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Memo to self: The next time blog traffic is slow, do one of two things. Link to a post that discusses the constitutionality of the federal income tax. Or post incorrect information about iPhones. Then spend rest of day moderating comments.
Quote of the day:
"Not everything that counts can be counted and not everything that can be counted, counts."
-- Attributed to Einstein
Losses arising from America’s housing recession could triple over the next few years and they represent the greatest threat to growth in the United States, one of the world’s leading economists has told The Times.
Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years. Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: “American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses.”
He said that US futures markets had priced in further declines in house prices in the short term, with contracts on the S&P Shiller index pointing to decreases of up to 14 per cent.
“Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years,” he said.
Professor Shiller, author of Irrational Exuberance, a phrase
later[No. Earlier -- JH] used by Alan Greenspan, the former Federal Reserve chairman, said: “This is a classic bubble scenario. A few years ago house prices got very high, pushed up because of investor expectations. Americans have fuelled the myth that prices would never fall, that values could only go up. People believed the story. Now there is a very real chance of a big recession.”
Atlantic magazine blogger Megan McArdle (a libertarian, by the way, whose former nom de blog was Jane Galt!) notes that the U.S. federal income tax is, in fact, legal.
I wish . . .That Ron Paul supporters would stop informing me, in ALL CAPS, that various current policies are UNCONSTITUTIONAL, when in fact those very things were WRITTEN INTO THE CONSTITUTION via the AMENDMENT PROCESS. The FOUNDING FATHERS deliberately gave future legislators the ability to AMEND the constitution, because they wisely assumed that in the FUTURE there might be circumstances they were unable to FORESEE in 1787. Whatever you may think of the income tax, it is not only constitutional, but actually in the constitution, via this very clear amendment:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.The complaints that I don't know what I'm talking about would be more convincing if the people making them gave evidence of having actually read the document that they claim validates their most dearly held beliefs.
Quote of the day:
"We have argued for many years that the No. 1 rule of asset allocation is that returns on capital are in markets in which capital is scarce. Investors should always want to play the role of the provider of scarce capital."
-- Richard Bernstein, chief U.S. strategist, Merrill Lynch, 2006
This is exactly what Warren Buffett and Berkshire Hathaway are doing by opening up a bond insurance company at the worst moment for bond insurers in many years. From AP:
Warren Buffett's Berkshire Hathaway will receive a license in New York to open a new bond insurance business, a state regulator said Friday.The license for Berkshire Hathaway Assurance Corp. will officially be approved no later than Monday.
Also on Friday, Berkshire Hathaway agreed to buy NRG N.V., the reinsurance unit of ING Group said for about $435.7 million in cash.
Buffett's new insurance unit could take some business away from other insurers, said Donald Light, a senior analyst with Celent. Light owns Berkshire Hathaway shares.
Buffett will have the advantage of setting up operations with a strong balance sheet and a clean book of business, making his operation attractive for bond issuers, Light added.
Buffett's foray into the bond insurance sector comes at a tumultuous time for his new competitors. In recent weeks, bond insurers have come under fire as rating agencies have downgraded them, or warned of possible downgrades, because of their exposure to the deteriorating credit markets.
Standard & Poor's downgraded ACA Capital Holdings Inc.'s bond insurance unit to "CCC" from "A" on Dec. 19, while Fitch Ratings has placed two of the largest bond insurers, MBIA Inc. and Ambac Financial Group Inc., on negative credit watch.
You probably didn’t know this, but your wallet does. The post-2001 federal spending boom has made inflation substantially worse in the Washington-Baltimore corridor than in the rest of the nation. This will be the sixth year in a row in which consumer prices have risen more locally than in the rest of the country, according to the Bureau of Labor Statistics.
The national figures are bad enough: In November consumer prices were 4.3 percent higher than in November 2006, one of the worst showings in a decade. The news caused stock markets to plunge two weeks ago when it was announced. In Baltimore-Washington, however, the 12-month price pop was even higher — 4.5 percent. Driven by electricity prices and housing and food costs, Baltimore-Washington inflation hasn’t trailed that of the nation since 2000 and 2001, when the regional technology bubble was letting out air.
Monetarists, who believe that inflationary price increases are always explained by increases in the money supply, would not be surprised. The housing-credit bonanza, the war in Iraq and the rapid rise in homeland security spending have showered the region with dough.
Check out David Nitkin’s story in Thursday’s edition of The Sun, which reported that Maryland companies reaped $24 billion in federal contracts for fiscal 2006. This is an enormous amount — about a 10th of Maryland’s entire economy.
Thanks to annual compounding, local-inflation pain has gotten worse with time. Baltimore-Washington consumer prices have risen 22 percent since 2001. Nationwide, prices have risen 18 percent. Unfortunately, the recipe for lower local inflation — the end of the boom — would cause trouble even worse than higher prices.
In today's Wall Street Journal, Steve Hanke, professor of applied economics at Johns Hopkins, and Stanford's Ronald McKinnon argue that the United States and other developed nations should intervene in the currency markets to support the greenback's value against the Euro and other currencies. The move would increase Americans' wealth, bolster the balance sheets of allies holding U.S. liabilities and diminish expectations that inflation will rise, the two argue.
By RONALD MCKINNON and STEVE H. HANKE
This article appeared in the Wall Street Journal, December 27, 2007; Page A11Central banks ended the year with a spectacular injection of liquidity to lubricate the economy. On Dec. 18, the European Central Bank alone pumped $502 billion -- 130% of Switzerland's annual GDP -- into the credit markets. The central bankers also signaled that they will continue pumping "as long as necessary." This delivered plenty of seasonal cheer to bankers who will be able to sweep dud loans and related impaired assets under the rug -- temporarily.
But the injection of all this liquidity coincided with a spat of troubling inflation news. On a year-over-year basis, the consumer-price and producer-price indexes for November jumped to 4.3% and 7.2%, respectively. Even the Federal Reserve's favorite backward-looking inflation gauge -- the so-called core price index for personal consumption expenditures -- has increased by 2.2% over the year, piercing the Fed's 2% inflation ceiling.
Contrary to what the inflation doves have been telling us, inflation and inflation expectations are not well contained. The dollar's sinking exchange value signaled long ago that monetary policy was too loose, and that inflation would eventually rear its ugly head.
This, of course, hasn't bothered the mercantilists in Washington, who have rejoiced as the dollar has shed almost 30% of its value against the euro over the past five years. For them, a maxi-revaluation of the Chinese renminbi against the dollar, and an unpegging of other currencies linked to the dollar, would be the ultimate prize.
As the mercantilists see it, a decimated dollar would work wonders for the U.S. trade deficit. This is bad economics and even worse politics. In open economies, ongoing trade imbalances are all about net saving propensities, not changes in exchange rates. Large trade deficits have been around since the 1980s without being discernibly affected by fluctuations in the dollar's exchange rate.
So what should be done? It's time for the Bush administration to put some teeth in its "strong" dollar rhetoric by encouraging a coordinated, joint intervention by leading central banks to strengthen and put a floor under the U.S. dollar -- as they have in the past during occasional bouts of undue dollar weakness. A stronger, more stable dollar will ensure that it retains its pre-eminent position as the world's reserve, intervention and invoicing currency. It will also provide an anchor for inflation expectations, something the Fed is anxiously searching for.
The current weakness in the dollar is cyclical. The housing downturn prompted the Fed to cut interest rates on dollar assets by a full percentage point since August -- perhaps too much. Normally, the dollar would recover when growth picks up again and monetary policy tightens. But foreign-exchange markets -- like those for common stocks and house prices -- can suffer from irrational exuberance and bandwagon effects that lead to overshooting. This is precisely why the dollar has been under siege.
If the U.S. government truly believes that a strong stable dollar is sustainable in the long run, it should intervene in the near term to strengthen the dollar.
But there's a catch. Under the normal operation of the world dollar standard which has prevailed since 1945, the U.S. government maintains open capital markets and generally remains passive in foreign-exchange markets, while other governments intervene more or less often to influence their exchange rates.
Today, outside of a few countries in Eastern Europe linked to the euro, countries in Asia, Latin America, and much of Africa and the Middle East use the dollar as their common intervention or "key" currency. Thus they avoid targeting their exchange rates at cross purposes and minimize political acrimony. For example, if the Korean central bank dampened its currency's appreciation by buying yen and selling won, the higher yen would greatly upset the Japanese who are already on the cusp of deflation -- and they would be even more upset if China also intervened in yen.
Instead, the dollar should be kept as the common intervention currency by other countries, and it would be unwise and perhaps futile for the U.S. to intervene unilaterally against one or more foreign currencies to support the dollar. This would run counter to the accepted modus operandi of the post-World War II dollar standard, a standard that has been a great boon to the U.S. and world economies.
The timing for joint intervention couldn't be better. America's most important trading partners have expressed angst over the dollar's decline. The president of the European Central Bank (ECB), Jean Claude Trichet, has expressed concern about the "brutal" movements in the dollar-euro exchange rate. Japan's new Prime Minister, Yasuo Fukuda, has worried in public about the rising yen pushing Japan back into deflation. The surge in the Canadian "petro dollar" is upsetting manufacturers in Ontario and Quebec. OPEC is studying the possibility of invoicing oil in something other than the dollar. And China's premier, Wen Jiabao, recently complained that the falling dollar was inflicting big losses on the massive credits China has extended to the U.S.
If the ECB, the Bank of Japan, the Bank of Canada, the Bank of England and so on, were to take the initiative, the U.S. would be wise to cooperate. Joint intervention on this scale would avoid intervening at cross-purposes. Also, official interventions are much more effective when all the relevant central banks are involved because markets receive a much stronger signal that national governments have made a credible commitment.
This brings us to China, and all the misplaced concern over its exchange rate. Given the need to make a strong-dollar policy credible, it is perverse to bash the one country that has done the most to prevent a dollar free fall. China's massive interventions to buy dollars have curbed a sharp dollar depreciation against the renminbi; they have also filled America's savings deficiency and financed its trade deficit.
As the renminbi's exchange rate is the linchpin for a raft of other Asian currencies, a sharp appreciation of the renminbi would put tremendous upward pressure on all the others -- including Korea, Japan, Thailand and even India. Forcing China into a major renminbi appreciation would usher in another bout of dollar weakness and further unhinge inflation expectations in the U.S. It would also send a deflationary impulse abroad and destabilize the international financial system.
China, with its huge foreign-exchange reserves (over $1.4 trillion), has another important role to play. Once the major industrial countries with convertible currencies -- led by the ECB -- agree to put a floor under the dollar, emerging markets with the largest dollar holdings -- China and Saudi Arabia -- must agree not to "diversify" into other convertible currencies such as the euro. Absent this agreement, the required interventions by, say, the ECB would be massive, throwing the strategy into question.
Cooperation is a win-win situation: The gross overvaluations of European currencies would be mitigated, large holders of dollar assets would be spared capital losses, and the U.S. would escape an inflationary conflagration associated with general dollar devaluation. For China to agree to all of this, however, the U.S. (and EU) must support a true strong-dollar policy -- by ending counterproductive China bashing.
Mr. McKinnon is professor emeritus of economics at Stanford University and a senior fellow at the Stanford Institute for Economic Policy Research. Mr. Hanke is a professor of applied economics at Johns Hopkins University and a senior fellow at the Cato Institute.
"Pakistan was once called the most allied ally of the United States. We are now the most nonallied."
-- Zulfikar Ali Bhutto, President of Pakistan, New York Times, July 6, 1973
ACA Capital, a bond insurer hammered by mortgage defaults and partly owned by Bear Stearns, said yesterday it has agreed to not pay dividends or pledge assets without the permission of the Maryland Insurance Administration. This is the latest domino in the mortgage debacle. First the homeowner defaults, then the mortgage bonds go bad, then the bank that owns the mortgage bonds has a crisis, and then the bond insurer has its own crisis. Then the bank that depended on the bond insurance to limit its losses has a crisis. From Gretchen Morgenson's and Vikas Bajaj's recent story in the New York Times.
It also means that the major banks that insured their securities with ACA Financial Guaranty might have to take back billions in losses from the insurer under the terms of the credit protection they bought from the company.The troubles at ACA could also serve as the first real test for credit default swaps, the tradable insurance contracts used by investors to protect, or hedge, against default on bonds. In June, the value of bonds underlying credit default swaps rose to $42.6 trillion, up from just $6.4 trillion at the end of 2004, according to the Bank for International Settlements.
''The hedge is only as good as the counterparty, or the other party, to the hedge,'' said Joseph Mason, a finance professor at Drexel University and the University of Pennsylvania. ''This is part and parcel of the financial innovation that has grown very rapidly in recent years.''
Canadian Imperial Bank of Commerce said Wednesday that there was a ''reasonably high probability'' that it would incur a ''large charge'' in its first-quarter results because of its exposure to ACA Capital, Reuters reported.
Turmoil at ACA Capital has been evident for a few months. In a filing last month, the company said it wrote down the value of its swaps contracts by $1.7 billion and reported a negative net worth of $883 million, about $25 a share. The merchant banking affiliate of Bear Stearns owns 29 percent of ACA Capital. The company also insures municipal bonds and manages collateralized debt obligations, pools of assets like mortgages and other loans.
PJM Interconnection, which manages the electric grid from New Jersey to North Carolina and as far west as Illinois, issued a news release today on an $80 million default in the wholesale electricity market by Power Edge LLC. Another participant, Exel Power Sources LLC, defaulted on a $4.5 million payment, PJM said.
Power Edge had purchased "financial transmission rights," one of myriad pieces of the wholesale market that PJM has created by slicing and dicing the basic process of generating electricity, shipping it to a certain location and selling it to distributors. FTRs are ways for financiers as well as power companies to bet on "congestion" charges that PJM levies in the summertime when transmission lines get clogged up by too much demand. If you own an FTR for a certain line at a certain time and there is congestion, you make money. In Power Edge's case, PJM says, the financial products were "counterflow" FTRs, which pay off when "the flow of power on a transmission line flows in the opposite direction of a transmission constraint."
No word about what Power Edge's problems might be. They don't even seem to have a Web site. Apparently, however, the company couldn't get bankers to extend credit to pay its bills.
Update, 7:59 PM Wednesday: Goof in column that occurred to me as I washed the dishes:
Family income is only 11 percent less than that of the nation and ranks 39th - ahead of every southern state except Texas, Florida and Georgia.
Virginia, of course, is also a southern state. In 2006 median family income in Virginia was $66,886. In North Carolina it was $52,336.
My Wednesday column is on the American Legislative Exchange Council's state-by-state economic scorecard. I argue that low taxes and low wages -- ALEC's preferred criteria -- aren't the only way to measure a state's economic competitiveness. The column includes a few pieces of data and state comparisons in other categories, such as household income and education. Below are the footnotes, as it were.
"Virginia Crushes Maryland in Economic Ranking of All 50 States" was the provocative headline on last week's announcement by a pro-markets, pro-limited-government research group. That's true -- if you don't measure poverty, education, business creation, household income, homeownership growth, venture-capital investment, broadband access, major-league sports, cultural opportunities, sprawl and pollution.
Poverty: 8.2 percent of Marylanders lived below the poverty line in 2006; 9.2 percent of Virginians lived below the poverty line. Source: U.S. Census Bureau, American Community Survey.
Education: 35 percent of Marylanders over 25 held a bachelor's degree in 2006. 33 percent of Virginians held a bachelor's degree. Source: U.S. Census Bureau, American Community Survey. Maryland wins in advanced degrees, too.
Business creation: In 2002 and 2003 Maryland ranked 23rd for the number of jobs created by start-up businesses. Virginia ranked 33rd. In 2005 Maryland ranked 12th for new companies while Virginia ranked 20th. Source: U.S. Small Business Administration and Census data compiled by the Corporation for Enterprise Development.
Household income: Maryland was No. 1 nationally for median household income in 2006. Virginia was No. 9. Source: U.S. Census Bureau, American Community Survey.
Homeownership: Maryland ranked 28th for growth in the homeownership rate between 2001 and 2005; Virginia ranked last in the nation, with a decline in homeownership.
Virginia, however, edged Maryland out last year in the percentage of owner-occupied homes, 69.9 percent vs. 69.4 percent. Sources: Census data and Census data via the Corporation for Enterprise Development.
Venture-capital investment. Maryland was 8th in the nation in 2005; Virginia, 9th. Source: Corporation for Enterprise Development.
Broadband access. Maryland was 9th nationally in 2005; Virginia, 14th.
Major league sports, cultural opportunities: Self-evident, I believe.
Sprawl: More people (53 percent) work outside their county of residence in Virginia than in any state in the country. Maryland is No. 2 at 47 percent. Source: Census Bureau. The Sierra Club's 1999 sprawl and land-planning report ranked Virginia behind Maryland in every category measured.
Pollution: Maryland ranked 19th in toxic releases per capita in 2002; Virginia was 24th. Source: Corporation for Enterprise Development.
Maryland is No. 4 in per-capita college graduates, No. 3 in doctorate-level engineers and scientists and No. 7 in the recent increase of high-school graduates.
All from the Corporation for Enterprise Development.
In 1959 [North Carolina] was one of the poorest places in the nation, ranking 45th with a median family income 30 percent below that of the country as a whole.
Source: Statisical Abstract of the United States, 1981. North Carolina median family income in 1959 was $3,956, compared with national median family income of $5,660.
Today, North Carolina... family income is only 11 percent less than that of the nation and ranks 39th -- ahead of every southern state except Texas, Florida and Georgia.
Source: U.S. Census Bureau, American Community Survey. 2006 North Carolina median family income was $52,336 compared with median family income of $58,526 for the nation.
are nothing new. Quote of the day:
"We have much to learn of the right keeping of Christmas. I do not think children now-a-days find the pleasure we found when we were young in preparing our simple little gifts and hiding these from one another. Now there is a surfeit of gifts, and a most unwise choice, and the children are not trained into the joy of giving. The hurry and bustle obscure the sacredness of the season."
-- Elizabeth Channing, Dec. 25, 1900. Autobiography and Diary of Elizabeth Parsons Channing (Boston: American Unitarian Association, 1907) 253.
Back on Wednesday. Happy holidays.
The always-interesting David Rosenberg from Merrill Lynch:
Delayed refunds could result in increased delinquencies This year's individual tax refunds will be delayed since Congress just finally passed the one-year patch for the Alternative Minimum Tax (AMT). This will play havoc with the January-February after-tax (disposable) income and spending data, which will be based on seasonal factors that expect the typical distribution of tax refunds. Moreover, the delay could result in increased credit card and mortgage payment delinquencies. Many early tax filers count on the refunds to paydown credit card balances following the holiday season. The timing is not good, since it comes at a time when we are already seeing rising delinquency rates.
Pulled from comments. This is a terrific point. By pulling punches on disclosure requirements, the IRS hurts charities that work hard to keep expense ratios low. Better disclosure would make these nonprofits look good on Form 990, which many donors use to direct giving. Without the relevant ratios front and center on the IRS forms, the groups' light is hidden under a bushel.
People need to understand these ratios and know where there money is going. I sit on a board of a national non-profit out of Rockville and know what sacrifices the staff, including the Exective Director, take to keep the admin and fundraising costs low. They have a clear understanding of the fact that if those costs are low, there is more going to the programs which is why anybody should be working for a charitable cause.
Nick Ciarelli, the Harvard student who was proprietor of the Web site that tried to scooped Apple on its own technology news and often succeeded, isn't saying. But if he accepted money to shut up and settle litigation with Apple -- even if he was moving on to other things anyway, as Wired magazine suggested -- it's too bad. Even the idea of a journalism subject silencing a journalist with money and threats is disconcerting. And make no mistake, Ciarelli was a journalist. Thanks to the Web, we all can be journalists now.
"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
-- John Maynard Keynes, The Economic Consequences of the Peace, 1920.
The Internal Revenue Service just blew a beautiful chance to give donors the most relevant, accessible financial information about charities.
Scandals at United Way, the Nature Conservancy, the Red Cross and other nonprofits helped prompt the agency to revamp Form 990, on which charities report activities to the public. But the unveiling of the new form on Thursday shows that the IRS caved in to pressure from nonprofits to keep disclosure as full as it should be.
A draft form proposed earlier this year included statistics on a summary page giving a clearer idea about how much donations pay for executive salaries and other non-charity items. But the IRS scrapped requirements to disclose the number of employees making more than $100,000; fundraising expense as a portion of contributions; total expenses as a percentage of assets and executive compensation as a portion of total compensation.
Charities dismissed the IRS proposal to list easily accessible fundraising expenses as "value laden." You bet it's value laden. If 90 cents out of every donated dollar goes to pay some for-profit fund raiser, that's valuable information for givers.
Although the new form will require disclosure of first-class air travel and club dues for executives, the IRS rejected proposals to list all executive expense reimbursements and allowances. The agency will require better disclosure of loans, business deals and other transactions with insiders, but even this could have been improved.
The new requirements stop far short of information available on publicly traded, for-profit organizations. Donors are investing in charities no less than shareholders are investing in Merck and Exxon. The information they receive should be at least as comprehensive.
The university attended by my oldest son polled students' parents on their kids' credit-card use.
Results (statistically unsound, to be sure) weren't as bad as I expected. 44 percent had 1 card. 39 percent had no card. 14 percent had two cards, and 2 percent had three cards. College people: 1 card, used responsibly and paid off every month, is a good way to go.
