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Planet Money's InsaneJournal:
| Wednesday, October 24th, 2012 | |
| 1:46 pm | NYT Excerpt: What Rust Belt Voters Really Need NYT Excerpt: What Rust Belt Voters Really Need<input ... ></input> <input ... ></input> <input ... ></input>"As this political cycle comes to a close, it's clear that the U.S. has entered a new economic chapter," Adam Davidson writes in his latest New York Times Magazine column. "By the next election, the upheaval of the past few years will have (hopefully) settled, and we'll be looking at a clearer vision of our future. It's a future in which the U.S. economy will no longer be the center of the world.
Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| 8:13 am | Ask A Banker: Derivatives, Gambling And Getting Around Regulation Ask A Banker: Derivatives, Gambling And Getting Around Regulation<input ... ></input> <input ... ></input> <input ... ></input> Hi! I am still here. I was once a banker and now I write for Dealbreaker and answer your questions about banking and whatnot. You can send questions to planetmoney@npr.org with "ask a banker" in the subject line, or ask on Twitter (@planetmoney). Last week I waxed lyrical and long about derivatives, which are basically contracts that allow people to change their payoffs in potential future states of the world. This prompted a number of comments along the lines of what D F wrote: Q. Or to summarize: It is a bet. It's like Vegas, but with more graphs and pie charts ... and we use your Grandma's pension. This is a comment, not a question, but let's take it as our question for this week. (Let's also ignore the base slander about pie charts. Pie charts! I would never!) The answer to your comment is: sure! Sure, derivatives are bets. In some simple sense anything you do to change your possible future can be called a "bet" — if you invest in my lemonade-stand startup, you are "betting on my success" — but one common and sensible use of the word "bet" involves zero-sum-ness. If I bet you $100 that the Jets will win this weekend, then the Jets will win and I will have $100 more and you will have $100 less, or the Jets will lose and you will have $100 more and I will have $100 less, and the Jets don't care either way. We've just shifted money around between ourselves; we've done nothing to change the outside world. There are some important clarifications; for instance, banks are much less in the business of making bets (gambling) than they are in the business of taking bets from customers (bookmaking). There are good reasons to believe that the act of betting improves welfare just by letting people tailor the world to their risk preferences. Your Grandma's pension, to some first approximation, is probably not currently being gambled on complex credit derivatives, though I can't really promise you that and you might want to look into it. Most importantly, banks and bankers are not really that troubled by this; lots of people believe that gambling is immoral but most of those people just don't work at investment banks. The people at investment banks tend to be enthusiastic poker and blackjack players. But here is a slightly more troubling fact: Gambling is illegal. This is not entirely true; you can gamble in Vegas or Atlantic City or various Indian casinos; you can play the state lottery; you can probably even bet on football or poker with your friends at your house without going to jail, though I'm not your lawyer and if you are arrested I'll deny ever having written this. But more or less if you and I write a contract saying "I bet you $100 the Jets will win this weekend," and they win and you don't pay me, and I sue you, courts will throw my case out because gambling contracts are not enforceable. Derivatives contracts mostly are.* That's important! Banks, by the magic of derivatives, transform a thing that doesn't work under the law — "betting" — into something that does work — "hedging" or "speculating" or whatever. And that brings us to an important point about derivatives, and the financial industry generally, that you are not going to like, D F. You probably don't like it already. What we talked about last week was using derivatives to shift economic outcomes in different future states of the world: giving me $100 more or $100 less dollars depending on whether the Jets win this weekend. But in practice derivatives are often used to accomplish something slightly different. Derivatives let you shift economic outcomes, yes, but they're equally important for shifting outcomes of legal and regulatory regimes – like, just to start with, the gambling laws. Derivatives are tools for hacking the tax code, or the securities laws, or U.S. generally accepted accounting principles. This is called "regulatory arbitrage." Some examples. A very simple sort of derivative is the "equity total return swap." This is a contract in which a bank agrees to give you money if a certain stock goes up, or pays dividends, and you agree to give the bank money if the stock goes down. So if IBM stock is worth $200 today, and you enter a one-year total return swap on IBM, then if IBM ends up at $220 you'll get $20. If it ends up at $170, you'll lose $30. In any case you'll get the dividends — about $3.40 per share — that IBM pays over that year. Now, the exact same thing happens if you just buy IBM stock: You make money if it goes up, lose money if it goes down, and get the dividends. So why not just cut out the middleman and buy the stock yourself? The answer is regulatory arbitrage.** Economically, buying a swap is about the same as buying a stock,*** but formally they are different, and those formalities matter to some people. For instance: tax lawyers. If you buy IBM stock in your Cayman Islands hedge fund, and it pays you a $3.40 dividend, the IRS holds on to 30% of that dividend, so you only get $2.38. But if you buy a swap, the swap pays you the full $3.40 dividend. You've made an extra dollar and change just by changing the formalities. Taxes aren't the only thing you could worry about. You might be a hedge fund that wants to influence a company to change something about its business, making its stock more valuable and making you a profit. If you buy more than 5% of the company's stock, you need to report that publicly, which will alert other people to the fact that something is up. Those people might buy stock to piggyback on your idea, pushing up the price and making it more expensive for you to buy more. But if you buy the stock "on swap" — that is, you don't buy it, but instead buy swaps on it — then you can limit and delay that disclosure, so you can buy up more of the company before you have to report it. Activist hedge funds love this, but companies love it less, so there is much debate over the application of these rules and whether they can be avoided by using swaps. There are vastly more complex examples. A beautiful one is a trade that SunTrust Bank did with an investment bank in 2008. SunTrust had owned a bunch of Coca-Cola shares for 100 years; the shares were worth well over a billion dollars. SunTrust was looking to raise money to increase its capital: banking regulators want banks to have a certain amount of capital,**** and SunTrust had less than the desirable amount, and one way to raise capital was to sell this stock and get cash for it. But the bank would have had to pay hundreds of millions of dollars in taxes if it sold the stock. SunTrust was thus in a little bit of a bind: for regulatory capital, it really ought to sell the stock; for tax purposes, it really ought to hang on to the stock and not pay taxes. What if there was a way to do both: sell the stock and raise capital as far as its banking regulators were concerned, but hang on to the stock and not pay taxes yet as far as the IRS was concerned? There was. An investment bank came to SunTrust and offered them a derivative trade — called a "variable forward purchase agreement" but that's almost beside the point — that would let SunTrust tell its banking regulators that it had sold some Coca-Cola shares at a profit, generating lots of delicious capital, while at the same time telling the IRS that it hadn't sold those shares and so didn't need to pay hundreds of millions of dollars in taxes on them yet. This was all perfectly legal — both the IRS and the banking regulators explicitly signed off! — and also perfectly delightful. One thing to realize about investment bankers is that they are motivated not only by money but also by fun, and this stuff is just plain fun. There is great joy to be obtained from understanding a vast and semi-logical body of rules, and then understanding a different vast and semi-logical body of rules, and then figuring out the differences between them that you can exploit, and then building a product to exploit those differences, and then giving it a catchy name. Throw in a dash of math, a heap of jargon and a modicum of graphic design, and you get something that appeals to lots of people who in a simpler and less financialized world would be working to cure cancer, is I guess the cliché, though more likely they'd be designing online role-playing games. This comes back to your comment, D F, about gambling. The knock on the derivatives business, as I explained it last week, is that it is "just" gambling – just a zero-sum speculative shifting of outcomes that doesn't make the world any better. I don't think that's true! I had hoped to explain why real people in the real world might actually want to change around their possible future states of the world, and why that might be a good thing for everyone. You're free to disagree, though, and you're far from alone. But the regulatory-arbitrage focus is different. It's harder to see the social benefit here: If Congress in its wisdom wants to tax dividends paid to foreigners, it's not clear why it shouldn't tax quasi-dividends paid to foreigners via swaps. If the SEC wants hedge funds to disclose 5% stakes, it's not obvious why 5% swap stakes are different. Maybe those rules are wrong, by the way — maybe dividends shouldn't be taxed! maybe hedge funds shouldn't be forced to disclose! — and, in that case, these regulatory arbitrage trades do make the world better, though not by as much as just fixing the rules. But as an area of human endeavor it might give you pause. Does it worry you that a bunch of smart and well-paid people are running around making and taking bets? That's barely the half of it. How do you feel about the fact that a lot of them are focused less on the betting and more on finding ways around tax and accounting and securities rules? * This is roughly the work of a federal law called the Commodity Futures Modernization Act and its predecessors, which prohibit states from treating eligible commodity and security derivatives as illegal gambling. There are some gray areas about what is a "derivative" and what is a plain old "bet"; for instance "political event contracts" - betting on the election - were recently consigned to the bad side of that line. ** Mostly. More technical discussion that you can safely ignore: swaps are a way to provide levered exposure to a stock, so instead of putting up $200 now, you just enter into a swap contract, effectively borrowing the purchase price from the bank. (Though I have to post margin for a good chunk of the purchase price.) There is some regulatory-arbitrage element here too; you could just buy the stock on margin, borrowing a portion of the purchase price, and some of the choice between doing a swaps and buying on margin does depend on which format offers better margin rules. About that name, by the way, "regulatory arbitrage." In finance theory, an "arbitrage" is a risk-free profit: if you can buy something for $100 and sell it at the same time in the same place for $101, you've made a $1 arbitrage profit. You mostly can't do that, so the term "arbitrage" is extended to things that feel less risky, to some people, than some other things; they say "we are making arbitrage profits" until they lose all their money. There is a thing called "risk arbitrage," which, as a name, troubles many people. But "regulatory arbitrage" can be a way of making risk-free profits because the profits come from elsewhere - the IRS, for instance. *** Important way in which they are not: if you buy a swap, you need the bank to be around to pay you. If you buy a stock, you don't need the bank to be around. You can see why there would be times when this would be a big issue. Less important point: nobody would really say "buy a swap"; the phrase is "enter into a swap." There's no "buyer" and "seller," it's a two-way transaction. I'm saying "buy" in the text because it's shorter. **** Don't feel bad if you don't know what capital is; many bankers don't either. A simple description is that if you take all the stuff that a bank owns, add up its value, and subtract the money that the bank owes to lenders and depositors, what's left over is capital. This simple definition leads to surprising amounts of puzzlement in practice. Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| Tuesday, October 23rd, 2012 | |
| 3:53 pm | Episode 412: How To Fix The Patent Mess Episode 412: How To Fix The Patent Mess<input ... ></input> <input ... ></input> <input ... ></input>Two big patent cases this summer in the smartphone industry: 1. A jury finds that Samsung violated Apple's patents, and orders Samsung to pay Apple $1 billion. 2. A judge throws out a case between Apple and Motorola (now owned by Google). The judge goes on to write an article in the Atlantic arguing that there are too many patents in America, and lots of industries could probably get along fine with no patents at all. These radically different rulings were just the latest reminder that the world of software patents is a mess. Big companies that should be focused on inventing the next great thing are instead spending billions of dollars buying up patents and suing each other. Small companies have to worry that someone with some random patent is going to sue them and shut them down. On today's show, we talk with Mark Lemley, who has some ideas for fixing the patent mess. Lemley is a professor at Stanford law school and an expert on software patents. Lemley also works for clients in the private sector, including Google. For More: See When Patents Attack, our big patent story from last year, and The Case Against Patents, a paper by the St. Louis Fed. Download the Planet Money iPhone App. Music: Fillagar's "Guilty Good Intentions." Find us: Twitter/ Facebook/ Spotify/ Tumblr. Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| Friday, October 19th, 2012 | |
| 2:53 am | The Candidate Is Fake; The Consultants Are Real The Candidate Is Fake; The Consultants Are Real<input ... ></input> <input ... ></input> <input ... ></input>When our series began yesterday, we brought together five economists from across the political spectrum and had them create a platform for their dream presidential candidate. It's a platform — Get rid of a tax deduction for homeowners! Raise the price of gas! — that would sink any real candidate. But we aren't creating a real candidate. We're creating a fake candidate. And to help us, we talked to two veteran political consultants — Hank Sheinkopf and Kim Alfano. "You have a radical plan which will bankrupt families," Alfano told us. "You're insane." "I think you should move to another country," Sheinkopf said. Canada, maybe? "Not even Canada," he said. "Some of this won't fly in Canada." And after they both finished laughing at the economists' ideas, the consultants agreed to help us create a campaign for our fake candidate. Sheinkopf's first piece of advice: Don't be so brainy. Take, for example, our economists' plan to eliminate the mortgage-interest tax deduction. We shouldn't mention that getting rid of the deduction would cost middle-class homeowners money, Sheinkopf said. Off the top of his head, he sketched out a possible TV ad:
You'll note the ad doesn't appeal to logic. It doesn't ask people to give up anything valuable. It says: Soak the other guy. Alfano said the ad shouldn't get bogged down in the details. Because once you give specifics, your opponent can use them against you. Sell images, not specifics. "I see a horse," she said. "I see a song." One thing you should never see in any political ad, according to Alfano: an economist. [Error: Irreparable invalid markup ('<div [...] horse."">') in entry. Owner must fix manually. Raw contents below.] <p class="ljsyndicationlink"><a href="http://www.npr.org/blogs/money/2012/10/23/163194272/the-political-consultants-are-real-the-candidate-is-faket?ft=1&f=93559255">http://www.npr.org/blogs/money/2012/10/23/163194272/the-political-consultants-are-real-the-candidate-is-faket?ft=1&f=93559255</a></p><div class="row">
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<h1>The Candidate Is Fake; The Consultants Are Real</h1>
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<p class="byline">by <a rel="author" href="http://www.npr.org/people/2101217/robert-smith"><span>Robert Smith</span></a></p>
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<time datetime="2012-10-19"><span class="date">October 19, 2012</span><span class="time"> 4:00 AM</span></time>
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<p>When our <a href="http://www.npr.org/2012/10/17/163104599/planet-moneys-fake-presidential-candidate" target="_blank">series</a> began yesterday, we brought together five economists from across the political spectrum and had them create a platform for their dream presidential candidate. It's a platform — <a href="http://www.npr.org/blogs/money/2012/10/18/163179117/two-more-policies-economists-love-and-politicians-hate" target="_blank">Get rid of a tax deduction for homeowners</a>! <a href="http://www.npr.org/blogs/money/2012/10/18/163179117/two-more-policies-economists-love-and-politicians-hate" target="_blank">Raise the price of gas</a>! — that would sink any real candidate.</p> <p>But we aren't creating a real candidate. We're creating a fake candidate. And to help us, we talked to two veteran political consultants — Hank Sheinkopf and Kim Alfano.</p> <p>"You have a radical plan which will bankrupt families," Alfano told us. "You're insane."</p> <p>"I think you should move to another country," Sheinkopf said.</p> <p>Canada, maybe?</p> <p>"Not even Canada," he said. "Some of this won't fly in Canada."</p> <p>And after they both finished laughing at the economists' ideas, the consultants agreed to help us create a campaign for our fake candidate.</p> <div id="res163247351" class="bucketwrap internallink inkinsetonecolumn inset1col ">
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<h3 class="slug"><a href="http://www.npr.org/sections/presidential-race">Presidential Race </a></h3>
<p><a href="http://www.npr.org/2012/10/17/163104599/planet-moneys-fake-presidential-candidate"> Planet Money's Fake Presidential Candidate</a></p>
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<p>Sheinkopf's first piece of advice: Don't be so brainy.</p> <p>Take, for example, our economists' plan to eliminate the mortgage-interest tax deduction. We shouldn't mention that getting rid of the deduction would cost middle-class homeowners money, Sheinkopf said. Off the top of his head, he sketched out a possible TV ad:</p> <blockquote class="edTag"> <p>"A bold economic plan to protect America's future," he said. "Get rid of deductions for the rich. ... Tax deduction for homeownership takes millions of dollars away from people in need, reduces services, takes money away from the places we need to spend it. From education. From health care. For our children, for our future ... reform the tax system."</p> </blockquote> <p>You'll note the ad doesn't appeal to logic. It doesn't ask people to give up anything valuable. It says: Soak the other guy.</p> <p>Alfano said the ad shouldn't get bogged down in the details. Because once you give specifics, your opponent can use them against you. Sell images, not specifics.</p> <p>"I see a horse," she said. "I see a song."</p> <p>One thing you should never see in any political ad, according to Alfano: an economist.</p> <div id="res163206851" class="bucketwrap image large" previewTitle="One consultant's vision for our political ad: "I see a horse."">
<img src="http://media.npr.org/assets/img/2012/10/18/horse-19e6e6fa3c74a1f782cb6a5c8ab61f72c1ac1e1b-s6-c10.jpg" data-original="http://media.npr.org/assets/img/2012/10/18/horse-19e6e6fa3c74a1f782cb6a5c8ab61f72c1ac1e1b.jpg" class="img lazyOnLoad" title="One consultant's vision for our political ad: "I see a horse."" alt="One consultant's vision for our political ad: "I see a horse."" /> <div class="captionwrap">
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<p><i>One consultant's vision for our political ad: "I see a horse."</i></p>
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<div class="fullattribution">Copyright 2012 National Public Radio. To see more, visit <a href="http://www.npr.org/">http://www.npr.org/</a>.<img src="http://www.google-analytics.com/__utm.gif?utmac=UA-5828686-4&utmdt=The+Candidate+Is+Fake%3B+The+Consultants+Are+Real&utme=8(APIKey)9()"/></div> |
| Monday, October 22nd, 2012 | |
| 10:13 am | Why A Hedge Fund Seized An Argentine Navy Ship In Ghana Why A Hedge Fund Seized An Argentine Navy Ship In Ghana<input ... ></input> <input ... ></input> <input ... ></input>The Libertad, a ship owned by the Argentine Navy, set sail across the Atlantic a few months ago. It was being tracked, via the Internet, by a U.S.-based hedge fund called NML Capital. The Libertad is a tall-masted sailing ship used for training sailors. NML Capital owns over $1 billion of Argentine debt that the country has refused to repay. The Libertad was supposed make a stop in Nigeria. But, because of worries over piracy, the ship docked instead in Ghana. That's when NML Capital filed suit in court in Ghana, asking for an injunction to seize the ship as partial repayment for the debt. A judge granted the injunction a few weeks ago and ordered that the ship be prevented from refueling until Argentina posts $20 million with the court, which would be used to repay NML Capital. This, not surprisingly, has been a huge deal in Argentina, which has refused to pay. The chief of the Argentine navy resigned because of the scandal. This weekend, the country evacuated most of the ship's crew, but the captain and a skeleton crew are still aboard. The fight over the ship goes back to 2001, when Argentina defaulted on roughly $100 billion in national debt — the biggest sovereign default of all time. The move was arguably good for the country's economy. But, clearly, it also created some long-term trouble. Between 2005 and 2010, Argentina cut deals to discharge 93 percent of its unpaid debt. Bondholders took huge losses, accepting 30 cents on the dollar. But the people who hold the other 7 percent of the debt are still fighting to get the money they're owed. This means that any assets Argentina holds overseas — including, apparently, a tall-masted navy ship docked in Ghana — are vulnerable to being impounded by the repo man. For More: Listen to "The Price Of Default," our show from last year on Argentina's default and the efforts of creditors to seize Argentine assets. Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| 12:18 pm | Opa! Our K-Pop Show, Set To Video Opa! Our K-Pop Show, Set To Video<input ... ></input> <input ... ></input> <input ... ></input>Planet Money listener Joey Daoud took it upon himself to set our recent K-Pop show to video. Nice work!
YouTube
If anybody else is inspired to turn any of our shows or radio stories into YouTube videos, please have at it (and let us know). Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| Tuesday, October 23rd, 2012 | |
| 9:10 am | Income For Young, Middle-Aged And Elderly Americans, In Two Graphs Income For Young, Middle-Aged And Elderly Americans, In Two Graphs<input ... ></input> <input ... ></input> <input ... ></input>We've done a bunch of posts about household income and spending in America, and we've often sliced things based on the familiar divisions of rich, middle class, and poor. But there's another, useful variable to consider: Age. 
The households of middle-aged people earn about $20,000 more each year, on average, than households of people in their late 20s and early 30s. And they earn roughly $30,000 more than people age 65 and over (note that this difference includes income from Social Security and retirement). 
None of this is terribly surprising — income over the life cycle is a curve, and it peaks when people are in their late 40s and early 50s. Still, it's useful to recall that when we talk about average household income for the nation as a whole, we're lumping in lots of disparate households. A 24-year-old who makes $27,000 a year is in a much different position than a 45-year-old making the same amount. A few notes on the data: * All numbers represent pre-tax income. * Income earned through work includes both money people earned on their full-time job and freelance income. * Government assistance and benefits includes unemployment compensation, food stamps and veterans' benefits, among other things. * "Other" includes financial support from others as well as rental and property income. * The data come the Bureau of Labor Statistics. Here's the spreadsheet. Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| Friday, October 19th, 2012 | |
| 2:53 am | The Candidate Is Fake; The Consultants Are Real The Candidate Is Fake; The Consultants Are Real<input ... ></input> <input ... ></input> <input ... ></input>When our series began yesterday, we brought together five economists from across the political spectrum and had them create a platform for their dream presidential candidate. It's a platform — Get rid of a tax deduction for homeowners! Raise the price of gas! — that would sink any real candidate. But we aren't creating a real candidate. We're creating a fake candidate. And to help us, we talked to two veteran political consultants — Hank Sheinkopf and Kim Alfano. "You have a radical plan which will bankrupt families," Alfano told us. "You're insane." "I think you should move to another country," Sheinkopf said. Canada, maybe? "Not even Canada," he said. "Some of this won't fly in Canada." And after they both finished laughing at the economists' ideas, the consultants agreed to help us create a campaign for our fake candidate. Sheinkopf's first piece of advice: Don't be so brainy. Take, for example, our economists' plan to eliminate the mortgage-interest tax deduction. We shouldn't mention that getting rid of the deduction would cost middle-class homeowners money, Sheinkopf said. Off the top of his head, he sketched out a possible TV ad:
You'll note the ad doesn't appeal to logic. It doesn't ask people to give up anything valuable. It says: Soak the other guy. Alfano said the ad shouldn't get bogged down in the details. Because once you give specifics, your opponent can use them against you. Sell images, not specifics. "I see a horse," she said. "I see a song." One thing you should never see in any political ad, according to Alfano: an economist. [Error: Irreparable invalid markup ('<div [...] horse."">') in entry. Owner must fix manually. Raw contents below.] <p class="ljsyndicationlink"><a href="http://www.npr.org/blogs/money/2012/10/22/163194272/the-political-consultants-are-real-the-candidate-is-faket?ft=1&f=93559255">http://www.npr.org/blogs/money/2012/10/22/163194272/the-political-consultants-are-real-the-candidate-is-faket?ft=1&f=93559255</a></p><div class="row">
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<h1>The Candidate Is Fake; The Consultants Are Real</h1>
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<p class="byline">by <a rel="author" href="http://www.npr.org/people/2101217/robert-smith"><span>Robert Smith</span></a></p>
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<time datetime="2012-10-19"><span class="date">October 19, 2012</span><span class="time"> 4:00 AM</span></time>
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<p>When our <a href="http://www.npr.org/templates/archives/archive.php?thingId=163164766" target="_blank">series</a> began yesterday, we brought together five economists from across the political spectrum and had them create a platform for their dream presidential candidate. It's a platform — <a href="http://www.npr.org/blogs/money/2012/10/18/163179117/two-more-policies-economists-love-and-politicians-hate" target="_blank">Get rid of a tax deduction for homeowners</a>! <a href="http://www.npr.org/blogs/money/2012/10/18/163179117/two-more-policies-economists-love-and-politicians-hate" target="_blank">Raise the price of gas</a>! — that would sink any real candidate.</p> <p>But we aren't creating a real candidate. We're creating a fake candidate. And to help us, we talked to two veteran political consultants — Hank Sheinkopf and Kim Alfano.</p> <p>"You have a radical plan which will bankrupt families," Alfano told us. "You're insane."</p> <p>"I think you should move to another country," Sheinkopf said.</p> <p>Canada, maybe?</p> <p>"Not even Canada," he said. "Some of this won't fly in Canada."</p> <p>And after they both finished laughing at the economists' ideas, the consultants agreed to help us create a campaign for our fake candidate.</p> <div id="res163247351" class="bucketwrap internallink inkinsetonecolumn inset1col ">
<a href="http://www.npr.org/2012/10/17/163104599/planet-moneys-fake-presidential-candidate" id="featuredStackSquareImage163104599" class="photowrap" reload="true" numResources="1"><img src="http://media.npr.org/assets/img/2012/10/19/101812robocandidate_poster_sq-e79631f997e53f15515abdc5e3576df86beb08e2-s1.jpg" class="img138" title="The candidate" alt="The candidate" /></a> <div class="bucketblock">
<h3 class="slug"><a href="http://www.npr.org/sections/presidential-race">Presidential Race </a></h3>
<p><a href="http://www.npr.org/2012/10/17/163104599/planet-moneys-fake-presidential-candidate"> Planet Money's Fake Presidential Candidate</a></p>
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<p>Sheinkopf's first piece of advice: Don't be so brainy.</p> <p>Take, for example, our economists' plan to eliminate the mortgage-interest tax deduction. We shouldn't mention that getting rid of the deduction would cost middle-class homeowners money, Sheinkopf said. Off the top of his head, he sketched out a possible TV ad:</p> <blockquote class="edTag"> <p>"A bold economic plan to protect America's future," he said. "Get rid of deductions for the rich. ... Tax deduction for homeownership takes millions of dollars away from people in need, reduces services, takes money away from the places we need to spend it. From education. From health care. For our children, for our future ... reform the tax system."</p> </blockquote> <p>You'll note the ad doesn't appeal to logic. It doesn't ask people to give up anything valuable. It says: Soak the other guy.</p> <p>Alfano said the ad shouldn't get bogged down in the details. Because once you give specifics, your opponent can use them against you. Sell images, not specifics.</p> <p>"I see a horse," she said. "I see a song."</p> <p>One thing you should never see in any political ad, according to Alfano: an economist.</p> <div id="res163206851" class="bucketwrap image large" previewTitle="One consultant's vision for our political ad: "I see a horse."">
<img src="http://media.npr.org/assets/img/2012/10/18/horse-19e6e6fa3c74a1f782cb6a5c8ab61f72c1ac1e1b-s6-c10.jpg" data-original="http://media.npr.org/assets/img/2012/10/18/horse-19e6e6fa3c74a1f782cb6a5c8ab61f72c1ac1e1b.jpg" class="img lazyOnLoad" title="One consultant's vision for our political ad: "I see a horse."" alt="One consultant's vision for our political ad: "I see a horse."" /> <div class="captionwrap">
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| 5:25 pm | Episode 411: Why Preschool Can Save The World Episode 411: Why Preschool Can Save The World<input ... ></input> <input ... ></input> <input ... ></input>On today's show, we meet a self-described robber baron who decided to spend his billions on finger paint and changing tables. We revisit decades-long studies that found preschool made a huge difference in the lives of poor children. And we talk to a Nobel prize-winning economist who says that spending public money on preschool produces a huge return on investment. We'll have more on preschool this weekend on This American Life. For more: Tulsa's Educare Center in the Tulsa; Paul Tough's How Children Succeed; The Carolina Abededarian Project; and "A new cost-benefit and rate of return analysis for the Perry Preschool Program: A Summary." Download the Planet Money iPhone App. Music: Cold War Kids' "Sensitive Kid." Find us: Twitter/ Facebook/ Spotify/ Tumblr. Note: Part of today's show aired in a podcast last year. Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| 11:31 am | Warning To Minnesota Residents: Don't Take Stanford Profs' Free, Online Courses Warning To Minnesota Residents: Don't Take Stanford Profs' Free, Online Courses<input ... ></input> <input ... ></input> <input ... ></input>Update, 10/20: The director of Minnesota's Office of Higher Education tells Slate:
Our original post follows. A couple of Stanford professors have set up a company called Coursera to offer free, online classes to anybody anywhere in the world who wants to take them. Anywhere in the world, that is, except Minnesota. Coursera's terms of service warns:
An official from the state's department of ed tells the Chronicle of Higher Education:
Coursera is one of several new projects aimed at using technology to make higher education cheaper and more widely available. As a general matter, projects that try to use technology to make things cheaper and more widely available often run into regulatory roadblocks. This particular roadblock seems perfectly designed to rile Alex Tabarrok and Tyler Cowen, a pair of libertarian-leaning economists and bloggers who recently co-founded an online learning project called Marginal Revolution University. On their blog this morning, Tabarrok brings the tongue-in-cheek bravado:
Update:
Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| 12:30 pm | Watch Our Fake Presidential Candidate's First Real Ad Watch Our Fake Presidential Candidate's First Real Ad<input ... ></input> <input ... ></input> <input ... ></input>The story so far: A panel of economists from across the political spectrum came up with a presidential platform they could all support. It was a platform that would doom any real candidate. So we created a fake one.
YouTube
We tested out one of our key ideas — eliminating the mortgage-interest tax deduction — on a focus group. They hated it. "Three quarters of your mortgage goes to interest, so if they eliminated that deduction it would be like you were throwing your money out the window every month," someone said. But getting rid of the deduction would make homes cheaper, the moderator said. "If housing prices go down lower, this is going to be very dangerous," someone else said. Not to worry: With the help of Alex Tornero of the Strategy Group for Media we drafted an ad that they promised would help sell the idea. We showed our focus group the ad, and they liked it. It didn't really convince them. But for a minute, we had them. We also showed the ad to our panel of economists. They talked about what the fake candidate should have said in the ad. The economists make good points, but their points would never fit into a 30-second ad. Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| 2:53 am | The Candidate Is Fake; The Consultants Are Real The Candidate Is Fake; The Consultants Are Real<input ... ></input> <input ... ></input> <input ... ></input>When our series began yesterday, we brought together five economists from across the political spectrum and had them create a platform for their dream presidential candidate. It's a platform — Get rid of a tax deduction for homeowners! Raise the price of gas! — that would sink any real candidate. But we aren't creating a real candidate. We're creating a fake candidate. And to help us, we talked to two veteran political consultants — Hank Sheinkopf and Kim Alfano. "You have a radical plan which will bankrupt families," Alfano told us. "You're insane." "I think you should move to another country," Sheinkopf said. Canada, maybe? "Not even Canada," he said. "Some of this won't fly in Canada." And after they both finished laughing at the economists' ideas, the consultants agreed to help us create a campaign for our fake candidate. Sheinkopf's first piece of advice: Don't be so brainy. Take, for example, our economists' plan to eliminate the mortgage-interest tax deduction. We shouldn't mention that getting rid of the deduction would cost middle-class homeowners money, Sheinkopf said. Off the top of his head, he sketched out a possible TV ad:
You'll note the ad doesn't appeal to logic. It doesn't ask people to give up anything valuable. It says: Soak the other guy. Alfano said the ad shouldn't get bogged down in the details. Because once you give specifics, your opponent can use them against you. Sell images, not specifics. "I see a horse," she said. "I see a song." One thing you should never see in any political ad, according to Alfano: an economist. [Error: Irreparable invalid markup ('<div [...] horse."">') in entry. Owner must fix manually. Raw contents below.] <p class="ljsyndicationlink"><a href="http://www.npr.org/blogs/money/2012/10/19/163194272/the-political-consultants-are-real-the-candidate-is-faket?ft=1&f=93559255">http://www.npr.org/blogs/money/2012/10/19/163194272/the-political-consultants-are-real-the-candidate-is-faket?ft=1&f=93559255</a></p><div class="row">
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<time datetime="2012-10-19"><span class="date">October 19, 2012</span><span class="time"> 4:00 AM</span></time>
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<p>When our <a href="http://www.npr.org/templates/archives/archive.php?thingId=163164766" target="_blank">series</a> began yesterday, we brought together five economists from across the political spectrum and had them create a platform for their dream presidential candidate. It's a platform — <a href="http://www.npr.org/blogs/money/2012/10/18/163179117/two-more-policies-economists-love-and-politicians-hate" target="_blank">Get rid of a tax deduction for homeowners</a>! <a href="http://www.npr.org/blogs/money/2012/10/18/163179117/two-more-policies-economists-love-and-politicians-hate" target="_blank">Raise the price of gas</a>! — that would sink any real candidate.</p> <p>But we aren't creating a real candidate. We're creating a fake candidate. And to help us, we talked to two veteran political consultants — Hank Sheinkopf and Kim Alfano.</p> <p>"You have a radical plan which will bankrupt families," Alfano told us. "You're insane."</p> <p>"I think you should move to another country," Sheinkopf said.</p> <p>Canada, maybe?</p> <p>"Not even Canada," he said. "Some of this won't fly in Canada."</p> <p>And after they both finished laughing at the economists' ideas, the consultants agreed to help us create a campaign for our fake candidate.</p> <div id="res163247351" class="bucketwrap internallink inkinsetonecolumn inset1col ">
<a href="http://www.npr.org/2012/10/17/163104599/planet-moneys-fake-presidential-candidate" id="featuredStackSquareImage163104599" class="photowrap" reload="true" numResources="1"><img src="http://media.npr.org/assets/img/2012/10/19/101812robocandidate_poster_sq-e79631f997e53f15515abdc5e3576df86beb08e2-s1.jpg" class="img138" title="The candidate" alt="The candidate" /></a> <div class="bucketblock">
<h3 class="slug"><a href="http://www.npr.org/sections/presidential-race">Presidential Race </a></h3>
<p><a href="http://www.npr.org/2012/10/17/163104599/planet-moneys-fake-presidential-candidate"> Planet Money's Fake Presidential Candidate</a></p>
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<p>Sheinkopf's first piece of advice: Don't be so brainy.</p> <p>Take, for example, our economists' plan to eliminate the mortgage-interest tax deduction. We shouldn't mention that getting rid of the deduction would cost middle-class homeowners money, Sheinkopf said. Off the top of his head, he sketched out a possible TV ad:</p> <blockquote class="edTag"> <p>"A bold economic plan to protect America's future," he said. "Get rid of deductions for the rich. ... Tax deduction for homeownership takes millions of dollars away from people in need, reduces services, takes money away from the places we need to spend it. From education. From health care. For our children, for our future ... reform the tax system."</p> </blockquote> <p>You'll note the ad doesn't appeal to logic. It doesn't ask people to give up anything valuable. It says: Soak the other guy.</p> <p>Alfano said the ad shouldn't get bogged down in the details. Because once you give specifics, your opponent can use them against you. Sell images, not specifics.</p> <p>"I see a horse," she said. "I see a song."</p> <p>One thing you should never see in any political ad, according to Alfano: an economist.</p> <div id="res163206851" class="bucketwrap image large" previewTitle="One consultant's vision for our political ad: "I see a horse."">
<img src="http://media.npr.org/assets/img/2012/10/18/horse-19e6e6fa3c74a1f782cb6a5c8ab61f72c1ac1e1b-s6-c10.jpg" data-original="http://media.npr.org/assets/img/2012/10/18/horse-19e6e6fa3c74a1f782cb6a5c8ab61f72c1ac1e1b.jpg" class="img lazyOnLoad" title="One consultant's vision for our political ad: "I see a horse."" alt="One consultant's vision for our political ad: "I see a horse."" /> <div class="captionwrap">
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<p><i>One consultant's vision for our political ad: "I see a horse."</i></p>
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| 2:53 am | The Candidate Is Fake; The Consultants Are Real The Candidate Is Fake; The Consultants Are Real<input ... ></input> <input ... ></input> <input ... ></input>Audio for this story from Morning Edition will be available at approx. 9:00 a.m. ET October 19, 2012 For more: See our fake candidate's real web site. When our series began yesterday, we brought together five economists from across the political spectrum and had them create a platform for their dream presidential candidate. It's a platform — get rid of a tax deduction for homeowners! raise the price of gas! — that would sink any real candidate. But we aren't creating a real candidate. We're creating a fake candidate. And to help us, we talked to two veteran political consultants — Hank Sheinkopf and Kim Alfano. "You have a radical plan which will bankrupt families," Alfano told us. "You're insane." "I think you should move to another country," Sheinkopf said. Canada, maybe? "Not even Canada," he said. "Some of this won't fly in Canada." And after they both finished laughing at the economists' ideas, the consultants agreed to help us create a campaign for our fake candidate. Sheinkopf's first piece of advice: Don't be so brainy. Take, for example, our economists' plan to eliminate the mortgage-interest tax deduction. We shouldn't mention that getting rid of the deduction would cost middle-class homeowners money, Sheinkopf said. Off the top of his head, he sketched out a possible TV ad:
You'll note the ad doesn't appeal to logic. It doesn't ask people to give up anything valuable. It says, soak the other guy. Alfano said the ad shouldn't get bogged down in the details. Because once you give specifics, your opponent can use them against you. Sell images, not specifics. "I see a horse," she said. "I see a song." One thing you should never see in any political ad, according to Alfano: an economist. [Error: Irreparable invalid markup ('<div [...] horse."">') in entry. Owner must fix manually. Raw contents below.] <p class="ljsyndicationlink"><a href="http://www.npr.org/blogs/money/2012/10/18/163194272/the-political-consultants-are-real-the-candidate-is-faket?ft=1&f=93559255">http://www.npr.org/blogs/money/2012/10/18/163194272/the-political-consultants-are-real-the-candidate-is-faket?ft=1&f=93559255</a></p><div class="row">
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<h1>The Candidate Is Fake; The Consultants Are Real</h1>
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<p class="byline">by <a rel="author" href="http://www.npr.org/people/2101217/robert-smith"><span>Robert Smith</span></a></p>
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<time datetime="2012-10-19"><span class="date">October 19, 2012</span><span class="time"> 4:00 AM</span></time>
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<p>Audio for this story from <a href="http://www.npr.org/templates/rundowns/rundown.php?prgId=3&prgDate=10-19-2012">Morning Edition</a> will be available at approx. 9:00 a.m. ET</p>
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<p class="date">October 19, 2012</p> <ul class="audiotools">
<li><a class="pending" title="Transcript Pending" href="http://www.npr.org/blogs/money/2012/10/18/163194272/the-political-consultants-are-real-the-candidate-is-faket?ft=1&f=93559255#"><span>Transcript</span></a></li>
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<p><em><strong>For more</strong>: <a href="http://www.npr.org/templates/story/story.php?storyId=163104599&live=1" target="_blank">See our fake candidate's real web site</a>.<br /></em></p> <p>When our <a href="http://www.npr.org/templates/archives/archive.php?thingId=163164766" target="_blank">series</a> began yesterday, we brought together five economists from across the political spectrum and had them create a platform for their dream presidential candidate. It's a platform — <a href="http://www.npr.org/blogs/money/2012/10/18/163179117/two-more-policies-economists-love-and-politicians-hate" target="_blank">get rid of a tax deduction for homeowners</a>! <a href="http://www.npr.org/blogs/money/2012/10/18/163179117/two-more-policies-economists-love-and-politicians-hate" target="_blank">raise the price of gas</a>! — that would sink any real candidate.</p> <p>But we aren't creating a real candidate. We're creating a fake candidate. And to help us, we talked to two veteran political consultants — Hank Sheinkopf and Kim Alfano.</p> <p>"You have a radical plan which will bankrupt families," Alfano told us. "You're insane."</p> <p>"I think you should move to another country," Sheinkopf said.</p> <p>Canada, maybe?</p> <p>"Not even Canada," he said. "Some of this won't fly in Canada."</p> <p>And after they both finished laughing at the economists' ideas, the consultants agreed to help us create a campaign for our fake candidate.</p> <p>Sheinkopf's first piece of advice: Don't be so brainy.</p> <p>Take, for example, our economists' plan to eliminate the mortgage-interest tax deduction. We shouldn't mention that getting rid of the deduction would cost middle-class homeowners money, Sheinkopf said. Off the top of his head, he sketched out a possible TV ad:</p> <blockquote class="edTag"> <p>A bold economic plan to protect America's future," he said. "Get rid of deductions for the rich ... Tax deduction for home ownership takes millions of dollars away from people in need. Reduces services. takes money away from the places we need to spend it. From education. From health care. For our children, for our future ... reform the tax system.</p> </blockquote> <p>You'll note the ad doesn't appeal to logic. It doesn't ask people to give up anything valuable. It says, soak the other guy.</p> <p>Alfano said the ad shouldn't get bogged down in the details. Because once you give specifics, your opponent can use them against you. Sell images, not specifics.</p> <p>"I see a horse," she said. "I see a song."</p> <p>One thing you should never see in any political ad, according to Alfano: an economist.</p> <div id="res163206851" class="bucketwrap image large" previewTitle="One consultant's vision for our political ad: "I see a horse."">
<img src="http://media.npr.org/assets/img/2012/10/18/horse-19e6e6fa3c74a1f782cb6a5c8ab61f72c1ac1e1b-s6-c10.jpg" data-original="http://media.npr.org/assets/img/2012/10/18/horse-19e6e6fa3c74a1f782cb6a5c8ab61f72c1ac1e1b.jpg" class="img lazyOnLoad" title="One consultant's vision for our political ad: "I see a horse."" alt="One consultant's vision for our political ad: "I see a horse."" /> <div class="captionwrap">
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<p><i>One consultant's vision for our political ad: "I see a horse."</i></p>
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| Thursday, October 18th, 2012 | |
| 2:31 pm | Two More Policies Economists Love And Politicians Hate Two More Policies Economists Love And Politicians Hate<input ... ></input> <input ... ></input> <input ... ></input>Watching a presidential campaign, it's easy to think that the nation is deeply divided over how to fix the economy. But when you talk to economists, it turns out they agree on an enormous number of issues. So we brought together five economists from across the political spectrum and had them create a platform their dream presidential candidate. This is the second in our four-part series. We'll have more tomorrow. This morning, we rolled out three ideas that economists love and politicians hate. Here are two more. Tax Carbon Emissions Economist love to tax bad things. Pollution is bad. So: Tax carbon emissions. This would drive up the price of gas. It would make electricity more expensive. Our economists love it. Legalize Marijuana From an economics perspective, banning marijuana doesn't make sense. "We spend a huge amount of resources putting people in jail and trying to catch them and discourage them, and all it does is make nasty gang members rich," says Russ Roberts of George Mason University. Our economists are unanimous. They say marijuana should be legalized, taxed and regulated. Coming tomorrow: We take our plan to real political consultants, and launch a fake campaign. Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| 3:32 am | A Tax Plan That Economists Love (And Politicians Hate) A Tax Plan That Economists Love (And Politicians Hate)<input ... ></input> <input ... ></input> <input ... ></input>Watching a presidential campaign, it's easy to think that the nation is deeply divided over how to fix the economy. But when you talk to economists, it turns out they agree on an enormous number of issues. So we brought together five economists from across the political spectrum and had them create their dream presidential candidate. Over the next few days, we'll have a series of stories on our economists' dream candidate. We start this morning with some changes to the tax code. Every single one of our economists said a dream candidate would kill off a giant perk that millions of Americans love and enjoy: the mortgage-interest tax deduction. If you pay a mortgage on your home, you can write off the interest you pay on that loan. And if you get this benefit, it seems great. A little help from the government to live the American dream of homeownership. But to an economist, a tax break is the same as the government writing you a check. "It just makes no sense that if we have Bill Gates or some very wealthy person, we're subsidizing them to get a very expensive home," said Dean Baker, of the Center for Economic and Policy Research. "So because rich people receive a larger subsidy, the price of houses increases so much it actually makes it less affordable for the poorer people," said Luigi Zingales, of the University of Chicago Booth School of Business. This deduction costs the U.S. government about $100 billion a year. And to understand why the government keeps the deduction in place, imagine what a presidential candidate would sound like if he promised to eliminate it: "When I'm elected president, I have a special plan for the middle class: All of you Americans who own your own homes, I promise to raise your tax bill by thousands of dollars a year." Also on the chopping block: the rule that allows employee health benefits to go untaxed. As with the mortgage-interest deduction, the rule distorts markets and disproportionately favors the well-off, who pay higher tax rates and tend to have better health care plans. So far, our economists' dream candidate is not doing so well with the middle class. A lot of people would probably pay more taxes. I asked our panel: Aren't there some taxes that we can cut or get rid of? They all agreed: Get rid of the corporate tax! Another hard sell. Right now, President Obama and Mitt Romney are advocating lower corporate taxes, but nothing? It may sound unfair. But two of the most liberal economists on our panel agreed. "The corporate income tax makes no sense whatsoever," said Robert Frank, a professor at Cornell. "We don't want to prevent Microsoft and General Motors ... from investing more and improving their product line," Baker said. "That's a good thing in my view." Our economists said if you want to tax rich people as public policy, then tax rich people — tax the people who own corporations. But taxing the corporation itself is taxing the thing that really does create jobs. The five economists on our panel are: Dean Baker, Katherine Baicker, Robert Frank, Russ Roberts and Luigi Zingales. We'll have more from them later today. For a response from Dean Baker, see this post. For our complete platform, see this post. Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| Wednesday, October 17th, 2012 | |
| 1:57 pm | Ask A Banker: What's A Derivative? Ask A Banker: What's A Derivative?<input ... ></input> <input ... ></input> <input ... ></input> Hi! Remember me? I was a banker. Now I am a guy who answers your questions, when I'm not writing for Dealbreaker. You can send questions to planetmoney@npr.org with "ask a banker" in the subject line, or ask on Twitter (@planetmoney). A bunch of questions last week were about what I actually did as a banker and why I left. These are good questions but to get to them we need to make a brief (not brief) stopover at another question, because what I did was "sell corporate equity derivatives," and that perhaps leaves you no more informed than you were before. So let's take the question reader Mike Kelly posed in a comment on my previous post: Q. It would be nice if you wrote about derivatives. The term gets used a lot in the media but is seldom explained in a way that is understandable outside the financial industry. I am glad you asked! You may end up less glad. I will tell you what a derivative is, but I will take a while to get there, and since I won't use words like "put option" or "synthetic CDO" you may feel cheated. That is okay. If you want to understand derivatives, you must learn to live with uncertainty, and also with feeling cheated. In your finance textbook, if you have one, which I hope you don't because I'm just making this up, a derivative is defined as a contract whose payoffs are determined by reference to the price of some underlying variable. Derivatives, which include options, futures, forwards and swaps, allow levered and/or nonlinear bets and ... ... and let's start somewhere else. There is a world. That world will have a future, and that future is uncertain. There are different possible states of the world, and different things will happen to you in those different states. If it's cold this winter, you will be sad, or perhaps happy if that's what you're into. If it rains tomorrow, you will get wet. If you take an economics course, you will start to talk like this. If you are a company or an investment fund, the outcomes that you care about can pretty much be reduced to money: if it's cold this winter, individual workers and managers might be happy or sad, but the company has no feelings. The company just has money. If it's cold this winter, the company might have more money, if it's an oil company, because people will buy more oil to heat their homes. Or it might have less money, if it's in the agriculture business, because its crops will freeze. Or it might have the same amount of money, if it's, like, Facebook or whatever. One thing you can do is graph future states of the world versus the amount of money you will have in those states. So for instance here is the money that an oil company will make this year (y-axis), graphed against the temperature this winter (x-axis): This is a simple chart but you should see immediately that it's wrong, or at least not right. Of course you can't predict how much money an oil company will make just by knowing the weather: there are many other things going on. You can make your graph better - make it a more useful tool for understanding future states of the world - by including more factors. For instance, oil companies make more money when people drive more, and people drive more when they have jobs to go to. So high unemployment is bad for oil companies, and unemployment is uncertain. So you can think about how much money the company makes against two uncertainties: the temperature, and the unemployment rate. Two uncertainties plus how much money the company makes leads to a three-dimensional graph. NOTE: You can totally skip over the following ridiculous three-dimensional graph, which I just made up. This is better – incomprehensible! but otherwise better - but it still goes only a very little way towards capturing the actual world. The unemployment rate itself depends on lots of other things, all of which are uncertain - interest rates and government policies and corporate innovation and the growth of China's economy. And each of those things can interact with each other in uncertain ways; the future path of China's economy could well influence corporate innovation, which in turn could affect interest rates. On top of all that, there's the stuff we haven't even talked about yet. The oil company's rigs could blow up, say, or everybody could start driving electric cars to their jobs producing solar panels that bring down the price of oil. Imagine building a million-dimensional graph. Each input - all of the axes but one - is some fact about the world whose future value is uncertain: the temperature this winter, the population growth in China, the price of corn, the number of homes built in Utah, the amount of rainfall in Tuscany. Each of these inputs is uncertain, and each can have an effect on the others. The output - the last axis, call it the "height" of the graph - is the amount of money that your company will make given any set of values for each of the other 999,999 axes. The higher the graph at any point, the more money you make at that point. Higher - more money - is better. You can't build that graph. You can't visualize a million dimensions (this screen is crowded enough with three), you can't think of all the uncertainties in the future that might matter, and you can't figure out how much money you'll make in every state of those uncertainties. I just wanted to tell you about it because everything in the financial world is an attempt to catch a flickering glimpse of that graph. That graph is the thing, the Platonic form. Stocks and bonds and hedge funds and derivatives and everything else are the shadows, the imperfect methods of approaching the thing. If you want to make all the money in the world, go make that graph. If you had that graph the next thing you'd ask yourself is: how do I think the world will be? If you're sure that it will be cold this winter, then you might think that our oil company will make more money. That's great, if you're the oil company, or its shareholders. If you're not a shareholder of the oil company, though, maybe you should buy some shares: they'll probably go up in value if it's cold*. Perhaps you're not sure that it will be cold. Let's say you think that most likely the temperature in the Northern U.S. will average about 30 degrees this winter, but there's a chance it could be as warm as 60. And let's also say you're the oil company. You will probably make a lot of money (if the average temp is 30 degrees). But you have a chance of making a lot less money (if it's 60). That's just fine. You don't have to do anything about that. But you could, if you wanted to. You might not want to risk making less money – maybe you took out a loan and you need at least a certain amount of money to pay it back. So you could do something that will make you less money in the cold-winter case, but more money in the warm-winter case. (Everything in life has trade-offs.) In other words, you'd smooth out your outcomes a bit. Like this: This is called "hedging." How do you hedge? Well, one thing you can do is just bet that it will be warm. You could make a bet where I pay you a quarter of a million dollars for every degree over 40, and you pay me a quarter million for every degree under 40. That would give you the outcome above. You'd need to find someone else to bet with you, though; I am unlikely to be good for it. Another thing you can do is find something correlated with a warm winter - that is, something that goes up in value if it's warm. Let's say agriculture companies will make a lot of money, and their stock prices will go up, if it's warm this winter. Oil companies don't often buy agriculture stocks but there's no reason they couldn't. It might be a nice hedge**. Hedging is one way to change the shape of the graph: you smooth the graph, making it less bad in bad cases at the cost of making it less good in good cases. There are other ways to change the shape of the graph. One is just doubling down: making the graph better in good cases and worse in bad cases. (Again: tradeoffs.) If you're an oil company, you make more money as oil prices go up. But if you're really confident that oil prices will go up, that might not be enough for you. Why not make even more more money if oil prices go up? Why not, say, buy another oil company? Your imaginary chart is million-dimensional, and you are just one person or oil company. So you think about some of the axes that you can predict accurately - and about some of the axes that you can't predict accurately, but that worry you, because how much money you make is strongly tied to them. If you are a farmer, you can't really predict the weather with much certainty, but your livelihood is tightly bound up with the weather, so you spend time thinking about the weather. The ones you can predict, you predict - as traders say, you "take a view." If you think the price of oil will go up, you buy oil stocks. If you think Facebook's stock will go up, you buy Facebook stock. If you think there's gold in them there hills, you buy the hills and start digging. You change the shape of the graph to make you more money in the states of the world that you think will come true. The ones you can't predict, but that keep you up at night - those you hedge. You flatten the graph in the scary places, so you can get back to sleep. Changing the shape of the graph is in some loose sense the business of the financial system, particularly the big investment banks, which are sometimes thought of as "dealers in risk." "Risk" here means the shape of the graph: hedgers come to dealers to flatten their graph by buying hedges (or "reducing risk"). Speculators come to dealers to steepen their graph by "putting on risk." Where do you get risk? Well, most of it comes from things that exist in the world. If you think house prices will go up, buy a house. If you think gold prices will go up, buy gold, or mine it. If you think Chinese people will buy more cars, start building cars and selling them to China. And if you think Facebook stock will go up, buy Facebook stock. A subset - a small but important subset - of "things that exist in the world" is the group of things called "securities." These are just stocks and bonds, which we've talked about a little before. Companies and governments finance themselves by selling securities, and people then go buy and sell them because they think that good or bad things will happen to those companies and governments. Securities are important because for the most part they are pretty easy to buy and sell, so they let you change the shape of your graph without drastically altering your life. If you think a lot of Chinese people are going to buy cars, but you don't feel qualified to start building cars, you can just go buy some shares of Ford stock. Because Ford will probably make more money if lots of Chinese people buy cars***. But you can also get that risk from things that don't exist in the world. Instead of buying oil, or oil company stocks, you could go to your friendly risk dealer and say, "I think that the price of oil will go up. But I don't want to buy oil because, where would I put it? I just got a new carpet and, you know, oil. So I just want you to give me money if the price of oil goes up." The dealer will agree to give you money if the price of oil goes up. In exchange, you will give the dealer money now, or maybe instead you'll just agree to give him money in the future if the price of oil goes down. You enter into an agreement that just changes your graph directly, without the intervention of things that already exist in the world. This is called a "derivative." A derivative is a contract – that is, not something previously existing in the world – between a risk dealer (an investment bank, often, or a commercial bank or insurance company or an options exchange) and a customer. The contract will have different payoffs in different future states of the world. It is entered into because the customer wants to change his risk profile. The customer wants to change the shape of his graph by the amounts of those payoffs in those different states. There are technicalities of course. There are "linear" derivatives, like forwards and futures and swaps, that change your graph in ways that look like straight lines. There are "nonlinear" derivatives, like options, that change your graph in ways that curve or kink. There are "exotic" derivatives, which, basically, have more curves and kinks. Incidentally, Wall Street more or less charges by the curve and kink, so exotic derivatives are more expensive than options, which are more expensive than linear derivatives. These things are all super important if you want to trade derivatives on Wall Street (or, more importantly, with Wall Street). If you do, I recommend that you go learn all about them and not read the previous 3,000 words. YOU'RE WELCOME. But if you don't want to trade derivatives on Wall Street, there is no particularly burning need for you to learn about those things. And that brings me to my question for you, Mike Kelly: If you don't want to trade derivatives on Wall Street, why do you want to know so much about derivatives? Allow me a presumptuous guess. While everyone's financial life consists of bumbling around changing the shape of their payoff graph in some more or less conscious way, the people who deal in derivatives - as dealers or as customers - are doing it particularly directly and consciously. If you build a lemonade stand, you probably do not scan the 10-day weather forecast and ponder historical correlations between temperature and lemonade consumption, because you are 8. But if you build a global macro hedge fund trading eurozone sovereign CDS, you probably actually have a computer model that approximates the million-axis graph I talked about above. (Maybe you call it a "VaR model.") Each day you come to work and actually in so many words ask yourself questions like "what do I think will happen to Europe?" and "how much money will I make if what I think will happen, happens?" and "how much money will I lose if it doesn't?" and "should I do a trade that will make those numbers different?" And if the answer to that last question is "yes," then you most likely go trade a derivative. Buying and selling derivatives means consciously trafficking in risk and uncertainty, in a relatively uncut form. This makes it interesting to people who don't buy or sell derivatives for a living, but who are curious about risk and uncertainty. These days, that is most of us. You may have heard of the "fear index," or the VIX, which reporters sometimes cite as evidence of the stock market's worries about the future. The VIX is basically just an arithmetic operation performed on certain derivative prices; it can't tell you how fearful you are unless you are buying and selling those derivatives. But the people who buy and sell those derivatives have been enshrined as our society's designated worriers about the future, and they're probably as good for that job as anyone else. Similarly, lots and lots of people are worried that various countries in Europe will default on their debts. This is something that matters a whole lot to a lot of real people, not just derivatives traders. But the price of derivatives based on Portuguese or Greek debt (credit default swaps) is as good an indication as you can probably get of how worried the people whose job it is to worry about this are. So if you want to know how likely it is that Portugal will default on its debt, those markets are a good starting point. So part of why you want to know about derivatives is because they tell you something important about the possible future states of the world. But there's another part. Because derivatives are a way to shift risk, they also have a tendency to hide risk, to move it from people who understand it to people who don't, and to allow too much of it to pile up in one place. And while everyone who trades derivatives is in some sense in the job of dealing thoughtfully with risk, some people are just bad at their jobs. This is why Warren Buffett has called derivatives "financial weapons of mass destruction." This matters a lot, too. A simple model of the 2007-2008 global financial crisis is that a whole lot of people - German banks, Lehman Brothers, AIG - entered into lots and lots of derivatives that changed their graphs in basically the same way: they made lots of money if house prices continued to go up, and they lost many times more money if house prices dropped. They did this because they were confident that house prices would keep going up and so wanted to make money in that case, or because they were stupid, or both. Obviously lots of people's graphs looked like that to begin with: everyone who had a house, and every bank who made mortgage loans, was better off if house prices went up than if they dropped. But the derivatives shifted some of that risk from people who understood and were able to bear it, to people who didn't understand it and blew up when the bad outcome materialized. And they also created additional risk: some people just went around betting each other that house prices would continue to go up, and those people also got blown up, magnifying the problem. There are things to object to in that model but on the whole I think it's a good one****. And so you worry about derivatives because you remember 2007-2008, and you think that it might happen again, and you are afraid. Maybe you're right, I don't know. It's hard to know, isn't it? Maybe you should buy some derivatives, just in case. Next time, maybe: What I did in banking, or, derivatives for regulatory arbitrage, or, why everything above was false. *Unless everyone thinks the same thing. There is a deep and subtle mystery here. If everyone thinks it will be cold, then you will have to pay so much for the oil company's shares now that you won't make any money when your prediction comes true. It's not enough to know what the future holds: other people have to think otherwise. I could make a lot of money betting that the moon is not made of smoked Gouda, if I could find anyone to take that bet. But I can't. This is called the "efficient markets theory." **For reasons mostly outside the scope of this column, the topic of hedging by oil companies - or other companies whose profits are tied to a volatile commodity, like gold miners - is actually full of interest. A very approximate thing you might say is "their shareholders don't want them to hedge, but their creditors do." A look at Figure 3 might give you a sense of why that might be. (Also, even more outside the scope: some oil companies do in fact own agricultural-ish companies because it turns out that lots of fertilizers are more or less made from oil byproducts. Appetizing!) ***Or they won't, I don't know. A possibly useful general disclaimer here: if you ever buy or sell a stock based on anything that I, or anyone else, say here, or anywhere else, you need to re-evaluate your life choices. ****Which is good, because it is a popular model. The version of it that I am waving at draws from Gary Gorton's work on the financial crisis, particularly his book Slapped by the Invisible Hand. Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| 10:59 am | Manufacturing Jobs Aren't Coming Back, No Matter Who's President Manufacturing Jobs Aren't Coming Back, No Matter Who's President<input ... ></input> <input ... ></input> <input ... ></input> The percentage of Americans working in manufacturing fell under President Reagan. It also fell under Presidents Bush, Clinton, Bush and Obama (respectively). Which is to say, the decline of manufacturing jobs in the U.S. economy is not about who is president or what his policies are. It's the result of long-running, irreversible, historical factors (read: technology and globalization). But when the subject of jobs came up last night, President Obama and former Gov. Romney talked a lot about manufacturing. There are gauzy, nostalgic reasons for this. In the decades after the second world war, high school dropouts could walk onto factory floors all around America and find decent, secure middle-class jobs. By the early '70s, a a quarter of American workers worked in manufacturing. But in the decades that followed, technological improvements allowed manufacturers to produce more stuff with fewer workers. And the workers factories did need had to be more highly skilled. They were needed not for their brawn, but for their ability to operate and maintain high-tech equipment. Today, only 9 percent of Americans work in manufacturing. That's not nothing. And, in fact, the sector has been adding jobs recently after getting hammered during the recession. But the long-run picture is clear. Manufacturing jobs will never again hold the central place in our economy that they once did. At the same time lots of other sectors — health care, professional services — will continue to become more important, and will continue to offer good, middle-class jobs. But those jobs will not, for the most part, be open to high school dropouts. Education, not manufacturing, is the key to long-term job growth in America. As Cristina Romer, the former chairwoman of Obama's Council of Economic Advisers has written:
Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| Tuesday, October 16th, 2012 | |
| 9:56 pm | Episode 410: Why K-Pop Is Taking Over The World Episode 410: Why K-Pop Is Taking Over The World<input ... ></input> <input ... ></input> <input ... ></input>America used to lead the world in making cars. Now we don't. China does. We used to be the number one maker of steel. American steel built bridges and ships all over the world. Not anymore. But the world's most popular music still comes from American artists. Turn on a car radio in Italy, walk into a store in Mozambique, and there's a good chance you'll hear an American pop tune. Music is an export, just like anything else. And, as with other exports, businesses in lots of other countries are fighting for their share of the global market. They want people all around to world to be listening to their music. And they're figuring out how to make it happen. The popularity of PSY's song "Gangnam Style" is not a fluke. Korea has spent the last twenty years preparing for this moment. For More: Gangnam Style: Three Reasons K-Pop Is Taking Over The World Music: Our k-pop Spotify playlist is collaborative. Add your favorite songs. Download the Planet Money iPhone App. Find us: Twitter/ Facebook/ Spotify/ Tumblr Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| 3:16 pm | NYT Excerpt: How Would Romney Manage Our Jobs Crisis? NYT Excerpt: How Would Romney Manage Our Jobs Crisis?<input ... ></input> <input ... ></input> <input ... ></input>In his New York Times Magazine column this week, Adam Davidson poses the question: Do good CEOs make good presidents? Here's an excerpt. With only a few weeks remaining until the election, it's still not clear how Mitt Romney would manage our jobs crisis. There aren't many lessons from his term as the governor of Massachusetts — the economy was comparatively healthy back then, and the unemployment rate was fairly low. His current economic platform lays out broad principles (Principle No. 1: Don't be Barack Obama) but is light on specifics. All that's certain is that Romney has promised to use decades of business savvy to create jobs, which raises the question: how do you apply business strategy to a jobs crisis? No business views hiring as an objective. When a crisis hits, the response of many executives is to let workers go. When I put this question to business analysts, several pointed me in the direction of Louisiana, which has applied a number of Romney's principles. Its governor, Bobby Jindal, is a former McKinsey & Company consultant who has focused on making his state more attractive to businesses. ... Read the full column here. Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
| 8:24 am | All The Money The Government Is Printing This Year, In One Graphic All The Money The Government Is Printing This Year, In One Graphic<input ... ></input> <input ... ></input> <input ... ></input>Usually when we talk about the Fed printing money, we're speaking metaphorically. Most money the Fed "prints" these days isn't actually currency; it's just an electronic representation showing that somebody has a certain amount of money in their account. But the government does still print actual, physical bills. This doesn't really have anything to do with monetary policy or the deficit or anything like that. We're just weirdly fascinated by it. For the most part, the government just prints new bills to replace old, weathered bills that are taken out of circulation. On top of that, the government has been printing lots more $100 dollar bills in the past few years, because people overseas have taken to holding onto them. The Fed has submitted its order for the fiscal year 2013, which started at the beginning of this month and runs through September of next year. In all, the order came to 7.8 billion notes, valued at $472.9 billion. Here's the complete order, broken down by denomination. 
BONUS GRAPHIC: How long does a bill last? Depends on the denomination. All bills are printed on the same durable paper, which a company in Massachusetts has been making for the U.S. Bureau of Engraving and Printing since 1879. 
But small bills, which change hands frequently, have a much shorter life than $100s, which people tend to hoard. See photos of how dollar bills were made a century ago. Correction: The "money to be printed" graphic in an earlier version of this post was mislabeled. Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/. 9()) |
