Tea Partiers For Obama (Socialists for Bush!)

Data is from FRED.   The series I used to construct the above charts were Population (POP), Consumer Price Index (USACPIALLMINMEI), Federal Government: Current Expenditures (FGEXPND), State & Local Government Current Expenditures (SLEXPND).

The impetus for these graphs was this -I was out last night with some friends and one mentioned that he thought President Obama was a socialist.  I said I thought he was slightly left of center.  Which I then followed up with the claim that I bet that real government expenditures (including federal state and local) per capita had actually fallen over his administration.  It turns out that I was not quite correct about that  - however what was true was that the growth rate of real government expenditures per capita has been very low under President Obama.

Today this article came up on Google News.  (Note to self - you are supposed to be ignoring Forbes!).  It appears that MarketWatch did a similar study and their numbers are a bit different (below).  Why the difference? First they are just looking at federal spending while I included federal, state, and local in my comparison.  Second they start with year two of a president's term because the spending in his first year is predominantly set by decisions of the previous  administration.  Their method may be better than mine at attributing to the president what they had direct control over.  But either way we come up with the same general conclusion - our current "socialist" president has presided over one of the smallest rates of growth in government in recent times. Perhaps the Socialist International will be forced to revoke his membership now.

Quick Quiz

What country has the world's largest proven oil reserves?  If you said Saudi Arabia ..well possibly.  But I am looking for another name.  Iran?  no.  Iraq?  no.  Kuwait?  Russia?  no. no.  The country I was looking for is Venezuela.  The answer is either Saudi Arabia or Venezuela ...it depends.

You would think there would be a definite answer to the question, but there is not.  That is partially due to how the term "proven oil reserves" is computed.  Wikipedia says "Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with a high degree of confidence to be commercially recoverable from a given date forward, from known reservoirs and under current economic conditions."  That final clause is all important.  Say one country has lots of oil but it costs 150 USD per barrel to recover whereas a second country has much less oil but it only costs 75 USD per barrel to recover.  If the current market price of oil is 200 USD per barrel then the first country will have higher proven reserves.  If the current market price of oil is 100 USD per barrel then the second country has higher proven reserves - because you cannot extract any of the first countries 150 USD oil profitably at the present market price of 100 USD.  So proven oil reserves depends on the current market price of a barrel of oil.  As the price moves around the rankings may change.  Also as countries make new discoveries or revise previous estimates the numbers can change.

So what are the actual rankings?  From the US EIA International Energy Outlook 2011.

World Oil Reserves As Of 1/1/2011
rank	country	billion bbls
1	Saudi Arabia	260.1
2	Venezuela	211.2
3	Canada	175.2
4	Iran	137.0
5	Iraq	115.0
6	Kuwait	101.5
7	UAE	97.8
13	USA	20.7
14	China	20.4
Source:  Oil & Gas Journal

The other surprise on this list is obviously Canada.  Their high ranking is due to inclusion of Alberta oil sands being counted as recoverable.  OPEC rankings are a bit different.  They have Venezuela first with 297 billion bbls, and Saudi Arabia second with 265 billion bls.  Also they only count conventional sources of oil - which means we do not count Canada's Alberta oil sands - and they fall down to the level of the US or China.

Why am I bringing this up?  USA today ran a story about Venezuela's upcoming election and I was surprised to see that they claimed that Venezuela had the world's largest proven oil reserves  "This nation of 29 million people is suffering from high unemployment, food shortages and rising crime despite having the largest oil reserves in the world."  I was very surprised to see the claim that they were anywhere near Saudi Arabia.

However consulting EIA's Venezuela page.  "According to Oil and Gas Journal (OGJ), Venezuela had 211 billion barrels of proven oil reserves in 2011, the second largest the world. This number constitutes a major upward revision – last year the same publication listed the country’s reserves at 99.4 billion barrels. The update results from the inclusion of massive reserves of extra-heavy oil in Venezuela’s Orinoco belt...Venezuela contains billions of barrels in extra-heavy crude oil and bitumen deposits, most of which are situated in the Orinoco Belt in central Venezuela. According to a study released by the U.S. Geological Survey, the mean estimate of recoverable oil resources from the Orinoco Belt is 513 billion barrels of crude oil. PdVSA began the ‘Magna Reserva’ project in 2005, which involved dividing the Orinoco region into 27 blocks and quantifying the reserves in place. This initiative resulted in the upgrading of Venezuelan reserve estimates by more than 100 billion barrels."

Also interesting - although Hugo Chavez likes to paint the USA as the devil (recall his burning sulfur speech) apparently the devil you know is worth doing business with.  Venezuela's largest oil export market is...the USA.  43% of their petroleum exports go to the United States.  And Venezuela is the USA's fourth largest supplier of petroleum  products after Canada, Saudi Arabia, and Mexico.  Just thought it was interesting.

Continental Congress Redux

NYT:  Braving Pangs of Violence, Voters Try to Reshape Libya

The Guardian:  Libya elections:  polling stations raids mar first vote since Gaddafi's death

Today Libya had their first democratic election since 1964.  There was some trepidation on the part of the peoples of Eastern Libya who were afraid of being dominated by the people of the more populous cities around Tripoli.  Despite some election related violence in the East it seems to have been very successful.  In the aftermath of Gaddafi's downfall there were a lot of questions about the devotion of the triumphant militias to the rule of law and democracy - so this is a huge step in the right direction.  What I found most interesting was this

"NYT:  The vote will select a 200 member congress that was initially expected to govern the country for 18 months while it drafted a constitution. But attempting to placate the protests of Easterners that the congress would be stacked in favor of the more populous West around Tripoli — about 100 members will be elected from the West, 60 from the East, and 40 from the desert South — the interim Transitional National Council stripped the congress of its authority over the constitution just two days before the vote. Instead the council decreed a new election to choose a smaller panel to draft the constitution that would be composed of equal numbers from each region"

You could consider a model in which each of the regions has the right to either accept the final constitution which they had some part in drafting or go it alone - and potentially have no voice in drafting.  So having proportional representation when drafting a constitution is not necessarily in the best interest of getting an agreement - as lesser represented areas always have the option of not signing.   The Eastern Libyans who felt dominated by the Westerners under Gaddafi may not be anxious to sign on to a strong central government.  See here and here.  That sounds reminiscent of the debate between the US Federalists (Hamilton, Madison, and Jay) and the US Anti-Federalists (Patrick Henry, George Mason, George "not P-Funk" Clinton, and Thomas Jefferson to some degree) in the drafting of the US Constitution.  Of course unlike the drafting of the US Constitution I suspect that one other major issue in the Libyan constitution will be how to divide the oil revenues which appear to be generated primarily in the South and East of the country.

Higgs Boson

A Higgs Boson explanation that even I can understand

And here is the BBC story on what the CERN LCH researchers are reporting today.

Actually there were really only three likely outcomes that could have been announced today

(1)    That there is no evidence of Higgs Boson.  Looking at the graph of energy versus collisions we don’t observe the predicted bump in the graph.   My "anonymous physics insider source" says that a year ago some people thought that this was a real possibility.  Although at this point in the study that would be a surprising result.

(2)    That there does appear to be a bump in the graph but given the size of the bump versus the size of our sample we cannot dismiss the possibility that the bump is the result of randomness.   In this case they would need to run more samples.  That would be a bit surprising because it is a non-committal result and those types of results don’t tend to garner huge fanfare.

(3)    That there does appear to be a bump in the graph and given the size of the bump versus the size of our sample we find that there is very little likelihood that the bump is the result of randomness.   That was what was in fact announced today.

Thanks to brother Steve for pointing me to an explanation that was right at my level.

7/7 update:  brother Steve points out a fourth possible announcement that the researchers could have made.  They could have said that not only do we see a bump at the graph at this particular energy level, and not only can we exclude randomness (as in case 3) but here are some properties of that particle as well.  They did not go that far. 

One of these things is not like the others....

Power prices for the PJM system

LMP (Hub)
AEP GEN HUB	$33.16
AEP-DAYTON HUB	$34.28
ATSI GEN HUB	$34.79
CHICAGO GEN HUB	$32.48
CHICAGO HUB	$35.31
DOMINION HUB	$35.48
EASTERN HUB	$99.00
N ILLINOIS HUB	$34.61
NEW JERSEY HUB	$39.03
OHIO HUB	$34.32
WEST INT HUB	$34.46
WESTERN HUB	$35.74

The Brilliance of Peggy Noonan

After graduating from college I moved to Washington DC.  As a young civil servant eager to understand how the city worked I read what were at the time the DC-must-read books.  President Reagan's term was coming to a close and there was much discussion of his place in history.  David Stockman's The Triumph of Politics (loved it), Hedrick Smith's The Power Game (ok), a few years later Draper's A Very Thin Line (made me angry) and Chris Matthews' Hardball (good) each were steeped in the policy battles of the Reagan years.

And then there was Peggy Noonan's What I Saw At The Revolution.  I should have read it again before writing this post because it has been a long time.  But I do clearly recall my reaction to reading it the first time.  "What she saw at the revolution ...was apparently nothing."   Stockmans' book was full of philosophy and economics as well as policy minutiae.  You may disagree with him on policy but he was trying to make an honest case for smaller government.  In contrast What I Saw At The Revolution was nearly  devoid of any policy content.  It's focus was the character of the people involved in policy and the peripherally the selling of policies, but there was almost nothing about why a particular policy was good or bad - as if it did not matter.

Over the years - God knows why - I continued to read Peggy Noonan's op-eds in the WSJ.  But the more I read the more I understood - she was not about selling policies she was about selling people.  While my view of the world was that good policies imply good person (or at least someone that I would support) her view of the world was the reverse  - good person implies good policy.  I found that just very strange.  Sure Ronald Reagan may have been a very nice person and a good family man - but there are a lot of people of high moral stature and most of them would do a lousy job at deciding macroeconomic policy.  On the other hand LBJ may have been an asshole to be around but if he made good policy (questionable) that is fine with me since I didn't have to hang around with him.

Even when I agreed with the final outcome of a Peggy Noonan article I strongly disagreed with her reasoning.  Here is her surprise endorsement of Barack Obama for President.   Notice anything missing?  Here is an archive of her articles if you can stand to read them.  Each article has minimum policy content in the sense of why we should or should not do something.  Rather each public policy skirmish becomes an act in a larger moralistic play to determine who are the good guys and who are the bad guys.   And then one day it hit me.  The true brilliance of "Noonan-ism".

The truth is that most people don't follow public policy that closely.  There are two reasons for this.  (1)  No context for decision making.  When distinguished academics cannot agree on the impact of alternative policy alternatives how is someone who has no exposure to the topic area and no supporting data supposed to determine the impact of a policy.  Lobbyists produce questionable studies which get recycled as expert testimony.  Unless you are a topic area expert it is difficult to separate garbage from serious research.  (2) People have lives to live and limited time to spend reading up on public policies which in reality they will have minimal say in.  Decisions made in Washington DC may have a big impact on your life but if you have to decide between spending time deciding which house to buy or reading alternative bills on tax credits for oil depreciation - which will you have more ability to influence and which will directly impact your life more?

TV news provides minimal illumination.  FOX News / MSNBC / CNBC / etc...rarely if ever get into the actual content of policy.  Their focus is either regurgitating party talking points, or interviewing partisans who regurgitate party talking points, or  reporting on who is winning and losing the horse-race.  While the first two are policy related they tend to be unfiltered for quality and context.  The third while being policy free is not the same as Noonan-ism.  TV is obsessed with winning and losing whereas Noonan-ism is obsessed with the goodness of the person involved.  But this is where Noonan-ism is so brilliant!

If you can't follow the twists and turns of every bill and policy proposal then what can you rely on to decide whether a policy is good or not?  Well there is the party identification and the reputation of particular indicative legislators.  If you know that you generally agree with a legislator and s/he is strongly in favor of a particular bill then that acts as a signal that you should be in favor of that same bill.  Ted Kennedy was known to be pro-labor and  pro-single payer health care.  If you are generally pro-labor / pro-single payer and Ted Kennedy supports a labor or health care bill then that is an indicator that you should support it as well.  I believe that most people do rely on the politician to indicate which policies they are in favor of even if they don't know all the specifics of the bill.  Under my signalling model it does not matter if you think that Ted Kennedy is a good human being or not.  He only acts as a signal for you.

However Noonan-ism breaks the chain.  If you subscribe to Noonan-ism and find out that Ted Kennedy is a horrible human being then you should oppose all bills that he supports (because bad person implies bad policy).  Hence the focus of a typical Peggy Noonan column is on the goodness (or at least the goodness as she wants you to see it) of the people involved in the policy.  That's what I see at the revolution.

Brent update

James Hamilton has an interesting posting over at Econobrowser.    While Cushing OK WTI is considered the US benchmark grade of crude oil and is the NYMEX deliverable grade, gasoline in the US is currently priced off of North Sea Brent crude.  This is due to pipeline constraints which have prevented midwest oil producers from getting their product to market - so Brent serves as the marginal barrel of oil for most US refiners.  (A discussion of that point can be found here.)   Hamilton shows that the price of US gasoline and Brent crude are cointegrated with an intercept approximately equal to the sum of taxes and refining margin on a gallon of gasoline, and with the coefficient on the price of Brent being the conversion factor from barrels to gallons (1/42).

For those who have never heard of cointegration here is a brief explanation.   If you you have two time series, each of which in isolation follows a random walk (or worse a random walk with drift), and you attempt to regress one of the variables on the other (both in levels) then you can end up with test statistics which imply that the two series are highly related when in fact they are not.  The problem is that when there is a random walk in the data the test statistics do not converge at the expected speed.  You can generally see the problem by looking at the regression residuals.  If your test statistics are significant but the regression residuals appear to follow a random walk then you likely have a "spurious regression" problem.

However there are cases in which you have two variables, each of which follow a random walk in isolation, but they maintain a stable relationship between themselves - like say gasoline and Brent crude prices!  In this case if you regress one of the variables on the other then the regression residuals will appear to be white noise.  In this case we say that the two variables are cointegrated of order 1 and there are meaningful test statistics for the coefficients in the regression.  Hamilton's textbook is the definitive source on this topic.

Now back to Brent:  it should not be at all surprising that gasoline and Brent prices are cointegrated.  66% of the cost of a gallon of gasoline is due to the crude oil input price.  Gasoline demand is notoriously price inelastic ie the demand for gasoline responds slowly to the price of gasoline.  Hence producer cost shocks will be passed through almost completely to the price of gasoline.  Since taxes and refining margins are fairly stable (except for that brief Katrina / Rita period) we should expect a fairly stable relationship between gasoline and the underlying oil price.

So Hamilton's good news is that with Brent prices falling from 125 USD / bbl in March 2012 to 95 USD / bbl today we should expect to see gasoline prices follow.  The bad news is the reason that oil prices fell was that oil demand has been slowly falling as well as the world economy has struggled.   Then on Friday Brent was up over 6 USD / bbl - the 4th largest move on record.  Still you have to be happy that crude oil prices are responding to the slowdown.  It will provide a bit of extra stimulus.

What is Risk

How the New Yorker's Atul Gawande Caused the debacle at UVA

"What's the difference between a risk and a gamble? You can rescue yourself from a risk. If a gamble goes wrong, the consequences are irrevocable. I first learned this distinction from a battalion commander who had served several tours in Afghanistan. I interviewed him for a series of articles I wrote about risk."

That quote is from John Dickerson of Slate discussing the firing of UVA President Theresa Sullivan.  Apparently the plot to unseat Sullivan was hatched by UVA rector  Helen Dragas.  While trying to convince other decision makers to back her coup attempt she provided the transcript of a commencement address by Atul Gawande.  In his address to Williams College graduates Gawande had discussed risk, failure, and recovering from failure.  Dickerson suggests that perhaps Dragas had missed the point of the Gawande's speech - the importance of being able too rescue oneself when a risk goes wrong.  Dragas's plan did go wrong (as protests broke out until Sullivan was reinstated) and Dragas and her co-conspirators had not planned for that eventuality.  While discussing Dragas et als mistake Dickerson makes the above comparison between risk and gamble.

I am going to show my ignorance here - I am a risk manager by profession and I have never heard this definition of risk versus gamble before and frankly it sounds strange to me.  However when I started thinking about why it was wrong I realized that "risk" is a hard word to define - possibly because the word is used in multiple ways.

Let's see what Websters has to say

"risk noun \'risk\

1 possibility of loss or injury: PERIL

2 someone or something that creates or suggests a hazard

3a: the chance of loss or the perils to the subject matter of an insurance contract; also: the degree of probability of such a loss

3b: a person or thing that is a specified hazard to an insurer

3c: an insurance hazard from a specified cause or source <war risk>

4: the chance that an investment (as a stock or commodity) will lose value"

 I don't think that any of the other definitions really express the word risk in a way that I know it.

Let's see what Wikipedia has to say

"Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). The notion implies that a choice having an influence on the outcome exists (or existed). Potential losses themselves may also be called "risks". Almost any human endeavor carries some risk, but some are much more risky than others."  

Wikipedia also provides a number of alternative definitions of "risk" prefaced by  "The many inconsistent and ambiguous meanings attached to "risk" lead to widespread confusion and also mean that very different approaches to risk management are taken in different fields."  Ok so that may explain why I have trouble defining "risk".  It appears that there are multiple manners in which the word "risk" is used. 

First "risk" can be used as a synonym for probability or hazard.  As in "what is the risk of getting hit by a truck?"   In this case we assume that the implication of the event occurring is very negative and the word "risk" just denotes the probability of the event occurring.  Furthermore when used in this context there are usually phrased as there being two distinct possibilities - getting hit by a truck or not getting hit by the truck.

Second "risk" can refer to a listing of possible bad states without assigning probabilities to them.  An example would be "What is the risk if you were to contract the flu?"  In this case the reference is not to the probability of the event occurring but rather to what the possible outcomes are.   If you are healthy then the "risk" is that you feel crappy, or be in bed for a week, whereas if you have a compromised immune system the "risk" of catching a flu is that it could be fatal. I guess one could attach probabilities to each possible outcome conditional on the initial health status of the person in question but that would be an atypical response to the question.

But how do the above uses of the word "risk" apply to this statement "what is the risk of holding one share of IBM stock for a week".  Well obviously the "risk" is that the price of the stock could drop but that is pretty uninformative.  Someone who asks that question wants to know how much the price of IBM could fall and what probability you would assign to each of those falls.  Just saying how much the price of IBM could fall is nearly tautological.  It "could" fall to zero but that not likely.  So this use of the word "risk" asks for both the possible outcomes as well as the probability of each occurring.  

The case of getting hit by a truck is really just a special case of this third meaning of "risk".  And it is one where the "risk" is easy to understand since there are only two outcomes.  But once we start assigning probabilities to multiple outcomes then "risk" becomes difficult to define.  Is "risk" the probability of the worst possible case? or the probability of being significantly worse off? or the probability of being any any worse off?  should every outcome get the same weighting?  We could present the "risk" as a distribution over possible outcomes - for example the left hand tail of a t-distribution with mean of 0.5% and standard deviation of 5% and 3 degrees of freedom.  That fully enumerates the probabilities of different negative outcomes but does it tell us what the "risk" is?  That tells us what the probabilities are.

I think of risk as having three distinct parts (1) a set of possible outcomes (2) a probability distribution over those outcomes (3) and a valuation or utility measure which assigns a value to each possible outcome.  Assuming the outcomes are distinct we can then construct a single measure of the "risk" of any situation by summing over the probability weighted valuations of the outcomes - similar to expected utility.

For example one possible valuation could be assign 0 to any outcome except the worst and assign 1 to the worst possible outcome.  Weighting each valuation by its respective probability and summing over our measure of risk would then be the probability of the worst case outcome.  There are literally an infinite number of possible weighting schemes one could come up with for different outcomes.

Now back to Dickerson's statement.  "What's the difference between a risk and a gamble? You can rescue yourself from a risk. If a gamble goes wrong, the consequences are irrevocable."  I don't see anything in the definition of risk which alludes to the ability of one to rescue oneself or not.  The point of his article may be correct but that is not the definition of risk.

ACA fallout

I wonder what percent of those who oppose the ACA and specifically the individual mandate can explain why it is unconstitutional?  Under our Supreme Court's current interpretation of the Constitution what precedent does this law violate?  Likewise I wonder what percent of those in favor of ACA and the individual mandate can explain why it is constitutional.  Obviously our legal system doesn't place equal burden on both sides of the argument.  A law is a priori assumed to be constitutional unless and until the courts say it is not.   (Pre-clearence by some states of voter laws is the one possible exception that I know of).

Furthermore, I would bet that 99+ percent of those who hold an opinion on the constitutionality of the ACA aligned themselves on the issue entirely independent of the constitutionality issue.  Rather they picked a side and that drove whether they felt the law was constitutional.  How many people (other than a few law professors) care whether the ACA is constitutional under the Commerce Clause or under the Federal governments right to tax authority?   Mitt Romney obviously didn't have a problem with the constitutionality of the individual mandate back in 2007  when he imposed it in Massachusetts.  Yeah that was a cheap shot...but I had to get it in somewhere.

Before I leave this topic - this one and this one are kind of funny as well.

Political Tribalism

Unpopular Mandate :  Why do politicians reverse their positions

This New Yorker article discusses the changing political support for Obama-care's individual mandate .  The mandate started out as a Heritage Foundation proposal in 1989.  In 1991 it was put forward as part of a Republican alternative to Clinton-care with eighteen Republican co-sponsors.   It was later enacted at the state level by then Massachusetts Gov. Romney.  Now every Republican in the House and Senate as well as Presidential Candidate Romney claim it is unconstitutional. 

The article discusses experiments which show that whether a person supports a particular piece of legislation is more dependent on that person's party identification and which party put forward a bill rather than the actual content of the bill.  I don't find that altogether irrational though.  Figuring out what a bill actually says and what its impact will likely be can often be extremely difficult.  Most people have other things to do all day than read legislation and furthermore most of the public doesn't have a theoretical framework or knowledge of empirical evidence enough to put complicated legislation into context.  That may sound elitist but it is not saying that public is stupid rather they just don't have that training.  Perhaps it is a bit different on social issues.  But how many people could tell you what the impact of reducing the capital gains tax will be on capital formation?  Party identification of a bill acts as a shortcut to whether a piece of legislation  is likely to be something a person would support or not.   It is tribalistic but it is not wholly irrational.

However the case of how the public uses party identification seems a bit different than the case where elected officials completely change their opinion on the constitutionality a bill.  Either you think something is constitutional or you don't.  One would hope that if a politician is proposing a bill they have some idea what is in a bill, some idea of what its impact would be, and if it is constitutional.  One would hope..

Crude Intentions

Whenever retail gasoline prices spike it is big news.  But you don't hear much mention when they start to come back down again.  We are entering driving season and US retail gasoline prices are nearly $0.50 off their highs of last March   1 Year Chart.    Since 2007 World Petroleum consumption is up 1.8MM bpd (2%) while world oil production is up 2.7 MM bpd.    The US, Europe, and Japan are together using 3.6 MM less bpd than they were in 2007.  The big gainer is China who is using 1.4 MM more bpd than in 2007.  Other big gainers are India +0.600 MM bpd and Saudi Arabia +0.800 MM bpd.  Saudi seemed surprising until you realize that they burn crude oil to generate electricity.  Checking todays NYMEX settles, the crude oil forward curve is essentially flat from Feb 2013 through  the end of 2018.  Either the world is predicting a lot of new production coming on line in the next decade, or they see a lot of substitution away from crude, or they are not predicting much growth for next decade.  Btw for all of those predicting that the Fed's stimulus will generate huge inflation - the crude oil market is not seeing it any more than the TIPs market is.

Forb-age

I never really read Forbes magazine.  I just never found their type of business journalism interesting.  It seems to be more a celebration of wealth than a serious inquiry into what makes the economy tick.  I very much like like Bloomberg Magazine and Bloomberg online coverage.  I like the Wall Street Journal reporting and the New York Times business section.  I am even willing to read the WSJ editorial page.  While some of it is nutso other articles do present a serious defense of conservative ideas.  I like the breadth of international coverage of the Economist although I don't really like their writing style.  And I find their policy prescriptions to be of the "if all you have is a hammer then every problem looks like a nail" sort.

I never really had anything against Forbes Magazine - I just didn't find their articles interesting.  When I think Forbes I think Steve Forbes.  He seemed to be a pleasant sort of guy who was willing to poke fun at himself.  To be fair he is one of those kooky Larry Kudlow, Club For Growth, supply side true believers.  Cut taxes for the wealthiest Americans and despite all evidence to the contrary we will experience an enormous burst of economic growth which will solve all of our problems regardless of the situation.  And while you are at it go onto the gold standard.  But I have nothing really against his magazine....until....today I just happened to see this article on Google.  Forbes   I think I will keep skipping Forbes Magazine.

If You Can't Gut the Law ..Then Gut the Enforcement

 House panel sticks with CFTC funding cut  

"(Reuters) - On a party-line vote, the House Appropriations Committee voted for a 12 percent cut in funding for the U.S. futures regulator on Tuesday, moving a step closer to a showdown with the Senate, where a large increase is proposed....Committee chairman Hal Rogers said the CFTC budget was up 80 percent from 2008 and the agency did not need more funding. "It just seems to me this is a big-time waste of money," said Rogers, Kentucky Republican, of proposals for more funding."

The dealer banks don't want derivatives to be forced onto exchanges as per Dodd-Frank.  Since it does not look like the bank's allies in the House will be able to overturn Dodd-Frank the one thing they can still do is to defund the agency who will be responsible for enforcing the new policies.  The CFTC is already underfunded.  To add more responsibilities to their plate while cutting their funding is...well nearly criminal in itself.

The truth is that strong regulation helps the futures (and securities) industries remain viable.  If end-users believe that there is potential for manipulation in a market then they will not want to trade in that market.  The less people trade in a market the less liquidity there is and the higher are the costs.  The two big advantages of the futures industry are (1) the large pool of liquidity (2) the central counter party and clearing credit model.  Taking either of these away hurts the industry.

If the Tea Party and the Occupy Wall Street crowds really want to ensure that we the taxpayer do not end up bailing out the big banks again then the best things that they could do are (1) make sure there are strong laws in place to regulate the futures, securities, and banking industries and (2) make sure that the agencies in charge of regulating these industries are properly funded for the size of their task.

Not Worth the PDF It's Printed On

MF Global Client Protection

"For All Futures Customers of a U.S. FCM Trading U.S. Futures or Options:  Section 4d(a)2 of the Commodity Exchange Act provides that a U.S. FCM must keep all money, securities and property of its customers use to margin futures or options trades on U.S. exchanges and all monies accruing to its customers as a result of such trades segregated from the funds of the FCM.  CFTC Regulations1.20 and 1.30 provide specific requirements for the handling of customer funds."

Some Things Never Change

If I were to open Google News for 525 BCE would the top four stories have been about Greece, Egypt, Persia, and the going's on in Tyre and Damascus?

Will Mitt Romney Have His Membership in The Axis of Incoherence Revoked??

Romney:  Spending Cuts Slow Economic Growth

Well this was positive - or it was until his spokesman backed away from it.  But I think it shows that he understands basic macroeconomics.  However, it brings to mind a question:  if decreasing government spending decreases growth, then shouldn't increasing government spending increase growth?  Actually I would guess that even during a liquidity trap there is probably a government spending equivalent of the Laffer curve.  Zero government spending leaves you with little growth.  Increasing government spending increases growth up to a point.  And after that point further increases in government spending decrease growth.  But where are we relative to the peak right now?  Is Romney suggesting that we are near the peak?  Maybe the Laffer curve is the wrong analogy.

Is It Not Registering?

Loophole at MF Global is Headache for Regulators

I find this really quite astounding.  The gist of the story is that most of the executives at MF Global who have been implicated in the misplacement of funds were not registered with the National Futures Association (the SRO for the futures industry).  Hence they cannot be cited for failure to supervise.  Jon Corzine was registered but his direct involvement with the cash transfers is in question.   However, Bradley Abelow (COO), Laurie Ferber (General Counsel), Henri Steenkamp (CFO), Vinay Mahajan (Treasurer), and Edith O'Brien (Assistant Treasury in charge of approving cash movements) were not registered with the NFA.

After reading through the rules of the NFA - it appears that every member firm must have a at least one registered supervisory principal - however it does not appear to require that all persons who are in supervisory roles be registered principals.   I suspect that rule will be changed soon.

NFA manual

MF reporting

I am generally a big fan of Frontline’s documentaries however I didn’t think that their story on the demise MF Global was particularly enlightening.  Perhaps I am already familiar with how the industry works and having followed the MF Global situation closely their story did not provide me with any new information.

I wonder if my enjoyment of Frontline is in part due to knowing very little about the topics of most of their stories.  If I knew more perhaps I would have the same reaction that I did to their MF Global story.  Or maybe it was just weak reporting on their part.

On the other hand Fortune Magazine has done a very good in depth piece detailing the last days of MF Global.

I know that I am not the first to notice the irony - but Jon Corzine seems to have forgotten the lessons of  Long Term Capital Management.  LTCM made huge bets on small convergence trades.  When they started losing money each of their counter-parties demanded increased collateral, which forced LTCM to liquidate large and somewhat illiquid positions, which led to further losses, which led to increased demands for collateral and so on.  Goldman CEO Jon Corzine strong-armed the other major investment banks to lend LTCM more money and not increase collateral calls so they could liquidate in an orderly fashion.  And now thirteen years later MF Global CEO Jon Corzine is undone by a similar liquidity crunch.  Whoever the Greek god of finance is (is it Mercury?) s/he must have an ironic sense of humor.