Infinite Jeff

What the income-inequality denialists and “politics of envy” critics don’t want to see:  pre-tax income and wage data compiled by Thomas Piketty (Paris School of Economics/EHESS) and Emmanuel Saez (Department of Economics, UC Berkeley, Director, Center for Equitable Growth, 2009 John Bates Clark medal winner).

From which data we’ve created a few visual displays of income concentration among the top 1% of U.S. families (the “merely rich”), the top 0.1% of U.S. families (the “very rich”) and the top 0.01% of U.S. families (the “filthy rich”) from 1950 to 2007.  Headlines for 2007:

• The merely rich — 1,498,750 families with incomes of at least $398,900 — had a 23.50% share of all U.S. family income.
• The very rich — 149,875 families with incomes of at least $2,053,000 — had a 12.28% share of all U.S. family income.
• The filthy rich — 14,988 families with incomes of at least $11,477,000 — had a 6.04% share of all U.S. family income.

The income shares of the merely, very and filthy rich in 2007 were all much, much larger than they were in 1950 — 12.82%, 4.39% and 1.22%, respectively.  Compared to the previous secular peak for income concentration in the late 1920’s, the 2007 income share of the merely rich was just shy of the 23.94% record set in 1928.  The 2007 income shares of the very and filthy rich, however, were well in excess of  the previous highs (also set in 1928) of 11.54% and 5.02%, respectively.

If the increase from 1950 to 2007 in the income share of the merely rich was remarkable, the increase in the income share of the very rich was truly exceptional and, as for the filthy rich … un-fucking-believable:

• From a 12.82% income share for the merely rich in 1950 to a 23.50% share in 2007 — an increase of 83%.
• From a 4.39% income share for the very rich in 1950 to a 12.28% share in 2007 — an increase of 180%.
• From a 1.22% income share for the filthy rich in 1950 to a 6.04% share in 2007 — an increase of 395%!

Looked at another way, the increase from 1950 to 2007 in the share of U.S. family income going to the top 1% as a whole was mainly attributable to increases in the income shares going to the very and filthy rich:

• The income share of the top 1%, excluding the filthy rich (i.e., the 99%–99.99% fractile), increased only 51% from 1950 to 2007.
• The income share of the top 1%, excluding the very along with the filthy rich (i.e., the 99%–99.9% fractile), increased only 33% from 1950 to 2007.

The accelerating growth of income concentration within the top 1% is evidence of nothing less than the emergence, especially since the 1980s, of an income plutocracy in the United States:

• As a percentage of the income going to the top 1.0% of U.S. families, the share of the very rich increased from 34.25% in 1950 to 52.23% in 2007.
• As a percentage of the income going to the top 1.0% of U.S. families, the share of the filthy rich increased from 9.52% in 1950 to 25.68% in 2007.

Economics & Finance, Politics filthy rich, income distribution, income inequality, piketty & saez, plutocracy

Economics & Finance, Law, Politics banks, dodd-frank, econolypse, proprietary trading, volcker rule

Economics & Finance, Law banks, dodd-frank, econolypse, proprietary trading, volcker rule

From today’s paper, the U.S. counterinsurgency strategy in Afghanistan reduced to meaningless chartjunk:

As if Edward Tufte’s diagnosis of the state of our verbal and statistical reasoning in the era of PowerPoint — “Power corrupts; PowerPoint corrupts absolutely” — needed any confirmation.

Make sentences, not bullet points.

Economics & Finance, Law, Politics afghanistan, counterinsurgency, powerpoint, tufte

Geithner re-announces his public-private plan for toxic assets.  Leaving aside the boring details, the plan amounts to what?

 •  corporate statism

•  crony capitalism

•  lemon socialism

•  Groucho Marxism

The answer, of course, is … all of the above.

Economics & Finance, Politics banks, geithner, ideology, public-private fund, TARP

Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits — a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

— John Maynard Keynes, The General Theory
of Employment, Interest and Money (1936)

— Jacket art by Edward Koren from
Akerlof & Shiller, Animal Spirits (2009)

Economics & Finance akerlof, animal spirits, econolypse, keynes, recession, shiller

The dean of the bank M&A bar speaks to the Financial Times:

“If the phrase ‘height of stupidity’ has any meaning, it would be shown if they nationalise a US bank,” said Rodgin Cohen, chairman of law firm Sullivan and Cromwell, who has advised on many of the past year’s biggest bank rescue deals and recapitalisations.

Mr Cohen stressed that the nationalisation of a large global bank had never been tested and the unintended repercussions of such a move could be severe, particularly in relation to any of the bank’s foreign subsidiaries. He favours a plan that would infuse banks with more capital and extract bad assets from their balance sheets as quickly as possible, to boost confidence in the institutions.

“Given time, these institutions have enormous earnings capacity,” he said. “If you start to take out these bad assets, we’ll start to see confidence rebuilt.  It can turn around, and it will turn around.”

And when it does turn around, we want to make sure our guys are still in charge so they can privatize the gains and share them with us.

Looks like the rent-seekers have found their mouthpiece.

Economics & Finance, Politics banks, law firms, lawyers, lemon socialism, nationalization

Corporate governance icon Lucian Bebchuk gives his directions to Public-Private Neverland in “How to Make TARP II Work,” a proposed structure for private sector investors to participate in the government’s acquisition of troubled assets from banks.  Prof. Bebchuk believes that an effective plan is possible based on the Public-Private Investment Fund (dimly) previewed by Treasury’s Geithner last week.  One element of Bebchuk’s proposal — establishing a “significant number” of privately managed P-P funds, each financed in part by the government, to make competing bids for troubled assets — reprises a paper he published in September 2008, during the debate over TARP I.

The other, less familiar element calls first for private fund managers to compete for government financing, to make proposals that maximize private participation in the P-P funds and minimize the government’s exposure.  If, for example, the government financing is in the form of a non-recourse loan, competitive bidding might result in each P-P fund being financed 60% by the government and 40% with private capital contributions, leaving the government exposed only to losses in excess of 40% of the fund portfolio’s initial value (itself the result of a competitive bidding process).  To keep the interests of the government and the private sector investors aligned in a heavy-loss scenario, the 40% private participation could be split so that only ¾ is equity and the remaining ¼ is debt that ranks pari passu with the government financing.  To give the government some exposure on the upside, it could acquire an equity participation in lieu of a portion of (or in addition to) its non-recourse loan.  And so forth.

Bebchuk’s dual-auction structure — bid for the government financing first, and then bid for the troubled assets — promises a sophisticated mechanism for price discovery in difficult circumstances, and is appealing on both rational and emotional grounds.  Designing the process and tinkering with the various parameters would be fun for a few months, and would certainly make it easier to ignore the advancing hoofbeats of the econolypse.  But even if the structure ultimately results in bid prices that reflect the “fundamental” economic value of the troubled assets (i.e., the discounted present value of their expected cash flows if held to maturity), what reason is there to think that these bids will be any closer to the troubled assets’ book values — and the banks’ asking prices — than the prices available in today’s supposedly “illiquid” market? Bebchuk makes a critical assumption:

It should be stated at the outset that making this market well-functioning would not necessarily bring the banking sector to normalcy. A well-functioning market will convert some of the troubled assets held by banks into cash and, perhaps more importantly, provide more reliable valuations for the troubled assets that banks will retain. While this might confirm the claims made by some banks about the value of their assets, it might lead to realization that some other banks are insolvent or inadequately capitalized, which would require infusions of additional capital. Thus, restarting the market for troubled assets might well be insufficient by itself to solve banks’ problems, but, at the minimum, it would clarify matters a great deal, removing the clouds that currently hamper the activities of some banks while identifying those requiring an infusion of capital. In any event, for the remainder of this paper, I shall take as given the administration’s stated objective of restarting the market for troubled assets, and I shall focus on how this objective can be best achieved.

I’m afraid there isn’t time for this.  If a public-private, dual-auction troubled asset acquisition plan isn’t reasonably certain to result in market-clearing prices, then it will be cheaper and more effective to nationalize now and auction off the troubled assets to private sector investors later.

Economics & Finance banks, bebchuk, econolypse, public-private fund, TARP

Roubini says that if we don’t like the sound of nationalization, we should call it “receivership” instead.

Calculated Risk suggests “pre-privatization” for a slight shift in emphasis.

Yglesias goes all in:

I say we go further and call it “awesome capitalist cowboys” just to ensure that everything’s really in tune with American cultural norms. Everyone loves cowboys!

Oh, what the hell — call it a “tax cut” and let slip the stress-testers.  Raise up the Resolution Trust Corporation.  Party like it’s 1989.

(h/t Matt for the linguistic trend-spotting)

Economics & Finance, Politics banks, nationalization

Martin Wolf writes in today’s Financial Times:

The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets.

Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it.

Read more…

Economics & Finance, Politics banks, geithner, lemon socialism, nationalization, TARP