around credit default swap reform from a financial reform bill, you should read this report from Litan as a giant warning flag. In case you weren’t sure if you’ve heard anyone directly lay out the case on how the market and political concentration in the United States banking sector hurts consumers and increases systemic risk through both political pressures and anticompetitive levels of control of the institutions of the market, now you have. It’s not Matt Taibbi, but it’s much further away from a “everything is actually fine and the Treasury is in control of reform” reassurance. Which should scare you, and give you yet another good reason for size caps for the major banks.

Mike suggests that this is a good reason to take more seriously the idea of breaking up big banks: if there were 20 or 30 dealer-banks instead of five, they just wouldn't have the same power to set prices and maintain opacity in the OTC derivatives market. True enough. At the same time, it's also a good argument for passing blunt reforms. Nothing is perfect, but blunt rules about equity trading have worked well for decades even though there are loads of incentives to game the system. OTC derivatives obviously can't be standardized to the same degree, but blunt rules could still take us a long way in that direction.

The Chinese Housing Bubble

| Mon Apr. 12, 2010 1:02 PM EDT

Over in Beijing, Bertel Schmitt has dinner with an American insurance company CFO and the Chinese head of a Chinese/American bank. He reports back:

When the discussion came to the Chinese real estate bubble, my Chinese banker friend emphatically acknowledged that China is in a huge one. Mostly in the tier one cities, but getting into the tier 2 cities also. He said that it is an absolute insanity. People buy homes and apartments, and keep them empty. Vacancy rates in tier one cities are sometimes higher than 30 percent. About 60 skyscrapers in Beijing are vacant. He congratulated me on my choice of renting, and suggested I should move, because rents are actually coming down. Caused by the oversupply of unsold properties, held for speculative purposes.

So what happens when a real estate bubble bursts in a country with a semi-state-controlled economy like China? Beats me. But it can't be good no matter what kind of country China is, can it?