Author: Daniel Indiviglio

A new Bloomberg survey of 62 prominent economists shows that most are feeling more optimistic about the economy than they were a few months ago. They’re now predicting 3% GDP growth for 2010 and 2011. They also believe that unemployment has peaked and will decline to 9.5% by year’s end. I certainly hope their optimism is warranted, I’m just not convinced.

So what are some of the reasons for the economists’ cheerier attitude? Bloomberg reports one saying:

“Consumption has been on an uptrend,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “The main reason for the pickup in recent months has been an improvement in the labor market.”

I’m not sure what improvement in the labor market Maki is talking about, but he must be looking at different numbers than what I’ve seen. According to the Bureau of Labor Statistics, the non-seasonally adjusted broader measures of unemployment have worsened in recent months — not improved. Unemployed plus discouraged workers went from 9.9% to 10.2% to 11.2% from November to December to January. If you add in marginally attached workers, then the percentages changed from 10.7% to 11.1% to 12.0% over the same period. These are the numbers that matter if you want to understand whether Americans will be more comfortable spending.

Consumption could be improving because there’s a perception that the labor market is improving. After all, the prevailing, generally reported unemployment rate tells a more positive story. Employed Americans are also probably beginning to believe that if their job has survived this long, they may be safe. But that perception isn’t reality yet.

What’s worse is that this potential consumption growth is limited to the optimism of those who are employed. That 12% I just mentioned above needs to experience actual labor market improvement, meaning jobs, to begin spending freely again. Once the rise in unemployment really does end, consumption should quickly plateau for those who are employed. Then, any consumption growth will be limited to employment growth, which is still expected to be quite slow. Even by these optimistic economists’ standards, unemployment will only decline by 0.2% (from 9.7% to 9.5%) through year’s end.

Here’s another economist:

“It’s a matter of time before strength in the economy effectively feeds on itself, with more employment leading to stronger spending, which in turn leads to more employment,” said James O’Sullivan, global chief economist at MF Global Ltd. in New York. “The key is going to be the business sector leading the way and consumer spending following.”

I disagree with the first part of this statement, insofar as he believes that “matter of time” is imminent. Certainly more employment will lead to stronger spending, which will feed on itself, as he says. But as I just mentioned, we aren’t going to have much more employment all year.

But I agree with the second part of his statement. I’ve mentioned before that business spending will likely have to lead the way to recovery. But I remain unconvinced that business spending will be strong enough to have a major impact in employment. After all, 70% of the economy comes from consumer spending, so business only has so much power over growth. Unless consumer demand increases, businesses will have a hard time causing each other to need to increase production significantly and ramp up hiring.

I also generally wouldn’t put as much weight into economic performance over the past few months when it comes to employment and spending. The holidays are an unusual time, where firms fire fewer people and consumers spend more money. I’d prefer to see how the economy does through spring before changing my view about the economic path we’re on.

Swiss bank UBS has decided to “claw back” 300 million Swiss francs ($282 million) of its deferred bonus compensation promised to top executives in order to cover a portion of its 2.74 billion-franc loss, Bloomberg reports. While it’s been largely suggested that banks should institute such policies for bonus compensation, many have been apprehensive to do so. It’s interesting to see a bank really employ the tactic. While this should give us some hope that bankers are getting it, the CEO’s attitude towards claw backs and the bank’s other actions indicate otherwise.

First, clawing back some compensation here makes total and complete sense. The firm posted an enormous loss. It had set aside some compensation to pad such losses, in case past bets that derived a profit led to future losses. As a result, it took some of that deferred compensation back, to cover a loss that resulted after the pay was set aside. That’s exactly how things should work. Bonus compensation should take into account long-term performance.

Yet, this comment by UBS CEO Oswald Gruebel is very disappointing:

“Bank salaries and bonuses are politically influenced and have become a controversial public topic as never before,” Gruebel said. “That’s why we raised the proportion of deferred share-based variable compensation for higher-paid colleagues. These decisions make possible equitable compensation as well as the coupling of bonuses to the long-term success of our firm.”

No. No. No. You shouldn’t be instituting these policies because of political pressure or public anger. You should be doing it because it makes sense. And it does. If long-term performance could be negatively affected by short-term gain, then you need a mechanism in place to prevent that. Claw backs are your check on that risk. He kind of says that at the end of the statement, but it’s pretty clear from what he says first that long-term success wasn’t the chief motivating factor for why this policy is in place.

And what’s worse? Despite that 2.7 billion-franc loss, take a guess how much in cash bonuses UBS paid out in 2009:

UBS is paying out 2.9 billion francs in cash bonuses for 2009, 34 percent more than the previous year.

As a matter of fact, UBS’s loss this year was far less than last year’s. But it was still a loss. And if you look at some simple math, you quickly find that without these cash bonuses, UBS would have made shareholders a profit, instead of a big, ugly, loss.

I know most bankers would argue that bonuses are misconstrued by the media, because they’re a major portion of compensation. I understand that much better than the average journalist, since I worked as a banker myself. But I also never took my bonus for granted. After my first year, it was never guaranteed. So I spent responsibly, assuming it could be as low as zero.

If bankers don’t have this attitude, then they might as well throw away the bonus concept altogether and just move to a pure salary system. If a bonus is always essentially guaranteed to be at a certain level no matter the firm’s performance, then why bother even calling it a bonus?

Gallup released its 2009 job creation index today. The results are interesting, though not altogether surprising. Most of the states doing the best specialize in two the most recession-proof industries: energy and government. The states doing the worst were largely those struck by the housing bubble’s pop and financial crisis. What does this mean for an employment recovery?

Here’s Gallup’s best and worst:

And here’s what the broader map looks like:

Looking at the best states, the influence of energy is obvious. You’ve got coal producers like West Virginia and oil producers like Texas all doing well. And they should be: although energy is somewhat affected by a recession, it’s not really as easy to cut back substantially on electricity and driving to work as it is, say, wine or movies.

Virginia and Maryland show that the federal government is also thriving. DC isn’t on this top list, but its index score was positive as well. As the unemployment reports have clearly shown, if any industry has held up well during the recession, it’s the federal government.

But what recession-proof industry is noticeably absent? Health care. But again, this makes sense. Health care isn’t really concentrated in any state or states: it’s spread out. So even though it has done comparably well, most states benefit equally.

How about the bad states? Long-suffering Michigan leads the list. Others in the west mostly have the housing bust to blame. Their economies were heavily dependent upon real estate, and those jobs continued to suffer in 2009.

The states listed in the northeast mostly felt the burn of the financial crisis. Even though the big banks have largely recovered, thousands of jobs were lost in financial services during the recession. The companies that remain aren’t in a hurry to ramp up their hiring yet.

I think you can learn a few things from this. First, don’t count on the industries that have done well to pull us out of recession. Government can only grow so large. Energy jobs also have no reason to grow any faster than at their normal rate over the next few years.

And unfortunately, the industries that suffered the most — real estate and finance — probably won’t add many more jobs in the near-term either. The housing and commercial real estate markets are still trying to gain their footing. And even when they do begin to recover, it’s crazy to expect the quantity of jobs to come back that existed during the boom. Some finance jobs could return, but a lot of banks and finance companies no longer exist. Meanwhile, Wall Street isn’t seeing much reason to grow very quickly: Main Street continues to flounder and financial regulation is still an unknown.

All of this points to the hypothesis that the employment recovery will be a lot slower than its quick decline.

Goldman Sach’s Chief Financial Officer, David Viniar, said some interesting things in a speech at a conference today in Miami. He indicated that 2010’s compensation scheme won’t likely resemble how the bank paid employees in 2009. He also said that Goldman has no intention of shedding its bank holding company status. I find both these statements perplexing.

Compensation

Let’s start with what he said about bonuses. The Wall Street Journal reports:

Goldman Sachs Group Inc, which held down executive pay last year, has no “magic formula” for setting compensation in 2010, Chief Financial Officer David Viniar said on Wednesday.

Viniar said pay this year would depend on a number of factors, including the firm’s performance, competition and “the world around us.”

And:

Viniar said Goldman did not target a compensation ratio.

“We try to pay our people fairly,” he said.

Indeed. The Journal also notes that Goldman’s 2009 compensation sunk to 36% of its net revenue, well below its historical average of 50%. Yet, Viniar says that 2010 compensation won’t necessarily resemble 2009’s strategy. What does this mean?

I guess you could take this one of two ways. On one hand, he could mean that Goldman intends to curb its compensation even further. Stop laughing: it’s possible, at least metaphysically. But right, not very plausible. What he more likely means is what most people expect: Goldman’s 2009 compensation levels were just a one-off to try to calm public controversy. In 2010, the firm will likely resume paying their employees even more “fairly.”

That is, unless the government and Federal Reserve regulate compensation practices. Barring that possibility, I wonder how short the public’s memory will be. In the latter part of 2010, when reports of Goldman’s bonus pool begin to surface, unemployment is largely expected to still be above 9%. If Goldman’s bankers make even more money than they did in 2009, but the rest of the nation is enduring a painfully slow economic recovery, won’t people dust off their pitchforks and start screaming again?

Bank Holding Company Status

You might recall that, during the financial crisis, it was largely thought Goldman was on the brink of failure. Since it was deemed “too big to fail,” the Federal Reserve decided to quickly convert Goldman from a traditional investment bank to a bank holding company, so that it could borrow emergency money from the Fed. But now that the crisis is over, Goldman no longer needs that status, and theoretically could go back to being a traditional investment bank.

But Viniar also confirmed that Goldman has no intention of doing so. I don’t understand why. I mean, I do understand — there are certain pleasant benefits that Goldman derives by being a bank holding company. But what I don’t understand is why the Federal Reserve would allow the bank to keep that status. Now that banking has healed, it could convert back. The Fed should demand that it does so.

Today, Federal Reserve Chairman Ben Bernanke released a speech transcript that provided the most comprehensive blueprint for the Fed’s exit strategy that we’ve seen to date. The speech was set to be made today before the House Financial Services Committee, but Washington has a snow day. So Bernanke released it anyway. I hope Congress will use the extra time they have to read and understand the speech. It’s pretty complicated, but also hugely significant. Let’s look at Bernanke’s plans.

First Step: Ending Emergency Facilities

Bernanke begins by explaining what we already know: that he’s winding down all of the emergency lending facilities put in place to stabilize the credit markets. About this, he says:

These changes, like the closure of a number of lending facilities earlier this month, should be viewed as further normalization of the Federal Reserve’s lending facilities, in light of the improving conditions in financial markets; they are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about as it was at the time of the January meeting of the FOMC.

I have my doubts that what he’s saying here is accurate. If consumer credit is still largely dependent on the Term Asset-Backed Securities Loan Facility (TALF) and the mortgage-backed security purchases, then how does he expect banks and finance companies lending to be unaffected when they end? Unless investors pick up all the slack, ending these programs will certainly “lead to tighter financial conditions for households and businesses.” But let’s hope my pessimism about investors’ appetite for asset- and mortgage-backed securities is wrong, and Bernanke’s optimism is right.

Step Two: Raise The Discount Rate

Bernanke says that he expects to raise the discount rate (the interest rate the Fed charges banks for borrowing money) before it raises the fed funds target rate (the interest rate that banks lend to each other overnight at the Fed). This should soak up some credit in the market, since banks would be discouraged from borrowing from the Fed’s discount window. He didn’t indicate exactly when the Fed intended to raise the discount rate, but said it would be “before long.”

Right now, not many banks are borrowing from the discount window, since the Fed’s Term Auction Facility, introduced during the crisis, has taken its place. But that ends in March. At that time, discount window borrowing could begin again, and at higher rates. So a discount rate increase is not meaningless.

Step Three: Forget About The Fed Funds Rate

For years, the federal funds rate has been the prevailing tool for Fed monetary policy. But lately, the fed funds market has sort of dried up. One way the Fed is distancing itself from utilizing the fed funds rate was just explained: it intends to start its tightening by raising the discount rate. But there’s more. In his penultimate paragraph, Bernanke explains:

As a result of the very large volume of reserves in the banking system, the level of activity and liquidity in the federal funds market has declined considerably, raising the possibility that the federal funds rate could for a time become a less reliable indicator than usual of conditions in short-term money markets.

So he hopes to replace that policy tool with a new one: the rate of interest that the Fed began paying banks on their reserve balances during the financial crisis. He continues:

Accordingly, the Federal Reserve is considering the utility, during the transition to a more normal policy configuration, of communicating the stance of policy in terms of another operating target, such as an alternative short-term interest rate. In particular, it is possible that the Federal Reserve could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities, as a guide to its policy stance, while simultaneously monitoring a range of market rates.

The logic is simple: the more interest the Fed is willing to pay on banks’ reserves, the less money they will unleash on the market. And the money they do lend, they will want more interest for, since they can do pretty well at the Fed. That will increase market interest rates and reduce monetary supply.

My concern here, however, is that this could still lead to some inflation down the road. When banks lend to consumers or businesses, the interest they collect is already a part of the monetary supply. But when banks get interest from the Fed, it’s printing money to pay that interest. If these interest rates are pushed higher, and the reserve balances grow larger, then wouldn’t this cause the Fed to print even more money? The short-term monetary supply tightening would lead to more monetary supply in the longer-term.

Step Four: New Exit Strategy Tools

In addition to these measures, the Fed hopes to employ three key exit strategy tools:

Reverse Repos

The idea here is that the Fed would sell interest-bearing securities to counterparties, but promise to buy them back. So this would reduce the monetary supply in the short-term, since the Fed would get a cash inflow, and the market would experience a cash outflow. This is a good short-term tactic — but that’s all that it is. In the long-term, the Fed will eventually have to actually sell some assets or more permanently soak up monetary supply.

Term Deposits For Banks

Here’s an interesting idea: the Fed is planning on offering banks term deposits — sort of certificates of deposits (CDs) for banks. This is kind of like when banks are paid interest on their reserves, but the term deposits will not be able to count as reserves, so they’re more like an actual investment. The more term deposits banks make, the less they can lend, curbing credit availability. I have the same worry here as I did interest on reserves, since the Fed will need to print money to pay interest on term deposits.

Selling Securities

Bernanke also mentions that the Fed could begin selling some of the trillions of dollars in securities that it’s accumulated since the financial crisis. But he doesn’t anticipate doing so anytime soon. What he will do now is allow any securities the Fed owns that mature, to run off accordingly. That’s sensible. This won’t result in an excess supply of securities in the market like selling would, but it would slowly reduce some the assets on the Fed’s balance sheet.

My general assessment is that these are mostly good ideas for short-term credit tightening. The question, of course, is the timing. If Bernanke waits too long, inflation may result. If he starts too soon, he might choke the recovery. But as mentioned, in the longer-term, some of these methods worry me, as they appear to imply that the Fed will be printing more money in order to tighten credit in the near-term.

The U.S. trade deficit — the measure of how much more the nation imports than exports — widened in December. This is generally interpreted as bad news. Many had hoped that exports could help to lead the U.S. out of recession, especially since the dollar has been so weak. But does today’s news really conflict with that possibility? Yes. No. Maybe.

The Commerce Department reports:

Total December exports of $142.7 billion and imports of $182.9 billion resulted in a goods and services deficit of $40.2 billion, up from $36.4 billion in November, revised.

That’s an approximate increase of 10%. At first glance, this seems pretty bad. U.S. exports aren’t outpacing imports. Indeed, the Wall Street Journal’s Real Time Economics blog concludes:

The widening reflects faster growth in imports than exports at year-end, an unwelcome side effect of the U.S. economic recovery. It also is a reminder that export-led growth, which nations are pursuing as a path out of recession, is easier said than done.

But it’s important to realize that there are two variables at play here: exports and imports. And, in fact, the exports news wasn’t that bad. They actually increased. The Commerce Department says:

December exports were $4.6 billion more than November exports of $138.1 billion.

So we did see some export growth after all. The reason why the deficit widened was because imports grew by $8.1 billion — more than the $4.6 billion increase in exports. So foreign nations are buying more U.S. goods and services, but Americans are buying even more goods and services from abroad. That’s troubling, because the import growth more than neutralized the export growth, widening the deficit. That additional $8.1 billion in imports could have stimulated the U.S. economy, but Americans chose to buy even more from abroad instead.

As a result, I would interpret this news as disappointing, but not disastrous. Indeed, if you consider that the dollar index has risen 7.5% since November, it might actually be impressive that exports are still growing. It could have been worse. The main reason why exports are expected to do so well is because the dollar has done so badly. If the dollar is doing better, but exports are still growing, albeit at a slow pace, then I think that’s hard to complain about.

Disney reported a healthy quarter ending January 2nd, beating forecasts. The entertainment conglomerate earned 47 cents per share, much better than the 38 cents per share expected by a poll of analysts by Thompson Reuters. Entertainment is typically an industry that suffers greatly in a recession. So how did Disney manage to defy that logic with a net income of $844 million at the end of 2009?

Given the fact that most economists think the U.S. is on the cusp of (an albeit slow) recovery, this result might not be that shocking after all. In fact, its most impressive performance came from its advertising revenues. CNN/Money reports:

Disney’s largest division — TV networks including ESPN and ABC — rebounded due to higher ad sales, with revenue rising 7%.

But Disney wasn’t alone here:

Higher broadcast and cable ad sales also helped rivals News Corp and Time Warner Inc. beat earnings expectations last week.

Advertising tends to lead economic recovery, since companies don’t want to miss out on rebound spending. So it’s not surprising that advertising showed improvement. Analysts must have been caught off guard with the extent to which companies were willing to spend on advertising again. Of course, this was in the latter part of the year, so it makes me wonder whether this was mostly a desperate attempt to capture the holiday shoppers, instead of a strong belief that the economy is about to enter a resilient recovery.

But the quarter was seemingly less magical for a large segment of Disney’s business. CNN/Money notes:

Revenue in the company’s movie studio and theme parks, which account for about half of Disney’s total revenue, were nearly flat.

No fireworks there, though I’d assert that even keeping revenue flat is pretty impressive in this economic climate for movies and theme parks. Entertainment and vacations are some of the first luxuries cut as Americans scale back their spending. But this performance shows the power of the Disney brand. When consumers are spending on movies and vacations, they’re still choosing to do so with Disney. That’s why, in a sense, I almost find the flat result of this portion of Disney’s business more impressive than its 7% rise in advertising revenue.

Today, TARP Congressional Oversight Panel Chair and Harvard Law Professor Elizabeth Warren has an op-ed in the Wall Street Journal urging Washington not to abandon the consumer financial protection agency. It’s an interesting piece. I agree with some aspects and disagree with others. But I was kind of shaken right from the start, when I realized I had trouble accepting her very first assertion: that banking is based on trust.

Warren begins:

Banking is based on trust. The banks get our paychecks and hold our savings; they know where we spend our money and they keep it private. If we don’t trust them, the whole system breaks down. Yet for years, Wall Street CEOs have thrown away customer trust like so much worthless trash.

Since the piece that this serves as the first paragraph for largely argues for the need of a consumer financial protection agency, the relevant question I’d ask is: do consumers pick a bank based on trust? Empirical observation leads me to say, not really.

Look at consumer banking. There are a few behemoths out there that have an enormous market share. According to the FDIC, if you look at the top-50 institutions by deposits (at least $12.5 billion), then just four hold 55% of deposits in the U.S.: Bank of America, Wells Fargo, JPMorgan and Citigroup. Do Americans favor these giant banks because of trust?

I doubt it. If you mean trust as safety, then I think consumers rate most banks on equal footing — as long as the FDIC is there to insure their deposits, then there’s nothing to worry about. Few Americans have more than $250,000 in a savings account.

If you mean trust as a strong relationship, you draw a similar conclusion. Big banks view customers as a number: there’s no personal connection. Anyone who banks with one of these titans almost certainly doesn’t do so because of the trust that’s been developed over the years through their great relationship — it’s for other reasons.

What are some of those reasons? Convenience is a big one. It’s great to have your bank’s ATMs all over the place. It’s nice to be able to talk to a customer service rep 24-7. Another reason is probably the deals these banks offer. They can more easily offer cheaper products than others due to economics of scale.

So I would assert that people view banking just like other consumer products: they want convenience and good deals. They’re willing to accept all the negatives that consequently follow, like a weaker relationship with the bank and the poor treatment that sometimes follows. I noted this consumer phenomenon before more generally, and I think it holds up for banks as well.

Warren uses this premise to launch into an argument that a consumer financial protection agency must be established to restore trust. Maybe that’s true, if trust is, indeed, important to consumer banking. I’m just not convinced that it is.

Instead, such an agency would likely just make banks’ services more expensive for the majority of customers — which would bother them, since cost is likely a reason for why they chose their bank. Most people who enjoy cheap products do so at the cost of those who are less sophisticated and pay a high price for their lack of savvy. I wrote about this in regard to overdraft fees recently.

While that might be a moral wrong that should be righted, I’m not sure that most consumers really care. For example, if you’re always responsible enough to never incur an overdraft fee, then you probably don’t care how high they are. After all, the majority benefits when banks use “tricks” and “clever” tactics to squeeze those few consumers who don’t know any better.

This morning, I attended the Internet Security Alliance’s presentation of a recognition award to former Obama Administration acting cyber security chief Melissa Hathaway. During the event, she gave a speech mostly consisting of her view of the state of cyber security, and where it should go from here. Given the recent Google-China incident, I found the speech to be quite timely. One interesting theme she spoke of was the idea of a private-public partnership in tackling cyber security.

I find the general idea of private-public partnership for cyber security particularly fitting. Not all security needs affect government and corporate interests, but hackers pose a threat to both. Since each party should be motivated to secure their computer networks, each has reason to work for better security measures. Hathaway gave several examples of how she envisioned this partnership working.

Cyber Security Challenges

One was through cyber security “challenges” where students compete in contests and learn about cyber security. She said that such initiatives have been very successful. They are sponsored by the government and private companies for students at the high school and university levels. She thought it was a great way to identify new talent and offer internships to students with a high aptitude for the work.

I think this sounds like a great idea, but that it could be taken a step further. There should be larger-scale competitions held for graduate student and professional computer scientists with significant cash prizes, the reward money for which can be made up of contributions from the government and private firms that would benefit. I have written in the past about how effective such contests can be in soliciting creative solutions to difficult problems. Innovation in cyber security can bear a high price for any one firm or the government to absorb, but such contests can spread out the cost among many parties and still accomplish the desired end.

Information Sharing

During the Q&A, Hathaway was asked about the recent news that Google would be working with the NSA. How did she envision such partnerships being useful for both parties? She responded:

I think we need to increase the information sharing of what’s happening from the private sector to the government, and what the government or the public sector knows what’s happening and increase that information sharing to the private sector. And together we can start to build all of our collective capabilities and understanding of what’s happening in our networks.

I think that’s right. Both private firms and the government will benefit by having more information about how networks are being infiltrated and affected by cyber security threats. The more information experts have, the better they can combat criminal hacker activity.

By the end of March, the Federal Reserve is set to end its mortgage-backed securities purchase program. This program was created to help alleviate the credit crunch for residential mortgages during the financial crisis. It has worked pretty well. Once the program ends next month the Fed will have approximately $1.25 trillion in MBS on its balance sheet. The Wall Street Journal’s Real Time Economics blog reports that St. Louis Fed President James Bullard favors beginning to sell this MBS soon. My question for him would be: to whom?

From RTE:

“If the economy stays on track, I’d expect that at some point we’d entertain the possibility of asset sales,” said Mr. Bullard, a 2010 voting member of the Fed’s policy-making arm, adding it could happen later this year. The Fed official said the asset sales should be very slow at first to test markets.

He also believes asset sales should begin before rate increases, according to RTE. I have a few concerns.

I’ve already mentioned my fear that investors won’t be willing or able to sustain the demand necessary to keep the MBS market moving once the Fed stops its purchases. If the program is ended too soon, that will lead to much higher mortgage rates and less mortgage availability. That’s sure to drive the prices of homes even lower and make housing inventory even higher.

But not only is Bullard on board with ending the program, he’s itching to start selling the MBS. Here’s the problem: if there isn’t enough investor demand to sustain a private new issue MBS market as it is, then to whom exactly would the Fed sell its MBS? The same problem would persist in the secondary market, unless the Fed is prepared to take deep discounts, which is unlikely, because if anyone can hold assets as long as they like, it’s the Fed.

Why am I so convinced that the MBS market is still very unhealthy? Because it told me. Last week at the American Securitization Forum conference, the industry participants answered a poll about when they thought the RMBS market would begin to recover. Their answer:

Only 8% say the market will get started again prior by mid-2010. A full 66% say it won’t even happen this year. 39% think it won’t happen until late 2011! So the Fed’s influence will have to be significant over at least the next year, unless it wants to debilitate the housing recovery.

Let’s think of a best-case scenario. The Fed ends its program in March, and that 8% is right: there are a handful of investors willing to play in the MBS market again. Those investors will have to soak up all of the new issue MBS. If the Fed is also trying to get rid of its MBS, then the market supply becomes greater, leading those investors to purchase less new issue MBS. That curtails origination and raises interest rates further. And again, this is the hopeful scenario.

As much as I hate to see the Fed’s involvement in the mortgage market, I don’t see how it can stop propping it up until we’re sure house prices have hit bottom, inventory has declined to normal levels and the foreclosures are mostly finished. And that’s just when it should stop its MBS purchases. It should finally sell its MBS even further down the road — once there is ample demand again for MBS so that the market can absorb the supply shock of the release of all of those securities.

Yesterday, Bloomberg had a rather depressing article about why the employment picture might not get cheerier anytime soon: small businesses continue to cut jobs. Since they account for 70% of new job creation, if small businesses aren’t hiring, it will be a very, very slow ride down from 9.7% unemployment. Let’s look at what the article says.

Bloomberg reports:

Companies with fewer than 500 employees, such as Phoenix Technologies Ltd. and Sonic Corp., helped lead the economy out of the four recessions since 1980. This time, they continue to cut capital spending and dismiss workers, eliminating 3,000 jobs in January, according to Roseland, New Jersey-based Automatic Data Processing Inc., the world’s largest payroll processor.

The article notes:

The Russell 2000 Index of small-cap stocks has risen 4 percent in the past six months, lagging behind a 6 percent increase in the Standard & Poor’s 500 Index. Coming out of previous recessions, shares of companies with market capitalization between $250 million and $1 billion generally led markets higher.

For example, it says:

The Russell Index gained 17 percent in the six months following the end of the 2001 recession, compared with 0.2 percent for the S&P 500.

And it quotes a Goldman economist:

“It suggests that a V-shaped economic rebound is even more unlikely than suggested by many standard economic indicators,” said Andrew Tilton, an economist at Goldman Sachs Group Inc. in New York, which sees gross domestic product growing 2.3 percent this year.

Unfortunately, I think this view makes a lot of sense. I’ve written a few times that this recession’s recovery might not resemble the usual quick road back to full employment. Labor immobility is a big problem. Consumer credit tightening should keep spending low and encourage personal debt reduction. While larger businesses are getting more credit, smaller ones aren’t having as easy a time, though the government is pushing to change that.

But even more credit for small business won’t necessarily lead to more hiring: no responsible business owner would incur additional debt to hire more workers — unless the company anticipates a major demand increase with considerable certainty that its current staff can’t accommodate. I doubt that’s happening at many smaller firms right now, since most economic forecasts predict only modest GDP growth for 2010.

For this reason, it makes sense that smaller businesses aren’t ramping up their hiring, and may even be continuing their layoffs. Until that changes, unemployment won’t be able to decline very significantly. This reinforces the view that a jobless recovery is likely.

It’s commonly thought that Democrats are crusaders for the little guy and hate those dastardly Wall Streeters. It’s a common misconception. In fact, during the 2008 elections, Democrats far out-earned Republicans in Wall Street-based political contributions. But according to a New York Times article today, that is changing. Given the recent financial regulation efforts in Congress and by the Obama administration, bankers and traders are thinking twice about their Democratic support.

The NY Times says:

Just two years after Mr. Obama helped his party pull in record Wall Street contributions — $89 million from the securities and investment business, according to the nonpartisan Center for Responsive Politics — some of his biggest supporters, like Mr. Dimon, have become the industry’s chief lobbyists against his regulatory agenda.

Republicans are rushing to capitalize on what they call Wall Street’s “buyer’s remorse” with the Democrats. And industry executives and lobbyists are warning Democrats that if Mr. Obama keeps attacking Wall Street “fat cats,” they may fight back by withholding their cash.

The Mr. Dimon referred to above is JP Morgan Chase CEO Jamie Dimon, a friend of President Obama’s. The article also says:

But this year Chase’s political action committee is sending the Democrats a pointed message. While it has contributed to some individual Democrats and state organizations, it has rebuffed solicitations from the national Democratic House and Senate campaign committees. Instead, it gave $30,000 to their Republican counterparts.

Ouch. That burns.

Last week, I noted that financial reform may be dead, as Banking Committee Chair Christopher Dodd (D-CT) is going ahead with his bill in the Senate without Republican support. Perhaps Republicans have realized how much they stand to gain by fighting some of Democrats’ more controversial provisions, like the consumer financial protection agency and Volcker Plan. But could this also drive Democrats to think twice about aggressive regulation?

I think this could go one of two ways. Either Democrats will suddenly realize that they need Wall Street’s money for their uphill campaigns this November, or Republicans will realize (if they haven’t already) that refusing to compromise on a bill may draw Wall Street’s allegiance and deep pockets to their side of the aisle. Either way, the result I think you’ll see is a best-case scenario that financial reform isn’t nearly as substantial as it once was hoped it could be — or might have been if it were put ahead of health care reform.

If the world’s savviest investors are to be believed, then the euro is in trouble. The Financial Times reports that bets against the euro have reached new heights. Investors doubt that the eurozone’s debt crisis will end well.

The article says:

Traders and hedge funds have bet nearly $8bn against the euro, amassing the biggest short position in the single currency since its launch on fears of a eurozone debt crisis.

Investors increased their bets against the euro to record levels in the week to February 2, according to the latest figures from the Chicago Mercantile Exchange, which are often used as a proxy of hedge fund activity.

The build-up in net short positions represents more than 40,000 contracts traded against the single currency, equivalent to bets worth $7.6bn. It suggests that investors are losing confidence in the euro’s ability to withstand any contagion from Greece’s fiscal problems to other European countries.

I don’t mean to say that these investors are necessarily right. They could be overly pessimistic. But to wager that magnitude of money, I would be a little surprised if these bets weren’t calculated on some sound logic. That’s an awful lot of money to put on a hunch.

But what it clearly shows is that foreign business will likely be even more prudent about investing in the eurozone and will require ample hedging of the currency. And as those hedges become harder to get, foreign business investment may dry up too, exacerbating the eurozone’s troubles.

For the past two months, in analyzing the unemployment reports I’ve noted that temporary jobs are growing. I’ve said that this is a good sign for permanent job growth, but haven’t really explained why. I came across a great chart that does exactly that in a picture.

The chart is from Credit Suisse, and was included as part of a presentation on the consumer credit economy that I saw last week at the American Securitization Forum’s annual conference. I’m sure I’ll be writing about more charts as the week progresses, since there were a lot of great ones that I now have access to. Here’s the one on temp workers:

The red line is temp jobs; the blue line is permanent non-farm employment. As this chart demonstrates, temp jobs lead permanent job growth. It’s rare to see such a clear correlation between two variables.

The chart shows how temp jobs have done well over the past few months, as they’ve hit the trough and begun to rebound. So too should permanent jobs, if this correlation continues to hold.

What’s a little troubling is that permanent jobs have hit bottom below that of temporary jobs historically in the graph shown. Obviously, we’d hate to see that here, because that would mean a lot more job losses. But I think that the time correlation looks more relevant than the distance between the curves above. So if that holds up, looking at 2003, the permanent job trough won’t be far off.

Correspondent Richard Posner wrote an interesting blog post suggesting six ways that the U.S. could stimulate economic growth, without making the debt much worse. I agree with much said in the post, but there’s one point that I want to pick at a little. Posner believes that ending the drug war would help. I’m not so sure.

There are many philosophical reasons for ending the drug war that are quite compelling. If you have any libertarian friends, just ask them, and I’m sure they’ll happily rant on for hours. There are also a couple of economic benefits that I’ve heard. But providing for more economic growth isn’t an argument I’ve come across very often. Here’s what Posner proposes:

Decriminalize most drug offenses in order to reduce the prison population, perhaps by as much as a half, which will both economize on government expenditures and increase the number of workers. (Again and for the same reason, phase in gradually.)

Effect On The Federal Budget

Let’s look at how much the federal government actually spends on prisons each year. That can be found in the Federal Prison System Budget Request for 2011 (.pdf). In 2010, federal prisons cost taxpayers $6.2 billion. While I wouldn’t say we should ignore spending a sum that size, in the grand scheme of budgets and deficits, that isn’t much.

Recall, the 2010 deficit projection is $1.6 trillion. That means if we eliminated all federal prisons, we would reduce the deficit by four-tenths of a percentage point. And, as Posner mentions, drug-related crimes account about half of the federal prisoners. So really, the effect would be only half of that tiny reduction, and again, there are surely some drug laws you’d want to remain intact. So the portion would be even smaller — less than two-tenths of a percentage point of the federal deficit.

Effect On State Budgets

Yet, federal prisons only account for a fraction of prisoners. According to the Bureau of Justice Statistics’ Prisoners in 2008 report (.pdf), there were about 200,000 federal prisoners and 1.3 million state prisoners. So if you shrunk prisoners overall, that would definitely help the states’ fiscal health too.

But, as it turns out, the report also shows that a far larger portion of federal prisoners than state prisoners are incarcerated due to drug-related crimes. While drugs convictions caused the prison terms of close to 50% of federal prisoners, they caused the incarceration of only 20% of state prisoners. So using the numbers above, you could conclude that 100,000 federal prisoners and 260,000 state prisoners are incarcerated because of drugs. Assuming similar costs on the state level, that would spread a maximum cost-savings of $7.8 billion over the 50 states. Again, that number is not insignificant, but it wouldn’t have a dramatic impact on state budgets.

More Hard-To-Employ, Low-Skilled Workers

So what happens if you unleash 360,000 prisoners into the population? Well, it probably wouldn’t help that 9.7% national unemployment rate come down much more quickly. Of course, Posner says that these changes should be made gradually, so not to shock unemployment. But given how slow an employment recovery is expected, just how gradual would that have to be? Over five years? Ten years?

And how much would these additional workers really help GDP? It isn’t very easy for those who have been in prison to find good jobs. And it’s even harder if employers are being picky due to a huge population of unemployed workers. Over probably the next decade, the problem for the U.S. isn’t going to be not enough unskilled workers, but too many. As far as I can see, this would exacerbate the problem.

Drugs And Productivity

Finally, I have a little trouble with the notion that legalizing drugs would increase economic growth, because I worry about the effect on worker productivity. Sure, I know, alcohol is legal now, and workers are pretty productive. But just which drugs are we talking about legalizing here? Marijuana is probably relatively benign. But where do we draw the line? Do we legalize LSD? How about Ecstasy? PCP? Cocaine? Heroin? All of those drugs are mind-altering. All can have significant negative effects on the brain, even if used only occasionally. While liberty advocates might argue that it’s the right of individuals to screw up their brain as much as they like, that’s very different from claiming that increased drug use would bring more economic growth. Duller minds would probably result in less productive workers, which would lower future economic growth.

An Excise Tax

On a purely statistic level, if you bring the drug trade above ground, then any revenue created would add to GDP. So in a sense, by definition, it would increase U.S. GDP, even though that business had gone on before, but wasn’t accounted for in official economic statistics. I guess you could kind of call it farming. Or pharmaceuticals? But I’m a little bit dubious on the notion that the U.S. would root for its future growth to be driven by mind-altering drugs.

The only real, tangible way that I could see any economic benefit to certain drugs being legalized is through regulation. Excise taxes on less harmful drugs, like marijuana, could definitely bring in some tax revenue on the state and federal levels to help combat the deficit — if the additional tax revenue is really used for that purpose.

When the iPad was first announced by Apple a few weeks ago, many voiced their concern that the device might be too expensive and too unnecessary to interest many consumers. I was one of those critics, writing a post titled, “I’m Worried About The iPad.” Yet, the title of that post wasn’t, “I’m Worried About Apple.” That’s because, even if the iPad turns out to mostly bomb, I think Apple will be just fine.

Arik Hesseldahl over at Bloomberg/Business Week wrote an article over the weekend on this theme. He appears to share the fears of people like me that the iPad won’t catch on, though he doesn’t want to count it out just yet (and neither do I). But like me, he doesn’t see even an iPad failure doing much to hurt Apple. His article concludes:

But back to the possibility of iPad failure. What would that mean? Clearly, Apple can keep growing untroubled by such a stumble. The Mac would keep eating away at the share of PCs based on Microsoft’s (MSFT) Windows, and the iPhone would continue giving Research In Motion (RIMM) and Nokia (NOK) headaches.

At the same time, it may also signal that the transformation of Apple from a late-’90s casualty of the PC wars into the most important technology company on the planet is near completion, and that its upward trajectory might begin to level off.

That’s the logical conclusion of the skeptical case, anyway. And as we all know, Apple has a funny way, in the fullness of time, of proving the skeptics wrong.

I think this assessment is spot-on. Apple is diversified enough with its wildly successful product offering that an iPad mistake would have little impact on its bottom line. Its continued earnings growth in the PC and mobile phone markets would easily outweigh a poor performance with the iPad.

Imagine an analogy to another powerful tech company: Microsoft. Pretend it’s the late 1990s. The company is at the top of its game. Windows has a huge market share; Office is becoming the standard for workplace productivity. The company thinks it might be a good idea to develop a new piece of software to try to cash in on a growing space in the market: web site editing and administration. Microsoft acquires a little software company that has a program called “FrontPage” that serves this function.

FrontPage doesn’t do so well, but that hardly brings Microsoft down. Its other product offerings wipe away any mediocre performance by that one program. So several years later, they can quietly kill the FrontPage.

And the same can happen with the iPad. Even a worst-case scenario isn’t all that bad for Apple, assuming its other products continue on their growth trajectory. But if the critics are wrong about the iPad, then Apple’s empire will grow even stronger.

This week, I attended the American Securitization Forum Conference. There were lots of wonderful, informative sessions about the state of the mortgage- and asset-backed securities market. But perhaps the session I was most excited for was the very last I expected to attend on Tuesday: Credit Rating Agency Business and Regulatory Reforms. I have relentlessly railed against the rating agencies since the financial crisis, as I believe their actions in characterizing bad bonds as good ones went a long way in overheating the mortgage market and causing the credit crunch. I haven’t changed my mind, but seeing a lot of these guys on the panel, I actually feel kind of bad for them. My anger might be better directed elsewhere.

The rating agencies have clearly taken a beating over the past few years. They really do recognize that they made big mistakes. Of course, they still maintain that they shouldn’t be sued for their “opinions.” But they do concede that most reforms that have been mentioned aren’t bad ideas.

In fact, they’ve begun adopting many of these reforms voluntarily. Some such steps include better educating their analysts, ensuring that analysts rotate among clients so to better avoid getting too comfortable with a given bank or issuer, and better asset performance surveillance after the rating has been assigned. It’s good that they’re taking the initiative, because Congress’ proposed reform was very thin on changes for the agencies.

The rating agencies are so important because they have traditionally had a major effect on prices in the bond market. Sure, market supply and demand matter more, but there are various bands within price ranges that have depended on the agency ratings for similar bonds. Under current law, the agencies also have a major effect on capital adequacy requirements.

But as I sat through the session, it was obvious that the defensive tone I heard in the voices of the rating analysts a few years ago was gone. They sounded like their souls had been broken. The panel discussion turned out to be anticlimactic. And it made me think: even though the rating agencies definitely messed up, it was investors who enabled their foolishness. And some investors aren’t as contrite about their mistakes.

Think about so called “no doc” mortgages. Those were the ones that didn’t require borrowers to supply any documentation in order to verify what they told the mortgage brokers was true. “You say you make $100,000 per year? Great — you qualify! Nope, we don’t need a pay stub.” The rating agencies were then glad to stamp AAA ratings on some of the bonds backed by those mortgages. That is clearly irresponsible. If you can’t be sure that the underwriting was based on anything real, then it’s impossible to say how the loans will perform. It’s like saying x + y = 4, without verifying the values of x and y.

But investors knew this going in, or should have. It wasn’t a secret that these deals lacked documentation. The agencies’ also never hid the fact that their ratings assumed that housing prices would generally rise. Investors became entirely too reliant and trusting on the ratings.

So, in a sense, the investors got exactly what they deserved. Sure, the rating agencies made mistakes, and the investors did expect them to be experts who knew a thing or two about the bonds they rated. But that’s no excuse for those investors not fully understanding the bonds and failing to demand adequate due diligence on the underlying assets. Even though, in practice, the agencies’ rating is considered to be a very important characteristic of a bond, in reality they’re merely opinions. Good investors don’t put too much confidence in the opinions of others, but develop strong, informed opinions of their own.

And going forward, I hope that’s what we begin to see. And, in fact, talking to people at the conference, I think that’s what we’re already beginning to see (I hope to expand more on this next week). Rating agencies can continue to merely provide opinions, and that’s fine — so long as investors take what they say as mere opinions, and not market gospel.

Earlier this week, Virginia Postrel wrote a post addressing the e-book price war brewing between Amazon and Apple. She argued that e-books should be very, very cheap. In fact, I agree with Postrel that e-books should certainly be less expensive than paper books. But I don’t buy into the argument that their pricing should approach zero just because the marginal cost of e-books is practically zero.

In her post, Postrel made the following seemingly uncontroversial argument:

Like publishers themselves apparently, these wise guys are using the wrong cost figures. To calculate the cost of a copy, they’re loading on fixed “pre-production” costs like the editor’s salary and the publisher’s rent. They’re including the marketing budget. But these are fixed costs. They don’t change when you produce another copy. They may be important when deciding whether to publish a book at all, but once the money has been spent they’re irrelevant to what you charge for a given copy. Optimal pricing should be based on the marginal cost of that incremental copy. Cover that incremental cost, and selling one more copy is profitable. The common intuition that e-books should be cheap reflects this basic microeconomics: Producing and delivering another e-copy costs next to nothing.

The notion that price should equal marginal cost is common economic theory. You probably learned it in Econ 101 — I know I did. But it’s largely misunderstood when people attempt to apply it in the real world. It shouldn’t apply to e-books.

There are a few ways to understand why this assertion is false. The first is just to witness the actual book market. What’s the marginal cost of a regular, paper book? I’m not sure, but since paper, printing and glue are pretty cheap these days, it’s maybe a dollar or two, max. Yet, even paperbacks are rarely less than $5. So it’s pretty obvious that marginal cost does not, in fact, equal price in publishing.

The reason why should be examined on a broader economic level. In fact, in the real world, marginal cost rarely equals price, and it rarely should. In economics, the only time that relationship is really supposed to hold up is within perfect competition. For a market to be perfectly competitive it has to have a number of attributes. Since my economics text book isn’t with me today, let’s turn to Investopedia for those conditions, which it does a decent job of providing:

1. All firms sell an identical product.
2. All firms are price takers.
3. All firms have a relatively small market share.
4. Buyers know the nature of the product being sold and the prices charged by each firm.
5. The industry is characterized by freedom of entry and exit.

I’m not sure that more than one or two of those conditions hold up in the book market, but a few in particular jump out at me as not applicable to publishing: #1 and #5.

All book publishers sell pretty similarly constructed books: they tend to have similar bindings, pages and covers. But they’re hardly identical products. Few would honestly be indifferent to reading the memoir of Sarah Palin versus that of Ted Kennedy. And this speaks to one of the unusual attributes of publishing: the great uncertainty whether a book will be a hit. For publishers to stay in business the winners often subsidize the losers, since it’s so difficult to predict which books will turn out to sell millions of copies.

Publishing also has relatively high barriers of entry. You need a great deal of investment for marketing, advances, printing, overhead, etc. Now, that could theoretically change for e-books, if e-book distributors decide to sell even amateurs’ books and not rely solely on publishing houses. But even then, barriers to entry exist, since you have to actually have written a book, which takes many productive hours, the opportunity cost of which is income you could have made in another job.

From a broader economic standpoint, it’s also pretty unlikely that the price equals marginal cost relationship holds up very often in the real world. For a great essay on this topic, check out this one by James DeLong from back in 2003. He explains that the relationship is particularly shaky in investment-intensive products, like those involving intellectual property or pharmaceuticals. When the vast, vast majority of cost involved in creating a product is upfront, how could a producer ever hope to break even if it charges customers only the small price each additional end product costs to produce?

So where does this lead e-books? As I said, they should definitely be cheaper than regular books. After all, their production cost is lower, since you don’t need to produce a physical book. But that price difference should just consist of however much it costs to print, bind and ship the book. As I said, that’s probably only a dollar or two per copy. The rest of the price, most of which likely accounts for the high up-front cost and investment required to find books that turn out to be big sellers, should remain intact.

Note: There’s one other argument that I hear from time to time that could apply to e-book pricing which really bothers me. It’s usually applied to music or movies. The narrative goes, “Well, people just pirate the stuff and get it for free these days online anyway, so you can’t possibly charge much for it, because no one will pay it.” Really? So since I can walk into a grocery store and quietly slip an orange into my jacket pocket, its price should be low too? How about a little memory stick from Best Buy? What if I could sneak behind a jewelry counter and steal a diamond ring? Should products really be priced based on how easy they are to steal? Of course not. Just because someone can easily obtain a product illegally doesn’t imply the price should be low.

This week, Apple prohibited its app developers from using an iPhone’s GPS to determine which ads to show users. From an advertiser standpoint, such a capability could be great: ads targeted by location can be a lot more effective — and lucrative. From an iPhone owner standpoint, I’m not sure I see the harm. What’s Apple’s goal in preventing app developers from utilizing device locations?

First, it’s easy to see why advertisers would find it so useful to know location. For example, if you sell skis, would you pay more if your ad was shown to a user in Miami or Aspen? Easy answer. It would also allow smaller, local companies to cash in on mobile apps more effectively. If a restaurant chain doesn’t have any locations in Texas, why is it paying for its ads to be shown to people living there?

So why won’t Apple allow that? Is the company worried about users not wanting advertisers to know their location? Perhaps. But there’s also speculation that Apple might just want all that location-based ad revenue for itself. AppleInsider writes:

Apple’s newly publicized policy on GPS data usage has led to some speculation that the company could retain location-aware advertising for its own, giving the iPhone maker a significant advantage over competitors like AdMob and Google. However, Apple has yet to formally roll out its own integrated advertising solutions, so whether location-based targeted ads would be a part of the network is unknown.

If this isn’t a profit-play by Apple, and the company really does just want to make its customers happy, then I think a different policy would actually serve them better — why not give iPhone users the option of whether they want to allow ads to know their location? It’s already the case that when an application wants to use my GPS, it asks my permission. Do the same if an app wants to use my location for ads. If an app is going to bother showing me ads, I’d actually prefer it display those which I might actually be interested in, and location could help achieve that end. But if someone else doesn’t, she can just tap “Don’t Allow.”

Since that’s clearly the more reasonable strategy from a customer satisfaction standpoint, I wouldn’t be surprised if the theory that AppleInsider notes above turns out to be right. If Apple wasn’t sure if users would want ads based on location, then it would make a lot more sense to simply ask them, rather than to just deny such ads altogether.

This morning, I got a puzzling press release from the Senate Banking Committee. Chairman Christopher Dodd (D-CT) explains that he and ranking member Senator Shelby (R-AL) have reached an impasse in coming to an agreement on what new financial regulation should look like. But Dodd is going ahead and drafting a final bill anyway. Huh? This isn’t a good sign. Financial reform may have failed.

Here’s the release, in its entirety:

WASHINGTON – Today, Senate Banking Committee Chairman Chris Dodd (D-CT) issued the following statement on the status of Financial Reform in the Senate.

“Last night, Senator Shelby assured me that he is still committed to finding a consensus on Financial Reform, but for now we have reached an impasse.”

“While I still hope that we will ultimately have a consensus package, it is time to move the process forward.”

“I have instructed my staff to begin drafting legislation to present to the committee later this month.”

“I appreciate the good work that has been done to this point by Senator Shelby and the other Banking Committee members who have worked so hard in this process. Over the past two months we have had productive bi-partisan negotiations in a number of areas and I intend to incorporate many of those agreements in this new proposal.”

If you find this confusing, you are not alone. As we’ve learned from the health care battle, without any Republican support, bills tend to die a slow death in the Senate. So if bipartisan efforts have failed — which is what Dodd seems to imply — then I worry this means financial reform has failed as well. Let me explain better explain how I derive this conclusion.

If Shelby isn’t on board, then it’s pretty likely Republicans at large aren’t on board. That means any bill Dodd is finalizing will be a waste of his time, because Republicans will use their 41 votes to block it. That is, if it even gets out of committee, which isn’t a given. I would say that this is merely political posturing on the part of Dodd, but since he isn’t seeking re-election, I’m not sure what he has to gain by drafting a bill doomed to failure.

You can decide for yourself who to be disappointed with here. The left will obviously be angered that Republicans weren’t willing to concede that financial regulation should look exactly like what the Democrats wanted. The right will argue, however, that the Democrats simply wouldn’t compromise with Republicans.

In the hopes that some financial regulation gets done, somehow, I would prefer a piecemeal approach at this point. Why not just delay all of the very controversial stuff for now, and start with the easy stuff? For example, both Democrats and Republicans appear to agree that firms should not be bailed out. So how about compromising on some reasonable mechanism for quick, efficient resolution for giant non-bank institutions? Can’t we also agree to raise capital requirements and/or lower leverage limits at least a little? Is there really much harm with a systemic risk council of regulators and economists that discusses market trends they’re seeing? Even if it doesn’t work to prevent financial crises, it probably wouldn’t hurt. I suspect that it’s the details that are getting messy, but at this point, something would be better than nothing.