Kevin Drum

Good Jobs News in April

| Fri May 7, 2010 11:25 AM EDT

I may be generally pessimistic about the economy, but we did get a good jobs report today. It wasn't just census hiring either. It was legitimately strong private sector job growth. The unemployment rate rose at the same time — and as the CBPP chart on the right suggests, this means we're probably in for a long, slow, grueling, recovery — but Eric Lascelles of TD Securities explains why a rising unemployment rate isn't entirely a bad thing:

The household survey argued for an even better 550,000 job gain in April, but the number of people looking for jobs rose by an even larger 805,000. As such, the unemployment rate went up. However, the interpretation can be spun in a positive direction since job applicants must be feeling good to seek entry to the labour force in such large numbers.

Steve Benen's employment chart is below. On the less bright side, long-term unemployment increased and wage growth was flat. The latter is obviously normal during the early stages of a recovery, but still, it needs to change if consumer spending is going to keep fueling growth. Overall, though, the report was good news. I'm still sort of pessimistic, but then again, I'm always sort of pessimistic.

Advertise on

Why Did the Market Tank?

| Fri May 7, 2010 11:00 AM EDT

Hey, remember how one of the big benefits of high-frequency trading is supposed to be that it deepens market liquidity? And remember how I wrote that, in reality, HFT probably does a great job of providing liquidity when you don't need it and a lousy job when you do need it? Well, yesterday the stock market needed liquidity and guess who didn't provide it?

Tradebot Systems Inc., a large high-frequency firm based in Kansas City, Mo., closed down its computer trading systems when the Dow Jones Industrial Average had dropped about 500 points, said Dave Cummings, founder and chairman of the firm....Mr. Cummings said Tradebot's system is designed to stop trading when the market becomes too volatile, too fast.

....The withdrawal of high-frequency firms from the market didn't necessarily cause the downturn, but could have added to it, some market experts say. A number of high-frequency firms closing down in the midst of a sharp market drop can "widen markets out substantially," said Jamie Selway, managing director of New York broker White Cap Trading.

In other news, the SEC is investigating what happened yesterday: "U.S. regulators plan to examine whether securities professionals triggered yesterday’s stock-market plunge or exploited the turmoil to profit illegally, two people with direct knowledge of the matter said....The SEC and Commodity Futures Trading Commission said in a joint statement after U.S. markets closed that they will examine 'unusual trading' that contributed to the plunge."

Overall, I'm with Atrios. Maybe this whole thing was mostly a glitch, maybe not. "Still, my gut tells me we are heading in a downward direction." Maybe not today and maybe not next week. But the aftermaths of banking crises don't usually play out in just a year or two. Normally it takes three or four. We're still in the middle of the hurricane.

Chart of the Century: Cooking The Planet

| Fri May 7, 2010 1:15 AM EDT

What happens if we do nothing about greenhouse gas emissions and end up in a worst case climate change scenario a century from now?  A new paper in the Proceedings of the National Academy of Sciences takes a look at the likely effects of very high global warming and concludes that large swathes of the world — including the East Coast of the United States — would become pretty much uninhabitable. In the map below, that's all the yellow and light purple areas.

Stuart Staniford has the details. But don't worry. It's only 5% likely that things will ever get this bad. Or the scientists might have miscalculated. It might only be 1% likely. Those are pretty good odds, right?

The Copenhagen Tapes

| Fri May 7, 2010 1:04 AM EDT

Remember that accidental tape recording of the final session of the Copenhagen summit that I wrote about a few days ago? Well, Der Spiegel now has the entire thing translated into English. In their telling, at least, pretty much no one comes out of this looking good.

Can Congress Strip Your Citizenship?

| Fri May 7, 2010 12:41 AM EDT

Joe Lieberman wants Congress to pass a law that would allow the State Department to revoke American citizenship from people suspected of allying themselves with terrorists. Now, the prospects for abuse here are pretty obvious. But set that aside for a moment. Even if it were a good idea, would it actually accomplish anything? Or is it mostly just anti-terror showboating?

According to citizenship law expert Peter Spiro, it's pretty much the latter. No matter what Congress says, the Supreme Court long ago ruled that citizenship can only be stripped from a person who performs an act with the specific intent of relinquishing citizenship:

Intent to relinquish would be pretty hard to establish, Shahzad’s case included....That’s the first way in which [the proposed law] would be ineffective: you just end up with another layer of litigation, about the last thing that anti-terror policies need after almost a decade of up-the-courts, down-the-courts delay.

And all for what, exactly? Citizenship makes a difference only with respect to a small slice of one anti-terror policies. By statute, the use of military commissions can only be used in the prosecution of noncitizens. Under Verdugo, nonresident noncitizens don’t enjoy Fourth Amendment protections. But remember what citizenship doesn’t protect you against: even Obama has authorized the targeted killing of citizens abroad, and Hamdi doesn’t mandate full due process for citizen detainees.

Lieberman and cosponsors try to frame this as a matter of prevention, depriving terrorists of the valuable tool of a US passport. This is nonsense. Anyone visibly affiliated with a terror group is already going to be on all sorts of no-fly and surveillance lists before that affiliation would warrant proceeding with expatriation. A passport isn’t much of a weapon then.

It's true that if Congress changes the law, this might open the door for the Supreme Court to reverse its earlier rulings on this subject. But even in the unlikely event that it did, the effect of the law would be minimal. And the potential for political abuse would obviously remain. So yeah: it's mostly just anti-terror showboating. Not exactly a big surprise coming from Joe Lieberman. (Via Kenneth Anderson.)

Arabic on the Net

| Fri May 7, 2010 12:16 AM EDT

Just so you know: according to ICANN, today was "the most significant day" since the launch of the internet. Why? Because for the first time ever, you can type in a full URL, including the top level domain name, in a non-Latin alphabet. Namely, Arabic:

One of the first websites with a full Arabic address is the Egyptian Ministry of Communications. Egypt's communication and information technology minister Tarek Kamal told the Associated Press that three Egyptian companies were the first to receive registrar licences for the '.masr' domain, written in Arabic.

Other countries will get top level domains in Arabic shortly, and further non-Latin alphabets are in the works. So now you know.

Advertise on

Our Lucky Ozone Escape

| Thu May 6, 2010 8:45 PM EDT

You all know the story of Stanislav Petrov, right? He's the Soviet lieutenant colonel who was on duty in 1983 when an early warning system reported that an American ICBM was heading toward the Soviet Union. Luckily (and correctly), he decided it was just a computer error and decided not to start World War III. Whew!

That's about how I felt when I read Brad Plumer's piece on possible planetary disasters in the last issue of the New Republic. I'd never heard this story before, but it turns out that back in the middle years of the 20th century Planet Earth dodged a serious ozone layer bullet thanks to nothing more than a chance decision1 by Dupont about how to manufacture chlorofluorocarbons:

As luck would have it, DuPont had been using chlorine instead of bromine to produce CFCs. As far as anyone could tell, the two elements were interchangeable. But, as another prescient ozone researcher, Paul Crutzen, later noted, bromine is 45 times as effective at destroying ozone as chlorine. Had DuPont chosen to use bromine, the ozone hole could well have spanned the globe by the 1970s instead of being largely confined to Antarctica — long before anyone had a glimmering of the problem.

It’s not hard to see what massive worldwide ozone depletion would’ve meant. Punta Arenas, the southernmost town of Chile, sits under the Antarctic ozone hole, and skin cancer rates there have soared by 66 percent since 1994. If humans had destroyed stratospheric ozone across the globe, we would likely be unable to set foot outdoors without layers of sunscreen and dark shades to prevent eye damage. Worse, the excess UV rays could have killed off many of the single-celled organisms that form the basis for the ocean’s food chain and disrupted global agriculture (studies show that bean and pea crop yields decline about 1 percent for every percent increase in UV exposure).

Just thought I'd share. Let's be careful out there, OK?

1In comments, Daryl Cobranchi points out that the reason Dupont used chlorine is that it's less expensive than bromine. So the "luck" here isn't that Dupont tossed a coin and it came up on the right side, it's the fact that Cl2 happens to be cheaper than Br2.

Did a B Kill Wall Street?

| Thu May 6, 2010 5:37 PM EDT

The stock market plummeted today, but it did so in an odd way: the Dow dropped about 6% in the space of five minutes and then gained about 5% a few minutes later. Initial news reports suggested the drop was centered on panic over Greece, but there was no special news about Greece that suddenly hit the wires at 2:30 pm and then, just as suddenly, disappeared a few minutes later. Perhaps, instead, it was just a garden variety screwup?

The WSJ reports that a trader may have accidentally placed an order to sell $16 billion in futures tied to stock indexes, when he meant to place the order for $16 million.

And there were "a number of erroneous trades" during the minutes when the market was plunging, a spokesman for the company that owns the New York Stock Exchange told Bloomberg.

The FT's Alphaville blog points out that Procter & Gamble shares fell by more than 20 percent — about three times as much as the Dow — before regaining almost all of the ground it lost, and says the decline may have been related to a "technical screw up." And Barron's notes that shares in Accenture — which opened and closed the day above $41 per share — traded for one cent per share at one point today.

Planet Money's chart of the Procter & Gamble drop is above (P&G = blue, overall market = red). So I wonder whose screwup this was? Rumors suggest it was some poor schlub at Citigroup. And what happened to all those automated systems we hear so much about that are supposed to prevent this kind of thing? After the Société Générale debacle didn't everyone supposedly install safeguards that prevented individual traders from taking massive positions like this?

Understanding the End User Exemption

| Thu May 6, 2010 5:26 PM EDT

Over at New Deal 2.0, former Goldman Sachs VP Wallace Turbeville explains derivative trading to end users in an interesting way that I haven't seen before. You should read the whole thing, but in a nutshell here's how he describes the process:

  1. A bank sells a derivative to an end user. For example, for an airline company it might be a hedge against fuel prices rising in the future.
  2. If the hedge goes the customer's way (i.e., fuel prices go up), the bank pays up. But if the hedge goes the bank's way (i.e., fuel prices decline), the end user has to pay up.
  3. As always, though, there's a risk of default. Maybe the end user won't make good on his payment.
  4. In essence, then, the bank is selling both a hedge and a loan at the same time, and assuming credit risk on the loan.

Why do this? Why not, instead, extend an ordinary loan, have the customer post that as collateral, and sell the hedge at a lower price since there's no credit risk built in? Turbeville:

It is widely known that deployment of credit capacity to trading with a company is far more profitable than conventional lending. This means that

  • the profit from a trade coupled with the extension of credit through forgone posting of collateral is far more profitable than
  • the profit from a conventional loan plus the profit from a trade in which no credit is extended.

Viewed from the perspective of the company making the trade, it is either willing to pay more for the packaged deal or it does not properly evaluate the all-in cost.

Turbeville goes on to explain in more detail why traders benefit from this arrangement (it locks in customers and helps banks build dominant positions in particular markets) but then circles back to his starting point:

There is a lingering, unanswered question raised by the foregoing discussion: Why do the end users prefer packaged credit and trading deals, even though the banks make more than the unpackaged alternative?

The obvious possibilities are inertia and convenience — though given the efficiency of modern finance it's hard to believe that separate credit facilities would really end up being much less convenient, especially for large, sophisticated companies. But in a followup piece, Turbeville suggests a different answer: a conventional loan is carried on a corporation's balance sheet as debt, while the embedded loan in a packaged derivative isn't. So the packaged deal provides an attractive accounting loophole:

Avoiding an accounting exemption is very appealing. But perhaps the better way to address this is to encourage efficient, third party systems, short of full on clearing, to track these exposures and to facilitate efficient collateral funding in bi-lateral transactions. The simple exemption for end users in financial regulation does not encourage the development of such a system. It ignores a troubling practice which need not burden the marketplace.

In other words, maybe the end user exemption that just about everyone supports isn't such a great idea after all. Via Mike Konczal.

Why Greece Matters

| Thu May 6, 2010 2:24 PM EDT

In an unprecedented display of 21st century comity and bipartisanship, I would like to fully endorse Andrew Stuttaford's takedown of Sen. Jim DeMint (R-SC), who remains defiantly unhappy that his proposal last year to ban taxpayer money from being used to "bail out" foreign countries was voted down:

All one can say is that, on this occasion, the Senate got it right. Senator DeMint may not like it, but we live in an economically interdependent world....Greece's problems are not just Greece's, and the threat that they pose to economic recovery stretches far beyond that unfortunate country's borders and, for that matter, the frontiers of the wretched eurozone.

The current weakness in the global economy is a clear and present danger (to borrow a phrase) to the dangerously fragile, dangerously indebted U.S. economy and to this nation's wider strategic, political, and economic interests. For all its flaws, the IMF is the best tool we have to help countries (usually on tough terms — that's why they are rioting in Greece, Senator) that have got themselves in the mess they have, a mess that threatens us, too. Seen in this light, crippling the IMF makes no sense — no sense at all.

Oddly enough, I wrote nearly those exact same words last night for distribution via email tomorrow. It's part of the answer to Felix Salmon's question, "Why should Americans care about Greece?" (For the other part of the answer, sign up for my newsletter! In addition to the rest of the answer, you also get bonus cats.)

What's more, I think Stuttaford is right about this despite the fact that even with IMF help Greece is likely doomed. In fact, as pessimistic as I've been about Greece for a long time, I've grown more pessimistic as time passes. At this point, unless the EU is almost literally willing to make Greece a long-term ward of the state and provide the massive amounts of funding needed to pull this off, it's hard to see any endgame that doesn't include debt default and Greece's exit from the Euro, with all the attendant chaos that implies. The IMF rescue delays the day of reckoning, which might be worthwhile in the same way that delaying GM's collapse until the economy improves might have been worthwhile, but I don't see how it eliminates it. I sure hope I'm wrong, though.