Author: Daniel Indiviglio

One important economic indicator continues to improve: consumer confidence. According to the Conference Board, the consumer confidence index increased further in January, from 53.6 in December to 55.9. Its Present Situation and Expectations indices increased too. How much does this data matter? A lot.

First, here’s probably the most hilarious chart I’ve ever seen, from the Conference Board’s press release:

I didn’t include that to be so much informational as amusing. The Conference Board doesn’t give you much without a $2,500 subscription, which, sadly, I do not have. But luckily, I can rely on the analysis of those who do, like Marketwatch:

The consumer confidence index rose to 55.9 in January from an upwardly revised 53.6 in December. It’s the highest reading since September 2008, when the financial crisis intensified. It was the third straight increase.

The index came in better than expected by economists surveyed by MarketWatch, who were looking for an increase to 53.5 from the previously reported December level of 52.9. Read our complete economic calendar and consensus forecast.

That first paragraph says something really significant. U.S. consumers are feeling the best about the economy that they have since the financial crisis. This is an important trend. A recovery can’t take hold until consumers begin to get out of the psychological doldrums that recession creates.

This indicates that spending may finally begin returning to more normal levels, which could spur demand and firms to begin hiring. At least, that’s the hope.

Yesterday, I wrote about the big existing home sales decline in December. Today, another important housing market metric was released: the S&P/Case-Shiller Home Price Indices for November. The news here isn’t any better here. Both, its 10-city and 20-city composite price averages were down in November. Prices were down for 16 of the 20 metropolitan areas it tracks. The indices trend isn’t encouraging.

Here’s how the month-over-month percentage change for the Composite-20 looks, seasonally adjusted since 2006*:

There’s obviously a big reversal there. In November, the Composite-20 prices declined for the second-straight month after entering positive territory in May, while the Composite-10 month-over-month change went negative for the first time since April.

The few major cities that did well are mostly on the west coast. They include Phoenix, Los Angeles, San Diego, San Francisco and Portland. Dallas and Miami were essentially unchanged, but all others declined.

Again this news isn’t very positive overall. As mentioned yesterday, November was actually a relatively good month for the housing market compared with December — and even there prices mostly declined, according to S&P/Case Shiller. So I’d expect these indices to decline even further in the first part of 2010.

* This data does not appear to be seasonally adjusted — sorry for any confusion.

Since last week, there’s been a lot of talk and debate about Obama’s recently unveiled “Volcker Plan,” which seeks to place aggressive limits on bank size and activities. Peter Wallison, a senior economist at the free-market focused think tank American Enterprise Institute, has an interesting op-ed in the Wall Street Journal today criticizing the plan. Most of the points he makes are those I’ve heard before, and some are even similar to my own worries. But towards the end, he picks up on an interesting subtlety involving banks’ addiction to real estate. Is it a problem?

Wallison writes:

There is one more factor to consider. Banks have been committing themselves increasingly to financing real estate. The reason for this is simple. Because they cannot underwrite or deal in securities, they have been losing out to securities firms in financing public companies–that is, most of American business other than small business. It is less expensive for a company to issue notes, bonds or commercial paper in the securities markets than to borrow from a bank.

Where, then, can banks find borrowers? The answer, unfortunately, is commercial and residential real estate.

Real-estate loans rose to 55% of all bank loans in 2008 from less than 25% in 1965. These loans will continue to rise in the future, because only real-estate, small business and consumer lending are now accessible activities for banks.

This is not a good trend, because the real-estate sector is highly cyclical and volatile. It was, indeed, the vast number of subprime and other risky mortgages in our financial system that caused the weakness of the banks and the financial crisis. Requiring banks to continue to lend to real estate, because they have few other alternatives, virtually guarantees another banking crisis in the future.

Since banks can never be let out of these restrictions as long as they are government-backed, one solution for banking organizations is to center their activities in the bank holding company which–because it is not government-backed–does not have to limit its range of activities. The fact that Mr. Obama now proposes to close off this one avenue through which banking organizations can be profitable is strong evidence that neither he nor his advisers, in attempting to lash out at banks, have thought through the long-term prospects and needs of the banking industry.

That might make good populist politics, but it is not responsible policy. Instead of trying to punish the banking industry, Mr. Obama should try to understand why banks have become so heavily invested in real estate.

First, when Wallison says “banks” I believe he means deposit-taking institutions — not bank holding companies with investment banking arms. I assume he’s calling them “government-backed” because he means that they have federal deposit insurance. As oppose to bank holding companies that have no explicit government guarantee, despite what recent events might suggest.

I bolded a sentence of the excerpt above, because that’s his crucial point. He worries that the Volcker plan would actually make banks’ reliance on real estate even worse. They would no longer be able to engage in prop trading. In the unquoted portion of his essay, he explains that prop trading, while risky, has been highly profitable for banks — unlike real estate, which has been less profitable and also surprisingly risky.

I have a few comments here. First, Wallison likely already knows the answer to the challenge that Wallison sets out for Obama in the final paragraph above. Banks have a love affair with real estate because it had been seen as overwhelmingly safe. They developed an absurd view that real estate would always be profitable. But more importantly, Wallison would likely point out that much real estate, particularly residential mortgages, had come with an implicit federal guarantee from the government-sponsored entities like Fannie Mae. That, I suspect, is what Wallison would like for President Obama to discover — and correct.

My second observation, however, is that the Obama administration probably wouldn’t be too troubled by Wallison’s analysis. I can imagine Volcker or others who support the plan responding, “So what you’re saying is that banks might have trouble being as profitable if we create these limitations? Hallelujah! That’s exactly what we want!” Wallison sees this as a problem, but those who think banks are making too much money would probably invite a situation where they have trouble profiting as greatly. And they’ve also convinced themselves that Wall Street’s complex securities — not real estate — caused the crisis.

Still, no matter your view on the cause of the financial crisis, banks reliance on real estate might be a legitimate problem for other reasons. If you consider the statistic that Wallison uses, that 55% of bank loans are now real-estate driven, while only 25% were in 1965, I can’t help but think about industrial and business growth. In recent years, especially the last decade, a lot of U.S. business growth was replaced with real estate-related growth. Is it a coincidence that banks have also shifted to catering more to real estate? It could be, but I think it’s more likely that the government’s insistence on promoting real estate has crowded out other industries and made those loans appear safer, and more consequently more desirable, to banks, which shied away from underwriting more loans for business endeavors. That’s not smart long-term economic policy if you want a nation to exhibit strong industrial and technological growth.

As the Google-China saga continues, we learn now that the Chinese government has adamantly denied involvement in the hacker attacks that triggered Google’s threat to leave the Asian superpower. While not surprising, this does put Google at an interesting crossroads. Does it follow through with its threat or back down?

First, here’s what the Chinese government said, via the Associated Press:

”Any accusation that the Chinese government participated in cyberattacks, either in an explicit or indirect way, is groundless and aims to discredit China,” an unidentified ministry spokesman said, according to a transcript of an interview with the official Xinhua News Agency posted on the ministry’s Web site.

And Google never explicitly said that the Chinese government orchestrated the attacks, though that certainly seemed the clear implication. In Google’s original announcement, the company said:

In mid-December, we detected a highly sophisticated and targeted attack on our corporate infrastructure originating from China that resulted in the theft of intellectual property from Google.

And

Second, we have evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists.

Google didn’t want to connect the dots itself, but how else could this attack have been the catalyst for the company’s decision to leave China? The only assumption anyone observing the situation could make here is that Google must believe that the Chinese government either authorized the attacks or approved of them. If it didn’t, then how would this security threat be different than any other? After all, if there was a major hacking coming out of Canada by hackers with no affiliation with the Canadian government, then it wouldn’t cause Google to withdraw from the country.

Moreover, China is insanely claiming that Google hasn’t demanded justice for the attacks. According to AP:

A Chinese Internet security official questioned the allegation, saying Google had not reported its complaints to China’s National Computer Network Emergency Response Technical Team.

”We have been hoping that Google will contact us so that we could have details on this issue and provide them help if necessary,” Zhou Yonglin, the team’s deputy chief of operations, said in an interview with Xinhua posted on the team’s Web site.

Google would not speak on the record about its communications with China (I tried). But even if this is true — and I highly doubt that it is — certainly the U.S. government has complained to China about the attacks. So its authorities are well aware of the problem, and don’t appear to be very cooperative.

It doesn’t seem likely that Google will be able to remain in China, given the attitude of its officials regarding this incident. That is, if Google keeps its word to pull out of the nation without significant government concession. Assistance in bringing criminals to justice seems a pretty benign request to accommodate, yet China isn’t even providing that base-level of cooperation. As a result, I’d be shocked if it revised its censorship policy to Google’s liking, as that’s a far more controversial demand.

News broke yesterday about a huge private investment in green tech company Better Place. Its business is one which has yet to be embraced by consumers: electric vehicles. In fact, its specific aspect of electric vehicles is even more distant to the emerging technology: the company mostly specializes in the infrastructure, like charging stations. An investor consortium led by HSBC has invested $350 million in the firm’s efforts. That’s one of the biggest green-tech investment deals to date. Is this a smart move?

To be clear: this consortium isn’t out for charity — it’s out for a profit. And that makes sense, as clean-green-tech seems like an obvious play for investors. As people become more concerned with global warming and carbon emissions, there is lots of profit to be made in defending Mother Nature.

Yet, electric vehicles haven’t exactly celebrated widespread success yet, at all. There are worries that ample resources may not be available to accommodate the demand for batteries. Prices need to come down significantly before the technology can walk on its own two feet, without government subsidy.

But in evaluating this technology, you needn’t only consider whether it can be successful on its own. Indeed, if prevailing government attitude doesn’t change, it may never have to. Most major nations have seen significant government support of electric car technology. The United States, the Great Britain, China and Japan, for example, have all encouraged electric vehicle production by offering subsidies for purchases and/or direct investment in the manufacturers.

So, in a sense, these investors might not only be considering the likelihood that the technology succeeds on its own, but whether governments will throw enough money at the emerging technology to make it a winner. And that may be a very smart investment. At this point, most governments look like they’ve made their choice: they want electronic vehicles to dominate the streets in the years to come.

I think that likely makes an otherwise very risky endeavor a much safer bet. Politicians are fickle, but in giving EV technology a head start with lots of state support, it would have to be a truly disastrous technology not to beat out its competitors, at least in the short-term. In the long-run, if the electric car turns out to be a dud in comparison to other technologies, then the government sponsorship will mean little. But these investors are especially interested in the short run, as Better Place’s press release makes clear. And for now, governments are making sure that electric vehicles win.

Today, the National Association of Realtors reports that existing home sales fell off a cliff in December, dropping by a seasonally adjusted 17% from November. Still, that’s 15% higher than December 2008, but the fewest sales since August. Should the decline worry us about the resilience of the housing market’s rebound? I think so.

First, here’s how bad December’s drop looks in a chart:

The first response from housing market bulls might be that December is a bad month for home sales. True, but these numbers are seasonally adjusted already to account for that. Moreover, look above at the difference between November and December in 2008. Then, existing home sales actually increased in December by 4%. That’s a much different story from the 17% decline in December 2009.

What I find most surprising about this drop is that December marked the first full month when the home buyers credit was opened up to current homeowners. Prior to that, only first-time buyers could qualify. I would have thought that this credit would appeal to the giant new population of potential buyers and would conjure up — or at least pull forward — some demand for home sales. This data indicates otherwise.

But the news isn’t all bad. The median home prices increased by a whopping 5% in December. That’s the first increase since May. And at $178,300 now, that median home price is the highest the U.S. has seen since July. But home price is a lagging indicator. It makes sense that prices were higher in December, given the steady sales growth from August through November. But considering the drastic drop in sales that December saw, I’ll be surprised if that price continues to increase this month.

There’s a bunch of other real estate market data coming out this week, including new home sales for December and the Case-Shiller Home Price Index for November. So it will be interesting to see how that data compares to this awful existing home sales number. But today’s news certainly isn’t positive for the housing market.

Today, we learn that discount retail giant Wal-mart intends to cut 11,200 jobs at its Sam’s Club warehouse outlets over the next month. The job cuts are targeted: Sam’s Club has decided to outsource its in-store product demonstration to U.S. marketing firm Shopper Events LLC. The move is an interesting one. What’s driving the decision?

Not cost-cutting, according to Sam’s Club CEO Brian Cornell. Instead, Bloomberg/BusinessWeek reports he says:

We view it as an investment in building membership loyalty and attracting new members and ultimately fueling growth for Sam’s Club.

And yet the article also notes that Cornell says that he will use savings from labor costs to improve the sampling of their products. This sounds like semantics to me.

If there are labor costs being saved, then how is that not cost-cutting? If you’re reallocating funds from one part of the company to another, you’re still cutting costs in the first. Certainly, Sam’s Club/Wal-mart must believe that it will save money by outsourcing these jobs, and consequently, can spend that money better elsewhere. But make no mistake: it wouldn’t be cutting jobs if it didn’t want to save money.

But Bloomberg/BusinessWeek notes that the memo explaining the job cuts from the CEO reassures employees losing their jobs:

Shopper Events, based in Rogers, Arkansas, a town next to Walmart’s Bentonville headquarters, plans to hire about the same number of workers that Sam’s Club is cutting, the memo said. The fired employees can apply for Shopper Events jobs.

I suspect “about the same number” means fewer, but some. And I would hardly expect these fired customers aren’t jolted at the prospect of being laid off soon and competing for what is likely to be fewer less-desirable job openings at the consulting firm. After all, if Shopper Events really planned on having the same number of employees, same pay and same benefits as Sam’s Club, then how would there be any cost savings by using an outside firm: the price the firm would need to charge Sam’s Club would be precisely the cost that wholesaler paid before the layoffs.

In a broader context, this is a little bit discouraging for the jobs picture. Although Sam’s Club hasn’t done as well as Wal-mart over the past few years, its parent company has been one of the few resilient retailers during the recession. If it’s still willing to engage in major new initiatives involving layoffs and labor cost savings, that could make for a pessimistic spin on the supposed job recovery that so many economists hope is underway.

Last May, former chief economist of the IMF, Simon Johnson, wrote an Atlantic article explaining how policymakers should act to avoid allowing banks to break the U.S. economy again. Now that financial reform is finally underway in Washington, we thought it might be useful to touch base with Johnson to get his views on the reform effort thus far. Our questions and his answers are below:

Atlantic Business: In your mind what’s the single most important regulatory measure that Washington’s policymakers have proposed?

Johnson: The big change in policy this week is the move by the president to reduce the size of our largest banks. “Too big to fail” banks have to be reduced in size; that’s the only way to reduce system risk to more reasonable levels.

Are there any lessons from health care reform that Congress should note in pursuing financial reform?

Seeking the middle ground – that last Senator – perhaps made sense for health care reform. It was never going to work as a way to achieve meaningful financial reform. You have to change the terms of debate and confront concentrated power much more directly. That is now where we are headed.

The Obama plan tries to retrace the bright line between commercial and investment banks. But banks like Lehman and Bear didn’t have a commercial charter when they got into trouble. So how would the Obama plan have prevented their failure?

It probably wouldn’t – and this is why the details of the Obama plan (or the “Volcker Rule”) need to be looked at. I don’t think what they have put forward is the last word. Rather is a sensible general idea – that the largest banks should become smaller – and it is a clear signal that the president is willing to fight on this issue.

Is compensation getting too much attention or not enough?

Compensation, particularly bonuses, in the financial sector are a symptom of a deeper problem – distorted incentives for big banks to take reckless risks. They reflect the real problem, but you have to deal with that problem directly – TBTF financial institutions.

How important is deficit reduction for Congress in achieving a healthy U.S. economy?

Over the medium-term (call it 5-10 years) it’s very important to reduce the deficit and keep government debt under control. High deficits and runway debt lead to inflation and other serious economic problems.

What do you say this argument: Our very very big banks have to be very very big because they deal with a wide range of services. If you force them to be smaller, you’ll unnecessarily strangle credit simply to avoid a once-in-a-century event?

Major international crises occur every 5-7 years according to Jamie Dimon (head of JPMorgan Chase) and every 3-5 years according to Larry Summers (chief economic guru in the administration). No one can show you any social benefits to banks growing beyond $100 billion in assets – and we see the social costs quite plainly (8 million net jobs lost since December 2007). Capping the size of our largest banks – at 1/5th or 1/10th of their current level – would not strangle credit.

Who should regulate the biggest banks?

Great question with no easy answer. You need a tough regulator who can stand up to the banks. Someone who is not captured by their ideology. At this time, we have neither such people nor such an institution in the United States.

Many of the banks that failed or almost failed in 2008 were subject to significant regulation from a variety of agencies in Washington, but they didn’t catch the meltdown. How would you reorganize our regulatory structure to prevent the next crisis?

Another good question with no obvious answer. I would bring in a new Fed chair – someone who would be much tougher on too big to fail institutions, like Tom Hoenig, president of the Kansas City Fed. I would give him the power, the people, and the resources. And I would break the biggest banks into much smaller units. Then at least it would be a fair fight.

Remember the good old days when President Obama and Congressional Democrats voiced their staunch support for Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner? That was just last month. But these days, Democrats are suddenly distancing themselves from these figures. Could this mean an end to their reign as the leaders of U.S. government finance? I don’t buy it.

Geithner

First, let’s consider Geithner. The Washington Post reports that the Volcker plan is evidence that Geithner and Obama’s relationship may be on the outs. After all, why would Obama make such a huge policy announcement with someone other than his trusted Treasury Secretary by his side? The article says:

“His influence may have slipped,” said a senior industry official who spoke on the condition of anonymity to preserve his relationship with the administration. “But you could also argue that it wasn’t Geithner who lost power. It’s just that the president needed Volcker politically” to look tough on big banks.

Right, you could argue that, or you could argue a few other things. First, it was Volcker’s idea. He’s been advocating for a while that banks need to be broken up Glass-Steagall style. So why would this be the Geithner plan, when it wasn’t Geithner’s idea? He does support the plan, bear in mind — he just doesn’t deserve credit for dreaming it up.

But, in fact, maybe this was a political decision. Geithner and Obama may have agreed that it would be best for Geithner to keep his distance from the Volcker plan. Why? Because it is going to fail. The Volcker Plan is a political maneuver to distract the public from the health care debacle. If the banking lobby has persuaded the Senate to think twice about the Consumer Financial Protection Agency, then it certainly isn’t going to allow Washington to break up the banks or to take away its billions-of-annual-dollars prop trading business. While much of the Volcker Plan is very good, almost none of it will likely make its way into whatever financial regulation bill the President eventually signs.

As a result, it would be politically dangerous to tie someone as important as Geithner to a plan that’s destined to fail. But it’s easy to sacrifice Volcker: his position in the administration as an advisor is much further from the public eye than the Treasury Secretary. There’s very little political risk involved for the President in a Volcker Plan failing, but far more in a Geithner Plan failing.

Finally, the President has stood behind Geithner unrelentingly thus far. To suddenly cast him aside now would also make President Obama look bad. Republicans could then blame the President for the continued economic turmoil saying, “Why do you think he fired his Treasury Secretary?” There’s no way the President wants to give Republicans any additional ammo for their attacks in this year’s midterm elections.

Bernanke

But what about Bernanke? The Senate sure does seem to be dragging its feet in reappointing him. His term ends in just nine days. What are they waiting for? Are the votes not there?

The Wall Street Journal reports today that more prominent Democrats are expressing their disapproval with Bernanke and promising to vote against his reappointment. The most recent such Senators include Russ Feingold (D-WI) and Barbara Boxer (D-CA). And that’s in addition to several other Democrat Senators who have already said they want Bernanke out.

Still, I don’t believe the Democrats would spur President Obama in this way by rejecting his decision to nominate Bernanke for reappointment. Chair of the Senate Banking Committee, Christopher Dodd (D-CT), explains exactly why:

“I think if you wanted to send the worst signal to the markets right now in the country and send us in a tailspin, it would be to reject this nomination,” Mr. Dodd told a group of reporters. “This is not naming someone to be an assistant secretary to something. This is the most important central banker in the world.”

The market has a very strong expectation that Bernanke will keep his job. And he should: he might not be perfect, but he handled the financial crisis heroically. That’s why the President wants him to keep the job. And that’s why the Democrats in Congress should too.

But what if a few more Democrats decide to defect to the other side and join Feingold and Boxer? If Republicans band together to vote against Bernanke’s reappointment, could it really be doomed? I still say no way. If push comes to shove, I think you’ll see Republicans change their stance on Bernanke quite quickly. It’s easy for them to complain about Bernanke when they know Democrats will reappoint him. But if that changes, so will the ease with which they vote against keeping him around.

Think about it: would Republicans really prefer President Obama to nominate a different Fed chair from scratch? Maybe they’d rather see Larry Summers in there? How about Paul Krugman? Whoever Obama picks can’t possibly make Republicans feel any better than Bernanke — George W. Bush’s pick four years ago. They’ll have to be practical. And if Republicans do change their minds, then they only need a handful of Democrats to go along.

I think you’re seeing a situation where the Democrats are in a little bit of disarray after the staggering Senate loss in Massachusetts. Both of these figures are caught in the crossfire. They’re looking for someone to blame; they’re looking for scapegoats. But at the end of the day, the political fallout from removing these two important figures in government finance would far outweigh the political benefits.

Win or lose, does Scott Brown spell change? Insight on CNBC’s The Kudlow Report with Mark Tapscott, Washington Examiner and Megan McArdle, The Atlantic Business & Economics Editor.

Way back in October, I wrote about what regulators’ decision to eliminate overdraft fees could mean for consumers. One likely result: no more free checking. An article today in the New York Times on the same topic also foresees this as a possibility, but offers a few more as well. One thing is for sure: consumers will be paying for their overdraft fee-free lives one way or another.

As I said previously, don’t expect banks to simply accept lower profits. They will lose billions of dollars over the next few years by not being able to collect overdraft fees. As we learned with last spring’s credit card regulation, when regulators change the rules, banks don’t accept less revenue: they adapt. So how might they change their strategies to continue to profit off checking without the luxury of overdraft fees?

Here are some suggestions from the Times article:

Some of the less creative institutions will tack on monthly fees again and hope customers don’t flee. Or they may raise the minimum balance requirements that some banks already have. If you value having access to a particular branch in your neighborhood, you may have no choice but to comply unless you’re willing to go to the trouble of switching banks.

Other banks may try something like what Fifth Third Bank has done with its Secure Checking Account package. The bank charges $7.50 a month, but it throws in identity theft protection, which millions of consumers already pay at least that much for elsewhere. Banks could add other services, too, say an hour with a salaried financial planner (who doesn’t push the bank’s own products).

Another option is the à la carte model, where banks offer bare-bones checking for free, but let people pay extra for things they truly value. For a few dollars a month, say, you could use any A.T.M. on earth free.

But the most popular option seems to be to get retailers to pay for a big part of free checking, not bank customers.

Why retailers?

Well, remember our old friend the debit card, which upended the industry a decade or so ago? Banks don’t just get overdraft revenue. They also get a cut of the fees merchants pay when someone uses a debit card, and banks generally get a bigger cut if cardholders sign for their purchase instead of using their PINs.

You see where this is heading, right? If banks can get enough people to use their debit cards and sign for their purchases often enough, it will go a long way toward keeping checking free and even subsidizing better interest rates or rewards. (It may also cause merchants to raise prices to cover those card fees, alas.)

Of all these possibilities, I wouldn’t be surprised if banks create greater incentives for their customers to debit and sign, as this last option above suggests. The article also later provides an example of exactly what I would expect:

A new company called PerkStreet Financial offers a different twist on free checking. You pay no fees for your account as long as it remains active, and you get about 1 percent back of every debit card purchase when you sign while buying (and for Web or recurring charges, say for monthly bills). You then redeem that 1 percent in the form of perks (hence the name) like gift cards from Starbucks and iTunes.

If you use the debit card enough, the merchant fees incurred will easily pay for the measly 1% rewards consumers accumulate — and the banks’ lost revenue from not being able to charge for overdrafts. But this isn’t really that good of a deal for consumers. This will simply cause retailers to charge more for their products, since their transaction costs will increase with more use of debit cards plus signing.

Of course, from a psychological perspective, consumers won’t realize that they’re paying marginally more from retailers, but will love the fact that they’re getting rewards for using their debit cards. From an economic perspective, however, the lost overdraft fee revenue that used to be paid by a small group of consumers will now be spread out over a much larger population. That’s good for those who were regular overdrafters, but bad for everybody else.

Today, the Bureau of Labor Statistics released December’s state-by-state unemployment data. It isn’t pretty. Even though the national rate was unchanged last month, most states saw their unemployment rates worsen. 43 states and the District of Columbia saw their unemployment rates increase from November to December, many significantly. This is a major change-in-direction from November’s good news, when 36 states saw their unemployment rates decline. Let’s consider some of the highlights.

First, the good news. There isn’t much of it. Four states saw their unemployment rates decline: Oklahoma (0.5%), South Dakota (0.2%), Iowa (0.1%) and Michigan (0.1%). Yes, Michigan was one of the four best states this month when considering the direction of unemployment. Three other states had rates unchanged: California, Idaho and Minnesota.

Every other state saw its unemployment number increase, both in rate and nominal amount. The biggest losers were Louisiana and Mississippi, both seeing their rate increase by 0.8%. Five more had a 0.7% increase: Tennessee, Massachusetts, Connecticut, West Virginia and Nevada. In fact, 33 states (and DC) had their rates increase by at least 0.3%.

As far as number of lost/gained jobs, California was the best, with its unemployed workers declining by 18,300. Michigan was second best, with 11,400 fewer unemployed. It’s nice to see those two states at the positive end of the spectrum.

The most jobs were lost by New York, which saw 36,400 more jobless. Texas was second-worst, losing 28,700 jobs. Florida followed with 23,500 more unemployed. Massachusetts and Tennessee round out the bottom five, each losing about 21,000 jobs.

The best state in the nation for employment remains North Dakota with a microscopic 4.4% unemployment rate, though the rate did increase by 0.3% in December. South Dakota and Nebraska were tied for second with 4.7% unemployment.

The worst state is still Michigan, despite its positive month, at 14.6% unemployment. Nevada and Rhode Island are nearly tied for second at 13.0% and 12.9% unemployment, respectively. South Carolina, California and DC are the other states with over 12% unemployment.

If you like you data in pictures, here’s the usual map showing unemployment by state, via BLS:

Reuters reports that a new survey indicates that investors are more optimistic that the stock market will rise than they have been in the past two years. That’s good, right? Maybe. If business can support that optimism, then yes: that’s great. But if they’re just inflating another bubble, then no: that’s not so great. Let’s look at what the Reuters survey says.

The probability of further gains in stocks, even after a spike of more than 65 percent on the S&P 500 from its lows last March, was judged as more likely in January than any time since the end of 2007, data from the Reuters/University of Michigan Surveys of Consumers indicated.

Well that just seems illogical. If the stock market is already up 65%, why would you have a greater expectation that it will increase than when it was only up, say, 5%? As the stock market goes up further, my expectation that it will continue to go up significantly would decline — especially as the nation struggles to pull itself out of a nasty recession.

I still contend that it will be very hard for the U.S. economy to recover much until consumer sentiment improves a lot. Consumer spending accounts for something like 70% of GDP. So for companies to feel the demand necessary to begin hiring, people need to open their wallets. That’s still not happening. While I agree with investors that consumers will come around eventually, I worry that eventually might not be in the near-term.

But investor confidence could help. After all, many regular American consumers also invest in the stock market, either through savings, discretionary income or their 401k. They’re all feeling about 65% better about their wealth now than they were in March. This should help encourage them not to be so wary to spend.

Still, investor optimism isn’t enough. There are other fundamental problems in the U.S. economy that need to be remedied going forward. We need to get financial reform passed, so to avoid another financial crisis. We need to promote fiscal responsibility, on both national and personal levels. For any market rally to endure, the U.S. economy needs to actually heal, not for investors to merely believe that the gaping wound the recession created might not be fatal.

I’ve seen a lot of hand-wringing over yesterday’s Supreme Court decision that businesses shouldn’t be forbidden from politically-motivated spending. I’m not sure why. As far as I can see, it shouldn’t have a drastic impact on politics, and especially not national elections. I’d make several observations, all leading to the conclusion that the decision won’t harm democracy and should actually help it.

Still Politics-As-Usual

First, the assertion that corporations will suddenly have broad new power to donate to political goals is perplexing. Corporations have long had the ability to further their political desires. They’ve been permitted to establish and donate to political action committees (PACs) to this end. I’m sure anyone reading this has seen ads by union or corporate lobbyist PACs about various issues or in favor of various candidates. This ruling would eliminate the need for that middleman, but the result would be essentially the same.

Neither Party Vastly Benefits

Second, this doesn’t vastly favor Republicans as most reports indicate. These days, most big businesses hedge their bets and donate to both parties. Or more appropriately, they donate to whoever is in power, or likely to be. That’s why the Obama campaign did so well. Not all that money was from individuals — a large portion was from corporations, or their PACs.

For example, the Democrats’ priorities align with plenty of corporate interests. Many businesses, and the U.S. Chamber of Commerce, supported last year’s stimulus. The tech industry is dominated by campaign contributions to the left, to further goals like net neutrality. Firms who are heavily involved in green tech initiatives also favor the Democrats. The HMOs love the health care reform bill. And of course, something like 99% of unions’ political spending goes to Democrats. While the Republicans will certainly continue to be favored by some parts of business, so will Democrats.

Good For Small Business

Next, while talking to my colleague Chris Good about the ruling, I concluded that it actually could be good for free market competition. Chris noted that, prior to the ruling, big businesses had PACs or gave money to powerful lobbyists who have PACs on their behalf, small ones didn’t. So a company like Wal-mart wields a great deal of political power, as do other big companies. But what about the smaller businesses? They often didn’t have the resources to establish PACs, or the same political objectives as the big firms’ lobbyist PACs champion. As a result, small business had largely been left on the sidelines when it came to politics. Yesterday’s ruling changes that.

Imagine if Wal-mart’s PAC donated money to a political campaign of a candidate who promised the company he’d fight to build one of their stores in his district. That would likely put smaller, local retailers out of business. Up to now, they couldn’t much to compete with the ads for that candidate that Wal-mart would indirectly support through its PAC donations. Now, they can create commercials or donate directly to candidates to fight against that. So really, this ruling could may help small business and hurt big business.

Like It Or Not, It’s Free Speech

Finally, if you believe that a capitalist free market society is what the U.S. ought to have, then this ruling is a positive step in that direction. It’s a step forward for free speech. Corporations are groups of individuals, and they should be able to voice their political beliefs without significant barriers. This ruling allows for that. The key thing to remember here is that Americans are also free disagree with, dispute or ignore coporate political ads.

For example, if Goldman Sachs ran ads championing giant banker bonuses, that probably wouldn’t go over well with average Americans. But if it has legitimate arguments for why certain regulatory proposals would hurt the U.S. economy, shouldn’t it be able to voice those concerns in a public forum? If you believe in freedom of speech, then the only answer can be “yes.”

Megan already provided a great explanation of the Obama administration’s new bank risk mitigation plan, but I wanted to offer a few additional observations. I agree with most of what she says. I don’t really see too many incredibly negative consequences stemming from the plan, and if done properly some of it might really help. But there are a few things to think about here.

First, a quick review of the plan. I’ll just quote Megan on both points, rather than reinvent the wheel:

First, banks that have access to the discount window will not be able to trade for their own account. That means no prop trading desk. No owning hedge funds or private equity funds. No investments of any kind to make profits for your shareholders. Financial institutions can make profits by servicing clients, or they can make profits by investing for their own book. But they can’t do both.

The second proposal is to extend something like the caps that already prohibit banks from holding more than 10% of federally insured deposits, to other kinds of liabilities. I asked, but got no clarity, on what exactly this means. Are regulators going to swoop in whenever a diversified financial institution has too big a share of the total liabilities in all US debt markets? Or are they going to intervene when a bank becomes dangerous to one particular debt market, the way Lehman turned out to be in commercial paper?

Let’s start with the first part. I’m far less excited about that aspect, because I’m wholly unconvinced that the mere existence of prop trading played a major part in the financial crisis.

Different From Lending, How?

First, Megan explains banks will no longer be allowed to invest for themselves by utilizing their capital if they want to continue to serve clients. I find this an odd concept, given that this is kind of exactly what banks are supposed to do.

Think of a run-of-the-mill regional bank. It doesn’t do any “investment banking” or gamble with “fancy derivatives.” It takes deposits through checking and savings accounts for customers. Then it provides all sorts of loans — mortgages, auto loans, small business loans, etc. — with those deposits, as prescribed by bank regulation. In short, the bank is using its customer’s deposits to make profit by betting that the loans it makes (which could also be called “investments”) will be profitable.

Now think about a prop desk. Here, the bank utilizes its capital base to invest in and trade all sorts of financial products: derivatives, mortgage-backed securities, credit card portfolios, you name it. In short, the bank is using its customer’s and shareholder’s capital to make profit by investing in various financial products.

What exactly is the difference between these two examples? Why can banks bet on loans but not derivatives or other financial products? Indeed, a bank could make much worse bets on loans than financial products — just ask all those regional banks that have gone bankrupt in the past year due to bad mortgages.

I take the real motive in proposing this prop trading rule change to lower investment banking profits. It may do a little to reduce bank risk in the process, but that risk will just be shifted to non-bank hedge funds, private equity funds and other trading firms.

Why Not Make Prop Trading Safer?

Rather than eliminate bank prop trading altogether, why not just limit the risk involved? For example, if you required banks to hold more capital, utilize less leverage or provide more of a cushion for particularly risky trading activities, then wouldn’t this mitigate risk from prop trading significantly? After all, that’s what depositary insurance and reserve requirements do for regional banks’ lending risk. What makes prop trading so awful that it needs to be essentially outlawed?

Liability Concentration Limits

The second part of Obama’s plan is much more useful in avoiding systemic risk. It’s also much more logistically challenging. But I take it to mean that banks will be forced to have only a certain amount of exposure to certain kinds of products. For example, if AIG only had, say, a mere 5% exposure to all real estate-related CDS, then it would have been in a lot better shape when the housing market crashed. So I’d really better term this proposal as “liability concentration limits.” This is a direct way to control systemic risk. If the exposure to any given market is better spread across the financial industry, then no one firm can blow up the system if one industry or product deteriorates.

This, however, should absolutely not be limited to banks. For example, you could have a situation where a hedge fund bets massively on some industry. If it bets too much and loses, then that could still cause a catastrophic market event if it can’t cover its obligations.

Remember, This Is Just A Proposal

Finally, I have serious doubts how much of this Obama administration proposal will actually make its way out of Congress. Far less controversial regulatory measures are already having trouble in the Senate. These suggestions would require several major Wall Street firms to spin off enormous chunks of their business. They would also likely result in their being forced to re-arrange their liabilities, which would require them to sell huge chunks of their portfolios.

Bear in mind that the bank lobby is extremely powerful. Goldman Sachs, one of the banks who will object to these regulatory measures as much as anyone, has a particularly strong influence in Washington. This proposal makes for a true test of just how much power lobbyists wield and how susceptible Washington is to their persuasion.

I would be quite surprised if the prop trading portion survived in any meaningful form. Goldman and others will almost certainly see to it that loopholes exist to allow them to continue doing business mostly as they please. The liability concentration limits might fare better, but as mentioned, they will also be much more cumbersome to actually structure and enforce.

So I wouldn’t get too excited about today’s news just yet. What we’ll eventually end up with will likely be much different, but let’s hope it isn’t completely useless.

Just yesterday, I questioned whether some charity initiatives should be approved by shareholders before corporations give their resources away. Today, we learn that one of Goldman Sachs’ shareholders is suing the bank so to recoup $500 million in charitable donations. The shareholder is also miffed about Goldman bankers’ astronomical compensation, another issue brought up separately a few months back. This is significant and a sensible reason for a shareholder to sue, under the circumstances.

First, here’s the news blurb, via Reuters:

A shareholder sued Goldman Sachs Group Inc’s (GS.N) board for excessive bonuses and wants bank executives to pay the $500 million in charitable donations that Goldman is making after being criticized for its compensation policy.

Goldman Sachs bonuses substantially exceed what competitors pay “even though, on a risk-adjusted basis, Goldman’s officers and managers have performed over the past several years in a manner that is, at best, only average,” the lawsuit says.

All true. Shareholders are right to be annoyed that more of the bonus pool isn’t being held back for long-term risk mitigation. Goldman did recently alter its bonus pool strategy slightly to defer more compensation and allow clawbacks. But that only applied to its top 30 bankers, who obviously only make up a fraction of the entire bonus pool. Given that, I think the shareholder’s compensation objection holds up.

I think there’s an important point being made here about the charity. The reason why Goldman’s management decided to donate that $500 million was hardly out of the kindness of their hearts. They did it to quiet Americans yelling about the size of the bank’s bonus pool. If those earnings had instead been retained as capital cushion, plowed into future growth or doled out to shareholders, I don’t think you’d see the same populist outrage.

But that’s not what happened. So essentially, that $500 million was also a kind of compensation — a cost necessary in Management’s eyes to pay out giant bonuses. I can understand why this shareholder is not amused.

I’m happy to see more shareholder interest in bank practices following the crisis. Their acquiescence to management’s poor decisions prior to the crisis was part of the problem. More activist shareholders should make for more responsible management. They are supposed to answer to shareholders, but if shareholders remain silent, then there’s no check on their actions other than often flaccid regulation. I can only hope that shareholders taking a more active interest in the firms they own turns out to be a lasting consequence of the crisis.

The Christmas underwear bomber made have faded from the headlines, but his near success remains in the minds of airlines and Washington. In response, Bloomberg reports that the Obama administration may call for an increase in the airline security fee. It hasn’t changed since it was initially created in 2001, in response to 9/11. Should they do it? And if so, who should pay?

First, is the additional money here being put to good use? If it’s used for security theater, then I would say, probably not. More TSA representatives to frisk every passenger won’t prevent body cavity bombs on airplanes. I’m not an expert on security technology, but unless a full body scanner can do that, then I wouldn’t advocate wasting money on more of those either. If, however, the money will beef up homeland security in a meaningful way to monitor and catch terrorists before they get to the airport, then the additional fee might be a good idea. Unfortunately, according to the article, full body scanners are the likely target for the spending.

So who should bear the cost — airlines or taxpayers? As you can probably guess, airlines think taxpayers should. Here’s why, via the Bloomberg article:

Security costs should be borne by the government, said David Castelveter, spokesman for the Air Transport Association, whose members include Delta Air Lines Inc. and AMR Corp.’s American Airlines. “The airlines are not under attack; the country is under attack,” Castelveter said.

That sort of could be true, but probably isn’t in this situation.

If the money is used in the way I wish it would be — to detect terrorists before they get to the airport — then I completely agree with the airline lobby. In that case, taxpayers should bear the cost, because it’s non-airline specific homeland security. Terrorists would thereby be prevented from blowing up planes, buildings, bridges, etc. All Americans would benefit, so all Americans should pay.

But if the money is spent to specifically beef up airline security with full body scanners, more TSA officers, etc., then it’s pretty clear that the airlines are specifically benefitting from the fee. In this case, they should pay. And after all, that cost would be passed on to consumers anyway. And that’s okay.

Think about this from an economic perspective. There’s a security risk in commercial flying. In order to mitigate that risk, some security measures may help. But that prevention doesn’t come for free. As a result, the cost of flying should reflect that risk premium. Flyers should pay.

Again, airlines object:

U.S. airlines, with collective losses of about $60 billion since 2001, say they lack pricing power to pass fees on to fliers.

And all I can say is: that’s too bad. If pricing hadn’t properly reflected the terrorism risk premium in the past, then that should be corrected. If that causes demand to decline, and fewer people to fly, then that’s a reasonable economic outcome. And if that causes fewer routes, or more airlines to go out of business, then again, that’s what the market dictates.

Finally, pricey security measures would provide flying with a competitive advantage over other modes of transportation, like trains that lack as advanced security. That may drive travelers from trains to planes, if they feel safer traveling one way over another. If airlines are specifically benefitting from additional security measures, then taxpayers shouldn’t be paying for that benefit. Airlines, and consequently flyers, should pay for the additional safety the spending provides.

Yesterday, Federal Deposit Insurance Corporation Chairwoman Sheila Bair gave a speech at the Commercial Mortgage Securities Association Annual Conference. In it, she said a lot of what we already know about Bair’s intentions for regulation going forward. But she also summarized some data the FDIC had compiled on the commercial real estate market. One item particularly caught my attention: the big banks’ exposure.

For some time now, commercial real estate has been characterized as what may be the next shoe to drop. If anything threatens to cause a double-dip recession, it’s a widespread deterioration in commercial mortgages. I’ve written about this several times. Megan’s magazine column this month in The Atlantic also addressed the topic.

But up to now, most of what I’ve read and heard about the upcoming commercial real estate doom had been mostly isolated to smaller, regional banks. They were said to hold greater CRE risk than the bigger banks. While bad news for the FDIC’s insurance fund, at least it would imply that the big banks might not need another bailout due to commercial mortgages going bad.

But yesterday, Bair said:

Despite what you may be hearing, CRE credit problems are affecting big and small banks alike. In fact, CRE noncurrent and charge-off rates are higher at banks with over one billion dollars in assets than at community banks. Industry analysts expect CMBS delinquency rates to continue climbing.

That’s pretty disturbing. Big banks are actually exposed to uglier commercial mortgages than smaller banks. But what does this mean in a broader context?

First, if we do see enormous losses from CRE, they’ll probably hit big banks first, since their delinquency and charge-off rates are initially higher. Then regional banks’ CRE losses will follow. Even if the smaller banks’ mortgages are a tad cleaner than those the bigger banks hold, it might not matter: just as we saw with residential mortgages, even prime loans can experience deterioration in an environment like this.

I think this is actually worse news than if the situation was reversed, and the losses began at regional banks first instead. If the big banks begin to encounter problems again before an economic recovery is well underway, this would almost certainly throw the financial markets back into disarray. A fragile economy couldn’t handle it.

But if regional banks got hit first, then the pain would initially be more dispersed and less front-page. That would more likely allow the economic recovery to slowly continue, without too strong a shock to the market or sentiment. Then, if it hit the big banks later, the economy might have recovered enough to better endure it.

We still don’t know how much pain CRE will bring. It could be a false alarm. But the sobering information Bair provides above at least provides some clue of how to know when we’re in the early bands of the storm. If large banks begin reporting big CRE losses, then we’re likely in for a heap of trouble.

Yesterday, on Slate’s The Big Money Matthew DeBord questioned why the U.S. should provide but a mere $7,500 tax credit on the upcoming Chevy Volt plug-in hybrid, expected to get up to 230 miles per gallon, but to retail for as much as $40,000. Some analyses indicate that the Volt will only be profitable if sold for $30,000 or less. So DeBord asks — why not a $10,000 credit? Indeed! Why not a $20,000 credit to make it super profitable for GM. Or why not a $40,000 credit, and just give them away for free? Then every American will want one! Let me take a shot at explaining the problem here.

After suggesting a $10,000 rebate, DeBord says:

For the Volt to be successful–and successful in this brave new realm will be measured not in small percentages of actual market share, but in big multiples of correct-demographic mindshare–it needs to sell and sell a lot. And of course the government does own a majority stake in GM. Soooo … would it be … sensible?

In a sense, DeBord is actually right. If the government wants to ensure that a product is successful, providing a tax credit that might not get it over the hump is probably not particularly sensible. But to that, I say, why stop at $10,000? If it’s success the government wants, then it could expand the credit even more.

Of course, the problem here is far more fundamental: it shouldn’t even be providing a $7,500 credit. I’ve complained in the past about the government providing an incentive for investment in an unproven technology. Essentially, this means that the government is making a bet on the future, without any particularly keen foresight.

Bear in mind, electric cars aren’t the only option for the future of autos. Hydrogen fuel cells, modified algae and several other possibilities are also out there. Generally, the market determines which technology succeeds. And the winner is the one that can be produced more profitably and more effectively than the rest. But by the government picking winners, it prevents this market discovery and, ultimately, an inferior technology could dominate.

DeBord’s logic also kind of makes sense where asserting that Americans would benefit if GM profits, since taxpayers own the carmaker. But this assertion falls prey to the same problem as the idea of expanding the credit: in nationalizing GM, the government chose a winner, while the market dictated the firm a loser. So the question here is really: do two wrongs make a right? Should the government throw more money at Volt tax credits in the hopes of rescuing a sinking ship that it shouldn’t have saved in the first place? I remain unconvinced.

Is there a fine line? Corporations have a duty to shareholders to maximize profits. But when they donate to charity — which is regularly done these days, often through foundations — this takes money out of shareholders’ hands or stifles future growth. It instead provides that money to some cause that management deems appropriate. But Glaxo-SmithKline’s recent decision to put thousands of chemical compounds which may cure malaria into the public domain gives this question a new dimension, adding additional complexity.

First, a disclaimer: make no mistake — I think charity is great and important. My personal view is that there is often a moral obligation to help others when given the ability to do so. But I also feel passionately that I should not force my morality upon others. As a result, I do not believe in involuntary charity. The end does not justify the means.

With that said, should corporations give to charity? In a general sense, there are many ways in which that’s perfectly acceptable. If shareholders vote to create a corporate foundation, for example, then by all means. If donations are made for tax reduction purposes, so to enhance profit, then that benefits shareholders, and probably doesn’t even need approval. In general, if shareholders don’t like how a corporation doles out its earnings, then that investor can voice the concern and sell her stake if unsatisfied with the firm’s response.

But Glaxo did something a little different in the example I’m interested in. The Guardian reports:

GSK will publish details of 13,500 chemical compounds from its own library that have potential to act against the parasite that causes malaria in sub-Saharan Africa, killing at least one million children every year.

It took a team of five investigators a year to screen the two million compounds in GSK’s library – its entire collection of potential drugs and possibly the biggest such library in the world.

Here a company is surrendering its intellectual property for the greater good. While this might be admirable on a moral level, I’m not so sure shareholders should be pleased. This isn’t a situation where Glaxo has some profits, and feels like donating a portion to a cause. This isn’t even a situation where it developed a revolutionary new drug and wants to give it away for free to those who need it.

Instead, the company invested countless millions of dollars in drug research to come up with those 13,500 chemical compounds. That investment, of course, came from shareholders. So in a more direct way, Glaxo management has decided to take investor dollars and donate the profit that may come from it to the world — without knowing what that profit may be.

Because remember, this is raw intellectual property — not an end product. Maybe one of those compounds also holds a cure for some other disease completely unrelated to malaria, unbeknownst to Glaxo. But now that drug would be in the public domain, much to the dismay of shareholders who thought their dollars would be directed at investment to reap profit.

Again, don’t get me wrong: on many levels a donation like this seems wonderful for the world. And if shareholders go along with it, then by all means, Glaxo should donate away. But without explicit shareholder approval, I’m a little unclear how this is different from taking investors’ money and misappropriating it. In this case, that end happens to something most people consider ethically courageous — hoping to cure an awful disease in poor countries. But if that money was appropriated in a less ethical manner without shareholder consent — say, a trip of leisure for the CEO and his wife to Barbados — how would that be any different from a logistical standpoint?

Note: I’ve got a call into Glaxo to ask them if shareholders are on board with this initiative, but the company has not yet responded. If it turns out that shareholders have green-lighted this move, then I’ll update this post, but I don’t understand that to be the case.

Quick Update: I spoke to a spokesperson from Glaxo this morning. She informed me that the board is generally supportive of the initiative, but no formal shareholder feedback has been solicited.