The New Yorker ran a rather confused piece by Gary Sernovitz, a managing director at the investment firm Lime Rock Partners, on whether Bernie Sanders or Hillary Clinton would be more effective in reining in Wall Street. The piece assures us that Secretary Clinton has a better understanding of Wall Street and that her plan would be more effective in cracking down on the industry. The piece is bizarre both because it essentially dismisses the concern with too big to fail banks and completely ignores Sanders’ proposal for a financial transactions tax, which is by far the most important mechanism for reining in the financial industry.
The piece assures us that too big to fail banks are no longer a problem, noting their drop in profitability from bubble peaks and telling readers:
“…not only are Sanders’s bogeybanks just one part of Wall Street but they are getting less powerful and less problematic by the year.”
This argument is strange for a couple of reasons. First, the peak of the subprime bubble frenzy is hardly a good base of comparison. The real question is should we anticipate declining profits going forward. That hardly seems clear. For example, Citigroup recently reported surging profits, while Wells Fargo’s third quarter profits were up 8 percent from 2014 levels.
If Sernovitz is predicting that the big banks are about to shrivel up to nothingness, the market does not agree with him. Citigroup has a market capitalization of $152 billion, JPMorgan has a market cap of $236 billion, and Bank of America has a market cap of $174 billion. Clearly investors agree with Sanders in thinking that these huge banks will have sizable profits for some time to come.
The real question on too big to fail is whether the government would sit by and let a Goldman Sachs or Citigroup go bankrupt. Perhaps some people think that it is now the case, but I’ve never met anyone in that group.
Sernovitz is also dismissive on Sanders call for bringing back the Glass-Steagall separation between commercial banking and investment banking. He makes the comparison to the battle over the Keystone XL pipeline, which is actually quite appropriate. The Keystone battle did take on exaggerated importance in the climate debate. There was never a zero/one proposition in which no tar sands oil would be pumped without the pipeline, while all of it would be pumped if the pipeline was constructed. Nonetheless, if the Obama administration was committed to restricting greenhouse gas emissions, it is difficult to see why it would support the building of a pipeline that would facilitate bringing some of the world’s dirtiest oil to market.
In the same vein, Sernovitz is right that it is difficult to see how anything about the growth of the housing bubble and its subsequent collapse would have been very different if Glass-Steagall were still in place. And, it is possible in principle to regulate bank’s risky practices without Glass-Steagall, as the Volcker rule is doing. However, enforcement tends to weaken over time under industry pressure, which is a reason why the clear lines of Glass-Steagall can be beneficial. Furthermore, as with Keystone, if we want to restrict banks’ power, what is the advantage of letting them get bigger and more complex?
The repeal of Glass-Steagall was sold in large part by boasting of the potential synergies from combining investment and commercial banking under one roof. But if the operations are kept completely separate, as is supposed to be the case, where are the synergies?
But the strangest part of Sernovitz’s story is that he leaves out Sanders’ financial transactions tax (FTT) altogether. This is bizarre, because the FTT is essentially a hatchet blow to the waste and exorbitant salaries in the industry.
Most research shows that trading volume is very responsive to the cost of trading, with most estimates putting the elasticity close to one. This means that if trading costs rise by 50 percent, then trading volume declines by 50 percent. (In its recent analysis of FTTs, the Tax Policy Center assumed that the elasticity was 1.5, meaning that trading volume decline by 150 percent of the increase in trading costs.) The implication of this finding is that the financial industry would pay the full cost of a financial transactions tax in the form of reduced trading revenue.
The Tax Policy Center estimated that a 0.1 percent tax on stock trades, scaled with lower taxes on other assets, would raise $50 billion a year in tax revenue. The implied reduction in trading revenue was even larger. Senator Sanders has proposed a tax of 0.5 percent on equities (also with a scaled tax on other assets). This would lead to an even larger reduction in revenue for the financial industry.
It is incredible that Sernovitz would ignore a policy with such enormous consequences for the financial sector in his assessment of which candidate would be tougher on Wall Street. Sanders FTT would almost certainly do more to change behavior on Wall Street than everything that Clinton has proposed taken together, by a rather large margin. Leaving out the FTT in this comparison is sort of like evaluating the New England Patriots’ Super Bowl prospects without discussing their quarterback.
The New Yorker ran a rather confused piece by Gary Sernovitz, a managing director at the investment firm Lime Rock Partners, on whether Bernie Sanders or Hillary Clinton would be more effective in reining in Wall Street. The piece assures us that Secretary Clinton has a better understanding of Wall Street and that her plan would be more effective in cracking down on the industry. The piece is bizarre both because it essentially dismisses the concern with too big to fail banks and completely ignores Sanders’ proposal for a financial transactions tax, which is by far the most important mechanism for reining in the financial industry.
The piece assures us that too big to fail banks are no longer a problem, noting their drop in profitability from bubble peaks and telling readers:
“…not only are Sanders’s bogeybanks just one part of Wall Street but they are getting less powerful and less problematic by the year.”
This argument is strange for a couple of reasons. First, the peak of the subprime bubble frenzy is hardly a good base of comparison. The real question is should we anticipate declining profits going forward. That hardly seems clear. For example, Citigroup recently reported surging profits, while Wells Fargo’s third quarter profits were up 8 percent from 2014 levels.
If Sernovitz is predicting that the big banks are about to shrivel up to nothingness, the market does not agree with him. Citigroup has a market capitalization of $152 billion, JPMorgan has a market cap of $236 billion, and Bank of America has a market cap of $174 billion. Clearly investors agree with Sanders in thinking that these huge banks will have sizable profits for some time to come.
The real question on too big to fail is whether the government would sit by and let a Goldman Sachs or Citigroup go bankrupt. Perhaps some people think that it is now the case, but I’ve never met anyone in that group.
Sernovitz is also dismissive on Sanders call for bringing back the Glass-Steagall separation between commercial banking and investment banking. He makes the comparison to the battle over the Keystone XL pipeline, which is actually quite appropriate. The Keystone battle did take on exaggerated importance in the climate debate. There was never a zero/one proposition in which no tar sands oil would be pumped without the pipeline, while all of it would be pumped if the pipeline was constructed. Nonetheless, if the Obama administration was committed to restricting greenhouse gas emissions, it is difficult to see why it would support the building of a pipeline that would facilitate bringing some of the world’s dirtiest oil to market.
In the same vein, Sernovitz is right that it is difficult to see how anything about the growth of the housing bubble and its subsequent collapse would have been very different if Glass-Steagall were still in place. And, it is possible in principle to regulate bank’s risky practices without Glass-Steagall, as the Volcker rule is doing. However, enforcement tends to weaken over time under industry pressure, which is a reason why the clear lines of Glass-Steagall can be beneficial. Furthermore, as with Keystone, if we want to restrict banks’ power, what is the advantage of letting them get bigger and more complex?
The repeal of Glass-Steagall was sold in large part by boasting of the potential synergies from combining investment and commercial banking under one roof. But if the operations are kept completely separate, as is supposed to be the case, where are the synergies?
But the strangest part of Sernovitz’s story is that he leaves out Sanders’ financial transactions tax (FTT) altogether. This is bizarre, because the FTT is essentially a hatchet blow to the waste and exorbitant salaries in the industry.
Most research shows that trading volume is very responsive to the cost of trading, with most estimates putting the elasticity close to one. This means that if trading costs rise by 50 percent, then trading volume declines by 50 percent. (In its recent analysis of FTTs, the Tax Policy Center assumed that the elasticity was 1.5, meaning that trading volume decline by 150 percent of the increase in trading costs.) The implication of this finding is that the financial industry would pay the full cost of a financial transactions tax in the form of reduced trading revenue.
The Tax Policy Center estimated that a 0.1 percent tax on stock trades, scaled with lower taxes on other assets, would raise $50 billion a year in tax revenue. The implied reduction in trading revenue was even larger. Senator Sanders has proposed a tax of 0.5 percent on equities (also with a scaled tax on other assets). This would lead to an even larger reduction in revenue for the financial industry.
It is incredible that Sernovitz would ignore a policy with such enormous consequences for the financial sector in his assessment of which candidate would be tougher on Wall Street. Sanders FTT would almost certainly do more to change behavior on Wall Street than everything that Clinton has proposed taken together, by a rather large margin. Leaving out the FTT in this comparison is sort of like evaluating the New England Patriots’ Super Bowl prospects without discussing their quarterback.
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The Washington Post had an article on a commitment by Secretary of State John Kerry that the United States would double its aid to developing countries for dealing with climate change from $400 million annually to $800 million by 2020. Those who are worried about the tax increases needed to pay for this aid may be interested in learning that the additional commitment comes to a bit less than 0.009 percent of the $4.7 trillion the government is projected to spend in 2020.
The Washington Post had an article on a commitment by Secretary of State John Kerry that the United States would double its aid to developing countries for dealing with climate change from $400 million annually to $800 million by 2020. Those who are worried about the tax increases needed to pay for this aid may be interested in learning that the additional commitment comes to a bit less than 0.009 percent of the $4.7 trillion the government is projected to spend in 2020.
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Yesterday the Labor Department released October data from its monthly Job Openings and Labor Turnover Survey (JOLTS). The release got surprisingly little attention in the media.
While there were no big surprises, it does not paint a picture of a robust labor market. The number of job opening was down 150,000 from the September level and was almost 300,000 below the peak hit in July. That is not necessarily a big deal; the monthly data are erratic and a monthly change of this size could just be sampling error. Nonetheless, the number of opening has been essentially flat since April, which means that the relatively strong growth reported in the establishment survey does not seem to be making it difficult for firms to find workers.
Consistent with this story, the quit rate remained at a relatively low 1.9 percent. This is a measure of workers’ confidence that they can leave a job they don’t like and either quickly get a new job or survive on savings or the earnings of other family members. The 1.9 percent rate is well above the 1.3 percent rate at the bottom of the downturn, but low relative to pre-recession levels. In fact, in the weak labor market following the 2001 recession (we continued to lose jobs until September of 2003) the quit rate never fell below 1.8 percent. The current reading looks much more like a recession than a strong labor market. (The series only goes back to the end of 2000, so we don’t have long experience with it.)
Quit Rate
Source: Bureau of Labor Statistics.
Yesterday the Labor Department released October data from its monthly Job Openings and Labor Turnover Survey (JOLTS). The release got surprisingly little attention in the media.
While there were no big surprises, it does not paint a picture of a robust labor market. The number of job opening was down 150,000 from the September level and was almost 300,000 below the peak hit in July. That is not necessarily a big deal; the monthly data are erratic and a monthly change of this size could just be sampling error. Nonetheless, the number of opening has been essentially flat since April, which means that the relatively strong growth reported in the establishment survey does not seem to be making it difficult for firms to find workers.
Consistent with this story, the quit rate remained at a relatively low 1.9 percent. This is a measure of workers’ confidence that they can leave a job they don’t like and either quickly get a new job or survive on savings or the earnings of other family members. The 1.9 percent rate is well above the 1.3 percent rate at the bottom of the downturn, but low relative to pre-recession levels. In fact, in the weak labor market following the 2001 recession (we continued to lose jobs until September of 2003) the quit rate never fell below 1.8 percent. The current reading looks much more like a recession than a strong labor market. (The series only goes back to the end of 2000, so we don’t have long experience with it.)
Quit Rate
Source: Bureau of Labor Statistics.
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Paul Krugman and Larry Summers both have very good columns this morning noting the economy’s continuing weakness and warning against excessive rate hikes by the Fed. While I fully agree with their assessment of the state of the economy and the dangers of Fed rate hikes, I think they are overly pessimistic about the Fed’s scope for action if the economy weakens.
While the Fed did adopt unorthodox monetary policy in this recession in the form of quantitative easing, the buying of long-term debt, it has another tool at its disposal that it chose not to use. Specifically, instead of just targeting the overnight interest rate (now zero), the Fed could have targeted a longer term interest rate.
For example, it could set a target of 1.0 percent as the interest rate for the 5-year Treasury note, committing itself to buy more notes to push up the price, and push down the interest rate to keep it at 1.0 percent. It could even do the same with 10-year Treasury notes.
This is an idea that Joe Gagnon at the Peterson Institute for International Economics put forward at the depth of the recession, but for some reason there was little interest in policy circles. The only obvious risk of going the interest rate targeting route is that it could be inflationary if it led to too rapid an expansion, but excessively high inflation will not be our problem if the economy were to again weaken. Furthermore, if it turned out that targeting was prompting too much growth, the Fed could quickly reverse course and let the interest rate rise back to the market level.
Of course, it would be best if we could count on fiscal policy to play a role in getting us back to full employment (lowering supply through reduced workweeks and work years should also be on the agenda), but the Fed does have more ammunition buried away in the basement and we should be pressing them to use it if the need arises.
Paul Krugman and Larry Summers both have very good columns this morning noting the economy’s continuing weakness and warning against excessive rate hikes by the Fed. While I fully agree with their assessment of the state of the economy and the dangers of Fed rate hikes, I think they are overly pessimistic about the Fed’s scope for action if the economy weakens.
While the Fed did adopt unorthodox monetary policy in this recession in the form of quantitative easing, the buying of long-term debt, it has another tool at its disposal that it chose not to use. Specifically, instead of just targeting the overnight interest rate (now zero), the Fed could have targeted a longer term interest rate.
For example, it could set a target of 1.0 percent as the interest rate for the 5-year Treasury note, committing itself to buy more notes to push up the price, and push down the interest rate to keep it at 1.0 percent. It could even do the same with 10-year Treasury notes.
This is an idea that Joe Gagnon at the Peterson Institute for International Economics put forward at the depth of the recession, but for some reason there was little interest in policy circles. The only obvious risk of going the interest rate targeting route is that it could be inflationary if it led to too rapid an expansion, but excessively high inflation will not be our problem if the economy were to again weaken. Furthermore, if it turned out that targeting was prompting too much growth, the Fed could quickly reverse course and let the interest rate rise back to the market level.
Of course, it would be best if we could count on fiscal policy to play a role in getting us back to full employment (lowering supply through reduced workweeks and work years should also be on the agenda), but the Fed does have more ammunition buried away in the basement and we should be pressing them to use it if the need arises.
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The context is Nigeria’s economic relationship with China. The NYT complains to readers that China is providing goods at a lower cost than other other countries or the country’s domestic industry.
“Chinese goods are so dominant that consumers have few other choices.”
The article points out that the goods are of varying quality and some, in the case of electronic items, may pose safety problems. Of course, the reason that consumers have few other choices is that the Chinese products sell for much lower prices than the goods produced by competitors.
The piece also complains that China’s firms are willing to accept a lower return on investment in Nigeria:
“The risks [associated with investing in Nigeria] have prompted Western companies to demand very fat profits before putting money into the country — returns on the order of 25 to 40 percent a year. Their Chinese counterparts have been willing to accept 10 percent or less.”
The piece points out that low cost Chinese imports have displaced hundreds of thousands of manufacturing workers in Nigeria. While this is likely true, this is an entirely predictable outcome of the removal of trade barriers, a process that the NYT usually celebrates in both its opinion and news pages.
The standard argument is that the gains from consumers in the form of lower prices easily exceed the losses to the workers who lose their jobs. There may be an issue of redirecting some of these gains to help the unemployed workers, but the country as a whole still gains. It is striking that the NYT seems reluctant to accept economic orthodoxy on trade when it comes to China’s role in Nigeria and the rest of Africa.
The context is Nigeria’s economic relationship with China. The NYT complains to readers that China is providing goods at a lower cost than other other countries or the country’s domestic industry.
“Chinese goods are so dominant that consumers have few other choices.”
The article points out that the goods are of varying quality and some, in the case of electronic items, may pose safety problems. Of course, the reason that consumers have few other choices is that the Chinese products sell for much lower prices than the goods produced by competitors.
The piece also complains that China’s firms are willing to accept a lower return on investment in Nigeria:
“The risks [associated with investing in Nigeria] have prompted Western companies to demand very fat profits before putting money into the country — returns on the order of 25 to 40 percent a year. Their Chinese counterparts have been willing to accept 10 percent or less.”
The piece points out that low cost Chinese imports have displaced hundreds of thousands of manufacturing workers in Nigeria. While this is likely true, this is an entirely predictable outcome of the removal of trade barriers, a process that the NYT usually celebrates in both its opinion and news pages.
The standard argument is that the gains from consumers in the form of lower prices easily exceed the losses to the workers who lose their jobs. There may be an issue of redirecting some of these gains to help the unemployed workers, but the country as a whole still gains. It is striking that the NYT seems reluctant to accept economic orthodoxy on trade when it comes to China’s role in Nigeria and the rest of Africa.
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