A Sandy Saga

Here's the ballad of Hurricane Sandy,
Who proved just a little too handy
At blowin' and drenchin'
And throwin' a wrench in-
To Wall Street's modus operandi.

Liquidity's normally fodder
For the markets to act as they oughter,
But as mortgages do,
When Sandy came through,
The stock market went underwater.

She disrupted the stock trading minions,
Though in most educated opinions,
This hurricane paled
Before those that whaled
At Floridians and Carolinians.

The wind filled New Yorkers with terror,
And climatically did something rarer,
Since trading has ceased
For two days at least
Not since the Victorian era.

It's a terribly deep devastation
In the experts' informed estimation,
Though the Keynesian boost
As rebuilding is loosed
May deliver some small compensation.

WSJ: Sandy Saga

In today's Wall Street Journal Total Return blog, Dr. Goose has contributed a lyrical ode to Hurricane Sandy, running wild in Wall Street's canyon of high finance. Please visit me at the Journal, and be sure to leave a greeting.

Hurricane Sandy

When the threat of disaster is heightened
For the Wall Street or media titan,
He may well reflect
On its fiscal effect,
But more likely will simply be frightened.

Hurricane Sandy is headed for the East Coast, and Wall Street is taking no chances. NASDAQ and the New York Stock Exchange are closed on Monday, as is the CBOE. From DC to NYC, closures have been announced for mass transit, schools and offices. Though we like to put on a tough face around these parts, there's a definite whiff of anxiety in the air. Here's hoping that everyone in the hurricane's path stays safe and dry, enjoying a quiet day indoors while nature rages outside.

A Chicken & Egg Problem

For GDP growth to look handsome,
Manufacturing's got to expand some,
But someone must buy
That expanded supply,
So we've got to expand our demand some.

"Without Demand, Manufacturing Can’t Pump Up Output or Jobs," says The Wall Street Journal's Real Time Economics blog. As much as many, including the White House, have pinned their expansionary hopes on a US manufacturing renaissance, this only works if foreign and domestic demand keeps those factories busy. Right now, both appear to be softening.

Recent factory surveys from the Federal Reserve Banks of New York, Philadelphia, Richmond and Kansas City show more respondents reporting falling orders than expanding. Moreover, "a third-quarter survey done by professional services firm PwC found 67% of major U.S. industrial multinationals said 'lack of demand' was an expected barrier to their company’s growth over the next year. That was the No. 1 choice among a list of obstacles that included energy prices, regulatory pressures and taxes, and was a jump from 48% pointing to a lack of demand in the second quarter."

Third quarter US GDP is set to be announced this morning at 8:30, with the consensus forecast of an expansion at a tepid 1.7% annualized rate. At the moment, the prospect of manufacturing our way to faster growth looks dim.

Economists' Golden Rule

The moral economist tries
A society so to devise
That there he would live in
In any case, given
No clue what his role would comprise.

The preceding verse sums up what Nobel laureate Paul Krugman has articulated as the "social vision" guiding his work. Prof. Krugman, of Princeton University, joined fellow Nobel laureate and Columbia professor Joseph Stiglitz Tuesday evening at New York's Fashion Institute of Technology for a wide-ranging conversation before a sold-out audience. The event was co-sponsored by the Institute for New Economic Thinking, whose executive director Robert Johnson moderated the conversation. A video of the entire talk along with Q&A is embedded below.

At 1:27:10 of the video, an earnest interrogator notes that classical economics has come under attack for a lack of moral vision, and asks if the two professors can articulate the moral code that underpins their work. Prof. Krugman, after an initially stunned reaction, responds that he follows the philosophy of John Rawls, who said in his Theory of Justice that social issues should be decided as if from behind a "veil of ignorance," where "no one knows his place in society, his class position or social status; nor does he know his fortune in the distribution of natural assets and abilities, his intelligence and strength, and the like." In other words, self-interest should be replaced by fairness and impartiality.

It would be neither just nor fair if I failed to thank my friend Sherry Brabham, FIT's Treasurer and head of Finance & Administration, whose guest I was for the evening.

Watch live streaming video from instituteforneweconomicthinking at livestream.com

WSJ: No Debt Limit

Here is the 2nd of Dr. Goose's now regular contributions to the WSJ Total Return blog, regarding Joe Stiglitz' thoughts on the US debt/GDP ratio. I am thrilled to become a regular contributor to the Wall Street Journal's website, and hope that readers of this space will visit me there as well.

Foreign Policy Debate

It's agreed by Obama and Romney,
As incumbent and GOP nom'nee,
That nothing impairs
One's foreign affairs
Like a shaky domestic econ'my.

Says Obama: "My answer to threats,
Which America constantly gets,
Is one that renews
Or else we'd still use
The cavalry and bayonets."

Says Romney, expounding on Syria:
"My policy on the extyria
Is the same as Obama's
Except that I promise
To be just a little supyria."

The third and final Presidential debate took place Monday night, and for me, three elements stood out: President Obama took an aggressive stance from the beginning and even landed a few "zingers"; Governor Romney largely seemed to agree with the details of the President's foreign policy and, as in the prior debates, appeared to moderate the more hardline aspects of positions he took in the primaries; both candidates agree that a strong economy is the foundation of a strong world power, and in fact would rather pivot away from the latter and focus on the former.

College Choice

The candidates tried to explain
How to lessen America's pain
From tuition and fees
That pay for degrees
Of commercially dubious gain.

Said Obama: "I'd like to enhance
Federal aid, be it loans or Pell grants;
Though I'm hopelessly lost
On containing the cost,
At least I will get you financed."

Said Romney: "The government's never
Very good, but the market is clever;
So you're out on your own
To get your own loan,
Where-, how-, from whom- for what-ever."

Said neither: "On loans, I will let it
Be decided by factors of credit,
So that those who can show
That they're getting to know
Something useful are those who will get it."

The US Presidential election is two weeks away and the final debate is this evening, but so far both candidates have gotten away without putting forth an effective plan to address the looming higher education crisis. We have a vicious cycle of ballooning student debt to pay for rapidly rising costs of education which, in all to many cases, does not prepare the graduates for a gainful career, and hence offers no hope of repaying those mountainous loans. Both President Obama and Governor Romney would do well to take a page from the book of my friend Jay Hallen, who proposed in the National Review that the provision and pricing of student loans should be based on the likelihood of repayment, as is the case with any other type of loan. This would have the effect of directing student loans to where the economy most needs them, i.e., toward programs that prepare students with the skills that employers most need.

Guest Post: ECB Tries Again

My friend Andy Fately sent a brilliant pair of limericks to his clients this morning. Andy, a Corporate FX Risk Strategist for Barclays Capital who used to tweet as @fx_poet, is a foreign exchange limericker, a rare subspecies of financial poet. Here are his verses today:

There once was a group of old fossils
Whose policy slips were colossal,
And later today,
They’re likely to say
Come follow us, like we’re apostles.

But what can they possibly do
To fix all the things that they blew?
The popular theme’s
A new banking scheme
To help failing banks to pull through.

Bad Search Results

An Internet stock tumbled early
When missed earnings leaked prematurely.
It's bad to surprise,
But if profits should rise,
The stock would go up again, surely.

The stock market was gripped by a thrill of panic Thursday, when Google's 3rd quarter earnings announcement was leaked during trading hours instead of after the 4:00 PM close. However, it was not just the slip-up by $GOOG's financial printer R.R. Donnelley that roiled the market, but the news itself: a 20% fall in profits and slowing revenue growth. Like fellow internet behemoth Facebook, Google is having some challenges in building ad revenue from increasingly popular mobile usage to the extent that it has from the desktop. There is hope for the future, though; CEO Larry Page, on the earnings conference call, enthused over the "tremendous innovation in advertising, which I believe will help us monetize mobile queries more effectively than desktop today." So, $GOOG shares, which closed down 8% on the day, may soon resume their upward trend.

In the meantime, the company has built up its cash pile to $45.7 billion, an amount large enough to -

• Pay for all of the e-commerce in China during the second quarter of this year;
• Bail out Bank of America;
• Close the funding gap in the Michigan Public School Employees Retirement System.

Small consolation for an earnings disappointment.

Housing Really Starts

Said the home builder Joey Ferraro*:
"I'm working like there's no tomorrow.
Though the fiscal cliff looms,
The consumer assumes
It's the best time to buy and to borrow."

The Census Bureau reported new residential construction today for the month of September, and stunned everybody with a 15% increase in housing starts. Ground was broken on an estimated 872,000 homes, versus 758,000 in August. Analysts, the most optimistic of whom had predicted 800,000 starts, were completely surprised; even Jack Welch, maintaining his Twitter silence from the safe distance of Quito, did not cast aspersions on this unbelievable number.

What unanticipated factors led to this surprising result? For one thing, as we read in the Journal today, a gradual improvement in the housing market has reduced the supply of unsold homes to six months, from eight months a year ago. But, aren't the threat of the fiscal cliff as well as tax and regulatory uncertainty putting a damper on economic activity? Not for home buyers, apparently. They appear to realize that, with home prices rising and mortgage rates at record low levels, there may never be a better time to act.

*All Joey Ferraros appearing in this work are fictitious. Any resemblance to real Ferraros, living or dead, is purely coincidental.

Note: this post appeared originally in the Wall Street Journal's Total Return blog.

Them's Fightin' Words

Said an on-the-fence guy to his mama,
Watching Romney debating Obama:
"I enjoy when attacks
Are short on the facts
And long on political drama."

Last night's debate between President Barack Obama and his Republican challenger, former Governor Mitt Romney, seemed to generate more "woo-hoo" than "a-ha" moments, and to judge by my Twitter stream, folks like it that way. The debate was notable for the return of a spirited, feisty President, snapping out of the torpor of his first-round performance. The challenger, by contrast, seemed at times awkward, at times bullying. This aspect of the debate culminated in Mr. Obama's hard staredown over the issue of how his administration handled the Benghazi attack.

Then too, many people seem to have drawn way too much amusement over Mr. Romney's recounting of the "binders full of women" that he received while choosing his cabinet as Governor of Massachusetts.

Missing, however, from both the candidates and the softball questions pitched by the "undecided voters" at the Long Island town hall, were specific challenges and statements regarding the fiscal cliff, the mortgage malaise and the developing student loan crisis. Could it be because there are no easy answers? Finally, although President Obama correctly pointed out the flaws in Mr. Romney's tax & budget math, Mr. Romney lost an opportunity to reciprocate with the President's numbers, which also do not quite add up.

Submerged and Subprime

The mortgage malaise is enduring
And frustrates our efforts at curing,
When a fourth of all dwellings
Are currently selling
For less than the loans they're securing.

The Wall Street Journal reports that the Consumer Financial Protection Bureau, as part of an effort to unify and update mortgage lending standards, has developed the concept of a "qualified mortgage" which, if adhered to by lenders, would provide them with a safe harbor against borrower lawsuits. The CFPB would like to simplify regulation and hopes that offering sought-after legal relief and regulatory certainty to lenders will induce them to lend again.

While such initiatives are commendable, I cannot escape the thought that they ignore the elephant in the room: that roughly a quarter of all US residential mortgages are underwater, and half of those underwater mortgages are delinquent. To clear this market imbalance will take a combination of foreclosures, lender write-downs and the passage of time; there are no quick fixes.

The Two Marketeers

The absence of pricing impedes
Allocation of goods that one needs,
But economists who
Made markets that do
Were honored today by the Swedes.

UCLA's Professor Lloyd Shapley,
Who theorized gaming so aptly,
Wrote a smart algorithm,
Determining with 'im
How best to pair couples up happ'ly.

Stanford's Professor Al Roth,
Who is younger but from the same cloth,
Found broad application
For Lloyd's innovation
Of optim'ly plighting one's troth.

How can you efficiently allocate goods - such as donor organs, medical residencies and mates - that cannot or may not be priced? It's a good question, and today the committee of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel(yes, that's what it's called) bestowed its 2012 prize on two US economists who answered this question and put the answer into practice. UCLA's Professor Emeritus Lloyd Shapley was a pioneer of game theory in the 1950s and '60s. Among his many accomplishments is the solution to the "stable marriage problem": how to match a group of, say, ten men with ten women, such that none of them would rather be with someone else. The algorithm that Shapley developed with David Gale has broad applications to other matching problems.

Prof. Al Roth, late of Harvard and now of Stanford, applied Shapley's theories to such problems as matching kidney donors who lack the correct blood type to donate to a member of their own family, and matching medical students to residency programs.

A number of econ blogs have written about the two Nobel Prize recipients today, but I particularly enjoyed Economists Do It With Models and the Wonkblog.

Debate Wrap-Up

The best one can ever expect,
In debates over whom to elect,
Is that when it's all done,
One's candidate won
But the other guy gets one's respect.

Dr. Goose's household gathered this evening to watch the debate between Vice President Joe Biden and the man who would take his job, Rep. Paul Ryan of Wisconsin. We saw a spirited debate in which each man vigorously stated and defended his case while challenging that of his opponent; a sharp but respectful exchange. When it was over, the two men shook hands and remained on stage as their respective families joined them and greeted one another amiably. They gave us an example of what democracy should be - I had a momentary, faint vision of post-gridlock Washington.

On substance, it was a rather balanced outcome, regarding which most of the viewers in our family room gave the edge to the Vice President. He defended the Obama record while giving point-by-point rebuttals to the Congressman's challenges. Mr. Ryan, for his part, was hard pressed to explain what a Romney administration would do differently in Iran and Syria, and refused to provide specifics to back up the claim that 20% across-the-board tax rate cuts could be made revenue-neutral.

Still, it was a debate from which both VP candidates and their supporters could emerge with heads held high.

Not Too Big To Fail

Said Fed Governor Daniel Tarullo:
"Bank stability's hitting a new low.
We must limit the size
Of those mega bank guys,
Since our power to save them is too low."

The Fed's thought leader on bank policy believes that regulators should address the problem of too-big-to-fail banks by directly limiting their size. In a speech at the University of Pennsylvania Law School, Federal Reserve Governor Daniel K. Tarullo laid out his thoughts on safeguarding the stability of the financial system. Mr. Tarullo, whose day job is that of Professor of Law at Georgetown University, suggests that banks may not grow too big to fail if their non-deposit liabilities are limited to a fixed percentage of the nation's GDP. Such liabilities would include interbank borrowing and other short- and long-term debts, but not customer deposits.

Notwithstanding the appealing simplicity of Mr. Tarullo's proposal, a banking industry spokesman warned of "unintended consequences." In this case, one has to wonder if he isn't more concerned about the intended consequences.

Hat tip to Sallie Krawcheck.

Deductive Reasoning

Said a tax analytical gent:
"One should always make clear one's intent
On cutting deductions
To pay for reductions
In tax rates by 20%."

"Many have tried to appraise
The most likely of Mitt Romney's ways
Of sparing the loss
Of defraying the cost
Of the mortgage the middle class pays."

"Though the Gov'nor himself may not say
With what tax breaks he's doing away,
It's safe to foresee
Under Romney there'd be
Less incentive to do Schedule A."

'Twas not a gent, but a lady - Texas tax journalist Kay Bell - who analyzed Governor Mitt Romney's recent statements about his tax plan and concluded that "Romney left himself some wiggle room" in the degree to which his plan would keep the mortgage interest deduction. Says Ms. Bell:

He didn't say the mortgage interest and charitable gift deductions would remain just as they are. He said there would still be 'preferences' for them. Just spit-balling here, but since Romney again reiterated in that same Situation Room interview that he would limit deductions "particularly for people at the high end" of the income scale, it looks like some of Mitt's personal wealth peers might not get as much Schedule A bang for the tax buck as they currently do.

But would limiting some mortgage interest and charitable deductions be enough to make his tax plan revenue neutral as he insists it will be? Not many people outside the Romney campaign think so.

Though the Republican Presidential nominee hotly denies it, the non-partisan Tax Policy Center has concluded that his plan amounts to a $5 trillion tax cut over a decade, heavily tilted toward the rich, which could not be made revenue neutral without raising taxes on households with income below $200,000.

Good News is Bad News

Jack Welch, nursing a grudge,
Said: "The joblessness numbers are fudged;
Self-seekingly cooked,
Like the numbers I booked
At GE, so I'm able to judge."

When the Bureau of Labor Statistics announced this morning that the unemployment rate had fallen below 8% for the first time since January 2009, it disappointed many Republicans who were hoping for a weak number to strengthen the hand of their Presidential candidate. One of those Romney supporters, former GE CEO Jack Welch, took his disappointment a little too far:

Unbelievable jobs numbers..these Chicago guys will do anything..can't debate so change numbers

— Jack Welch (@jack_welch) October 5, 2012

Economists such as Justin Wolfers leapt to the defense of the BLS, which, although part of the President's cabinet, has a proudly independent and non-partisan structure and tradition. Other commentators regarded Mr. Welch with irony and contempt, considering the earnings manipulation that occurred during his management, resulting in a settlement of SEC charges.

Shout-out to all the fans of Dr. Goose at the BLS!

Big Bird Trilogy

Said Romney: "I find it absurd
Giving federal support to Big Bird.
To feather his nest
Leaves our budget distressed -
Free markets are really preferred."

"Though he helps us to learn ABCs,
Our country is fiscally squeezed,
And funding this fellow
Who's goofy and yellow
Means borrowing from the Chinese."

"In our nation's historic chronology,
We patriots make no apology
To assert: win or lose
It's our birthright to choose -
'Give me freedom before ornithology.'"

Debatable Figures

Presidential debating is won
When the relevant numbers are run:
The percentages which
Tell the poor from the rich -
99, 47 and 1.

Did President Barack Obama have an esprit de l'escalier last night? That's French for the moment when you realize what you shoulda said. He and former Governor Mitt Romney met for their first debate, and most observers called the contest for the challenger. Not only did the President lack the Governor's energy and enthusiasm but, in a debate that stood out for its polite, boring tone, Mr. Obama passed up repeated opportunities to score points with incendiary references to Mr. Romney's "47%" comments. Perhaps he was distracted by the 20-year figure, as in his wedding anniversary so awkwardly hijacked by the debate.

Romney's Good Idea

Said a policy wonk named Maria:
"We're in need of a tax panacea,
And I'm hearing that Romney,
The GOP nom'nee,
Has floated a clever idea."

"Mr. Romney proposes to cap
Those deductions it's too hard to scrap,
To bolster his case
Of broad'ning the base
While constricting the deficit gap."

"Though a limit of 17G
Balanced budgets will not guarantee,
I'm glad to see some
Specificity from
This heretofore vague nominee."

On the day before his first debate with Pres. Barack Obama, Mitt Romney introduced an intriguing(*) new element into the campaign with a proposal to cap personal income tax deductions at $17,000. Among the blognoscenti and twitterati, the electrified reaction was: "Tax specifics from Mitt Romney? Stuff just got real!" The concept is simple, but elegant: Romney would like to lower tax rates while broadening the base, by eliminating deductions, exemptions, credits, etc. Since each of those tax expenditures comes with a constituency that will fight to keep it, one simply sidesteps those fights by keeping all the loopholes, but limiting one's capacity to use them. In Romney's own words: "As an option you could say everybody’s going to get up to a $17,000 deduction; and you could use your charitable deduction, your home mortgage deduction, or others - your healthcare deduction. And you can fill that bucket, if you will, that $17,000 bucket that way."

Now, as Josh Barro explains in Bloomberg, even a simple and elegant proposal has the devil in the details. Moreover, it's likely that this cap will not be enough to pay for the across-the-board 20% tax cut that Mr. Romney wants. However, as we chew over this interesting new idea, it pays to remember that the perfect should never be the enemy of the good.

(*)As always, I am required to disclose that the use of the word "intriguing" signifies a good idea from someone with whom I generally disagree.

Billionaire's Blues

Said a mogul of stock-market dealing,
His support for Obama repealing:
"I don't mind paying tax,
But this President lacks
Due regard for my sensitive feeling."

In this week's New Yorker magazine, Chrystia Freeland poses the pertinent question: Why do billionaires feel victimized by Obama? "The growing antagonism of the super-wealthy toward Obama can seem mystifying, since Obama has served the rich quite well," she writes, supporting Wall Street rescues and resisting calls for bank nationalization. "The economists Emmanuel Saez and Thomas Piketty have found that 93% of the gains during the 2009-10 recovery went to the top one per cent of earners... the top 0.01 per cent captured thirty-seven per cent of the total recovery pie..."

If there is a leader of the hedge fund opposition to Obama, it may be the Bronx-born, billionaire Democrat Leon Cooperman, manager of the hedge fund Omega Advisors. Cooperman seems to have taken personal offense to President Obama's rhetoric regarding "millionaires and billionaires not paying their fair share of taxes." Says Cooperman: "It’s a question of tone. The President makes it sound like the problems of the ninety-nine per cent are caused by the one per cent, and that’s not the case." Of course, having made comparisons between Obama and Hitler on a couple of occasions, Cooperman may have tonal problems of his own.