Monthly Archives: July 2014

Edesses on Mian and Sufi: House of Debt

Michael Edesses reviews the book House of Debt, by Atif Mian and Amir Sufi.  He starts with Larry Summers’s reaction to the book.  Summers, of course, was part of the inner circle, making decisions during the crisis.  Edesses’s take on that is right on the money:

Summers points out that he argued for cram-down. Nevertheless, he says, “the president and his team felt that in a world where many legislative battles lay ahead, a failure on cram-down would be costly in time and political capital.” But enormous amounts of political capital had already been spent on bank bailouts. How is it decided on what to expend political capital?

An even more questionable Summers rebuttal has to do with the proposal that the government buy underwater mortgages from banks. Summers says, “The problem was that in many cases mortgage assets were carried on banks’ books at valuations far above what appeared to be current market value. Buying them at such valuations would have been a massive backdoor subsidy to banks of the kind we would not accept. Forcing writedowns was precluded for regulators who feared what it would do to banks’ capital positions.”

I find this hard to understand. He means that banks’ capital positions were fictional, and regulators feared they would have to face reality? It is hard to escape the feeling that part of the explanation is that a policymaker in Summers’s position is more sensitive to the concerns of banks and the executives of those banks with which he is intimately familiar – one might say captured by banks, even unconsciously – than to the concerns of underwater homeowners.

I think homeowners vs. banks is really a false dichotomy.  It wasn’t good guys and bad guys, or even bad guys and bad guys.  More like bad guys and dumb guys.  And gullible guys.  I’m sure there were ladies involved as well.  Not trying to pile on the guys.

But I worked my ass off for years, and lived in a single wide trailer, in order to build my home.  I resisted the urge to borrow WAY more than made sense, although, like all the people who did so, it was easily available.  To me, it’s just plain wrong to bail out homeowners who borrowed more money than their home was ultimately worth.  And if it’s paid for with my tax dollars, well, that’s just insult on injury to me.  Maybe a cram-down in bankruptcy would be OK, to some extent, but really, if the bank loaned someone more than what in the past has been considered reasonable leverage on real estate, then the lender should eat the loss and the borrower should lose the property and suffer the credit downgrade.

This opinion excludes the illegal and immoral shenanigans pulled by the banks.

But let’s check the assumptions here when it comes to the bailout of homeowners, and even the equity like loan structure proposed by Mian and Sufi.  First, they blame the severity and length of the great recession on breakdown of consumer spending due to excessive consumer debt.

What is unique about the Mian and Sufi analysis is that they take great pains to construct the sequence of events and establish causation. In particular, they rebut the banking view, which states that it was difficult to get the economy moving again after the crisis because banks were reluctant to lend. The consequent drying-up of credit, according to this view, especially to small businesses, put a damper on economic recovery.

Instead, Mian and Sufi argue that the driver of the prolonged slump was a sustained cutback in consumption by homeowners who lost much or all of their home equity. On these points, they couldn’t be more convincing.

This brings to mind the interesting post from John Mauldin regarding GDP, and it certainly makes me think that this is what Mian and Sufi were looking at.  So this first assumption maybe could be looked at again.  Also, I have not read the book, but US consumers have really not de-levered.  See here.

But then they go on to try to fix this problem that they have identified.  I’m not sure that it needs fixing.  This is the assumption that I really doubt.  It seems to me that if we fix anything, it should be the court system and resolution of foreclosures and bad debt, which was shown to be not in working order during the crisis.  Another solution might be for the lenders to assume the risk of the loans they make.  That is, eliminate the moral hazard to the lenders which has been established via bailouts.

Mian and Sufi instead propose a way to share the risk by changing the debt contract.

the debt contract is a very poor instrument on which to base a stable economy. “If we are to avoid the painful boom-and-bust episodes that are becoming all too frequent,” say Mian and Sufi, “we must address the key problem: the inflexibility of debt contracts.”

I guess if lenders and borrowers agree to that arrangement, OK, but not sure it really fixes the problem.  And it certainly doesn’t help the bank balance sheets nearly as much as the FASB rule changes.


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…and now gut viruses

This stuff is so cool!  Does it make me weird that I find the microbiome so fascinating?

From New Scientist.  Researchers in the Netherlands have determined that there is one particular virus that seems to be most common in the human gut.  Other than that one, there’s just so many that a huge majority have not been identified.  Virus.  This is in addition to the bacteria that we are finding out are so important.

“The fact that the virome has been overlooked for 10 years is the elephant in the room in microbiome research,” says Dutilh. “Most people just focus on bacteria, but there are also viruses and even fungi. It’s the interaction between all of these things and the host gut that is really important.”


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Advances in Cancer Elimination

There’s always a lot of criticism around the approach taken by modern medicine toward cancer.  It makes perfect sense that any for profit company will only fund research that is likely to result in profits for them, in the long run.  Unfortunately, this goal is directly in opposition to the goal of quickly and permanently eliminating the disease from a person.  This is true for all kinds of diseases, especially chronic conditions.

However, it’s not always the case that there is no research towards cures.  The Atlantic details successes in immunotherapy that may be a cure for some cancer patients.  And of course the Kanzius treatment is in its final set of animal trials before going to the FDA to get approval for human trials.  Yay!

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More on Corporate Personhood

My previous post here.  I previously discussed the moral hazard associated with corporate personhood.   Catherine Rampell has added another twist – the great tax advantages enjoyed by corporations.

Turns out corporations enjoy tons of rights and privileges that biological beings should be salivating over.

The most obvious place to start is taxes. Companies save billions from loopholes that don’t apply to individuals — yet.

People, for example, pay taxes on their worldwide incomes. Corporations do not, as long as they don’t bring the foreign profits back into the United States.
She lists some other advantages as well, but ends with the big one that I started with.  Corporations can’t go to jail.

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Market Forces in Healthcare

Interesting post from Karl Denninger.   He describes how a market focused surgery center is saving a lot of money for self-insured companies that have switched to plans that include that specific option.  As individuals choose to use the surgery center, they move away from more expensive hospitals.

Denninger quotes Craig Jones, the president of the hospital association, explaining that hospitals charge more due to other expenses inherent to their business models – as Jones says, “what you’re leaving the hospital with are sicker patients and more complex patients.”  Denninger characterizes this as “thuggery,” comparing it to crooked auto repair shops:

that sort of practice — getting a car up on the rack with a vague promise of it being “reasonable” to fix and then presenting the owner with a huge bill that must be paid to get the car back used to be common in the car repair business.

Laws were passed to prohibit this practice because it was (properly) seen as outrageously abusive to consumers who lack enough knowledge to be able to detect this sort of deception and effectively deal with it.

But if you read through to the end of the original article he cites, there’s another pretty good reason that hospitals cost more:

Those other costs that Jones implies are areas such as the emergency room and caring for uninsured patients.

This is the central conundrum between health care and free markets.  In any free market, there is always the option of “no transaction.”  With health care, this is simply not the case.  If someone is uninsured, yet critically ill, the law says that a hospital cannot refuse him treatment.  It makes sense for hospitals to be pared down by competition to the point where they consist of critical care, emergency rooms, and care for the uninsured.  The competition is already taking all the same day surgeries and procedures, as well as non-critical urgent care.  That leaves hospitals to cover critical care consisting of multi-day stays, 24-7 operating hours, and the most expensive life sustaining equipment, and emergency rooms used for only life-threatening emergencies (for the insured) and all types of health care needs (for the uninsured, and for the few hours that non-critical urgent care sites would be closed).

The answer comes down to, who will be forced to pay, and in what way?

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Bankster Fraud Doesn’t Really Exist (DOJ)

Everyone knows that not one Wall Street top level banker has been criminally prosecuted for the mortgage crisis that they created.  I assumed that DOJ simply was not trying to prosecute them, because their crimes seem so obvious to everyone else.  In fact, William Black at New Economic Perspectives has documented that the Assistant US Attorneys have been trained so that they cannot even suspect CEOs of any kind of fraud, and they have additionally been instructed not to look in all the places where they would find evidence of it:

In researching my series of articles on the critical omissions in Attorney General Eric Holder’s press release about the settlement with Citi I realized that I need to write multiple articles about the destructive role played by Benjamin Wagner. Holder made Wagner DOJ’s leader on mortgage fraud because Wagner was so willing to propagate the single most absurd, destructive, but so very useful (to the administration and the banksters) lie about mortgage fraud.

“Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. ‘It doesn’t make any sense to me that they would be deliberately defrauding themselves,’ Wagner said.”

This column addresses a single article Wagner’s shop published in a journal volume entitled “Mortgage Fraud” to train Assistant U.S. Attorneys (AUSAs) on how to investigate and prosecute mortgage fraud. 32 UNITED STATES ATTORNEYS’ BULLETIN MAY 2010. The title of the article is “Finding the Smoking Gun,” and the author is Barbara E. Nelan, Assistant United States Attorney, Northern District of Georgia.

This article exemplifies three decisive DOJ failures led by Wagner. AUSAs were trained by Wagner to believe three lies:

  1. The “bank,” by which he really meant the bank CEO, was always the victim of mortgage fraud and never the leader of those frauds
  2. Banking regulatory agencies had no meaningful role to play in detecting, investigating, and aiding the prosecution of frauds that was worth mentioning in the training, and
  3. Whistleblowers had no meaningful role to play in detecting and aiding the prosecution of frauds that was worth mentioning in the training

Those three lies guaranteed de facto immunity for the senior bank officers who led the three most destructive financial fraud epidemics in history.

It makes sense that if the leadership of DOJ does not want these prosecutions to occur, that they would have to train this way.  Surely some smart young AUSA would otherwise figure it out and bring a case.

Black goes on to describe how DOJ, in fact, trained AUSAs to see evidence of management fraud and misunderstand it

Black does have this one backwards:

I am friends with academic historians, and know their scorn for the “great man” style of history in which normal people barely exist and are barely considered. Under Wagner, the opposite sin occurs – the senior officers of the bank disappear from the DOJ narrative.

Actually, this is exactly “great man” style at work.  The great man does not appear because the narrative is about crime – the great man is off doing God’s work.

His conclusion:

At the end of Wagner’s training program the AUSA or FBI agent will be far less effective than before the training. They are being taught to hunt for mice and to believe that lions and hyenas do not actually exist. They are taught that the bank CEO is their invariably honest friend and the bank is the helpless victim of the fiendishly clever hairdressers, minor real estate agents, and 20 year old loan brokers whose prior job was flipping burgers. It is all a sick perversion of justice and a squandering of our grotesquely inadequate resources for prosecuting elite white-collar criminals. Holder and Wagner exemplify every warning Edwin Sutherland made 75 years ago when in his presidential address he announced the concept of white-collar crime and gave his examples showing the vastly greater ability of elites who control seemingly legitimate firms to do immense damage to society because apologists define their crimes out of existence.

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Grantham on Keystone XL

From Advisor Perspectives:

Two Afterthoughts on the Risks and Return of the Keystone Pipeline

The XL Pipeline has become an intense issue in which facts tend to be swamped by political leanings and financial interests. Everyone can recognize that in a perfect environmental world there would be no pipelines; it is hard to argue that they improve nature. But they are a necessary environmental evil to facilitate a modern economy. As always, it is a question of degree: how bad is this particular pipeline and how useful is its construction to the health of the U.S. economy?

The bad news about the diluted bitumen (or dilbit) that would come from the Canadian Tar Sands to fill the pipeline is that it is not crude oil. It is more toxic than crude oil, far heavier, and more expensive to clean up. We have good data on this because of a major leak in 2010 into the Kalamazoo River from a pipeline carrying dilbit. The first problem came from the benzene, a light petrochemical that is added to the dilbit, without which the dilbit is too thick to actually move along a pipeline. After the leak of over a million gallons, which ran for 17 hours before pumping finally stopped, the benzene evaporated into a brown poisonous gas, necessitating the immediate evacuation of all neighboring houses. The second problem was that after the loss of its benzene the diluted bitumen became just plain bitumen – close to the tarry stuff that goes on roads – and sank to the river bottom, where it bounced slowly along, creating lasting damage for scores of miles. The cost so far, for work that still continues two and a half years later, has reached an estimated $1,000 a gallon, over 20 times the already heavy cost of dealing with regular oil in a river leak. These details can be checked in a detailed report that won last year’s Pulitzer Prize for American Journalism from InsideClimate News.2

So much for the risks. Now what about the rewards? The main potential reward, especially in an economy that is having the slowest recovery ever recorded, is in job creation. Job creation turns out to be an incredibly complicated economic issue, depending on the unique circumstances of each project and how it interacts with competing projects. If there were armies of unemployed welders and other construction workers sitting around, one could easily imagine that almost every job needed would draw from the unemployment pool and would be true job creation. But what if there were intense competition for every welder, every oil worker, and most heavy construction workers? Then we would not be in the job creation business but in the job competition business, deciding which potential employer will bid up wages and which will go without workers. A recent Bloomberg article opened with the question, “How high is the demand for welders to work in the shale boom on the U.S. Gulf Coast?” It then answered, “So high that you can take every citizen in the region of Lake Charles between the ages of 5 and 85 and teach them all how to weld and you’re not going to have enough welders,” citing a source from Huntsman Corp. “So high that San Jacinto College in Pasadena, Texas, offers a four-hour welding class in the middle of the night” because the equipment is finally available then.

The article points out that in the Gulf area shortages of welders, fabricators, pipe fitters, and oil and gas workers are pushing up wages so fast that expansion projects are running well over budget already and some, like a $20 billion gas-to-liquids plant slated by Royal Dutch Shell Plc for Louisiana, have already been canceled. Labor conditions in the Gulf Coast will be especially tight in 2016 and 2017 and projects along the Houston Ship Channel alone are expected to employ more than 250,000 workers, according to the Port of Houston Authority.

Attempts to calculate investment opportunities opened up by cheap local supplies of natural gas or to estimate the time it will take to absorb the current surplus will have to take into account this chronic shortage of workers with the required skills. In this area – oil and chemicals in the Gulf – as in many others, the shortfalls in the quantity and quality of U.S. training programs are playing a painful role.

Considering the above, it is clear that the XL Pipeline will not “create” jobs. Every one of its potential workers, almost all of whom already travel widely for jobs, could get a job several times over if given an hour on the telephone. What is happening here is an allocation of limited manpower resources: will we use them to extend chemical plants to capitalize on the incredible U.S. advantage in cheap natural gas; will we extend our fracking of U.S. sweet crude; or will we transport Canadian diluted bitumen, the most dangerous and toxic of all fuels, in order to increase the price for a handful of Canadian Tar Sand producers who currently suffer from constrained delivery capabilities and hence lower local prices? Even ignoring the severe environmental risks, it should be an easy decision on economic grounds alone.

Here’s how Wikipedia describes the issue for Canada:

Getting to tidewater

Canada’s oil sands for example are landlocked and it is crucial to the petroleum industry that transportation of petroleum products keeps pace with production. Currently landlocked Canadian oil sands petroleum products suffer huge losses on price differentials. Until Canadian crude oil, Western Canadian Select, accesses international prices like LLS or Maya crude oil by getting to tidewater (south to the US Gulf ports via Keystone XL for example, west to the BC Pacific coast via the proposed Northern Gateway line to ports at Kitimat, BC or north via the northern hamlet of Tuktoyaktuk, near the Beaufort Sea.,[15] the Alberta government (and to some extent, the Canadian government) is losing from $4 – 30 billion [16] in tax and royalty revenues as the primary product of the oil sands, Western Canadian Select (WCS), the bitumen crude oil basket, is discounted so heavily against West Texas Intermediate (WTI) while Maya crude oil, a similar product close to tidewater, is reaching peak prices.[16] Calgary-based Canada West Foundation warned in April 2013, that Alberta is “running up against a [pipeline capacity] wall around 2016, when we will have barrels of oil we can’t move.”[15]

Frustrated by delays in getting approval for Keystone XL (via the US Gulf of Mexico), the Enbridge Northern Gateway Pipelines (via Kitimat, BC) and the expansion of the existing TransMountain line to Vancouver, British Columbia, Alberta has intensified exploration of two northern projects “to help the province get its oil to tidewater, making it available for export to overseas markets.” [15] Canadian Prime Minister Stephen Harper, spent $9 million by May, 2012 and $16.5 million by May, 2013 to promote Keystone XL.[17]

In the United States, Democrats are concerned that Keystone XL would simply facilitate getting Alberta oil sands products to tidewater for export to China and other countries via the American Gulf Coast of Mexico.[17]

Port Metro Vancouver has a number of petroleum terminals including: Suncor’s Burrard Products Terminal, Imperial Oil Limited’a Ioco in Burrard Inlet East, Kinder Morgan Westridge Kinder Morgan Westridge in Burnaby, Shell Canada’s Shellburn, Chevron Canada Ltd.’s Stanovan in Burnaby [18]

So, if Keystone XL goes through, US will gain some temporary labor requirements to build it, and possibly some refining jobs.  But then the price for the bitumen will increase, so the price of the gas will increase, and some of the gasoline will be shipped out, increasing US gas prices even more.  So we get higher gas prices for everyone in the US also, in the end.

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