The New York Times today released a look at the amount of profit coming to the US government from TARP. The government has made about $4 billion from repayment so far with some likely to continue. As the Times’ graphic points out the Treasury still holds warrants with JPMorgan and Capital One. It could profit from a third-party sale or, much more likely, repurchase by JPMorgan and Capital One.
The Times does some credit for pointing out that this is far from final. Rather than quoting the early arguments for possible TARP profit from then-Treasury Secretary Henry Paulson they look at current market conditions. Paulson’s case needs a grain of salt since he began making it back when TARP was going to be used to buy assets not bank equity.
More importantly the money made back from TARP has vanished in other areas. The FDIC reported last week that it lost almost $3.7 billion in its insurance fund. While the fund is paid for by bankers rather than taxpayers the fund is dipping as the FDIC increased its concern for “problem institutions,” rose. At the end of June the list had 416 institutions with $299.8 billion in assets.
The TARP figures also exclude possible losses on Bear Stearns and AIG, which were funded by separate programs. A year from the tumult of late August and early September 2008 the financial situation is markedly improved but it’s not time to start counting profit yet.
Monday, August 31, 2009
Friday, August 14, 2009
Second Life Growth overstated, Ignores Crash
Linden Labs, the developer of the (supposedly) addictive Second Life online game, reported this week that Second Life's economy grew by 94 percent in the last year. The report even converts the game's in-game currency, Linden dollars (L$) to real US$, a sample process because a real exchange market for the two currencies sets a price just like that between dollars and Euros. Yet putting together the information in the charts provided in the release shows that this virtual economy per capita grew at 18, not 94 percent, over the last year.There are two main problems with the analysis done by Linden.
First, the report also gives the number of user-hours in Second Life. This is essentially a measure of population. I use user hours because in reality we cannot extend our days. In Second Life more time online essentially expands population.
Figure 1 shows the value of user-to-user transactions per user-hour.
It’s very clear that back in 2007, the Second Life economy crashed. In fact the per user value of the Second Life economy, fell in 8 of the last 14 quarters. This decline beginning in Q2 2007 through Q2 of 2008 is about as long as the current US recession. It also resulted in the per capita economy contracting by 27 percent, a level more akin to the Great Depression than the current US recession.
Second, the report gives the value of all user-to-user transactions in Second Life. Notice that I have not shorthanded any of his with GDP. That’s because real world metrics like GDP measure only the value of final goods produced. This means that computer circuit sales are not measured directly but as a component of the price of computers. I don't know what people are trading on Second Life but if any of them are trading for things that they then use to create new products, actions, or environments then the report is double counting. The available data doesn’t provide a way to correct this error but the real per economic value is likely lower than reported.
The lesson from this is likely that the Second Life economy is more volatile than the actual one. The turn-around in Second Life that began in Q2-2008 seems to signal little for the real economy.
California follows national trend
In a recent article, I warned that national leaders should look at the problems facing California as a harbinger for the national debt outlook. California paid out almost $2 billion in IOUs since beginning the new fiscal year without an operating budget in July. While the IOUs, officially warrants, were set to mature at latest on October 2nd, California has announced that it will end warrant issuance on September 4th and begin repaying them. The move comes as Gov. Schwarzenegger signed a budget that should eliminate the projected fiscal shortfall in FY2010.
The improving credit conditions are not unlike those at the national level. In its statements this week the Federal Reserve’s governing body, the FOMC, announced that it would end its $300 billion Treasury purchase program one month later than expected. The move will spread out the remaining purchases, of less than $50 billion, over a longer period, and wane the economy of Fed purchases. Other Fed programs aimed at private firms, such as the commercial paper program, have already seen stymied outflows as firms find better borrowing rates in the market.
Yet in neither Sacramento nor the Fed have debt issues been resolved. California is taking a loan to pay its IOUS. The Fed’s balance sheet remains double the size that it was at the beginning of 2008.
The improving credit conditions are not unlike those at the national level. In its statements this week the Federal Reserve’s governing body, the FOMC, announced that it would end its $300 billion Treasury purchase program one month later than expected. The move will spread out the remaining purchases, of less than $50 billion, over a longer period, and wane the economy of Fed purchases. Other Fed programs aimed at private firms, such as the commercial paper program, have already seen stymied outflows as firms find better borrowing rates in the market.
Yet in neither Sacramento nor the Fed have debt issues been resolved. California is taking a loan to pay its IOUS. The Fed’s balance sheet remains double the size that it was at the beginning of 2008.
California follows national trend
In a recent article, I warned that national leaders should look at the problems facing California as a harbinger for the national debt outlook. California paid out almost $2 billion in IOUs since beginning the new fiscal year without an operating budget in July. While the IOUs, officially warrants, were set to mature at latest on October 2nd, California has announced that it will end warrant issuance on September 4th and begin repaying them. The move comes as Gov. Schwarzenegger signed a budget that should eliminate the projected fiscal shortfall in FY2010.
The improving credit conditions are not unlike those at the national level. In its statements this week the Federal Reserve’s governing body, the FOMC, announced that it would end its $300 billion Treasury purchase program one month later than expected. The move will spread out the remaining purchases, of less than $50 billion, over a longer period, and wane the economy of Fed purchases. Other Fed programs aimed at private firms, such as the commercial paper program, have already seen stymied outflows as firms find better borrowing rates in the market.
Yet in neither Sacramento nor the Fed have debt issues been resolved. California is taking a loan to pay its IOUS. The Fed’s balance sheet remains double the size that it was at the beginning of 2008.
The improving credit conditions are not unlike those at the national level. In its statements this week the Federal Reserve’s governing body, the FOMC, announced that it would end its $300 billion Treasury purchase program one month later than expected. The move will spread out the remaining purchases, of less than $50 billion, over a longer period, and wane the economy of Fed purchases. Other Fed programs aimed at private firms, such as the commercial paper program, have already seen stymied outflows as firms find better borrowing rates in the market.
Yet in neither Sacramento nor the Fed have debt issues been resolved. California is taking a loan to pay its IOUS. The Fed’s balance sheet remains double the size that it was at the beginning of 2008.
Tuesday, August 11, 2009
Jobs
Early this year, projections released by recovery.gov made me skeptical that the outcome of the American Recovery and Reinvestment Act could meet the public promises on the jobs front. The issue was not the number of jobs but the cross-state equality promised in the projections. The projections were the culmination of a paper written at the Council of Economic Advisers by Jared Bernstein and CEA Chairwoman Christina Romer.
Romer and Bernstein combined proportional projections, essentially multiplying each states labor force by a constant factor, with modeling to produce a estimates of the number of jobs likely to be “Saved or created over the next two years” in each state. Figure 1 shows the number of jobs predicted to be saved or created as a share of the state’s total labor force against the unemployment rate at the time of the estimates. The results show that Idaho, a low unemployment state was expected to gain a higher proportion of jobs than Michigan, where high unemployment should have made creating jobs cheap.
The modeling work took methods used by Moody’s Mark Zandi into account, yet the results were seemingly unaffected by unemployment. Zandi’s method incorporate “resource slack,” a technical term meant to describe that people in low employment areas will take low paying jobs. When unemployment is high there is a significant amount of slack and less money is needed to induce people to work.
Not only are the results not differentiated by unemployment, but are almost constant. At the median the program was supposed to save or create 2.27 percent worth of pre-recessionary labor force worth of jobs. Even the weakest growth state, Rhode Island, was projected to gain or save 2.08 percent of it’s labor force. The only outlier in the group was DC, expected to gain or save 60 percent more jobs as a share of labor force than the average state. The results for DC likely account for the concentration of the government as a jobs provider, a sector that would grow as the government expanded programs and created new ones, like administering ARRA.
New data from Recovery.gov seems to follow this tight concentration of results. The site now provides information on the total amount spend by ARRA (divided into loans, grants, and contracts). As figure 2 shows, the money from ARRA to date has not been evenly distributed. The three biggest recipients, California, New York and Florida, have received 25 percent of all funds. Yet they are also big states.
When we compare the amount spent so far to the projected jobs impact released earlier this year, the states appear to receive a much more equal share. Figure 3 charts the cost per job in each state with the December 2007 state unemployment rate, the metric used in the jobs projections earlier this year. The trend is weakly positive (albeit not statistically so). While the figure appears to undercut the resource slack assumption, arguing that it actually costs more per job in high unemployment states to create jobs there is still a significant amount of funds to be spent.
A more complete picture will emerge at the end of this week when tentative job creation numbers will be released. I expect the new numbers to vary from those released back in the first months of this year. Likely indicating that some states have had difficulties in creating jobs.
Who's the Pig's Head?
Typically, I'd just tweet a funny link but this one really deserves a bit more attention. A comic over at Abstuse Goose combines The Lord of the Flies with a fictive history of the Federal Reserve. The joke takes the expense that with a Federal Reserve system the lost boys could fund elaborate weapons production and make the ensuing madness more "civilized."
Sure the error in the this comic, which I often make mentally, is to equate the Fed as an established institution. The first panel purports to create a "government and Federal Reserve Banking System" all in one stroke. In reality, Treasury came along with the Washington Presidency but we don't get the Federal Reserve Act until 1913. Even then the structure of Fed Independence that we know today isn't enshrined until the Fed and Treasury reached The Accord in 1951 over who would manage debt.
More than a historical lesson, the Fed faces revision today. The Administration's financial regulatory reform plan would turn the Fed into a systemic regulator. The comic doesn't assume such a role for the Fed, in large part because the intuition already has important goals: price stability and full employment.
Volcker and Greenspan shaped a mysterious Fed. One that appears to have always existed. It hasn't. The current crisis could make the current Fed structure as ephemeral as we have believed it permanent.
Sure the error in the this comic, which I often make mentally, is to equate the Fed as an established institution. The first panel purports to create a "government and Federal Reserve Banking System" all in one stroke. In reality, Treasury came along with the Washington Presidency but we don't get the Federal Reserve Act until 1913. Even then the structure of Fed Independence that we know today isn't enshrined until the Fed and Treasury reached The Accord in 1951 over who would manage debt.
More than a historical lesson, the Fed faces revision today. The Administration's financial regulatory reform plan would turn the Fed into a systemic regulator. The comic doesn't assume such a role for the Fed, in large part because the intuition already has important goals: price stability and full employment.
Volcker and Greenspan shaped a mysterious Fed. One that appears to have always existed. It hasn't. The current crisis could make the current Fed structure as ephemeral as we have believed it permanent.
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