Big Bird Trilogy

Said Romney: "I find it absurd
Giving federal support to Big Bird.
To feather his nest
Leaves our budget distressed -
Free markets are really preferred."

"Though he helps us to learn ABCs,
Our country is fiscally squeezed,
And funding this fellow
Who's goofy and yellow
Means borrowing from the Chinese."

"In our nation's historic chronology,
We patriots make no apology
To assert: win or lose
It's our birthright to choose -
'Give me freedom before ornithology.'"

Debatable Figures

Presidential debating is won
When the relevant numbers are run:
The percentages which
Tell the poor from the rich -
99, 47 and 1.

Did President Barack Obama have an esprit de l'escalier last night? That's French for the moment when you realize what you shoulda said. He and former Governor Mitt Romney met for their first debate, and most observers called the contest for the challenger. Not only did the President lack the Governor's energy and enthusiasm but, in a debate that stood out for its polite, boring tone, Mr. Obama passed up repeated opportunities to score points with incendiary references to Mr. Romney's "47%" comments. Perhaps he was distracted by the 20-year figure, as in his wedding anniversary so awkwardly hijacked by the debate.

Romney's Good Idea

Said a policy wonk named Maria:
"We're in need of a tax panacea,
And I'm hearing that Romney,
The GOP nom'nee,
Has floated a clever idea."

"Mr. Romney proposes to cap
Those deductions it's too hard to scrap,
To bolster his case
Of broad'ning the base
While constricting the deficit gap."

"Though a limit of 17G
Balanced budgets will not guarantee,
I'm glad to see some
Specificity from
This heretofore vague nominee."

On the day before his first debate with Pres. Barack Obama, Mitt Romney introduced an intriguing(*) new element into the campaign with a proposal to cap personal income tax deductions at $17,000. Among the blognoscenti and twitterati, the electrified reaction was: "Tax specifics from Mitt Romney? Stuff just got real!" The concept is simple, but elegant: Romney would like to lower tax rates while broadening the base, by eliminating deductions, exemptions, credits, etc. Since each of those tax expenditures comes with a constituency that will fight to keep it, one simply sidesteps those fights by keeping all the loopholes, but limiting one's capacity to use them. In Romney's own words: "As an option you could say everybody’s going to get up to a $17,000 deduction; and you could use your charitable deduction, your home mortgage deduction, or others - your healthcare deduction. And you can fill that bucket, if you will, that $17,000 bucket that way."

Now, as Josh Barro explains in Bloomberg, even a simple and elegant proposal has the devil in the details. Moreover, it's likely that this cap will not be enough to pay for the across-the-board 20% tax cut that Mr. Romney wants. However, as we chew over this interesting new idea, it pays to remember that the perfect should never be the enemy of the good.

(*)As always, I am required to disclose that the use of the word "intriguing" signifies a good idea from someone with whom I generally disagree.

Billionaire's Blues

Said a mogul of stock-market dealing,
His support for Obama repealing:
"I don't mind paying tax,
But this President lacks
Due regard for my sensitive feeling."

In this week's New Yorker magazine, Chrystia Freeland poses the pertinent question: Why do billionaires feel victimized by Obama? "The growing antagonism of the super-wealthy toward Obama can seem mystifying, since Obama has served the rich quite well," she writes, supporting Wall Street rescues and resisting calls for bank nationalization. "The economists Emmanuel Saez and Thomas Piketty have found that 93% of the gains during the 2009-10 recovery went to the top one per cent of earners... the top 0.01 per cent captured thirty-seven per cent of the total recovery pie..."

If there is a leader of the hedge fund opposition to Obama, it may be the Bronx-born, billionaire Democrat Leon Cooperman, manager of the hedge fund Omega Advisors. Cooperman seems to have taken personal offense to President Obama's rhetoric regarding "millionaires and billionaires not paying their fair share of taxes." Says Cooperman: "It’s a question of tone. The President makes it sound like the problems of the ninety-nine per cent are caused by the one per cent, and that’s not the case." Of course, having made comparisons between Obama and Hitler on a couple of occasions, Cooperman may have tonal problems of his own.

Repent, O Ye Bankers

Said the Bishop, in humbling homily:
"You bankers are quite the anomaly.
I'd like to convert you
To living in virtue,
Instead of behaving abom'nably."

The Wall Street Journal's Jason Zweig writes that the Church of England has called for "the financial industry [to] look within and search its soul." This call to soul-searching followed an invitation from the British parliamentary commission on the LIBOR-fixing scandal for public comment on how to reform finance. "The church calls for two striking steps," writes Zweig.

First, bankers should seek to build “a culture of the virtues” that would enable anyone working in finance to answer the question, “What would it mean to be a good banker?”... Second, the financial industry needs to apologize and repent.

The Rev. Dr. Malcolm Brown, director of the Church of England’s Mission and Public Affairs Council, elaborates:

It’s like shoplifting: Even if you put what you took back onto the shelf, you still did something wrong. Just restoring the status quo ante doesn’t give people the sense that trust has been restored. You can’t just put it back on the shelf; you have to admit that the way things were done was wrong.

Overheard in the Boardroom

"We took a non-core operation
And spun it off, free of taxation.
In time it so grew,
We repurchased it, too,
In the interest of world domination."

Glencore, the giant international commodities company, has been in the news lately with its offer to merge with Xstrata, the giant international mining company. Xstrata was created ten years ago as a spin-off of Glencore's then-small coal-mining operations, with Glencore retaining a 34% stake. In the intervening time, through a series of acquisitions, Xstrata has grown to a market capitalization of £28 billion ($45 billion), 20% greater than that of its "mother".

I have to admit that M&A is not my forte, and I wondered why a company would spin off a division, only to buy it back ten years later. One answer may lie in the fact that the spin-off, or IPO of a division, comprised a means for Glencore to realize the the division's value without actually selling it directly to another party, which would have incurred a tax liability. Having created publicly traded shares in a tax-free transaction, the new mining company had a currency with which to effect acquisitions. It could then grow to a size at which it could form a world-beating competitor as part of Glencore once again. Neat trick, provided one has the patience to wait ten years.

Day of LIBOR Reckoning

Said a banker: "We used to condone
The rigging the cost of a loan,
A benevolent practice
'Til many attacked us,
And now we must humbly atone."

The LIBOR rate-rigging scandal slowly rolls on, and by all appearances will continue to do so for some time. Bloomberg reports that management of RBS condoned and participated in the manipulation of the London Interbank Offer Rate, beyond the four traders who the bank has fired. And why not? “This kind of activity was widespread in the industry,” said David Greene, a senior partner at law firm Edwin Coe LLP in London. “A lot of the traders didn’t consider this behavior to be wrong. They took it as the practice of the trade. This is how things operated, and it seemed harmless.” Canadian regulators are currently pursuing legal action against, besides RBS: HSBC Holdings Plc, JPMorgan Chase & Co., Citigroup Inc., Deutsche Bank AG, as well as interdealer brokers ICAP Plc and RP Martin Holdings Ltd.

To any interbank traders, bank managers and all others beginning their Day of Atonement at sundown tonight, Dr. Goose wishes you an easy fast.

Tale of the Taylor Rule

There's a model of rate calculation,
First advanced in the Great Moderation,
That would have the Fed set
The cost of our debt
Based on output as well as inflation.

Then one of those Keynsian guys
Came and asked: "Do you think it is wise
To posit, post-crisis,
The worst is that prices
May lag, as the model implies?"

"A recession of untold ferocity
And slow monetary velocity
Demand a new means
To grease the machines,
And yours lacks the needed viscosity."

The Taylor Rule is one of those economic concepts of which I often hear mention, but on which I rarely focus. Created by Stanford professor John Taylor and others in the early '90s, the Rule would have the Federal Reserve raise (or lower) the base interest rate by about 1.5 percentage points for every one-percentage-point change in inflation. A 1% point change in GDP would call for a 0.5% point change in rates. (For those who appreciate the beauty of algebra, the Taylor equation below is explained in the link above.) Depending on which economist you talk to, Prof. Taylor has given us either a useful rule of thumb, or an article of faith.

This weekend, I was absorbed by a blog post from University of Oregon professor Mark Thoma, which questions adherence to the Taylor Rule orthodoxy in these days of deleveraging-driven Great Recession. In the Economist's View, Prof. Thoma and others argue that it's silly to hold the Fed to a rule that assumes no economic frictions except for "mild price stickiness." Evidently, the Taylor Rule would have the Fed setting rates much higher than zero, but even future Nobel Prize winners should know that unquestioning adherence to a model may have adverse real-world consequences.

Flip-Flopper?

An economist known to propound
A theory he thought to be sound
Ignored a taboo
By changing his view
When facts that disproved it were found.

"You have to learn from the data," says Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis (pictured at right). This, he says in an interview with The Wall Street Journal, is why he set aside his concerns regarding "structural unemployment" and came to support the Fed's easing efforts more strongly. Structural unemployment results when the jobless lack the skills or mobility to fill open positions, while cyclical unemployment merely reflects a temporary economic downturn. Mr. Kocherlakota has been studying the problem of structural unemployment and concluded that it is less important than he previously espoused. In fact, he now believes that the Fed's most effective course is to keep interest rates low until the jobless rate falls to 5.5%.

The Minneapolis Fed president's comments, first conveyed in a speech on Thursday, appeared to move him from hawkish to the dovish side of the Federal Reserve board. However, Mr. Kocherlakota's public change of mind also serves as a reminder of the silliness and artificiality of "sides" in questions as complex as growth, inflation and employment.