Germany on the Couch

What accounts for the German attitude toward finance? A few months ago, Michael Lewis explained their weakness for buying up toxic assets in a long article that compared those toxic assets to a shit sandwich and suggested that Germans snapped them up because of their longstanding fascination with shit and excretion. Seriously. But what about Germany's equally longstanding and uncompromising angst over debt? That's all down to Weimar-era hyperinflation, right? Not so, says John Plender:

The fear of currency debasement was entrenched long before the 20th century. Frederick the Great in the Seven Years War debauched the currency several times to fund the fighting. Note, too, that Goethe’s Faust Part II brilliantly describes the perils of inflation. Mephistopheles urges the emperor to use undiscovered gold beneath his lands as putative collateral for promissory notes to pay the army. When the emperor and his court find they can print money without restraint, their wild spending leads to an inflationary spiral and civil chaos.

Poor Germany! First they're slaves of excrement and now they're slaves of Faust. I wonder if anyone will ever bother taking the time to figure out what really motivates German attitudes toward financial probity?

In the 19th century, the theory of nullification, and the crisis it provoked, was all about states' rights. Nullification advocates argued that the constitution was a compact between sovereign states, and therefore states could choose to ignore federal laws that they considered unconstitutional.

The Civil War largely put an end to this clash, but in the 21st century there's a new theory of nullification. This one, though, isn't about a conflict between states and the federal government. It's about a conflict within the federal government. There isn't yet any modern-day John Calhoun to articulate this new theory of nullification in detail, but the nickel version is pretty simple: it says that a single senator can nullify a duly passed statute of the United States.

In one sense, this is just the latest front in the Republican war against executive branch nominees of the Obama administration. But until now, that war has been merely an escalation: more nominees are being filibustered than ever before, creating logjams in the federal court system and a shortage of leadership in the executive branch. It's a big problem, but nothing has actually been shut down because of it.

That's now changing. Republicans are refusing to allow votes on President Obama's nominee to head the new Consumer Financial Protection Bureau and on his nominees to fill vacancies on the National Labor Relations Board. In both cases, the Republican refusal is explicity aimed at shutting down these agencies. In the case of the CFPB, it's because the law that created it gives certain powers to its director, and without a director those powers can't be exercised. In the case of the NLRB, it's because they can't function at all unless a minimum of three out of five seats are filled. When Craig Becker, already a recess appointment because of a  Republican filibuster last year, finishes his term at the end of 2011, only two seats will remain filled and the NLRB will grind to a halt.

Republicans make no bones about why they're doing this. They opposed the CFPB from the start, and they're now using the filibuster as a way of unilaterally preventing it from operating even though it was lawfully created by a vote of Congress and signed into law by the president. Likewise, they're afraid the NLRB is about to make some rulings they dislike, so they're using the filibuster as a way of shutting it down by denying it a quorum. Since, in practice, a single senator can place a hold on a nominee, this means that a single senator is now able to shut down an entire agency of the federal government simply out of dislike for what it's doing.

President Obama's options are limited. Republicans are keeping the Senate technically in session by having a few senators meet for a few minutes every couple of days, a ploy that prevents Obama from making recess appointments. So Obama has only a few choices. He can make a recess appointment anyway, arguing that these senate "sessions" are shams, and then fight it out in court. Or, as Theodore Roosevelt did in 1903, he could make a series of recess appointments in the minutes or seconds between adjournment of the current session and the opening of a new one on January 3rd.

Is Obama likely to do either of these things? Pundits and bloggers love to chew over these kinds of unconventional possibilities, but Obama himself has shown little appetite for them. There are probably two reasons for this. First, he's afraid that Republicans would become even more obstructionist than ever if he went down this road. Second, he's unsure how the public would respond to this kind of hardball. The former has probably become less salient over time, given that there's not an awful lot more obstructionist that Republicans can become at this point. But at the same time, the latter has become more salient because there's an election coming up. So although the liberal base would love to see Obama show more spine on the appointment front, he probably won't. Obama has consistently ignored his base in favor of the independents he needs to win reelection, and he's consistently demonstrated that he thinks independents are put off by partisan confrontation.

But if that's the case, it's likely that our modern-day nullifiers will win by default. John Calhoun would be proud.

From Amy Orr in the Wall Street Journal:

Much has been made about hedge funds’ failure to keep up with the major stock market benchmarks this year.

Wait. Haven't I heard this story before? Oh right:

But 2011 is merely the latest disappointment in a string of misses that stretches back nine years, according to one analysis of the hedge fund industry.

Money invested in hedge funds since 2003 would have generated a return of 18% through November, according to data compiled by Hedge Fund Research. That puts it far behind the Standard & Poor’s 500-stock index, which has generated returns of 29% over that same period, once dividends are factored in, according to Simon Lack of SL Advisors. The hedge fund underperformance is even starker when placed next to a small basket of investment grade corporate bonds, as measured by the Dow Jones Corporate Bond Index. That benchmark has gained 77% since 2003. Factor in hedge fund managers’ customary 2% management fee and a 20% cut in profits, and the gap widens even more.

....For those who really want to invest with hedge funds, his advice is simple: Ask managers to cut fees. “Fees are at least twice as high as they should be,” Mr. Lack said. “If they all just cut fees by 50%, the world will keep turning but it will give investors a fairer share of profits.”

Measuring hedge fund performance is tricky, since most of them don't just report their performance in nicely printed four-color reports the way regulated mutual funds do. And obviously there are some hedge funds that have consistently delivered outsized returns.

But most of them don't, as a steady stream of research reports has made obvious for years. And yet, rich people with lots of money have continued to eagerly shovel their money into these funds, most of which have mediocre returns and all of which have astronomical management fees.

Why? Obviously it's a great racket for hedge fund managers, who get paid enormous fees and benefit from the carried interest loophole, which allows them to pay taxes on their earnings at low capital gains rates even though they've invested no money of their own and their fees are "capital gains" only because a benevolent Congress has deemed it so. Conversely, for hedge fund customers, the whole enterprise seems to be little more than a fancy way to feel sophisticated and plugged-in while lighting their money on fire.

The whole thing is just a gigantic mystery. Either (a) hedge funds actually do better than outside researchers think, or (b) rich investors are really, really stupid. Is there an option C?

All the cool kids are doing two things at the end of the year. The first is a top ten list of most popular posts. I managed to figure out how to find this information from our Google Analytics account, and I'm so proud of myself that I'm going to share the results. Here are my highest traffic posts of 2011:

Of course, this is all a bit random since a high-traffic post is usually just a marker that the MoJo powers-that-be highlighted it or that some other high-traffic blog happened to link to it. Unfortunately, my Google Analytics skillz are just barely good enough to generate this list, not good enough to figure out who my top referrers are. Maybe next year.

The second thing that seems to be the rage this year is a review of the past year's posts to highlight my biggest mistakes. Unfortunately, my memory is nowhere near good enough to do this without help, and the Mother Jones archives aren't set up to allow quick browsing of past posts. So this one is technologically out of reach for the moment. Feel free to nominate my worst boners in comments, though.

And now, just because this was so much fun, here are the next ten highest traffic posts of the year. Enjoy.

Altogether, this is a pretty wide ranging bunch of favorites. But if you're looking for posts about the euromess, I'm afraid none of them made the top 20. Just not a very popular topic, apparently, and one where you really have to read lots of posts to get a good picture of what's going on anyway. But for what it's worth, here are the top two:

The New Republic has a roundtable today on the most overlooked stories of 2011, and most of them are on the same dreary topics that get overlooked every year: Iraq, immigration, Turkey, the economy, etc. etc. Yawn. But John Judis nails the real winner:

John Judis: The Subversion of the Do Not Call Registry

The great under- or, better, un-covered story of the year: Cardholder Services and the Do Not Call Registry. You don’t know what I’m talking about? That’s because you don’t work at home. George W. Bush’s administration invaded Iraq and let Bernie Madoff run wild; but to its credit, it established the Do Not Call Registry to block telemarketers from flooding our telephones with unwanted offers. After I registered my phone number on the Federal Trade Commission’s web site in 2004, the phone calls virtually stopped.

But guess what? Under the Obama administration, which claims to understand the power and wisdom of government regulation, they’ve begun again. I get seven or eight a day now (mostly I don’t answer them), including to my cell phone, where I get charged for them. Many of them have been from an outfit called “Cardholder Services.” And it’s not just me. Google “cardholder services” and you’ll find a plethora of complaints. I have already filed complaints with the FTC twice this year, and the second time I asked for an acknowledgement. But I never heard back, and the phone calls continue. A little while ago, I got a call on my cellphone from a number in Salem, Oregon. 503-902-8252. Complaints about this number are all over the web. So the Obama administration has not followed through on the one thing that the Bush administration did right.

I get these calls too, but luckily I have a solution! Remember a couple of years ago when you used to get three or four robocalls a day offering you a chance to extend your auto warranty? It was pretty annoying. But the FTC finally put these scammers out of business. I'll let the Wall Street Journal explain how it happened:

The Federal Trade Commission filed complaints on Thursday against two companies that were behind an automated telemarketing campaign that enraged Senator Charles E. Schumer and, authorities say, deceived thousands of people across the country.

Mr. Schumer, Democrat of New York, was in a meeting on Capitol Hill last week when he picked up his cellphone, triggering a phony, prerecorded sales pitch, ostensibly for an extended vehicle warranty.

Irate, Mr. Schumer became one of an estimated 30,000 Americans to make complaints about the robocalls with consumer protection authorities. He held a press conference to rail against the “robo-dialed harassment.”

Did you get that? 30,000 Americans had already complained about these calls and the FTC did bupkis. They obviously Do Not Care about ordinary non-powerful Americans like you and me and 29,998 others.

But then Chuck Schumer got one call on his cell phone, called a press conference, and probably threatened the FTC with complete defunding if they didn't shut down the bastards tomorrow. And guess what? The FTC shut the bastards down.

The moral of the story here is that the FTC may not care about us ordinary schlubs, but they do care about pissed-off senators. So I recommend that Judis make a recording of the Cardholder Services robocall, get the private cell phone number of some senator (he must have contacts that can help him with this), and then call the senator and play back the call. Voila! A high-level complaint will be registered from one of the princes of Washington, and the FTC will spring into action.

You may thank me later.

There are some slight spoilers here, so don't read on if you haven't seen Hugo and want to remain surprised. But here is Jonah Goldberg's assessment:

The film begins magically and you can tell it is a true labor of love. The whole thing is beautiful. The child actors are excellent. Sasha Baron Cohen flirts with greatness. But for all the loving detail and the directorial confidence, the whole thing strikes me as . . . self-indulgent.

I never read the book (The Invention of Hugo Cabret), so maybe the fault lies in the material itself. But I doubt it. The movie begins wonderfully, following young Hugo as he lives and works in a French train station (Gare Montparnasse). It teases — one could even say seduces — the audience into thinking we’re about to be swept away into a magical tale akin to the Lion, the Witch and the Wardrobe (the book, not the movie). Instead, it becomes an at times didactic treatise on the wonders of film and, yes, the burning need for film preservation. There’s no real magic, just fairly heavy-handed allusions to the magic of cinema. It’s all very meta if you ask me.

Since Jonah and I disagree about nearly everything else, I suppose it's appropriate that I had almost precisely the opposite reaction to Hugo. The first half of the film disappointed me: it rambled tediously, provided no real sense of why I should care about Hugo or anyone else, and the narrative was driven by the most ridiculous kind of coincidence mongering. And Sasha Baron Cohen? I thought he came very close to ruining the film entirely.

But in the second half, when the coincidences are over and the plot is finally allowed to move forward more naturally, driven by the needs of the characters rather than the need to set up the premise, the whole movie turns a corner. It's by turns fascinating, touching, and interesting in a genuinely historical way. Sure, I guess you could say it was all about the burning need for film preservation, but only in the same way that Hamlet was about the burning need for better governance structures in Denmark.

But I'll agree with Jonah in one respect: the film's marketing does indeed make it seem like some kind of fantasy-based children's movie. This is pretty blatant misrepresentation, and I'd swear there are one or two short, entirely gratuitous scenes in the movie that are there solely to provide fodder for the trailers. There's no fantasy in Hugo, just an earthbound story that could stand to have been told a bit better at the beginning and that should have ditched Sasha Baron Cohen completely.

Better than most movies these days, though. I didn't swoon over it — and, as usual, I didn't feel like 3D added anything to the experience — but it's worth seeing. Just be sure to go in expecting less enchantment than the ads suggest.

Matt Yglesias provides a nickel summary of the ECB's latest plan for rescuing Italy and other troubled countries in the eurozone:

Basically, as an alternative to directly guaranteeing the Italian government affordable loans the ECB is guaranteeing super-cheap loans to European banks. The banks are then able to plow that money into government debt at a profit and the strong demand for government debt assures that borrowing costs fall. This achieves two goals. On the one hand, the ECB can be bailing out the Italian fiscal situations while maintaining the legal fiction that this isn't what they're doing. On the other hand, precisely because doing it this backwards way creates profits for banks, the ECB is de facto engineering a taxpayer-financed bailout of Europe's banks.

....The whole thing is incredibly slimey and I have to suspect that it will end poorly, but for the time being at least it's working.

Because I'm a simpleminded person and don't understand the intricacies of high finance, I too think this will end poorly. And it will end poorly for a very simpleminded reason: no matter how cheap the ECB's loans are, there are only just so many Italian bonds that European banks want to buy. At some point — and this point is probably not all that far away — Europe's banks will realize that nothing structural has changed, Italy is still in trouble, they have an awful lot of Italian bonds on their books, and 5.6% isn't a high enough yield to buy more of them no matter how cheaply they're getting their money. And then they'll stop, and yields will go right back up.

There is, besides this, something else that puzzles me. The reason this plan is supposed to work is because the ECB is providing European banks with cheap money. But money is already cheap. American banks, for example, can raise money for next to nothing. So why aren't American banks loading up on Italian bonds? Is it just because of the added exchange rate risk, which eurozone banks don't have to worry about? That doesn't seem really plausible. So what's going on? Either Italian bonds are worth buying at 5.6% or they're not, and this shouldn't fundamentally depend on whether you're a European bank, an American bank, or a Saudi Arabian bank.

This whole thing is very mysterious. I will continue to watch with skepticism that it will work, and a sense of wonder if it does.

The Sage of Omaha is annoyed:

Among investors, there are few prizes more coveted than the opportunity to ask Warren Buffett a question at Berkshire Hathaway's annual shareholders meeting. But this year, Fidelity Investments mysteriously claimed more than its fair share.

Turns out, it was no accident—and the Oracle of Omaha is none too pleased about being outfoxed on his own turf. Now he is turning the tables. "There's no question they figured out how to game the system," Mr. Buffett says. He said he didn't like Fidelity's ploy because "it's not in the spirit of the meeting."

Hey, guess what, Warren? You could solve this problem by making yourself available for questions more often than once a year. You're the one who created the incentive for this mess. You can uncreate it any time you want.

Rick Santorum will not be the next president of the United States. That is all. 

Orcs for Romney!

This is political correctness run amok. CNN and Time should be ashamed of themselves.

But if you really must know, apparently Iowa's orc community prefers Mitt Romney over Ron Paul, 25%-22%.