Sunday, March 22, 2009

Regulating Banks and Non-Banks: One Year Later

A year ago today I wrote about financial regulation . As the G20 meeting on April 2 approaches, the topic is more relevant than ever.

I argued last year that when the Glass-Steagall wall between banking and non-bank financial institutions was torn down in 1999, the law should have extended U.S. regulatory authority beyond banking to all the other institutions.

My views were shaped by research I did at the FDIC. I developed a state credit-quality indicator, based on bank examiners' classification of loan quality at insured banks. The indicator deducted 20 percent of the loan value classified as substandard, 50 percent of loans classified as doubtful, and 100 percent of loans classified as loss. The results were included in an article I wrote with Professor George Benston published in the Journal of Money, Credit and Banking, "Bank Examiners' Evaluation of Credit".

Whatever use a state credit-quality indicator might have had as an early warning system (e.g., of mortgage-quality problems in Arizona, California, Florida and Nevada) disappeared when mortgage loans were wrapped up into securitized packages that were beyond easy classification by bank examiners and were camouflaged by AAA ratings by rating agencies and insurance companies.

The Chairman of the UK Financial Service Authority (FSA), Lord Turner, on March 18 has highlighted for the G20 socially undesirable financial innovation as a key source of the global crisis. He recommends regulation of near-bank activities such as hedge funds and credit-rating agencies, with a Europe-wide financial body to set standards and supervise. The UK seems to have joined the hawkish German and French authorities.

While the United States has been considered a dove on financial regulatory issues, the Obama administration may surprise the G20. Stephen Labaton in the NY Times on Saturday says a plan is being prepared that would
regulate the shadow banking system, with heightened standards put in place after the economy began to rebound. A broad consensus has emerged that hedge funds must be registered and more closely monitored, probably by the Securities and Exchange Commission.

The U.S. plan will probably give the government greater authority over large troubled companies not now regulated by Washington. The Treasury secretary would have authority to seize a struggling institution after consulting with the president and upon the recommendation of two-thirds of the Federal Reserve board. The government now can seize only the banking unit that controls federally insured deposits of large troubled institutions.

NYC | In the Eye of the Storm, OMB's Mark Page

Ross Sandler (L) and Mark Page. All photos by JT Marlin. 
NY State's Gov. David Paterson has  agreed with legislative leaders to close a NY State budget gap for FY 2009 of $1.6 billion.

But now a monster gap of $13 billion is awaiting the Governor in ten days.

In some ways, NY City is better off than NY State, because the biggest part of NYC's tax base is the property tax.

NYC's annual property assessments are averaged over five years, creating a surge of revenue as the averages keep rising for two or three years after the beginning of a decline in property values.

When recovery starts, of course, NYC doesn't get as much revenue as it would if assessments were recognized more rapidly, but then the income-and-sales taxes are bouncing up and the City doesn't need the money as much.

However, when NY State catches a cold, NYC gets pneumonia because NYC depends on the State for aid.

Half the State’s revenues come from NYC, but something less than half comes back to NYC in aid. So a gap of $13 billion at the State level without raising taxes might mean $6 billion less aid for NY City.

That's another thorn in the side of Mark Page, the man who has been a steady hand on NYC's fiscal wheel as director of NYC’s Office of Management and Budget since Mayor Bloomberg took office in 2002. He was introduced not long ago by Mr. Ross Sandler of the New York Law School.

Mr. Page is a graduate of Harvard College and the NYU Law School and his responsibilities as OMB Director include
developing and implementing the city’s budget, monitoring and forecasting the revenues and expenses of the city, analyzing the economy, evaluating agency management improvement initiatives, and issuing bonds in the public capital markets in conjunction with the New York City comptroller.
Mr. Page joined OMB in 1978 as deputy counsel, was named general counsel in 1980 and had the title of deputy director added in 1982. He is reputed to hate giving speeches and is hard to locate at a podium other than responding to questions from members of the NY City Council. He's actually a pleasure to listen to as he speaks in perfectly formed sentences without any apparent reference to notes.

I had a chance to listen to him at New York Law School and took some photos and notes. I started reporting below what Mr. Page said, but midway I received word that a videotape of his comments had been posted online, at which point I decided I would stop typing up my notes. I have posted the link to the NYLS videotape at the end.
NYC OMB Director Mark Page.

The banking industry has been engaged in in an extended use of vapors. Washington is engaged in a dramatic wielding of stimulus dollars.

Here in New York City, we are engaged in questions about the frequency of garbage collection, the number of workers in the parks during the summer, and high school class size, the daily oatmeal of government.

Government budgeting is not that complicated. It has to do with handling the fact that we want to get more services, like more frequent garbage collection, and pay less taxes... and preferably eliminate taxes.
Henry Stern.
It’s easy to do more and tax less when you’re getting more money out of existing tax rates. Economic expansion gives us more.

But then when you get in the inevitable reciprocal cycle, a given tax structure gives you less money to spend on services. 
As I have heard it said very loudly at MTA meetings, in a downturn you are likely to have to tax more for less services. This is not a very seductive premise, particularly as government is political.
To make this point, we have divided our spending into controllable and uncontrollable costs. In government there are some things that are very difficult to avoid paying for. For an individual, the analogy might be with mortgage payments.

Jonathan Gelber (L) and Roger Herz.
For New York City government, the stuff you are really stuck with paying starts with debt service and pension benefits.

We’ve done a lot over the last seven years with bringing the East River and Harlem River bridges up to standard. We’ve spent a lot on building and maintaining schools and roads. And we have the debt to show for it.
To hear how Mr. Page's speech proceeded, with questions from audience members like Jonathan Gelber, Roger Herz and Henry Stern (all shown in photos) go to the videotape here.

Wednesday, March 18, 2009

PEACE | What Happened to Our Dividend?

When the Berlin Wall came down in 1989 and the Soviet Union disintegrated, many of us looked forward to a Peace Dividend, a reduction in military spending that would allow more U.S. Government spending on public needs like health care or education, or tax cuts, or a combination.

We got the tax cuts but the Peace Dividend has melted away. Spending on the ongoing wars in Iraq and Afghanistan have replaced spending on the Cold War, and U.S. military spending is still at the level it was in 1990.

In FY 2008, the federal budget shows $751.6 billion for defense. This is made up of four elements: (1) DoD spending (line 051) of $583.1 billion, (2) Nuclear weapons in the Department of Energy budget, $24.2 billion, (3) Veterans Administration, $86.6 billion and (4) borrowing cost of unfunded military expenditure, $57.7 billion.

However, the Bureau of Economic Analysis (BEA), in the Department of Commerce, shows a higher number for national defense consumption and gross investment expenditure, $734.8 billion. If we again add in Veterans Affairs ($86.6 billion) and interest on military-related borrowing (which BEA figures is $163.0 billion), the total is $984.4 billion, nearly $1 trillion. So how does this compare with 1990?

MilEx as Share of GDP.
One measure of the change between 1990 and 2008 is military spending as a share of GDP. The media tend to report the 2008 figure as 4.1 percent. This is the lower line in the first chart below, which I reproduce by permission from Professor Jurgen Brauer of the James M. Hull College of Business at Augusta State University in Augusta, Ga.
Prof. Brauer argues:
But that uses the DoD budget number without the DOE’s nuclear weapons complex, without the VA, and without the interest cost for military-related debt.
If the BEA’s numbers for defense spending are used, as in the top line in the chart, the ratio is 6.9 percent of GDP. By the U.S. government’s own accounts, military expenditure is two-thirds higher than the usual media report.

MilEx as Share of Federal Spending. The second chart shows military expenditure as a percentage of the overall federal budget.
The lower line in this chart ends at 19.9 percent for 2008, about 20 cents of the federal dollar. But Prof. Brauer argues that this is not the right number to use, because the federal budget
is loaded down with transfer payments, that is, monies that come in and go out simply because federal law mandates that they be handled through the feds. Examples are social security contributions that pay for grandpa’s monthly check or money that residents of Oklahoma pay in federal taxes that then go back to Oklahoma to fund schools or build highways there.
When transfer payments are removed, the budget for federal functions is only $1,440.6 billion, of which BEA's $984.4 billion in military expenditure is 68.3 percent, as shown on the top line on the chart. That’s not 20 cents on the federal dollar but 70 cents.

Spending on defense has come down since the 1960s. But compared with 1990 the Peace Dividend has disappeared.

Sunday, March 15, 2009

STATE PRODUCT | Few Thrived Under Bush 43

As the Democratic Administration wrestles with huge U.S. economic problems, elected officials can take comfort in the fact that they have an easy act to follow.

The numbers are in, and under Bush 43 only four U.S. states beat the average long-term growth rate.

The four "winner" states that did better than the long-term U.S. per-capita average annual growth rate of 2.5 percent were North Dakota, New York, Louisiana and Montana. (Louisiana wins on a technicality as is explained below.) The other 46 states grew at less than the long-term average growth rate.

The numbers are through 2007, but we know that 2008 was a recession year, so the final numbers by state will be worse.

The state records are on two charts prepared by my friend Professor Jurgen Brauer of the James M. Hull College of Business at Augusta State University in Augusta, Ga. His numbers are from the St. Louis Fed's FRED database, which vacuums population data from the U.S. Census and Gross State Product (GSP) data from the Bureau of Economic Analysis.

With Prof. Brauer's permission I am using his chart showing average annual real growth in per-capita GSP during the first seven Bush 43 years.

Among the top ten losing states, two showed negative annual per-capita GSP real growth during 2001-2007 (2000 being the base year): Michigan and Georgia. The next eight states all had real growth of less than one percent: Indiana, Colorado, South Carolina, Missouri, Ohio, Alaska, Illinois and New Hampshire. Professor Brauer observes:
Two of the bottom five states in real per-capita GSP average annual growth rates switched from “red” to “blue” in the November 2008 presidential elections.
On the upside, the top state in per-capita GSP real growth was North Dakota, with annual growth of about 3.5 percent. The next nine states were all in the 2-3 percent range on per-capita real growth: New York, Louisiana, Montana, Vermont, Oregon, Maryland, South Dakota, Iowa and Alabama. Professor Brauer adds:
Only four states in the nation beat the long-term per-capita average annual growth rate for the United States of 2.5 percent since the late 1920s. Louisiana is an anomaly for its growth is at least partially explained by the exodus of poor residents following Hurricane Katrina so that the improvement in its average growth rate for the remaining residents is a statistical fiction.
Prof. Brauer's second chart shows the state-by-state per-capita value of economic production in 2007.
The top ten states by per-capita GSP in 2007 are Delaware ($56,500 GSP per capita), Connecticut, New York, Massachusetts, New Jersey, Alaska, California, Virginia, Minnesota and Colorado (the District of Columbia is not included).

The bottom ten states are Mississippi (less than $25,000 GSP per capita), West Virginia, Arkansas, Montana, South Carolina, Oklahoma, Alabama, Idaho, Maine and Kentucky.

Should the weak economic performance of the states during the 2001-2007 years be a surprise?

Michael Kinsley, writing in the Washington Post in 2005, concluded that the Democrats did better since 1960 on the Republican ("Daddy"-party) criterion of economic prosperity.
From 1960 to 2005 the GDP in year-2000 dollars rose an average of $165 billion a year under Republican presidents and $212 billon a year under Democrats. Measured from 1989, or measured with a one-year delay, or both, the results are similar. [On the] average annual rise in real per-capita income, Democrats score about 30 percent higher.
Bush 43 did not reverse this weak economic record.

The Great Recession

In his NY Times column today, "Bad News, and More Bad News," Clark Hoyt responds to mail that complains of the NY Times writing too much about bad news. He says: "A newspaper's responsibility is not to be an economic cheerleader, but to maintain a level head and help put the world in perspective for readers.

The theme of Mr. Hoyt's column can't be repeated too often, but I have a problem with the sentence that the Public Editor attributes to Times business columnist David Leonhardt:
"[A]s bad as things are, they are still not as bad as the recession of 1982, let alone the Great Depression."
Does Mr. Leonhardt still say that? If so, I would respond that his comparison between today and 1982, which he based on job-market data, is a case of apples and oranges. The reason for the recession that produced high unemployment in 1982 was Fed Chairman Paul Volcker's brave determination to break the back of inflation. In the process he allowed interest rates to soar.

The 1980-82 recession was painful, but recovery was entirely within the control of the Fed, which simply had to ease credit.

Continuing credit problems today are not the deliberate creation of the Fed, which has--on the contrary--eased the target fed funds interest rate down to the "zero bound". To say that 1982 was worse is like someone suffering an angina attack saying that his heart was worse off right after his triple-bypass operation. Not so, because the surgeons then had the situation under control.

A consensus is growing that this recession is the worst downturn since the Great Depression. It's global. it looks only at U.S. data and misses the full extent of the devastation from the credit freeze. The IMF’s Dominique Strauss-Kahn, said on March 10: "I think that we can now say that we've entered a Great Recession."

Prior uses of the term "Great Recession" (which was applied to earlier recessions) have been collected by Catherine Rampell of the NY Times using Nexis and were quoted by World Wide Words. WWW does not mention the prominent March 1 NY Times Op-Ed by economic historian Niall Ferguson.

On December 5, 2008 the U.S. Federal News Service reported: "Some economists are already calling this 'the Great Recession' because they fear it may be longer and deeper than any recession in recent history." As early as April 2008, Former Wall Street Journal writer Jesse Eisinger predicted in Portfolio that: "The next president will take office during what may well come to be known as the Great Recession."

One year ago, in March 2008, I contributed three posts for HuffPost about the Bankers' Panic of 2008. I was focused on regulatory shortcomings and what could be done about them, rather than the likely economic consequences.

A March 10, 2009 poll reports that 53 percent of respondents say the United States is at least somewhat likely to enter a 1930’s-like Depression within the next few years. The Rasmussen Reports national telephone survey found that 39 percent think this outcome is unlikely. The latest results are more pessimistic than those found in early January, when 44 percent said a 1930’s-like Depression was likely. It will be a big challenge to restore positive “animal spirits”. But the poll may be a sign of “blood is in the streets” –- Main Street as well as Wall Street.

Thursday, March 12, 2009

UN | Winning Back Business Support

At dinner yesterday I spoke with Georg Kell about business support of the UN. Georg is Executive Director of the UN Global Compact and is thinking ahead about the world's needs and how business and the UN can help meet them.

My interest in this is lifelong. My father was a member of the U.S. Budget Bureau team at the founding of the UN in San Francisco in 1945 and he worked for two UN agencies during the next two decades.

Business in 1945 was a huge supporter of the UN–think of the gift of six Manhattan blocks to the UN from John D. Rockefeller, Jr. Business looked forward to the UN's role not just in promoting peace but in supporting through its specialized agencies a global infrastructure, such as safe airports and air traffic controls.

Georg is focused on resurrecting this business support, which waned during the years when news about the UN seemed to revolve around ideology. Georg is a native of Munich and started his career as a venture capital analyst. He became a UN civil servant 18 years ago. The first ten years of his career he worked with UNCTAD. On the 50th Anniversary of the UN he wrote a paper giving five reasons why the UN is good for business and deserved more support. This paper attracted the attention of UN Secretary-General Kofi Annan... and Georg was soon given his present mandate.

Georg views 1945 as one of the great moments of history when support for the UN came from a broad swath of the world. The UN was seen as an agency for development to ensure peace. Development requires private investment, so business was a natural ally. Georg sees his job with the Global Compact as rebuilding the sense of partnership between business and the UN in advancing the goals of peace and development.

The Global Compact has been a success. Business is again deeply involved is supporting the UN. Some 5,000 companies in 130 countries have signed up with the Global Compact. In 80 of the countries, business networks have been created with at least half a dozen business leaders and a professional staff. The focus of the networks recently has been on the following key topics:

- Challenges to the Global Business Model. What happens to world trade if businesses shorten their supply chains or, worse, if countries look inward to their domestic industries and move to defend them with protectionist tariffs or quotas or other barriers?

- Best Practice for Business in Conflict-Prone Areas. The idea of divestment of subsidiaries from countries that are prone to conflict is being critiqued as making the situation worse. What are best business practices in such areas?

- Response to Climate-Change Worries. Scientific certainty about the threats from climate change is growing and is contributing to a new sense of urgency among businesses about the need for action. The UN will convene a conference in Copenhagen on May 24-25 that will bring together 500 CEOs or senior corporate staff along with other stakeholders. Georg sees the solution as a carbon tax or perhaps some form of carbon cap.

The global financial meltdown has made executives more humble about their ability to withstand financial and non-financial (environmental, human) risks. Georg believes that a major shift has occurred, back toward thinking with a longer-term time horizon. Sustainability is not being taken for granted as much as it was a few years ago. Business is more somber, more about functionality, about quality, about durability.

My Dad's labors show how useful the UN can be. In 17 years as Director of Technical Assistance at the International Civil Aviation Organization, he built up a crew of 1,500 ICAO technical experts working with airports all over the world to ensure safe air travel. Pilots of a German airline flying into Tokyo or Moscow learned to communicate smoothly in a common language with airport controllers to anticipate weather conditions, take off and land safely.

Georg Kell and the Global Compact are embarked on a new round of missions for the UN in partnership with world business. Their work offers hope for economic recovery, conflict reduction and a sustainable environment.

Tuesday, March 10, 2009

NYC TAXES | Plucking the Golden Geese

March 10, 2009–French Finance Minister Jean-Baptiste Colbert, the second after Fouquet to serve under Louis XIV, said that the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.

The golden geese in New York City are the top 1 percent of NYC taxpayers, the 41,282 filers earning $500,000 or more. They pay 47.8 percent of the $7.3 billion collected by the city in income taxes. The concentration of golden feathers is much greater now than in 1993, when approximately the same share of taxes, 47.6 percent, was paid by more than five times as large a share of taxpayers, the 5.5 percent earning $100,000 or more.

Why has the concentration of taxpayers become so much more intense? Three explanations come to mind: (1) Inflation ($100,000 ain’t worth what it was in 1993). (2) The financial bubble, which in recent years was good to top-earning New Yorkers. (3) The number of NYC personal income-tax filers, which has increased to 4.1 million from 2.7 million in 1990.

One thing hasn’t changed much–average personal income tax rates in Manhattan are higher than in the other boroughs. Back in 1993, the average effective tax rate was 3.05 percent–3.58 percent in Manhattan and less than 3 percent in all of the other four boroughs.

NY City and NY State officials are seeking to raise tax rates further on the highest categories of personal incomes. Council Speaker Christine Quinn has proposed boosting the city's income tax from 3.65 to 4.25 percent for those earning $297,000 or more; to 4.45 percent for those making $532,000 and to 4.65 percent (a percentage-point increase) for the $1.2 million league and above. Comptroller Bill Thompson is supporting higher taxes for the top category.

Albany legislators are also seeking to raise the state income tax -- from 6.85 percent to 8.25 percent for people making a minimum of $250,000; 8.97 percent for those making $500,000 and above in taxable income and 10.3 percent for those at the $1-million-and-up level.

NYC’s budget director, Mark Page, has argued that the City’s golden geese have wings and can fly. He says:
The basic concern is how do you collect revenue from New York City's tax base if you have a relatively small group of individuals paying a very large proportion of your income-tax revenue.
A consoling fact for New Yorkers is that state and local taxes have been deductible against income on which federal taxes are imposed. But there is a question about what new tax rules will emerge from the budget debate that is taking place in Washington.

BLS | Rising Unemployment Rate Understates the Pain

Concerns are properly growing about the 8.1 percent unemployment rate reported for February and the higher rates that are on their way. But the true pain of unemployment is close to twice this rate. The Bureau of Labor Statistics routinely provides the data to report the higher rate.

The standard unemployment rate averaged 5.8 percent in 2008. A higher number of 10.5 percent takes account of three additional categories, including (1) workers who are too discouraged to look for work, (2) others "marginally attached" to the labor force, and (3) workers who have settled for part-time jobs.

Reporting the higher rate along with the standard one would help make clear why unemployment rates have been higher in much of Europe (France, Germany, Italy, for example) than in the United States. The reason, in part, is that European unemployment benefits extend longer, so workers are recorded as officially unemployed for longer. In the United States, workers settle for part-time work rather than have no job at all.

Differences among U.S. unemployment rates have been nicely summarized by Professor Jurgen Brauer of the University of Georgia at Augusta in his March blog. With his permission I am sharing his lucid exposition
Chart of BLS Unemployment Rates
by Jurgen Brauer
of the different unemployment rates. His chart at right–click on it to get a better view–shows five measures of unemployment and underemployment. Prof. Brauer explains:
The red and the light blue lines both go back to 1960; the others back to 1994. The red line is called U3 unemployment and depicts the United States’ “official” unemployment rate, averaged over the months for the respective year. In 2008, the monthly unemployment rate ranged from 4.8 percent of the civilian labor force in April to 7.1 percent in December, with an average for the year [shown in the chart] of 5.8 percent.
The red U3 line is the number that is commonly reported on a month-to-month basis, i.e., the February rate of 8.1 percent. Recession years–i.e., years when the economy has been in decline–are shown by the dashed vertical lines. Arthur Okun famously used unemployment, numbers for which are available the next month, as a predictor for GDP (which takes several months to estimate). Professor Brauer continues:
The light blue line at the bottom of the chart is called U1. This measures long-term unemployment, namely the proportion of those who are willing and able to work (i.e., people who are actively looking for work) yet nonetheless are unemployed for 16 weeks or more, that is, about 4 months or longer. U1 shows the same up and down pattern as U3, and the reason government officials track it is because it indicates long-term hardship. The other three lines are called U4, U5, and U6 unemployment, respectively, and have been tracked only since 1994.
The three lines add categories of workers who are discouraged or underemployed:
U4 adds in so-called discouraged workers, a subset of those “marginally attached” to the workforce, that is, folks who are willing and able to work but have become so discouraged about their labor market prospects that they have stopped looking for employment.
U5 adds all other marginally attached workers (those who want to work and have looked for work but whose primary reason why they are not in the workforce right now is non-job market related).
U6 rounds this out by including those who are employed part time for economic reasons, that is, they want to work full time but cannot get anything other than part time.
The U4 and U5 numbers only add about one percentage point. But U6, which includes those who say they want and are looking for full-time work but can get only part-time work, adds 3-5 percentage points. In 2008, U3 was 5.8 percent but U6 was 10.5 percent, a difference of 4.7 percentage points, nearly double.

Sunday, March 8, 2009

How the Financial System Was Taken Down

Robert Weissman has tried to assemble the whole picture of the financial meltdown in a newly released report, Sold Out: How Wall Street and Washington Betrayed America, produced by Essential Information and the Consumer Education Foundation. The report details 12 deregulatory moves that are attributed to $5 billion spent in 1998-2008 on U.S. federal campaign contributions and lobbying expenditures. (Weissman is editor of the Washington, D.C.-based Multinational Monitor, and director of Essential Action.) Here are the 12 moves:
1. Repeal of Glass-Steagall: The 1999 repeal of the Glass-Steagall Act helped create the conditions in which banks invested monies from checking and savings accounts into creative financial instruments such as mortgage-backed securities and credit default swaps, investment gambles that led many of the banks to ruin and rocked the financial markets in 2008.
Comment: The 1999 law tore down the wall between banks and investment banks. Senator Carter Glass was a leader in Congress both of the effort to create the Federal Reserve System and the 1933 Glass-Steagall law that forbids banks from engaging in investment banking, merchant banking or insurance activities. Paul Volcker has said he thinks one of the first things that needs to be done to fix the system is to restore the wall between investment banking and commercial banking.
2. Off-the-Books Bank Accounting: Holding assets off the balance sheet generally allows companies to avoid disclosing “toxic” or money-losing assets to investors in order to make the company appear more valuable than it is.
Comment: In his memoir of his years as Chairman of the SEC, Arthur Levitt, Jr. complains about the huge lobbying effort by accounting firms.
3-4. CFTC Blocked from Regulating Derivatives: Financial derivatives are unregulated. By all accounts this has been a disaster. Warren Buffett warned they represent "weapons of mass financial destruction". They have amplified the financial crisis. The Commodity Futures Trading Commission (CFTC) sought to exert regulatory control over financial derivatives during the Clinton era, but failed to get the authority. The non-regulation of financial derivatives was again assured in 2000, with the Commodities Futures Modernization Act.
Comment: These two steps were crucial. They were victories for “financial innovation” – i.e., non-regulation. Passage of the Commodities Futures Modernization Act under the leadership of Senator Phil Gramm prohibited any incursion by the CFTC into regulating financial derivatives.

5-6. Excessive Capital Leveraging Was Encouraged. In 1975, the Securities and Exchange Commission (SEC) promulgated a rule requiring investment banks to maintain a debt-to-net-capital ratio of less than 15 to 1. In simpler terms, this limited the amount of borrowed money the investment banks could use. In 2004, however, the SEC succumbed to a push from the big investment banks, led by Goldman Sachs, and authorized investment banks to develop net capital requirements based on their own risk assessment models. With this new freedom, investment banks pushed ratios to as high as 40 to 1. Meanwhile global bank regulators, in a program known as Basel II, should have been tightening up capital requirements but, influenced by the banks themselves, have been moving in the opposite direction, toward letting commercial banks rely on their own internal risk-assessment models.
Comment: It’s as simple as ABC. Bank examiners look at the loan portfolios of banks to ensure Adequacy of Bank Capital. The potential for systemic meltdown is huge when investment banks have debt-to-net-capital ratios as high as 40 to 1.
7-9. No Predatory Lending Enforcement: Banking regulators retained authority to crack down on predatory lending abuses, but they sat on their hands. The Federal Reserve took three formal actions against such abuses in 2002-2007, while the Office of Comptroller of the Currency took three in 2004-2006. When the states sought to fill the vacuum created by federal non-enforcement of consumer protection laws against predatory lenders, the Feds stepped in and prohibited states from enforcing consumer-protection rules against nationally chartered banks. Under the doctrine of “assignee liability,” anyone profiting from predatory lending practices should be held financially accountable. With some limited exceptions, however, assignee liability does not apply to mortgage loans. Rep. Bob Ney worked hard to keep this effective immunity.
Comment: Bank supervision was lax. It happens when everyone seems to be making money.
10. Fannie and Freddie Enter Subprime. Fannie Mae and Freddie Mac were dominant purchasers in the subprime secondary market. The Government-Sponsored Enterprises were followers, not leaders, but they did end up taking on substantial subprime assets -- at least $57 billion. The purchase of subprime assets was a break from prior practice, justified by theories of expanded access to homeownership for low-income families and rationalized by mathematical models allegedly able to identify and assess risk. Fannie and Freddie are responsible for their own demise.

11. Merger Mania: Megabanks achieved too-big-to-fail status. While this should have meant they be treated as public utilities requiring heightened regulation and risk control, other deregulatory maneuvers enabled them to combine size, explicit and implicit federal guarantees, and reckless high-risk investments.

12. Credit Rating Agency Failure:
Wall Street packaged mortgage loans into pools of securitized assets and then sliced them into tranches. The resultant financial instruments were attractive to many buyers because they promised high returns. But pension funds and other investors could only enter the game if the securities were highly rated. The credit rating agencies enabled these investors to enter the game, by attaching high ratings to securities that actually were high risk. The Credit Rating Agencies Reform Act of 2006 gave the SEC insufficient oversight authority. The SEC must give an approval rating to credit ratings agencies if they are adhering to their own standards -- even if the SEC knows those standards to be flawed.

Friday, March 6, 2009

Enough "Blood on the Streets"?

How low can the market go? In 1815, Nathan Rothschild said that the time to buy stocks was "when there is blood on the streets". Are we there yet?

The Great Depression lasted a decade but the Dow industrial index fell 89 percent from its high of 381 on September 3, 1929 to its low of 41 on July 8, 1932. The economy remained sour for the rest of the decade but the stock market picked up.

For the enthralling story of what happened during those years, I recommend chapters 17-20 of Liaquat Ahamed’s timely Lords of Finance: The Bankers Who Broke the World. I had the pleasure of listening to Liaquat talk at a recent evening event in New York City. He modestly disclaimed knowledge of the financial disasters that were going to happen and simply said that the Time magazine cover showing Robert Rubin, Larry Summers and Alan Greenspan with the caption “Committee to Save the World” suggested to him the idea for his book. The title reminded him of the name given to the top bankers working on global financial problems after World War I, “The Most Exclusive Club in the World.” The book studies the origins of the Great Depression that is clearly told by taking the different perspectives of the four leading actors of the period, the Lords of Finance -- Montagu Norman in the UK, Benjamin Strong at the New York Fed, Hjalmar Schacht in Germany and Emile Moreau in France.

Yesterday’s stock-market drop brings us to a cumulative decline that can only be compared with the 1930s. Fearful of today’s jobs report, investors drove the major U.S. stock averages down 4-7 percent. Jack McHugh has tallied from how far down this took the markets from their peaks.
I think we can all agree that what ails our economy and markets is worse than anything since that awful time [the Great Depression], and the worst punishment Mr. Market has meted out since the 1930’s was a drop in the S&P 500 of just less than 50% (1974 & 2002).
The cumulative drop from their peaks (October 11, 2007 so far is:
Dow Jones Industrial Average — All Time High: 14,198. March 5 - Down 53.6% to 6594.
Standard & Poor’s 500 — All Time High: 1576. March 5 - Down 56.7% to 683.
Russell 2000 — All Time High: 856.50. March 5 - Down 59.2% to 349.45.
KBW Bank Index (BKX) — All Time High: 121.16. March 5 - Down 84.3% to 18.97.

Barry Ritholtz’s blog provides this list of Blue Clip penny and under-$10 stocks:
AIG (39 cents – less than it costs to mail a letter). Citigroup (98 cents). E*Trade (66 cents). Fannie Mae (39 cents). Freddie Mac (39 cents). Unisys (37 cents). Ford ($1.83). GM ($1.83). Las Vegas Sands ($1.97). MGM ($1.99). CIT ($2). Kodak ($2.50). Bank of America ($3.15). New York Times ($4.00). News Corp ($6.15). Xerox ($4.36). International Paper ($4.22). Alcoa ($5.55). GE ($6.75). Dow Chemical ($6.56). Wells Fargo ($7.95). Dell ($8.50).

In terms of timing, the Dow peaked before FDR came to office – before he was even elected. So the fears are lingering longer than they did then.

In what ways are markets and economies possibly worse off than in 1932?
- Expectations are higher because billions of people in the developing countries who were anticipating joining the global economy are seeing their hopes dashed. The 1930s effects were severe but were concentrated on the industrialized countries. The potential for instability in some countries is great and the proliferation of weapons makes this scarier than it would have been in the 1930s.

- The size of the credit overhang is much larger. The gold standard, for all of its faults in extending the distress in the 1929-33 period, kept a lid on the growth of credit. Today’s system has no natural limit to credit growth. Credit-market exposures today exceed GDP – in the United States by 50 percent, estimates Liaquat, in the UK by four times, and in Iceland by eight times GDP.

- In the world’s second-largest economy, Japan, the stock market has fallen 81 percent from its peak at the end of 1989. This 20-year decline raises questions about how quickly the world's current mess can be cleaned up.

Thursday, March 5, 2009

BLS | Higher U.S. Unit Labor Costs

March 5, 2009–Here, and I thought the inflation dragon was reliably on vacation as the Great Recession reduces demand for goods and services, but unit-cost (cost-push) inflation seems to have returned in the fourth quarter of 2008.

The BLS announced today revised figures for the fourth quarter of 2008 that show labor productivity declined 0.4 percent from the previous quarter in the overall nonfarm business sector, as output fell faster than hours. Unit labor costs increased 5.7 percent over the prior quarter at a seasonally adjusted annual rate.

The decline in productivity was greatest in the manufacturing sector, where productivity (output per hour) fell 4.0 percent, a downward revision (from -3.0 percent) of one percentage point from numbers previously announced on February 5. Output dropped 17.7 percent, and hours fell 14.2 percent. The declines were all the largest since the series began in second-quarter 1987. Unit labor costs increased 14.7 percent.

Within manufacturing, reduction in hours exceeded reduction in output in nondurable manufacturing.

But reduction in hours was less than reduction in output in the case of durables. In the durable goods manufacturing sector, productivity dropped 14.8 percent, as output per hour fell 26.9 percent and hours declined 14.2 percent. (See Table B.) The decreases in output and output per hour were the biggest since the series began in second-quarter of 1987.

Fourth-quarter 2008 output per hour fell relative to the same quarter in 2007, the first negative figure in the chart going back to 2001. The unit-cost increase is also higher than any other quarter on the chart. (See Charts 3 and 4.)

The loss of productivity would not surprise Harold Cole, Lee Ohanian and Ron Leung, who concluded (2005) that monetary shocks only account for one-third of the wouldwide loss of output in the Great Depression and that lowered productivity shocks accounted for two-thirds of the loss.

It’s not surprising that durable manufacturing would be showing a decline in productivity at a time when the future of the U.S. auto industry and other industries is in doubt. Imagine being an auto worker in this environment. Prescriptions for antidepressants have increased 15 percent during the last year even though marketing for them has fallen. There isn't much argument against the idea that personal depression reduces productivity. But higher unit labor costs won't help U.S. manufactures compete at home or overseas.

Friday, February 27, 2009

NYC TAX | DOES "Amnesty" Work?

Feb. 27, 2009–The Daily News has been running a series of stories showing more than $2 billion in various fines and taxes owed to the City of New York by scofflaws. Their reporter Erin Einhorn today writes that the City Comptroller has sent a letter to the Mayor calling for a tax amnesty.

A tax amnesty works like this: The tax collection agency announces a window of opportunity during which taxpayers owing money from prior years may voluntarily pay up. During this window, the taxpayers are assured they won't have to pay penalties or interest.

Amnesties have worked in the past. People whose consciences were bothering them, or were afraid of being caught some day, chose the amnesty window to come clean. In 1985 a New Yorker sent in a check for $2.5 million to cover unpaid taxes. NY City collected $84 million from an FY 2004 amnesty; NY State collected $22 million from an amnesty the year before.

Mayoral spokesman Marc LaVogna advises that the Finance Department already has an amnesty program, but I could find no details on the site or using Google.

Is a tax amnesty a good idea? I had to look into this while I was working for the NY City Comptroller  as chief economist in 1992-2006. Here's what I think:

1. Evidence from NYC's experience with payments for trips and falls suggests it's always a good idea to settle early and reasonably to avoid costly administrative expenses. So Speaker Quinn's idea of negotiating away some fines in return for early payment makes sense. But this is a case-by-case concept rather than a blanket amnesty.

2. Specifically, scofflaws outed in the Daily News should not be covered by a blanket amnesty. The jig is up for them. Delinquents already in the crosshairs of the Finance Department should perhaps qualify for individual concessions to speed up payment but not for a general one.

3. Amnesties offered frequently yield decreasing returns. Having had one in 2004, it may be too soon for the City to have another one. The City's current need for revenue, its potential increase in revenue and reduction in staff time, should be weighed against the loss of penalties and interest.

4. Amnesties have been known to be counterproductive, causing a reduction in compliance. Offers of amnesty should always be accompanied by an announced commitment to a higher level of enforcement after the amnesty window closes. Otherwise frequent amnesties create the danger of "moral hazard", perversely increasing the number of scofflaws. Fewer taxpayers might pay on time if they can count on there being frequent amnesties from penalties and interest.

Tuesday, February 24, 2009

BLOOMBERG | Cloning Himself

Nearly 30 years ago, Mayor Michael Bloomberg left Salomon Brothers (it was the recession of 1981-82), and he transformed his $10 million severance check and his Salomon shares into a giant company with more than 9,000 employees concentrated in the New York City area.

He had a hunch he could compete with the Reuters terminals and he was right.

Now he wants to clone himself so that in 30 years other people can look back and say: "My giant company got started in New York during the Decession (Repression?) of 2008-2010."

His new idea is one I hoped the Mayor would come round to. I said so last October in an Op Ed in City Hall News:
Today, the city has a once-in-a-generation opportunity to harness the energy of Wall Street entrepreneurs bursting with ideas as grand as Bloomberg's was in 1981, but who need partners to make their ideas a reality. Layoffs from the downsizing of Wall Street create a unique opportunity for talented displaced workers to start or partner in new businesses or social ventures. The displacement could help advance the Mayor's PlaNYC 2030 agenda by encouraging green entrepreneurs--profit-oriented or nonprofit, like Solar One and GreenEdge NYC--to make the Big Apple into the Green Apple.
When I wrote this less than five months ago, the latest estimate from Albany of the likely loss of New York's financial services jobs was 40,000. The estimate now is 65,000.

Mayor Bloomberg doesn’t pretend his plan will restore all 65,000 jobs. But his “guess” is that the small businesses could create 25,000 jobs. Last week a NY Times story by Patrick McGeehan describes the Mayor’s new plan, which is to
invest $45 million in government money to retrain investment bankers, traders and others who have lost jobs on Wall Street, as well as provide seed capital and office space for new businesses those laid-off bankers might create. The plan is intended to stem a potential exodus of banking professionals from the city during the restructuring of the financial services industry, which has been the city’s economic engine for decades, and to speed the industry’s recovery, which will take at least several years, officials said. Mr. Bloomberg recounted how he created his company in a rented 10-foot-by-10-foot room. He received no help from the city, but he said that was no reason not to help other entrepreneurs now.
The most tangible aspect of the plan is the creation of new incubators, one of them at 160 Varick Street, where he announced his new plan. The Varick Street building
will house an incubator for start-up companies that might employ laid-off professionals. Trinity Real Estate donated the space for three years and the Polytechnic Institute of New York University will select the entrepreneurs who will occupy the space, beginning in April. A second business incubator is scheduled to open in Lower Manhattan later in the year, said Seth W. Pinsky, the president of the city’s Economic Development Corporation. The agency plans to put $3 million into funds to make small investments in start-up companies, Mr. Pinsky said. He said that he hoped to attract twice as much money from private investors and that $9 million would be enough to help start hundreds of new businesses.
I spent the first half year after retiring from the Comptroller's Office in a business incubator in Manhattan and I have recently written about another one, Green Spaces in Brooklyn, as “Green Edge 14”. A report I worked on for the NYC Comptroller on the software industry in 1999 concluded that NYC needed more well-conceived incubators.

Successful incubators such as those that spawned the successes of Route 128 and Silicon Valley require energy from several sources. The MIT-Stanford model is based on a three-way fusion of energy from business entrepreneurs, government money and leadership, and university knowledge. Incubators in New York City that have petered out have usually lacked strong enough government support or university involvement.

My friend Professor Henry Etzkowitz calls the fusion of energy from the three sources in a well-functioning incubator the "Triple Helix" of innovation. If we are looking to clone financial entrepreneurs, it’s hard to think of a better DNA to work with than the Mayor’s.

Monday, February 23, 2009

DEPRESSION | Was the Fed the Cause? Or Property Speculation?

Friedman and Schwartz,
Monetary History of
 the U.S., 1963.
February 23, 2009–In the 1950s, the cause of the Great Depression was attributed simply to 1920s over-buying of real estate, with Florida as the poster state.

Subsequently, monetarist economists have put the blame on blunders by the Federal Reserve System, which was adrift after the death in 1928 of its able New York Bank President, Benjamin Strong.

Milton Friedman and Anna Schwartz demonstrated that the Fed was selling government securities instead of the more logical counter-deflationary action of buying them.

The Fed was therefore said to have taken liquidity out of the financial system and to have kept interest rates too high for recovery in the 1930s.

Making the Fed the culprit has contributed to a complacent feeling that the Fed knows so much now that the Depression couldn't happen again. The problems of the Japanese financial system since 1990 have been brushed off (e.g., by former Fed Governor Larry Meyer) as indicators that the Japanese response to a downturn was just too slow and too timid.

Polly Cleveland has recently reasserted the older version of the story, namely that the Depression was primarily a reaction to the 1920's real estate bubble. It began with the production of cars in 1899, which grew exponentially (with just a two-year interruption for World War I) until a peak of 4 million cars in 1929.
The auto suddenly opened up vast suburban and rural areas to housing. Developers—legitimate and bogus—leapt at the opportunity. Banks jumped in too, creating so-called "shoestring mortgages", effectively allowing property purchases on margin. Within a few years, tens of thousands of acres around major cities had been subdivided and sold. In rural areas, developers bought up farms, dug a pond, built a "clubhouse" and sold cheap "vacation" lots. As reported in Homer Hoyt's classic One Hundred Years of Land Values in Chicago, from 1918 to 1926, Chicago’s population increased 35 percent and land values rose 150 percent, or about 12 percent a year.
Land values tapered off in 1926, then fell. After 1929, home construction and car production collapsed. In Chicago, by 1933 land values had fallen some 70 percent overall; peripheral areas fell even more. U.S. auto production did not regain the 4 million level until 1949. Housing production did not pass the 1926 peak until 1950. Cleveland continues:
Around Detroit, more than 95 percent of recorded lots were vacant as of 1938. Nationally, the number of vacant lots rose to 20-30 million, compared with about 30 million occupied housing units. According to economic historian Alex Field, the barren subdivisions ringing the cities hindered the recovery of construction: Missing titles of defaulted owners and poor physical layout created de facto brownfields.

The real estate bubble helped set off and then worsen the Depression. Collapsing land values left people suddenly much poorer, so they cut spending. They also defaulted on mortgages, sticking the banks with "toxic" assets: liens on near-worthless property. The struggling banks in turn cut off lending even to good customers. Bank runs—panicky depositors withdrawing cash—further crippled the banking system.
Cleveland compares the innovation of the automobile with the innovation of collateralized debt obligations. Both started off innocently enough (securitization of housing debt was a good idea when properly monitored), but ended up setting off destructive real estate bubbles.

What we have found out is that the downside of the business cycle is not necessarily more under control than it was in the 1930s.

Saturday, February 21, 2009

GAS PRICES | Why Rising While Crude Falls?

Feb. 21, 2009–I was wondering why gas prices have not fallen in line with the drop in the price of crude oil. It's a deepening global recession. Demand is dropping continuously, and crude oil prices have behaved as we expected. Why haven't retail prices dropped correspondingly? Instead, they have been rising. Is this perverse situation going to continue?

To answer the last question first, the Oil Price Information Service says that a disconnect between crude prices and gasoline prices will continue well into this year, with an average price of gas at the pump rising to $2.50 a gallon by early Spring. Prices are not expected to get back to the $4 per gallon level--at least not soon--but don't expect the price of gas to follow the decline in crude oil prices.

What's going on here? Price-gouging? An answer has been provided by the HEAT Zone blog on February 16, 2009 and I pass it on.

1. Refining activity has been cut back

Demand for gasoline in the U.S. began to drop at the end of 2008, as penny-pinching Americans drove less. Plummeting demand for gasoline, usually the most profitable petroleum product, led to refiners actually losing money as the wholesale price of crude purchased to manufacture gasoline actually cost more than the wholesale gasoline refiners were selling. When raw materials used to make a product cost more than that product, producers lose money. Wanting to minimize their losses, refiners cut back on gasoline production substantially, putting activity levels at their lowest point in 17 years, according to the Energy Information Administration. This supply reduction has succeeded in driving prices up 22 percent since December 30, 2008.
2. Different crude prices, different delivery systems
Oil prices are commonly reported as the price of West Texas International crude oil sold on the NYMEX (NY Mercantile Exchange). West Texas is a high quality crude that in the past has drawn a higher price than crude from the Middle East or Latin America. However, plummeting demand for petroleum products worldwide means huge supplies of West Texas oil are available, pushing the price of West Texas crude below other crude oils from around the world (such as North Sea Brent crude from the UK and light, sweet crude from Saudi Arabia). Because international crude has usually been cheaper than West Texas crude, American refineries are set up to receive crude by tanker and no domestic transport systems exist. Therefore refineries can’t easily switch to West Texas crude while it’s cheaper.
So now you know why gas prices at the pump are rising even though the price of crude oil we produce in West Texas is falling.

Tuesday, February 17, 2009

POST-2008 | Shift to Thrift

One of the joys of being interviewed in the mainstream media is you hear from friends with wise or witty reactions. I got a nice note from Dick Roberts about the NY Times quoting me in the Economists’ Forecast story yesterday:
Delighted that the Times saw fit to consult you. The photo adds authenticity.
Dick wrote a response to my somewhat bearish perspective on New York City. He could also have been responding to Ann Medlock's salute to the coming return to fashion of the forgotten virtue of thrift. After all, the only 2008 winners among Dow stocks are the two retailers, Wal-Mart and McDonalds, that cater to thrifty consumers.

Dick, who is my frequent summertime tennis partner, provides a warning about the excesses of thrift:
Since most of the issues confronting us have their analogy in tennis, consider the consequences of players, who feeling poor, play a few extra sets with a can of balls they would have discarded in more opulent times.
A seemingly innocuous bit of domestic thrift could have, alas, serious consequences:
Since the balls have less bounce, the players stretch too far and run too fast, leading to injuries, thereby imposing additional costs on insurers, Medicare, and personal savings. Result: diminished funds available to purchase consumer goods. Result: retarded growth in the US economy, reduction of imports. Result: acceleration of recessions in Asia, Europe, third world. Result: social unrest in Mideast, unemployment in China, possible regime changes in unstable countries. All for the want of a horseshoe nail. What can you and I and our spouses do to reverse this trend?
Dick's warnings are a stretch but I actually worked on a study of this kind at the NYC Comptroller's Office in 1995, on the "Net Loss" from some budget cuts. The study is likely to get dusted off by agencies facing cuts because of looming gaps in state and city budgets. Thank you Dick, for reminding me to flag the report!

Monday, February 16, 2009

U.S. SECURITY | Dennis Blair on Top Concerns

Feb. 16, 2009–Dennis Blair, Obama's director of national intelligence, told the Senate Intelligence Committee on Friday that based on reports from the nation's 16 intelligence agencies, the global recession is now the country's top security concern. Unrest overseas, he says, would be a threat worse than terrorism.

I interviewed Jim Burke of CBER, which tracks what institutional investors are doing. I have posted his comments on Huffington Post here.

Friday, February 13, 2009

NYC | Quinn's Fiscal Proposals

Speaker Christine Quinn is attempting to help solve NYC's fiscal problems by raising the rate of taxation of NYC's personal income tax (PIT) on incomes above $297,000, to 4.25 percent (from 3.65 percent), above $532,000 to 4.45 percent and above $1.2 million to 4.65 percent (i.e., a full percentage point increase). The current NY State top rate is 6.85 percent and this is also being considered for an increase.

The PIT surtax is estimated to raise $1 billion and I could be convinced that under current conditions the increase is fair and the brackets well chosen, because:
- NYC has to balance its budget. There are no easy solutions. Those who are high income earners are better able to weather the storm.
- Back in the early days of the Clinton Administration, New Yorkers earning more thsn $200,000 got hit with a surcharge. There was little complaint (New Yorkers voted for him with lop-sided majorities) and the economy recovered well from the recession that hit its lowest point in 1992.
- Anyone in the bracket above $297,000 knows that taxes paid to NYC are deductible from taxable federal income. So the tax is shared with Uncle Sam.
- It's very hard to find a tax that doesn't hurt NYC's competitive situation (the property tax, which is the best of the taxes to raise for competitive reasons, has already been increased), but at least high income earners know that NYC is a good business partner and is a good place to live.
- My friend the late Karen Gerard, former deputy mayor for economic development, once said that after her retirement from the city she worked out a way to save a Wall Street firm millions of dollars by moving to New Jersey. She expected the firm to move. Instead, its reaction was that he savings was "chump change". For many individuals, it would take more than a 1 percentage point increase in the NYC income tax to persuade them to move out of NYC.
- The only tax that doesn't affect the competitive situation of NYC is a tax on land.

On the other hand:
- There would be a competitive effect relative to Connecticut or New Jersey or upstate.
- The top bracket will be high for a city tax. Back in May 2000, when I was Chief Economist in the Office of the NYC Comptroller, we reported a top rate of 3.9 percent, the highest PIT rate for any city that also had a state PIT. Washington, DC had a PIT rate of 9 percent for incomes above $20,000 - but it has no state PIT.
- An increase in the NYC's income tax would have to be approved by the state legislature. Albany has a much bigger budget gap to close than NYC and doesn't have the property tax to fall back on.
- The NYC increase would be on top of whatever increases the state comes up with. The Daily News on Feb. 5 reported that the number of millionaires in New York appears to have dropped by 10 percent, from 48,984 people in 2008 to 44,165 in 2009. The lower Wall Street bonuses would account for much of the change. One proposal would raise the state income tax above the current 6.85 percent for those making $250,000 and above. Others would start at $500,000 or $1 million.
- Gov. Paterson said the last time a temporary tax was approved on the wealthy, in 2003, New York was coming out of a recession. "In contrast, at this point we have not found the floor of this budget deficit, and millionaires - however many of them are still left - can't pay a $48 billion deficit over three years."
- Assembly Speaker Sheldon Silver said there is strong support for hiking taxes on the wealthy, which could raise at least $1 billion. A state surcharge of 1 percentage point on top of Speaker Quinn's percentage point would bring top combined state-city PIT rates to 12.5 percent.
- A fairness issue can be raised based on what percentage of PIT are paid by what percentage of taxpayers. Back in 1997, only 5.5 percent of NYC's PIT filers had adjusted gross incomes (AGIs) of more than $100,000. Yet they paid 57 percent of the PIT.
- A NYC PIT surcharge will be paid mainly by Manhattan residents. In 1997, Manhattan residents accounted for fewer than one-fourth of resident PIT filers, but half of AGIs and 57 percent of the NYC resident PIT tax liability.
- Nonresidents continue to get off lightly. They earned in 1997 on average twice the incomes of NYC residents, and accounted for 37 percent of the earnings of NYC workers, yet they paid only 7 percent of the PIT. Since then, the commuter tax has been eliminated.

Speaker Quinn has also assembled four proposals to help small businesses: Streamlining the permit and licensing process, waiving for 12 months permit and license fees and developing neighborhood marketing campaigns, requiring city agencies to review the effects of new regulations affecting small businesses, and offering commercial kitchen space “at a reasonable fee” to 60 start-up food manufacturers.

Three other proposals are designed to improve municipal efficiency: Merging city agencies with similar or overlapping functions, consolidating the Board of Education’s Retirement System into the general city pension system, reducing “unnecessary administration costs”, and reducing spending on municipal recruitment programs that currently cost the city $30 million a year.

Two proposals relate to R&D and training in the medical and biotech areas: Creating an annual four-year tax credit of up to $250,000 for research and development, facilities and staff training in the area of biotech, and training more nurses by linking experienced nurses to health-care-education programs at the City University of New York.

The remaining four proposals don't fit in any of the above areas: Purchasing the .nyc domain name for New York City businesses, organizations and residents; raising penalties for those who commit gang initiation crimes; creating a one-time amnesty program for those with outstanding violations to pay portions of fines; and improving the referrals of New Yorkers at risk of losing unemployment benefits to public programs like food stamps or Medicaid.

None of Speaker Quinn's smaller proposals would have anything like the fiscal impact of the surtax on personal incomes.

NYC and NY State Stimulus Details

NY Gov. David Paterson and Sen. Charles E. Schumer (D-NY) held a conference call about the NY State share of the American Recovery and Reinvestment Act aka the stimulus package. According to the NY Times, the anticipated aid will bring more than $21 billion into the state, would close much of the city’s $4 billion budget gap and would significantly narrow the state’s $14 billion deficit. But Gov. Paterson warned that the state deficit was widening by the day.

Details that follow are abbreviated from Sen. Schumer’s website.
By some estimates, the package will create 215,000 new jobs in New York alone, while preventing layoffs of thousands more. "This is one of the first bills where New York gets more back from the federal government than we have put in," said Schumer.

$12.6 billion boost in Federal Medical Assistance Percentage (FMAP) for New York over the next nine quarters. Currently, Medicaid is funded using a formula that determines how much the federal government contributes and how much the state is obligated to pay for Medicaid services. In New York, the federal government covers just 50 percent of Medicaid costs. New York is one of eleven states that divide the remaining bill between the state and the counties, putting a massive burden on county budgets. As a result of this, Upstate New York counties expect to pay $1.580 billion in Medicaid expenses this year. Because New York counties are faced with such a large share of Medicaid expenses, a portion of the FMAP boost for New York would go directly to the counties. So of the $12.6 billion, $8.6 billion will go to the state, $2.8 billion to New York City, $929 million to counties in Upstate New York and $262 million to Long Island.


$2.72 billion for the State Fiscal Stabilization Fund
to prevent massive cuts to education. New York spends approximately one-third of all tax revenue on education. All states, including New York, face massive budget deficits due to declines in the tax base. This funding will help make up that difference and prevent teacher lay-offs, cuts to education and property tax increases.

$800 million for Special Education Part B State Grants/IDEA to help educate individuals with disabilities. The federal government currently funds IDEA at only 17 percent. This money will significantly increase the federal share for special education funding.

$1 billion for Title I of No Child Left Behind. No Child Left Behind has been chronically underfunded, which means schools have had to live up to the demands of NCLB without the resources to do so. This funding is a much needed injection of funds to help schools meet the requirements of NCLB.


$87.5 million through the Drinking Water State Revolving Fund to address the backlog of drinking water infrastructure needs

$439.2 million through the Clean Water State Revolving Fund to address the backlog of clean water infrastructure needs

$1 billion in Highway Funding to be used on activities eligible under the Federal-aid Highway Program’s Surface Transportation Program and could also include rail and port infrastructure activities at the discretion of the states.

$1.3 billion in Mass Transit Funding for investments in mass transit.


A new tax credit for tuition of $2,500 - a significant improvement over current tax benefits to families with children in college. For families that receive some benefit now from either the HOPE credit or the tuition deduction, the maximum benefit per student will increase by 39 to 317 percent, depending on the family's circumstances. Additionally, tens of thousands of families that receive no tax benefit today will be eligible for a refundable credit of up to $1,000.


More than $403 million in weatherization funds for New York seniors and families to help reduce their sky-high home heating costs and create thousands of new jobs. This investment will save families up to $800 each on their utility bills and will create approximately 30,000 jobs in New York alone. It will also make New York more energy efficient and begin to reduce our dependence on volatile foreign sources of energy.


$96 million in COPS grants to hire and rehire local law enforcement officials. Schumer fought to make sure this funding was included in the bill so that local police departments could afford to maintain current staffing levels or hire new officers to combat rising crime.
$166.3 million in Byrne/JAG grants, which provide flexible funding to local police departments to support a variety of law enforcement efforts.


Up to $400 for individuals and $800 for married couples for the Making Work Pay Tax Credit, $250 to Social Security beneficiaries, SSI recipients, and disabled veterans.

$7,500 to $8,000 for the Improved Homebuyer Tax Credit for first-time homebuyers who purchase a home from the date of enactment through at least July, 2009. New homebuyers will no longer have to pay back the credit as required under current law. The exact amount of the credit is still under negotiation.
$2,500 for the College Tuition Tax Credit (an increase in the tax credit for higher education and allowing the credit for four full years)

3,142,000 NY taxpaers protected from the Alternative Minimum Tax, based on an estimate of the Congressional Research Service for 2009. Nationally, 26 million working families protected from the Alternative Minimum Tax, representing thousands of dollars in additional income taxes per family.


$4 billion nationally through the Public Housing Capital Fund to enable local public housing agencies to address a national $32 billion backlog in capital needs – especially those improving energy efficiency in aging developments – in this critical element of the nation’s affordable housing infrastructure. Of this amount, NYC will receive $390 million.

$251 million in HOME Funding to enable state and local government, in partnership with community-based organizations, to acquire, construct, and rehabilitate affordable housing and provide rental assistance to low-income families

$142.1 million through the Homelessness Prevention Fund to be used for prevention activities, which include: short or medium-term rental assistance, first and last month’s rental payment, or utility payments. As such, most of this funding will go directly into the economy of local communities, as the funds will be used to pay housing and other associated costs in the private market

$98 million for Community Development Block Grants, flexible grants that provide communities with resources to address a wide range of unique community development needs.

$51 million for the Neighborhood Stabilization Program, a program that provides funding for communities to redevelop demolished or vacant properties and purchase and rehabilitee foreclosed homes for resale. This grant program will endow Upstate New York communities with the funds needed to finally tackle the growing vacant housing problem that drives down property values and contributes to neighborhood blight.

Thursday, February 12, 2009

Blair Warns of Economic Unrest

Dennis Blair, Obama's director of national intelligence, told the Senate Intelligence Committee yesterday that the global recession could create unrest overseas that would be a threat worse than terrorism. He said:
“The longer it takes for the recovery to begin, the greater the likelihood of serious damage to U.S. strategic interests.
In other words, we can expect the Global Peace Index - the Dow-Jones of world peace - to take a hit. Just to start with the first name on the list, the most peaceful country in the world in mid-2008 was Iceland, which has seen all three of its major banks become insolvent.

Iceland replaced Norway as #1 in both the Global Peace Index and the UN's best-place-to-live table of 177 countries, based on health care, life expectancy, per-capita income and education.

With a population of barely 300,000, Iceland has an admired free health and education system. It buys the most books per capita and the most mobile telephones, and it has the highest proportion of working women in the world.

But Iceland's banking system has liabilities of more than $100 billion, a huge amount for a country with a GDP of $14 billion.

Iceland certainly over the long run qualifies as a peaceful country, since it gave up its armed forces 700 years ago.

But at the end of November, Iceland's citizens assembled to call for the government to resign, and at least five people were injured. The krona’s value was cut in half following a banking crisis that started in October. One-third of the population is at risk of losing their homes and savings.

Global Peace Index Rankings

The table below provides the 2008 GPI rankings for the 140 countries analysed in that year and the 121 countries analysed in 2007, as well as year-on-year comparison. Countries most at peace are ranked first. A lower score indicates a more peaceful country. You can click on a country to see the detail of its peace indicators and drivers.

Global Peace Index 2008
• Compare
• 2007
• 2008
New Zealand
Czech Republic
Hong Kong
South Korea
Costa Rica
United Arab Emirates
United Kingdom
Equatorial Guinea
Bosnia and Herzegovina
Burkina Faso
Dominican Republic
El Salvador
Papua New Guinea
United States of America
Trinidad and Tobago
Saudi Arabia
South Africa
Congo (Brazzaville)
Cote d'Ivoire
Sri Lanka
Democratic Republic of the Congo
North Korea
Central African Republic

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NAACP | Happy 100th Birthday (Updated July 7, 2016)

This illustration shows the veneration of Lincoln shown by those
celebrating the end of slavery in the United States.
Feb. 12, 2009–Today is the 200th birthday of Abraham Lincoln and also the 100th birthday of the NAACP.

Its founding was first scheduled for February 12, 1909, as a mark of respect for Lincoln.

For the same reason, this is considered the NAACP's birth date even though the meeting that actually created the organization was postponed to May 30, 1909.

Billed as a conference of the Niagara Movement, the meeting was held in New York City's Henry Street Settlement House.

The Founders of the NAACP

The 40 people in attendance called themselves at first the "National Negro Committee". Harvard Professor W. E. B. Du Bois helped organize the event and presided over it. One year later, at its second conference, the membership renamed themselves the National Association for the Advancement of Colored People.

The first officers, as reported by Mary White Ovington, were:
- National President, Moorfield Storey, Boston
- Chairman of the Executive Committee, William English Walling
- Treasurer, John E. Milholland and Disbursing Treasurer, Oswald Garrison Villard
- Executive Secretary, Frances Blascoer
- Director of Publicity and Research, Dr. W. E. B. DuBois.
John E. Milholland, the NAACP's first Treasurer, was a Presbyterian from New York City and upstate Lewis, NY. He was a Lincoln Republican, with pride in his party's having abolished slavery and championed votes for all men regardless of color at the end of the Civil War. Milholland continued to champion the rights of black Americans to his death in 1926, long after his Republican party had ceased to care–the last election in which Republicans campaigned more aggressively than Democrats for progressive ideas like human rights was 1912.

Milholland's daughter Inez (who married my mother's uncle Eugen Boissevain) followed in her father's footsteps. She insisted that a delegation from Howard University be allowed to march in the 1913 woman suffrage parade in Washington. She died in 1916 after exhausting weeks on a whistle-stop tour of the west, campaigning against President Woodrow Wilson for not supporting the right of women to vote.

At a memorial for Inez in 1924, her father complained publicly about the absence of black people on the program, which was put together by the National Woman's Party.

On the centennial of their founding, the NAACP called for equity in distribution of stimulus funds.

Monday, February 9, 2009

BRANDS | Life and Death of Multinationals

My friend Michael Phillips sent an email today expressing scepticism about the awesome power of the "big global companies". He argues that despots like Mao, Stalin, Castro, Chavez, Ho Chi Minh and Kim Jong-il are much more durable. He refers back to a list he says he was the first to post on the Internet– the top 100 global companies in 1960. He compares that list to the top global companies in 2008.
Only eleven companies are on both lists. Another only has the same name (AT&T is not the same continuous company) and two of the eleven are about to collapse (Ford, GM). Four from the 2008 list are already out of business (Citigroup, Bank of Scotland, Merrill Lynch and Volkswagen).
So, he says, we have more to fear from dictators than multinationals. Dictators have the power to use weapons that with proliferation are becoming more dangerous.
Of the top hundred global companies today, among these ferocious demonic monsters, only eleven will still exist when today's 20 year-olds are retiring. Big global corporations are best compared to orchids, delicate hot house plants. They come and go, mostly go. Fear of big global companies is not a rational fear.
Food for thought. We should be enlisting multinational corporations in the cause of nonproliferation and peace. Nuclear weapons in the hands of rogue states can't be good for most businesses.

Turkey's Economy - Action Needed Now

Having traveled to Istanbul three times in the last two years, I'm interested in how the Turkish economy is bearing up. I emailed a Pace University MBA graduate, Filiz Bakirhan, who was both a student of mine and an intern at the NYC Comptroller's Office, and now lives in Turkey. I asked her for an update on the economy.

She reports that Turkey is affected deeply, like so many other countries, by the financial crisis that stems from U.S. subprime mortgage problems beginning in 2007. She says:
By the third quarter of 2008, Turkey’s economy was seriously affected and the crisis is expected to worsen in 2009. Global production and trade has decreased sharply. Many sectors in Turkey with difficulty refinancing their short-term debts. Some companies have gone bankrupt even with strong sales. Credit problems have contributed to an increase in the unemployment rate to 10.9% in October 2008 from 9.7% in 2007. Consumers have decreased their spending because of the economic insecurity.
Apparently Turkey has been slower to take action than other countries. Turkey’s AKP (Justice and Development Party) has not introduced its own stimulus package, and faces local elections next month. Businesses are looking for tax incentives or tax reductions.
Payroll taxes are high and payroll tax cuts would lower the barriers to hiring workers from the unregistered economy. Businesses are also hoping the government will increase public spending to spur demand. Some also urge the government should restructure its tax sources to raise more revenue from taxes on land. In Turkey, many people are squatters and pay no taxes on land. But a series of Turkish governments have sought votes from squatters by giving them rights.
What has Turkey done so far? Filiz says it has taken one concrete action:
On January 15, the Turkish Central Bank cut its interest rate to 13% from 15%. Although the Turkish Lira has lost almost a quarter of its value in 2008, Turkish commentators think that it is presently secure.
In addition, the government has been negotiating with the IMF:
Turkey’s previous three-year $10 billion standby loan deal expired in May. A new agreement is expected to be for 18-24 months and includes financial support in the $20-25 billion range. Some economists believe that an IMF deal won’t be finalized until after the March elections and in any case won’t affect the situation greatly because the IMF money won’t be enough. But the new deal might boost confidence in the market and help the non-financial sectors recover their debts.
Is this enough? Filiz says no:
The AKP needs to give Turkey a stimulus package including tax reduction and public spending as well as a new IMF agreement, before next month’s elections.

Saturday, February 7, 2009

HUFFPOST | Editors Talk

Feb. 7, 2009–Behind HuffPost are lots of people, not just (surprise) Arianna Huffington. Four of them were on offer at the 92nd Street Y in Manhattan February 5.

The panel discussion is billed as giving the lowdown on "How they choose the stories that make the news" and "their insights into blogging, including what blogs they link to and why, what content gets blogs noticed, the best practices for community building and quick tips for making blogging more empowering, profitable and fun."

Roy Sekoff. My photo.
The MC is Editor Roy Sekoff, shown at left. With him are Senior News Editor Katharine Zaleski, Senior Blog Editor Colin Sterling and Columnist-Reporter Jason Linkins. If you’ve never clicked on the "About Us" button on HuffPost, here’s the editorial staff lineup (the business side is another world). The four speakers are shown in bold:
Co-Founder & Editor-in-Chief: Arianna Huffington
Chief Executive Officer: Betsy Morgan
Editor: Roy Sekoff
Political Editor: Thomas B. Edsall
Senior Editor: Willow Bay
Senior News Editor: Katharine Zaleski
Senior Blog Editor: Colin Sterling

National Editor: Nico Pitney; Senior Features Editor: Katherine Thomson
Senior Style Editor: Anya Strzemien; Media Editor: Danny Shea
Business/Green Editor: Dave Burdick; Living Editor: Verena von Pfetten;
World Editor: Hanna Ingber Win; Chicago Editor: Ben Goldberger;
Washington Editor at Large: Hilary Rosen; Night Editor: Marcus Baram
Associate News Editors: Nicholas Graham, Nicholas Sabloff
Associate Video Editor: Patrick Waldo
Associate Editor, Citizen Journalism: Matt Palevsky
Associate Blog Editors: David Flumenbaum, Katherine Goldstein, David Weiner, Whitney Snyder
Reporters: Ryan Grim, Jason Linkins, Sam Stein
Community Manager: Katie Saddlemire
Editor at Large: Nora Ephron
Roy has a challenge as MC. The crowd has struggled in from a dark, icy-cold, windy night. Roy is well tanned, obviously just flown in from the LA sun and zephyrs. He’s breezy himself and used to taking control of the house. However, his first couple of warmup jokes fall flat on a sullen audience of 100 or so earnest New Yorkers, God’s frozen people. My take is they resent he hasn’t been suffering with them the bitter NYC weather. Think: Jovial American journalist covering the 900th day of the Siege of Leningrad.

In fairness to audience members, they not only braved the cold but paid $27 plus round trip fares, in a deepening recession. Not even relatives got in free. Roy starts in about the blogger tone being “more personal than the typical news story, something you would write to a friend.” If they could have text-messaged him in real time it would have been: "Pls LA guy speed up."

Roy does step up the pace and we find out why he has a rep for very hard work on the nuts and bolts of the HuffPost operation. He's the Founding Editor, been with HuffPost since it opened in May 2005. Katharine Zaleski also, we find out, came on the same month. Roy came to HuffPost via Film School and a job with Michael Moore, where he honed his skills as a champion of the progressive POV. He was hired by Arianna before HuffPost opened. He speaks a lot about Arianna, how she gets the word out during her travels, how she serves as a sounding board, how she listens because she is interested in everything. Roy has a huge job serving as the cable-bridge between Arianna and her e-empire.

The panel is mightily impressed by the rapid growth of Twitter. Users can send only Tweets of fewer than 140 characters. Great time-saver for the reader. Except that maybe the number of Tweets will just rise. I do a Google search and find Twitter users exceed 200,000 per day, firing out 3 million Tweets – a mind-blowing average of 15 Tweets per Twit. It's like the invention of the machine gun. No one is safe any more.

Google search tells us global blogposts were 1.6 million in 2006 but have grown so fast that in 2008 Japan alone has that many. MySpace page views are 1.5 billion per day. Facebook is growing by 600,000 users per day. Stunning.

Katharine Zakeski. My photo.
Katharine Zaleski is News Editor and the most decorative of the four panelists. She is in the eye of the storm in HuffPost's NYC operations where the news is edited. She notes that almost all readers used to get to the site via the "front door" – the home page ( - but now 60 percent of readers get to HuffPost via links direct to a story from a search or Digg or a blogpost.

She says the nature of news coverage has been transformed by the Internet. Old model: News reporter looks for a scoop or a new angle, files story, goes to bed. People would get the news in the morning. Television shortened the lag. All-news radio shortened it some more. New model: Delays in reporting important news are down to minutes. The amount of related content that can be offered soon becomes gigantic. Katharine says her job is "to latch onto a breaking story and then stay with it" through the day or night. She works through the night when important stories are breaking. When news about Eliot Spitzer having meetings with a female in Washington, HuffPost for a while "owned" the story of the collateral damage to Ashley Alexander Dupree, by having more new information on Ashley’s music and career than anyone else.

Katharine waves off reports of antagonism between the main stream media and the blogsites. The two are complementary. A good major story on HuffPost, she says, is inclusive, with lots of links to the msm. Sure, HuffPost
depends on the newspapers. The papers also benefit by their content being promoted on the blogs. The great newspapers are using the Internet, adding online news sites with comment boxes, frequent updates and blogs. Same with television,
though she opines that CNN is just 10 percent dependent on the story, with 90 percent of the value in the production.

At question time, Katharine’s mother Caroline, sitting near HuffPost blogger Blake Fleetwood, asks a question anonymously. Katharine mercilessly outs her Mom. But Mom is unflappable. You can see where Katharine gets her poise.

Jason Linkins, Colin Sterling. My photo.
Jason Linkins is the third panelist. He writes "Eat the Press", and was rated one of the five funniest bloggers by Comedy Central. He says HuffPost has 3,000 bloggers. When the final numbers were in on election night, the TV commentators were saying goodbye to one another and their audiences. That's one concept, says Jason, that would never occur to a blogsite. The stories keep rolling in – Rod Blagojevich, Bernie Madoff, who knows what next? He says that the job of bloggers is to "kneecap people who screw up."

So far as "tone" goes, Jason says he got there by trial and error. He started out to be a marine biologist and swam his way into the new medium.

Colin Sterling, Senior Blog Editor, is the final speaker. He is introduced as Harry Potter and you can judge the likeness for yourself. He says he tries to make HuffPost authoritative by including links, and more Google-able by adding enough tags. Colin's most embarrassing moment, he says in answer to a question from the by-now engaged audience, was when he posted a skeptical view of global warming. He's a graduate of UCLA and was like Roy working for Arianna before HuffPost was created.

By the end of the evening, the crowd is happy. Frankly, they didn't get everything promised in the promotion, but who cares? They got $27 worth of information and some entertainment as a bonus. If they need more, they can buy the $15 book on sale in the lobby, The Huffington Post Complete Guide to Blogging. Now I'd dearly like to go to a panel featuring the business side of HuffPost, i.e., the rest of the masthead that keeps the brand afloat and valued last year in the $40-$200 million range.