Zaretsky is a longstanding critic of the laws and norms surrounding deaccessioning — the term of art for when museums sell off parts of their collections. Earlier this month, he gained a high-profile convert in the person of Virginia Postrel, who made the case that DIA should sell its paintings “to satisfy Detroit’s creditors”, just so long as the paintings remained in an American public museum somewhere. In the conversation which followed, Tyler Cowen had a certain amount of sympathy for Postrel while saying that such an action would essentially ratify the end of civilization in Detroit; he also worried that such an action might have a chilling effect on future art donations to museums. And Marion Maneker proposed that DIA should essentially become an art-lending library, making large sums of money from sending its masterpieces out on worldwide tours.

I’m a fan of the lending-library model, in principle — although no such lending institution really exists. Only Eli Broad ever really suggested it in a serious manner, and he ended up doing such a big U-turn on the idea that he’s basically now attempting to become a borrower, rather than a lender, of great art. In England, regional art museums are weaning themselves off government support by sending art on loan to China — but DIA has already faced the issue of receiving no government support, and managed to solve it in a particularly democratic and elegant manner. (Basically, it receives up to $23 million a year from three local counties, in return for giving those counties’ residents free admission to the museum.)

The point here is that decisions about selling art can and should only be made at the museum level. Back in 2008, for instance, after the University of Iowa was severely damaged by floods, there was a brief suggestion that maybe the university should sell off Mural, its masterpiece by Jackson Pollock. And while there might be arguments that this particular masterpiece belongs somewhere else, it was always clear (to me, at least) that any such decision should not be made by the Iowa legislature.

Even the threat that Detroit might attempt to sell the art in DIA is causing serious harm to the museum, which is now spending more management time on hiring bankruptcy lawyers than it is on programming — despite the fact that the museum’s finances and attendance are both pretty healthy.

The Michigan AG has declared that “the art collection is held in charitable trust for the people of Michigan and cannot be sold for purposes other than the acquisition of art”. That’s pretty unambiguous, legally. As for the norms involved, the one thing which is conspicuous by its absence from Postrel’s argument (or anybody else’s, for that matter) is any explanation of why Detroit’s unsecured creditors should have more right to these paintings than the museum does, or than the people of Michigan do. There’s no lien on this art: the whole point of being an unsecured creditor is that you can not take ownership of any particular asset if there’s a default. It’s conceivable that there are certain assets a bankruptcy judge might force Detroit to liquidate in Chapter 9 proceedings — but it’s pretty much inconceivable that those assets would include paintings in DIA.

So why does Postrel think that a little local insolvency is both a necessary and sufficient condition to break up one of America’s great municipal art collections? When she advocates the voluntary sale of kidneys, I’m with her — everybody benefits, in that case. But what she’s proposing in Detroit is not voluntary at all: she’s proposing that DIA be forced, against its will, and against the clearly expressed will of its citizens, to part with deeply beloved art works. In return, it would get — well, nothing, really: all the proceeds would end up being pocketed by the insurance companies which wrapped Detroit’s municipal bonds.

It’s easy to see how art-market types like Zaretsky and Maneker love the idea of freeing up a lot of the art which is currently in museums. Most of the money in the art world comes from buying and selling art, but nearly all of the greatest art the world has ever seen is in museums, where it’s never going to get sold. Back in 2006, there was a case for creating a new norm, whereby museums could sell art only to other museums, so as to “allow for a more comfortable distribution of resources between cash poor asset rich institutions and asset poor cash rich ones, allowing them to trade to mutual advantage”. But since then we’ve seen dozens of major art collectors create their own museums, to the point at which the distinction between a museum and a private collection has become impossibly muddied.

And ultimately there’s something to be said for the idea that there are some things money can’t buy. Most of the discussion on this topic is highly respectful of international boundaries, interestingly enough — Postrel suggested that DIA’s works be sold to an American museum, rather than to, say, a cash-rich institution in the middle east. And I doubt she would support the idea that Greece should pay its debts by selling its antiquities to foreign collectors. But if we’re going to say that art should stay within the US — even when it was created in France — we’re basically saying that it should not, after all, go to the institution with the deepest pockets, and that national interests trump financial concerns. Well, there are municipal interests, too: the art was bought by Detroit, not by the federal government.

It’s fantastic that Detroit has a world-class art collection, and that its art doesn’t naturally gravitate towards the richest cities in the country. Postrel says that Los Angeles and Dallas-Fort Worth have institutions which fall under the general rubric of being “asset poor cash rich”, and which are natural homes to DIA’s collection — but the fact is that both cities have large amounts of great art already. Do you find the Getty’s collection a little thin? Just go down the hill to LACMA, and you’ll find enough world-class art to last you a month.

Putting restrictions on the sale of art will never have great appeal to libertarians like Postrel, or even Cowen — it’s the art-world equivalent of rent control. In that sense, Detroit being able to hold on to its art is a bit like poor San Franciscans being able to hold on to their Mission apartments. It might not be economically efficient, but it’s a sign that you won’t ever be able to buy a masterpiece through the tactical acquisition of distressed municipal debt. Detroit is not rich financially; it probably never will be again. But it’s rich in art. And no bankruptcy judge can take that away from it.

And then comes the litany of municipal woes: Detroit has the highest violent crime rate of any major US city, at five times the national average; there were 344 murders in 2011, of which just 39 were solved. Right now, the average response time, if you put in an emergency call to the Detroit Police Department, is 58 minutes.

Detroit’s infrastructure is crumbling: 40% of its street lights are out of order, and it has 78,000 abandoned and blighted structures, of which 38,000 are considered dangerous buildings. Those buildings account for a large proportion of the 12,000 fires Detroit has every year. At the moment, firefighters are instructed not to use the hydraulic ladders on their firetrucks unless there is an immediate threat to life, because the ladders have not received safety inspections for years. Detroit also has just 36 ambulances, of which generally no more than 14 are in operation at any given time. And in terms of the city’s IT infrastructure — well, you can probably guess; suffice to say that a recent IRS audit characterized the city’s income tax system as “catastrophic”.

As far as Detroit’s balance sheet is concerned, there is $9 billion of debt, excluding pension liabilities, and also excluding healthcare and life insurance obligations which are calculated at roughly $6 billion. Debt service in 2013 is projected at more than $240 million, or about 22% of total revenues. Worryingly, under the section of the proposal headed “Realization of Value of Assets”, one finds the priceless collection owned by the Detroit Institute of Arts:

Bill Schuette, the Michigan attorney general, has declared in no uncertain terms that DIA’s collection is off-limits when it comes to satisfying the obligations of the City of Detroit; he’s absolutely right. But you can be sure that there will be arm-twisting all the same: Detroit’s emergency manager, Kevyn Orr, doesn’t seem to think of DIA as anything beyond a store of recoverable value.

He wants to write down some of Detroit’s debt, as well — although far from all of it. Cate Long has a good round-up of how various bondholders will be treated under his proposal; she concludes that he’s treating bondholders in good faith, but that he’s behaving less fairly towards retirees. (It’s a combination you might expect, given that Orr was appointed by a Republican governor; it’s basically the opposite of how the Obama administration treated the bankrupt Chrysler and GM.)

It’s worth noting that even though Detroit is defaulting on millions of dollars of debt obligations, bondholders in general are not going to be hit, thanks to the wonders of third-party guarantees. For instance, Bloomberg reports that the 2028 general-obligation bond is currently trading at 96 cents on the dollar, “the lowest since March 2012″ (it’s backed by Assured Guaranty).

As a result, the real pain here is going to be felt by two main groups. The first is the companies who provide wraps for municipal debt — companies whose muni arms somehow managed to escape the financial crisis largely unscathed, and which had to expect some losses on all the debt they were insuring. It’s hard to feel any sympathy for them. But the second group — Detroit’s municipal retirees — had much less choice about taking on their unsecured exposure to the city’s finances. Looking at the straits Detroit is in, the bond default makes sense. But it’s not being driven by stratospheric pension costs, and the swipe at pensioners does look rather gratuitous.

As Long says, “this is merely an opening gambit by Orr”. Let’s hope that Detroit’s unions, as well as the people representing non-unionized workers, fight him aggressively. Because Detroit’s population is poor enough as it is. Those pension payments are needed — and what’s more, they will overwhelmingly be recycled straight back into the local economy. Unlike bond coupons.

Cognical was set up, at least in part, to address the Catch-22 built in to the US lending system: you can’t get credit if you don’t have a credit score, and you can’t get a credit score until you’ve been extended some credit. The result is a system where many borrowers, especially immigrants and the poor, find themselves forced to pay through the nose to loan sharks, pawn shops, payday lenders, installment lenders, and other institutions which range from the consumer-unfriendly to the downright predatory.

It’s hard to wade through the jargon on the Cognical website. Exempli gratia: “Leveraging our experience with machine learning algorithms and unstructured big data, we assess and transform application variables in specific ways to expand the data and its predictive value.” But the general idea is pretty simple: rather than just look at credit score, lenders can use Cognical to mine enormous quantities of data, in the hope and expectation that buried in there somewhere the firm will be able to find patterns which can predict whether or not any given individual is going to repay a loan.

Cognical claims spectacular results, but I’m not completely sold: with big data comes a massive rise in spurious correlations, and in any case it’s not like the borrowers in question are leaving a massive data trail behind them in the first place. On top of that, even if Cognical is doing amazing work, all of it will be for naught unless and until someone happens to apply for a loan from one of Cognical’s clients.

As a result, what you really want, it seems to me, is two things. First is a dataset which is obviously germane in terms of throwing light on an individual’s ability to pay her obligations in a timely manner. and second is a way to get that dataset into the hands of the institutions which really matter, when it comes to this particular game: the three big credit bureaus, as well as FICO.

Wonderfully, that is exactly what a bunch of us, including Sasha Orloff of LendUp, ended up talking about at the CGI conference the following week. At the moment, it’s only an idea, but I’m keeping my fingers crossed that the idea is so good, and so obvious, that it’s going to end up being put into effect at some point.

What’s the dataset? It’s not a bunch of Facebook likes and Twitter favorites, the kind of inchoate data only Max Levchin could love. Rather, it’s a big and simple obligation: rent payments. It’s pretty obvious that if you’re good at making your rent payments on time every month, you’re also more likely to pay other obligations in a timely manner. And so if rent payments were reported to the ratings agencies, that would give them valuable information about the group currently known as “thin files” — people about whom there’s too little data to make a determination as to creditworthiness.

The place to start is HUD, along with the enormous housing agencies in cities like New York and Chicago. As public agencies, they have every reason to want to improve the lives of the people they’re renting apartments to — and one easy way of doing that would be by improving those people’s access to affordable credit. (And there would be a financial benefit for the agencies, too: if tenants knew that their rent payments would be a part of their credit score, they might be more inclined to pay on time.)

The ratings bureaus are weirdly low-tech: they don’t exactly have convenient APIs which allow anybody to upload payment datasets. Instead, they use a clunky old thing called Metro 2, which was designed back when people were mainly worried about Y2K issues. Still, it’s possible to write a program which converts any structured data into Metro 2 and then uploads it to the ratings bureaus — Orloff has done it, and he says he would be happy to donate the code to any open service or housing agency which wanted to report rental information.

Of course, once the rental information was uploaded to Experian and Equifax and TransUnion, they would have to actually do something with it — as would FICO. That might take a while. But Experian says that it’s already incorporating rental data into its own scores, and certainly landlords would be very interested in a FICO score which included such data. The demand is out there, and if the information is just dropped into the companies’ laps, it would be hard for them to simply ignore it.

The goal here is, simply, to score the unscored. Such people might not have high FICO scores, at the beginning, especially if their history of rental payments is spotty. But score beats no score, and once you have one, you can start working to improve it. What’s more, people who have been diligently paying rent on time for years, and who have sensibly be avoiding debt, might actually end up with high FICO scores rather than none at all.

It doesn’t need to end with public housing agencies, of course. The government could set up a central system where all landlords could, if they wanted to, upload the rental information of their tenants. And once such a system was set up, it could conceivably be extended beyond rent payments, to include things like utility bills as well. The idea being that when a company like FICO attempts to ascertain creditworthiness, all information has to have some value. And the more information that can be obtained about people who haven’t formally borrowed much money in the past, the more likely it is that they’ll be able to get a score. Which is a very useful thing indeed, in today’s economy.

Good news for America’s unpaid army of latte-fetchers and lunch-order-takers! A Federal district judge in Manhattan has ruled that Fox Searchlight Pictures violated state and federal labor laws by using unpaid production interns on “500 Days of Summer” and “Black Swan”.

The ruling in the “Black Swan” case could have a big impact for the estimated 1 million American college students who work in unpaid internships. Ross Perlin, author of the 2011’s “Intern Nation”, says the decision could end decades of what’s effectively “wage theft”:

At their peak following the 2008 crash, unpaid internships were increasingly crowding out paid ones and replacing regular positions altogether, in the process turning the entry-level job into an endangered species. It was “a capitalist’s dream,” as sociologist Andrew Ross put it: free white collar labor made to seem almost entirely normal.

Dylan Matthews — a former intern himself — writes that the ruling has the effect of turning a 2010 Department of Labor fact sheet into established law: the judge in the Black Swan case said Searchlight’s internships violated all six of that document’s criteria on what an internship should be. Rebecca Greenfield — whose LinkedIn profile suggest that, yes, she’s been an intern — talked with both of the plaintiffs. Both were well-off enough to afford to perform free labor: one got money from his mother to live in New York and work for free; the other lived off his savings from a previous job at AIG.

That unpaid internships favor the wealthy isn’t a new argument, but recent legal scrutiny hasn’t gotten rid of the practice. ProPublica is running an investigation into the intern economy — there’s even a Kickstarter campaign to help them hire an intern to cover interns. The organization’s research intern has held six internships, both paid and unpaid, and writes that she’s struggled financially since finishing grad school in 2011. She does, however, say that she’s both learning and getting paid at ProPublica.

Matt Yglesias, who earned valuable intern-ish experience getting coffee at Rolling Stone, worries that enforcing minimum wage labor laws for internships will just push people into expensive grad schools. “Erecting extremely sharp walls between ‘education,’ ‘training,’ and ‘work’” doesn’t make a ton of sense,” he writes. (Though it’s much easier to put scare quotes on “work” when you have it.) In the end,Yglesias nods approvingly at arrangements like Germany’s vocational training programs, where students do, in fact, get paid.

This won’t be the last intern lawsuit. Former Hearst interns filed their own suit last month. Yesterday, two former magazine interns at noted intern factory Conde Nast got in on the act. One former intern at W, Condé’s high-end fashion book, described her 10-hour days as being like “The Devil Wears Prada”, but worse. That could describe every internship ever. — Ryan McCarthy, who is not an intern, either paid or unpaid, but is a former intern, and, after a few beers, will probably tell you he’s probably still bitter about the whole thing.

On to today’s links:

Ugh
Detroit will default on its unsecured debt – Reuters
Some positive news about Detroit – BI

Alpha
Let’s all invest in San Francisco parking spots! – AP

Leaders
American CEOs remain “oblivious to political reality” – Bloomberg

Right On
The best response to the failed policies of austerity: full employment – Guardian

Fails
The 50 worst charities in America – Tampa Bay Times

Servicey
How to avoid tax avoidance – Reuters

Data Points
In 1956, Argentina’s annual per-capita beef consumption was 222 pounds – NYT

Oxpeckers
The BBC spent $152 million on a failed CMS – Economist

Hilarious
TheStreet.com says Yahoo might buy a company that doesn’t exist anymore – Valleywag

And, of course, there are many more links at Counterparties.

The world is questioning the effectiveness of Abenomics — the economic policies advocated by Shinzō Abe, the prime minister of Japan. Abe’s plan to revitalize the country’s sluggish economy seemed to be working, as reflected in the Nikkei which soared to around 15,100 in May from 10,395 in December. That has changed: the Nikkei fell 7% yesterday and is down 20% since its May high, closing at 12,445 Thursday. Swiss hedge fund manager Felix Zulauf said Japan would  “cause the next big global crisis”.

The reality is it is probably too soon to tell whether Abenomics is working. The prime minister’s three-pronged plan is certainly ambitious. In order to do “whatever it takes” to hit a 2% inflation target, the Bank of Japan is flooding the markets with money and the government has implemented major fiscal stimulus. Last week, Abe proposed a growth strategy that includes a target to lift per-person income by 40% over 10 years and “a series of deregulated and lightly taxed zones around the country”. Abe has said this is the most important of the three prongs, but The Economist notes that the announcement “left many disappointed by its timidity”.

As far as growth goes, David Keohane points out that “it’s hard to escape the effects of demographic determinism.” Japan has an aging population, a very low fertility rate, and Abe has not yet proposed a great solution to fix this.

What Japan does have going for it is low unemployment, although as Noah Smith has pointed out, a lot of that has to do with falling real wages and women opting out of the labor force. But Joseph Stiglitz is still bullish on Japan, noting that “we see that even after two decades of ‘malaise,’ Japan’s performance is far superior to that of the United States”  – if you consider a broader range of factors like inequality and life expectancy. The Nikkei is still up almost 20% since the beginning of the year.  – Shane Ferro

On to today’s links:

The Fed
Ben Bernanke would very much like you to stop overreacting to what Ben Bernanke says – Jon Hilsenrath

Ugh
With 3 unemployed workers for every job opening, “the labor market is still pretty much murder” – The Atlantic

New Normal
The biggest economic mystery of 2013: What’s up with inflation? – Matthew O’Brien
Everyone gets a college degree! (sort of) – NYT

Reversals
Junk bonds and treasuries: negatively correlated no more – Sober Look

Comparisons
How the music industry explains American inequality – Alan Krueger

Alpha
The problem of investing in the US Postal Service – WSJ
Rival hedge funds are pretty excited about SAC’s problems – Reuters

Big Brother Inc.
Washington’s double standard: “Secrets are sacrosanct until officials find political expediency in leaking them” – Jack Shafer
The secrecy industrial complex – David Rohde

Takedowns
Josh Barro takes down CAP’s recommendations for the economy – Josh Barro

Charts
The geography of hunger in America – Atlantic Cities

Wonks
Fiscalists vs market monetarists, a bloggy taxonomy – Cardiff Garcia

Surveys
CEO’s aren’t that excited about the US economy – Business Roundtable

And, of course, there are many more links at Counterparties.

I’d argue that it is unlikely that Arrested Development will convince millions of users to stay an extra month in 2014 and 2015. If this is the case, the show would need to achieve its return in the immediate future. Therefore, if we don’t see Netflix adding four to five million new subscribers during the quarter, one of two things are true. One, the show was a poor investment whose draw was a fraction of those anticipated, or two, the show is instead intended to convince many of the million subscribers currently churning away each month to defer their cancellation. This would be telling.

While Wall Street analysts are assessing the success of original content in terms of new customers, I believe Netflix’s primary goal is on imminent service cancellations.

Ball lists three reasons why Netflix is making original content. There’s the way in which that content keeps people subscribing for longer; the way in which original content will allow Netflix to raise its prices in the future; and then there’s this:

Hedging against rising content licensing costs, which are up 700% over the past two years. While per-show licenses will never surpass the cost of original producing a series, their increases will make ongoing investments in House of Cards less expensive on a differential basis.

The ever-increasing cost of licensing is a huge issue for Netflix, and it’s the reason why its business model is a very tough one: any time that Netflix builds up a profit margin, the studios will simply raise their prices until that margin disappears. Netflix had to pay a whopping $1.355 billion in licensing costs just in the first quarter of this year; that number is only going to increase, unless Netflix can find some other way of finding content. Like producing it in-house. At the margin, the more material that Netflix produces on its own, the less it needs from third parties, and the easier that Netflix finds it to say no to ridiculous demands.

But what Ball misses, I think, is that Netflix is playing a very, very long game here — not one measured in months or quarters, and certainly not one where original content pays for itself within a year. Netflix doesn’t particularly want or need the content it produces in-house to make a profit on a short-term basis. Instead, it wants “to become HBO faster than HBO can become Netflix,” in the words of its chief content officer Ted Sarandos.

Most importantly, the thing that Netflix aspires to, and which HBO already has, is an exclusive library of shows. If everything goes according to plan, then the Netflix of the future will be something people feel that they have to subscribe to, on the grounds that it’s the only place where they can find shows A, B, C, and D. That’s what it means to become HBO — and Netflix is fully cognizant that this is a process which takes many years and billions of dollars.

If Netflix gets there, then it becomes a license to print money, just as HBO is today. Shows like Arrested Development and House of Cards may or may not pay for themselves over the short term — in fact, they almost certainly won’t. But that doesn’t matter. In the long term, they will become part of a library which has massive value on two fronts: the shows can be licensed out in jurisdictions where Netflix doesn’t want to compete, and they will also help make Netflix a service that can guarantee you a great show that you want to watch, whenever you want to watch it.

Ball says that “Arrested Development is an established brand that’s intended to be a one-off event to convince its fanatical (and tech-savvy) followers to give Netflix’s broader streaming service a try.” That’s true — narrowly. But the series is much more than that: it’s also a way for Netflix to signal to all its current and potential subscribers that it is home to high-quality exclusive content, if and when they ever feel like giving it a try. In a weird way, Arrested Development is worth more as the number of people who haven’t seen it goes up.

No one today is likely to subscribe to Netflix just on the grounds that they think they might like to watch Arrested Development at some point. But when there are dozens such shows — none of which are available anywhere else — that begins to add up. At that point, not only does Netflix provide something for everybody; it also becomes the only place to watch certain shows with cultural-touchstone status. And presto, the decision is no longer whether Netflix is worth the subscription price; rather, the question is whether you can afford not to have it.

There’s no guarantee that Netflix is going to succeed at this strategy: many have sailed into the treacherous waters of Hollywood video production, and few have thrived there. And in the first instance the strategy just means that it’s no longer just the content companies managing to extract enormous rents from Netflix; it’s the production industry and the talent as well. The old argument still applies, mutatis mutandis, to the new strategy: as high-quality original content becomes increasingly important to Netflix, Hollywood will find ever more ingenious ways of forcing Netflix to pay through the nose for it.

Still, for viewers, this can only be good. The viewing audience doesn’t care whether Netflix makes money: they just want great shows to be produced. If they like House of Cards and Arrested Development, they should be very heartened: there’s going to be a lot more new shows where those ones came from.

The US and UK have a unique sort of corporate governance mess on their hands. Both countries are trying to deal with the complications of owning a multi-billion dollar financial institution, and are having a hard time doing so.

Britain’s problem is RBS, which the government owns 81% of as a result of 2008 bailout that ended up costing $71 billion. In the US, it’s Fannie Mae and Freddie Mac, the mortgage giants that have been under federal conservatorship since 2008.

Hours after a senior official at the Bank of England called for a more certain timetable for RBS’s privatization, CEO Stephen Hester, who took over in November 2008, unexpectedly announced his departure.

Reuters’ Matt Scuffham reports that the RBS board decided Hester need to be replaced after he refused “to make an open-ended commitment to remain”. Analysts, the WSJ says, were “surprised and disappointed” by Hester’s departure just as the bank’s privatization process is getting underway. Faisal Islam thinks Hester’s exit may be a sign that the government wants to restructure how it manages the bank, something it has had trouble doing in the past.

The US government, meanwhile, is facing a lawsuit from Fannie and Freddie shareholders seeking $41 billion in damages for improperly seizing the companies in 2008. Fannie’s stock has been on a tear recently, based on the essentially speculative rationale that the government will decide to privatize the company. Matt Levine makes the great point that the bailout-related lawsuit could should cause the government to keep its hands on the mortgage companies:

Fannie and Freddie were designed to carry out a public purpose while also making money for private shareholders. When those goals conflicted, the public purpose won and the private shareholders were thrown into the abyss. If you’re the government: that’s perfect. Except now those shareholders are suing, as shareholders tend to do. If you’re the government: why would you set yourself up for more of that?

Jesse Eisinger argues that Congress continues to find new and interesting ways to bungle Fannie and Freddie’s rehabilitation. Neither of the two main proposals to reform Fannie and Freddie, Eisinger writes, reflect what we’ve learned about the housing market since the crisis. Not that Frannie were ever that sound to begin with. The companies were flawed all along, Eisinger says: “hybrids, privately held institutions with government charters – along with too much political influence and too little capital.” – Ben Walsh

On to today’s links:

Mysteries Explained
Don’t worry, credit cards are the reason you’re a bad person – Derek Thompson

Big Brother Inc.
About half a million private contractors have access to top-secret info – Brad Plumer

New Normal
The President’s report on the “Great Gatsby Curve” – White House

Alpha
Foreign exchange rate benchmarks may have been manipulated daily for the last decade – Bloomberg
Maybe all that FX market manipulation was just standard trading – Felix Salmon
The term “market manipulation” used to mean something – Matt Levine
Dan Loeb is giving more money to charter schools to get back at the teachers’ union – Bloomberg

Pivots
“The tectonic plates of the world economy are shifting” – David Wessel
Are central bankers finally losing control of long-term interest rates? – BI

Health Care
The overlooked driver of health care costs: lack of competition – Eduardo Porter

Deals
Why Pandora just bought a radio station in South Dakota – Bloomberg Businessweek

Ya Think
Large banks are still Too Big to Fail, and S&P is on it! – FT

JP Morgan
Jamie Dimon doesn’t agree with JP Morgan – Jonathan Weil

Niche Markets
The French film industry threatens to torpedo major US-EU trade talks – Reuters

Crisis Retro
Regulators say AIG Financial Products is having trouble managing risk again – Shahien Nasiripour

Fails
The JOBS Act has been a big missed opportunity to spur more small company IPOs – Steven Davidoff

Awesome
That Kanye West interview everyone is talking about – NYT

Surveys
A majority of Americans responded truthfully to a survey – WSJ

And, of course, there are many more links at Counterparties.

The problem here comes as little surprise. There are huge investors out there — largely ETFs and index funds — which invest internationally and which need to engage in a lot of large FX trades, especially at the end of the month. Their substantial FX trading notwithstanding, those funds don’t tend to employ dedicated FX traders. Instead, they do a deal with a big wirehouse — probably Deutsche, Citi, UBS, or Barclays — which promises them execution at whatever the spot FX rate is at the end of the day.

So at 3:30pm or so at the end of the month, the index fund tells the bank that it will need to (say) exchange 1 billion dollars into Swiss francs; the bank promises to do so, at whatever the official market rate is at 4pm. The official market rate is determined by WM/Reuters, which looks at all the trades taking place between 3:59:30pm and 4:00:30pm, and then takes the median rate of all those trades.

The bank’s trader now has both upside and downside risk. As Matt Levine explains, if the bank can’t manage to buy those Swiss francs at the WM/Reuters level, then it will lose money; if it can get a better price than the WM/Reuters official rate, then it will make money. When a trader buys a large amount of FX in a short amount of time, that can work in his favor or against him — if such a thing is done tactically, it’s called a concentration move. Here’s Izabella Kaminska:

“Concentration” tactics are normal practice for the industry. It’s the equivalent of creating economies of scale and then choosing the moment to transact so that the depth of the market, and its likely impact on the price, is most beneficial to you. It’s called skillful execution.

If you’re an investor rather than a trader, you generally hate the concentration issue. A big trade will move the market in and of itself, and you’ll end up getting a worse price than a small investor would. On the other hand, if you’re a sell-side trader rather than an investor, and you’re gifted with half an hour and a billion dollars of firepower, then you’re likely to be able to make quite a lot of money by being tactical about exactly how and where you do the transaction.

Essentially, the trader’s job is to procure a billion dollars’ worth of Swiss francs as cheaply as possible. The amount that the client will pay for the Swiss francs is set, and the trader will pocket the difference.

But here’s where the market manipulation comes in: what happens if you “bang the close”, and drive up the price of Swiss francs in the crucial 60 seconds between 3:59:30pm and 4:00:30pm? Then you’re not just trading to get the best execution for your own end of the deal; you’re also trading to get the worst possible price for your client.

Does this happen? Undoubtedly, yes. But as Kaminska says, it probably happens less now than it used to in the past, thanks to what she calls “a tech-related platform revolution”. And remember that no one is putting a gun to the index funds’ heads and forcing them to negotiate deals based on the WM/Reuters market close. If they want to just go into the market and buy the FX themselves, they’re more than welcome to do so. While the funds are surely concerned about traders trying to manipulate closing prices in the FX market — just as traders also try to manipulate closing prices in the stock market on days when options expire — they will have made an internal determination that it’s cheaper to live with that, compared to the cost of hiring their own traders. Especially since implicit FX costs only turn up in infinitesimally smaller returns, while explicit payroll costs show up directly in all-important fund-management fees.

The bigger picture here is that trades move markets, that traders know that trades move markets, and that traders are always going to try to profit from their ability to move markets. As Kaminska says, that’s execution, more than it is manipulation. If traders are really manipulating the close in order to make easy money from index funds, that’s a bad thing: those index funds are meant to be their clients. But when you have an unregulated, Wild West market like FX — which, by its nature, is almost impossible for any national regulator to oversee — it’s simply naive to believe that such behavior is never going to happen. My advice to the index funds is that they renegotiate their contracts, and try to put in place a system which aligns incentives more. Because if the incentives are opposed, as they are here, then the client is never going to end up the winner in the deal.

If there was an index for fixed income with the status of the Dow Jones industrial average or Standard & Poor’s 500 index for stocks, the carnage in fixed-income markets would have been a big story and we’d all be talking about a bear market in bonds…

Mr. Beinner said investors need to reconsider their traditional fixed-income allocations, nearly all of which carry interest rate risk. “It’s an asset class with a negative expected return without any other positive offsetting properties. So why have it as a part of your portfolio?”

Mr Beinner, here, is Jonathan Beinner, the chief investment officer for global fixed income at Goldman Sachs Asset Management — basically, a bond investor. And it’s not common to hear bond investors (or any investors, for that matter) tell you that if you give them your money, your expected return will be negative.

The weird thing, however, is that “the millions of Americans scraping by on paltry interest payments”, as Stewart characterizes them, probably want interest rates to go up. It’s the quandary of the millionaire: if you spend a pretty modest amount each year, you’ll run through your savings far too quickly, thanks to record-low interest rates. If those interest rates were higher, then your income would be higher too.

And it’s not just individuals with savings who are looking for higher rates. According to Jamie Dimon, if rates go up by 3 percentage points, JP Morgan would make an extra $5 billion per year. Stephen Gandel isn’t convinced — but clearly Dimon, who’s sitting on one of the largest fixed-income balance sheets in the world, is pretty sanguine about the prospect of interest rates rising sooner rather than later.

So, should we all be freaking out about the carnage of falling bond prices? Or should we welcome a normalized world of higher interest rates? And given that nearly all investors have some kind of fixed-income exposure, what are they meant to do?

The problem here is that bonds don’t behave like stocks: you can’t hold them in perpetuity, because they mature. And if you try to buy and hold individual bonds, you’ll rapidly discover that keeping track of them all is a lot of work. As a result, just about the only bonds that individuals buy are munis; at least those don’t come with massive tax headaches. (This is one of the main reasons TIPS haven’t taken off in a bigger way: their tax treatment is a nightmare.)

The result is that when people invest in bonds, what they actually do, most of the time, is invest in bond funds. And bond funds, like most funds, tend to do well in good times, while underperforming in bad times. Theoretically, no one ever needs to lose money on any Treasury bond bought at a positive yield — you just hold it to maturity and you’ll end up receiving more than you paid. But if you buy a Treasury bond fund, you can lose a lot of money in a very short amount of time: 6.8% in May alone, according to Morningstar. As Stewart says, that’s “years of interest payments”.

The real problem with today’s low interest rate environment, then, is not that interest rates are bound to go up sooner or later. That’s a good sign: it’s what happens when an economy goes back to normal. Rather, it’s how we get there from here: as Goldman COO Gary Cohn told Stewart, “we have an entire generation of investors who have never experienced a rising rate environment.” Most of those investors are looking after the money of individuals who consider bond funds to be low-risk investments, and a lot of them are going to end up doing very stupid things as interest rates start to rise, losing a lot of their investors’ money.

If you’re invested in a bond fund, then now — just when prices have plunged — is not a particularly auspicious time to sell; doing so just locks in losses. But if your bond funds are falling while your stock funds are rising, then at some point you might start thinking about rebalancing — which would involve selling stocks while buying the very bonds which seem to have entered a secular bear market. That’s going to be a very hard decision to make. Generally speaking, second-guessing rebalancing decisions is a bad idea: the whole point is to set up rules in advance, and then stick to them in a disciplined manner. But when interest rates are rising and bond funds are losing value, pouring even more money into them feels very much like throwing good money after bad — especially when it’s money you can’t afford to lose.

And to make matters even harder, there will certainly be a select group of bond investors out there which makes the right decisions rather than the wrong ones, and which manages to make good returns even in a rising interest-rate environment. It’s not easy, but it can be done. The problem, of course, is that it’s impossible to know ex ante who’s going to be the new bond star. My gut feeling is that it’s going to be someone who remembers 1994, the last time that we had a bear market in bonds.

I might be wrong about picking an old-timer. But what I do know, for people who have blindly put a substantial part of their life savings into bond funds without paying too much attention to exactly who’s managing those funds or what they’re investing in, is that the risk of doing nothing is substantial. The problem, as ever, is that it’s far from clear that doing something is better.

Nancy Folbre declared this week that the “golden age of human capital” behind us. As evidence, she points to the falling rate of return on a college degree, thanks to “declining state support, higher tuition and fees, increased inequality of access and the growing burden of debt.” Further, she says, technology is making many relatively well-paying jobs obsolete as complex tasks are increasingly done by computers. But maybe that’s okay, Folbre writes. Education has an intrinsic value: it’s good for society even if it isn’t making us richer.

Paul Krugman notes the “skill” involved in being a skilled worker — what we now think of as a job needing a college degree — has evolved with each epoch of technological innovation. Five centuries ago, monks were highly skilled workers who copied books line by line. (Then the printing press happened). “The role of higher education as a creator of human capital came along quite late. And maybe, as Nancy Folbre says, this role is already waning,” says Krugman.

But a lower return on investment doesn’t mean college is worthless. Adam Looney, a fellow at the Brookings Institution and the director of the Hamilton Project, came up with this graph last year showing the increasing difference in the employment rate and average incomes for those with and without college degrees:

The benefits of college even extend to those who don’t graduate. Dylan Matthews recaps Looney’s most recent study, which finds that, on average, college dropouts makes $8,000 more per year than high-school graduates who never started college. The change in the employment rate for those with some college is also flat since the start of the recession; for those with no college at all employment rates have fallen 9%, notes Josh Brown. As Felix wrote last year, “the fact is that while this economy is undoubtedly tough for recent graduates, especially those with liberal-arts degrees, it’s much, much tougher for people who don’t have any degree at all.” — Shane Ferro

On to today’s links:

Long Reads
Modern Warfare: The legal battle over the future of the billion-dollar Call of Duty franchise – Max Chafkin

EU Mess
Today he ECB’s day of reckoning in German court – Reuters
A brief is thistory of politicians and bankers declaring the worst of the euro zone crisis over – MacroScope

Servicey
Yelp for Wall Street brokers is about as accurate as Yelp – Dealbook

New Normal
Goldman will now let special clients borrow against the Bordeaux in their cellar – Bloomberg

Financial Arcana
How “financialization” can hurt the economy – Bruce Bartlett

Facebook
On Facebook: “When everything is a potential vessel for advertising, everyone is annoying” – Tom Scocca

Alpha
Anthony Scaramucci wants to build an alternative to bars that are “not fun” and have unattractive staff – Bloomberg

Wonks
We already tried libertarianism — it was called feudalism – Mike Konczal
The soaring number of $100 Bills – Timothy Taylor

Deals
Dole’s 90-year-old CEO makes unsolicited $1.5 billion offer for the company – Dealbook

Yikes
A German bank employee accidentally transferred millions while napping on his keyboard – AFP

And, of course, there are many more links at Counterparties.

Americans with $1 million in savings may be in for a dispiriting surprise — they still haven’t saved nearly enough. The problem, reports the NYT’s Jeff Somer, is that bond yields have fallen and life expectancies have risen.

A  65-year old couple with a $1 million nest egg of tax-free municipal bonds that withdraws 4% per year, Somer says, has a 72% chance of running through their retirement savings before they die. The even larger problem is that the millionaire 65-year old couple is far from typical. The median household retirement account balance for Americans aged 55-64 is just $120,000.

“The bottom line,” Somer quotes NYU professor Edward Wolff saying, “is that people at nearly all levels of the income distribution have undersaved”. The result, according to Wolff, is that Social Security will be the primary income source for most retirees, even for retirees who are relatively well off.

Mutual fund managers’ solution to the problem is mandatory savings. BlackRock’s Larry Fink is one of the most visible champions of mandatory investment plans like Australia’s, which have the benefits of removing the market-timing itch and the problem of employers who have no retirement plan at all. Under the Australian model, employers must contribute 9% of pay (rising to 12% in 2020) for their workers. This, Dan Kadlec writes, “increasingly is being held up as a model for the US”.

But all defined-contribution schemes are reliant on the market going up. And no such plan, Tadas Viskanta writes, can treat the market like an “ATM machine from which one can extract guaranteed returns”. — Ben Walsh

On to today’s links:

Unintended Consequences
Gazprom’s demise could topple the Putin regime – Anders Aslund

The Fed
The history of the Fed’s balance sheet, visualized – Sober Look

Big Brother Inc.
There’s never been a more important leak in American history than Edward Snowden’s – Daniel Ellsberg
“The national security apparatus has been more and more privatized and turned over to contractors” – NYT
A look at the VC firm that helps the NSA find startup investments - TechCrunch

Deals
Google is (finally) close to acquiring Waze for more than $1 billion – AllThingsD

New Normal
5 maps that show how divided America really is – Atlantic Cities
Low-paying jobs in retail, hospitality and temp-help accounted for 55% of May’s job gains – Bloomberg

Regulations
Sheila Bair’s financial regulation listicle – VoxEU

Facebook
Facebook is maybe, possibly gonna be included in the S&P 500 within the next year – Bloomberg

Oxpeckers
At CNN, longform reporting loses out to B-roll footage of a guy on a beach every time – Zocalo Public Square

Alpha
In the fight for survival, funds of funds go bespoke – FT

Primary Sources
S&P raises its outlook on US debt to stable – S&P

The Singularity
A Kickstarter for the world’s first remote-controlled cyborg – Christopher Mims

Housing
Fannie and Freddie are worried that mortgage servicing companies are getting too big – Reuters

And, of course, there are many more links at Counterparties.

Given how much I dislike philanthropy which is mainly designed to make the giver feel important, I ought to be happy about all these developments. But in fact, I’m quite conflicted.

Part of the reason is that philanthropy can not simply be reduced to dollar amounts. You can make a stab at doing so — and if you work for the Robin Hood Foundation, you will do just that. But Robin Hood is very clear that all it’s trying to do is create a way in which to compare apples with oranges, so that there’s a bit of structure under which to answer the “apple or orange?” question. If the Robin Hood quants decide that funding apples causes $4 of benefit while putting the same amount of money into oranges causes $5 of benefit, then they’ll chose the oranges over the apples. But they’re not saying that the apples actually create $4 of benefit: they’re just saying that given their mission, and the way in which they put numbers on such things, they prefer oranges to apples.

The Robin Hood people are very open about the fact that some other foundation with a different mission, or even a different set of quants at the same foundation making slightly different assumptions, could come to a very different conclusion. The quantification framework isn’t a way of replacing judgment with numbers; instead, it’s a way of helping people to be more explicit about exactly what assumptions they’re making when they choose one action over another.

This is my problem with the kind of philosophy Matthews is talking about; call it the GiveWell view. Here’s Matthews, explaining why a well-intentioned chap name Jason Trigg is working at a high-frequency trading shop:

Trigg makes money just to give it away. His logic is simple: The more he makes, the more good he can do.

He’s figured out just how to take measure of his contribution. His outlet of choice is the Against Malaria Foundation, considered one of the world’s most effective charities. It estimates that a $2,500 donation can save one life. A quantitative analyst at Trigg’s hedge fund can earn well more than $100,000 a year. By giving away half of a high finance salary, Trigg says, he can save many more lives than he could on an academic’s salary.

David Brooks does a good job of explaining how there can be something dehumanizing about such logic: there are good reasons to be suspicious of anybody who thinks that philanthropy can or should be reduced to dollar amounts or preset decision matrices. But there’s more going on here, and it’s worth unteasing the various different components of Trigg’s implicit syllogism.

First, there’s what you might call the Peter Singer imperative: “If it is within our power to prevent something bad from happening, without thereby sacrificing anything of comparable moral importance, we ought, morally, to do it.”

Second, we have the ability to turn money into saved lives. “Remember,” writes Matthews, “that giving about $2,500 can save one life from malaria.” Maybe the number is a little fuzzy: it might be $2,000 or $3,000 or even $4,000. But it is fair to say that if I spend tens of thousands of dollars a year on discretionary consumption, then there’s an opportunity cost to that spending — and the opportunity cost is dead people. They died of malaria, and if only I had given that money to the Against Malaria Foundation instead of spending it on booze and taxicabs and theater tickets, then those dead Africans would be alive today.

Third, there is no moral difference between directly saving someone’s life, on the one hand, and, on the other hand, spending an amount of money such that at the margin one extra life will have been saved. The moral worthiness of donating $2,500 to a malaria charity is exactly the same as the moral worthiness of jumping into a shallow pond to save a child from drowning. Both save one life.

Fourth, if you were walking past a shallow pond where a child was drowning, you would surely jump in to save that child.

Fifth, moral mathematics scales: if donating $2,500 and saving one life is good, then donating $5,000 and saving two lives is twice as good, and so on and so forth. If there are diminishing marginal returns on your donated dollar, then they’re small.

If you accept those five premises, then the conclusions rapidly and easily follow: not only should you donate the overwhelming majority of your disposable income to the Against Malaria Foundation, but you also have a moral imperative to maximize the amount of disposable income you have, just so that you can maximize the amount of money you donate and thereby the number of lives you can save.

But the fact is that when you disaggregate the logic in this way, you’ll find very few people willing to accept all five of the premises. I don’t want to wade into the realm of moral philosophy here, so let’s just concentrate on premise number two: the idea that there’s some kind of easy fungibility between dollars and saved lives. This is great as a marketing technique, and if you go through an elaborate quantitative exercise, you can end up at GiveWell’s “cost per life saved” conclusion:

Using the 2012-2013 cost per LLIN, we estimate the cost per child life saved through an AMF LLIN distribution at just under $2,300 using the marginal cost ($5.15 per LLIN) and just under $2,500 using the total cost ($5.54 per LLIN).

The Robin Hood Foundation is far from modest when it comes to its quantitative techniques, but never goes nearly as far as this. At Robin Hood, everything is based on conditionals: if you’re giving away a certain amount of money anyway, and if you have a certain mission statement, and if you make certain clearly-delineated but far-from-certain assumptions, then you will end up preferring this course of action to that one.

GiveWell, by contrast, makes a vastly bolder claim: that if you donate $2,500 to the Against Malaria Foundation, you will save a child’s life. It is entirely transparent in how it arrives at that conclusion, and is perfectly happy for people to quibble with its methodology. But by the time the claim makes it into the pages of the Washington Post, any minor caveats have fallen away, and the conclusion is taken as a simple statement of fact.

I believe that humility is of paramount importance in all philanthropy, and I worry that there’s not nearly enough of it at GiveWell. Malaria is a sexy disease: it’s probably second only to HIV/AIDS in terms of the amount of not-for-profit resources being thrown at it. Zoom out, for a minute, and look at national governments in Africa; at universities and other research institutions around the world; at national and international development banks; at huge philanthropies like the Gates Foundation or the Global Fund; at the philanthropic arms of the big pharmaceutical companies; and, yes, at smaller charities like the Against Malaria Foundation. Add it all up, and you’ll find thousands of people marshaling billions of dollars in resources. These people have been working for many years on trying to build effective strategies to minimize malaria’s footprint and, ultimately, to eradicate it altogether. Some of those strategies have been more effective than others, and the broad distribution of long-lasting insecticide-treated bed nets is undoubtedly one of the better ones. Still, here’s the thesis that GiveWell would have you believe: you can be reasonably certain that every time someone donates another $2,500 to the Against Malaria Foundation, another child’s life will be saved.

I don’t buy it. It’s not that the Against Malaria Foundation isn’t an excellent, well-run charity doing an excellent job at distributing bed nets. In and of itself, distributing bed nets is a good thing to do, and it should, on balance, be helpful the fight against malaria. The Against Malaria Foundation is a worthy cause, and if you write them a check, you’re not going to be committing any of the sins I railed against in December. What’s more, the amount of time that the Against Malaria Foundation has spent with GiveWell has surely paid huge dividends for them: thanks to the GiveWell seal of approval, they have received millions of dollars they would not have gotten otherwise.

But there’s something far too facile about putting a dollar amount on marginal lives saved. Even GiveWell says so: look at the blog post they put up in December, in which they tried to quantify the relative cost-effectiveness of their top three charities. Malaria is a lethal disease, which makes it almost too easy to try to put a dollar amount on lives saved. But attempting the same exercise for deworming is much harder, and they didn’t even bother trying for their third charity, which simply gives cash lump sums, unconditionally, to the poor. Basically, if you want to use GiveWell to help you find a charity where you can buy a saved life with a known number of dollars, you’re going to end up with a shortlist of one.

The Trigg syllogism, then, rests on an assumption which rarely obtains in the real world: that giving money to charity is something which can and will predictably save lives. Charities tend to do little to disabuse this assumption, because people who believe it are likely as a result to donate more money. But talk to anybody who actually works in development or for a nonprofit, and they’ll tell you the world is a lot messier than that. Most of the time, when we give money to charity, we can realistically only hope that our donation will make a positive difference at all; all too often, a marginal extra dollar, even when it’s given to an unambiguously good cause can cause more harm than good.

The purpose of GiveWell is to try to identify the charities where that doesn’t happen — the charities where your donation will do the most good and the least harm. Certain quantitatively-minded types consider that a very worthy cause, and I’d be one of them too, if I believed that GiveWell could really do that.

Instead, however, I think that GiveWell faces three very big problems. The first is model risk: although GiveWell is very open about the models that it’s using, there’s no particular reason to believe that they are robust; obviously, their recommendations are no better than the models used to generate them. The second is that GiveWell imposes a substantial burden on the large number of charities it investigates and doesn’t recommend; that burden carries a real cost.

Finally, and most importantly, there’s GiveWell’s built-in bias towards relatively small-scale, replicable and quantifiable interventions. (Robin Hood has the same bias, for the same reasons.) Such actions are an important part of the philanthropic universe, but the Robin Hood and GiveWell types have a tendency to become evangelical about the way in which virtually all charities should adopt such a framework, and that, I think, is a very bad idea, for reasons that Rob Reich explored in his Boston Review essay about foundations.

Reich explains that things like bed nets are public goods, best provided by the state. And that philanthropies are best placed to do something else entirely: they “can operate on a longer time horizon than can businesses in the marketplace and elected officials in public institutions,” he says, “taking risks in social policy experimentation and innovation that we should not routinely expect to see in the commercial or state sector.” He continues:

When it comes to the ongoing work of experimentation, foundations have a structural advantage over market and state institutions: a longer time horizon. Once more, the lack of accountability may be a surprising advantage. Commercial entities in the marketplace do not have an incentive structure that systematically rewards high-risk, long time horizon experimentation; they need to show quarterly results. Similarly, public officials in a democracy do not have an incentive structure that rewards high-risk, long time horizon experimentation; they need to show results quickly from the expenditure of public dollars in order to get re-elected. In contrast, foundations are not subject to earnings reports, impatient investors or stockholders, or short-term election cycles.

Foundations, answerable only to the diverse preferences and ideas of their donors, with a protected endowment permitted to exist in perpetuity, may be uniquely situated to engage in the sort of high-risk, long-run policy innovation and experimentation that is healthy in a democratic society.

It seems to me that the philosophy of GiveWell and Robin Hood runs directly counter to this philosophy: they require precisely the short-term results which are required also by the marketplace and by the state. As such, they are deliberately disarming philanthropies of one of their key structural advantages.

Both GiveWell and Robin Hood were founded by marketplace-friendly hedge-fund types — but then again, so was the Laura and John Arnold Foundation which falls squarely into Reich’s sweet spot, funding the kind of ambitious, risky, long-term projects with none of the predictability that GiveWell and Robin Hood require. The Arnolds — like the Gateses — take a scientific, quantitative view of the world. But that doesn’t mean they take a narrowly quantitative approach to philanthropy itself. Bill Gates has more than enough money to give a bed net to every living child in Malawi — but his ambition is greater than that. And while I have my quibbles with the way the Gates Foundation is run, I do applaud its ambition and the way in which it tries to do the kind of things that only a monster-size philanthropy could ever even attempt.

Jason Trigg, in this light, is not a moral hero equivalent to a man who has saved dozens of children from drowning; instead, he starts to look more like someone contracting a third party to provide a service which is probably best provided at the state level in the first place. There’s nothing bad about what he’s doing — far from it. But I do think that what he does is limited along a number of axes, and that if he spent less time working at high-frequency trading, and more time out in the field learning about the way that non-profit develop organizations work in practice, then he might develop a richer, more nuanced, and probably humbler view of what his financial contributions can and can’t achieve in reality.

Update: GiveWell responds, pointing to a 2011 post in which they made most of the points I’m making here, and in which they said that they were going to move away from narrowly quantitative estimates and towards a more holistic view of where money can be best spent.

Date gave a speech at a conference in Miami last week where he was very bullish on big data and sophisticated analytics and all that kind of stuff. Can it all work to the benefit of poorer bank customers with cashflow issues, who need to borrow money against their next paycheck?

Date sees what he calls “the small-dollar credit problem” as one that can be largely solved by better data, which can then give lenders an incentive to lower their prices…

“The credit costs are much higher than what they need to be. I think that through the application of more and different data sources, you can actually make fraud and credit decisions much better than has been possible in the past, and that, with the right competitive dynamic, can therefore start bringing pricing in,” he says.

There is a parallel universe where such thinking makes sense. In this universe, if I have a job, and bad credit, and short-term cashflow issues, and a bank account, and my paycheck gets directly deposited into that account, then my bank knows with a high degree of certainty exactly when I’ll be able to repay what Date calls a “deposit advance”. Indeed, it can take the money it’s owed directly out of my paycheck before I get any access to it at all. This product is as low-risk as an unsecured loan to a person with bad credit can ever be. Since it’s low risk, banks ought in theory to be able to make such loans at relatively low interest rates. And because everybody loves being able to borrow at a low interest rate, a “competitive dynamic” could then drive rates down.

But that’s not the world we live in. In this world, banks have no interest in banking the kind of people who need payday loans — unless they can extract a large amount of fee income from them. Indeed, Chase launched its Liquid prepaid debit card in large part because it no longer wanted to offer checking accounts to these customers at all, and wanted some other product to move them into. The last thing that banks want to do is to create a new product which will in any way incentivize low-income customers to open new checking accounts, which are likely to always hover around the zero balance level.

The only way this product could ever work, after all, is when the person asking for the loan is also directly depositing their paycheck into their checking account. As such, it’s not a product where there’s much of a “competitive dynamic” — the number of banks which can offer me one of these loans is exactly one. And the number of people willing to change their primary bank just so that they’ll have access to a lower-cost payday loan is extremely close to zero. Very few people ever change their primary bank at all, and when they do it’s not because of low loan rates — especially when the loan in question is something you’ve promised yourself you’ll never need.

Date’s vision, then, involves three highly improbable things all working together: banks which want to attract low-income customers; low-income customers willing to change banks to get lower payday loan rates; and the promise that “better data” can magically improve credit underwriting. Even more simply, there’s one big reason why we’re never going to see this product: you can’t get an is from an ought. Date’s heart is in the right place, but he’s not going to get very far trying to sell this idea.

America’s jobs market seems to have found its boring, dissatisfying comfort zone.

The Labor Department announced today that the US economy added 175,000 thousand jobs in May. (Unemployment ticked up a notch to 7.6%.) Matthew O’Brien writes that this is basically the same thing that’s been happening for the past two and a half years. “There were 175,000 new jobs a month in 2011, 183,000 in 2012, and 189,000 so far in 2013.” Kevin Roose thinks “there’s something to be said for this kind of quiet, steady progress”.

For all its consistency, the labor market has been subpar. The percentage of Americans participating in the workforce has fallen steadily over the last four years. The government continues to cut jobs, putting increasing importance on private sector job growth. (Annie Lowrey has the details of how government cuts are becoming much deeper thanks to sequestration.) The scariest US jobs chart is still terrifying.

At the current rate of job creation, employment, on an absolute level, won’t reach pre-crisis levels until late 2014, a full 8 years since the recession began. The Chicago Fed estimates that the economy needs to create 80,000 jobs per month to have a chance at making a dent in unemployment. Multiples of that may actually be needed to bring down unemployment, as more Americans return to the workforce. The Chicago Fed also projects that a return to full employment (where the unemployed are workers between jobs but still in the workforce) could take another five years, a timetable that, Matthew Klein writes, “puts the US on track for a lost decade”.

Wall Street is rooting for things to get ever so slightly worse, hoping to stave off any decrease in the Fed’s bond buying programs. Fed-whisperer Jon Hilsenrath reports that if the economy continues to grow at its current pace, the Fed will slow bond purchasing later this year.

Ryan Avent concludes that the Fed is perfectly happy for the US outlook to be consistently gloomy with rays of hope:

178,000 jobs per month seems to be the Fed’s good-enough-rate… It is hard to see the logic in that; there are few things more damaging to an economy than a prolonged period of high unemployment. But there is no sign that policymakers are interested in any other path.

– Ben Walsh

On to today’s links:

Tax Arcana
“POPS” — the illegal tax shelter that may cost HP’s former chairman $100 million – Bloomberg

MF Doom
MF Global’s auditor at PwC had a history of missing financial problems — including Madoff’s – Francine McKenna

New Normal
Labor’s share of income is falling everywhere (not just in the US) – Timothy Taylor

Health Care
The culprit behind high US health care prices? Blame employers – NYT

Libel Tourism
Saudi prince takes Forbes to court in England for allegedly understating his fortune – Reuters

Ugh
American Idol stars dominate the celebrity list at Wal-Mart’s shareholder meeting – NYT

Jobs
Canada posts its biggest employment gain in 11 years – Reuters
“Bad is not good. Good is good, unless your timeframe is the lifespan of fly.” – Josh Brown

Cephalopods
Lloyd Blankfein’s advice to new college graduates: “appreciate that life is unpredictable” – Politico

Facebook
Facebook is killing “sponsored stories” – Ad Age

Ouch
Mary Meeker’s State of the Internet is maybe not the factual State of the Internet – SF Chronicle
Mark Meeker’s reply: “We stand by the report”- KPCB

The Fed
Goldman: This is when the Fed will pull back – Finansakrobat

And, of course, there are many more links at Counterparties.

Click on a station, and if you see the graph “flatlining” during peak hours, you can pretty much assume the station is down.

Here’s an example, using two stations on Washington Square:

The station on the left seems to be working OK, with activity during the day and less activity at night. But the one on the right has a tendency to flatline, whatever the hour — a good indication that it can neither dispense nor accept bikes.

If the problem with stations being out of order isn’t easily fixed, then, I’d suggest that CitiBike add this simple piece of functionality to their app: when you select a given station, it should show not only the number of bikes and spaces available, but also how those numbers have changed over the past few hours. If they haven’t changed at all, that’s a reasonably good indication that the station might not be working.