Forever blowing bubbles, pretty bubbles in the air…

As you might have realized, one of my research fascinations is the exploration of bubbles in economics and finance. Well master of bubbles and 2007 housing crisis predictor himself, Robert Shiller, typed a simple yet excellent “future of bubbles” article – read it here.

Posted in Capitalism, Economic Theory, Finance, Macroeconomy, Microeconomics | Leave a comment

Detroit’s Doomsday

Cover of "Robocop"

Detroit: bankrupt, corrupt, with crime and unemployment rife. Was the plot of Robocop, now is reality.

Updates: Pictures of an apocalyptic Detroit; the bankruptcy declaration complete with slideshow presentation to creditors. 

Well Detroit couldn’t have really timed it better, declaring Chapter 9 Bankruptcy – the largest ever municipal bankruptcy filing in the US – the day after we talked about municipal debt.

Not like this is a surprise though. Back in March Michigan Governor Rick Snyder appointed renowned bankruptcy expert Kevyn Orr as the emergency manager of Detroit when it appeared Detroit was in imminent danger of defaulting on several upcoming bond and pension payments.

Since that time Kevyn Orr has been in talks with Detroit’s numerous creditors in an attempt to find some common ground with the municipal bond holders and the unions representing the city’s huge municipal employee pension obligations.

Today after Rick Snyder granted authorization for bankruptcy, Kevyn Orr filed the paperwork, which is already available online.

In the past few decades Detroit has hemorrhaged jobs and population as the historical manufacturing jobs moved overseas or to the right-to-work states in the South. In recent years Detroit’s unemployment rate has hovered around 15-16%, over double the national average. Similarly the number of properties with delinquent property taxes is absolutely stunning if viewed visually. Housing vacancy rates are so high in some areas, and the budget so restricted, that the city has actually turned off street lights and restricted policing to save money.

Perhaps worst of all, for decades the city failed to spend the necessary money to evolve itself and its workforce, and hence has been passed over. Eventually stagnation descends into decay. Although to be fair these investments are difficult to make when rent-seeking unions maintain a stranglehold on public policy, actively opposing the necessary innovations while simultaneously consuming an ever growing portion of the budget.

Detroit is a profound example of the growth of public employee remunerations outstripping the growth and hence tax revenue of their municipality. This forces the city to deficit spend in order to fulfill the unions’ unobtanium-plated pension obligations.

The result is a self-perpetuating cycle of debt; the city sells municipal bonds but then funds the interest payments on those bonds with sales of new municipal bonds, pays interest on those newer bonds by selling more bonds, etc., but each time the interest rates are higher. It’s equivalent to getting a new (higher interest) credit card in order to payoff other credit cards; eventually no one will lend you anymore money and you’ll still be in debt.

However unions are not the only ones to blame. Wall Street was kind enough to make huge losses for Detroit’s pension plans, though this moribund failure has not stopped bankers from still happily taking their extensive cut:

The debt sales cost Detroit $474 million, including underwriting expenses, bond-insurance premiums and fees for wrong-way bets on swaps, according to data compiled by Bloomberg. That almost equals the city’s 2013 budget for police and fire protection. The largest part is $350 million owed for derivatives meant to lower borrowing costs on variable-rate debt.

As a quick example: back in March of 2010 when Detroit’s outlook was rosier – the city sold 14 year maturing municipal bonds at an outrageous yield of 7.56%, double that of top rated municipal debt. Recall the rule of 72 – a 7.56% interest rate doubles in 10 years, hence financing at this rate over 14 years is a massive bill. You’d have to expect nothing short of a miracle in Detroit to expect that money would be repaid.

Currently if we tally up the numbers, municipal worker pensions are expected to lose 90% of their value, with an 81% loss for unsecured creditors and a 75% loss for secured creditors.

What’s the lesson to be learned here? Well there is a saying “debts that cannot be paid will not be paid,” the finance equivalent of economics’ caveat emptor

Lastly, here’s a good list of what to expect next in Detroit

Posted in Banksters, Finance, Labor Market, Microeconomics, Public Finance, Rent seeking | Leave a comment

Corporate Complexity

A friend found this very cool visualization tool you can use to see the global complexity of banking corporations.

Posted in Banksters, Finance | Leave a comment

Article Collection 07/16/2013

Just like the last one, a collection of [what nerds like myself find is] interesting stuff.

Macroeconomics

Greece, Italy, and otherwise Southern Europe are falling apart; nothing surprising here if you know your economics.

Calculated Risk does a 5 part series on Bonds, Banks and Sovereign Debt Risk, very good stuff.

The future of Japan: Brad DeLong’s take, Noahpinion’s opinion and Worthwhile’s piece, consensus opinion on default seems to be “likely.”

Skyscrapers and bubble correlation – in the past it’s been suggested skyscraper construction is a decent indicator of an oncoming financial crisis or recession. I’m skeptical, but it’s still an interesting theory.

Relationship of financial crises and wars – particularly the panic of 1907 and WWI.

Bank deposits over loans ratios hit new highs – not an encouraging sign.

Decent explanation of what a liquidity trap is and why we’re in one – something we spent quite some time on in Macro.

Microeconomics

Tragedy of the Commons? The rise of jellyfish swarms. (The dynamics at play can be explored in a game in java, these are called predator-prey models or Lotka-Volterra equations.)

Jodi from Economists-Do-It-With-Models (a great site) tackles a stupid article by Salon blaming Econ 101 for all of societies’ woes in a post accurately titled “Econ 101 myth-busting-busting and the dumbest thing I’ve read today.”

Politicians, their paychecks and a corruption index – I can hardly contain my glee.

Recall when I said “I don’t believe fracking companies are paying the true societal or environment cost of fracking, there is a negative externality here” well what do you think? Also check out this slideshow of our largest strip mines.

Bloomberg claims most rappers are lying about how much money they have – also Bloomberg does a terrible analysis of rap lyrics in “proving” their claim.

I misspoke when saying we subsidize Brazil’s sugar farmers, we actually subsidize their cotton farmers, along with our own, of course.

ACA: 74% of small businesses in survey say will “fire workers or cut hours”, and here’s a quick explanation as to why this is likely.

ACA: States and ACA healthcare exchange problems.

ACA: Labor Unions finally open an economics textbook, examine how price floors work, and get mad at Obama over the ACA making unions less competitive. Derp.

BART union’s 2,400 members strike, shuts down commutes of 400,000; here’s their deal.

Kansas school teachers choosing to quit big union, the $600 annual dues are too high.

Twinkies are back, and without the old ridiculous, dumb union rules (although those are mentioned in the article). 

Americans united in opposition to internet sales tax – not surprising, most Americans oppose any tax they’ll have to pay.

Technology and Jobs – Kenneth Rogoff on creative destruction.

Info on the number of Americans on food stamps, poverty and unemployment as less noticeable today as food stamps avoid the painful visual of the old 1930s bread lines – check out this infographic as well.

How the cost of Medicare procedures are determined – by a cartel of specialists.

Intellectual property laws (i.e. copyrights, patents, etc) can exacerbate inequality, what with things like patent trolls, Copyright Term Extension Act or the fact that the Happy-Birthday song is copyrighted?

Collusion case against Apple: Judge rules Apple colluded and set prices on ebooks.

Would you fire someone by text message? kthnxbai sry g2g lol 

Black babies cost less to adopt – this is one is very interesting. There is also another way to say this, “white babies made more expensive to adopt.” In essence they’re tinkering with the price to get as many children into homes as possible.

Alabama to lower school standards for students based on their race – apparently not realizing by lowering standards for a group of students, you will create separate and unequal degrees.

WSJ shows the results of some programs who charged students tuition based on their expected future earnings. Harrison Bergeron anyone?

Posted in Finance, Incentives, Labor, Labor Market, Macroeconomy, Microeconomics, Monopoly, Public Choice, Public Finance, Rent seeking, Resource Economics, Technology | Leave a comment

Booming Tear Gas Industry Continues To Lead Global Economic Recovery

View 0:19-0:47; from The Onion.

 

 

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Banking, rehypothecation and collateral shortages

First I’ll caution the reader that this is rather advanced stuff (I read through it half a dozen times before it clicked), but this is an absolutely excellent piece exploring the ongoing global macroeconomic and macro-financial banking problems, the issues of rehypothecation and the associated shadow banking system, and the lack of high quality collateral:

The main point is that while quantitative easing does expand the money supply, the trade off of safe assets for cash is at the expense of quality collateral; in other words as the money supply expands, the supply of quality collateral contracts. The details are more nebulous, but important as we think about what the future will look like.

The Financial Times and John Aziz have gotten in on the action, and their presentations are much more novice-friendly than the ZH article above:

Tthe International Monetary Fund (IMF working paper hosted by Barry Ritholtz here) and the Bank of International Settlements have openly discussed the collateral and rehypothecation problems summarized by ZH above. However ZH does a great job in compiling that stuff for us:

Posted in Advanced, Banksters, Capital, Capitalism, Finance, Macroeconomy, Public Finance, Rent seeking | Leave a comment

Article Collection 06/22/13

So I realized I have way too many articles to address each individually its own post, yet I’d also like to keep the links around so I can revisit the best or most applicable ones later. Hence I’ll periodically post categorized anthologies of good articles I’ve found in the last few weeks alongside fuller topical posts. If I’ve linked an article, I liked it and believe it’s worth reading if you’re interested.

Macroeconomics – Contextually this past week has been horrendous in global markets for stocks and US treasury yields exploded as markets realized QE is not infinite, free Central Bank money will end eventually, China is faltering, Abenomics is “meh” and the Eurozone is still completely, I’d even say irreparably, broken.

Why Are Markets Freaking About the Fed? – A quickie on Fed policy and the worry of moving from open ended asset purchases to tapering.

This is why global markets are freaking out – More down-to-earth analysis than the one above.

Financial Sector Thinks It’s About Ready To Ruin World Again – Beautiful piece from The Onion.

Faltering Economy in China Dims Job Prospects for Graduates – If you thought US college grads were having a tough time, China’s got us beat. (Then again Chinese kids probably don’t graduate with double digit debt…)

The Economics of Happiness – Macro but also Micro in the sense that GDP is a horrid measurement and alternatives or revisions, although less practical and more cumbersome, are always worthy of consideration.

Kyle Bass at the Strategic Investment Conference 2013 – A talk on Japan by hedge fund manager Kyle Bass (I’ve linked to him before on the topic). Excellent commentary if you’re a fan of the current global macroeconomic implications on financial economics, note you’ll need some financial literacy for this talk to make sense. (ZH has a concise overview here if you need to read along.)

250 px

(Photo credit: Wikipedia)

Microeconomics – No universal theme, but a variety of interesting micro issues.

Chuck E. Cheese’s Announces New Lower Prices, But The Restaurants Will Be Dirtier – From The Onion. Brilliant.

Starboard Value calls for Smithfield Foods break-up – The Financial Times writes about events close-to-home for Smithfield Foods, at least 122 layoffs already in Portsmouth as a result.

Your 4th Of July BBQ Will Cost A Whole Lot More This Year – Micro in that last years drought is part of the reason, macro in that gasoline is part of the reason; either way this is pretty significant inflation in food prices.

America’s Worst Charities – Shocking really, I had no idea it was this bad. If you’re looking for a scam that is profitable yet legal, solicit for charities. But as an aside this does raise an interesting point: do you only donate for the benefit, e.g. tax write-offs, and not out of altruism, or do you donate altruistically in the pure hope that others will be helped?

How American Health Care Killed My Father – long winded but intriguing article circa 2009; just reading the first page would likely be sufficient to give you a new or abridged perspective on US healthcare.

Blaming Capitalism for Corporatism – Excellent piece that addresses the elephant in the room: state sponsored corporatism and its deleterious effects on everyone else. Only fools confuse corporatism and capitalism.

Profits Without Production – A second equally good look at the problems of corporatism, although focusing more on rent-seeking.

Men are disappearing from the workforce – Shows some interesting statistics, although fails to mention that women are also disappearing! Both the percentage of women working and the total labor force participation rate have been falling since the 2008 crisis  

Sons of Rahm Emanuel’s top union ally John Coli also rise – Chicago’s Teamsters are the definition of corruption, who knew?

Los Angeles Labor Unions Play Politics Like It’s Monopoly – LA’s (and CA’s) unions are spending money they don’t have against members’ wishes in a manner heavily reflective of corruption, who knew?

How Bureaucrats Captured Government – A brief history of bureaucracy and government employees in America – with a focus on incentives.

Op-Ed on Immigration – The mustachioed Peter Kirsanow has a well reasoned piece on the current immigration reform debate and the effect of amnesty on American low-skilled workers. I don’t necessarily agree with him on the long term implications but I’ve included it because (1) this is a major policy issue that needs to be addressed sooner or later, (2) Kirsanow has the probable short term effects right and (3) I’ll always find an excuse to link to a guy with an awesome mustache (seriously).

The Costs and Benefits of Recycling and Recycling Policy – A quick and reasonable read on the opportunity costs imposed by making recycling a legal enforcement issue rather than voluntary. A second article delves into more of the philosophy of this decision, but both are great reads.

Politics, etc

The Secret War – Wired’s analysis on the head of the NSA General Keith Alexander and America’s preparations for cyberwar. This article is a good summary of the more worrying bits.

On the Espionage Act charges against Edward Snowden – Glenn Greenwald is an excellent writer and journalist and while this is out of the normal sphere of economics, government repression of dissent and whistle-blowing certainly does perpetuate internal inefficiencies in that it condones them.

Posted in Macroeconomy, Microeconomics | Leave a comment