Sunday, July 22, 2012

GUILD HALL | Hamptons Institute on U.S. Economy

Hamptons Institute at Guild Hall. L to R: Joe Nocera, Ken Miller, Cyrus
Amir-Mokri, Joseph Perella (iPhone photo by JT Marlin).
At Guild Hall in East Hampton this afternoon the Hamptons Institute presented an appraisal of the future of the U.S. economy. The Hamptons Institute is partnered with the Roosevelt Institute. The event, sponsored by the Tarr Family and the Chubb Group and its agent Dayton Ritz & Osborne, was billed as a bipartisan conversation. But the most far-reaching proposal I have heard for regulatory reform came not from the Democrats on the panel but from the sole Republican.

Joe Nocera, Op-Ed columnist for the New York Times served as moderator. He asked for views about Dodd-Frank. What else can be done to rein in Wall Street? Is the anger at Wall Street justified? Are U.S. banks are better off than European ones?

Ken Miller, President and CEO of Ken Miller Capital and a Democrat, was the most outspoken and progressive. He thinks Dodd-Frank is a step forward, and the Treasury has a good team in place, but Dodd-Frank won't solve the basic problem of over-leveraging. Wall Street firms raise risks as they seek higher returns through leverage. He thinks the culture of Wall Street must change - there is too much "short-termism". The problem for regulation is that it must be ubiquitous. Dodd-Frank addresses the symptoms, not the causes. On the issue of anger at Wall Street, he thinks that it is justified although many other players are to blame for the meltdown. He thinks the Board of Directors of Lehman should have been more vigilant. In his final comments, he said that China is facing some short-term problems but has a strong economic outlook. The U.S. problem he sees as one of timidity in solving problems because a small number of voters in swing states will decide the 2012 presidential election.

Cyrus Amir-Mokri,  Assistant Secretary for Financial Institutions at the U.S. Treasury, shocked everyone in the room (just kidding) by saying that he supported President Obama's policies and believed that Dodd-Frank was being implemented in valuable ways to institute stronger regulatory reform and bringing "shadow banking" into the "light of day". He said that even Republicans agreed that rules of the road are necessary for the financial sector and that the task of the Treasury and other regulators is to control the negative externalities that come from the risk-taking activities of Wall Street firms. Dodd-Frank does, he says, address the "Too Big to Fail" issue. Dodd-Frank will create clearer consequences for shareholders and for management - capital rules, liquidity rules, risk management principles, counterparty disclosure. What Washington is attempting to do is restore confidence in a system that had lost public confidence. The economy has not been performing as well as everyone has hoped, but job growth has been positive every month since the initial losses following on the Bush Administration.

Joseph Perella,  Chairman and CEO at Perella Weinberg Partners, was the designated Republican on the panel. He thinks we can't go back to Glass-Steagall because the economy has become more complex and Wall Street has moved from partnership to public ownership. He wonders whether regulation can work. He summarized the prevailing Too Big to Fail system succinctly:
It's like a Las Vegas Casino where the croupiers keep their winnings but the House takes the losses.
It's hard, he said, to regulate ambition. There must be a high price for failure, as there used to be. Shareholder activists are seeking to limit compensation when returns are low. He thinks President Obama has moved too far to the left (another surprise). In his summary he said that the economy was wiped out and it will take a long time to recuperate.

Comment on the Q&A. At the Question and Answer period, I pointed out that a one-time president of Guild Hall, William H. Woodin, was FDR's first Treasury Secretary, and I asked the panel why FDR got so much more done in his first 100 days than President Obama did. Joe Nocera responded that not all FDR's innovations were such a good idea, using as an example the Bank Holiday. But (as I did not respond, since there were others waiting to ask questions) most states already had taken bank holidays because the banks didn't have enough currency to pay all the customers. During the national Bank Holiday that was declared when FDR was inaugurated, Woodin had the Treasury's Bureau of Engraving and Printing run the presses overtime and he had $2 billion in bills delivered by trucks over the weekend, with movie cameras filming the printing and deliveries for the benefit of U.S. movie audiences. The Treasury also sent out examiners to determine the solvency of each bank, beginning with the money-center banks, the 1933 equivalent of recent stress tests. The Glass-Steagall Act of 1933 lasted nearly 70 years as the centerpiece of the financial system and the Steagall part (setting up deposit insurance and the FDIC) is still in place. Secretary Woodin (along of course with FDR) was a crucial cheerleader during the months in 1933 that Senator Carter Glass instituted his wall around the banking hen-house as a condition of the deposit insurance that was promoted by Rep. Henry B. Steagall. It took nearly 70 years for the foxes to find their way back into the banking hen-house, and less than five years more for this to bring down the global financial system.

As Joe Perella was leaving, I asked him if he had any idea how the Canadian regulators manage to control their big banks. He said:
It's very simple. The Canadian bank regulators are represented at the Board meetings of the banks.
Mr. Perella's approach to Too Big to Fail makes sense to me. Transparency and accountability in one stroke. This was my big takeaway from the seminar.

Further Comment: I don't recollect any reference either to Neil Barofsky or Gretchen Morgenson at the Hamptons Institute panel meeting. But this morning Morgenson wrote a devastating summary of Neil Barofsky's new book, Bailout (Free Press). Barofsky was the special inspector general for the Troubled Asset Relief Program (TARP). Here's one snippet on his experience:
Government officials, he says, eagerly served Wall Street interests at the public's expense, and regulators were captured by the very industry they were supposed to be regulating.
This story is not unfamiliar. But it is, as Morgenson says, "deeply depressing." Joe Nocera pointed out that it took the Pecora Committee time to stir up the Congress into the determination to reform the financial system as it did in 1933 - and I could add that it took six years for the Bankers' Panic of 1907 to translate into the creation of the Federal Reserve System in 1913. But our communication systems are much better than they were 80 and 100 years ago - we should not be taking so long. Dodd-Frank was not enough and is not being implemented fast enough.

I checked out the report that regulators are or have a right to send representatives to board meetings of  banks in Canada. From my followup research, the key is that they "have the right". It's an option. The Office of the Suprintendent of Financial Institutions routinely gets a copy of all board documents - the agenda, minutes and exhibits. Also, regulators send a representative to the board of the Canada Mortgage and Housing Corporation.

Tuesday, July 10, 2012

A Projection Is Not a Promise

Incoming presidential administrations
tend to be overoptimistic and don't
make enough use of their
predecessors' experience.
In a post on this blog on November 27, 2008 I commented on the Obama transition based on consulting a 1986 book by Carl Brauer on presidential transitions from Eisenhower to Reagan. Brauer argues that incoming administrations are inherently overoptimistic, which may explain why - another conclusion - they also tend to underutilize the experience of outgoing administrations.

Overoptimism on the economy was certainly in evidence on January 9, 2009, as the projections by the Council of Economic Advisers on that date were for the unemployment rate - assuming stimulus actions were in place - to peak at 8 percent during 2009.

That peak was topped before mid-2009. The GOP argued that the 8 percent unemployment rate was a broken "promise". PolitiFact rates that charge as "Mostly False".  Here is the PolitiFact Truth-o-Meter summary of three years ago, July 9, 2009, six months after the CEA forecast:

They [GOP critics] are referring to a Jan. 9, 2009, report called "The Job Impact of the American Recovery and Reinvestment Plan" from Christina Romer, chairwoman of the president's Council of Economic Advisers, and Jared Bernstein, the vice president's top economic adviser.

Their report projected that the stimulus plan proposed by Obama would create between three and four million jobs by the end of 2010. The report also includes a graphic predicting unemployment rates with and without the stimulus. Without the stimulus (the baseline), unemployment was projected to hit about 8.5 percent in 2009 and then continue rising to a peak of about 9 percent in 2010.

With the stimulus, they predicted the unemployment rate would peak at just under 8 percent in 2009.

But in June, the unemployment rate was 9.5 percent.

In the past week, the administration has acknowledged its projections were wrong.

Here's what Romer herself said in a July 2 interview on Fox: "None of us had a crystal ball back in December and January. I think almost every private forecaster realized that there were other things going on in the economy. It was worse than we anticipated. What the private forecasters are saying now is that they do anticipate that the economy will start growing again in the second half of the year, and that usually, then, employment and unemployment start to respond shortly after that. So I think that is a realistic expectation."

CityEconomist Comment: With the benefit of hindsight, the projection might be called overoptimistic. The problem for the CEA was that the fourth-quarter economic data were not yet available in January and no one knew yet how capital-weak the banks really were, how unsupervised the banks were, and how worldwide the recession would be. But in no way was the projection a promise - something to stress given that in January the old claim was revived by the GOP.

Further Comment:  The experience shows us the wisdom of our forebears. Brauer's advice to new presidential administrations to be cautious is good. Upon arrival, a new administration's projections should lean to the pessimistic side. Similarly, there is a principle among forecasters that if you give a number, don't give a [firm] date. If you give a date, don't give a [firm] number. Especially for the very first forecast.

Monday, July 9, 2012

HARVARD | Admissions Changes, 1958-2012

L to R: John Tepper Marlin, Mrs. Robert
Swezey, Jeremiah Brady. Two Portsmouth '58
alumni at Harvard 1962 50th Reunion,
and the widow of a third. 
I greatly enjoyed my 50th Harvard Reunion in May. Last month I commented to the East Hampton Star on the great, and very visible, changes in Harvard admissions since I embarked on my undergraduate years in 1958. Here is the letter as published. 

Changing Composition [of Harvard Undergraduates]

    Springs, June 25, 2012

To The [East Hampton] Star:
     Helen Rattray’s report (Connections, June 14) on Chris Cory’s 50th reunion at Yale prompts me to compare a couple of her comments to last month’s 50th reunion at Harvard, which I attended with my wife, Alice.
    It is instructive to watch in the parade of alumni/ae the changing composition of the classes before and after 1962. The 1960s saw a huge disruption in college admissions. In the 1950s there appears to have been a modest push for more Catholics at Harvard, but this is not so visible in the parade. The push in the 1960s for more minorities and in the 1970s for more women caused much more consternation.
    I attended a small Catholic prep school, Portsmouth Priory (now Abbey), having spent three years already at another Benedictine school in England. The Class of 1962 at Harvard included seven graduates of Portsmouth, two of them via advanced placement. Given that the Portsmouth senior class numbered 35 students, the school was pleased.
     Meanwhile, while Yale had two (some say three) African-American students in the class of 1962, Harvard had 11, with a slightly larger class than Yale’s. The 50th reunion attendance in Sanders Theater was 100-percent white, as far as I could tell. One of the Harvard 11, W. Haywood Burns, was elected a 1962 class marshal and went on to become dean of the City College of New York Law School at Queens College. However, he died at 55 years of age in a 1996 Cape Town car crash.
    Once the civil rights era of the 1960s took hold under President Kennedy, affirmative action in admitting minorities became the new goal. But within a few years, the search for gender equality hit Harvard Yard. In 1970, the 50th anniversary of the ratification of the 19th Amendment, giving U.S. women the right to vote, was celebrated with a huge parade in New York City that featured both Gloria Steinem and Betty Friedan. It had taken 50 years between the 15th Amendment enfranchisement of black males until the 19th Amendment. Young women in 1970 were not going to wait that long again to press for equal opportunity in college admissions.
    The story of the struggle at Harvard over Radcliffe admissions during the years before and after 1970 was told in April 2012 by Helen Lefkowich Horo­witz, a college dean, who received her Ph.D. from Harvard in 1969. Students and the National Organization for Women campaigned for an equal male-female ratio at Harvard when the ratio of men to women at Harvard was fixed at 4 to 1.
    To understand what the women were up against then, here is what the dean of freshmen, F. Skiddy von Stade, no doubt exhausted by the implications of a rapidly changing composition of the freshman class, had to say about the idea of admitting equal numbers of men and women:
    When I see bright, well-educated, but relatively dull housewives who attended the Seven Sisters, I honestly shudder at the thought of changing the balance of males versus females at Harvard. . . . Quite simply, I do not see highly educated women making startling strides in contributing to our society in the foreseeable future. They are not, in my opinion, going to stop getting married and/or having children. They will fail in their present role as women if they do.
    Ms. Horowitz comments:
I’m sure his niece, the great mezzo Frederica von Stade, would have shaken her head at this, if her schedule permitted.
    The dean of admissions in 1970 issued a report that opposed changing the 4-to-1 ratio. But five years later the Strauch Committee recommended gender-blind admissions and this seems to be, formally, the rule now.
    Are there still quotas at Harvard? Formally, no more. But the admissions office would doubtless be forgiven for keeping on eye on the composition of the class to avoid surprise imbalances at the end of the process.
    The unconfirmed scuttlebutt is that the anti-merit quotas that used to keep out New York City Jewish kids are now most likely to be keeping the numbers down on admitting so many talented Koreans applying from overseas or Korean-American families in the United States. I am pleased to say that a Korean-American from the Harvard Class of 1962 was very much present at the 50th reunion.
    Sincerely,
    JOHN TEPPER MARLIN

Friday, July 6, 2012

U.S. Banks Likely Targets from LIBOR Scandal

The LIBOR scandal will reach over the Atlantic to major U.S. banks, says Charles Gasparino in the New York Post. He seems to look forward to it. Comment: Many would add, about time. Never in the field of human conflict has so much been improperly owed by so many to so few.

Bank regulation has failed, both voluntary approaches like the LIBOR oversight body, and the governmental kind. Floyd Norris in The New York Times argues that  that a separate market regulator is needed from the bank regulators, because regulators are captured by those they regulate. Comment: Alas, history shows that separate regulators are no guarantee. In fact, some libertarians have argued seriously that the more regulators there are the better if there is to be any regulation, because it creates a competition among regulators that tends to become a competition in laxity. The separate Savings & Loan regulator was captured in the 1970s when the industry's speculative excesses built up, resulting in the 1980s crises that foreshadowed our 2008-2012 bank losses and revelations. Separate bank regulators are advocates for the subset that they regulate. We had a great global regulatory system in place by FDR and Treasury Secretary Woodin and Senator Glass in 1933. It was eroded over time. (Although only the Glass part of the Glass-Steagall Act was torn down - the Steagall part remains in the form of the FDIC.) The Economist Magazine had it right when it said in 1999 that what was happening was that banks were being allowed into the securities markets, which meant that with deposit insurance federal regulation must extend to the whole market.

Wednesday, July 4, 2012

MONTESSORI | Key to Innovative Passion?

Tony Wagner
On May 3 Harvard celebrated its 375th anniversary in New York with a focus on Harvard's "tradition of innovation". I wrote about it on HuffPost and more recently on my CityEconomist blog. One of the things Harvard has done is to create a Technology and Entrepreneurship Center, which sounds a lot like the NYC Cornell-Technion center that will be created on Roosevelt Island in New York City.

The first Innovation Education Fellow at the T&E Center is Tony Wagner, who has written a four-star (on Amazon) new book Creating Innovators: The Making of Young People Who Will Change the WorldKnowledge@Wharton interviewed him about his book. They asked: "How can parents, mentors and others help young people to develop creativity and the skills of innovation as they age?"
Wagner: ... [E]ncourage more exploratory play. So many parents are programming their kids' days and weeks, are worrying about their kids resumes in kindergarten or even earlier. What they need to understand, first and foremost, is that passion derives from more exploratory play. I don't know whether you picked this up in the book, but I uncovered research to the effect that many of the most successful entrepreneurs and innovators today were, in fact, products of Montessori schools, where it is much more of a play-based form of learning. I think the second thing that parents need to understand is they cannot and they should not try to protect their children. Too many parents are helicopter parents who are trying to hover. They are trying to tell their children how wonderful they are, which I think is a huge mistake. You really have to allow kids to experiment and to make mistakes because that is how they are going to gain self-confidence. They don't gain real self-confidence from having been protected and living in a cocoon all their childhood.
My mother (Hilda van Stockum Marlin) and grandmother (Olga Boissevain van Stockum) were both trained in the Montessori Method by Maria Montessori herself. My sister Sheila founded many Montessori schools in the UK and currently is based at High Elms Manor in Garston, UK. We have just located a copy of my mother's curriculum book, which she prepared under Ms. Montessori's direction. We are still hunting for the original book in full color.

BOOKEXPO | Future of Publishing

At the three-day BookExpo and BlogWorld at the Javits Center a couple of weeks ago, I spoke with quite a few people about the future of the book-publishing and e-publishing industries. The first thing I found out is that no one is prepared to make any firm forecasts. But here are some recurring themes:

1. E-Books are for the time being keeping publishers alive because they are getting paid for their backlists through e-book fees, and this isn't taking any work. Also, e-books, rather than proving to be a substitute for physical books, are making it poosible for people to read more.

2. Bookstore Closings are seriously affecting the mass-market publishers, who could always count on unloading large quantities of excess books on the bookstores. The high profit margins on mass-market books (which means just about any book printed in large quantities that is and sold at a low price) are attractive to bookstores because they are purchased as gifts or as bargains. But they are hard to sell sight unseen by mail or email. The number of mass-marketers of books is shrinking.

3. Author-Reader Links are made difficult by the unwillingness of on-demand publishers like Amazon (and its subsidiary CreateSpace) or iInfinity or others to provide authors with the names of their book buyers. In the view of many at the two conferences, this is very short-sighted because the future of publishing is in a heightened connection between authors and readers. CloudWave, with whose principals I spoke at length, is trying to address this connection.

4. Author Promotional Efforts are now expected by publishers. Less famous authors who are building their reader loyalty through websites and emails are surprising their publishers with their long lines at book-signing events.

WOMEN | They Start More Firms But Get 1/9 of the $

Amanda Steinberg advises women on their finances through NY-based Daily Worth, which has attracted venture-capital funding. She has commented on the following facts reported by  Crains New York:
- women start companies at twice the rate of men, but
- they own about one-third of US small businesses, and
- receive just 11 percent of VC funding.

Her take is that - VCs don't like to fund "lifestyle" startups that women tend to favor, and - taking on a startup requires a commitment to the business that may interfere with the desire of many women today to have control over their non-work hours.  My source for this is the latest NYTECH Newsletter, referencing