Archive for June, 2009|Monthly archive page
In the midst of the Bush-Obama balance sheet bailout, one group stands out in its importance — bondholders. I know — a couple of times some bondholders have had to take a haircut to protect other investors.
Here in California, with our $24 billion deficit, it seems like nothing — absolutely nothing — and threaten bondholders. Yes, some bondholders are pension funds or charitable organizations. A minority of Republicans along with a movie star governor have adamantly refused to raise taxes, especially those taxes that might affect the class of people who are bondholders.
Education and healthcare are being slashed beyond recognition. My God, even prisons might be cut a bit. The state is also raiding the treasuries of cities and counties for funds. Their response will be the same as the state’s: cut back on anything that might help the poor and if necessary extend the cuts to the middle class. All this so that California can payback its bondholders. No haircut here. They must be paid back in full.
And the children, deprived of adequate education and health care, of course, they must make a modest sacrifice to protect the interests of bondholders.
Measurement of profits always includes a certain degree of subjectivity as long as the operation involves durable physical assets or longer-term financial assets, the value of which will depend upon future economic conditions. The economist who concerns himself most deeply with this issue was J. R. Hicks, a younger contemporary of Keynes. Hicks recognized that accounting is backward looking, while economic values depend upon the unknowable future. I backward looking, Hicks meant that accountants use previous prices and extrapolations based upon historical experience. Economics looks at an investment in terms of how it is expected to perform in the future.
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The previous post described how Congress coerced the FASB to change accounting methods to make banks look healther.
Floyd Norris at the NY Times gives an aggregate investment of the profits that Wall Street desired accounting changes made possible. The following Bloomberg article gives some estimates about the effects on Citi’s and Wells Fargo’s profits.
Norris concludes “Both the banks and their regulators see virtue in opacity.”
Norris, Floyd. 2009. “Seeking Reality in Bank Balance Sheets.” New York Times Blog (5 June).
“David Zion, the accounting analyst at Credit Suisse, is out with a report today on fair value accounting, in which he calculates how many billions of dollars were added to bank “values” by the changes that the Financial Accounting Standards Board (FASB) was forced to make: “We estimate first quarter pretax earnings improved by $4.9 billion as a result of the new other-than-temporary impairment (OTTI) rules for the 20 Financials sector companies that early adopted them, including eight companies where the new rules may have increased pretax earnings by more than 5%. In addition, the FASB’s mark-to-market clarification resulted in five of the 20 companies marking assets up from $27 million to $4.5 billion”.”
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Congress coerced financial regulators to let Wall Street redefine the way it measured profits — allowing the big banks to show profits and pass the highly vaunted stress test. In the next post, I will indicate how effective this technique has been in creating an illusion of profitability. Then in a third post, I will offer some more comments.
Pulliam, Susan and Tom McGinty. 2009. “Congress Helped Banks Defang Key Rule.” Wall Street Journal (3 June): p. A 1.
“Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets. Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter. The accounting issue lies at the heart of the financial crisis: Are the hardest-to-value securities worth no more than what the market is willing to pay, or did the market grow too dysfunctional to properly set values?” Read more »
When Jaimie Galbraith is good, he can be very good. Here is an example, explaining European unemployment as a result of inequality rather than social democracy. After explaining the close association between inequality and unemployment, he goes on:
97: “The European economy is no longer a collection of separated national systems. Spain, Germany, and France are not independent, mutually isolated national economies. There are no barriers to trade or capital flow, in fact, no formal barriers to the movement of labor throughout Europe. There is now a single currency unit across most of the region. The integration of the European economy in practice — from the standpoint of a large multinational corporate employer, for instance — is nearly complete. From every analytical point of view, it is necessary to start thinking of Europe as a single unit. It is therefore necessary, from a statistical and practical point of view, to measure inequality and employment at the European, and not the national, level.” Read more »
I’m not much of a fan of Milton Friedman, but he once offered a very interesting suggestion to rid society of crime.
“The first and most obvious [way to reduce the amount of crime] is to reduce the range of activities that are designated as illegal. Surely, one reason for the growth in crime is that the number of activities that are classified as such, has multiplied in recent decades.”
Friedman, Milton. 1997. “Economics of Crime.” The Journal of Economic Perspectives , Vol. 11, No. 2 (Spring): p. 194.
Following Friedman’s logic the Defense Department found a simple strategy for evacuating the cities.
“On a map of Baghdad, the US Army’s Forward Operating Base Falcon is clearly within city limits. Except that Iraqi and American military officials have decided it’s not. As the June 30 deadline for US soldiers to be out of Iraqi cities approaches, there are no plans to relocate the roughly 3,000 American troops who help maintain security in south Baghdad along what were the fault lines in the sectarian war. “We and the Iraqis decided it wasn’t in the city,” says a US military official. The base on the southern outskirts of Baghdad’s Rasheed district is an example of the fluidity of the Status of Forces Agreement (SOFA) agreed to late last year, which orders all US combat forces out of Iraqi cities, towns, and villages by June 30.” Read more »
California keeps cutting billions of dollars from education. The real problem is the teacher’s union, yeah? So the answer is a simple prescription of multiple doses of multiple choice tests. The rationale of these tests takes me back a few decades to the Cold War when proponents of the free market used to ridicule Soviet planning techniques. These same people sometimes referred to a cartoon from the Soviet humor magazine Krokodil showing a nail factory which had fulfilled its output plan by producing one single nail, the size of the plant. Screwing up nails is bad; screwing up kids is inexcusable. Blaming the teacher’s union, while refusing to raise sufficient taxes to support the educational system and the educators — that’s easy.
By BOB DAVIS
WASHINGTON — The U.S. Treasury chose World Bank economist David Dollar as economic emissary to China despite sharp criticism of his economic research.
Mr. Dollar co-authored several influential studies that argued for the effectiveness of aid and the importance of tariff cuts in liberalizing economies and reducing poverty.
But in 2006, a detailed review of World Bank research led by Princeton economist Angus Deaton called the aid paper “unconvincing” because of methodological problems. The paper’s results “provide only the weakest of evidence for their central contention, that aid is effective when policies are sound,” the review said. The reviewers said the work on trade and growth raised “serious questions about whether the review is really supported by the evidence.”
The Bank defended Mr. Dollar’s work on trade and said that Mr. Dollar’s work “stimulated a useful and ongoing debate.”
Mr. Dollar is now the World Bank’s country director for China. He will remain in Beijing for his Treasury job. Mr. Dollar didn’t respond for comment.
Treasury Secretary Timothy Geithner called Mr. Dollar and David Loevinger, who was appointed as the Washington-based senior coordinator for China affairs, “uniquely qualified to serve in these roles because of their deep expertise and extended experience” in U.S.-China economic issues.
“David Dollar has been involved in some of the most important debates in economic policy for developing countries and the debates have been lively and important. And those at the center of this debate and whose views are taken seriously should expect to be criticized,” a senior Treasury official said.
Write to Bob Davis at email@example.com