Incumbents Beware

Percent of Labor Force Unemployed for 27 weeks or more

This November will be an especially challenging time to be an incumbent with long-term unemployment at a post-war high. With those unemployed for more than 27 weeks representing 4% of the workforce, we are in uncharted territory when it comes to voter dissatisfaction with the status quo. There will be lots of commentary about Democrats vs. Republicans vs. Tea Party extremists, but the overriding theme will be "throw the bums out."

It's well-known that recessions are generally not kind to incumbents; and according to the NBER, the recession officially ended in  July 2009.  But a quick glance at the chart above shows that rising levels of the long-term unemployed were associated with the incumbent party losing the White House in 1960, 1980 and 1992.

Incumbents can take some comfort from the slight tick down in the long-term unemployment rate over the past few months, but with the absolute level nearly double the '80 - '81 peak,  November 2 promises to be a bitter night for incumbents from both parties.


Source: St Louis Federal Reserve

Candidate Change, Meet President Perseverance

The Wall Street Journal reports that President Obama is considering detaining terror suspects indefinitely.

While this continuation of the previous administration's policy may disappoint those who need to believe that every element of the Bush/Cheney foreign policy was evil or incompetent, it's not terribly surprising if you think about it for a clear-headed minute.

Nearly 3,000 civilians were killed in the 9/11 attacks.

Let's say you're the President and your military and intelligence agencies have managed to track down and capture a number of suspected terrorists. Under no duress, these suspects applaud the 9/11 attacks, claim responsibility (perhaps boastfully rather than truthfully) and pledge themselves to commit their lives to the further killing of Americans by any means possible. And just in case there's any doubt, they're all in favor of the extermination of Israel and maybe the overthrow of the kingdom of Saudi Arabia.

As President, would you release such suspects to threaten American citizens again? Remember, the 9/11 attacks on the Twin Towers were the second successful attack in eight years. So what's a President to do? He's sworn to protect, preserve and defend the Constitution, but as Commander in Chief he's also required to protect and defend the citizens. It would be convenient if these suspects could be tried, convicted and thrown in prison for life; but a civilian criminal trial may be a dicey proposition if the specific evidence is primarily confessions that may sound more like boasts.

In an era of rougher justice "...shot while trying to escape" would be one likely end to this awkward predicament. Or perhaps the suspects would be quietly extradited to a country whose legal system makes a specific judicial outcome more certain.

But we live in the current era. Meanwhile President Obama -- unlike candidate Obama -- is privy to the dossiers on these suspects and responsible for the security of the nation. He has a track record of respect for the Constitution and clear-headed, practical thinking. I'm prepared to give him the benefit of the doubt here. From the vantage point of the Oval Office, he seems to be doing the same for his predecessor.

Are You Smarter Than a Fifth Grader?Congressional Edition

From Politico reprinted in its entirety for non-subscribers:

Rep. cries foul over Nets naming rights

"Maybe they should just call it TARP Arena.

Rep. Bill Pascrell Jr. (D-N.J.), wary of taxpayer anger over the AIG bonuses, wants the New Jersey Nets to reconsider selling naming rights to the British bank Barclays for an NBA arena being built in Brooklyn.

Barclays received $8.5 billion in bailout funds from the Treasury Department, and Pascrell believes the $400 million it cost to have the naming rights for the soon-to-be Brooklyn Nets arena should be used, say, for lending to consumers instead. Pascrell was quick to make an exception for the new Citi ballpark the New York Mets are building, because that ball yard was already well under construction under the Citi name before the bailout money was approved.

“I believe that any further payments of taxpayer money, whether through TARP or the Federal Reserve System, be conditioned on the cancellation of any stadium or arena naming-rights agreements that may be in place,” Pascrell said.

It’s worth noting, of course, that Pascrell represents a lot of New Jersey Nets fans quite unhappy about losing their NBA team to Brooklyn."


Actually, Congressman, Barclays did NOT receive any "bailout" funds from the Treasury Department. Nor have they accepted any bailout money from the government of the UK, where they happen to be domiciled. To their credit, they have steadfastly resisted taking money that comes with governmental strings attached; and with each passing day and every congressional comment like yours, the wisdom of their strategy becomes more clear.

True, Barclays received $8.5 billion from AIG, presumably as collateral against or settlement of AIG's contractual obligations under trading arrangements. But to suggest that this is the same as a bailout is just wrong. To further imply that any organization that does business with a recipient of bailout funds is thereby subject to mindless Congressional meddling is either stupid or frightening, depending on how serious you are.

Oh, and Congressman, pretty much all "payments of taxpayer money" are made "through the Federal Reserve System." In fact, when you give a one-dollar tip to the guy who shines your shoes in the Congressional cloak-room, you're using what we in this country call a "Federal Reserve Note". It's actually printed on the top of the dollar bill in capital letters to help you remember.

Perhaps you'd like to regulate what he does with that too?

Great Moments in StatesmanshipH.R. 1586

Photo credit Stephen Crowley/The New York Times

H.R. 1586The Law of Unintended Consequences

Well, they did it.

The US House of Representatives, apparently vying for the title of "The World's Greatest Retributive Body" passed HR 1586 - "To impose an additional tax on bonuses received from certain TARP recipients". HR 1586 was designed specifically for the purpose of taxing the bonuses of several dozen employees of AIG, the giant insurance company at the epicenter of the financial crisis.

Look, I'm no fan of AIG. AIG's reckless underwriting of credit default swaps has required a $170 billion injection of government aid to post collateral with counter-parties and extinguish obligations. And I will be surprised if AIG doesn't require more aid before this crisis is over.

So I am as infuriated as any other taxpayer to read that AIG planned to pay out $165 million in bonuses, including bonuses to employees who worked in their Financial Products group, where the credit default swaps were written.

But the speed with which the House has wielded its most powerful weapon -- As Chief Justice John Marshall put it, "The power to tax is the power to destroy" -- is a truly frightening precedent. By levying a confiscatory 90% tax on bonuses paid by firms who have received aid under the Troubled Asset Relief Program, the House has undermined the compensation model of our leading financial institutions, not just AIG. More to the point, it will create a financial hardship for many employees whose banks may not have needed TARP funds, but were persuaded by former Treasury Secretary Hank Paulson to accept them in an act of industry solidarity designed to stabilize the crisis late last year. It will also create financial hardship for many employees who had absolutely nothing to do with mortgage securities, credit default swaps or crazy leverage ratios and who probably earned their bonus. For some, it may mean selling their houses into an inventory-clogged market. For all, it will surely mean a reduction in both their saving and spending, just exactly what we don't need in the current economy.

It was bad enough last month when Deputy Sheriff Barney Fife... I mean House Financial Services Committee Chairman Barney Frank... was chiding Northern Trust for honoring its commitment to sponsor a PGA event in Los Angeles. But HR 1586 is a breathtaking act of power, passion and political pandering that should give pause to any believer in liberal democracy. Look hard enough and you will find federal aid, if only in the form of freedom from federal tax, in almost every nook and cranny of our modern society. Will lesser forms of federal aid be used as a pretext for the House to follow its new precedent of hastily drafted confiscatory taxes to coerce private behavior?

Fortunately, the administration has expressed reservations about the House bill and the public outrage has encouraged some AIG employees to forfeit their bonuses, so cooler heads may yet prevail and this hastily drafted legislation may be rejected or modified.

If you'd like to see how your representative voted, click here.

A Lesson in This Recession?

During economic booms, certain publications and political parties can be counted on to point out that the growing wealth produced by the expanding economy is being inequitably bestowed upon various segments of the population. This (unsurprising) observation usually leads to journalistic hand-wringing, cynical campaign slogans and calls for a more progressive tax code and redistributionist spending programs.

The breadth and depth of the current recession provides an interesting opportunity to observe the results of an experiment no sane policy-maker would ever intentionally conduct.

Last week, the Federal Reserve released its latest triennial analysis of changes in family income and net worth:

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances

Trust me, you probably don't want to read it all (I haven't yet either) but I'll share one of the authors' observations. The report is based on household surveys conducted in 2007 and focuses on changes in household finances since the 2004 survey. In light of the significant changes in housing and equity prices during 2008, the study's authors also make an attempt to estimate the impact of 2008's market meltdowns through October.

A number of assumptions are required, which can be found on pages A10-A12. The authors conclude, "...these assumptions imply large drops in median and mean net worth since the 2007 survey — 17.8 percent and 22.7 percent, respectively."

These numbers feel about right. From January to October 2008, the S&P 500 declined 34.0% and the Case-Shiller 20-city composite house price index declined 14.5%.

Many commentators get tripped up when confronting means and medians, and politicians are probably responsible for statistics being lumped together with lies and damned lies. So here's a little refresher (page A6) on interpreting means and medians that most students should've had by ninth grade.

"Where a comparable median and mean are given, the gain of the mean relative to the median may usually be taken as indicative of relatively greater change at the top of the distribution; for example, when the mean increases more rapidly than the median, it is typically taken to indicate that the values in the top of the distribution rose more rapidly than those in the lower part of the distribution."

This is equally true in reverse, i.e., when the mean decreases at a greater rate than the median, it is typically taken to indicate that the values in the top of the distribution fell more rapidly than those in the lower part of the distribution.

So by certain conventional measures of inequality, the concurrent meltdowns in the financial and housing markets plus the economic recession have increased "fairness" in the United States.

This is not a headline I expect to read soon.

I make this observation not in defense of the well-to-do compared to the less fortunate. To be sure, this recession is hurting every family at every level. And the hardship at the lower end of the income and wealth spectrum is undoubtedly more palpable and immediate. What's more, the magnitude of federal aid being provided to companies like AIG evokes uncomfortable echoes of the "Welfare Queens" who figured in class warfare debates of the '70s and '80s. It seems we all live in a glass house now; so maybe everyone should put down his stone.

But when this economy recovers, as it certainly will, maybe we'll have learned that although prosperity inevitably benefits the prosperous, it's better (for everyone) than the alternative.

"We Don't Need No Stinkin' TARP Money" - Northern Trust

Northern Trust has released a response to Congressman Barney Frank regarding its sponsorship of the Northern Trust Open, a PGA golf tournament. Congressman Frank, Senator John Kerry and a score of political grandees have been publicly harrumphing about Northern Trust's expenditures on the golf tournament while the US Treasury holds preferred stock in Northern Trust under the Capital Purchase Program of the Troubled Assets Relief Program (TARP).

Northern Trust's basic message is "We're happy to give back the money we didn't ask for.... where should we send the check?"

In his letter to the Congressman, Northern Trust CEO, Frederick H. Waddell, gets the nuance right when he says, "As we have stated publicly, the Northern Trust Open and its related activities were in no way reliant upon Capital Purchase Program funds, and would have occurred even had we not received Capital Purchase Program funds."

Click here for my earlier post on the topic.

At the end of the day, congressional meddling in the day-to-day operations of TARP recipients may be the most effective way of getting the funds back quickly. But it will certainly cause investors -- and possibly depositors -- to discriminate between those banks who can and do return the funds and those who can't. When the Treasury took stakes in the various banks late last year, it apparently cajoled some of the stronger financial institutions into accepting the funds. The Treasury's intent was to characterize the financial crisis as a systemic liquidity issue that could be alleviated by a temporary injection of capital from the government. The Treasury specifically tried to avoid singling out banks that needed the money to avoid creating more concerns among their counter-parties and depositors.

As the Treasury Department put it back on October 14,

"Nine large financial institutions already have agreed to participate in this program, moving quickly and collectively to signal the importance of the program for the system. These healthy institutions have voluntarily agreed to participate on the same terms that will be available to small and medium-sized banks and thrifts across the nation."

With Citicorp trading at $1.27 per share at the moment, maybe the Treasury's desire for benign opacity was naive. But if Northern Trust, JP Morgan, Goldman Sachs and a few others rush to repay the TARP money so they can be left alone to run their businesses, it could have a serious impact on those banks who don't.

This is a pretty serious policy reversal to be driven by a golf tournament.

Addendum: Northern Trust's June 17, 2009 press release regarding its repayment of TARP funds.

While We're On the Subject...

"Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, along with 17 Democrats on the committee, demanded Tuesday that Northern Trust repay what it spent on entertainment during the [Northern Trust Open held in Los Angeles] which ended on Sunday."

"And Senator John Kerry of Massachusetts vowed to introduce legislation to end “the extravagant spending practices” of banks that received taxpayer dollars in the federal bailout."
Link to NYT story

Congressman Frank and Senator Kerry:

By my reckoning, the US federal deficit has soared from around $1 trillion when Congressman Frank first entered Congress in 1981 to $10 trillion today and we're on our way to $12 trillion according to the President's recent budget proposal.

Until the federal government pays back this money, there are a few expenditures I'd like to discuss with you.

In the meantime, I trust that you and your honorable colleagues in the House and Senate -- mindful of taxpayer concern over profligate spending -- are currently using the Metro for your daily commute. If not, you should know the Federal Center station is mere 6-minute walk to and from the Capitol. I know the fare-card system can be confusing at first, but my nephew's third-grade class has been studying the Metro and would be happy to organize a field trip to help you and your colleagues learn the ropes.



We look forward to your continuing vigilance on behalf of the tax-payers.

Dumb and Dumber

I don't know which is sillier.

1) The outrage professed by certain politicians that banks receiving government assistance engage in marketing activities, which might include entertaining clients and fulfilling obligations made months ago to sponsor a golf tournament, or

2) The ridiculous statements made by the PR departments of banks that "... the money for these activities comes from operating profits, not TARP funds."

One expects the grandstanding from politicians, but the bankers really ought to know better. What percent of the population do they think buys the notion that TARP funds are "balance sheet" cash distinct from cash used in operating activities? Please just stop it.

It suffices to say, as Northern Trust recently did, "We came to the conclusion that no public purpose would be served by canceling the Northern Trust Open and related events.” But then they blew it by trotting out the "No TARP funds were used..." defense.

Marketing your business, raising money for charitable purposes and supporting your local community are valid reasons for sponsoring a golf tournament and remain so today. Here's my suggestion. Take away the single malts in the courtesy tent: your customers will gladly drink blended scotch in these parlous times. Make your employees double up in hotel rooms; none of them will WANT to go without a compelling business reason for doing so. Keep it low key, and maybe get the local hospitality and restaurant businesses to highlight the dollars and jobs that are supported by a major golf event.

Then, shut up.

Taxpayers are not stupid. Eventually someone will observe that government assistance is not exactly a novel idea. Farmers receive agricultural subsidies, households receive tax credits, not-for-profits enjoy their tax-free status. If the receipt of a financial benefit from the federal government is sufficient reason for Barney Frank to weigh in on every recipient's every expenditure, then maybe he should personally do the grocery shopping for every family on food stamps.

Finally, I have to reprint comment 8. to the NYT article linked above. I can attribute it only to "Joe", but it bears quoting in its entirety.

"Money is fungible, idiots! Either give them money, or don’t and take them over. This false outrage is really getting tiresome. I say let them golf. But force them to tee off from the blue tees and make Barney Frank go along with them, in bright Madras shorts and cap, to provide oversight and prevent them from taking mulligans. That ought to freak them out a little bit. Then post their scores publicly. Bankers need all the humiliation they can get these days."