A Greek Bondholder's New Haircut

To lessen the shame and defeat in it,
A bailout's got something to sweeten it,
So there's little regret
To sign away debt,
If, in any case, one would have eaten it.

Led by France and Germany, the euro zone has crafted the framework of an agreement to avoid a Greek default and provide a mechanism to stabilize the finances of its other overly indebted members. The announcement was greeted favorably by global equity markets, in spite of the provision that writes off 50% of Greece's foreign debt; proof that a certain loss is preferred to a general uncertainty. The "sweetener" in this case is an expanded European Financial Stability Facility, which is to be leveraged from €446 billion to €1 trillion. Such leverage would eventually require the participation of cash-rich outsiders such as China, but that is a crisis for another day.

An Allegedly Well-Placed Tipper

A Goldman director named Gupta
Was looked upta but turned out corrupta;
He tipped from inside,
Said the Feds, who then tried
To disrupt that which Gupta was upta.

Federal prosecutors have indicted Goldman Sachs director Rajat Gupta on charges of engaging in an insider trading scheme with hedge fund manager Raj Rajaratnam, who has already been convicted. In a novel twist, the prosecution acknowledges that Mr. Gupta did not directly profit from the tips he provided on Goldman Sachs and P&G (of which he is also a director); rather, Mr. Gupta's motivation was seen to be the cultivation of influence and favor with his far richer friend, with whom he also invested. For his part, Mr. Gupta found it serendipitous that his indictment coincided with Diwali, the Indian "Festival of Lights" and start of the new year, as he felt that this would offer a measure of divine protection.
Regardless of the outcome of this case, may all those kindling the festival lights have a Happy Diwali and a prosperous New Year!

Obama Harps on his Refi Program

"Since Congress won't do as they oughta
For folks who have homes underwater,
As Lender-in-Chief, I
Will back ev'ry refi
Allowed by executive order."

With an eye toward the 2012 election, President Obama has evidently decided that half measures taken on one's own are better than whole measures frustrated by House Republicans. Thus, the Administration announced with great fanfare a loosening of restrictions on its HARP (Home Affordable Refinance Program), which would actually benefit only one out of eleven underwater homeowners. For those mortgagors with loans taken out before May 2009 and guaranteed by Fannie Mae or Freddie Mac, the new HARP will allow a refi at any loan-to-value ratio, doing away with the former 125% limit. Indications are however that only about a million homeowners qualify for this "expanded" program, and it does not appear that the pace of refinancing will pick up, so the most telling impact of the new HARP may be on the campaign trail, when the President runs against the "do-nothing Congress."

Wage Index Report

The data on wages disclose
That the specter of joblessness grows,
Except for the few
Making mega-bucks, who,
In their number, substantially rose.

The Social Security Administration released its Wage Statistics for 2010, and - with one glaring exception - they tell a sorry tale.   Journalist and author David Cay Johnston crunched the numbers and found that

There were fewer jobs and they paid less last year except at the very top, where the number of people making more than $1 million increased by 20 percent over 2009. The median paycheck — half made more, half less — fell again in 2010, down 1.2 percent to $26,364. That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999. The number of Americans with any work fell again last year, down by more than a half million from 2009 to less than 150.4 million.

Hat tip to Barry Ritholtz, who notes the obvious statistical underpinning for the Occupy Wall Street movement.

Crowded Out by MasterCard

The thing that is most in the way
Of a really robust USA
Is the mountain of debt
On consumers who let
All their spending get carried away.

Joe Weisenthal points out in the Business Insider that the biggest impediment to American employment growth is a lack of demand for goods, which can be traced back to the enormous household debt burden (see graph). Though declining, it is still too high. The only ways around this problem are to develop more exports or substitute government spending until consumers get back on their feet. In a much-maligned conclusion, Weisenthal determines that, far from "getting in the way," government is failing to do its part.

Atlas Shrunk

If the strong want to lift up the weak,
As the Germans and French would the Greek,
It is best if such acts
Do not overly tax
The Teutonic or Gallic physique.

Plans to support the public finances of Europe's peripheral nations have been thrown into fresh doubt by the news that France's Aaa rating from Moody's is under pressure.  The rating agency's French analyst, Alexander Kockerbeck, noted that France has "a lot of additional risks we did not have in the past," pointing to "developments in the euro zone."  The €440 billion European Financial Stability Facility is designed to let the triple-A countries guarantee some of the debts of the shakier ones.  If France is downgraded, then the EFSF must either do without the €158 billion French participation, or accept a double-A rating.  Germany may be bracing for a heavier burden.

The Ideal Rate

"The taxation of capital gains,"
Said a student of John Maynard Keynes,
"Would ideally fall
Between 'nothing at all'
And the rate at which Buffett complains."

Writing in the Wall Street Journal on the "Three Policies That Gave Us the [Steve] Jobs Economy," Amity Shlaes cites the slashing of the capital gains rate from a confiscatory 49% to 25% in 1978. Building on this evidence, she reaches the silly conclusion that "taxes on capital should always be lowered, and dramatically." One might just as easily conclude that, because a diet improved one's physique, that mealtime portions should always be dramatically lowered, too. But what is the correct capital gains rate? Undoubtedly, it lies between encouragement of wild speculation and discouragement of capital formation.

To The Point

America's unequal strata,
As confirmed by definitive data,
Have made it quite plain,
On Wall Street and Main,
That something is deeply the matta.

Insider Trading: Is It Bad?

If A buys a company share
From B, who remains unaware
Of the info that A
May not give away,
Well then, this is rather unfair.

The sentencing of hedge fund manager Raj Rajaratnam to 11 years in prison for his insider trading conviction highlights once again the seriousness of this offense in the US legal system and, for some, revives the debate over whether it should be so.  Mr. Rajaratnam, who will soon rub shoulders with Bernie Madoff in the Butner, NC federal prison, used a network of experts in selected industries to "find an edge" in his investments.  Such experts really comprised a network of well-placed tipsters, US Attorney Preet Bharara convinced a Manhattan jury.  To those who would argue that insider trading is a victimless crime, one could point out that every inside trade has a counterparty unaware of the underlying material, non-public information, who is thus cheated out of the full value of the traded stock; in Mr. Rajaratnam's case, the defrauded values were in the millions.

Taxed to the Nines

Said Cain: "With this tax plan of mine,
Your taxation is fair, flat and fine!"
(But it opens the door
For a VAT on the poor);
Said the Right and the Left: "Nein, nein, nein!"

With Herman Cain's rise in polls of Republican Presidential primary voters, his "9-9-9" tax plan is getting a closer look. The early findings have both progressive and conservative analysts sounding like hordes of angry Germans. Anti-tax groups such as Freedom Works point out that Cain's 9% national sales tax (and elements of his 9% corporate tax) could act as a Trojan Horse for a larger and much less transparent value-added tax. Meanwhile, the Think Progress blog concludes that Cain's 9% flat income tax, combined with the sales tax and the elimination of taxes on capital gains and inheritances, would dramatically shift the tax burden downward to the poor and the middle class.

Message From Slovakia

"'Ere a bailout our nation commits to,
Some cold perspiration befits you,
As this saga has shown
That our currency zone
Is prone to financial jiu jitsu."

Well played, Slovakia. This tiny outpost of New Europe now holds the fate of the €440 billion European Financial Stability Facility (EFSF) in its hands. As the last of the 17-member euro zone to take up the ratification of the EFSF, Slovakia roiled the waters Tuesday when its divided parliament voted No. Even though a majority of the Slovak parties support the stability framework in principle, the question is caught up in parliamentary maneuvering, with the government evidently headed for a no-confidence vote. In the meantime, France and Germany can only sweat it out, as they test the limits of their persuasive powers.

And the Nobel Goes To...

The committee bestowed some respect
On the science of cause and effect
With a new Nobel prize
For a couple of guys
Who proved that it's hard to project.

The 2011 Sveriges Riksbank Economics Prize in Memory of Alfred Nobel has been awarded to two Americans who have done pioneering work on the effects of government policy on the macroeconomy. Thomas Sargent of NYU and Christopher Sims of Princeton (pictured right above and below respectively), who were classmates at Harvard and now teach a course together at Princeton, have worked mostly separately and often disagree; the Nobel committee felt that their different approaches were complementary. Mr. Sargent developed complex models to predict the behavior of the economy, while Mr. Sims is skeptical of such models and has focused on direct analysis of economic data.

European Financial Stability Negotiations

Said Merkel, "On this I agree
With Monsieur Président Sarkozy:
There's a pretty good chance
Of a downgrade for France
And political fallout for me."

Against the backdrop of the failure of the French-Belgian bank Dexia, French President Nicholas Sarkozy met with German Chancellor Angela Merkel on Sunday to resolve their differences over the path to European financial stability. The two announced to the press that a deal would be struck by the end of the month, meaning that agreement is still a long way off. France would like its banks to have access to the European Financial Stability Facility for capital support, but Germany - the biggest contributor to the EFSF - would face domestic political unrest. The Germans, for their part, would like troubled banks to draw on private or national capital sources, but France might face a downgrade if it tried to shore up its banks on its own. A Franco-German agreement is key to resolving the Greco-Italo-Hispano debt crisis that grips Europe.

Harvard Nobel Prize in Economics Prediction Pool

A man of conviction who needs
To declare which economist leads
May wager a bet
On the one who will get
That prize given out by the Swedes.

Nobel Prize season is upon us: on Monday, October 10, the winner(s) of the 2011 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel will be announced in Stockholm. That means that once again it's time for the Nobel Prize in Economics Pool, sponsored by Harvard University. The self-described "world's most accurate prediction market" invites economists far and wide to wager a dollar on the name of each predicted winner. Although practitioners of the Dismal Science failed to predict last year's winners, Thomson Reuters has stepped in with a handy handicapping sheet. Don't delay - entries must be received in Cambridge MA before 11:59 PM this Sunday night!

Oktobernomics

Said a sturdy Oktoberfest waiter,
Dressed up in his Hosen of Leder:
"Is this best-ever year
For consumption of beer
A good or a bad indicator?"

Organizers of the Munich Oktoberfest reported that 6.9 million visitors drank a record 7.5 million liters (2 million gallons) of beer this year.  (Many readers may not be aware that the annual festival actually runs from September 17 to October 3.)  Hungry quaffers ate hundreds of thousands of roast chickens, 118 oxen and miles of sausage as well.   Is all this record-breaking revelry a positive indicator for Europe, or are crisis-weary Germans simply drowning their sorrows in Löwenbräu? One sign of a new frugality amidst the excess: the Münchener Polizei reported fewer brawls in which beer steins (or Maßkrüge, in the local vernacular) were broken over someone's head.

It's Your Turn

Said Bernanke, recounting the facts,
While deflecting some Red-State attacks:
"The Fed did our part;
It's on Congress to start
To simplify filing one's tax."

Fed Chairman Ben Bernanke addressed the Congressional Joint Economic Committee on Tuesday, and told them that they and their colleagues must work together with the White House to renew the "close to faltering" American economy. His suggested Congressional to-do list includes finding a permanent solution for Fannie Mae and Freddie Mac; easing mortgage refinancing while enabling banks to rent out foreclosed properties; and simplifying the US tax code. At the same time, he dismissed the ever-more-frequently heard Republican criticism that, by keeping interest rates low, the Fed is enabling federal budget deficits. "I don't think that's a valid point," retorted the Chairman.

Preoccupied with Wall Street

Said the protesting, earnest young bands,
In their Occupy Wall Street demands:
"With a shortage of jobs
Comes a surfeit of mobs
With way too much time on our hands."

The Occupy Wall Street protest in lower Manhattan preoccupied the New York Police Department over the weekend, in a march across the Brooklyn Bridge that resulted in 700 arrests. The protesters also captivated the attention of millions and inspired similar movements in cities including Chicago, L.A., Montreal and Melbourne.  Occupy Wall Street appears to be an organic movement that feeds on a generalized anger at the state of politics and the economy.  Though there is no set list of demands, one protester perhaps summed up the grievances best:

"From 2006-2009 I owned a business with 12 employees. I closed my doors in 2009. I lost my home in 2010. I lived in my truck for six months. Now I rent a tiny room. I have no health insurance."

Charge it Forward

Said the Fed to the banks: "If you please,
Shrink your debit-card interchange fees."
Said the bankers, compliant:
"We'll look to the client
To offset the revenue squeeze."

New, lower federal limits on the interchange fees that banks may charge merchants on debit card transactions have gone into effect; but, like squeezing a balloon, such price controls will often raise prices elsewhere. Accordingly, banks have begun to roll out fees for their customers who use debit cards. First off the starting blocks was Bank of America, which announced a $5 monthly fee, while Chase is testing a debit card fee in selected markets. Other financial institutions such as Citibank and USAA have seized the opportunity to set themselves apart as "no-fee" providers, though experts warn that these banks may burst their customers' bubbles if they find it necessary to charge fees at a later point.