Goldman Says Buzz Off to Groveling Banking Lobby: That’s the IIF, in case you didn’t know. If there’s any justice in the world, Goldman’s departure from the group will help precipitate the defenestration of its ridiculous managing director, Charles Dallara.
Energy Hedge Funds Missing Oil Boom: There must be something to all that "market-neutral" talk after all!
The Only Laugh-Out-Loud Letter from a Corporate Raider You Will Read This Week
US-listed ETF Master List, sorted by Market Cap
Thoma vs. Mankiw on Opt-Out Financial Regulation
Dodd Bill Places A “Hit” On Good Appraisers, With Bondage
CNBC Publicizes This Blog: Charlie Gasparino vs Yves Smith.
Warren Buffett has a 10-year, $1 million bet with some fund-of-funds managers: he reckons that his investment in Vanguard’s S&P 500 index fund will outperform their portfolio of five fund-of-funds. It’s a pretty standard active vs passive bet, albeit for uncommonly large stakes; the interesting thing here is that the active side of the bet can be considered to be a fund-of-fund-of-funds, which is pretty crazy, even after accounting for the fact that the top level fund isn’t going to charge any management fees.
It’s crazy because diversification is bad for the active side of the bet:
Buffett offered to bet any taker $1 million that over 10 years and after fees, the performance of an S&P index fund would beat 10 hedge funds that any opponent might choose. Some time later he repeated the offer, adding that since he hadn’t been taken up on the bet, he must be right in his thinking.
But in July 2007, Ted Seides, a principal of Protégé but speaking for himself at that point, wrote Buffett to say he’d like to make the bet – or at least some version of it.
Months of sporadic negotiation ensued. The two sides eventually agreed that Seides would bet on five funds of funds rather than 10 hedge funds.
Buffett’s actually in better shape here than he would have been with the original bet: the five fund-of-funds, between them, are bound to invest in much more than just 10 hedge funds. And the more hedge funds which underpin the bet the greater the chance that Buffett is going to win. After all, the average fund-of-funds, net of all fees, is going to underperform the market as a whole. Even Buffett’s opponents concede that:
Top hedge fund managers have surpassed market returns net of all fees, while assuming less risk as well. We believe such results will continue.
There is a wide gap between the returns of the best hedge funds and the average ones. This differential affords sophisticated institutional investors, among them funds of funds, an opportunity to pick strategies and managers that these investors think will outperform the averages.
Funds of funds with the ability to sort the wheat from the chaff will earn returns that amply compensate for the extra layer of fees their clients pay.
But of course the more hedge funds that these managers invest in, the harder it’s going to be for them to invest only in "the best hedge funds" and "sort the wheat from the chaff".
So I think Buffett actually underestimates his chances when he says he has a 60% chance of winning the bet. And if he does lose, I think he’ll lose not because the hedge-fund managers did particularly well, but because the S&P did badly.
This is one area where the fund-of-funds have a big advantage: while Buffett is confining himself to large publicly-listed US equities, his opponents have the entire universe of asset classes to choose from. If they simply invest in something a bit more globally diversified, and if the US stock market doesn’t go anywhere over the next 10 years, then it’s quite easy to see how the hedge-fund managers might win with no thanks at all to their alpha-generating prowess.
When Lehman Brothers stock closed Friday at $32.29 a share, that put the bank on a price-to-book ratio of 0.82, based on Lehman’s Q1 announcement that it had a book value of $39.45 per share. When Lehman Brothers stock opened Monday at $29.47 a share, that put the bank on a price-to-book ratio of 0.87, based on the bank’s announcement this morning that its book value has fallen to $34. So things are clearly getting better, right?
Are you worried about $140 oil and the concomitant rise in jet-fuel costs? Heritage isn’t. The Ireland-registered Swiss investment company wants to buy Silverjet for ߣ5 million or so (call it 12 cents on the dollar for creditors) and get the all-business-class airline flying again. And there might even be a bidding war: there’s reportedly at least one other firm offer on the table, and interest from other parties too.
But all-business-class airlines don’t work, especially not when they’re independently owned. Given the credit card holdbacks and enormous borrowing costs and generally adverse business conditions that any new owner would face, wouldn’t it be easier and cheaper to simply burn a million pounds in cash? It would almost certainly be more fun.
Today is an excellent day to look for the latest information on the subject of sovereign wealth funds. For one thing, it marks the publication of a 92-page Monitor Group report on the subject, which looks at the funds in detail, notes that their differences in many ways outweigh their similarities, and which ultimately welcomes them to the international financial scene.
There’s also an important BusinessWeek article which manages to get Abu Dhabi Investment Authority managers on the record, which is quite a feat. (Pay no attention to the fact that ADIA’s head of strategy is named Villain.) Be sure to note the asset allocation sidebar, too, it might even give you some ideas with respect to your own portfolio.
Rachel Ziemba notes that ADIA has a much deeper website now than it has had in the past, which states unequivocally that "ADIA does not seek active management of the companies it invests in".
Helmut Reisen is writing about SWFs at Vox EU, and in case you missed it last week, the FT’s John Thornhill has some interesting quotes from Gao Xiqing, the president and chief investment officer of China Investment Corporation, which – like so many things Chinese – seems to be moving in the direction that the West wants, just not as quickly as they might like.
And do you recall a little kerfuffle over a leaked Milken Institute report saying that SWFs might not be as big as everybody thought they were? Well, the report’s now out, but not with the Milken Institute’s imprimatur. The author, Christopher Balding, has left Milken, and posted the report under his own name.
Balding’s case for the SWFs being smaller than you think is indeed based on public ownership data, and therefore doesn’t include any money that they’ve farmed out for management to external fund managers. He writes:
Though these SWF’s invest in hedge
funds, private equity funds, or privately managed funds operated by partners which might
not require foreign registration of securities, it is doubtful that this would account for the
difference between current estimates and verified holdings. Using the most liberal
allowances for sovereign wealth fund holdings, it is difficult in accepted international
financial statistics to account for widely cited estimates of assets under management for
Abu Dhabi, Saudi Arabia, and Kuwait. Even allowing for significant measurement errors
and flawed ownership data, it is difficult to reconcile differences of such enormity.
This does seem to me to be more assertion than argument: why are these things doubtful and difficult to reconcile? I suspect that a large part of big fund mangers’ assets under management is these days made up of SWF funds. It’s much easier to outsource such things to proven professionals than it is to navigate the politics of hiring and managing such professionals yourself.
Banks, by their nature, are opaque creatures, and investment banks even more so. Even when they have a public listing and aren’t owned by a much larger financial-services entity, it’s almost impossible to tell from outside what’s going on inside them. Thus did analysts expect Lehman Brothers to report second-quarter revenue of $2.62 billion, and a net loss of 22 cents a share; the real numbers are going to be more like negative revenue of $700 million (this is investment banking, of course you can have negative revenue) and a net loss of $5.14 per share.
Even David Einhorn probably wasn’t expecting numbers that bad. But there seems to be a fair few investors still willing to shovel good money into Lehman: the New Jersey Division of Investment, among others, is likely to subscribe to some $6 billion in newly-issued stock.
In the past, buying LEH when it’s traded well below book value has been a way to make some spectacular profits, so you can see where the temptation lies. On the other hand, with the stock destined to open this morning significantly below the $30 level, there’s a definite feeling of slow-motion trainwreck here. Still, at least the slow-motion bit is a good thing: it means that Treasury and the Fed have that much more time to find someone with credibly deep pockets willing to buy the bank outright.
Martin Sullivan is still holding on to the CEO job at AIG, despite last month’s attempt to use the WSJ to oust him. Still, if at first you don’t succeed, try again, and so there’s a new front-page WSJ story today which sticks the knife in even further – this time it’s not only employees such as Steven Udvar-Hazy who are quoted as being unhappy with Sullivan, but even the chairman of the board:
AIG Chairman Robert Willumstad and director Morris Offitt met with Mr. Broad, Mr. Davis and Mr. Davis’s son Christopher, a portfolio manager at the Davis firm, in midtown Manhattan. There, the investors expressed their concerns about the company’s performance.
"You’re not telling us anything we don’t know," Mr. Willumstad said, according to a person familiar with the situation. "We’re unhappy about the performance as well."
The most damning part of the article, however, isn’t the fact that Sullivan’s boss is unhappy about his performance – it’s rather the way in which Sullivan’s own spokesman defends it.
An AIG spokesman defended Mr. Sullivan’s track record. "Under Mr. Sullivan’s effective leadership throughout 2005, AIG was able to file audited financials…
At that point, you can stop reading. If the best thing that Martin Sullivan has done, according to his own spokesman, is to have filed audited financials in 2005, you know it’s all over.
Tim Geithner has an important article in the FT today, headlined "We can reduce risk in the financial system". He’s entirely right, and his proposals are entirely sensible. Geithner was one of many regulators who warned about the credit bubble while it was inflating, and although they didn’t manage to prevent the credit crunch, global regulatory authorities in general have clearly emerged over the past year as being part of the solution rather than part of the problem.
And when you look back over the history of global financial crises, from LTCM to emerging-market meltdown to Bear Stearns, there’s one constant: the involvement of the New York Fed. So Geithner speaks with some authority when he says that at the moment it’s difficult "to mobilise liquidity across borders quickly in a crisis" and calls for a unified regulatory framework rather than the current patchwork quilt both within the US and around the world which makes regulatory arbitrage and jurisdiction-shopping far too tempting and easy for global financial institutions. (One obvious case: ICE.)
Geithner has five specific proposals:
All of these are very good ideas, and it’s hard to imagine Geithner’s peers in the regulatory world objecting to any of them. For that reason, I’m optimistic that between the New York Fed’s bully pulpit, on the one hand, and the fear instilled in regulators around the world by the events of the past year, on the other, these ideas will actually be acted upon in a reasonably timely fashion.
My only doubt is in number four: institutions, by their nature, will never willingly sign on any plan which makes them obsolete, which means in turn that many US regulators will fight these proposals. I’m not sure how to get around that problem, since I have no faith in the ability of the US legislature to force the matter in a constructive way. Maybe it will take one more spectacular failure – of Fannie Mae or Freddie Mac, perhaps – before the people running the USA wake up and realize that the current alphabet soup is not helping anybody except the regulatory arbitrageurs.
Late on Friday night, German time, I got an email from Portfolio headquarters in New York. "Not that I need to tell you this," it said, "but give us a little taste of how Europe is shaping up Monday morning."
OK. Here in Berlin it’s an absolutely gorgeous day, sunny, not too hot, blue skies. The mood is very cheerful, since Germany beat Poland 2-0 last night in the European cup. The rest of the first four matches went more or less according to expectations too: the Czech Republic beat Switzerland in the opener, Portgual beat Turkey 2-0, and Croatia managed to beat Austria 1-0. Tonight is Netherlands-Italy, which should be fun.
You want news news? There’s a truck drivers’ strike in Spain, not much else. On the business side, Germany’s Postbank is going to be sold, probably for about $15 billion, but we kinda knew that was going to happen already. And the weird France Télécom bid for Scandinavia’s TeliaSonera seems to be falling apart – also to no one’s great surprise.
Oh, and the stock markets? No news there, basically flat. If you’re the kind of person who watches CNBC all day and was panicked into thinking that the world was coming to an end on Friday, it wasn’t. As for oil, it’s down a little bit, although still at an eye-watering $137.65 a barrel. Basically, USians, you’re on your own. You wanna continue with the whole crazy-volatile markets thing? Go right ahead. Won’t bother us.
Ben Stein this week uses his column to lay a thousand-word guilt trip on his son. Never mind that entire book he wrote about the joys of fatherhood, the main point that Stein wants to get across right now is that parenting is all about the joyless struggle to make money to support one’s children. For consider the sacrifices Ben is making for the sake of his son:
I think of this as I shlep through the airport security line with my heavy bags (Willy Loman style), as crazy people sit in front of me on the plane, trying to break my nose by throwing their seatbacks onto me, and as I wake up early to travel to the next destination…
Right now, today, thank your parents for working to support you. Don’t act as if it’s the divine right of students. Get right up in their faces and say, ‘Thank you for what you do so I can live like this.’ Say something. Say it, so that when they’re at O’Hare or Dallas-Fort Worth and they’ve just learned that their flight is canceled and they’ll have to stay overnight at the airport, they will know you appreciate them.
Yes, Stein is comparing himself to Willy Loman – and, to drive the point home, he even quotes Death of a Salesman at the end of the column. (He also, inexplicably, quotes three whole words of Hart Crane’s modernist masterpiece Voyages, for no discernible reason.) And he seems to think that the tragedy of Willy Loman is that he was doing it for the kids:
O, golden children, you get to talk about how you’ll never ‘sell out,’ and meanwhile your parents stay up late in torment, thinking of how they can pay your tuition. Because, brilliant kids, work (business) involves exhaustion and eating humble pie and going on even when you think you can’t. And you are the beneficiaries of it in your gilded youth.
The weird thing is that Stein, as he never tires of informing us all, has more money than he’ll ever spend. He has multiple houses, multiple cars, millions of dollars in retirement accounts, and he’ll be 65 next year. Insofar as he’s still schlepping through airport security lines with heavy bags, he’s not doing it for his son. And I’m quite sure he’s never stayed up late in torment, thinking of how he can pay his son’s tuition.
Stein has probably done so many maudlin homages to his father at this point that he felt he had to change it up a bit, and instead talk about himself as a father, and not just as a son. But the self-pity act rings dreadfully hollow, especially from a man as preening and arrogant as Stein. And besides, I’d like to think that on Father’s Day all fathers get honored, not just the ones fortunate enough to have found steady employment with which to support lazy college students.
Fatherhood isn’t some kind of contest to see who can hold down the most soul-destroying job, and judging by this petty column it’s Ben Stein who really needs to grow up a little.
Floyd Norris notes that the S&P financials have sunk back to their mid-March lows. But although the index as a whole is back at its mid-March level, its components generally aren’t. What we’re seeing is pretty much what Mohamed El-Erian predicted in April: the second shoe dropping, and the bad news moving from the world of financial engineering into a much more real world of struggling businesses.
During the next few months there will be a reversal in the direction of causality: the unusual adverse contamination by the financial sector of the real economy is now morphing into the more common phenomenon of recessionary forces threatening to undermine the financial system…
While the financial system has taken steps to enhance balance sheets, they speak essentially to addressing the consequences of excessive leveraging and imprudent financial alchemy. As such, the nasty turn in the real economy may fuel another wave of disruptions that, this time around, would also have an impact on mid-size and smaller banks.
So far, Wall Street still looks noticeably healthier than it did during the worst days of the Bear Stearns crisis. But Main Street, as exemplified by lenders in places like Ohio, looks much worse. Here are the biggest financial stock-price losers in the banking industry, from Norris:
First Horizon, down 43 percent. (It is the parent of First Tennessee Bank.)
National City, down 34 percent. Ohio’s largest bank is under increased regulatory scrutiny.
Wachovia, down 21 percent. Its CEO was fired for losses.
Huntington Bank, down 21 percent. Also from Ohio.
Regions Financial, down 21 percent. It is based in Birmingham, Ala., where the county government may have to declare bankruptcy after getting caught in the derivatives mess.
Fifth Third Bank, down 21 percent. Another Ohio bank.
KeyCorp, down 19 percent. Another Ohio bank.
These aren’t institutions which came unstuck when their leveraged super-senior trades imploded; these aren’t banks which were lending billions of dollars to private-equity firms in the form of PIK-toggle bonds. Yes, they have real-estate exposure, but look at the states here: Tennessee, Ohio, Alabama. Not California or Florida, where the real-estate bubble burst most spectacularly.
Commercial banks are in many ways a leveraged play on the strength of their local economy. So while the March dip in the S&P financials was symptomatic of Wall Street’s troubles, the June dip indicates something much broader.
New study calls for $45 trillion to cut greenhouse gases in half by 2050
Billers, Players, and Income Inequality
Idiosyncrasy in house prices: "When I had my flat valued, the highest valuation was more than 10% above the lowest. 4.4% is therefore only a fraction of the idiosyncratic uncertainty about a particular property’s price."
Is Sam Zell taking a page out of Nick Denton’s book? Denton, overseeing bloggers, judges them on the number of pageviews they generate; Zell, overseeing newspaper journalists, is judging them on the number of column inches they generate:
The struggling company has looked at the column inches of news produced by each reporter, and by each paper’s news staff. Finding wide variation, they said, they have concluded that it could do without a large number of news employees and not lose much content.
Perhaps they should start with the copy editors? After all, they produce no column inches at all. And then, after encouraging all journalists to write as long as possible, the letters page could become at least half a dozen pages long. After that, I have a couple of college students I could point them to who are good at tweaking margins and line spacing in order to maximize the number of words per page…
Do you read the FT’s "popular and influential Lex column"? The phraseology comes from a Guardian story today, but it’s something of a journalistic cliché: the FT definitely considers Lex to be a flagship franchise. But in fact there’s a very good chance you don’t read it, and you’re not influenced by it.
WSJ editor Robert Thomson Thompson is taking full advantage of that fact, and poaching top Lex editors to build his own version of the property in-house, replacing the Breaking Views column the WSJ currently runs. The big loser here is Lex; only going free can save it now.
In the UK, where the FT holds much the same position within the financial classes as the WSJ does in the US, everybody (or everybody who matters, anyway) reads it, normally on the train in to work: it’s easily accessible on the back page, and comes in nice bite-sized chunks. But in the US, the FT still has a tiny print circulation of about 150,000 – compared to over 2 million for the WSJ. And in a classic case of shooting itself in the foot, the FT has made Lex almost impossible to read online: according to the version of the "product selection page" I get here in Germany, a subscription to FT.com costs $109, while if you want to add Lex to that, you have to pay $299. In other words, the marginal cost of subscribing to Lex is greater than the cost of subscribing to the rest of the FT combined.
Outside the UK, then, Lex isn’t remotely the popular and influential flagship that the higher-ups in London might consider it to be. Rather than sitting easily-accessible on the back page of your daily paper, it’s hidden behind forbidding subscription firewalls, and needs to be actively sought out if you want to read it.
As a result, the WSJ still has the stronger brand when it comes to such things. It’s called Heard on the Street, but – until now – it hasn’t had the verve and punch of Lex. Its authors consider themselves reporters first and foremost, with the opinion aspect often played down. Many people within and outside the WSJ thought for years that it should have a Lex-like column for informed financial opinion, but the old guard at the WSJ always resisted, partly on the grounds that having in-house journalists pissing off important financial sources could make it needlessly difficult to perform the paper’s core journalistic function.
So a couple of years ago, the WSJ decided on a compromise solution: it would have a daily financial opinion column, but it would outsource that column to Breaking Views, a company founded by former Lex editor Hugo Dixon. That way the WSJ’s readers would get a Lex-like column, but the paper itself wouldn’t be considered to be giving up its much-vaunted impartiality and objectivity.
While the compromise was in many ways better than nothing, it also had the unintended consequence of signalling both externally and internally, to its own journalists, that the paper’s top editors felt incapable of producing such a column themselves. The FT, for one, took great pleasure in thinking that it was the only paper able to produce a Lex-like product in-house: the WSJ was forced to join the likes of NRC Handelsblad, in the Netherlands, and syndicate content from elsewhere.
That state of affairs has now come to an end. The WSJ will soon stop carrying the Breaking Views column, and has hired the US editor of Lex, Thorold Barker, along with his colleague Liam Denning, to reinvent Heard on the Street as a replacement. The FT and the WSJ will now have directly competing financial-opinion columns – but the key difference between them is that while the WSJ’s column will land on 2 million desks each day, the FT’s will still be stuck behind those idiotic firewalls.
This is clearly a move by Robert Thomson to move the Journal in a British direction, and to turn it into a media outlet unafraid of having its own opinion. Whither the longer-form journalism in which Heard on the Street historically specialized? That’s not a priority any more, it would seem.
Meanwhile, Lex is suffering: it’s lost not only Barker and Denning, but also four other journalists since February, including former editor Tracy Corrigan and deputy Patrick Foulis. Lex journalists were never big fans of the Alphaville blog, but now they’ve hired Alphaville’s Helen Thomas to help plug some of the gaps in New York.
Where does this leave Breaking Views? The WSJ decision harms them at the margin, but not by nearly as much as you might think. Breaking Views’s syndication rights are a tiny proportion of its revenue, which mainly comes from bulk subscriptions from investment banks. In that sense, the BV newspaper columns in places like the WSJ and Le Monde are not primarily money-spinners (although they do generate some income for the company) but rather branding devices: valuable negative-cost advertising for the kind of analysis at which BV excels. But given the tiny audience of potential subscribers (BV doesn’t even make public how much its subscription rates are, they’re so high) the main job of selling subscriptions will always be done by the BV sales team, rather than through newspaper columns.
The new lay of the land, then, has Breaking Views at the narrow, elite end of the spectrum. The reinvented Heard on the Street is likely to have a lot of Lex DNA in it: while maybe not as punchy or as funny as Breaking Views, it will be short and smart and to-the-point, and it will have an enormous built-in circulation base, both in print and online. (Murdoch and Thomson, if they have any sense at all, won’t even think about putting up extra subscription firewalls around the new-look Heard content.) So the outlook there is pretty rosy too.
Lex, however, is in a much more painful spot. It will always have a lot of clout and importance in the UK, but in the US it will struggle to get much of a foothold. US investment bankers with access to Breaking Views – and direct access to Breaking Views journalists – are likely to prefer that to Lex, which still doesn’t carry bylines. The rest of the US market will be perfectly happy with Heard on the Street.
Which leaves the best course for Lex to be something I’ve been advocating for some time, except now it’s a necessity rather than just a good idea. The FT should buy lex.com, and put all Lex content up on it for free. At a stroke, Lex would become the only one of the three main financial opinion sources to be easily linkable, and it would have an instant global presence and mindshare that the other two could only dream of. The Lex brand is still probably the most valuable of the three, but it’s becoming increasingly less valuable by the day. The only way to reverse that course is to make all Lex content free.
Dan Gross has a most peculiar column about collectible architecture, something I’ve been writing about quite a bit:
Can historic Modernist homes be treasured, shown, and monetized like Warhols and Gauguins? A recent visit to one of America’s best-known and most successful Modernist houses, Philip Johnson’s Glass House, and a look at its business model, suggests the answer might be no.
He then goes on to explain how the Glass House, which was left to the National Trust for Historic Preservation, doesn’t make money. He doesn’t explain why it should make money, and he also doesn’t explain how Warhols and Gaugins are regularly "monetized" by similar not-for-profit entities. (Hint: they’re not.)
As a punchline, Gross points out that Richard Neutra’s Kaufmann House, which was sold by Christie’s in a blaze of publicity in May, actually never got sold after all. But that was just another real-estate transaction which fell through – such things are not exactly rare these days.
I’m not a fan of selling modernist architecture at auction: I think that carefully-brokered transactions would be better for all concerned, and indeed now that the Kaufmann House sale has fallen through, both high-profile architecture auctions last month can be considered failures. (The other was Louis Kahn’s Esherick House in Philadelphia.)
I also fear that these auction failures will put a year-long crimp in the nascent and fragile market in collectible architecture: that they might well have done more harm than good.
Why is a market in collectible modernist architecture important? Because the public as a whole tends to follow the money, when it comes to taste in art and architecture. It wasn’t that long ago that avant-garde architects like Zaha Hadid were generally ridiculed in the press; nowadays, when she builds something new, the new building is welcomed by the local community. Tastes change quickly, and contemporary architecture is now as popular as it’s ever been – something evidenced by the rise of "starchitects" in recent years.
So when Ed Glaeser talks about Lucien Freud’s paintings "offending standard sensibilities," I think he’s a bit out of date. They might have done, a few years ago, but now they’ve been ratified by record sale prices, the public is used to them and rather admires them.
Glaeser wonders what is to be done about Boston’s City Hall – an architecturally important building which is unloved by locals. He suggests that "a serious campaign to teach people why City Hall is so interesting could give the structure a much more solid base of popular support". I suggest that serious campaigns rarely have any effect in terms of popular support. Much better that modernism generally is ratified by high prices – that will have a much bigger effect on popular taste. If modernist buildings fetch a premium in the market, then the taste of the market will, eventually, trickle down to the population as a whole. There are very few things which are valuable yet not generally desirable.
Tyler Cowen brings up one of my favorite subjects: the dollar value (as opposed to the dollar cost) of private schooling. And I’m happy he comes down on my side of a question which will never be resolved to everybody’s satisfaction: public or private?
I ended up telling my mother I was happy to remain in the public school. If nothing else I feared the commuting costs and not having friends’ homes be nearby. Furthermore at public school I met Randall Kroszner and Daniel Klein, among other notables. Natasha and I faced this choice again with Yana and she ended up in public high school. I can’t really cite economics here but if your public school is halfway decent that is the side I come down on.
Insofar as there’s been much empirical research on this, it generally shows that, after adjusting for socio-economic status, there’s very little difference in educational outcomes between public schools and private schools. Given that fact, it makes sense to take the money that would otherwise be spent on private schools, and to spend it instead on other forms of education: books, travel, opera, you name it.
One of Cowen’s commenters hilariously then adds on the "time cost of parental involvement," as though these are the kind of things most middle-class parents wouldn’t love to do.
So while Tim Harford might concentrate on the marginal benefits of sending your kids to a private school – peer effects, mainly, and probably-better teachers – he doesn’t spend nearly as much time considering the marginal costs, which are huge. Stop to ask yourself how much pre-tax income you would need to send two children to private school through age 18, and then ask yourself how much happier you would be if you didn’t need to earn all that money, or if you could spend that money on other things instead.
Yes, teachers are important, but parents are even more important. And middle-class parents of kids in public schools have, at the margin, more time and more money to spend on their kids. Which, I suspect, more than makes up for any pedagogic weaknesses at the public school they send their children to.
Daniel Hall unwraps a rarely-heard yet very powerful argument in favor of cap-and-trade over carbon taxes. Essentially, coporate pork in a cap-and-trade system (free emissions allowances) is much less harmful than corporate pork in a carbon-tax system (lower taxes, or tax exemptions). Why?
Because one system (cap-and-trade with free allowances) equalizes the marginal cost of emissions, while the other (carbon taxes with exemptions) does not.
Once you establish a cap-and-trade system, every regulated entity within that system will have an identical incentive to reduce emissions. The incentive will be the market price for allowances. And this incentive will be the same for all firms regardless of how allowances are initially distributed. Even if firms get allowances for free, they will still face an opportunity cost for emissions.
If you establish a carbon tax system with different tax rates for different sectors, however, firms will face varying incentives to reduce emissions. This will end up making some firms or sectors work much harder to reduce emissions (those with the higher tax rates) and others work less hard. This will have (at least) two unfortunate effects: one is that society will get less bang for its buck now — fewer emissions reductions for the money it spends than it could have done if marginal tax rates were equal. The second problem is that over time the existence of differing marginal tax rates will tend to push economic activities into sectors with low tax rates and away from those with high tax rates.
This is similar, but not identical, to the argument I was making yesterday. Basically: assume imperfect government and an exasperatingly craven legislature. Then ask yourself what the world will, in practice, look like under each of the two alternatives. The cap-and-trade world is the better one.
(Via Avent)
Exodus of the Polish plumber: "There were an estimated one million British-based Poles at one time but half have now left the U.K."
Feds Swoop In on an Unsuspecting Town
Court Finds Dell Guilty of Fraud: "Dell often blamed software when hardware was actually the problem… Subscribers to a "next-day" repair service sometimes waited as long as a year for support… Dell also advertised special no-interest financing, but denied almost everyone those terms and then charged them interest rates as high as 30 percent…"
How we’ve moved on from the Days of Panic: S&P today downgraded both Ambac and MBIA, and as of now (a couple of hours later) the news still hasn’t made it to the NYT’s business front page; on the wsj.com homepage, it’s well below the fold, the 7th-most-important story of the moment.
And the stocks in question? MBIA is up more than 7%, while Ambac is up over 4%. The WSJ’s Kathy Shwiff tries to think of some explanation of how this makes any sense at all:
The downgrade takes any notion of shareholder-unfriendly capital-raising off the table and could lead the insurers to shift attention and capital to "clean" subsidiaries, offering some possibility of a fresh start.
I suppose in that scenario the rump companies be left to wither slowly in run-off mode – a mode in which, if you believe the insurers, they will actually be profitable over time, and have some substantial present value.
But really I think the reason for the shares going up today is that MBIA and Ambac are worth less than $2.5 billion between them: they’re small-caps, they’re volatile, and there’s a lot of trading and speculation going on. I wouldn’t read anything more than that into a stock like Ambac going up 11 cents on the day.
Alan Greenspan once complained that "we lack the kind of analytical framework for financial stability that we have for monetary policy" – something which is clearly a problem when central banks are in charge of both things, and especially in times such as now, when the consequences from the former spill over into the latter. Alexander Campbell has found one presentation which seems to have studied the phenomenon reasonably closely; it concludes that
All of this seems intuitively true, but as Campbell says, "translating that into real-world policy will be tricky". Still, this is clearly an important avenue of research for central banks around the world: it doesn’t matter how good your monetary policy is if you’re leaving yourself wide open to a banking crisis.
As you surely know, Ecuador is in the process of putting together a new constitution. And this week’s report on Ecuadorean politics and economics from Analytica Securities in Quito (you are on their email list, right?) outlines few of the things which are likely to go into it.
Top of the list is "the
principle of conditional property rights". What does that mean?
Individual property rights would be guaranteed
by the new Constitution, but property rights
would have to be consistent with public
welfare and the upkeep of the environment… Expropriation
could take place not just to build public
infrastructure, but also to guarantee food
security, promote equality or to conserve the
environment.
Yes, that means what you think it means:
The committee on food security
within the Constituent Assembly intends to
classify the unequal distribution of agricultural lands as a threat to the food security of peasant and indigenous communities. And it
wants to guarantee peasants access to
agricultural lands. The upshot of these
principles could be to render agro-industrial
assets, prominent in both the coast and the
highlands, vulnerable to expropriation in the
context of a new land reform designed to
replace agro-industry with a peasant based
subsistence agriculture.
And let’s not forget the "strategic
sectors of the economy":
According to this notion, the
government should control key public
services and natural resources and harness
them for national development. Included
are oil and mining, telecoms, electricity,
water and radio and television frequencies…
The definition of banking as a "delegated
public service" has met with stern opposition
from the private banking sector.
Yes, that means what you think it means too: that banks would essentially stop making their own credit decisions, and simply become vehicles by which the government outsourced top-down lending decisions. Oh, and the government is likely to strip the central bank of its independence, too, which means the end of reliable statistics or arm’s-length banking-industry regulation.
All of this, incidentally, comes from president Rafael Correa, who still has a popularity rating of 60% despite having been in power for a year and a half. (Fun fact: his vice-president is named Lenin.) And all of this, too, is coming from an oil-exporting country which has done really rather well by global capitalism of late.
I think it’s fair to say that the Washington Consensus is dead.
Confused by the fight between Greg Mankiw and Brad DeLong over whether or not we should cut the corporate tax rate? Well, this is likely to confuse you even more: Steve Waldman has a great evisceration of Mankiw’s arguments – and then proceeds to say that cutting the corporate tax rate is a great idea, and such a tax cut should be paid for "by increasing the highest marginal tax rate, or better yet, by creating a new top tax bracket".
I don’t get it. I have one big reason for not supporting a decrease in the corporate tax rate, which is that the bigger the gap between the corporate tax rate and the top marginal income tax rate, the more top-earning individuals will figure out a way of turning themselves into corporations. In other words, a cut in the corporate tax rate is a cut in the income tax rate, even if you hike income taxes at the same time. Do we really want a world where corporations don’t have highly-paid employees, but rather outsource key managerial functions to sole proprietorships? If not, then I’d recommend keeping corporate taxes and income taxes at roughly the same level.
I missed this, last week:
Exxon Mobil has amassed a large pile of common stock held in treasury. At the end of 2007, the company had 2.367 billion shares held in treasury, for which it paid $113 billion over the last 10 years, according to a regulatory filing. If that stock were valued at the current market price of $90 a share, it would be worth $237 billion, or $124 billion more than what Exxon Mobil originally paid for it.
In fact, if you look at the most recent 10-Q rather than the older 10-K, the numbers are even bigger: Exxon now has 2.736 billion shares held in treasury, for which it paid $123 billion. (The NYT report has a typo: the number at the end of last year was 2.637 billion shares, not 2.367 billion shares.) But the value of the shares that Exxon owns in itself is still about $238 billion, since the shares have now softened slightly to just over $87 apiece.
This is a good reminder that Exxon is not in the business of investing in oil production, so much as it’s in the business of maximizing shareholder value. That $123 billion it’s spent on its own stock could have been invested instead in the oil business – but Exxon refuses to invest any money unless it gets a return on capital employed of more than 35%. Any excess cash gets returned to shareholders in one way or another, either through dividends or through stock buybacks.
State-owned oil companies are also prone to underinvestment these days, using the much easier tactic of simply leaving oil in the ground:
The Saudis have indeed deliberately decided to leave theirs in the ground. “King Abdullah, the country’s ruler, put it more bluntly: “I keep no secret from you that, when there were some new finds, I told them, ‘No, leave it in the ground, with grace from God, our children need it’.” FT 5/19/08. I see the interest rate as part of the Saudis’ decision how much oil to pump. Because the current rate of return on financial assets is abnormally low, they can do better by saving the oil for the future than by selling it today and investing the proceeds. Holding back production raises today’s oil price, to a point where the expected future return on oil has fallen to the same level as the interest rate.
All of which leads me to conclude that if high oil prices act like a natural carbon tax, in terms of bringing down demand, then financial incentives act a bit like a natural carbon cap, in terms of bringing down the amount of investment and production in the oil industry as a whole. It’s just that at the moment, the financial benefits of these decisions go entirely to oil-producing nations and to the shareholders of big oil companies. If we implemented a carbon tax or a cap-and-trade system, everybody could get some of the upside.
(HT: Guambat)
Brad DeLong reckons that the relative merits of carbon taxes and cap-and-trade "roughly offset each other". "To first order cap-and-trade and carbon taxes are the same," he says, but there are second- and third-order differences. Among the second-order differences are these, and you can see how he ends up with the "roughly offset" conclusion:
Cap-and-trade runs the risk that the cap will be set at the wrong place and so the price will go damagingly above its social optimum value.
Carbon taxes run the risk that the tax will be set too low and so the quantity emitted will go damagingly above its social optimum value.
These two considerations do not offset each other. The second risk is high and real; the first risk is low and politically much more unrealistic.
Given the hysteria over energy prices in general and gasoline prices in particular, it’s easy to imagine how a carbon tax would be set too low. And it’s true that no one really knows what the elasticities are in the energy market, which means that an aggressively-low emissions cap could indeed send prices into the stratosphere.
But, realistically, what would happen in such an event? Would Congress sit idly by as fuel-oil costs exceeded monthly mortgage payments? Would they tell their constituents that, sorry, nothing they can do about $15-a-gallon gasoline prices, we set our cap and now we have to stick with it? Of course not. They would tweak the cap-and-trade system in one of any number of ways: they might allow companies to borrow emissions credits from future years, or they might implement a "safety valve" allowing the government to auction off new emission credits at a certain price, or they might simply raise the cap. Alternatively, of course, they could take the unexpected excess revenue from the cap-and-trade auctions and start mailing large checks to everybody in the country, thereby helping to cancel out the ill effects of higher energy prices.
The one thing you can be pretty sure would not happen is that Congress would happily take the cap-and-trade windfall revenue and use it to, say, pay down the national debt. Although even that would have social value which would offset the negative social effects of higher energy prices.
But what of the scenario where emissions permits are auctioned off at a relatively low price, and then suddenly skyrocket in the secondary market, giving no windfall to the government? Well, for one thing, the value of next year’s permits has just gone up, so the windfall will come. And for another thing, given that most people bought their emissions permits at a relatively low price, and that it’s only the marginal permits which are expensive, the effects on actual energy prices would likely not be huge.
In other words, as I’ve said many times in the past, cap-and-trade is flexible. Once you’ve installed the mechanism, it can and will be tweaked over time. Changing tax rates, by contrast, is much harder. Which is why cap-and-trade is superior to a carbon tax.
