by Bruce Webb


This figure shows graphically the outcomes for the OAS (black line) and DI (gray line) under the three alternative scenarios Low Cost (I), Intermediate Cost (II), and High Cost (III) in the 2008 Report. Almost universally reporting on Social Security revolves around Intermediate Cost and if we examine its lines we see the standard reported outcomes, the DI Trust Fund going to depletion in 2023 and OAS in 2041. But that was then, the 2009 Report shortened up the intervals to 2017 and 2037 for Intermediate Cost, and the 2010 Report is certainly going to see DI in a state of near term collapse. Okay Intermediate Cost shows us a program in need of some fixes, immediately for DI, and in the medium term for OAS. Familiar story.

And High Cost tells the same story, only more so.

But Low Cost is different. Under Low Cost Social Security OASI is projected to be fully funded through the 75 year window and even have balances growing faster than costs after 2050 and Trust Fund Ratios never falling below 350. Would this be a good outcome. Well the fully funded part is nice, and a more or less flat tail after 2050 is nice, but a constant TF ratio above 350? Well no that is not a good thing, and the only thing worse would have Low Cost OAS look like Low Cost DI and rocketing through a TF ratio of 1000 on way to 2000. There is a point where the Trust Fund is literally too big for Social Security's good. To understand why follow me below the fold.

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Mark Thoma at Moneywatch writes a made up interview "with William Dudley, President of the Federal Reserve Bank of New York, on the Fed's failures as a regulator prior to the crisis, and its plans to improve regulation going forward." (via Economist View)

by Linda Beale

Limit Banks' Proprietary Trading? Links Worth Noting on Possible Reprise of Glass Steagall Maybe

Obama takes on America's banks with new Glass-Steagall act, Guardian.co.uk, Jan. 21, 2010

President Obama came out in support of the "Volcker rule" intended to stop depositary banks from running hedge funds and using their money to bet on the markets. I particularly like the part that recognizes that allowing banks to merge into bigger and bigger consolidated enterprises is not likely to be in the public interest. (I've actually proposed we severely restrict tax-free reorganizations generally.) About time that Obama stood for something stronger than "oh, let's limit leverage a little bit" on the big banks. It will take a significant package with significant changes to make a difference to the amount of risk in the financial system, but looks like Congress has already decided it doesn't want to touch the Volker rule with a ten-foot pole. Or at least, the people in Congress that need to move something through.

US Senator Dodd: Strongly Supports 'Volcker Rule', Boles, dow jones (Feb. 3, 2010)

Then there's Chris Dodd, about whom there have been on-again, off again indications of his support, nonsupport for the Volcker rule. Dodd now says he's supportive, but worries about his compromise negotiations on banking reform. I'm worried about those too--that they will be far from the bold steps that need to be taken to get this issue under control. Breaking up big banks--not just protecting deposit banks--is probably a step that needs to be taken.

Towards a 21st Century Glass-Steagall, new deal 2.0 (Jan 21 2010) (new site for me, discovered courtesy of my Angry Bear colleagues) (interesting take on problems of proprietary trading)

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by Dale Coberly

AN IMMODEST PROPOSAL

Bruce Webb offered a modest proposal in a recent post to "fix" the Social Security "problem" by (essentially) cutting the payroll tax a few tenths of a percent to reduce the surplus and thereby reduce the debt by that much money borrowed from and owed TO Social Security.

What is wrong with Bruce's proposal is that it takes more intelligence to understand than most people can bring to bear on the question, and would require more honesty from Congress than they have shown in two hundred years.

So here is an alternate proposal more suited to the intelligence and honesty of the times:

RAISE the payroll tax one tenth of one percent this year, and again next year, and the year after. This would be, from some perspectives, slightly unfair to the workers who pay the tax... but not a huge amount of money... and it would increase the national debt. But it would give congress some extra money to play with to spend on submarines and other things we need to win the war on terror. And it would put Social Security into long term actuarial solvency beyond any question or doubt.

And that would make the extra cost worthwhile to the workers. They would have their Social Security guaranteed, and that guarantee is worth more than a few bucks a week.

What the Congress would do with the rising debt is anybody's question. But it is not a question that ever troubled them in the past, when the enemies of Social Security weren't using "the looming crisis in Social Security" as an argument for killing the workers ability to save for their own retirement.

Oh, the limit of the payroll tax increase proposed here would be a 2% increase for the worker and for his employer. Phased in over twenty years, it wouldn't hurt. And it really would go to pay for the eventual retirement of the workers paying the tax. Congress would never have to pay back the money in the trust fund, so that shouldn't worry them. Unless the sight of those phony iou's climbing into the stratosphere made them nervous.
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by Dale Coberly

Many months ago, I quoted the brilliant Janet Tavakoli's book Credit Derivatives and Synthetic Structures:

The trader then went on to tell me that Commercial Bank of Korea would sell credit default protection on bonds issued by the Commercial Bank of Korea.
"That's very interesting," I countered, "but the credit default option is worthless."
"But people are doing it," persisted the trader.
"That's because they don't know what they're doing," I affirmed. "The correlation between Commercial Bank of Korea and itself is 100 percent. I would pay nothing for that credit protection. It is worthless for this purpose."
The trader mustered his best grammar, chilliest tone, and most authoritative voice: "There are those who would disagree with you." (p. 85)

Apparently, that anonymous trader—or another money-losing risk-mispricing hedge fund manager—is now running The Big C:

Credit specialists at Citi are considering launching the first derivatives intended to pay out in the event of a financial crisis. The firm has drawn up plans for a tradable liquidity index, known as the CLX, on which products could be structured that allow buyers to hedge a spike in funding costs....

"The great thing about the index is that it hedges your funding costs while being very simple to trade. I believe it will reduce the systemic risk in the industry, akin to how the advent of swaps means people don't worry about interest-rate exposures any more – they just pay a fee to hedge it," he says.

Because if funding dries up, The Big C will be there to support you!

I thought this was an attempt to make money on a premium, but it isn't:

Like a swap, the contracts envisaged by Citi would be entered into without an up-front premium, with money changing hands according to the index's movements around a fair strike value.

So the model is actually that you pay a higher cost of funds during good times, and during bad times, depend on the ability of your counterparty to make you whole.

When banks do it, it's called "deposit insurance," and it is valuable because in the worst-case scenario, the U.S. Treasury can print money. Since—the last time I checked—Citigroup cannot do that, the option is as valuable as the ability of the bank to perform in a crisis. How did that work out last time?

Via my usually source for financial information.

Or, nothing to see here. (via Felix's Twitter feed)

by Rebecca Wilder

Yes, the renminbi (RMB) is closer to fair value. Chinese Foreign Ministry spokesman Ma Zhaoxu states:

"Our currency, the RMB, has appreciated more than 20 percent against the U.S. dollar since July 2005, when China moved to a floating exchange rate regime," Ma said. Before 2005, the RMB was pegged to the U.S. dollar at a fixed rate.

"The RMB exchange rate has drawn close to a reasonable and balanced level, given the international balance of payments and the market supply and demand for foreign exchange," Ma said.

The New York Times asserts that China's currency is undervalued by 25%-40%. The NY Times, like many politicians and media channels, is entirely too obsessed with China's exchange rate; they fail to understand that economic fundamentals are changing.

Contrary to popular belief, the level of the renminbi has become rather inconsequential to Chinese trade flows. Why? Because despite the fact that the renminbi has been pegged against the dollar since July of 2008, imports are surging.

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Favorite papers from the 2008 AEA in New Orleans (all PDF, ungated):

Emily Haisley on lottery tickets and perception. I heard about this paper before reading it. Such a simple idea, such a direct experiment.

Michele Tertilt: Women's Liberation: What's in it for Men (with M. Doepke). The next step is to figure out why so many rulers started having a significant number of female children. But that's for sociologists, whose work is harder than that of economists.

Dean Yang and Sharon Maccini: Under the Weather: Health, Schooling, and Socioeconomic Consequences of Early-Life Rainfall. The paper that convinced me that Economics really is a good field in which to work.

Marcellus Andrews, "Risk, Inequality, and the economics of disaster." This was much better live, where he prefaced it by taking about coming the hotel as an insurance inspector and pointed to the "sh*t line." After the presentation, people were coming out, talking about how if they had wanted a sermon, they would have gone to church. Only person I went out of my way to thank for his talk, interrupting him conversation with Jamie Galbraith in the process.

Acemoglu and Finkelstein, Input and Technology Choices in Regulated Industries: Evidence from the Health Care Sector. Two future Nobelists collaborate. What's not to like?

Dani Rodrik, Second Best Institutions. The best of a set of presentations.

A Healthy Blog notes that Massachusetts has reversed the national trend:

Since the enactment of Chapter 58, Massachusetts has increased the percentage of employers offering coverage to their employees. With the employer offer rate up 4% over two year, to 76%, we are climbing well above the national average of 60%. This increase occurred in spite of the recession. Most employees (80%) who are eligible for employer-sponsored insurance choose to enroll. There are large (and predictable) differences between small and large employers, with the small employers less likely to offer health insurance.

Full report here (PDF).