Thursday, January 15, 2015

Antonio Weiss and Debt Management


One of the comments frequently made about Antonio Weiss and the job of Under Secretary of the Treasury for Domestic Finance is that position’s responsibility for managing the public debt. To read some of the comments, one would imagine the Under Secretary spending his time at his computer projecting cash inflows and outflow, running econometric models to decide on the most cost-effective way to borrow, and making daily decisions on debt issuance.
Of course, that is not the way it works. There is an entire office staffed by career employees dedicated to debt management and others who compile short-term forecasts of daily cash inflows and outflows. For the most part, the Under Secretary does not get involved in these decisions unless he or she wants to or desires to make a major change, such as to the maturity structure of the debt or to the type of securities issued (for example, inflation-indexed bonds or floating rate notes). Also, if there is a debt limit crisis, which has a large political aspect, the Under Secretary and the Secretary have to get involved, even though they would prefer to be doing something else.

During the Reagan and George H.W. Bush administrations, the Assistant Secretary or the Under Secretary sometimes became involved in debt management issues to fight off proposed changes they believed to be bad ideas. For example, during the Reagan Administration, there was a big fight over issues such as inflation-indexed bonds, making notes and bonds callable (in the case of 30-year bonds, shortening the call protection which at the time was 25 years), shortening the maturity structure of the debt, issuing bearer bonds abroad, and so on. In the George H.W. Bush Administration, inflation-indexed bonds were more or less summarily dismissed by the Assistant Secretary and the Under Secretary, but there was major pressure, which was successfully resisted, to sell bonds linked to the price of oil as a budget gimmick to finance additional oil purchases for the Strategic Petroleum Reserve. Also, Resolution Funding Corporation (“RefCorp”) bonds were issued, which was a budget gimmick to put $30 billion of the cost of the Savings and Loans cleanup off-budget.
One Under Secretary who had a strong interest in debt management was Peter Fisher of the George W. Bush Administration, perhaps not surprising since he had been in charge of open market operations at the New York Fed. He was very proud that he was able to shorten the time between the auction deadline for Treasury securities and the announcement of results. That, of course, was a worthy goal, but one has to wonder if it should have been a priority objective of an Under Secretary.  He also achieved notoriety for the botched announcement of the discontinuance of issuance of 30-year bonds, a decision that has since been reversed.

The truth about debt management is that, while there is a substantial amount of detail involved, it is not that interesting unless one is an active market participant with money riding on Treasury decisions. The Treasury can certainly make mistakes, but, as long as it does this task competently, it is usually little noticed. It is a necessary task, but it is not an area in which to achieve major social change.
Consequently, most Under Secretaries take the job with other agendas. It is not clear why Antonio Weiss wanted the position, and it would have been interesting to hear his answer to that question at a confirmation hearing.

As for his critics, I think they wasted political capital in successfully tanking his nomination, though not in preventing Weiss from taking another position to advise Secretary Lew. Absent a crisis, major initiatives from Domestic Finance look unlikely in the next two years. It is true that Treasury’s formal role in financial regulation has increased, and perhaps that was Senator Warren’s real concern. The problem though with financial regulation is at the front-line agencies – their turf fights, their looking out for “their companies,” and their susceptibility to regulatory capture, at least on some issues. Those problems should be addressed, but, in all likelihood, will not be in the current political climate.
In other words, I agree with the frequently made comment that this fight was not really about Weiss, who had the misfortune to find himself in the crossfire between different factions of the Democratic Party. It is hard to see, though, how this fight benefitted anybody, except providing some amusement to some Republican onlookers.

Sunday, January 11, 2015

A Comment about the Price of Oil and Futures Markets


Every time there is a big increase in the price of oil, people are quick to blame speculators in the futures markets. Funny, though, now that there has been a large and rapid fall in the oil price, I haven't seen anything blaming the speculators. At some point, though, the price of oil will increase. Look for speculators to be blamed.
A few things to remember about futures markets:

For every long position there is a short position. The futures markets are a zero sum game (except for things like commissions.) The gains and losses offset each other.
Very few futures contracts are held to maturity and result in delivery of the underlying commodity. It is the threat of delivery that causes the cash and futures prices to converge as maturity approaches.

To make the case that the futures market is affecting the cash market price, one has to make the case that some development in the futures market is affecting the underlying supply and demand conditions for the commodity in a way that would not happen if the futures market did not exist.
Despite the foregoing, I actually think that financial institutions are often not subject to enough regulation or supervision, resulting in imprudent risk taking that can ultimately cost the government and/or society. However, those in favor of better regulation should not use market developments that they know are unpopular (e.g., a stock market decline or an increase in the price of oil) to make the case for more regulation unless they have a good reason to believe that the development is due to lax regulation. Often, they do not have a good case, and this hurts their credibility with people who have some knowledge of the markets in question.

Friday, November 28, 2014

Some Interesting Items on the Web (November 28, 2014)


Financial Regulation and Related Matters:
“Secret Tapes Hint at Turmoil in New York Fed Team Monitoring JPMorgan.” Jake Bernstein of ProPublica.

“The Fed Needs Governors Who Aren’t Wall Street Insiders: With two vacancies to fill, Obama should pick nominees who will look out for Main Street, not the big banks.” Wall Street Journal op-ed by Senators Elizabeth Warren and Joe Manchin.

“George Painter, administrative law judge who criticized his own agency, dies at 87.” This is an article about a former CFTC administrative law judge who recently died. The CFTC had some serious problems with its ALJs in 2010. See my October 2010 posts about this.
“After Criticism, Fed Will Study Wall St. Oversight.” New York Times article.

“Enough Is Enough: The President's Latest Wall Street Nominee.” Senator Elizabeth Warren explains why she opposes the nomination of Antonio Weiss to be Under Secretary of the Treasury for Domestic Finance.
“Senator Elizabeth Warren’s Misplaced Rage at Obama’s Treasury Nominee.” Andrew Ross Sorkin of The New York Times doesn’t think much of Senator Warren’s opposition of Antonio Weiss. While having no opinion about Mr. Weiss, I don’t think much of Sorkin’s article. I do, though, agree with Sorkin that having worked for an investment bank should not be an immediate disqualification for the Treasury position. Mr. Weiss seems to be caught in the crossfire of a fight among Democrats as this New York Times article indicates: “Liberal Treasury Nominee’s Wall St. Prowess May Be a Vulnerability.” A blog post at the Center for Economic and Policy Research also criticizes Sorkin’s article – “It Would Take a Lot of Mismanagement to Raise the Cost of Treasury Debt by ‘Just’ 20 Basis Points.”

The Affordable Care Act:
“The Policy at the Heart of the Jonathan Gruber Controversy.” Neil Irwin of The New York Times.

“‘Grubergate’ Is Giving the Supreme Court Cover to Destroy Obamacare.” Brian Beutler of The New Republic.

“Obamacare’s biggest obstacle now may be its public image.” Catherine Rampell of The Washington Post.

“What Jon Gruber's Quotes Really Tell Us About Obamacare—and American Politics.” Jonathan Cohn of The New Republic.

Immigration:

“An Imperial President? Hardly. The smarter Republican response is to pass their own legislation, not howl in protest.” Jacob Weisberg of Slate.

“The GOP Reaction to Obama's Immigration Order Will Be Way More Damaging Than They Realize.” Noam Scheiber of The New Republic.

“Suffer Little Children.” Paul Krugman column on immigration in The New York Times.
CIA and NSA:

“Mark Udall to consider all options to reveal CIA torture report.” Denver Post article.

“Senate Torture Report Talks Break Down As Administration Pushes For Redactions.” Ryan Grimm and Ali Watkins of The Huffington Post.

Ferguson:

“What Ferguson Means: The View From Abroad.” Huffington Post article.

“The law may have spoken but the Ferguson verdict is not justice.” Gary Younge writing for The Guardian: “The trouble is that the United States, for far longer than it has been a ‘nation of laws’, has been a nation of injustice. And in the absence of basic justice such laws can amount to little more than codified tyranny. When a white cop, Darren Wilson, shoots an unarmed black teenager, Michael Brown, dead and then is not indicted, the contradiction is glaring. For a world where it is not only legal for people to shoot you dead while you walk down the street, but where they can do so in the name of the law, is one in which some feel they have nothing to lose. And, in the words of James Baldwin: ‘There is nothing so dangerous as a man who has nothing to lose. You do not need 10 men. Only one will do.’”
“It’s Incredibly Rare For A Grand Jury To Do What Ferguson’s Just Did.” Ben Casselman of FveThirtyEight.

“How Not to Use a Grand Jury.” Jeffrey Toobin writing for The New Yorker.

“Chronicle of a Riot Foretold.” Jelani Cobb writing for The New Yorker.

“Ferguson: An American Dilemma.” John Cassidy of The New Yorker.
“America's Budding Police State.” Clive Crook writing for Bloomberg View.

Miscellaneous:                  

“Behind the G.O.P.’s Misleading Shutdown Statements.” David Firestone of The New York Times.
“You’re Wrong, You’re Wrong, You’re Definitely Wrong, and I’m Probably Wrong, Too: What it was like to edit The New Republic at its most contentious.” Hendrik Hertzberg writing for The New Republic.

“Argentina’s Case Has No Victors, Many Losers.” Floyd Norris of The New York Times.

“United States: U.S. District Court Finds Transfers of Secured Debt by MERS Subject to Pennsylvania Recording Requirements.” Brian J. Levin article at the Mondaq website. Legal issues involving MERS and the separation of a mortgage from a promissory note continue to be considered by the courts.

“Wait! The right wants a new CBO director after all.” Lori Montgomery of The Washington Post.

“Keynes Is Slowly Winning.” Paul Krugman blog post.

“Counting Benghazi Blessings.” Gail Collins of The New York Times.
“Get Real, Boris Johnson!” Roger Cohen of The New York Times on the IRS problems of the mayor of London.

“Judge on the Spot.” Linda Greenhouse writing for The New York Times.

Tuesday, November 25, 2014

Andrew Ross Sorkin Opines on Elizabeth Warren and Antonio Weiss


In this morning’s New York Times, Andrew Ross Sorkin in his Dealbook column attacks Elizabeth Warren rather viciously for her opposition to President Obama’s nomination of Antonio Weiss for the position of Under Secretary of the Treasury for Domestic Finance (“Senator Elizabeth Warren’s Misplaced Rage at Obama’s Treasury Nominee”). The article is intemperate enough to make one wonder what it is doing on the New York Times’ news pages rather than in its opinion section because it is more advocacy than analysis.
I hasten to say that I have no opinion about whether Antonio Weiss would be a good Treasury Under Secretary having only been aware of him since his nomination was announced. Also, I agree with Mr. Sorkin that having worked for a financial firm should not operate as an immediate disqualification for this Treasury Under Secretary position. I do, though, take issue with the following paragraphs in Mr. Sorkin’s column:

“The role Mr. Weiss has been nominated for is largely responsible for managing the country’s $12.9 trillion debt at a time when the Federal Reserve is ending its stimulus. The job requires deep experience in the capital markets and global relationships. This is not a job for a local lawyer or research group executive.
“To put this in context, according to Politico, if the interest on the securities the Treasury sells was just 20 basis points higher for a year because of uncertainty or mismanagement, it would cost taxpayers $32 billion — more than it would cost to fund the Consumer Financial Protection Bureau for 50 years. The bureau was, of course, inspired by Ms. Warren.”
Bringing up the Consumer Financial Protection Bureau in this context is, of course, a cheap rhetorical trick that says more about Mr. Sorkin than it does Senator Warren, but the real problem with this paragraph is that it makes Treasury debt management seem more difficult than it actually is. Essentially, in its debt management decisions, Treasury needs to be aware of any shortfall between revenues and expenditures, the timing mismatch between when revenues are received and payments need to be made, and the need to refinance maturing debt. This is not that difficult. Usually, Treasury adds or subtracts from its current pattern of security issuance given the short-term forecasts of its cash needs.

In my experience at Treasury, most debt management decisions are not that important unless they come as a surprise to the market. I remember as a new Domestic Finance employee in the early 1980s wondering how Treasury was going to finance the huge increase in deficits that took place at the beginning of President Reagan’s administration. They had jumped from about $50 billion a year to around $200 billion, which were big numbers at the time. My career boss, Frank Cavanaugh, had a simple answer, “more.” He was absolutely right. There were some political appointees at Treasury who wanted to change debt management practices significantly and others who disagreed with the first group; for the most part, Secretary Don Regan did not accept the recommendations for changes.
During the Clinton and George W. Bush administrations, there was a conscious policy to shorten the average maturity of the public debt. The Obama administration has reversed this and has been lengthening the average maturity. While I did not and do not agree with the previous shortening decision, I also do not think it was that significant except for the decision to discontinue issuing 30-year bonds during the Bush administration. The announcement of this decision came as a surprise to the market and was botched in its execution (the news embargo was broken by a consultant who informed a client firm and Treasury posted the information on the web before the embargo expired). The decision itself was wrong and was reversed after the Under Secretary who made the decision, Peter Fisher, left the Treasury. What this episode demonstrates is that Treasury should not try to be too clever and try to outwit the market. As a Treasury Assistant Secretary for Domestic Finance in the George H.W. Bush administration, David Mullins, remarked with respect to Treasury debt management, “it’s tough for an elephant to dance.”

With respect to Mr. Weiss, I would be more concerned about his views on financial market and financial institution regulation, given Treasury’s enhanced role in this area, and also whether he is the sort of person one can trust to deal with a financial market emergency, should that happen. I also would want to have some idea about his management skills and whether he seems to be someone who understands the differences between the public and private sectors and can make the transition without too many problems.  
As for Mr. Sorkin, he may be right that Senator Warren is wrong to oppose Mr. Weiss. The way he makes his argument, though, reinforces the suspicion, which has been prevalent for some time, that he has been at least partially captured by Wall Street ever since he wrote Too Big to Fail. One should listen to people from Wall Street because they know their business, but one should always keep in mind that their expressed views may be colored by their self-interest.

Saturday, November 15, 2014

Some Interesting Items on the Web (November 15, 2014)


The Affordable Care Act:
“The Real Villains of the Obamacare Cases Aren't the Judges—They're the Lawyers.” New Republic article by Yishai Schwartz.

“Delay sought on health care at appeals court.” Lyle Denniston writing for Scotusblog.
“Symposium: It’s way too soon for ACA opponents to celebrate.” Brianne Gorod writing for Scotusblog.

“State Obamacare Strategies Take Shape as Court Case Looms.” Article by Alex Wayne for Bloomberg Businessweek.

“This Philly-Based Investment Adviser Has Become Obamacare's Digital Menace.” Sam Stein article for The Huffington Post about the man who is finding the Jonathan Gruber videos.
“Eight Reasons to Stop Freaking Out About the Supreme Court's Next Obamacare Case.” Brian Beutler article in The New Republic.

“Will GOP Govs Really Rescue Obamacare?” Michael Tomasky is doubtful if the plaintiffs win at the Supreme Court. Article in The Daily Beast.
“Law in the Raw.” Linda Greenhouse article for The New York Times.

“Four Reasons the Supreme Court Is Likely to Rule Against the Obama Administration in Burwell.” John Yoo writing for National Review Online. Linda Greenhouse refers to this article.
“Did the Author of Obamacare Admit It’s Evil?”  Jonathan Chait of New York magazine.

“Will Obamacare separate Scalia from his principles?” E.J. Dionne writing for The Washington Post.

“The mess Jonathan Gruber created.” Steve Benen writing for the MSNBC website.
“The Jonathan Gruber Controversy and Washington’s Dirty Little Secret.” Neil Irwin of The New York Times.

“The Jon Gruber controversy and what it means for Obamacare, explained.” Sarah Kliff of Vox.

“The Truth About Gruber-Gate.” Kate Pickert writing for the Time magazine website.
Miscellaneous:                  

“CFTC Turns Toward Administrative Judges.” Wall Street Journal article. In 2010, the CFTC had problems with its administrative law judges. I wrote about it here, here, and here.                                
“In Cuba, Misadventures in Regime Change.” New York Times editorial.

“UK High Court court wades into Argentina’s debt crisis.” Financial Times article.

“The Governing Trap.” Advice for the Republicans from the editors of the National Review.
 “Don’t govern on fantasies.” E.J. Dionne comments on the National Review editorial in his Washington Post column.

“Wobbling on Climate Change.” New York Times op-ed by Piers J. Sellers, the acting director of earth science at NASA’s Goddard Space Flight Center.
“The Worst Voter Turnout in 72 Years.” New York Times editorial.

“Who Will Run CBO Next?” Damian Paletta speculates for The Wall Street Journal.
“GOP Plan to Block Immigration Action Could End in Government Shutdown.” Margaret Hartmann of New York magazine.

“Mexico’s Bold Move on Debt Restructuring Contracts.” New York Times article.

“Tim Geithner: The 3 Words That Saved The Euro Were Ad-Libbed.” Article by Ben Walsh in The Huffington Post.
“Why the Republicans Won.” Elizabeth Drew writing for The New York Review of Books’ blog.

“Congress Extends Itself.” Gail Collins writing about Congress and tax legislation. She comments:
“The current Ways and Means chairman, Dave Camp, is a tragic figure who actually attempted to do tax reform with an ambitious proposal that eliminated some temporary taxes and made the rest permanent. It included a 4 percent reduction in the top tax rate, because no matter how hard Camp struggled, he could not honestly get it lower.
“He might just as well have proposed a bill declaring God dead. The committee never even voted on it. John Boehner made fun of it. Camp was the political version of Justin Bieber, without the parties.”

Some Comments on Recent Affordable Care Act Political Developments


I was a bit taken aback when I read E.J. Dionne's column in The Washington Post last Thursday morning. The normally temperate columnist concluded:
“Here’s a hypothetical for you: First, the Supreme Court issues a ruling that installs a conservative president. Then, he appoints two conservative Supreme Court justices who then join with three of their colleagues to make mincemeat of the greatest achievement of a progressive president elected by a clear majority. If such a thing happened in any other country, would we still call it a democratic republic?”
In the same vein, Linda Greenhouse concluded her article (“Law in the Raw”) written for The New York Times on King v. Burwell on a dispiriting note:

“So this case is rich in almost every possible dimension. Its arrival on the Supreme Court’s docket is also profoundly depressing. In decades of court-watching, I have struggled — sometimes it has seemed against all odds — to maintain the belief that the Supreme Court really is a court and not just a collection of politicians in robes. This past week, I’ve found myself struggling against the impulse to say two words: I surrender.”
Emotions are obviously running high on this subject. Opponents of the ACA are gleeful, thinking that they may have the ACA on the ropes, while supporters of the law are fearful of what might happen if the Supreme Court finds for the plaintiffs. As I have indicated, Republican opponents of the law are probably better off politically if they lose this case. That way they can complain about whichever justice or justices joins the four more liberal members of the Court while still contending that the ACA is a terrible statute and terrible public policy. If they win, Republicans in Congress and many Republican governors will have to deal with real-world consequences, including some very angry voters.

If King v. Burwell was not enough to keep Republican opponents of the ACA’s spirits up, there were some new Jonathan Gruber videos on which to comment while they conveniently ignored that both parties play games in order to get the CBO to score the fiscal impact of legislation in a way that enables it to be passed.
Gruber was, of course, not careful in what he said. Calling voters “stupid” in a public forum is not smart. Congressional committees may now hold hearings on what Gruber said, but this is for show – in fact, it is a sideshow. Rather than getting on their high horse and criticizing Democrats for dishonesty and lack of transparency, serious Republican policy wonks would better spend their time in coming up with ways to reduce U.S. medical costs to levels approaching what other industrial countries pay while providing universal healthcare to their citizens and achieving better public health results. Harping on Gruber is not serious.

As a final point, while the ACA will at some point be amended and, hopefully, improved, the goal of providing universal, or near-universal, affordable healthcare is not going away, no matter how successful the Republicans have been at bad-mouthing “Obamacare.” Republicans need to accept that. They might usefully remember that, while admittedly, the United Kingdom is a very different country than the U.S., Prime Minister Clement Attlee, whose government, among other initiatives, created the National Health Service after World War II, is considered to be among the greatest Prime Ministers of the 20th century.
“The arc of the moral universe is long, but it bends towards justice.” (Theodore Parker, Martin Luther King, and others.)
           

Sunday, November 9, 2014

Some Interesting Items on the Web (November 9, 2014)


Politics:
“Obama Is a Republican: He’s the heir to Richard Nixon, not Saul Alinsky.” Bruce Bartlett writing for The American Conservative.

“The Bushes, Led by W., Rally to Make Jeb ‘45’.” Peter Baker article in The New York Times.
“Capitol Book Club, With a Bonus.” New York Times article.

“The Democrats’ Catastrophe and the Need For a New Agenda.” Harold Meyerson writing for The American Prospect.
“Congratulations, Voters. You Just Made This Climate Denier the Most Powerful Senator on the Environment.” New Republic article by Rebecca Leber.

“Dark Money Helped Win the Senate.” New York Times editorial
Economic Policy:

“The Mortgage Industry Is Strangling the Housing Market and Blaming the Government.” David Dayen writing for The New Republic.

“The Power Behind the Throne at the Federal Reserve.” Article by Jesse Eisinger about Scott Alvarez in The New York Times.

“Mario Draghi's German problem.” Reuters.

“The Conflict Between Germany and the E.C.B. That Threatens Europe.” Neil Irwin writing for The Upshot of The New York Times.
“Notes on Easy Money and Inequality.” Paul Krugman.

“Banks Again Avoid Having Any Skin in the Game.” Floyd Norris of The New York Times.
“Ideology and Investment.” Paul Krugman column.

“Blaming Easy Money for Alien Invasions.” Noah Smith writing for Bloomberg View.

“John Maynard Keynes Is the Economist the World Needs Now.” Bloomberg Businessweek article by Peter Coy.
The Affordable Care Act:

“States Benefiting Most From Obama’s Health Law Elected Republicans.” Margot Sanger-Katz of The New York Times.

“Afternoon Must-Read: Nicholas Bagley: The Supreme Court Will Hear King. That’s Bad News for the ACA.” Brad DeLong opines.

“The New Affordable Care Act Supreme Court Case: King v. Burwell.” I opine.

“Symposium: The grant in King – Obamacare subsidies as textualism’s big test.” Interesting article by Yale law professor Abbe Gluck. He argues that using Justic Scalia’s interpretive methods, the plaintiffs in the King case lose.
“What’s at Stake in Supreme Court’s Latest Health Care Case.” Margot Sanger-Katz of The New York Times.

Argentina Debt:

“The Hot New Threat To Argentina — ‘Acceleration’.” Linette Lopez writing for Business Insider.
“A New Twist in the Argentine Debt Saga.” Bloomberg Businessweek article by Sheelah Kolhatkar.

“Hedge Fund’s Move Risks Prolonging Argentina Bond Default.” Bloomberg Businessweek article by Katia Porzecanski and Camila Russo.
“Singer Seeks Order to Keep Argentine Lawyer in U.S.” Bloomberg article.

Ebola:

“Cuba’s Impressive Role on Ebola.” New York Times editorial.
“Ebola’s Information Paradox.” New York Times op-ed by Steven Johnson.

“You're Overreacting to the Ebola Outbreak, and It's Not Helping.” New Republic article by Eric Sasson.

“U.S. and Cuba Come Together Over Ebola, Infuriating Republicans.” New York Times editorial page post by Ernesto LondoƱo.

Miscellaneous:                                                                                
“World Bank Workers Are Venting Their Frustrations in These Mysterious Flyers.” Article posted on Business Insider.

“In Cold War, U.S. Spy Agencies Used 1,000 Nazis.” New York Times article by Eric Lichtblau.

“Big Banks Brace for Penalties in Probes.” Wall Street Journal article.

“Prosecutors Suspect Repeat Offenses on Wall Street.” New York Times article.

“Approaching Brexit? Merkel Fears Britain Crossing a Red Line on Immigration.” Spiegel Online International article.

“Ireland’s IDA boss faces bizarre CNBC interview.” Irish Times article.        
“The $9 Billion Witness: Meet JPMorgan Chase's Worst Nightmare.” Matt Taibbi article in Rolling Stone.

“Doubting the Economic Data? Consider the Source.” Floyd Norris of The New York Times.