Category: Current Affairs
Regulating the shadow banking system
There is a new paper by Gary Gorton and Andrew Metrick, and (part of) the abstract reads as follows:
We first document the rise of shadow banking over the last three decades, helped by regulatory and legal changes that gave advantages to the main institutions of shadow banking: money-market mutual funds to capture retail deposits from traditional banks, securitization to move assets of traditional banks off their balance sheets, and repurchase agreements (“repo”) that facilitated the use of securitized bonds in financial transactions as a form of money. All of these features rely on an evolution of the bankruptcy code that allows securitized bonds to be used as a form of privately created money in large financial transactions, a usage that can have significant efficiency gains and would be costly to eliminate. History has demonstrated two successful methods for the regulation of privately created money: strict guidelines on collateral (used to stabilize national bank notes in the 19th century), and government-guaranteed insurance (used to stabilize demand deposits in the 20th century). We propose the use of strict rules on collateral for both securitization and repo as the best approach for shadow banking, with compliance required in order to enjoy the safe-harbor from bankruptcy.
I liked this paper very much. It has excellent detail on how the shadow banking system works, excellent conceptual analysis comparing shadow banking to America's earlier "free banking era," and the central point that we don't have enough safe collateral for repo (should the Fed issue a special form of such collateral?). It uses the word "rehypothecation" and ends with an excellent (and to me somewhat scary) few sentences:
It seems that U.S. Treasuries are extensively rehypothecated and should be viewed as money…This means that open market operations are exchanging one kind of money for another, rather than exchanging money for "bonds." "Quantitative easing" may well be the monetary policy of the future.
Addendum: Arnold Kling comments.
Scary sentences
It seems the Obama administration is looking for any possible argument to justify its policy of assassinating U.S. citizens without legal restraint. But that's not always easy to manage:
“The more forcefully the administration urges a court to stay out because this is warfare, the more it puts itself in the uncomfortable position of arguing we’re at war even in Yemen,”
The administration doesn't want any possibility of judicial review:
…they are seeking to have the lawsuit dismissed without discussing its merits. For example, officials say, the brief is virtually certain to argue that Mr. Awlaki’s father has no legal standing to file a lawsuit on behalf of his son.
Is the administration trying to figure out the law, and then follow it, or to simply push through whatever it wants to do?
Gorillas and Girls
Ireland's science minister has pulled out of the launch of a book branding evolution a hoax after the event became mired in controversy.
Yes, that's right Ireland's science minister questions evolution. But, he says Mr May the author of the book he was to promote, "Just because you are anti-evolution doesn’t mean you are anti-science." I suppose this is true if one doesn't count as science biology, molecular biology, botany, paleontology, zoology and a host of other fields that rely on evolution as a key concept.
So the controversy is obvious, right? Not quite. What would a controversy about science be without sex? It turns out that the author of the book, non-ironically titled "The Origin of Specious Nonsense," is,
Mr May, a self-proclaimed marriage counsellor, writer, poet and philosopher, [who] has presented on various radio stations and once owned a public relations company.
But the ex-Christian evangelist teacher was also the one-time editor of Ireland’s first magazine devoted to sex.
All of this makes the name of the launch party that science minister Conor Lenihan was to attend even more interesting, 'Gorillas and Girls'. Hard to make this kind of thing up.
Hat tip to Dan Cole at Law, Economics, and Cycling.
What is the most likely source of doomsday in 2012?
Alek has a request:
1) While I'm far from a doomsayer, I'm wondering what is the best way to bet in favor of the world ending in 2012? Betting against is pretty obvious.
I am taking this to ask what is the most likely cause of the destruction of all civilization, circa 2012, and not how to collect on the bet, in which case he should read Pascal. (If the 2012 end of the world won't be a total surprise, any leveraged short position should do, but spend the money quickly!)
Here are some hypotheses, but my answer is: destruction of the earth by space aliens.
Here are previous MR posts on The Fermi Paradox. Rampaging space aliens would explain why we don't see more civilizations out there, plus predatory ways imply that contact is short-lived, thereby making our current lack of contact more likely in the Bayesian sense.
We could be living in some kind of "branching/splitting" theory where the highest number of branches come right before everything ends and for Bayesian reasons we expect to be right up against that final point. Still, why should we think that maximum branching/splitting is coming in 2012? After a Lakers threepeat, are there no more possible worlds to create?
The overwhelming probability from a nuclear exchange, at least circa 2012, is that it would remain limited, albeit highly destructive. A pandemic is unlikely to kill more than a billion people. A very large asteroid or a super-volcano explosion can be considered other leading contenders for world-enders.
A few nights ago Natasha and I saw The Day the Earth Stood Still, 1951 version. It's more a tract on foreign policy than science fiction and Klaatu of course is a stand in for the United States. I hadn't seen it in over twenty years and I'm astonished how well the movie captures and presages today's current mix of paranoia and utter unpreparedness, vis-a-vis "aliens." It works poorly when Klaatu dons the rhetoric and tactics of the United States in galactic affairs, combined with equally clumsy implied threats, backed by no moral authority but superior hardware. It's one of the scariest, and best, movies to watch in 2010, with a superb Bernard Herrmann soundtrack and it also has good shots of WDC in 1951. I won't give away the ending but a careful listen shows it's as pessimistic about the aliens as anything. Supposedly the movie deeply influenced Ronald Reagan and brought him to the arms control table.
“Cash for Clunkers” failed
Here is a new paper by Atif Mian and Amir Sufi:
A key rationale for fiscal stimulus is to boost consumption when aggregate demand is perceived to be inefficiently low. We examine the ability of the government to increase consumption by evaluating the impact of the 2009 "Cash for Clunkers" program on short and medium run auto purchases. Our empirical strategy exploits variation across U.S. cities in ex-ante exposure to the program as measured by the number of "clunkers" in the city as of the summer of 2008. We find that the program induced the purchase of an additional 360,000 cars in July and August of 2009. However, almost all of the additional purchases under the program were pulled forward from the very near future; the effect of the program on auto purchases is almost completely reversed by as early as March 2010 – only seven months after the program ended. The effect of the program on auto purchases was significantly more short-lived than previously suggested. We also find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.
Ungated versions of the paper are here.
Haiti fact of the day
By some estimates, the quake left about 33 million cubic yards of debris in Port-au-Prince – more than seven times the amount of concrete used to build the Hoover Dam. So far, only about 2 percent has been cleared, which means the city looks pretty much as it did a month after the Jan. 12 quake.
The story is here and for the pointer I thank the eagle-eyed Daniel Lippman.
Which public figures have integrity?
UWC pleads:
I'm having a hard time coming up with many independently and oddly Google is failing to find a list.
Nelson Mandela
Garry Kasparov
Oprah Winfrey
Ellen DeGeneres
David Letterman
Simon CowellHelp!
How did David Letterman get on that list? Does Simon Cowell make the cut? Is it about who has integrity or who is perceived as having integrity?
It also depends who you count as a public figure and whether they still must be living or only recently deceased. For a few, how about Margaret Thatcher, Hans Blix, Anna Politkovskaya, Ben Goldacre, Lech Walesa, Christopher Reeve, Neil Armstrong, the passengers who downed the flight hijacked by al-Qaeda, leading members of the Iranian opposition, and any number of political dissidents, starting with Burma and Aung San Suu Kyi. Lee Kuan Yew is a more controversial option; he has been a non-corrupt leader who led his country to a very good place, and more or less eliminated corruption, but he has not always respected civil liberties. Nonetheless integrity is not the only value and I don't wish to use the word as a stand-in for all other values of import.
Who am I forgetting? What would Robin Hanson say about this list?
Very bad incentives in New York State
State institutions for the developmentally disabled generate so much federal Medicaid money that New York's other programs for people with intellectual disabilities would be threatened without them, state officials acknowledge in an internal document obtained by the Poughkeepsie Journal.
The article is here. It gets worse:
The document, labeled "Confidential – Policy Advice," raises questions about the state's decision to keep 1,100 institutional beds at eight centers that were once slated to close.
And that is not all:
The Medicaid reimbursement rate for state institutions is $4,556 per person per day, the Poughkeepsie Journal has reported, three to four times higher than the cost of care.
Or this:
Put another way, just 1 percent of New York's developmentally disabled population – its 1,400 institutionalized people – generates about 40 percent of federal Medicaid money for the system, operated by the state Office for People With Developmental Disabilities.
This is one root of the problem:
The reason New York's rate is so much higher than the cost of care is a provision in the formula that, since the 1980s, allowed the state to keep two-thirds of federal payments for residents moved from institutions into community homes.
The Poughkeepsie Journal uncovered quite a story. How does this sentence grab you?:
New York is well-known among disability researchers and providers for its ability to maximize Medicaid revenues, reaping more federal money for the developmentally disabled than any other state.
And does it put people to work?
New York's nine high-cost institutions are part of the reason, but a greater factor is the sheer size of the system, which serves 125,000 people including nearly 37,000 in 7,500 state and private group homes. The state even has a $27-million-a-year research center on developmental disabilities, and a huge bureaucracy to manage all that: 27,000 employees in 2009 earning an average of $42,000. This includes 278 people who made more than $100,000, according to an analysis of the state's salary database.
If we pursue an earlier story, and ask about the people living in the system, it gets truly scary:
Opened in 2001 without public input or review, the LIT [Local Intensive Treatment Unit, part of this system] serves what officials say are people who have had a brush with the law. Residents are classified by "offending behaviors," and, unlike those in two other units of what is now called the Wassaic campus of the Taconic Developmental Disabilities Service Office, they are not free to leave.
The Wassaic LIT and 10 other "intensive treatment" units – some with uncomfortable resemblance to prisons – mark a stark departure from the state's historically non-punitive approach to care of people with mental disabilities.
…In fact, numbers the state did provide show the LIT is populated mostly by people who have been transferred not from the criminal justice system but from other units here and across the state system.
To return to one of the original facts:
Every one of the unit's residents, among 1,400 residents in nine state institutions, generates $4,556 per day in state and federal Medicaid reimbursements.
Twelve percent of the residents are listed as being institutionalized for "elopement." This guy offered an skeptical perspective on what is happening:
"I don't believe that that is the case, that these people are offenders," said Sidney Hirschfeld, director of the statewide Legal Service office.
He said a very small number had any involvement in the criminal justice system and was concerned that residents were being classified by offenses for which they were not charged, tried or convicted.
Need I relate stories such as this?
In one case, a mildly disabled woman in her 50s was kept in a unit so long – 15 years – that she developed aggressive "institutional behaviors" that became the justification to keep her there. A judge ordered her released, Shea said, but months later a community home still has not been found.
“Those situations are not unique,” Shea said. “Lengths of stay are 10 to 12 years.”
And here is another perspective, from inside the politics:
“Whatever they do there, my preference would be to obviously save jobs,” Euvrard said
For the pointer I thank the ever-vigilant Michelle Dawson.
What will Basel III do?
Felix Salmon has one good summary, here a bit on community banks, overall emerging markets get off lightly, and Germany is unhappy (in this case probably a good thing). A few points:
1. This agreement is probably good news.
2. It is difficult to divine the net future effects of such changes upon announcement. There is also the question of how binding this ends up being and whether the implementation lags will matter.
3. One key question is how much current systems prevent regulatory arbitrage, namely driving more intermediation into less regulated, less reliable and less easily monitored institutions.
Stay tuned…
No Checks, No Balances
From the NYTimes
The lead plaintiff is Binyam Mohamed, an Ethiopian citizen and legal resident of Britain who was arrested in Pakistan in 2002. He claimed he was turned over to the C.I.A., which flew him to Morocco and handed him off to its security service.
Moroccan interrogators, he said, held him for 18 months and subjected him to an array of tortures, including cutting his penis with a scalpel and then pouring a hot, stinging liquid on the open wounds.
Mr. Mohamed was later transferred back to the C.I.A., which he said flew him to its secret prison in Afghanistan. There, he said, he was held in continuous darkness, fed sparsely and subjected to loud noise – like the recorded screams of women and children – 24 hours a day.
He was later transferred again to the military prison at Guantánamo Bay, Cuba, where he was held for an additional five years. He was released and returned to Britain in early 2009 and is now free.
and from the court's response:
First, that the judicial branch may have deferred to the
executive branch’s claim of privilege in the interest of
national security does not preclude the government from honoring
the fundamental principles of justice.
Oh that's nice the U.S. government is not precluded from honoring the fundamental principles of justice. Tell me, what government ever was?
Scary sentences
It's not a good sign when the government has to intervene to prevent a run on a bank that is already owned by the government…
In case you have not been paying attention
Here is a tidbit from today's news:
Among other policies, the Obama team has also placed a United States citizen on a targeted-killings list without a trial, blocked efforts by detainees in Afghanistan to bring habeas-corpus lawsuits challenging their indefinite imprisonment, and continued the C.I.A. rendition program – though the administration says it now takes greater safeguards to prevent detainees from being mistreated.
I wish to commend Kevin Drum in particular for continuing to draw our attention to these policies.
The Canterbury earthquake
The NZX 50 Index of stocks climbed in Wellington, led by building-related companies. Insurers fell. New Zealand’s dollar rose to 72.41 U.S. cents from 72.07 cents in New York on Sept. 3. The nation’s bonds declined, pushing 10-year yields to their highest in more than a month.
Here is more. The costs of repair are estimated at about two percent of gdp. Milk supply from New Zealand has not been disrupted.
Markets in Everything, Except Greenhouse Gases
In 2002 Time named Richard Sandor a “Hero of the Planet” for founding the Chicago Climate Exchange (CCX). The CCX traded permits based on voluntary but binding commitments from firms to cutback on carbon emissions and other greenhouse gases. Without enforced limits, however, or, if you prefer, without property rights in emissions, the market is not self-sustaining and CCX is cutting workers and may be wound down.
CCX founder Richard Sandor had hoped the exchange would become the hub for a national regulated market for greenhouse gas emissions to be kick-started by a U.S. climate change bill.
But prices for the carbon credits traded on the bourse since its 2003 launch, which were based on voluntary but legally binding emissions reduction commitments by its members, have crashed to around 10 cents a tonne from all-time highs of over $7 in 2008, and trading volumes have largely dried up.
Although the U.S. has vowed to cut its greenhouse gas emissions by 17 percent below 2005 levels by 2020, and despite the House of Representatives narrowly passing an ambitious climate bill in June 2008, several similar bills have stalled in the Senate in the past year.
“(The layoffs) seem to indicate that this market player thinks any U.S. climate action is still a way off,” said commodities house FCStone…
Fiscal stimulus coming to Haiti
Experts said the presidential and legislative elections could very well be the economic stimulus quake-ravaged Haitians have been awaiting since the devastating Jan. 12 earthquake left an estimated 300,000 dead, and wiped-out jobs. The campaigns are expected to hire tens of thousands of Haitians.
“It's like a cash transfer to the population, a sort of cash-for-work program,'' said Leslie Voltaire, a former government minister who plans to hire 10,000 Election Day monitors and a helicopter to get around Haiti's mountainous terrain.
The full story is here. And was the last election a model of Downsian competition? Maybe not:
In the 2006 presidential race, which saw Haitian President René Préval beat out 34 other candidates, experts speculated that a candidate needed between $3 million and $6 million to mount a strong challenge.
It is now also believed that the country can no longer afford to have senatorial elections every two years.