Saturday, July 19, 2014

Some Interesting Articles on the Web (July 19, 2014)


Israel, Palestinians, Gaza:
“Gaza and Israel: The Road to War, Paved by the West.” New York Times op-ed by Nathan Thrall.

Argentina:

“Argentina and the holdouts: Tick tock.” Article by H.C. on The Economist website.
“Sovereign Debt at Square One.” Article by Jeffrey Frankel posted at the Project Syndicate website.

Inflation:
“Addicted to Inflation.” Paul Krugman makes good points about those who have been warning that Fed policy would lead to higher inflation. However, he does not discuss his own advocacy that the Fed raise its target inflation rate of two percent to perhaps four percent. As I understand it, one reason he thinks a higher inflation target is justified is that it is a way around the zero lower bound, i.e., it is a way to lower real interest rates below zero. In his view, this is necessary in order to reach full employment. I think he underestimates the potential for inflation to get out of control and underestimates the psychological and political effects of higher inflation. That is one reason that I think a better policy response in the current situation to unemployment is fiscal policy, not higher inflation rate targeting. Of course, in the current political situation, that is not going to happen. Nevertheless, Krugman is right that the inflation fear mongers have been wrong, and that many of them won't admit it.

“Understanding the Crank Epidemic.” Paul Krugman blog post.

“Why Amity Shlaes is dead wrong about inflation.” James Pethokoukis writing for the AEI website.
“Inflation Cranks Keep Cranking.” Article by Ramesh Ponnuru for Bloomberg View.

“The Trouble With Shadowstats” Blog post by John Aziz.
Malaysia Airliner Flight 17:
“The Crash of Malaysia Airlines Flight 17 Is a Game Changer.” Article by Julia Ioffe for the New Republic website.

“Whoever Shot Down the Malaysia Airlines Plane Probably Didn't Know What They Were Aiming At.” Article by Linda Kinstler for the New Republic website.

Australia Carbon Tax Repeal:
“The Repeal of Australia’s Carbon Tax Could Have Worldwide Ramifications.” Article in Slate by Ariel Bogle.

“Australia Becomes First Developed Nation to Repeal Carbon Tax.” Article by Rob Taylor and  Rhiannon Hoyle posted at The Wall Street Journal website.

Miscellaneous:

“D.C. Decriminalizes Marijuana: Pot Politics Buds Along the Potomac.” Francis X. Clines writing for “Taking Note,” The New York Times editorial page editor’s blog.
“America’s Long History of Immigrant Scaremongering: Conservatives claim that the young immigrants crossing the border are diseased and pose a dangerous public health risk. It’s a sad American tradition.” Slate article by Jamelle Bouie.

Wednesday, July 16, 2014

Some Interesting Articles on the Web (July 16, 2014)


Israel, Palestinians, Gaza:
“Jewish Groups Mostly Silent on Israeli Beating of American Teen Tariq Khdeir: J Street Calls It 'Brutal' — ADL Has No Comment.” Article in Jewish Daily Forward.

“US blocked Qatari funds intended for Hamas employees.” This article in The Times of Israel says that funds from Qatar to pay civil servants in the Gaza Strip were blocked by the U.S. That is not entirely clear. See next article.
“Hamas is looking for a way out: The organization’s financial straits far outweigh the image boost provided by Operation Protective Edge.” This article in Haaretz highlights divisions in the Arab world with respect to Hamas and suggests that the blocking of Qatari funds to pay civil servants in Gaza was due to Israeli pressure.

“What Hamas hopes to gain from the crisis in Gaza.” Article by Ishaan Tharoor in The Washington Post.
“Israel can't win this or any future conflicts by bombing Gaza.” Article by Ibrahim Sharqieh in the Los Angeles Times.

“Iron Dome—Savior, or Sales Job? When the fighting is over in Gaza, one of these stories is going to look strange.” James Fallows discusses the controversy over the effectiveness of Israel’s Iron Dome rocket shield in a post at The Atlantic website.
“Iron Dome: the public relations weapon.” John Mecklin writes a rather critical article about the Iron Dome in a post on the Bulletin of the Atomic Scientists website.

“How Israel's ‘Iron Dome’ works.” Blog post by N.P. on The Economist website. This post is more positive about the effectiveness of the Iron Dome than the previous articles.
Argentina:

“Stopping a repeat of Argentine debt war” by Elaine Moore in the Financial Times.
“If Argentina Settles Debt Dispute, More Claims Could Come: Economists Figure Country Could Be on Hook for About $13 Billion, Far Less Than $120 Billion Some Politicians Have Suggested” by Shane Romig in The Wall Street Journal.

Miscellaneous:

 “Elizabeth Warren Splits Progressives On Mortgage Reform” by Zach Carter writing for The Huffington Post. Among other things, this article indicates why the Congress will have difficulty deciding what to do about Fannie Mae and Freddie Mac.
“Punish the Executives, Not Just the Banks.” Blog post on The New Yorker website by James Surowiecki.

“Expected Health Spending Declines (Again).” Blog post by Margot Sanger-Katz on The New York Times’ “The Upshot.”

“Opinion: the Brics bank is more about geopolitics than investment.” Opinion piece by Joe Leahy on the Financial Times website.

Monday, July 14, 2014

Some Interesting Articles on the Web (July 14, 2014)


Israel, Palestinians, Gaza:
“A Damaging Distance: For Israelis and Palestinians, Separation Is Dehumanizing” by Ethan Browner in The New York Times.

“John Kerry's First Peace Effort in Israel and Palestine Failed, But Now He Needs to Try Again”  by John P. Judis in the New Republic. This is a pessimistic article about Israel and the Palestinians.It also has an interesting discussion of the events that precipitated the current violence.
“Asymmetric Warfare in Gaza” by Paul Pillar. A former CIA official blames Israel: “…before all this started Hamas was giving no indication that it was looking for an armed conflict. Besides reaching the unity deal under which it would support Mahmoud Abbas's negotiating approach toward resolving the conflict with Israel, Hamas was observing a cease-fire. Until the Israeli government's forceful moves after the kidnapping/murders last month, Hamas had not fired any rockets into Israel since that cease-fire was reached in November 2012, despite several earlier Israeli provocations that Hamas considered to be violations of the cease-fire. Hamas even tried to restrain other groups from firing rockets after Israel had begun its wholesale incarcerations in the West Bank.”

“Gaza war seen rather differently in US, UK newspapers” by Ilan Ben Zion in The Times of  Israel.
“Netanyahu finally speaks his mind” by David Horowitz in The Times of Israel. The author writes that Israeli Prime Minister Netanyahu indicated at a press conference that he is not for full sovereignty of the Palestinians in their own state.

Spying and the Press:
“NSA Given Advance Notice Of UK Attack On The Guardian.” AP article by Jack Gillum.

The Affordable Care Act:
“Fox Falsely Blames Administration's Tweaks For Ending CBO's Obamacare Scoring” at the Media Matters website. Media Matters criticizes a report on Fox News which says that CBO’s failure to update its estimates of the total costs of the Affordable Care Act is due to actions the Administration has taken in its implementation of the law. Fox News is not alone in making this claim, which, as this article demonstrates, is easily debunked. However, as far as I can tell, the claim is made in websites, publications, and radio and television shows that are paid attention to mainly by those who already oppose the ACA. Their arguments on this point, after an initial flurry in the press when a CBO report came out, are not getting much traction.

Friday, July 11, 2014

Some Interesting Articles on the Web (July 11, 2014)


Iraq:
The Washington Post has an article on their website (posted July 3) by Ali Khedery, a former U.S. diplomat who served in Iraq. He argues that the U.S. should not have supported Maliki for as long as it has. The article has been gaining some attention, including a report on NPR this morning. “Why we stuck with Maliki — and lost Iraq”

James Jeffrey, a former U.S. ambassador to Iraq, disagrees with some of what Khedery wrote in his article. “It’s not Washington’s job to tell Iraq who its leaders should be”
Global Warming/Climate Change:

“Climate sceptics are losing their grip” by Martin Wolf, writing in the Financial Times.
“Miami, the great world city, is drowning while the powers that be look away” by Robin McKie, writing for The Observer.

“The Climate Optimists” by Will Oremus writing for Slate. This article is about the Heartland Institute’s conference in Las Vegas.
Spying:

“Downfall: Obama's Reckless German Spy Scandal” by Jacob Heilbrunn, writing for The National Interest website.

Monday, July 7, 2014

Argentina and BNY Mellon – An Update


According to this Reuters report, Argentina credited BNY Mellon’s account at the Central Bank of Argentina with $539 million on June 26 in order to make payment to bondholders. Judge Thomas Griesa wants BNY Mellon to return the money to Argentina, but BNY Mellon cannot because Argentina will not agree to the transfer. Argentina’s position is that the funds no longer belong to it but to the bondholders. BNY Mellon is caught in the middle, since it cannot forward the funds to the bondholders without being held in contempt by the U.S. court. BNY Mellon is seeking guidance from Judge Griesa about what to do.

It is possible that some holders of the restructured bonds will sue BNY Mellon for the funds. In its defense, I assume BNY Mellon will point to the judge’s order.
In addition, if this is not resolved by the end of the month, a committee that ISDA appoints will have to determine whether Argentina has defaulted on the bonds, thus setting up a complex auction process to settle credit default swaps on Argentinian debt. Observers assume that it is likely that Elliot Management’s hedge funds hold to an  unknown extent some CDS on Argentinian debt so that they will get some sort of payout even it Argentina does not do what Judge Griesa wants.

As for Judge Griesa, he appears to have done as much as he can, which is quite a bit, to pressure Argentina to settle with the holdouts. He can hold Argentina in contempt, but that would seem to be mostly symbolic, since he would find it difficult to enforce a fine or jail a sovereign country.
All in all, this is a total mess. After the financial crisis of 2008, it seems that a better system to resolve this sort of problem would be in place and a better system for making determinations of default and settlement of CDS would have been set up.

As for derivatives, whatever the merits of imposing more regulation on interest rate swaps, it was not this type of derivative that played a large role in the financial crisis. It was CDS, which I have argued elsewhere are inherently flawed contracts.      

Tuesday, July 1, 2014

The Argentina Debt/Default Situation, Discharging Payment Obligations, and U.S. Treasury Securities


The Argentinian debt situation after the U.S. Supreme Court declined to hear an appeal, is the sleeper financial story of the summer. It has gotten some press coverage, but not a lot. This is the sort of story that could either become a front page story when and if Argentina defaults or it could fizzle if Argentina reaches a deal with its holdout creditors and the other creditors who previously accepted a restructuring of Argentinian debt do not object.
The situation is unusual, since the judge in this case, Thomas P. Griesa, is creating the possibility of default on the restructured debt through his orders, even though Argentina has the means and the desire to meet its obligations on these bonds. The last payment was due yesterday. There is now a 30-day grace period before default is declared.
While I am not an expert about the legal and practical fallout of this unfortunate situation, one aspect of this case I found interesting is the role of the trustee bank, BNY Mellon. The judge has said that, if BNY Mellon facilitates any payment on the bonds contrary to his prohibition of Argentina making any payments on the bonds without also paying the holdout creditors, then BNY Mellon would be in contempt. On this point, a Georgetown University law professor, Adam Levitan, writing for the blog Credit Slips, argues that if Argentina tenders payment to BNY Mellon, then it has not defaulted:
“… [I]f the Republic tenders payment to Bank of New York Mellon as the indenture trustee, then the Republic has fulfilled its obligation, and there's no event of default possible under the indenture (the EOD [event of default] only occurs 30 days after failure to pay anyhow). At this point, I think the problem becomes Bank of New York Mellon's. Because of Judge Griesa's injunction, Bank of New York Mellon might refuse to accept payment from Argentina. Or BNYM might accept payment, but refuse to distribute it (more likely the former). Either course of action raises potential liability for Bank of New York Mellon to the exchange bondholders.”
Argentina has in fact transferred the funds it owes to BNY Mellon, and I assume it is prepared to make an argument similar to the one Levitan makes concerning its obligations on these bonds. However, even if the argument is correct, which is by no means certain, the beneficial owners of the bonds will still be mighty unhappy, since they will not have received payment. (I do not think BNY Mellon will defy the judge.)

This discussion reminds me of a similar issue that came up when I was at Treasury. As a result of the Salomon bidding scandal in 1990, the Treasury Department decided it needed to consolidate the auction procedures and terms and conditions of its securities in the Code of Federal Regulations. This forced more precision than had heretofore been manifest for Treasury securities. One of the questions that we felt needed to be addressed was at what point has Treasury discharged its payment obligation on its securities.
By way of background, the bulk of marketable Treasury securities are held in what is called the commercial book-entry system, which is operated by the Federal Reserve Banks as Treasury’s fiscal agents. Depository institutions can have accounts at Federal Reserve Banks, through which they can hold Treasury securities for their customers, which may be other financial institutions, which in turn may be holding the securities for their customers. The question for Treasury in connection with the commercial book-entry system was whether Treasury is ultimately responsible to the beneficial owners of its securities or just to the depository institution with accounts at the Fed.

The current version of the Uniform Offering Circular, which has been rendered into “plain English,” which is supposedly easier to understand than the more legalistic version, says the following on this point:
(c) Discharge of payment obligations—
“(1) The commercial book-entry system. We [the U.S. Treasury Department] discharge our payment obligations when we credit payment to the account maintained at a Federal Reserve Bank for a depository institution or other authorized entity, or when we make payment according to the instructions of the person or entity maintaining the account. Further, we do not have any obligations to any person or entity that does not have an account with a Federal Reserve Bank. We also will not recognize the claims of any person or entity:
“(i) That does not have an account at a Federal Reserve Bank, or
“(ii) With respect to any accounts not maintained at a Federal Reserve Bank.”
What happens as a practical matter is that the Treasury’s account at the Fed is deducted and the depository institutions’ accounts are simultaneously credited for the payment of interest or principal on Treasury securities on a payment date. The reason for the language limiting Treasury’s obligation to the depository institutions with Federal Reserve security accounts is that Treasury is not in a position to ensure that all the financial intermediaries which are holding Treasury securities for customers are maintaining accurate books and records and are passing on payments on Treasury securities in a timely manner. (Customers at most broker-dealers, though, do benefit from SIPC insurance of up to $500,000 if a broker-dealer uses customer securities improperly and cannot make customers whole.)

While the Treasury situation is not analogous to the Argentinian one, and the institutional arrangements and legal agreements are different, the question of what action a debt issuer needs to take to meet its payment obligation is the same. The U.S. Treasury’s answer is clear; the answer with respect to Argentinian bonds is currently murky.

Friday, May 23, 2014

Social Security and Budget Deficits: Michael Hiltzik v. Timothy Geithner and Andrew Biggs


In his new lengthy book, Stress Test, former Secretary of the Treasury Tim Geithner has a brief passage concerning a White House official (Dan Pfeiffer) suggesting he say that Social Security does not “contribute to the deficit” on the Sunday morning network talk shows. Geithner refused because, in his view, Social Security “wasn’t a main driver of our future deficits, but it did contribute.” While this is a brief passage in a book which focuses on financial crises and not Social Security, conservative commentators jumped all over this, some even saying that the White House encouraged Geithner to lie.
The debate over whether Social Security contributes to the deficit is uninteresting once one understands what is in fact going on, but it is representative of public policy advocates of various stripes taking advantage of a confusing subject in order to score political points rather than trying to clarify the issue while making a cogent argument.

The first thing to notice is that what Geithner writes is ambiguous and vague. For example, he does not clarify what deficit he or Pfeiffer are referring to. If it is the on-budget deficit, Pfeiffer is correct, since Social Security receipts, including interest payments from the Treasury, are higher than expenditures. It is nonetheless true, that if you net out intragovernment transfers, such as interest payments to government trust funds, as is done in the unified budget, Social Security then contributes to the deficit as measured in the unified budget in the sense that currently its expenditures are higher than its receipts with interest payments excluded.  
The ambiguity, though, is worse than that. Note that Geithner does not take a position on whether Social Security was currently contributing to the “deficit,” but rather that it would “contribute” to “future deficits.” This does not make much sense. If the discussion with Pfeiffer was taking place in 2011, as Fox News indicates it was, then Social Security was currently running a deficit if one did not include its interest payment receipts of $114.4 billion. If deficit refers to the on-budget deficit, then Social Security will deplete its funds in 2033 according to the latest report of the Social Security trustees. (The Disability Insurance fund will be depleted in 2016 according to the Report, but it seems to be a common assumption that Congress will solve this by transferring funds from the other Social Security trust funds.) However, under current law, this does not mean that Social Security would increase the on-budget deficit; rather, it means that benefits would be cut, perhaps by 25 percent. That, of course, is unlikely to happen, because the political costs to any Congress or Administration of letting that happen would be too great. Geithner does not say, though, that he is making a political forecast. In fact, in an attempt to minimize the minor political damage he apparently inadvertently inflicted on the Obama Administration, he indicated to Fox News that he is just speaking about math: “Asked, though, whether Social Security does contribute, he said: ‘To the long-term fiscal problem? Yeah, because, as is obvious, it's just a math thing.’” 

Michael Hiltzik, a liberal columnist for the Los Angeles Times, weighed in on the Social Security budget deficit with a column criticizing both Geithner and conservative commentators for not understanding that Social Security does not contribute to the budget deficit. Of course, he is talking about the on-budget deficit and does not mention the projections of the Social Security trustees that benefits will have to be cut in about 19 years absent any changes in the law.
Hiltzik’s column did not sit well with Andrew Biggs, who works at the American Enterprise Institute. He wrote a blog post on this, attacking what Hiltzik had written. While it is clear from a post he wrote in 2012 that Biggs understands the distinction between the on-budget and unified budget deficit, he does not explain that distinction in his attack on Hiltzik, though he does refer to places where he has written about it. He also seems to think that quoting Charles Blahous, a Republican who is currently one of the two public trustees for the Social Security trust funds, asserting that Hiltzik is “flat wrong” settles the matter. That is an assertion, not an explanation.

What Biggs does not recognize is that when Social Security was running a surplus, whether or not you included interest, there were some who argued that it should not be included in the budget deficit because it masked future liabilities. He does seem to indicate some sympathy to the view, though, that the Social Security surpluses were spent not saved.
Hiltzik subsequently responded to Biggs, arguing that it is legitimate to include interest when determining whether Social Security is contributing to the deficit. If you have had the patience to follow this, you can see why I think this whole debate is beside the point. The real issue going forward is what level of benefits do we want Social Security to pay and, if the current level of payroll taxes along with the accumulated trust fund assets built up in prior years are insufficient to finance the preferred benefit level, then what changes are made to finance the program.

It is mostly Republicans but also some Democrats who argue that we need to reform Social Security now because it will be harder and more painful if we delay. For example, Charles Blahous and Robert Reischauer, his Democratic colleague on the board of trustees for the Social Security Trust funds, jointly wrote in a message accompanying the release of 2013 Report:     
“Social Security’s long-term income shortfall is now larger than it has been at any point since before the landmark program reforms of 1983. The dates of projected depletion of each of its trust funds are unchanged from last year’s report. It is important to grasp that the amount of time remaining to enact a financing solution that is both reasonably balanced and politically plausible is far less than the amount of time projected before final depletion of Social Security’s combined trust funds. Toward that end, this year’s report contains new illustrations of the magnitudes of benefit changes required if lawmakers wish to preserve solvency without affecting current beneficiaries. Importantly, even if a Social Security solution were enacted today and effective immediately, it would require financing corrections that are substantially more severe than those enacted in the 1983 program amendments. Each passing year of legislative inaction reduces the likelihood that a solution can be found that is acceptable to lawmakers on both sides of the political aisle.”
Part of the reason for the hurry though is that most people do not believe that there will be a 25 percent cut in benefits come 2033 or so if no changes are made until then. James Kwak is persuasive in making the case why we should not plan on this happen. Therefore, if benefit cuts are part of what you advocate, you want to do this now before it becomes politically impossible.

It is interesting, though, that some Democrats have concluded that the best defense of Social Security is to go on the offense. Most prominent among this group is Elizabeth Warren, but there are others, who argue that Social Security should be expanded, not contracted.
Ultimately, all the accounting discussion is smoke which is an attempt to hide the real debate. Some liberals, as well as some conservatives, use arguments about accounting and current law to hide the real issues when they argue about this. As for issues that are on the table, they include removing the cap on payroll taxes, taxing more sources of income, and reducing benefits, at least marginally, for high income retirees. There are lots of other ideas out there, some better than others. One thing I would not be in favor of is increasing the payroll tax rates. The Greenspan Commission of the 1980s already succeeded in raising these rates too much, and as currently structured it is a regressive tax, even if Social Security as a whole is arguably not regressive.

There are, however, more pressing issues than Social Security reform, which can be handled one way or another. A more serious problem is the increasing share of the economy being devoted to the medical sector because of demographics and health care inflation. Whether or not the government is paying the costs through Medicare and Medicaid or private insurance companies are paying the costs with the premiums they collect, this is a burden on the economy that needs to be addressed. The Affordable Care Act did not do enough in this regard. This is, though, a more difficult problem than Social Security, and in the current political climate, there doesn’t seem to be much likelihood of addressing it in any meaningful way.