DATA MGMT

A lot of emphasis is on the “99%” versus the “1%” in these protests. But who are the 1% and what do they do for a living? Are they all Wilt Chamberlains and Oprahs and other people taking part in the dynamism of the new economy? Nope. It’s same as it ever was — high-level management and the financial sector.

Suzy Khimm goes through the numbers here. I’m curious about occupations. I’ll hand the mic off to “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data“ by Bakija, Cole, and Heim. This is the latest and greatest report on occupations and inequality. Here’s a chart of the occupations of the top 1%:

Inequality has fractals. Let’s go into the top 0.1% — what do they look like? Here’s the chart of the occupations of the top 0.1%, including capital gains:

It boils down to managers, executives, and people who work in finance. From the paper: “[o]ur findings suggest that the incomes of executives, managers, supervisors, and financial professionals can account for 60 percent of the increase in the share of national income going to the top percentile of the income distribution between 1979 and 2005.”

For fun, there are more than twice as many people listed as “Not working or deceased” than are in “arts, media, sports.” For every elite sports player who earned a place at the top of the income pyramid due to technology changes and superstar, tournament-style labor markets that broadcast him across the globe, there are two trust fund babies.

The top 1% of managers and executives often means C-level employees, especially CEOs. And their earnings versus the average worker have skyrocketed in the past 30 years, so this shouldn’t be surprising:

How has this evolved over time? Can we get a cross-section of the top of that protest sign above?

Same candidates. There’s a reason the protests ended up on Wall Street: The top 1% and top 0.1% comprises all the senior bosses and the financial sector.

One of the best things about Occupy Wall Street is that there is no chatter about Obama or Perry or whatever is the electoral political issue of the day. There are a lot of people rethinking things, discussing, learning, and conceptualizing the kinds of world they want to create. Since so much about inequality is a function of the legal structure known as a “corporation,” I’d encourage you to check out Alex Gourevitch on how the corporate is structured in our laws.

The paper notes that stock market returns drive much of the manager’s income. This is related to a process of financialization, something JW Mason has done a fantastic job outlining here. The “dominant ethos among managers today is that a business exists only to enrich its shareholders, including, of course, senior managers themselves,” and this is done by paying out more in dividends that is earned in profits. Think of it as our-real-economy-as-ATM-machine, cashing out wealth during the good times and then leaving workers and the rest of the real economy to deal with the aftermath.

Both articles mention chapter 6 of Doug Henwood’s Wall Street; anyone interested in how things have changed and where they need to go would be wise to check it out. It’s even available for free pdf book download here.

There’s good reason to focus on the top 1% instead of the top 10 or 50%. There is evidence that financial pay at this elite level is correlated with deregulation and the other legal changes that brought on the crisis. High-ranking senior corporate executives’ pay has dwarfed workers’ salaries, but is only a reward for engaging in shady financial engineering practices. These problems require a legal solution and thus they require a democratic challenge and a rethinking of how we want to structure our economy. Here’s to the 99% and Occupy Wall Street helping get us there.

(Updated: This post fixed the inclusion of an incorrect chart which referred to the top 0.1% instead of the top 1%. Additional chart added for top 1%.)

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de Rortybomb http://bit.ly/rflMlt

IOR caps: a new instrument of monetary policy?

Fri, 14 Oct 2011 15:29:09 -0400

IOR caps: a new instrument of monetary policy?:

As the MMT-ers emphasize, in aggregate bank lending is almost never reserve-constrained. Unless a central bank is willing to tolerate arbitrarily high interest rates, it must be willing supply reserves in response to increasing demand.

However, to point out that the banking system is not reserve constrained does not imply that individual banks are not reserve constrained. Macro types tend to assume there is an interest rate and an interbank market to which any bank can turn for reserves at the policy interest rate. But that’s simply not true, at least in the United States. Most banks do not regularly borrow at all on interbank markets, or at the central bank discount window. [1] The largest banks have ready access to interbank loans and use them to finance substantial portions of their balance sheets. But small banks do not. This is understandable. Borrowing in the “Federal Funds market” occurs via bilateral unsecured loan contracts. Small banks are perfectly comfortable lending to large, implicitly backstopped banks. But banks large and small are reluctant to make cheap unsecured loans to the Bank of Palookaville, whose exposure to the local Cadillac dealer is hard to evaluate from a distance. So small banks tend to amass precautionary stashes of reserves and lend them overnight to big banks, who may borrow at will. Prior to the financial crisis, the net reserve position of the largest 20% of US banks was negative. All of these banks’ reserves and then some were borrowed on the interbank market. That has changed since the Federal Reserve has flooded the banking system with cash, but small banks continue to devote a larger fraction of their balance sheets than large banks to reserves and near-reserves. While large banks happily rely upon central-bank guaranteed liquidity, small banks maintain buffers in case that abundance fails to trickle down. Aggregate lending cannot be reserve constrained, but lending by small banks may well be.

If small bank lending is reserve constrained, then policies that redirect flows of reserves from larger banks to smaller banks might be expansionary. At the margin, Bank of Palookaville is more likely to fund a loan if its reserve stockpile is well above what it requires for self-insurance. As the stockpile dwindles, a small bank’s cost of lending must include an increasing charge for the bank’s liquidity risk. There is evidence for this. In an influential paper, Kashyap and Stein famously documented a “bank lending channel” of monetary policy that operates predominantly through smaller banks.

But how could a central bank oppose the general tendency of reserves to flow from smaller to larger banks? Once the Fed buys an asset or makes a loan, the reserves are “out there”, no longer under its control. In the past, affecting patterns of reserve flow might have been difficult. But now the Fed pays interest on reserves, on terms that are entirely at its discretion. Suppose that the Fed were to cap, in absolute dollars, the quantity of reserves on which it is willing to pay interest to any single bank. Then banks with “too many” reserves would look to shed the excess, an unremunerated asset they need to finance. They might reduce the interest they pay (or raise the fees they charge) to depositors, which, at the margin, would cause funds to flow to banks whose reserve level is below the cap. Alternatively, reserve-heavy banks might lend their excess directly to smaller banks. This would allow the two banks would split the interest payment that would otherwise have been foregone, while reversing the usual direction of reserve flow in the interbank market. In either case, smaller banks might find any liquidity constraints they face substantially reduced.

The level at which reserve remuneration is capped would become a new instrument of monetary policy. The most contractionary setting would be where we are now, with no cap at all and the vast majority of excess reserves held by the largest banks. A hyperexpansionary policy would determine the cap by dividing the total quantity of excess reserves by the nearly 7000 US banks, unleashing forces of arbitrage that would inflate the balance sheet of every Podunk bank. Between these two poles there are infinite gradations, a tunable instrument of monetary policy.

Beyond the important but sterile dimension of “contraction” vs. “expansion”, there are other reasons to like this idea. Banking activity in the United States is quantitatively dominated by a small number of very large banks for whom the absence of reserve constraint is a competitive advantage. Reducing or eliminating the reserve constraint faced by small banks would even up the playing field. From a Hayekian perspective, status quo banking has devolved from an enterprise in which dispersed decisionmakers compete for advantage based on context-specific information towards a notionally private form of central planning, a Soviet backed by a few giant data-crunching hierarchies. If your inner Hayek is strong, you should applaud increasing the ability of small bankers to lend to people they know and projects they understand, while bearing much more of the risk than employees of large banks would. Smaller banks lend disproportionately to small and medium-sized enterprises, so if you think small entrepreneurs are at the heart of the economy, shifting activity towards smaller banks should help. Finally, small banks are not too big to fail. If we can’t break up the TBTF banks (I still hope we can), perhaps we can slowly deflate them by creating incentives for activity to migrate elsewhere.

Capping interest on reserves might or might not prove helpful. Quantitatively, I don’t think we have a sense of how much more lending would occur if small banks, like large banks, faced no liquidity constraint. On one hand, “the 99%” of banks currently account for only 22% of activity (measured by balance sheet size) and the smallest 90% of banks account for less than 8%. You can argue that with numbers like these, smaller banks just can’t make a difference. On the other hand, finance flows fast and the hyperconcentration of banking may prove reversible. An IOR cap has no financial cost, can be implemented at will, and would be expansionary at the margin however large or small the effect. Perhaps it is worth a try.

[1] According to bank call reports (June, 2011), only about 40% of US banks borrow funds from the interbank or repo markets. Both the fraction of banks that use interbank finance at all and the degree to which banks finance their assets in the interbank market strongly correlates with size. As of the most recent reports, 71% of banks in the largest size decile reported using some interbank or repo finance, which financed more than 4% of these banks’ balance sheets. Only 6% of banks in the smallest size decile reported any interbank or repo funding at all. Of these few small banks that do borrow reserves, interbank and repo finance accounts for only 2% of their funding. Prior to the financial crisis (September 2006), banks in the top decile relied on interbank and repo markets to fund roughly 9% of their (gigantic) balance sheets, while the smallest decile (all banks) received less than 1% of its funding from these markets.

Call reports are end-of-quarter snapshots, and so will undercount banks that transiently tap the interbank market to cover sporadic reserve shortfalls. But that would be true across deciles, and wouldn’t alter the lower frequency structure of interbank funding.

de interfluidity http://bit.ly/nqCzl4

What Obama Wants - Krugman

Fri, 08 Jul 2011 20:37:54 -0400

What Obama Wants - Krugman:

Now, this might just be theater: Mr. Obama may be pulling an anti-Corleone, making Republicans an offer they can’t accept. The reports say that the Obama plan also involves significant new revenues, a notion that remains anathema to the Republican base. So the goal may be to paint the G.O.P. into a corner, making Republicans look like intransigent extremists — which they are.

But let’s be frank. It’s getting harder and harder to trust Mr. Obama’s motives in the budget fight, given the way his economic rhetoric has veered to the right. In fact, if all you did was listen to his speeches, you might conclude that he basically shares the G.O.P.’s diagnosis of what ails our economy and what should be done to fix it. And maybe that’s not a false impression; maybe it’s the simple truth.

Once Greece goes…

Mon, 04 Jul 2011 15:43:53 -0400

Once Greece goes…:

The Indignati are not stupid, and are well aware of two salient points. First, the ‘bailouts’, as they are always called, are no such thing. Taxpayer-funded capital injections into otherwise bankrupt banks were bailouts. The Greek ‘bailouts’ are loans, pure and simple. The money will have to be repaid, and repaid at ungenerous rates of interest: 5.2 per cent for Greece, 5.8 per cent for Ireland. These short-sighted and grasping interest rates, motivated by the need to provide political cover for other governments, make an already critical problem significantly worse. The Greeks know they are being lent money just so they can work very hard for lower wages and higher taxes in order to pay it back at great cost. This arrangement is in place because of the second thing the Indignati know well, the fact that the outstanding Greek debt is mainly owned by French and German banks. This is why the Western European governments are especially keen on the ‘bailout’: it’s helping to keep their banks solvent. The Indignati do not find that a compelling reason to embrace a decade or so of abject misery. They want the Greek government to default, and the banks to accept losses for loans they shouldn’t have made in the first place.

Eurozone Brinksmanship: Ministers Walk Back Greek Rollover Commitment, Demand Austerity Measures First

Mon, 20 Jun 2011 17:13:03 -0400

Eurozone Brinksmanship: Ministers Walk Back Greek Rollover Commitment, Demand Austerity Measures First:

One of the interesting features of the seemingly unending Eurozone crisis is that the half life of rescue measures is decreasing.

The elephant in the room, which we will put aside to focus on the current state of play, is that everyone knows the Greek debts must be restructured. To have Greece pay out punitive rates on past debt will simply grind the economy into a deeper hole, worsening its debt to GDP ratio and eroding its physical and human infrastructure. All the delay of the inevitable does is allow for more extend and pretend while Western financial firms strip the economy for fun and profit. And this is terribly inefficient looting; their profits from this pilferage will be small relative to the pain inflicted on the Greek populace.

Why Fischer’s IMF candidacy is a non-starter

Mon, 13 Jun 2011 17:09:29 -0400

Why Fischer’s IMF candidacy is a non-starter:

The important difference of opinion with respect to organizing war production shaped up between Lt. Gen. Brehon Somervell, commander of Army Services Forces, and Simon Kuznets and his former student-turned-boss,Robert Nathan, at the civilian War Production Board.

Since 1924, the official plan if war broke out had been, first, put the military in charge of civilian production. But, as Lacey writes, “despite years of planning and having sent hundreds of senior officers to the Industrial Staff College, [the military] had absolutely no idea on the eve of the war what services would be needed to fight,” much less how to ramp up production to the astronomical levels required by a desperate war.

So in the first weeks after Pearl Harbor, President Franklin Roosevelt signed an executive order creating a civilian War Production Board, consolidating various existing agencies and charging it with coordinating all aspects of the mobilization. In charge would be Donald Nelson, a former Sears, Roebuck executive (that is, after Supreme Court Justice William O. Douglas briefly ran the show). Nelson hired Nathan for his all-important planning committee, who in turn hired Kuznets as chief statistician (as economists were often identified in those days). A few weeks later, the War Department (as today’s Defense Department was known then) restructured itself, as well, establishing three broad chains of command: air force, ground force and supply, all of them under Marshall. In charge of supply would be Lt. General Somervell, best remembered today for his “brainchild,” the Pentagon building.

Kept from All Thoughtful Men

Mon, 13 Jun 2011 17:08:12 -0400

Kept from All Thoughtful Men:

The vanishing sovereignty of Greece

Thu, 09 Jun 2011 07:17:04 -0400

The vanishing sovereignty of Greece :

In other words, Greece’s economic sovereignty has already vanished. Unless Greece does what the Troika wants it to do to get its financial house in order, it will collapse and become Cuba by the Aegean. If the government does regain control of its finances, economic sovereignty and the national pride that goes with it will be restored.

Or maybe not, because the euro zone debt crisis has handed the EU and the ECB a golden opportunity to create a supranational government. Actually, “government” might be the wrong word, because it implies that it is democratically elected. Better to call it a supranational bureaucracy that assumes it has the power of an elected government.

Debtor's prison

Mon, 06 Jun 2011 16:09:30 -0400

Debtor's prison:

Economic history is filled with bouts of financial euphoria followed by painful mornings after. When nations awake saddled with debts incurred to finance wars, episodes of failed speculation, or grand projects that haven’t paid off, they have two choices. Either the creditor class prevails at the expense of everyone else, or governments find way to reduce the debt burden so athat the productive power of the economy can recover.

A $4.2bn question for Sino-Forest Corporation

Thu, 02 Jun 2011 20:32:01 -0400

A $4.2bn question for Sino-Forest Corporation:

Muddy Waters Research, a specialist in Chinese companies, on Thursday issued a blockbuster “strong sell” rating on Toronto-listed Sino-Forest Corporation, a self-described “commercial forest plantation operator in China”.

But this was no ordinary “sell” rating: Muddy Waters both initiated coverage on the forestry company, which listed in Canada via a reverse takeover in 1995, and accused it of a “stratospheric” fraud.

In response, the Toronto market authorities suspended trading in Sino-Forest stock — trading symbol TRE.TO — pending a clarification or two.

Copenhagen Interpretation Finance

Mon, 30 May 2011 15:26:36 -0400

Copenhagen Interpretation Finance

Soft options are no longer viable options

Sun, 29 May 2011 19:48:40 -0400

Soft options are no longer viable options:

Has this been the first policy shift since the arrest of Dominique Strauss-Kahn? A lingering dispute between the International Monetary Fund and the European Union has come out in the open. It is about the EU’s hesitance in supporting Greece all the way through next year. The IMF is saying to the EU: unless you agree to new loans for 2012, we are not going to risk our shareholders’ funds and pay the next tranche of the old loan. That tranche is due on June 29. If the stand-off is not resolved, Greece will default in July.

I understand that this was already the position when Mr Strauss-Kahn was running the IMF. But if he was still in charge today, I suspect, he would have tried, and possibly succeeded, to persuade the political leadership of the EU to accelerate the discussion about a second loan. Or he would have tried to postpone the publication of the latest IMF/EU report on progress on Greek economic reforms and debt sustainability. I would have been a touch more confident that a really damaging accident could be avoided.

All Watched Over by Machines of Loving Grace (2011) - Ep. 1

Thu, 26 May 2011 09:23:08 -0400

All Watched Over by Machines of Loving Grace (2011) - Ep. 1

DATA MGMT

Bloomberg’s Awful Comment; What Can We Say For Certain Regarding the GSEs?

What happened at MF Global

Negative natural rates of interest and NGDP targets

Le seigneur de l’euro

the neoliberal corpse

From the Armchair to the Computer

Lower interest rates, higher savings?

Who are the 1%, and what do they do for a living?

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Like this:

IOR caps: a new instrument of monetary policy?

What Obama Wants - Krugman

Once Greece goes…

Eurozone Brinksmanship: Ministers Walk Back Greek Rollover Commitment, Demand Austerity Measures First

Why Fischer’s IMF candidacy is a non-starter

Kept from All Thoughtful Men

The vanishing sovereignty of Greece

Debtor's prison

A $4.2bn question for Sino-Forest Corporation

Copenhagen Interpretation Finance

Copenhagen Interpretation Finance

Soft options are no longer viable options

All Watched Over by Machines of Loving Grace (2011) - Ep. 1

All Watched Over by Machines of Loving Grace (2011) - Ep. 1