The Wall Street Journal ran a lengthy piece on how bond rating agencies are again giving inflated ratings, in this case to collateralized loan obligations that include tranches of a variety of bonds and loans. Inflated ratings were a major problem in the housing bubble years, with the major rating agencies giving investment-grade ratings to mortgage-backed securities that were filled with subprime mortgages.
The piece notes the basic incentive problem that the issuer pays the rating agency. This gives rating agencies an incentive to give higher ratings as a way to attract business.
There actually is a simple solution to this incentive problem: have a third party pick the rating agency. Senator Al Franken proposed an amendment to the Dodd-Frank bill that would have had the Securities and Exchange Commission (SEC) pick rating agencies rather than issuers. The amendment passed the Senate with 65 votes, getting strong bi-partisan support.
Under this provision, if JP Morgan wanted to have a new issue rated, instead of calling Moody’s or Standard and Poor, it would call the SEC, which would then decide which agency should do the rating. This means that rating agencies would have no incentive to inflate ratings to gain customers.
In spite of the strong bipartisan support in the Senate, then-Treasury Secretary Timothy Geithner did not want the provision to be included in the bill. As he boasts in his autobiography, he arranged to have it killed in the House-Senate conference.
So, when we see the problem of inflated bond ratings re-emerging, we should all be saying “Thank you, Secretary Geithner.”
The Wall Street Journal ran a lengthy piece on how bond rating agencies are again giving inflated ratings, in this case to collateralized loan obligations that include tranches of a variety of bonds and loans. Inflated ratings were a major problem in the housing bubble years, with the major rating agencies giving investment-grade ratings to mortgage-backed securities that were filled with subprime mortgages.
The piece notes the basic incentive problem that the issuer pays the rating agency. This gives rating agencies an incentive to give higher ratings as a way to attract business.
There actually is a simple solution to this incentive problem: have a third party pick the rating agency. Senator Al Franken proposed an amendment to the Dodd-Frank bill that would have had the Securities and Exchange Commission (SEC) pick rating agencies rather than issuers. The amendment passed the Senate with 65 votes, getting strong bi-partisan support.
Under this provision, if JP Morgan wanted to have a new issue rated, instead of calling Moody’s or Standard and Poor, it would call the SEC, which would then decide which agency should do the rating. This means that rating agencies would have no incentive to inflate ratings to gain customers.
In spite of the strong bipartisan support in the Senate, then-Treasury Secretary Timothy Geithner did not want the provision to be included in the bill. As he boasts in his autobiography, he arranged to have it killed in the House-Senate conference.
So, when we see the problem of inflated bond ratings re-emerging, we should all be saying “Thank you, Secretary Geithner.”
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The NYT neglected to mention this fact in this piece talking about Japan’s economy. While the piece noted that Japan’s debt to GDP ratio is close to 250 percent, the highest for any wealthy country, it didn’t point out that the debt service burden is virtually zero.
In fact, because much of Japan’s debt carries a negative nominal interest rate, the I.M.F. projects that its burden will actually be negative as of 2021. This means that people will on net be paying Japan to lend it money so that the debt is a source of revenue.
The NYT neglected to mention this fact in this piece talking about Japan’s economy. While the piece noted that Japan’s debt to GDP ratio is close to 250 percent, the highest for any wealthy country, it didn’t point out that the debt service burden is virtually zero.
In fact, because much of Japan’s debt carries a negative nominal interest rate, the I.M.F. projects that its burden will actually be negative as of 2021. This means that people will on net be paying Japan to lend it money so that the debt is a source of revenue.
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This is an important point to mention in reference to Bernie Sanders’ plan to tax corporations with large gaps between CEO pay and the pay of an average worker. High CEO pay is not based on their contribution to corporate profits or returns to shareholders, rather it is a result of their ability to control the corporate boards who set their pay.
This means that the most likely response of companies to a tax on excessive pay gaps between the average and the median worker is to find ways to game the system. For example, they can contract out to other companies the lower-paying work that brings down the average or median pay (it is not clear which would be the reference point from this piece). If shareholders (or workers) had more control of corporations, they would have a strong incentive for reducing CEO pay, since it is coming at the expense of corporate profit and/or the pay of the typical worker.
In this context is important to remember that the excessive pay of CEOs is not just a question of the individual CEO’s salary, it also leads to a bloated pay structure for top executives across the board. This excessive pay for top executives is typically a substantial share (around 10 percent) of corporate profits.
This is an important point to mention in reference to Bernie Sanders’ plan to tax corporations with large gaps between CEO pay and the pay of an average worker. High CEO pay is not based on their contribution to corporate profits or returns to shareholders, rather it is a result of their ability to control the corporate boards who set their pay.
This means that the most likely response of companies to a tax on excessive pay gaps between the average and the median worker is to find ways to game the system. For example, they can contract out to other companies the lower-paying work that brings down the average or median pay (it is not clear which would be the reference point from this piece). If shareholders (or workers) had more control of corporations, they would have a strong incentive for reducing CEO pay, since it is coming at the expense of corporate profit and/or the pay of the typical worker.
In this context is important to remember that the excessive pay of CEOs is not just a question of the individual CEO’s salary, it also leads to a bloated pay structure for top executives across the board. This excessive pay for top executives is typically a substantial share (around 10 percent) of corporate profits.
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The Washington Post seems more than a bit out of touch with reality in this piece on China’s celebration of the 70th anniversary of the Communist revolution there. The article tells readers:
“China is now the world’s second-largest economy and could overtake the United States for top spot as soon as next year.”
According to the I.M.F., China’s economy passed the United States to become the world’s largest in 2015 and is now more than 25 percent larger than the U.S. economy.
The piece also gets China’s per capita income wrong, putting it at $10,000 a year. The I.M.F puts it at just over $17,000 a year in 2011 dollars, which would translate into more than $19,000 a year in 2019 dollars. While it is still much poorer than the United States on a per capita basis, it is now near the top of the middle income countries.
The Washington Post seems more than a bit out of touch with reality in this piece on China’s celebration of the 70th anniversary of the Communist revolution there. The article tells readers:
“China is now the world’s second-largest economy and could overtake the United States for top spot as soon as next year.”
According to the I.M.F., China’s economy passed the United States to become the world’s largest in 2015 and is now more than 25 percent larger than the U.S. economy.
The piece also gets China’s per capita income wrong, putting it at $10,000 a year. The I.M.F puts it at just over $17,000 a year in 2011 dollars, which would translate into more than $19,000 a year in 2019 dollars. While it is still much poorer than the United States on a per capita basis, it is now near the top of the middle income countries.
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Yes folks, the Trump administration is fighting hard to put America first. Its threat to pull the U.S. out of an international postal agreement will save the United States between $300 million and $500 million annually, according to the New York Times. For those folks who aren’t used to dealing with hundreds of millions of dollars, this comes to approximately 0.0025 percent of GDP.
According to the article, “Peter Navarro, President Trump’s trade adviser, said the decision was a ‘huge victory for millions of American workers and businesses.'”
Yes folks, the Trump administration is fighting hard to put America first. Its threat to pull the U.S. out of an international postal agreement will save the United States between $300 million and $500 million annually, according to the New York Times. For those folks who aren’t used to dealing with hundreds of millions of dollars, this comes to approximately 0.0025 percent of GDP.
According to the article, “Peter Navarro, President Trump’s trade adviser, said the decision was a ‘huge victory for millions of American workers and businesses.'”
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That is undoubtedly the question that readers of Robert Samuelson’s column on negative interest rates are asking. At one point Samuelson tells readers:
“No less a figure than former Federal Reserve chairman Alan Greenspan has suggested that it’s just a matter of time before negative rates come to the United States.”
For folks too young or too old to remember, Alan Greenspan was chair of the Fed as the housing bubble grew to ever-larger dimensions. He insisted everything was just fine, in fact, he even co-authored several papers touting the fact that people were spending based on the housing equity created by the bubble. There is no one who deserves more blame for the Great Recession, the largest economic disaster since the Great Depression, than Alan Greenspan.
But apart from his selection of authority figures, there is a more basic problem with Samuelson’s piece: it doesn’t make any sense. We sort of get the idea that he doesn’t like negative interest rates, but it’s not really clear why. The confusion shows itself most clearly in the concluding paragraph:
“The larger issue here is barely discussed — the dependence of U.S. economic growth on constant doses of “stimulus,” whether bloated budget deficits, super-low interest rates or negative rates. Their waning effectiveness raises hard questions of whether the economy can achieve adequate growth on its own.”
Okay, for folks keeping score at home, the first question we should be asking when we look at the macroeconomy is whether the issue is too much demand or too little demand. For folks like Robert Samuelson, who constantly whine about budget deficits, the problem should be too much demand.
Their story is that budget deficits are creating too much demand in the economy, forcing the Fed to either raise interest rates, and thereby crowd out investment and slow productivity growth, or alternatively to allow the economy to become overheated and generate inflation. Clearly this story cannot describe the current economy, where inflation remains well below the Fed’s 2.0 percent target, even as interest rates remain at historically low levels.
The other story is too little demand, which seems to be the case now. This is sort of what Samuelson is getting at in his last paragraph, but the implication is that if the economy has too little demand then “bloated” budget deficits are not a problem. If budget deficits were smaller we would see less demand and less growth, and more unemployment. Again, we know that Robert Samuelson doesn’t like budget deficits (I don’t like chocolate ice cream), but that has nothing to do with the issue at hand.
It is also worth having some fun with his comment about the economy achieving adequate growth “on its own.” There is no “on its own,” which should be obvious to fans of economics everywhere.
Suppose the government didn’t grant patent and copyright monopolies, would we see the same amount of investment in research and development and intellectual products? Presumably, we would not. (Pharma and the others may exaggerate the incentive effect here, but it obviously is not zero.) Direct spending is one way the government directs economy activity and boosts spending, but it is not the only way. People writing about economics for major news outlets should know this.
That is undoubtedly the question that readers of Robert Samuelson’s column on negative interest rates are asking. At one point Samuelson tells readers:
“No less a figure than former Federal Reserve chairman Alan Greenspan has suggested that it’s just a matter of time before negative rates come to the United States.”
For folks too young or too old to remember, Alan Greenspan was chair of the Fed as the housing bubble grew to ever-larger dimensions. He insisted everything was just fine, in fact, he even co-authored several papers touting the fact that people were spending based on the housing equity created by the bubble. There is no one who deserves more blame for the Great Recession, the largest economic disaster since the Great Depression, than Alan Greenspan.
But apart from his selection of authority figures, there is a more basic problem with Samuelson’s piece: it doesn’t make any sense. We sort of get the idea that he doesn’t like negative interest rates, but it’s not really clear why. The confusion shows itself most clearly in the concluding paragraph:
“The larger issue here is barely discussed — the dependence of U.S. economic growth on constant doses of “stimulus,” whether bloated budget deficits, super-low interest rates or negative rates. Their waning effectiveness raises hard questions of whether the economy can achieve adequate growth on its own.”
Okay, for folks keeping score at home, the first question we should be asking when we look at the macroeconomy is whether the issue is too much demand or too little demand. For folks like Robert Samuelson, who constantly whine about budget deficits, the problem should be too much demand.
Their story is that budget deficits are creating too much demand in the economy, forcing the Fed to either raise interest rates, and thereby crowd out investment and slow productivity growth, or alternatively to allow the economy to become overheated and generate inflation. Clearly this story cannot describe the current economy, where inflation remains well below the Fed’s 2.0 percent target, even as interest rates remain at historically low levels.
The other story is too little demand, which seems to be the case now. This is sort of what Samuelson is getting at in his last paragraph, but the implication is that if the economy has too little demand then “bloated” budget deficits are not a problem. If budget deficits were smaller we would see less demand and less growth, and more unemployment. Again, we know that Robert Samuelson doesn’t like budget deficits (I don’t like chocolate ice cream), but that has nothing to do with the issue at hand.
It is also worth having some fun with his comment about the economy achieving adequate growth “on its own.” There is no “on its own,” which should be obvious to fans of economics everywhere.
Suppose the government didn’t grant patent and copyright monopolies, would we see the same amount of investment in research and development and intellectual products? Presumably, we would not. (Pharma and the others may exaggerate the incentive effect here, but it obviously is not zero.) Direct spending is one way the government directs economy activity and boosts spending, but it is not the only way. People writing about economics for major news outlets should know this.
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I have known reporters at Business Insider. I had been under the impression that it tried to be a serious news outlet. Apparently, I was mistaken.
It ran an article this morning attacking the financial transactions taxes being proposed by Senators Bernie Sanders and Kamala Harris in their presidential campaigns, which was based entirely on an analysis by an industry-funded group.
The gist of the piece is that colleges and universities would pay the tax from their endowments, as would pension funds. While anyone who trades would pay the tax, the article ignored the basic logic of the tax even as it presented it to readers. It tells readers:
“‘Moreover, because trading volume decreased, the FTT failed to raise the amount of revenue expected in those countries, and in some countries like Italy and Sweden, the FTT only raised 3% to 15% of the annual expected revenue,’ MMI [the industry-funded organization] wrote in the report.”
Of course there would be a decline in trading, that is a main point of the tax, to discourage excessive trading. The proponents of the tax (which include me) always assume that trading will decline, although by an amount that is consistent with better-designed taxes, like the 320-year-old stock transfer tax in the United Kingdom.
The reduction in trading volume saves colleges, universities, pension funds and others money since they pay for this trading out of their assets. By most estimates of the impact of trading costs on trading volumes, the reduction in trading costs should be roughly equal to the size of the tax.
Since each trade has a winner and loser, investors on average are not profiting from the trading and would not be hurt by trading less. If trading fell too much, there would be a problem that prices are not reflecting fundamental values, but with the taxes being proposed we are just talking about reducing trading volumes to 1990s levels.
This means that the numbers on costs that are highlighted by the industry group and Business Insider are actually the loses being suffered by the financial industry, since the tax payments by colleges, universities, and pension funds would be almost completely offset by their savings on trading costs.
It is understandable that a group funded by the financial industry would not want to highlight this point, but why would Business Insider not explain it to its readers?
I have known reporters at Business Insider. I had been under the impression that it tried to be a serious news outlet. Apparently, I was mistaken.
It ran an article this morning attacking the financial transactions taxes being proposed by Senators Bernie Sanders and Kamala Harris in their presidential campaigns, which was based entirely on an analysis by an industry-funded group.
The gist of the piece is that colleges and universities would pay the tax from their endowments, as would pension funds. While anyone who trades would pay the tax, the article ignored the basic logic of the tax even as it presented it to readers. It tells readers:
“‘Moreover, because trading volume decreased, the FTT failed to raise the amount of revenue expected in those countries, and in some countries like Italy and Sweden, the FTT only raised 3% to 15% of the annual expected revenue,’ MMI [the industry-funded organization] wrote in the report.”
Of course there would be a decline in trading, that is a main point of the tax, to discourage excessive trading. The proponents of the tax (which include me) always assume that trading will decline, although by an amount that is consistent with better-designed taxes, like the 320-year-old stock transfer tax in the United Kingdom.
The reduction in trading volume saves colleges, universities, pension funds and others money since they pay for this trading out of their assets. By most estimates of the impact of trading costs on trading volumes, the reduction in trading costs should be roughly equal to the size of the tax.
Since each trade has a winner and loser, investors on average are not profiting from the trading and would not be hurt by trading less. If trading fell too much, there would be a problem that prices are not reflecting fundamental values, but with the taxes being proposed we are just talking about reducing trading volumes to 1990s levels.
This means that the numbers on costs that are highlighted by the industry group and Business Insider are actually the loses being suffered by the financial industry, since the tax payments by colleges, universities, and pension funds would be almost completely offset by their savings on trading costs.
It is understandable that a group funded by the financial industry would not want to highlight this point, but why would Business Insider not explain it to its readers?
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In an otherwise useful NYT article on the “gig economy,” Neil Irwin tells us:
“The company [Uber] views its role as making a market between people who want a ride and people who want to get somewhere. In other words, it sees itself more like a stock exchange or an auction website. The New York Stock Exchange doesn’t set the price of General Motors stock, nor eBay the price of Beanie Babies.”
Actually, Irwin doesn’t know how Uber “views” its role. This is a claim the company is making about its role in order to avoid being treated as an employer. That does not mean the company, in fact, views its role this way.
In an otherwise useful NYT article on the “gig economy,” Neil Irwin tells us:
“The company [Uber] views its role as making a market between people who want a ride and people who want to get somewhere. In other words, it sees itself more like a stock exchange or an auction website. The New York Stock Exchange doesn’t set the price of General Motors stock, nor eBay the price of Beanie Babies.”
Actually, Irwin doesn’t know how Uber “views” its role. This is a claim the company is making about its role in order to avoid being treated as an employer. That does not mean the company, in fact, views its role this way.
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