Thursday, June 28, 2012

Supreme Court ACA Ruling

When the Chief Justice made a majority
To uphold the Prez' priority,
It wasn't because
Of the old commerce clause,
But the Congress' taxing authority.

In a landmark decision that delighted liberals, enraged conservatives and gave everybody something to ponder, the Supreme Court upheld President Obama's Affordable Care Act 5-4, with Chief Justice John Roberts siding with the majority - sort of. The rejectionists, led by usual swing voter Justice Kennedy, found the ACA "invalid in its entirety." The more liberal justices, led by Ruth Bader Ginsburg, sided with the President and his Solicitor General on the basis of Congress' ability to regulate interstate commerce. The Chief Justice, perhaps splitting hairs, would not validate the "commerce clause" argument, but did reason that the individual mandate in the ACA amounts to a tax, which the Congress has broad powers to impose. Part of the Court's ruling may be read as enabling the states to opt out of funding the expanded Medicaid coverage mandated by the ACA, which means that - even assuming the President is re-elected in the fall - we're not done fighting over Obamacare.

Cause of Death

Said the mayor of a municipality
Whose failure was filed with finality:
"The medical fees
Of our retirees
Were the cause of our fiscal mortality."

The city of Stockton, California is the latest US locality to conclude that the cure is worse than the disease. The city declared bankruptcy with $700 million in debt overwhelming the resources of its 300,000 residents. Among the insurmountable costs were Stockton's pension and healthcare outlays for its retired workers, along with falling property values and an expensive downtown-revitalization project. The Wall Street Journal reports that healthcare costs are expected to rise for all of the US states, regardless of the outcome of the Supreme Court decision on the Affordable Care Act, indicating much work to do to bring health care costs on a sustainable path.

Tuesday, June 26, 2012

A Matter of Degree

Asked a socially relevant chronicle:
"Is a college degree economical?
Well, the lifetime return
On the extra you earn
Is substantial, but not astronomical."

Dr. Goose had occasion to visit Loyola University of Maryland as part of an adult entourage in an orientation program for incoming freshmen. Loyola impressed with many outstanding qualities, beginning with its president, the Rev. Brian Linnane, SJ, a clear-thinking, no-nonsense advocate of cura personalis – "Care of the whole person."

I also had occasion to note that the cost of one year at this fine institution has reached $57,000, as has that of many private universities. While listening to a presentation on financial aid, I did a back-of-the-napkin calculation and found that, in order to yield a 4% return on the four-year investment in education over a 40-year time horizon, a graduate would have to earn $11,000 a year more than they would have with only a high school diploma. Those who strive for an 8% return would have to earn an additional $19,000 a year. Studies show that such incremental earning power is within the reach of the typical college graduate, but probably not those who indulge in "coasting", against which Father Linnane inveighed ominously.

Monday, June 25, 2012

Road Trip

Dr. Goose is on the road Monday and Tuesday, and will return to economic limerick writing on Wednesday.

Friday, June 22, 2012

Bringing Down the Price of Oil

When there's negative news from abroad
And the US recovery's flawed,
It precipitates shocks
To oil and stocks
In Chicago, New York & Riyadh.

"Be careful what you wish for; you just might get it." Everybody wants cheaper oil, but it often comes with a cloud over it, bringing lower stock prices along for the ride. On Thursday, the Dow Jones industrials fell 1.96% as negative economic news from Europe and China combined with the announcement of a manufacturing slowdown in the Philadelphia Fed district to cast a pall over US growth prospects. US crude oil prices responded to the weak data by falling to $78.20 a barrel, a new low for the year.

Wednesday, June 20, 2012

Like We Did Last Summer

Said the Fed: "The economy's gist, again,
Is that lackluster data persist again;
In short, we have found
That it's coming unwound,
So come on now baby - let's twist again!"

The policy makers of the Federal Reserve Open Market Committee conclude their latest two-day meeting this afternoon with a Ben Bernanke press conference at 2:15 EDT. Most observers expect that, in view of lingering economic weakness in the US, and the downside risks posed by the euro zone debt crisis, the Fed will continue with the so-called Operation Twist.

Under this groovy program of monetary stimulus, the Fed sells short-term Treasury bills and notes, and invests the proceeds in long-term bonds (either Treasuries or mortgage-backed). In so doing, Chairman Bernanke and his cohort hope to stimulate credit activity by holding down the cost of long-term borrowing. As we have seen, this program has had mixed results, in part due to many Americans' limited access to credit. Then again, the tools of the Fed are also limited.

Tuesday, June 19, 2012

Unqualified Interest

As a primary task of the Fed, it
Should cheapen the cost of our credit,
Which would help a lot more
If the mean credit score
Would qualify many to get it.

The Wall Street Journal's Jon Hilsenrath reports that the Fed's efforts to spread the stimulant of low interest rates throughout the US economy is stymied by the many borrowers who are over-leveraged, underwater and therefore unqualified to refinance at lower rates. Moreover, the fortunate few who can refi at will tend to reinvest rather than spend the proceeds, as they were already able to buy whatever they wanted. In a response that is short on verbiage but long on sarcasm and contempt, the Zero Hedge blog suggests that our national economic model - borrowing to fund consumer-driven growth - may not be sustainable.

Sunday, June 17, 2012


A political analyst noted,
On the day that Athenians voted,
That whoever's elected,
An exit's expected -
From euro to drachma demoted.

"Europe can exhale." So enthused the Munich-based Süddeutsche Zeitung after pro-European parties narrowly won the most closely watched Greek election in modern times. The radical-left Syriza Party, which wanted to reject the austerity measures forced on the country as a condition of continued eurozone membership and financial support, made a strong showing, if even in defeat. So, Europe stays together.

But, can the eurozone members collectively exhale? Despite the narrowly pro-European election result, the financial and political pressures on the Greek people remain immense, and the road to stability and prosperity is long and treacherous.

Saturday, June 16, 2012

Rope-Walking Wallenda

A rope-walking man named Wallenda
Crossed the Falls on a cable so slenda;
Though tied to a tether,
One didn't know whether
He'd slip and impale his pudenda.

Friday, June 15, 2012

No Pain - Or Gain

While bankers are prone to complain
That hedging is hard to explain,
It's fairly alleged
That you aren't really hedged
If you're also expecting a gain.

One of the many talking points employed by JPMorgan Chase CEO Jamie Dimon in his closely watched Senate testimony this week was that "this particular synthetic credit portfolio was intended to earn a lot of revenue if there was a crisis. I consider that a hedge; what it morphed into, I will not try to defend." The Chief Investment Office's loss - $2 billion and rising - on its London Whale position was simply well-intentioned risk management gone bad. In this, Mr. Dimon deliberately muddied the waters and his senatorial inquisitors failed to impose any clarity on the discussion. Anytime you say "I expect this position to make a profit if X happens," you are making a bet, not a hedge. The fact that market turmoil is expected to trigger the profits does not remove it from the realm of speculation. The only one who is truly hedged is the one who can say: "My results are locked in regardless of what the market does."

Wednesday, June 13, 2012

Dimon's Congressional Testimony

A high-ranking finance professional
Who was called to a hearing Congressional
To give his account
Of a massive amount
That was lost, made a searing confessional:

"My Office of Risk Diminution
Found a newfangled hedging solution,
Which no one construed
Nor checked, nor reviewed,
Nor subjected to sound execution."

"But in spite of my solemn admission
(Which I make with humblest contrition)
That we bungled our bets -
We are hiring vets
And expanding our lending position."

"So before you propose regulation
To limit our trade fluctuation,
No federal commission
Could outmatch our mission
To aid the American nation."

J.P. Morgan Chase CEO Jamie Dimon has been called to testify before the U.S. Senate Committee on Banking, Housing and Urban Affairs, to answer for the infamous and still-growing loss from derivative positions in the bank's Chief Investment Office. For those of you too busy to review the full text of the CEO's prepared testimony, I humbly offer the foregoing summary in verse. The rest of you may draw some insightfully ironic enjoyment from Mr. Dimon's deft attempt to deflect criticism of the bank's errors and omissions, and to convince the Senators that the bank is its own best overseer.

Tuesday, June 12, 2012

Spanish Bank Bailout

The ECB, EU and Spain
Gave a lesson in legerdemain,
In pledging a sum,
Knowing not where it's from,
Or where it would end up a-gain.

A €100 billion "bailout" of Spanish banks announced on the weekend turned out to be less than meets the eye. Global equity markets tumbled and Spanish government bond yields jumped to 6.521% as investors considered the unresolved issues in the European initiative. For starters, nobody knows yet where the money will come from - the old European Financial Stability Facility, or the new European Stabilization Mechanism. If the latter, the "aid" will comprise a loan to the Spanish government, the proceeds of which will be invested in Spanish banks. This government loan, equal to 10% of existing government debt, would be senior to that existing debt. This means that a short-term fix for the banks would end up damaging the attractiveness of Spanish government bonds, the core holders of which are...Spanish banks.

Sunday, June 10, 2012

Less Than Zero

The economy's got so abominable
That constraints on the Fed are phenomenal,
But the will to inflate
Makes a negative rate
Seem potentially real, if not nominal.

Thanks to Marketplace radio, it has come to my attention that members of the general public are still concerned about the Fed's inability to drop interest rates below zero. Because of the so-called "zero lower bound" problem, it may seem that the Fed has run out of monetary tools to stimulate the economy. In terms of nominal interest rates, this is correct. That's why, according to Marketplace Money economics editor Chris Farrell, it may be time for the Fed to "get real":
The Fed can create a negative "real rate" under certain conditions. Two quick definitions: "Real" means adjusted for inflation and "nominal" means the stated rate. So if the fed funds rate is at zero (nominal) and inflation is running at 2.5 percent, the real rate (inflation-adjusted) is below zero. In other words, if the Fed's nominal rate is at 0 percent and the inflation rate is 2.5 percent, then the real rate of interest is -2.5 percent. The Fed could lower the real rate of interest by pushing for a higher rate of inflation -- say, 3 percent (for a -3 percent real rate). Among others, it's an approach that New York Times columnist and Nobel laureate Paul Krugman has written about favorably.

Friday, June 8, 2012

The Business of Money

If those who manage and gather it
Were not so quick to slather it
On those who watch and legislate it,
Less so for to regulate it,
Likely there'd be risk in it,
But less than now exists in it,
Regaining public trust in it
When rules are more robust in it.

Last night, Dr. Goose attended a stimulating panel discussion at the Museum of the City of New York entitled: "Can Wall Street Reinvent Itself?" The short answer is that nobody knows, but you can provoke some necessary clear thinking and soul-searching when smart, knowledgable and conscientious people tackle the question. Moderated by NYU financial law professor and retired Lehman investment banker Ronald Filler, the panel included -

If there was consensus among the panel, it was that the public's trust is damaged and can only be regained by by an industry structure that rewards working in the client's interest, with simple, strong rules to enforce such behavior.

Thursday, June 7, 2012

Banking Bair

Sheila Bair, no longer at leisure,
Said: "The banks have collective amnesia,
As they're not really fit
For the capital hit
That would come with the next global seizure."

Former FDIC head Sheila Bair has come out of semi-retirement to head a new watchdog group, the Systemic Risk Council. Backed by the Pew Charitable Trusts, the Council will monitor and encourage financial regulatory reform. In an interview with Kai Ryssdal of Marketplace, Ms. Bair voices concern that the major banks have forgotten the lessons of the financial crisis, and spend more time trying to water down reforms than strengthening themselves for the next crash. In a related piece, Marketplace's Heidi Moore explains that the major US banks alone require $500 billion of additional capital to withstand a major shock. In this, America is just the tip of the iceberg, as the greatest global systemic risk lies with banks in Europe and Japan.

Wednesday, June 6, 2012

Skills Mismatch

Though an HR director named Schmidt
Looked for candidates with the right fit,
The conditions she set
Could only be met
By the one who had recently quit.

One of the puzzling aspects of America's ongoing high unemployment rate is the so-called skills mismatch: in spite of millions of unemployed, there are also millions (though not as many) of unfilled positions for which employers cannot find applicants with the right skills. The Wall Street Journal looks at this conundrum and finds an alternative explanation: that the software used to screen candidates imposes so many requirements that only someone who has already done the job would qualify. One may infer an element of behavioral economics behind this; evidently, the aversion to a less-than-perfect candidate is greater than the desire to fill the position.

Thanks to Jodi Beggs of Harvard University and Economists Do It With Models, who requested a behavioral economics limerick. Hope this fits the bill, Jodi!

Tuesday, June 5, 2012

MF Global Trustee's Report

When financial wrongdoing's unveiled,
Of a scope that can scarcely be scaled,
One is sadly resigned
That justice will find
There are none to be judged and/or jailed.

The trustee in the MF Global bankruptcy has issued his report, but it will disappoint those looking for a swift path to justice against those responsible for the misuse of $1.6 billion of customer funds. James Giddens, who is unwinding MF Global US brokerage unit, offered little insight beyond the well-known facts: "My investigation has concluded that management's actions, along with the lack of sufficient monitoring and systems, resulted in customer property being used during the liquidity crisis to fund the extraordinary liquidity drains elsewhere in the business." Although he may pursue legal action against former CEO Jon Corzine and others for taking excessive risks and failing to safeguard customer funds, Mr. Giddens drew "no conclusions" about criminal wrongdoing or regulatory violations, citing his lack of authority in those matters. Well, no worries - that should leave the field open to the unrelenting avengers of the SEC and the Justice Department... right?

Sunday, June 3, 2012

Government is the Problem

When politically seeking causalities
For our tepid employment realities,
It seldom is heard
How shrinkage occurred
At states and municipalities.

Friday's Non-Farm Payroll report of 69,000 jobs added was shockingly lower than the consensus expectation of +150,000. The disappointment dominated stock markets, news programs and weekend punditry. Many repeated the question: what will it take to get companies hiring again? Seemingly lost in the discussion was the fact that, while private employment rose slowly, government employment actually continues to fall. The Calculated Risk blog schools us:
So far in 2012 - through May - state and local government have lost 7,000 jobs (8,000 jobs were lost in May alone though). In the first five months of 2011, state and local governments lost 126,000 payroll jobs - and 230,000 for the year. This graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 230,000 in 2011.
Remember folks, jobs in the public sector are just as important for the economy as those in the private sector.

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