The pain in Spain again

Spanish labour costs are painfully converging with German ones.

The fragment of the US blogosphere that pays any attention to Europe is still full of gloom about the prospects for the Eurozone. See for instance Kevin Drum. But here’s a ray of light from the very experienced insider Gavyn Davies, blogging in the FT:

The good news is that Spain has in fact improved its competitiveness markedly in recent years, as a result of the reductions in labour costs which have accompanied the recession and structural reforms in the labour market:

The chart actually understates the improvement. Continue reading “The pain in Spain again”

Can’t-cheat-an-honest-man Dep’t

We all want something for nothing. That’s how con artists make a living.
Yes, including Paul Ryan.

Megan McArdle debuts at Newsweek/Daily Beast with a reflection on con artistry and self-deception.

One thing Megan doesn’t note: the “equity premium” – the virtually-guaranteed 8% return on diversified stock portfolios – was the whole premise of Paul Ryan’s Social Security privatization plan. And of course “dynamic scoring” is jsut another version of something for nothing.

Wouldn’t it be nice if the con artists got out of politics and went back to just fleecing individuals?

Who SHOULD be the Next Treasury Secretary?

Four days ago, Ezra Klein reported that Erskine Bowles is the front-runner for Treasury Secretary in a second Obama Administration.  It’s hard to think of any plausible Democrat who would be a greater disaster.  Bowles has a man-crush on Paul Ryan; his chairman’s mark for his eponymous commission was simply an embarrassment on both political and policy grounds; a managing director of Morgan Stanley, he is Wall Street’s creature.  He has no business running Treasury any more than I do.  Take a look:

But if that is the case, then assuming (in best chickens-counting style) that there even is a second Obama Administration, who should the next Treasury Secretary be?

This isn’t merely idle blog talk (although I am under no illusions about RBC’s awesome policy influence).  One great failing of progressives is that after the 2008 election, we simply celebrated.  Wall Street did not: it got to work making sure that its people were in key positions, and that Barack Obama’s agenda would never challenge the financial industry’s power.  That’s how we got Timothy Geithner at Treasury, Larry Summers at NEC, Ben Bernanke reappointed at the Fed, Bowles himself appointed to an absurd “deficit reduction commission”, Christy Romer sidelined at CEA, and ditto Elizabeth Warren.

So if, as anyone not committed to entrenched plutocracy should hope, President Obama wins a second term, the very next day should be devoted to making sure that President Obama does not make such disastrous picks again.  That means being prepared to push very hard against rancid appointments like Bowles and in favor of someone else.  I would hope that the day after Obama’s re-election, Al Franken and re-elected Senator Sherrod Brown call the White House and make it very clear that if they have anything to say about, Bowles will never be confirmed.

But who should be?  A couple of notes: 1) at this stage, we should not worry about confirmability too much.  The Republicans will seek to block anyone (whether by filibuster or otherwise), and at some point progressives will have to press President Obama to make a recess appointment; and 2) for what it’s worth (and it may not be worth much), there has never been a woman or a minority heading Treasury.

There are a few I can think of offhand: former FDIC chair Sheila Bair, former CFTC chair Brooksley Born, Paul Volcker (too old?), Gary Gensler, Christy Romer, Jared Bernstein.  Hillary?  I would be very wary: the Clintons created the Wall Street Democratic party, all of her advisors will be Rubinites, and if she wants to run for President in 2016, negotiating with Wall Street potential campaign contributors provides dark incentives.  Still, she could be more progressive as a way of attracting primary support. 

 Paul Campos wants The Shrill One: that would be great, but I think that’s a little too far-fetched even at this stage.  Nevertheless, Campos is asking the right question.

By the day after Election Day, progressives should have an answer.  Because Wall Street sure will.


With-a-fountain-pen Dep’t

How did the underwriters of the Facebook IPO make $125 million in trading profits in addition to their $176 million in underwriting fees?

Facebook went public at $38 per share, and is now trading at $30. So Morgan Stanley, the lead underwriter, and its accomplices partners at Goldman and J.P. Morgan, did an excellent job for their customers (Facebook and its selling shareholders, including Goldman itself) while leaving the public – including Morgan Stanley’s own retail customers at Smith Barney – holding the bag for something north of $3 billion.

They also did quite nicely for themselves, thank you: $176 million in underwriting fees plus $125 million in trading profits.

It’s the trading profits that leave me puzzled. The WSJ reporter writes, “Morgan Stanley and the other banks made additional money through their attempts to buoy the faltering stock early on.” But attempting to “buoy” a stock means buying it. How do you make $125 million buying a stock that opened at $44 and is now trading at $30? They must have sold into any temporary rally generated by their support efforts. So it sounds to me as if the banks figured out a way to fleece the suckers twice.

As the man said, “There’s no such thing as a gentleman when real money is on the table.”

Thank you, John Boehner and Paul Ryan

Security screeners and Customs agents at airports are “domestic discretionary spending. Think about that the next time you miss your flight because the security line didn’t move.

I got to the airport and hour and ten minutes early for my flight today. It was a mid-afternoon flight, not at one of the peak periods; I had a boarding pass; and I wasn’t checking a bag. So the timing should have been ample.

But I almost missed the flight anyway, because the security-screening line was out the door; only two of four lanes were open.

TSA screeners are “domestic discretionary spending.” So are the Customs folks whose scarcity when I landed in Dallas on a flight from Guatemala caused me to miss my connecting flight to Washington; the line, also at a non-peak period, took more than an hour.

Think about that the next time someone tells you we need to work on the deficit by shrinking the size of the federal government.

Footnote Could we save money and make life easier for passengers by simplifying the screening process, without losing anything on the security side? Probably. But it’s not as if the Teahadis in Congress are actually working on that problem; they’re just slashing everything in sight save defense and rural pork. While we have the rules we have, fewer screeners and fewer Customs folks at airports means more missed flights.

A price worth paying? No, I don’t think so, either.

Think twice about that financial advisor

What’s a financial advisor to do? The correct advice pretty much fits on a single sheet of paper that is available for free at the public library. Moreover, the products one should recommend buying are inexpensive, and are widely-available at leading websites. An audit study finds predictably depressign results

Suppose you are in business offering people advice about some important products. You have a problem, though. The correct advice pretty much fits on a single sheet of paper that is available for free at the public library. Moreover, the products one should recommend buying are inexpensive, and are widely-available at leading websites.

Thus the predicament of the modern financial advisor. Thus also the predicament of her unsophisticated customers. If the right advice is simple and free, at-best the expensive and complicated advice she will sell you will be overpriced, and probably more than a little wrong. Moreover, if the correct products to buy are cheap, no-load index funds that generate little sales commission, your advisor has obvious incentives to offer you something riskier or fundamentally more costly.

Thus, we have the results of an important, if cosmically unsurprising experiment: “The Market for Financial Advice: An Audit Study,” by Sendhil Mullainathan, Marcus North, and Antionette Schoar. Continue reading “Think twice about that financial advisor”

News from the 0.1%

The CEO of RBS turns down his £1m bonus.

Today’s headline in Britain about the CEO’s bonus at the Royal Bank of Scotland, rescued from collapse in 2008 and now owned 83% by the British government:

Mr Hester, the chief executive of Royal Bank of Scotland, has bowed to mounting public anger and agreed to give up shares worth almost £970,000.

Naturally Stephen Hester’s decision to live on his paltry pay of £1.2m has nothing at all to do with saving the Cameron-Clegg government from embarrassment and possible humiliation in the Commons. Where are the Murdochs’ phone hackers when you need them?

If the bonus was necessary to get Mr. Hester to do a proper job, he will now underperform. Logically he must now be sacked.

In another glimpse into the entitlement world of the banksters, the Sunday Times (yesterday, p.25, paywall) quotes the chairman of a rival bank sounding off indignantly (my italics):

And if he goes, how much would they have to pay the next person? It would either be somebody decent, who will want £10m upfront because they won’t trust the government, or they’ll get the chief executive of an NHS trust, pay them £100,000, and it will be a multi-billion-pound disaster.

Never mind that the chief executives of NHS trusts get basic pay of around £150,000, not £100,000, plus modest performance bonuses by City standards sometimes reaching £20,000: similar to the pay of senior NHS consultants. What’s astonishing is the top banker’s lack of imagination about the rest of the world. Running a big hospital is a order of magnitude more complex than running a bank, even a big and troubled one. You have thousands of high-technology and intrinsically dangerous products (medical procedures) as against a bank’s dozen or so; the key staff – the doctors – are prickly and highly specialised experts, with entrenched professional autonomy; and the consequences of screwing up are deaths, not paper losses. Would you trust Mr. Hester to run a teaching hospital?

Welfare Recipients’ Stunning Sense of Entitlement

The front page of this morning’s Financial Times describes the struggle between the Royal Bank of Scotland and PM David Cameron over executive pay. RBS chairman Sir Philip Hampton’s salary of nearly $2 million is set to be supplemented with a bonus of at least that hefty size. Cameron is calling for executive pay restraint, but the RBS board is intransigent.

The FT quotes a “senior banker” as saying that if Sir Philip doesn’t get a bonus, it would demoralise staff members by signalling that they now effectively work for “an arm of the civil service or a utility rather than for a bank”.

Let’s review the facts for this unnamed champion of free enterprise.

The Royal Bank of Scotland exists today only because the UK taxpayer bailed it out three years ago. The government owns 83% of the bank’s shares. Rather than be grateful for this generous welfare programme, the wizard of private industry quoted in the article is outraged that he might have to accept some public sector style restraints on compensation.

Cry me a river.

It’s all about Me

A striking but unrepresentative example of waste and vanity in Spanish public spending.

Courtesy of El Pais, a photo of an uncompleted 30-ton statue of Carlos Fabra, former PP boss of Castellón province:

This €300,000 monument stands in front of Fabra’s pet project, the Castellón international airport. The €124m facility may never open – to flights that is, you can tour the empty halls if you want. Castellón (pop. 180k) is about 50 miles north of the unsaturated airport of the regional capital Valencia, to which it is connected by two motorways and a main rail line. You will not be surprised to learn that Sr. Fabra is now helping police with their inquiries into corruption.

The statue could stand as an icon of the German view of Spain and the Mediterranean generally: waste! vanity! boondoggles! uncontrolled spending! laziness! The allegations are a bit inconsistent: it takes a lot of leadership and effort, as P.J. O’Rourke observed about Washington, to waste money on the scale of Castellón airport and the Osprey plane.

Overt monuments to Me by serving politicians like Fabra are in fact very rare in democracies. Self-preservation shifts the monumental urge to retirement, or a plaque on the metro or whatever. Even most monarchs and dictators are fairly modest. The spectacular Bronze Horseman monument to Peter the Great in St. Petersburg wasn’t put up by Peter himself, not exactly a wilting flower, but by Catherine. Fabra’s statue suggests that he isn’t quite right in the head.

The dud airport model is more common. Lleida in Catalonia and nearby Huesca in Aragon both have shiny new ones. The latter has no scheduled services, the former only nine. Both small cities are connected by a high-speed rail line to the hub airport at Barcelona.

On a smaller scale, my home town of Vélez-Málaga (pop. 50,000) is about to close the underused new tram built by the previous mayor, connecting the old town inland to its coastal satellite Torre del Mar.

Two observations which won’t be noticed against the tide of stereotyping. Over the last decade, Spain’s central government has been running a very conservative fiscal policy, with a a primary surplus until the property boom imploded and banks had to be rescued on a massive scale. (In retrospect, the central bank should have seized and bankrupted them like the FDIC, paid off the retail depositors, and let the German wholesale lenders go begging to Mrs. Merkel. They’d be facing the same lectures now, but without the imposed austerity.) National investment spending has been pretty sensible: motorways, research, high-speed rail lines – justified by the poor quality of the legacy network -, and perhaps we should count subsidies to investments by renewable energy operators. The waste has been by regional and local government. Most of the bust banks were regional Caixas, with ties to regional politicians. The Valencia region was within days of a default a week ago and had to be bailed out by the central government.

There is some structural flaw in the post-Franco decentralisation, necessary as it was after a quarter-century of his dead hand. My guess: the regions get a big share of income tax automatically, so political accountability to regional taxpayers is weak. The autonomy is not balanced either by any national equivalent of the brutal audits of the French Cour des Comptes, which proudly traces its history back to 1303, when the Chambre des comptes de Paris was created as a deliberately scary instrument of centralising royal power. (Not that royal finance was a safe job: at least six royal treasurers were hanged, and Fouquet died in prison.) Similarly the Spanish regions have allowed mayors far too much leeway over development, though this is changing at least in Andalusia.

Incidentally, it’s nothing to do with socialism: most of the regions, including Valencia, are PP fiefs. The mayor responsible for my local tram fiasco was PSOE, as is the decent regional government in Seville. The spectacularly bent former leadership of Marbella was PP, like well-run Málaga. The mess has very little to do with ideology.

It’s a pity that public-sector bankruptcy is so rare. The assets of private-sector enterprises mostly make money: but only because the many mistakes are quickly written down, and the assets recycled at a better valuation, by the great institution of bankruptcy, turbocharged by limited liability. The taxpayers of Vélez-Málaga (including me) are stuck for ever with the debt on the tram, so it will always appear to make a loss. With 600,000 tickets a year (half the estimated ridership), I reckon it should meet its direct operating costs, the strictly economic test for an unsaleable public asset. The only reason to close it is the dumb contract the city signed with the operator, guaranteeing it a minimum revenue and assuming all the economic risk.

Question for discussion: would more frequent bankruptcy by local government be worth it, weighing higher interest costs against the benefit of truth in accounts?

U.S. banks seek European deals, don’t pause to thank U.S. regulators.

A story in today’s New York Times talks about how U.S. financial firms are stepping in to buy up assets that European banks are being forced to shed. But it buries the lede: that government regulation deserves the credit for leaving them in the financial condition to do so.

Today’s New York Times has a story about how European banks are selling assets (including in the U.S.) to build up their threadbare capital cushions, and how U.S. banks and private equity firms are buying. I wonder who the audience is for this kind of story. If you’re Citibank or KKR you presumably already know that, and where, such opportunities are to be found. Nor can there be that many general readers who care whether a French or an American bank holds the mortgage on some Florida hotel. I suspect that this is actually thinly disguised advertising for the local industry—”if your European credit lines are shrinking, come on over to Wall Street!”—but as that genre goes, this story seems pretty harmless.

The most interesting part, though, is as usual buried towards the end:

But American institutions remain stronger than their European counterparts, said Christopher Kotowski, an analyst with Oppenheimer.

“Everyone is going to be cutting staff and shrinking capital commitments but the Europeans are doing it more,” Mr. Kotowski said. In large part, that’s because earlier in the United States financial crisis, Washington forced American banks to take huge write-downs, while raising tens of billions in fresh capital and halting dividends to conserve cash. European banks have been much slower to take those steps.

Somehow I doubt that the banks themselves will give government regulators much credit for this. But we should. I propose a new slogan: “Trust your bank? Thank your government.”