Couple music videos.

My Internet connection took the better part of an hour to upload, so they're all fuzzy-

Let's make some work

All too often it seems policymakers equate increased spending with job creation, or job creation with increased spending. The two are directly correlated, in a Keynesian macroeconomic sense, which is exacerbated by all kinds of negative feedback cycles during a recession (asset depreciation, liquidity traps, wage-demand spirals) but far from the same. But does it really cost $500,000 of direct government appropriations to create a job? That’s the not so pretty math update from the Recovery Act, which has spent about $350 billion so far and created some 700,000 jobs. Just as an employer creates jobs because of the marginal productivity of that job, and not tax rates, e.g. an employer will hire a worker at salary $X if they produce something worth >$X if the tax rate is 50%, but not hire if the salary exceeds the value of marginal product even if the tax rate is 0%- the government only drives organic job growth when it's profitable. Otherwise when the appropriation runs out, the job runs out. Employers would prefer to keep more of their profit, but they don’t care how much the government takes of non-existent profit. So tax rate arguments are of almost secondary importance- of primary importance is industry, market creation.

As DC turns to Job Creation: Act II, the focus should be less on throwing more money out the door, and more on making promising nascent growth industries profitable. Temporary government expenditures will create more temporary jobs, two or three year tax credits in long-term infrastructure driven sectors, like clean energy or biotech, will continue to not pencil out on 30-year amortized balance sheets. Profits won’t return to Main Street until new industries are profitable industries. America will only sustainably recover from the latest credit driven asset depreciation shock when there is either paradigm shifting technical innovation that changes the profit calculus (say of silicone being cheaper than coal, or server space being cheaper than a piece of paper; a hard bargain), or when the government just decides to change the calculus itself.

Congress could establish a set of 30-40 year tax credits and streamlined regulations (the one or two year stuff they’re used to releasing a couple months after the last temporary set expired doesn’t fool even the macabre neophyte investor class) that will spur private sector investment and growth. On my short list of such credits? for starters a $.03/kWh clean energy production tax credit, cheap leases on set-aside government land to build new energy infrastructure, 50% tax deductions on all mass transit investments, and 30% tax offset for all biotechnology investments. Tax attorneys could fill in the details. And perhaps most beneficial of all, tax credit driven job creation would change government receipts (perhaps offset by higher top-end marginal income tax rates), but not directly add to deficit spending. The annual $1.4 trillion deficit we run now mandates we not continue short-term stimulus spending into the long-term, only further raising the cost of capital and chocking off promising nascent industries. The bottom line is there needs to be a paradigm shift from spending to incentivizing, from direct expenditures and subsidies, to indirect industrial tax policy. That’s why the much heralded “Jobs Bill” Leader Reid and Speaker Pelosi are corralling should not fall into the trap of thinking the only way for the public sector to create private sector employment is too bequeath it money, rather it could simply make it profitable. For all the economic carnage out there, we should begin to focus a little less on triage, and a little more on getting well.

either way

those moments pass
like bullets through chest
legs detach
vains spread
eyes swoon dangerous
an ocean of drugs
a swelling ego
cut down a dumb world
there is no choice
just the pull
the cut of that voice
kindred souls
every hour after
just leaky containers
every single part
ephemeral remainders
every single time
every moment
to ever be timeless
to ever hold my heart
murderered either way

The President's Financial Regulatory Proposal

About two days a week throughout the fall last year there would be a black suburban parked on the street I walk from the red line to work. On these days I’d walk a little slower to see Treasury Secretary Paulson walk from a giant office building into the waiting car. I saw him the day after Lehman failed, the only thing fresh looking about him was his suit- and the day after the inauguration, with 8 foot high metal cage-like fences spilled down Penn Avenue as far as the eye could see, tons of trash blowing surreally in the freezing wind- this time looking more relaxed in his basketball shorts and unbuttoned shirt. It was pretty surreal to wake up and read the Journal or Times chronicling the latest historical market failure and then cross paths with its leading financial firefighter. A year later I’m afraid the sense of urgency of those fall months is fast diminishing. A tragedy of the last year is a terrible thing to waste. From the ashes of a failed regulatory system, that cost 3 million people their jobs and nearly as many their homes, and $7 trillion in wealth, is the promise to build a sleeker, more common-sense, more responsive regulatory system. And here many people will stop me simply with the semantics, “regulation” is a terrible word- so call it what you will. The basic concept though holds true in essentially every aspect of life. We don’t get on a jet plane and just hope the proper safety checks have been done and the pilot isn’t drunk, we “regulate” it, we don’t trust a stranger to deliver our new baby at a whim, we “regulate” it. So those who would notionally dismiss regulation as a bad thing should maybe stop flying or stop having kids.

The legal zeitgeist of these times is the President’s Financial Regulatory Reform proposal (http://www.financialstability.gov/docs/regs/FinalReport_web.pdf). In a little over two short months this entire white paper has been translated to authorizing language and sent to the Hill, where as usual it was met with a startling sense of complacency and criticism without much constructive feedback. If this can pass in some form by 2010 my hypothesis of complacency is proved wrong. If not, a similar asset bubble and burst cycle and all of the capital contraction, income decline and job loss and capital loss (repeat) is not just possible but probable. The impetus to correct a clearly insufficient financial regulatory regime – one that forced the government to choose between catastrophic failure and chaos or injecting huge of amounts of taxpayer dollars- is otherwise lost. Critics can say what they like about the choices made last year, but with Bear, Lehman, AIG, WaMu- those were the options. Here are some core tenets of the President’s regulatory agenda.

1) Capital ratios. A working group is currently drafting the details due out in a couple months. When the banks’ experienced severe asset valuation shocks they were forced to liquidate and perpetuate the cycle. With better loan loss provisioning this cycle could have been prevented. In practical terms, probably means going from tangible common equity ratios of 4% to 8%.

2) Resolution authority. The FDIC can repossess and either break up or auction off bankrupt depository institutions. There is no similar authority for non-depositories or holding companies that own depositories. The Fed can loan money to anyone or anything so long as it is last resort and there is sufficient collateral. If there isn’t, then there is no way to protect innocent bystanders from the consequences of large bank failure. The President’s proposal would permit the Fed with Treasury consent, to seize and efficiently break up large failing firms.

3) Preventing regulatory arbitrage. Under current law, thrift holding companies (banks with a higher share of mortgages created to facilitate liquidity in the housing market), industrial loan companies (like GMAC or GE Capital), credit card banks, trust companies and grandfathered non-bank banks are exempt from most supervisory requirements, simply because they were left out of the BHC Act. Firms (like Bear, Lehman, AIG, WaMu) simply owned one of these entities and could simultaneously avoid regulation while having access to the Fed’s lending if they got into trouble. This gave the public no risk management function but sole responsibility should they encounter significant risk. Heads I win, tails you lose. Financial companies should not be able to escape consolidated supervision by technicality.

4) Systemic risk regulation. The proposal creates a new category of Tier 1 financial companies which will be overseen by the Federal Reserve. These would be firms whose failure threatened the entire market, and would be subject to coordinated and robust prudential regulation. Bank holding companies consist of so many separate entities that they can have a dozen separate regulators each and allows firms to arbitrage the differences to their advantage.

5) Consumer financial protection. A central catalyst of the ’08 recession was the set of uninformed and stupid decisions consumers made- like buying houses they couldn’t ever afford or signing up for credit cards with early payback penalties. The proposal observes correctly that finance and economics have a distinct world view, one that does not manage the cultural, psychological and communications challenges inherent in good consumer advocacy. There are bright lines that could be established, but it takes clear authority and communication otherwise it will likely die in the interagency process as it has for decades. Without clear responsibility for common-sense consumer protection there can be no accountability. There are consumer protections for seatbelts, kids toys and lawnmowers, it's time for some for households' budgets too.

6) Office of National Insurance Regulator. The U.S. regulates the insurance industry essentially entirely at the State level and is the only G-20 country without a national framework for insurance oversight. There is clear executive will to do so, now we need legislative consensus.

7) Office of National Bank Supervisor. This would consolidate the Office of the Comptroller of the Currency (which regulates interstate banks) and the Office of Thrift Supervision to oversee all national banks. One office in Treasury would have sole authority for national banks and be able to provide consolidated prudential oversight rather than the current fragmented system.

8) Financial Services Oversight Council. This would force regulators to actually talk to each other and coordinate policy while closing gaps in regulation. In ’08 we saw a fundamentally ad hoc response among the Fed, FDIC, OCC, Treasury and others with predictable turf wars and inefficiencies. Before any major action, like designating a firm a Tier 1 Financial Holding Company or intervening in an institution’s distress, this council would meet to have an integrated approach. It would be a consensus building forum while avoiding the tenuous nature of decision by committee by giving the Treasury Secretary executive authority as the Chairman.

9) Central clearinghouse of derivatives. This would establish a central resolution, clearing and payment exchange for derivates. Most derivatives today are cleared by JP Morgan and Mellon Bank of New York, so creating a consolidated exchange would be eminently doable. By providing transparency in this market, it would not prevent dealmaking, hedging or economically valuable speculation, it would just provide basic information to inform the price discovery mechanism. It was a surprise to most of the world that AIG had a hedge fund grafted on top of it that had drunkenly bet the house on the U.S. housing binge. If people could have seen this, the asset valuation collapse could have been incorporate in prices in near real time and prevented a huge dis-equilibrium and subsequent quick collapse. Contrary to popular misconception, this proposal would not prohibit custom derivatives.

People on the Hill who have better ideas should put them forward, but a system that allowed the consequences of the last year is definitionaly in need of repair. Just ask a harried former Republican Treasury Secretary.

5 Pretty Convenient Truths about Healthcare

5) The government will not take over healthcare in the rather unlikely political event that a public option is passed. Four of the five bills out of committee have an individual mandate requirement that precludes individuals who are already insured, or offered insurance by their employer, from leaving for a public option. Additionally, there are strong tax incentives in place for employers to continue to offer competitive insurance. Adding one more public plan to the 2500 private ones in existence, and putting them on one central exchange for consumers to search, will definitionaly result in more competition and choice.

4) The cost curve must be bent. Medicare and Medicaid could be cash flow negative in 8 years. For true fiscal conservatives the most expensive thing government could do is continue on the present trajectory of healthcare spending growth (~1.5% above inflation) with no meaningful attempt at reform. Denying or obfuscating on the need for reform is the surest way to continue to grow the public debt. By not insisting on a public option, President Obama has wisely left negotiating room for moderate conservatives not ideologically opposed to reform.

3) There is reason to believe the government could run a pretty good health benefits plan. When private insurers make money they pass a significant portion onto their shareholders and (often a larger amount) to their executives. However because the government has no profit margin, any net income the government made would go right back into Treasury’s coffers to either provide more or cheaper insurance, or pay down the debt. Government already runs three of the largest insurance systems in the world in Medicare, Medicaid and Social Security – and you haven’t heard a single opponent of healthcare reform suggest repealing any of these (a classic inter-temporal allocation problem – people love the money already committed to them, but loathe the idea of spending future money for the same improvement). Additionally, the Federal government has unique comparative advantage in negotiating lower drug and procedure costs by virtue of its size. This is one reason why Senator Baucus’ attempt at political compromise with non-profit coops (in lieu of a public plan) is well intentioned but off the mark- these would be run at the State level and miss the huge economies of scale of a Federal plan.

2) For something as important and scientific as medicine and healthcare, there should be basic best practices established. The fact that there is such a disparity in healthcare utilization across both hospitals and regions, procedures for identical conditions (like $10,000 radiation versus $200,000 proton radiation with the same success rate for prostate cancer), and a wide divergence in collection rates is definitionaly inefficient. There can be only one best way. Creating comparative effectiveness research centers and expert panels to guide technical decision-making can improve both outcomes and reduce costs.

1) The majority of opposition to reform doesn’t come from people who actually disagree with true reform. Health is one of the most universal and personal concepts imaginable, and it is understandable that people who have good existing coverage would be intensely resistant to change. But herein lies a tremendous opportunity to explain that reducing cost growth by opening up competition is not the same as denying coverage, in fact it’s the opposite. Should be a good reason to tune in tonight.

Music Video

Come on down

When most people hear the word ‘mentoring’ they probably think of something like troubled teens breaking windows, or take your daughter to work day, or some medieval apprenticeship in axe smelting. Or maybe a couple junior partners ensconced in wing-backed chairs sipping vintage chardonnay while talking about penetrating market share. But they don’t usually conjure up images of themselves, at least not concrete ones. Mentoring has become a chore, a vehicle to log community service or pad a resume or atone guilt.

But for many young professionals, the familiar path for attempting to develop a meaningful career goes something like school, internship, cold calls, email solicitations, happenstance job postings, and submitting applications like buying lottery tickets. Getting a job you actually really want, or honing useful experiences in a field, is about as deliberate as falling through a trap door. It kind of either happens or it doesn’t. Harvard either sends you a big manila folder or a wafer-thin legal envelope. That principal either calls you for a second interview or fades into utter oblivion. You show up the first few weeks of work and either realize you found something that genuinely makes you happy and productive, or you realize you didn’t need the last 8 years of school to answer the phone when it rings or discuss 1970s cultural trivia with co-workers you can’t stand. It kind of just happens. And in the 21st century, innovations and widgets and databases designed to mute this uncertainty and randomness seem to just accelerate it. Now instead of a few job postings we’re not sure we’re interested in, we can see a thousand, or instead of five bosses we don’t know we want, we can network with fifty. But going in for that first face to face in some downtown office or stately board room while being offered free drinks and being peppered with questions still seems just as ice-cold evolutionary as antelope crossing the Serengeti. Degrees and core competencies and letters of recommendation may get you in the door, but you still either sink or swim. It’s all decided usually in matter of minutes or hours, or if you’re lucky days. There is rarely that trial opportunity, an environment that isn’t so clearly and awkwardly motivated by self interest. I want this job, you want to finish the paperwork and successfully close a headhunt, so just try to resist my effusive charm and unrestrained intelligence. The fact is most people think they’re more insightful and unique than they could ever hope to be, and so this shock and awe approach to dream career acquisition usually goes about as well as its military equivalent.

The reality is we can more easily follow a feed of Britney Spears’ daily caloric intake than vaguely describe what it is we want to do every day with job title ‘fill in the blank.’ We develop a better rapport with our cleaning ladies than we do with people we may potentially spend a majority of our waking hours with. Years of school and imagined lives and aspirations and resumes are crushed together in one giant professional particle accelerator, and it either spits out a job you like, or maybe consumes your life as fuel to swallow the universe whole in one giant eternal black hole. We test drive cars but not careers, we rate 30 second youtube clips but not vocations, we try on a pair of slacks at the mall but not a job offer, we scorn Wall Street bonuses but know we just wish it was us on the receiving end. And in these little gaps is where I think there is a role for mentoring. Mentoring can be more than trying to save people from entering the penal-justice system or reduce an uptick in attrition. Mentoring is where droves of teenage aspiring financiers can have a fail-safe environment to test their assumptions, and would be engineers can stress-test career pathways before they commit hundreds of thousands and years of their life. It's where people can actually pick up and hold that big shiny prize they've coveted forever. It's where people can discover what they want and what they like.

There’s a billion gray-haired professionals populating skyrise cubicle farms, slogging through subways in yellow sweat-stained polos, negotiating morning rush hour at the Starbucks drive-thru, sifting through folders of porn on the weekend, who deep down know they want more. And there are at least as many religiously, compulsively anally driven twenty-somethings whose main mental construct is centered around getting a usually painfully generic big break that will deliver them from their current stalled ascent up the career escalator. Seems like supply and demand groping for a market. And rather than unite them in a high-stakes, hire or fire, promote or shelf, judge or patronize, win or lose, zombie dance, how about actually try it, whatever it happens to be. This is why I created Plategro.com. And while I think it has a likelihood of success about the same as an AIG subprime mortgage getting paid back, I think it’s good to dream.

Ok, after seeing what Chase and Goldman and co have been able to do in the fixed income and commodities sectors this quarter, I officially rescind my last blog post. I want cap and trade to pass, I want it to be a volatile market, I want some index to short, I want as much consolidation as possible, and I want a bunch of government agencies with overlapping responsibilities and a slew of new regulations with no established case law whose fissures can be easily navigated. In the process there will be so much liquidity generated that banks will be able to underwrite lots of new clean energy investments. And with the intent of the cap being to actually incent new capital purchases, maybe it will be a sustainable boom not bubble. And as some have pointed out, the climate doesn't have a constituency, so how could we expect any different sort of political economy? Probably accurate. What was I thinking?