Economic Pain Abroad

The Wall Street Journal reports that as bad as the economy has been in the U.S., it’s been truly calamitous elsewhere.

On Wednesday, Mexico became the latest country to report a plunge in output. The country’s gross domestic product fell at an annualized rate of 21.5% in the first quarter, the worst performance since the 1995 peso crisis led to an International Monetary Fund and U.S. Treasury financial rescue. This time, Mexico has insulated itself somewhat by arranging a $47 billion IMF credit line in advance.

Mexico’s decline followed by a day Japan’s report that its economy contracted in the first quarter at a 15.2% clip, its worst performance since 1955. Last week, Germany said its first quarter decline in GDP, an annualized 14.4%, was the worst since 1970.

The article notes these countries rely on U.S. exports, I wonder if part of the disparity between the U.S. and others results from weak to piddling efforts to shore up spending gaps with fiscal stimulus. The Germans haven’t done much, the Mexicans have done very little, and though Japan recently pledged more, it’s still fairly small in terms of  what we’ve done in the U.S. Meanwhile fiscal stimulus heavy China saw growth of 6.1 percent in the first quarter (though this is sluggish by Chinese standards).


Hilarious/Depressing But Mostly Just Depressing Graph of the Day

Via Ezra Klein, we see this graph, from Adam S. Posen and Mark Hinterschweiger at the Peterson Institute for International Economics, which shows the growth of fake money in relation to the growth of real money.

Posen and Hinterschweiger’s dry, academic take:

Between 2003 and 2008, US gross fixed capital increased by about 25 percent, a reasonable number during an economic expansion, but hardly a boom. During the same five-year period, the global amount of over-the-counter (OTC) derivatives increased by 300 percent, while derivatives held by the 25 largest US commercial banks rose by 170 percent. Clearly, growth in new financial products has outpaced fixed capital formation both globally and in the United States by a large margin. This has been especially true since 2006, when investment stagnated, but derivatives continued to grow at a rapid rate. There only seems to be a weak link, if any, between the growth of the newest complex—and now proven dangerous if not toxic—financial products and real corporate investment.

Meanwhile, note that 89 percent of these derivatives were held by the financial services industry, which should further demolish the notion that the much vaunted “financial innovation” really did anything to streamline capital — as you might expect innovation to do — but did help inflate the size of the financial sector.

As a side note, I’ll add that when this lost “wealth” is put in context correctly (that is, it wasn’t “lost” nor “wealth” per se), it illustrates just how ethereal the whole machine was. You should think about this when you hear Tim Geithner or Barack Obama say they want to return the banking industry to its precrash position.

Jedi Mind Tricks: Finance Edition

It makes me feel better about myself that Felix Salmon is similarly perplexed about this:

The government has told Bank of America it needs $33.9 billion in capital to withstand any worsening of the economic downturn, according to an executive at the bank.[…]

[…]But J. Steele Alphin, the bank’s chief administrative officer, said Bank of America would have plenty of options to raise the capital on its own before it would have to convert any of the taxpayer money into common stock.

“We’re not happy about it because it’s still a big number,” Mr. Alphin said. “We think it should be a bit less at the end of the day.”[…]

[…]Mr. Alphin said since the government figure is less than the $45 billion provided to Bank of America, the bank will now start looking at ways of repaying the $11 billion difference over time to the government.

In addition to the obvious that TARP repayment will be contingent on a bank’s ability to survive without assistance from other government programs (like loan guarantees), the notion that a difference between the amount of TARP money already provided and the amount of additional capital the government thinks BoA needs somehow demonstrates a clean bill of health is flatly insane. I’ll be the first to admit that the techno-jargon bandied about in banking can be confusing, but even I have no problem understanding that the government is trying to tell BoA that it needs $35 billion more than it already has on reserve. As Felix Salmon notes:

It seems to me that BofA is in some weird state of denial here, where a $35 billion capital shortfall can be considered evidence that it actually has more regulatory capital than it really needs. What’s more, the bank now seems to be happy going on the record with this kind of analysis. Which doesn’t instill in me a great deal of confidence in its management.

More frightening, the spin seems to be working.

Marriage and Economy

Marriage research is something I know almost nothing about, so there’s a lot in Mark Regnerus’ Washington Post piece advocating early marriage I’m completely unqualified to discuss, but I still wanted to comment on this:

Sara, a 19-year-old college student from Dallas, equated thinking about marrying her boyfriend with staging a rebellion. Her parents “want my full attention on grades and school because they want me to get a good job,” she told me. Understandable. But our children now sense that marrying young may be not simply foolish but also wrong and socially harmful. And yet today, as ever, marriage wisely entered into remains good for the economy and the community, good for one’s personal well-being, good for wealth creation and, yes, good for the environment, too. We are sending mixed messages.[…]

[…]Today, there’s an even more compelling argument against delayed marriage: the economic benefits of pooling resources. My wife and I married at 22 with nothing to our name but a pair of degrees and some dreams. We enjoy recounting those days of austerity, and we’re still fiscal conservatives because of it, better poised to weather the current crisis than many, because marriage is an unbelievably efficient arrangement and the best wealth-creating institution there is.

This is a slighly different issue, but I did — back in my college days — mostly attend a class on “Women in the Labor Market,” and I want to draw a distinction between the economic benefits of pooling resources (the economic benefit of marriage) and the economic benefits of working (the economic benefit of marriage-abstainment). That is, most people who marry do so at least in part, to have children. Due to the threadbare social safety net in the United States, as well as certain social norms, having children can often derail women’s careers, especially in fast paced (and well paid) industries like science, technology, or medicine. At the least, the it’s one of the larger contributing factors to wage inequality. Certainly, there’s some “correlation is not causation” doubt-casting that can be applied to this conclusion, but I still think it’s worth pointing out that marriage, when coupled with raising children, is not necessarily the most economically sound nor societally productive decision.

Anyway, the piece makes for an interesting read. At the very least, it seems to be pretty unremarkable to note that there are abounding biological reasons to marry early.

High Incomes Produce High Costs

I’m really not sure what to say about Gabriel Sherman’s piece in New York magazine documenting the petulant outbursts of Wall Street bankers, other than to echo the general observation that the disconnect in understanding between bankers and everyone else is truly remarkable. I do want to make one particular point though concerning the notion that living in New York necessitates obscene levels of pay.

“You can’t live in New York and have kids and send them to school on $75,000,” he continues. “And you have the Obama administration suggesting that. That was a very populist thing that Obama said. He’s being disingenuous. He knows that you can’t live in New York on $75,000.”

That was an argument I heard over and over: that the high cost of living like a wealthy person in New York necessitates high salaries. It was loopy logic, but expressed sincerely. “You could make the argument that $250,000 is a fair amount to make,” says the laid-off JPMorgan vice-president. “Well, what about the $125,000 that staffers on Capitol Hill make? They’re making high salaries for where they live, maybe we should cut their salary, too.”

A similar point is made earlier in the article when noblesse oblige is recast, or perhaps more accurately, reinterpreted, as trickle down economics, but you really can’t make this type of argument without acknowledging that the absurdly high incomes of bankers help create the “cost structure” for “not optional” expenditures like “40,000 private schools and “a summer home within an hour or two commute from Manhattan.” The whole enterprise becomes a cyclically developing self-fulfilling prophecy to meet the ever expanding incomes of the ultra wealthy. If the ultra wealthy are simply very wealthy, then the costs of the services these people consume will go down, and so too with them, the costs of living for everyone else.

Obviously, there are also a lot of other ways to respond to these arguments — for example, I think it’s more likely that an entire office of Congressional staffers makes $150,000 than one does alone, or that nobody is talking about capping income, or that even if a staffer did make $150,000, it’s not likely to produce pervese incentives that topple the financial system, etc. — but I always think it’s important to make this point anytime someone who’s fabulously wealthy complains about the need to spend money on luxury items.

UPDATE: In the article, you get the clear sense that many bankers — at least those interviewed — held firmly to the belief that their money-like-substance creation was inherently valuable, and that the public will rue the day the bankers left. So just in case you were wondering, you’ll want to know that on average, managed funds performed more poorly between 2004 and 2008 than market composites.

Inequality And You

Via Ezra Klein, the Center for Budget and Policy Priorities is doing a series on the growing problem of inequality. The results are truly arresting.

This is about as tangible an example as you can get of the phrase “it takes money to make money,” but of course, it’s also a reflection of policy choices and a culture that has conflated capitalism with morality. And as Ezra notes, the fact that the incomes of the top 1 percent have grown 256 percent really doesn’t even do the data service.

It’s easier, after all, to get large percentage changes on small absolute numbers. Increasing the salary of someone who makes $25,000 by 100% only requires another $25,000. If you make $725,000, however, a $25,000 raise is peanuts. It’s three percent.

This chart below illustrates the trend in dollar terms.

A lot of liberals immediately react to inequality as a moral quandry, in the sense that policy goals should be aligned to promote fairness. Of course, there is an obvious validity to this argument, but it’s also worth noting that in a system  where merely running for Senate costs tens of millions, growing gaps in inequality grossly skew political representation to favor the interests of the rich. And as inequality grows, so too will the political power of the mega wealthy and we’ll continue to see more and more narrow and parochial interest groups exert tremendous influence on policy matters that affect everyone (legislation to stave off catastrophic climate change comes to mind). Now, I don’t really envision a scenario where if the scope of economic growth isn’t widened, we’ll find ourselves enserfed to oil tycoons and bank executives, but we will continue to see our democracy increasingly distorted to serve the needs of a select few.

Banks: TARP Imperils Ability to Overpay Executives

Via Kevin Drum, we get some context Goldman Sachs’ “noble” desire to pay back $5 billion in TARP funds.

Back in September, Goldman Sachs received a $5 billion capital investment from Warren Buffett that requires interest payments of 10%.  A month later they received a $10 billion capital injection from the Treasury that requires interest payments of only 5%.

So this should mean that if Goldman is animated by shareholder best interest, it would pay off the Buffet loan first, right? After all, the interest will cost the company — and shareholders — much more the longer it sits on the books, so this should be a no-brainer. Analyst Richard Bove sheds some light.

“If you were thinking of shareholders first, you would get rid of the most onerous amount first, and that would benefit shareholders. … However, if you pay off TARP you are eliminating all of the restrictions on paying management,” Bove told “You shouldn’t be diluting existing shareholders to pay off TARP so you can pay management more money.”

I suppose you could make the argument that the best interest of shareholders would be best met by the PR boon associated with unshackling the company from more rigorous government oversight, but I think given the financial industry’s history over the past couple years,  it’s pretty safe to assume this isn’t the true motivating factor. Further, this logic would be rendered even more incredulous when you consider that TARP money aside, financial firms are still the benefactors of significant government aid.

Even as they clamor to exit the most prominent part of the bailout program by repaying government investments, firms continue to rely on other federal programs to raise even larger amounts of money….The Federal Deposit Insurance Corp. has helped companies [] borrow more than $336 billion through the end of March, by guaranteeing to repay investors if the firms defaulted. And financial firms hold more than $1 trillion in emergency loans from the Federal Reserve.

Goldman Sachs declared a “duty” to repay the Treasury after posting a first-quarter profit. The chief executives of several large banks at a meeting last month urged President Obama to accept repayments. But no company has similarly pledged to leave the government’s other aid programs.

The explanation appears to be simple: Only the capital investments by the Treasury require the companies to make significant sacrifices, such as restricting executive pay.

I’m aware that the strict government oversight is legislatively codified in the TARP bill, but Congress ought to pass a law extending the jurisdiction of these powers to cover banks currently relying on government loan guarantees. The legislation should be written loosely enough to allow leeway in determining who is subject, but the recent spate of news suggesting banks are all of a sudden “profitable” is insulting to one’s intelligence. After all, if Goldman was doing well enough to pay off the TARP funds, why did they need to raise $5 billion in stock to do it?

Finally, these measures represent a significant gamble by the part of the banks that the populist rage engendered by the AIG bonus mess has finally subsided. They might be right to assume that the more complicated nature of the situation won’t result in the same level of outrage, but it’s not a lock. It’s hard to speak for “the public”, but I can tell you that I’m not yet comfortable enough with the idea that finance should return to its status quo to let this slide — and Barney Frank is no fool.