Wednesday, October 22, 2014

BEYOND IRONY: Fed Chairman causes the very inequality she bemoans


Chairman Yellen complains about inequality, yet seems oblivious to her own role in exacerbating it.  Quantititative easing makes money plentiful and cheap; and this has benefitted those who can access the money in extraordinary ways.  Let me count a few of the beneficiaries:

  • The big Wall Street banks, .. which can borrow directly from the Fed, essentially free. Because banks are in the business of making money from money, they use the Fed’s money to make more money by trading with it, investing it in government debt and pocketing the profit or by lending it out at wide spreads. ...No other business on the face of the earth gets its raw material so cheaply. No wonder bank profits have soared.
  • Wall Street’s traders and investment bankers...know – and have known for years, thanks to the Fed’s telegraphing of its quantitative easing program – that the Fed will be a continuing buyer of their risky securities at (ever-rising) market prices. Since the onset of Mr. Bernanke and Ms. Yellen’s policy, the Fed’s balance sheet has grown to $4.5 trillion, from around $800 billion before the crisis. That’s a whole lot of securities bought at high, profitable prices and paid directly to Wall Street traders. The Fed might as well have been paying the traders’ seven-figure bonuses directly.
  • The Fed’s low-interest rate policies have also been a bonanza for Wall Street’s investment bankers – and their bonuses — as companies around the world race to raise debt capital at low rates. 
  • Private equity firms ... borrow money cheaply and leverage the billions of dollars in equity – said to be $3.5 trillion these days — to buy and sell companies. The buyout firms, and of course Wall Street, also get fees from all this deal activity. 

Meanwhile the little guys on fixed income get crushed by low interest rates:
...because they can’t get a return without taking an inordinate amount of risk, by either investing in the stock market, ...,or by “reaching for yield” by investing in risky debt securities that are increasingly overpriced. Either way, Ms. Yellen’s policies are crushing these 62 million American households. 

Monday, October 20, 2014

REPOST: Über succeeds where taxis fail

Saturday, April 14, 2012


Über succeeds where taxis fail

Almost all the everyday complaints about cabs trace back to bad regulation
Drivers won’t take you to the outer reaches of your metropolitan area? The regulated fares won’t let them charge you more to recover the cost of dead-heading back without a return customer. Cabs are poorly maintained? Blame restricted competition, and the inability to charge for better quality. Cabbies drive like maniacs? With high fixed costs for cars and gas, and no way to increase their earnings except by finding another fare, is it any wonder that they try to get from place to place as fast as possible?

Über is a better way to move assets to higher valued uses

Uber makes its money at least in part by alleviating these inefficiencies. In most places, “black car” or livery services are regulated differently, and more lightly, than taxis are. Though Uber has good reason not to say so, it’s basically turning livery services into cabs. The company is one step further removed from regulation, because it doesn’t run cars itself; it funnels passengers to existing services. “We’re sort of like an efficient lead-generation system for limo companies,” says Kalanick, “but with math involved.”

Predictably, the old technology asks the government to regulate the new technology
The commission has also launched a public fight against Uber. In January, Chairman Ron Linton declared that the service was “operating illegally” and personally led a “sting” operation, impounding the car of the unlucky driver who had dropped him off at the Mayflower hotel in front of a waiting reporter. Linton followed up with an op-ed in The Washington Post, insisting that Uber was unlawfully charging for time and distance. Uber’s defenders pointed out that D.C. limo regulations define “sedans” as “for-hire” cars that charge for service “on the basis of time and mileage.” Linton now says that

HT: Brock

Friday, October 17, 2014

What happens when Apple makes it easy to switch between carriers?

Price competition should become fierce.

A preinstalled data-only SIM card has been inserted into the $499 iPad Air 2, and allows users to change carriers at the tap of a finger. It's available in the U.S. on AT&T (NYSE:T), Sprint(NYSE:S) and T Mobile (TMUS), and in the U.K. on EE. Consumers can buy short-term data plans and can switch between the carriers to find the best deal.

Wednesday, October 15, 2014

Should Tennessee fund venture capital?

Not unless they can do it better than the millions of people who already do this for a living.

Equally direct, when asked about TNInvestco 2.0, Vanderbilt University economist Luke Froeb, who is on the faculty of the Owen Graduate School of Management, said venture investment such as that discussed here should be left to the marketplace, without State involvement. He then pointed us, once again, to his earlier comments regarding what he has termed TNInvestco's "perverse incentives" for fund managers.

In fact, if they had to do it, don't you think they should have mimicked the way that investors fund VC?  Here is a REPOST on the peculiar way that they chose to do it last time.

Monday, September 10, 2012


Perverse incentives in TN state funded investment

The state is auditing the its venture capital fund, which awards $20 Million ($25 M in future tax credits are worth about $20 M today), and then asks fund managers to invest  in early stage ventures.  After the investment pays out, the state and the managers split whatever remains.

Proponents of the program say it was an innovative attempt to steer venture capital toward economic development priorities like health care, bioscience, music and other sectors. As the Business Journal reports today, some Republicans are questioning the program’s job creation so far and want to evaluate other aspects of its financial performance.


Any audit should first understand the incentives.  To do this, lets run through some scenarios.  This is what is called a "sensitivity analysis."

 Compare the (very approximate) terms of a typical Venture Capitalist (VC) to those of TNInvestco under the following scenarios:
  • Scenario A:  Good Scenario (Invest $20 million, sell investments for $50 million)
    • TNinvestco gets $25 million, State gets $25 million
    • Typical VC gets $6 million, investor gets $44 million

  • Scenario B:  Break-even Scenario (Invest $20 million, sell investments for $20 million)
    • TNInvestco gets $10 million, State gets $10 million
    • Typical VC gets zilch, investor gets $20 million

  • Scenario C:  Worse-case Scenario (Invest $20 million, sell investments for $10 million)
    •  TNInvestco gets $5 million, State gets $5 million
    • Typical VC gets zilch, investor gets $10 million
The key thing to note is that the typical VC is makes nothing (other than management fees) unless a fund makes money for investors.  This serves to align the fund manager's incentives with the profitability goals of the fund investors.

In contrast, a TNInvestco fund manager makes a substantial amount unless the fund is a total failure.  

Bottom line, TNInvestco creates incentives for the managers to not lose money, as opposed to the high level of risk taking that is typical to venture capital.  One would expect safer investments. 

Stay tuned for what the audit uncovers.


If you pay people who are unemployed, ...

... you get more unemployment.  From the St Louis Fed:

Longer benefits may reduce unemployed workers’ job search efforts, decreasing their likelihood of becoming reemployed.

BOTTOM LINE:  Every recession since 1950 has included an emergency response from Congress to increase unemployment benefits.  The good news is that the perverse incentives of the program seem small, increasing unemployment rate only a small fraction.

Friday, October 10, 2014

How can a country decrease exports?

by strengthening their currency:

Whenever the ruble moves to the weak end of the trading band, the central bank begins selling dollars and euros to cushion the currency’s decline. It automatically moves the band by 5 kopecks, or hundredths of a ruble, once an intervention allotment of $350 million is exhausted.

To combat the falling ruble, the Russia is raising interest rates, but.... 

While higher interest rates would reduce pressure on the ruble by making assets denominated in the currency more appealing, that isn’t expected to be enough to offset the impact of strong domestic demand for hard currencies. Since the West imposed sanctions against Russia, domestic banks and companies have had increasingly limited access to external borrowing, yet they still need to repay more than $47 billion in foreign debt. 
As a result, both lenders and other firms are buying dollars and euros on the Russian market.

How can a country increase exports?

Countries with strong currencies, face reduced demand for their exports:

“I would not want to be in machine tools in Germany at the moment,” said Adam Posen, president of the Peterson Institute for International Economics and a former Bank of England official. “I would not want to be in ship building in South Korea.”




The feeble recovery is tempting countries to weaken their currencies (by printing money):

European Central Bank President Mario Draghi has praised the euro’s decline, an indication to investors that a weaker currency is a key ECB policy objective. Bank of Japan governor Haruhiko Kuroda made similar remarks about the yen’s value. South Korea and China have come under fire for keeping their currencies lower than levels many economists say would reflect fair market values.

But this works only if you are the only country doing it.  If rivals also weaken their currencies, the net effect is zero, a type of prisoners' dilemma.

Top finance officials trying to talk down the value of their exchange rates have resurrected warnings of a global currency war. Such tit-for-tat devaluations tend to create short-term growth at other countries’ expense.

Monday, October 6, 2014

Saving Endangered Species by Hunting Them

While the scimitar-horned oryx was declared extinct in the wild in 2000, they have thrived in captivity in Texas.
By any measure, those gains have been impressive. In 1979, according to the Texas-based Exotic Wildlife Association, there were 32 scimitar-horned oryx in a captive breeding program in Texas; today there are more than 11,000. Only two addax were known to exist in the state in 1971; today there are more than 5,000. And the number of dama gazelle has increased from nine individuals in 1979 to more than 800 today.

This was accomplished because an exemption from the Endangered Species Act allowed reserves to offer hunting packages so that sportsmen could hunt the animals. This gave reserves a profit opportunity related to conserving the animals. But after protracted court battles, this exemption was drastically curtailed in 2012.
Without the unfettered ability to hunt, breed and trade these animals, ranchers say they will lose the economic incentive to maintain the herds, and whatever gains have been made in restoring their numbers will be lost.

The prospect of the implementation of the new rules led ranchers to escalate hunts before the market evaporated. Fortunately, clearer heads have prevailed and the exemption has been reinstated. Poachers have an incentive to kill off an entire herd because they have no claim to the offspring the herd produces next year. In contrast, no rancher kills off a herd precisely because it is even more valuable next year.

Hat tip: Richard Carroll