Idle Speculator: Payrolls, Policies, Politics

Friday morning’s report on the employment situation had a little bit for everyone, bulls and bears alike. November revisions saw the first positive month for payroll growth since the current recession began, and the “less bad” trend remains firmly intact. However, the number of discouraged workers jumped dramatically, and payroll growth is still far too low to significantly bring the unemployment rate to a persistently lower level. While unemployment continues to pose a risk to Democrats in 2010, neither party is making a compelling offer to the electorate at the moment, and both of them are too focused on scapegoating the other. While we expect some positive economic surprises in 2010, the U.S. electorate and economy will remain stuck between an elephant and a donkey for some time.

Continue reading: http://654advisors.com/idlespeculation/20100112.pdf

2004 CSE Not to Blame for Crisis?

We’ve argued in several places that changes to the SEC’s Consolidated Supervised Entity’s program in 2004 contributed to the dramatic rise in systemic leverage that precipitated the financial crisis. The SEC’s Director of Trading and Markets offered a rebuttal to this argument back in April 2009: http://www.sec.gov/news/speech/2009/spch040909ers.htm

Today, I want to discuss a Commission action that I believe has been unfairly characterized as being a major contributor to the current crisis. I am referring to the Commission’s 2004 rule amendments to the broker-dealer net capital rule that established the consolidated supervised entity (CSE) program. Since August 2008, commenters in the press and elsewhere have suggested that the 2004 amendments removed a leverage restriction that had prevented the firms from taking on debt that exceeded more than twelve times their capital and, as a consequence, the Commission allowed these firms to increase their debt-to-capital ratios to unsafe levels well-above 12-to-1, indeed to 33-to-1 as some have suggested. These commenters point to the 2004 amendments as a significant factor leading to the demise of Bear Stearns. While this theme has been repeated often in the press and elsewhere, it lacks foundation in fact.

It’s an interesting speech, but several facts still argue against letting the SEC and other regulators off the hook. First, leverage at the largest investment banks, including Bear Stearns, Lehman Brothers, and Merrill Lynch — and in the financial system as a whole — was far beyond anything that could be considered prudent. So whether due to CSE changes or something else entirely, this is still a clear sign of regulatory failure. Second, Christopher Cox, towards the end of his tenure as SEC chief, took actions and made statements that were damning of the CSE:

Washington, D.C., Sept. 26, 2008 — Securities and Exchange Commission Chairman Christopher Cox today announced a decision by the Division of Trading and Markets to end the Consolidated Supervised Entities (CSE) program, created in 2004 as a way for global investment bank conglomerates that lack a supervisor under law to voluntarily submit to regulation. Chairman Cox also described the agency’s plans for enhancing SEC oversight of the broker-dealer subsidiaries of bank holding companies regulated by the Federal Reserve, based on the recent Memorandum of Understanding (MOU) between the SEC and the Fed.

…Because of the lack of explicit statutory authority for the Commission to require these investment bank holding companies to report their capital, maintain liquidity, or submit to leverage requirements, the Commission in 2004 created a voluntary program, the Consolidated Supervised Entities program, in an effort to fill this regulatory gap.

As I have reported to the Congress multiple times in recent months, the CSE program was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate of the CSE program, and weakened its effectiveness.

It sounds like Director Sirri’s argument, that the CSE did not explicitly allow higher leverage ratios, might very well hold water. But his speech does not address the issues that Chairman Cox’s statement raised — namely, that the CSE left gaping holes in financial regulation that were ruthlessly exploited by the largest investment banks.

URLs:

http://www.sec.gov/news/speech/2009/spch040909ers.htm

http://www.sec.gov/news/press/2008/2008-230.htm

Between a ‘Derm and a Donkey

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2010.01.14  MEA CULPA – The following entry was based on a news report that mislabeled bank assets (loans, credit) as liabilities (deposits, capital). That’s a common mistake — most people would tend to think of money that someone else put into their care as an “asset”. After reading the FT’s front page story on the proposed bank levy, we note that it’s designed to be applied to exactly the kinds of assets that helped to precipitate the financial crisis. We therefore apologize for calling it a joke, and for the other aspersions we cast in its direction (see below). Our initial assessment was obviously wrong. It might not be a bad idea, and perhaps the Obama administration has taken the position that it will be easier to administer than tighter capital requirements; or perhaps the threat of the tax is being used as leverage in tightening long term capital requirements.  However…

(1) A fifteen basis point haircut on typical investment bank returns, especially if nothing is done about the leverage that can be employed, is awfully skimpy;  

(2) There are still risks in who will actually bear the cost;

(3) the activities of investment banks actually do some social good, believe it or not;

(4) The President and Congress are still more like Herbert Hoover than FDR/JFK/RR; and

(5) We’re still stuck between ‘Derms and Dems for the foreseeable future.

=====

In our latest Idle Speculator, we asserted that in the years ahead, the U.S. economy was likely to remain stuck between a pachyderm and a donkey. If today’s events are any indication, it’s a good call. President Obama called for a punitive tax on large banks, and the only Republican response we’ve heard so far is from a Congresswoman who mostly railed against public spending. In our view, both sides continue to make little if any sense. 

President Obama’s bank tax would apply only to institutions with $50B or more in assets, and the rate would be 15 basis points (0.15%). However, the levy would not be on bank income, but rather on banks’ liabilities, i.e., deposits. What does this mean? We’d need to take a closer look once legislation is drafted, but based on what’s been said, here’s our initial impression:

First, the large banks aren’t going to pay a damn thing. Depositors (savers) are simply going to take a 0.15% haircut on the interest rate they receive, all else equal. Essentially, this will just act as an additional tax on people who deposit funds with large banks, and/or as a marginal incentive to deposit funds with other institutions.

Second, it won’t do anything to prevent the systemic leverage and boneheaded risk taking that got us into this mess. Systemic fragility arises when banks create too many assets (by extending credit) relative to their liabilities and capital. If the government wanted to prevent this through taxation rather than regulation (probably a bad idea to begin with), then it should be taxing bank assets. Of course, even then, it would simply mean that debtors’ interest rates would go up by the amount of the tax…which means the banks still wouldn’t pay a damn thing (refer back to point one).

In his remarks, the President said:

“My determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at the very firms who owe their continued existence to the American people who have not been made whole, and who continue to face real hardship in this recession…”

As in his recent comments on the jobs situation, the President shot well wide of the mark. While it’s reportedly an attempt to marshall populist support by attacking a particulary unpopular industry, the approach is a joke (as supporting evidence, we’d point out that Financials are the third best performing sector in the S&P 500 today, and that Money Center and Regional Banks are among the best performing industries within it). 

We can only infer that of late, the President has been listening to the very worst strategists in his Cabinet, folks who would recommend Herbert Hoover’s approach to economic crisis and recovery over FDR’s (or JFK’s or Reagan’s if you prefer) at a time when the latter’s is far more appropriate. Obama’s current hawkishness is evident in the AP article:

Obama said he was determined that every dollar spent from the $700 billion Troubled Asset Relief Program to rescue Wall Street firms, auto companies and mortgage holders is either repaid or paid for in some fashion.

His party’s hawkishness is also evident in the continuing failure to extend the COBRA subsidy under ARRA (a cynic might infer that this is intended to garner more support for heath care reform, but it’s a hawkish action either way). Thus, despite all the talk on the right and among tea party goers about “tax and spend liberals”, the reality looks quite different to us. The American electorate continues to be presented with only two choices — revenue hawks and budget hawks, i.e., higher taxes or lower spending – and those are essentially flip sides of the same coin.

In any case, forcing depositors to take a haircut, forcing debtors to pay marginally higher interest rates, or recovering every single dollar issued under TARP will do nothing to remedy the real hardships being faced by the American people in this recession. It also does nothing to prevent another financial crisis. If the President really wants to accomplish something on those counts, here are a few suggestions:

• Push hard for focused, meaningful financial regulatory reforms that will prevent excessive systemic fragility.
• Use the federal government’s creditworthiness and risk taking capacity to provide more direct assistance (i.e., employment) to the underemployed. 
• Stop being so terrified of budget deficits. Thinking about structural deficits is OK, but acting now to solve them could actually make the problem worse (ask Japan).
• Let private sector intermediaries (banks) use a historically steep yield curve to continue repairing their balance sheets by financing public deficits.
• If you insist on attacking TARP recipients, target the agents who control them (e.g., executive compensation or bonuses above a certain level), not owners, depositors, and borrowers.
• Enact policy measures that lower uncertainty, raise optimism, and thus increase the private demand for credit and investment.

You might also demand some accountability from whichever advisors had the most influence over today’s statement and last Friday’s…

URLs:

http://654advisors.com/idlespeculation/20100112.pdf

http://news.yahoo.com/s/ap/20100114/ap_on_bi_ge/us_obama_bank_fees

http://biz.yahoo.com/p/

http://biz.yahoo.com/p/4conameu.html

http://www.dol.gov/ebsa/faqs/faq-cobra-arra.html

http://www.ft.com/cms/s/0/a025fd26-00ad-11df-ae8d-00144feabdc0.html

http://ftalphaville.ft.com/blog/2010/01/14/126481/the-back-of-the-envelope-bank-levy/

Happy 75th Elvis!

Elvis Presley, the King of Rock’n'Roll, was born seventy five years ago today. For fun, we’ve traced out a brief history of one of his best known songs, “Hound Dog”, that illustrates the richness, complexity, network effects, competitive forces, and social factors at work in creative industries: 

• “Hound Dog” was written in 1952 by Jerry Leiber and Mike Stoller.
  • Leiber and Stoller wrote another great old standard, “Kansas City” (we recommend Hound Dog Taylor/Brewer Phillip’s version, and Willie Nelson/Susan Tedeschi’s).
    • Hound Dog Taylor and the House Rockers helped catalyze the creation of legendary blues label Alligator Records, started by a shipping clerk of a label that refused to sign them.
• ‘Hound Dog” was first recorded by Big Mama Thornton in 1952, and was the first and biggest hit of her career, reaching #1 four years before the King’s recording was released.
  • Charles Sawyer, who interviewed Ms. Thornton in 1978, claims that her version inspired Elvis to record it.  His interview also includes Thornton’s memory of doo-wop artist Johnny Ace’s suicide – real life blues.  
• “Hound Dog” was reportedly recorded by multiple acts in multiple genres, including country, before Elvis gave it a shot circa 1955 (his recording was released in 1956).
• According to biographical sources, Elvis reportedly heard the song performed in Vegas by Freddie Bell and the Bellboys.
  • Front man Frankie Bello was an Italian American lad from South Philly; reportedly, the Bellboys were a solid Las Vegas act and enjoyed international support, but never caught on in the States.
    • Philadelphia’s The Roots faced the same situation of international platinum / domestic anonymity in the 1990s, but overcame it in a big way this past decade.
  • The Bellboys’ stage antics appear to have been a strong influence on Elvis’ still developing delivery and persona.
• Big Mama Thornton:
  • Got her first break in a Hollywood moment, standing in at the club where she scrubbed floors after the regular performer quit.
  • Reportedly lived a hard drinking life; then again, she outlasted the younger Elvis, who had demons of his own. 
    • The main difference might be that had Elvis survived, his financial situation would not have imposed any constraint on a desire to turn things around.
  • Is the namesake of the Willie Mae Rock Camp for Girls in New York, which seems to have a stronger social purpose than Sir Denis Eton-Hogg’s Hoggwood summer camp for pale young boys (if you don’t get the reference, shoot us an email).

It’s safe to assume that the proportion of music fans who have heard, respectively, of Hound Dog Taylor, Big Mama Thornton, Johnny Ace, Freddie Bell, and Elvis Presley follows a power distribution (familiarity with Elvis running very high, and familiarity with everyone else relatively low; you could also substitute income for familiarity). It’s tempting to suspect that race, ethnicity, economic power, etc, are the responsible factors, i.e., to simply ascribe Elvis’ relative popularity to human wickedness and shortcomings. However, power laws are observed across a wide range of natural and social phenomena, which raises some interesting questions and possibilities:

• In the US of the 1950s, social factors almost certainly meant that successful ‘cultural crossover’ of R&B required white artists to be the carriers. However, power laws limit the popularity attained by all but a handful of crossover artists, meaning that just one or a few would end up as the conduit.
• While we tend to think of ‘fairness’ as a socially determined good, to the extent that societies obey biological ‘laws’, its determinants might actually lie in natural phenomena. Vilfredo Pareto discovered this about ninety years ago, when he found that incomes across many different countries were distributed according to power laws, with a very small proportion of the population earning a very large proportion of total income. At least two recent books have given differing but fascinating treatments to this subject: Albert-Laszlo Barabasi’s Linked and Malcolm Gladwell’s Outliers.
• If power laws are naturally occurring, then the proper objective for social justice or fairness would seem to be removing or reducing constraints that unfairly limit one’s opportunity to sit atop a power distribution, whatever field it’s in. But the odds of any one individual or entity occupying that position are quite remote. And the possibility of social policies doing away with power laws completely might well be zero.
• If we assume that power laws are at work in asset and securities prices, that lends support to the idea that there will always be undervalued and overvalued assets for an investor to select from. In Outliers, Gladwell raises an analogous argument about human capital. And the Willie Mae Rock Camp is a good example of how institutions can help society do a better job of identifying, developing, and valuing talent.

That’s deep enough. Happy Birthday to Elvis, and to David Bowie, Stephen Hawking, Charles Osgood, Soupy Sales, and everyone else born on January 8th!

IMPORTANT DISCLOSURE: Symmetry Capital Management, LLC is a member of the Amazon Associates program, and earns a revenue sharing fee of approximately 4% on qualified purchases made by clicking through from our website.

URLs:

http://news.yahoo.com/s/ap/20100107/ap_en_mu/us_museum_elvis_presley_2

http://en.wikipedia.org/wiki/Leiber_and_Stoller

http://popup.lala.com/popup/3675218809813776552

http://popup.lala.com/popup/432627077923496532

http://en.wikipedia.org/wiki/Hound_Dog_Taylor

http://popup.lala.com/popup/432627043551418906

http://en.wikipedia.org/wiki/Big_Mama_Thornton

http://www.people.fas.harvard.edu/~sawyer/thornton.html

http://en.wikipedia.org/wiki/Johnny_Ace

http://www.youtube.com/watch?v=fJQ-fDb4M4s

http://en.wikipedia.org/wiki/Freddie_Bell_and_the_Bellboys

http://www.theroots.com/

http://en.wikipedia.org/wiki/Hound_Dog_(song)

http://www.musicianguide.com/biographies/1608000152/Big-Mama-Thornton.html

http://www.williemaerockcamp.org/about.html

http://en.wikipedia.org/wiki/Power_law

http://www.amazon.com/gp/product/0452284392?ie=UTF8&tag=symmetrycapit-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=0452284392

http://www.amazon.com/gp/product/0316017922?ie=UTF8&tag=symmetrycapit-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=0316017922

http://www.famousbirthdays.com/

Those Damn Democrats

In a marked turnaround from 2008, a lot of pundits are predicting that Democrats will take a drubbing in 2010 midterm elections. Our view is that it’s way to early to call, as the economic mood in 2H10 will depend heavily on signals given (and actions taken) by President Obama, Congress, and the Federal Reserve in the first half of the year. But being opportunistic, the conversation gives us a chance to post this wonderful old chestnut:

Farmer: Farewell to the Natural Rate

An interesting theory and a cool video graphic can be found here, where UCLA economist Roger Farmer examines the relationship between inflation, unemployment, and job vacancies, adding yet another contribution to the Keynesian renaissance:

In two forthcoming books, Expectations Employment and Prices (2010a) and How the Economy Works (2010b), I provide a theory that explains these data. I argue that there is no natural rate of unemployment and that the economy can come to rest in a stationary equilibrium at any point on the Beveridge curve. Which equilibrium persists, is decided by the confidence of households and firms that pins down asset values as reflected in housing wealth and the value of the stock market.

When households feel wealthy, that belief is self-fulfilling. Consumers spend a lot, firms hire workers, and the economy comes to rest at a point on the Beveridge curve with low unemployment and high vacancies. When the values of houses, factories, and machines fall, households spend less, firms lay off workers, and the economy comes to rest at a point on the Beveridge curve with high unemployment and low vacancies. Both situations – and anything in between – are zero-profit equilibria. High inflation makes the trade-off between unemployment and vacancies less favourable, and in the steady state, any inflation rate is consistent with any unemployment rate.

Most policymakers subscribe to the theory of the existence of a natural rate of unemployment. The data suggest that this theory is unconfirmed at best. To make the theory consistent with data, one must posit that the natural rate changes between recessions in unpredictable ways. This version of natural rate theory is difficult or impossible to refute. It is religion, not science.

For more than fifty years policy makers have been trying to hit two targets, unemployment and inflation, with one instrument, the interest rate. Recently, central bankers have discovered a second instrument – quantitative easing. I believe that quantitative easing works by influencing the value of real assets as reflected in housing wealth and the stock market and that it was successfully deployed by central banks in 2009 to maintain aggregate demand. In my two forthcoming books, I argue that quantitative easing should permanently enter the lexicon of central banking as a second instrument of monetary policy and that it will prove to be a more effective and flexible tool than fiscal policy for restoring and maintaining full employment.

A competing idea is to attack this from the fiscal side rather than the monetary side, by making the federal government the ‘employer of last resort’. This is an interesting idea for a few reasons. First, it’s been proposed by economists on both the ‘left’ (e.g., L. Randall Wray) and the ‘right’ (e.g., Edmund Phelps). Second, it would put at least some intermediary stages between USD creation and the USD carry trade. And third, while either lever should work from a Wicksellian point of view, as long as the USD is the primary global reserve currency, quantitative easing may be riskier to the global financial system (not to mention the USD’s reserve currency status) than a purely domestic employment program would be.

IMPORTANT DISCLOSURE: Symmetry Capital Management, LLC is a member of the Amazon Associates program, and earns a revenue sharing fee of approximately 4% on qualified purchases made by clicking through from our website.

URLs:

http://www.voxeu.org/index.php?q=node/4452

http://www.amazon.com/gp/product/0195397908?ie=UTF8&tag=symmetrycapit-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=0195397908

http://www.amazon.com/gp/product/0195397916?ie=UTF8&tag=symmetrycapit-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=0195397916

http://ideas.repec.org/p/wpa/wuwpma/9802006.html

http://www.amazon.com/gp/product/0674094964?ie=UTF8&tag=symmetrycapit-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=0674094964

Auerback: Deficit Hawking

Good piece from Marshall Auerback on the risk of premature public sector tightening, as manifest in a proposed ‘deficit commission’.

…President Obama has voiced support for such a plan, as have 35 Democratic and Republican senators, who have signed on to legislation that would create a bipartisan commission with broad power to force painful spending cuts and tax increases through Congress….Even before its official inception, the proposed commission is starting with remarkably partisan assumptions about debt and entitlement programs. What is so inherently “unsustainable” about our current levels of government debt? In the early Victorian period, for example, the British government debt to GDP ratio was nearly 200 per cent and almost reached that level again in the early 1920s.  The historian Lord Macaulay noted that at every stage of debt increase, “it was seriously asserted by wise men that bankruptcy and ruin were at hand; yet still the debt kept on growing, and still bankruptcy and ruin were as remote as ever.”

The ideas which underlie this new commission also display fundamental ignorance about double-entry bookkeeping principles which have been in existence for over 7 centuries.

In truth, today’s deficit hawks are nothing more than zealots — poised again to preach their nonsensical theology that government deficits are dangerous and need to be cut, without honestly explaining the full consequences of their recommendations. If households attempt to net save by spending less than they are earning, and businesses attempt to net save (reinvesting less than their retained earnings), then private sector incomes and real output will decline absent an increase in government spending. The danger of premature fiscal tightening was illustrated in the US in 1936-37, when the ending of a war veterans’ bonus and the introduction of Social Security taxes helped push the US back into recession when recovery from the Great Depression was far from complete.

I’m becoming a rather lonely wingnut, but we strongly suspect that Auerback and his ilk are right, and that the spending phobes and deficit hawks are wrong. If so, and if the Administration and Congress tighten prematurely, with or without the Fed, then the 1937 and 1990s Japan scenarios remain firmly in play. Time will tell.

URLs:

http://www.newdeal20.org/?p=7241

http://654advisors.com/idlespeculation/2007110701.pdf

Rubin to the Rescue?

In Newsweek, former Goldman Sachs CEO, Clinton Treasury Secretary, and Citigroup bigwig Robert Rubin offers his analysis of the Great Recession and proposed nostrums for preventing another:

Given my views as to the causes of the crisis, I would recommend the following:

• There should be greatly increased capital and margin requirements for derivatives and other instruments of financial engineering to create a greater cushion when trouble develops and to reduce risk exposure. I developed this view during my many years of working with derivatives before entering government, as described in my 2003 book, In an Uncertain World.
• Standard derivative contracts should trade on an exchange to increase transparency. Transactions that are custom designed would not be exchange traded but would be subject to the same capital and margin requirements as listed transactions. Disclosure requirements could be considered for customized transactions, to provide private counterparties and regulators with the transparency to understand the risks.
• There should be two sets of more stringent leverage limitations for systemically significant institutions, one defined by risk-based models and the second by much simpler measures, since mathematical models can’t capture the full range of real-world possibilities.
• There should be significant constraints on off-balance-sheet financing; for example, institutions must retain ownership of a portion of off-balance-sheet assets.
• We need a change in accounting systems to avoid the artificial effects of mark-to-market accounting for illiquid assets on balance sheets and on markets. There are other accounting approaches that would better reflect long-run values for these assets.
• We should also provide effective mechanisms for dealing with systemically important nonbank financial institutions—including bank holding companies—that get into trouble, to mitigate “too big to fail” concerns, but practical ways to do this need to be developed.
• There should be greatly increased protections, both to safeguard consumers and to reduce systemic risk. The elements should include readily understandable disclosure, suitability requirements, prohibition of practices or instruments inherently susceptible to abuse, and, if some practical way can be found, personalized advice for the most vulnerable consumers.

Fair enough, mostly no brainers, but is Rubin being disingenuous? As we’ve previously written, there seem to be growing threats to to the man’s political capital, particularly within the Democratic party. And judging by this piece from Marshall Auerback, those threats still exist, and have intensified since 2006:

As one of the people whose policies threw the global economy off the rails, Rubin may be uniquely qualified to provide solutions as to how to get the economy back on track. But that would presuppose that the man actually acknowledged mistakes (as some of his other Goldman Sachs/Clinton Administration colleagues, such as Gary Gensler, have done) and displayed at least a marginal understanding of where he went wrong.

No such luck. We get the usual self-serving “nobody could have possibly predicted a crisis of this magnitude” right at the start…

Auerback cites a damning interview with the former head of the CFTC, Brooksley Born (a position now held by the aforementioned Gary Gensler):

…as analysts sort out the origins of what has become the worst financial crisis since the Great Depression, Born has emerged as a sort of modern-day Cassandra. Some people believe the debacle could have been averted or muted had Greenspan and others followed her advice.As chairperson of the CFTC, Born advocated reining in the huge and growing market for financial derivatives.

According to Auerback:

Rubin now suggests that Born’s problem was one of style, rather than substance: she, being “too confrontational”, risked aborting any politically feasible reform of OTC derivatives. That’s certainly an interesting reinterpretation of Rubin’s actual role as Treasury Secretary, during which he laid the groundwork for today’s crisis through an aggressive championing of financial deregulation. It’s hard to think of one instance where the former Goldman Sachs CEO actually came down hard on his former Wall Street colleagues. Had he at least acknowledged some remorse or recognition of error, he would be more appropriately suited for an advisory role on how to fix the global economy, much as a reformed criminal often has useful insights on penal reform.No such luck here. If being one of the worst Treasury Secretaries ever wasn’t enough, Rubin left another unfortunate legacy at Citigroup, where he was a senior advisor after he quit the Treasury. He left Citi just before its near collapse amidst criticism of his performance. A distinguishing moment of his tenure was when Rubin got hold of Peter Fisher in the US Treasury Department to try to put pressure on the bond-rating agencies to avoid downgrading Enron’ debt which was a debtor of Citigroup…

Letting him publicly expound on getting the global economy back on track is akin to providing Kim Il Jong-il a public platform on human rights. Unlike Greenspan, who at least admitted mistakes, Rubin expects to be taken seriously as a policy maker despite acknowledging zero responsibility for the debacle that threw millions of Americans into unemployment. People around the world have lost their jobs, savings, and more largely thanks to the policies championed by this misguided deficit warrior.

Ouch.

We’ll pile on by reminding people that as Treasury Secretary, Rubin presided over implementation of the “strong dollar” policy designed by his predecessor, Lloyd Bentsen, which had damaging effects on many developing nations’ economies. He’s also featured prominently in a recent list at Motley Fool of “The 10 Dumbest Banker Quotes of All Time”. And we agree with Auerback that a sincere mea culpa for past errors, whether at Treasury or Citigroup, would buy the man some badly needed goodwill. We think he should also expand his bullet points to include the following: 

• Let’s not repeat the mistake of believing that experts always know best.
• Let’s agree that optimal outcomes often require more than just unbridled private actors.
• Let’s resolve not to get caught up in any more cults of personality, whether adorer or adoree.

Update 01/07/2010 (via Mark Thoma) – Larry Summers, who is currently President Obama’s National Economic Council chief, and was Robert Rubin’s protege and eventual successor at the Clinton Treasury, also finds his political capital under attack from both the left and the right.   

IMPORTANT DISCLOSURE: Symmetry Capital Management, LLC is a member of the Amazon Associates program, and earns a revenue sharing fee of approximately 4% on qualified purchases made by clicking through from our website.

URLs:

http://www.newsweek.com/id/225623/page/2

http://www.amazon.com/gp/product/0375757309?ie=UTF8&tag=symmetrycapit-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=0375757309

http://www.newdeal20.org/?p=7270

http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html

http://www.fool.com/investing/general/2009/11/25/the-10-dumbest-banker-quotes-of-all-time.aspx

http://www.economicprincipals.com/issues/2010.01.03/880.html

http://capitalgainsandgames.com/blog/bruce-bartlett/1373/summers-out

Krugman’s 1937 Feeling

Paul Krugman echoes our warnings of a 1937 (and Japan 1990s) redux:

The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.

But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.

…will policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are.

The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out…Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done — and the illusory good numbers we’re about to see will probably head off any further possibility of action.

Meanwhile, all the talk at the Fed is about the need for an “exit strategy” from its efforts to support the economy. One of those efforts, purchases of long-term U.S. government debt, has already come to an end. It’s widely expected that another, purchases of mortgage-backed securities, will end in a few months. This amounts to a monetary tightening, even if the Fed doesn’t raise interest rates directly — and there’s a lot of pressure on Mr. Bernanke to do that too.

Update 1/07/2009 – An interview with Krugman on prospects for economic recovery is available on Advisor Perspectives. He still gets some political digs in, but it’s refreshing to hear his thoughts on economic issues outside the context of his NYT column.

URLs:

http://www.nytimes.com/2010/01/04/opinion/04krugman.html

http://www.advisorperspectives.com/newsletters09/Paul_Krugman_on_the_Prospects_for_Recovery.php

Conference Board: Job satisfaction at record low

Disturbing findings from the Conference Board’s latest job satisfaction survey, which reached its lowest level since the survey began in 1987. Some endpoint comparisons:

Source: Yahoo, Associated Press, Conference Board

According to the AP article, these findings imply that the American work force could become less innovative, competitive, and productive over time. Potential explanations for declining job satisfaction:

Conference Board officials and outside economists suggested that weak wage growth helps explain why workers’ unhappiness has been rising for more than 20 years. After growing in the 1980s and 1990s, average household incomes adjusted for inflation have been shrinking since 2000. Also, compared with 1980, three times as many workers contribute to the cost of their health insurance — and those contributions have gone up. The average employee contribution for single-coverage medical care benefits rose from $48 a month to $76 a month between 1999 and 2006.

It’s difficult to know what forces and factors might be driving the underlying trends (lower pay, boredom, security, unhappiness with superiors) that are manifested in higher levels of job dissatisfaction. It would be helpful to have data prior to 1987, but accepting that as is, and assuming statistically significant and unbiased results, let’s consider them in the context of major structural developments of the past two decades. Two forces that spring to mind are productivity growth and economic globalization.

• Rising productivity could have a positive or negative impact. To the extent that it raises net income and/or free time, it should raise satisfaction. However, we’d have to have some idea of how the gains from higher productivity have been shared/divided among different industries, different types of workers (including in managers’ and executives’ compensation), different stakeholders (customers, creditors, shareholders, governments, society at large), etc. Further study might try to analyze whether declines in satisfaction have coincided with changes in the rate of productivity growth.
• Globalization has been a rising force since 1987, especially since the early 1990s, with undeniable effects on the structure of U.S. employment. And while education and retraining are reasonable responses, it’s important to consider that, relative to renovating an individual’s human capital, a job can be outsourced rather easily.
• We would also toss in the declining marginal competitiveness of our corporate tax code as a factor that, if it pushes capital investment outside of the U.S., amplifies the negative impacts of globalization (admittedly, this assertion requires that some qualifications be added to the role of productivity growth). The burden of corporate taxes has also been found under certain conditions to fall disproportionately on workers’ income.

Productivity gains can be shared among owners (share value and dividends), employees (income and benefits), executives (compensation), governments (tax authorities and and regulatory bodies), and society. The following table is a highly simplified back of the envelope tabulation, based simply on the annualized after-inflation growth rates in each of the following items, using a core PCE inflation rate of 2.7% per year (it doesn’t contain any direct estimates of productivity growth). Executive compensation data is fairly slippery — the low end is based on an amalgam of sources, and the high end is based on estimates of the ratio of average CEO compensation to average employee compensation (2006 ~ $400, 1980 ~$42, 1965 ~$20). Information on data sources is provided below.

For globalization, an overly simple proxy is returns to equity owners in developing markets. Brazil’s economy and Bovespa stock market index have been among the top performers over the period in question, returning almost 16% annualized the last ten years, and over 20% annualized since 1994; against an official annualized inflation rate over the past decade, we get a real annualized return around 9%, a figure that comports well with other emerging market return statistics.

We need to emphasize that this is a back of the envelope analysis that leaves plenty of questions unanswered. A more credible analysis would consider other potential forces and factors, formalize and scrub the data, and provide some meaningful statistical insights.  However, if we can at least assume that the ordinal findings hold up, then it’s a good start, and implies that the benefits of economic growth over the past decade or two have accrued first to developing economies and markets, then to equity owners and executives, then to public coffers, and only minimally to employees, which could help to explain rising job dissatisfaction.

Please note that we are not anti-globalization. But we do believe that developed economy countries can do a better job of designing and implementing policies that, while still friendly to trade and growth, can help mitigate the negative domestic impacts brought about by global economic development. We also believe that while health care reform is an important piece of the puzzle, closing the ‘compensation gap’ domestically would ideally be resolved in the private sector. However, the issue requires some enlightened executive and board leadership, and if history is any guide, the problem is most likely to be addressed via higher tax rates on top incomes. Finally,  if corporate taxes fall disproportionately on labor income, or amplify negative impacts of globalization, then they could be an indirect factor in job dissatisfaction, along with the more direct impact of payroll taxes and benefits costs.

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Via a tweet from Laurie Ruettiman of the Punk Rock HR blog, there’s a video version of the AP story. Ruettiman also blogged about a new CBS series, “Undercover Boss,” that might contribute towards reducing job dissatisfaction (or not…time will tell). If you get a chance to watch the trailer she linked, it’s worth it (it’s a fun site to peruse too, see especially her short and sweet employee handbook). According to Ruettiman, Undercover Boss (like The Office, The Beatles, white boy blues, and the Mini Cooper) is another clever premise borrowed from the Brits.

Judging by the trailers, the show gives executives an anonymous, and thus open, firsthand view of their company’s line operations, and more importantly, some insight into the questions we raised above. In a year when corporate profits are expected to rebound nicely, a show like this could gain quite a popular following (of course, more cynical interpretations of corporate participants’ motivations are possible). If this allows a growing ’fair pay’ movement to take root, shareholders beware. With Wall Street’s social capital at all time lows, labor costs, including non-union labor, might be due for a trend reversal in the years ahead – though admittedly, that might not happen in the face of historically high unemployment levels. If it doesn’t happen, then current job satisfaction trends are more likely to remain intact, which, over the long run, will impose unwanted costs on us all.

DATA: According to one set of estimates (http://www.pay-without-performance.com/Core_Guay_Thomas-IsUS-CEO-Compensation-Inefficient.pdf, p. 65), executive compensation increased at an annualized nominal rate of just under 13% from 1993 to 2003, and another 13% in 2004 (http://www.guardian.co.uk/business/2005/aug/04/executivesalaries.executivepay2). It declined 15% in 2007 and 11% in 2008 (http://www.forbes.com/2009/04/22/executive-pay-ceo-leadership-compensation-best-boss-09-ceo_land.html). If we interpolate conservatively (g = 0%) for the years 1987-1992 and 2005-2006, we get an annualized rate of 5.2%, which is in the ballpark of a study that found a 5.57% annualized increase from 1997 to 2004 (http://www.cfapubs.org/doi/pdf/10.2469/faj.v63.n3.4687). EBRI estimates that employee compensation costs grew at 3.3% annually from 1987 to 2004 (http://www.ebri.org/pdf/publications/facts/0305fact.pdf).

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a state registered investment advisor. The foregoing article is intended only for readers’ interest, amusement, and edification. It is not an offer to buy or a solicitation to sell any security, nor is it a recommendation to engage in any particular investment strategy. Any mention of public securities herein is purely coincidental, and no securities mentioned are owned by the firm’s clients, principals, or the firm itself. SCM participates in the Amazon.com Associates program and earns a small revenue sharing fee (~4%) on qualified merchandise for any “click through” sales from our website.

URLs:

http://finance.yahoo.com/news/Americans-job-satisfaction-apf-1483464009.html?x=0&sec=topStories&pos=3&asset=&ccode=

http://www.youtube.com/watch?v=Gps7Dx8cN4Q 

http://finance.yahoo.com/q/hp?s=%5EBVSP&a=00&b=5&c=2000&d=00&e=5&f=2010&g=m

http://www.bcb.gov.br/pec/metas/InflationTargetingTable.pdf

http://punkrockhr.com/undercover-boss/

http://www.amazon.com/gp/redirect.html?ie=UTF8&location=http%3A%2F%2Fwww.amazon.com%2Fgp%2Fentity%2FWhite-Boy-Blues-%28Series%29%2FB000AQ2MUU&tag=symmetrycapit-20&linkCode=ur2&camp=1789&creative=390957