Felix Salmon

Remember when credit-card companies started cutting back on credit lines because delinquencies were going up and people weren’t paying off their debts? Well, pull out your hankies and prepare to dry your eyes: now they have the opposite problem. Harry Terris at American Banker has a classic headline today, “Card Payment Rates Stymie Lending”.

The problem for credit-card issuers, explains Terris, is that those of us with credit cards are doing a much better job of paying off our balances. Here’s the chart, showing the percentage of outstanding principal balance that cardholders are paying off every month:

Well done, America! You’re paying off your credit-card debt at unprecedented rates! And the result is that the total amount of credit card debt in America is going nowhere. Here’s the chart:

After falling sharply during the financial crisis, revolving debt has been flat since the beginning of 2011. And in real terms, of course, that means it’s falling. Here’s the same chart in billions of constant 1982 dollars:

And here’s that same chart, zoomed in to the past 10 years.

The lesson here, for credit-card issuers, is “be careful what you wish for”. They worried about credit-card balances being too high during the recession, and cut off a lot of credit just when people needed it most. And then balances just fell, and fell, and never recovered.

For consumers, this is excellent news. It almost never makes sense to borrow on a credit card: the rates are insanely high, most of the time. Using credit cards can be perfectly sensible: they’re very handy payment mechanisms. But running a balance on your credit card is the first no-no of personal finance, especially if you have any liquid savings at all.

So even as America worries about the rising level of student loan debt, here’s some good news: the level of credit-card debt is going nowhere, and is actually falling in real terms. Let’s keep that up. It will mean lower profits for the big banks, who issue the lion’s share of all credit cards, and it will mean lower interest payments for consumers.

Of course, people still need loans. So once we’ve weaned ourselves off credit cards as a source of credit, the next task is to find an easy and cheap way for individuals to borrow relatively short-term funds. Banks hate personal loans, because they’re not nearly as profitable as credit cards. And peer-to-peer lending isn’t going to work when it comes to supplying broadly-available credit lines. Still, I’m beginning to dare to hope that the credit-card scam — sell convenience, and then make billions of dollars from overinflated interest rates — is beginning to come to an end.

This chart comes from a new paper by Karl Case and Robert Shiller, looking at the results of a survey they’ve been handing out to homebuyers annually since 2003. The idea is a very smart one: if you want to get an idea of the behavioral economics of homebuyers, the best way to understand what they’re thinking is to simply ask them.

And this chart, in particular, is both very elegant and very informative. It’s elegant because you have a very close maturity match: the average duration of a US mortgage, before it’s refinanced or the house is sold, is about 7.5 years, which is close to the ten-year horizon in this question, which Case and Shiller ask every year:

On average over the next 10 years, how much do you expect the value of your property to change each year?

Now the number of homebuyers in America vastly exceeds the number of people who understand the mechanics of compound interest. If you asked instead “how much do you think your home will be worth in ten years”, and then presented that answer as an annualized percentage increase, I suspect that the answers — especially in the peak years of 2004 and 2005 — would be substantially lower. (Put it this way: if you bought a $260,000 home in 2004 and expected its value to rise at 12% a year for 10 years, then by 2014, you’re saying, it would be worth more than $1 million. I suspect the number of people answering 12% or more is going to be greater than the number of people who think the value of their home will quadruple in ten years.)

Still, that’s not particularly important, especially since the question has remained the same for the past decade: the trend here is real. And what’s fascinating is that the big fall in expected long-term home-price appreciation happened before the financial crisis, and that the crisis is actually completely invisible in this chart: expectations continued to deteriorate long after it was over.

And even given the fact that homeowners tend to overestimate annualized percentage returns over 10-year horizons, we’re now at the point at which the expected rise in home values barely exceeds today’s record-low mortgage rates. Over the long term, homebuyers still think it’s a good idea to buy a house. And they might be right about that. But they’re not buying because they think they’ll make a handy profit in ten years’ time.

Which brings me to one of the central themes of the Case-Shiller paper: the idea of a “speculative bubble”. If you look at the situation in the chart circa 2004-5, there was a huge gap between the cost of funds and the long-term expected return. And if people really believed house prices were going to rise that much in future, it made all the sense in the world to lever up, get the biggest mortgage they could find, and buy lots and lots of house. After all, the more levered you are, and the more house you buy, the more money you make.

Case and Shiller have a handy definition of a speculative bubble, in this paper: it’s a bubble with “prices driven up by greed and excessive speculation”. But here’s the thing: people don’t speculate on a ten-year time horizon, and the producers of “Flip This House” weren’t waiting around to see what properties would end up being worth once the kids had gone off to college. A truly speculative bubble, it seems to me, is a function much more of short-term house-price expectations than it is of long-term expectations. If you think you can buy a house today, sell it in a few months’ time, and make tens of thousands of dollars doing so, and if you intend to do precisely that, then you’re clearly part of a speculative bubble. But it turns out that home buyers were actually surprisingly modest in their expectations of one-year price increases — they expected prices to rise less than they ended up rising in reality.

On the other hand, if you buy a house now in the expectation that it’s going to increase in value substantially over the next decade, you might be a buy-and-hold investor, but it’s hard to characterize what you’re doing as speculation.

I’ve been disagreeing with Shiller on the subject of speculative bubbles for five years now, but I think this is important: just because you have a bubble, doesn’t mean you have a speculative bubble. The dot-com bubble was speculative; the rise in house prices in 2000 was not. There was a speculative bubble in Miami condos; there was not a speculative bubble in Manhattan co-ops. If you buy because prices are rising, that might be because you want to flip your property and make money — or it might equally be because you worry that if you don’t buy now, prices are going to run away from you, and you’ll be forced to move out of the neighborhood you love because you can’t afford it any more. It’s still a bubble, but it’s more of a fear bubble than a greed bubble.

Still, bubbles are bad things, and they’re liable to burst either way. And so I take solace in this chart, because it shows me that people are buying, these days, for the right reason — which has nothing to do with expectations of future house prices, and everything to do with simply paying a fair price for the shelter they’re consuming. House prices might not rise much over the next decade. But if they fail to rise, today’s house buyers aren’t going to be disappointed: they will still have lived in their homes while paying a perfectly reasonable sum to do so. Which is a much better state of affairs than bubble-and-bust.

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Mitt Romney is defending his comments in an anonymously sourced video, taken surreptitiously at a Florida fundraiser, that “there are 47 percent of the people who will vote for the president no matter what… These are people who pay no income tax”. Which is odd, because Romney’s take on “the 47%” was factually wrong and politically daft.

It is true, according to the Tax Policy Center, that 46% of American taxpayers pay no federal income taxes — the so-called lucky duckies. They do, however, pay taxes like “federal payroll and excise taxes as well as state and local income, sales, and property taxes”. A combination of poverty and tax breaks for children, the elderly and the working poor account for 87.2% of cases where zero federal income taxes are paid, something Ronald Reagan bragged about. Awkwardly for Romney, there’s also a small slice of high-earning taxpayers who pay no federal income tax due to the treatment of capital gains and dividends. NPR’s Planet Money has a great graph that simplifies the breakdown. The reality is that America’s tax system is barely progressive and in effect approaches a flat tax.

Politically, the Atlantic‘s David Graham shows the non-federal taxpayers live largely in Southern and Western states Romney must win. And Graham’s colleague Derek Thompson notes that Obama won a huge share of low-income voters in those states, the president was less successful with elderly Southerners. Romney will need their support in November.

Dismissing nearly half of Americans as unreachable and unworthy struck Jonathan Chait as exactly what we’d been waiting to see: the real Mitt Romney. He turned out to be a “sneering plutocrat” who thinks of the “lowest-earning half of the population as implacably hostile parasites”. As the Huffington Post’s Ryan Grim and Matt Sledge put it in cataloging the wide-ranging negative reaction to Romney’s comments — which also disgusted David Brooks — that’s a stance that “offends liberals and conservatives alike”. — Ben Walsh

On to today’s links:

Alpha
The Einhorn Effect: A mere mention can send a stock down 13% in a month - WSJ

New Normal
Debt collectors are now using district attorneys’ stationery to threaten you with jail time - NYT

Politicking
Paul Ryan’s probably not telling the truth about having the same body fat levels as world-class sprinters - Slate

#OWS
The importance of Occupy: It changed the conversation (among other things) - Felix
“Rarely can a movement have been so hastily obituarised as Occupy Wall Street” - Guardian

EU Mess
Europe’s too-big-to-fail banks now even too-big-to-fail-ier - Bloomberg
Berlin’s 168 billion euro problem with the EU bailout fund - Der Spiegel
The head of Germany’s central bank says the ECB kinda reminds him of the devil in Faust - Telegraph

Hackgate
“Letter to Rupert Murdoch regarding burglary”: Absolutely scathing note from MP Tom Watson - Tom Watson

Long Reads
The giant medical company that ran illegal, deadly bone-cement tests on humans - Fortune

Taxmageddon
There’s a 15% chance that the US goes off the fiscal cliff and wrecks the economy - Moody’s

Politicking
Ramesh Ponnuru on why the GOP has the entitlement issue all wrong - Bloomberg

“Hot Money”
Becoming a less-effective tax shelter will cost Switzerland $65 billion in deposits - FT

Financial Arcana
Russia agrees to a 90% haircut on $11 billion in Soviet-era loans to North Korea - WSJ

Wonks
Math explains why you’re less popular than your friends - Scientific American

Back when this blog was on hiatus, I put a chart of Microsoft and Apple valuations up over at felixsalmon.com. People liked it, and so I decided to take the obvious next step, and animate it. The result is the video above, and this gif.

The data are a little bit out of date at this point, and so you can’t see Apple soaring to its latest $650 billion valuation* — but it’s easy to see where it’s going. And the big picture is still very clear: Apple basically curves up with market cap being an inverse function of p/e, as you’d expect; when Microsoft, by contrast, reached its highest valuation, it had a whopping great p/e ratio.

Today, for the record, Apple has a market cap of $650 billion and a p/e ratio of 16.4; Microsoft has a market cap of $260 billion and a p/e ratio of 15.6. As far as their earnings ratios are concerned, both are very much in line with the S&P 500, which is currently trading at a p/e of 16.5. Wherever excess earnings growth is going to come from, the market isn’t expecting it from either of these tech giants.

*Yes, I said $700 billion in the video. I meant $700 per share. Oops.

On September 7, Occupy the SEC followed up its fantastic comment letter of last February with an equally perspicacious and detailed update. At 15 pages, the new letter is much shorter than the 325-page original, but it still packs a heavy punch, and it arrives at exactly the right time: just as the SEC and other regulatory agencies are trying to work out how the Volcker Rule should look, especially in the wake of the JP Morgan London Whale fiasco. (All of which was, embarrassingly, entirely Volcker-compliant.)

Meanwhile, the Occupy Bank Working Group, which got a flurry of publicity back in March, is still going strong, working on something which has the potential to be much more far-reaching than any letter. It takes time to build a new kind of bank, which is their ultimate ambition, and they’re not there yet. But they’re moving in that direction, and if Andrew Ross Sorkin had talked to any of them before filing his column today, he might not have been so dismissive with respect to the legacy of Occupy. (“It will be an asterisk in the history books, if it gets a mention at all.”)

In fact, Occupy was hugely important: it provided an overarching frame, and context, which could then be applied in a myriad of different situations and geographies. When Mitt Romney dismisses 47% of America as “victims, who believe the government has a responsibility to care for them”, it’s impossible not to think of Occupy, the self-described 99%, and the fact that it was emphatically not a call for government handouts. In reality, it was much closer to a call for a genuine equality of opportunity — something that Romney should be supporting, rather than opposing.

But Sorkin isn’t interested in the effects that Occupy has had on political discourse, or even on regulatory rule-making. He’s looking for some very narrow things indeed:

Has the debate over breaking up the banks that were too big to fail, save for a change of heart by the former chairman of Citigroup, Sanford I. Weill, really changed or picked up steam as a result of Occupy Wall Street? No. Have any new regulations for banks or businesses been enacted as a result of Occupy Wall Street? No. Has there been any new meaningful push to put Wall Street executives behind bars as a result of Occupy Wall Street? No.

And even on the issues of economic inequality and upward mobility — perhaps Occupy Wall Street’s strongest themes — has the movement changed the debate over executive compensation or education reform? It is not even a close call.

Actually, I think that Occupy the SEC did change the debate over breaking up the banks. Certainly its letter was very widely read in Washington, where Congressional staffers are constantly inundated with lobbyists’ position papers but see very little from, well, the 99%. But more generally, Occupy was clearly opposed to the entire Washington system, and so it’s rather silly to point to the fact that the Washington system hasn’t done much in the past year, and use that as evidence that Occupy was a dud.

Speaking personally, I find it impossible to read the unemployment numbers on the first Friday of every month without thinking about the protestors at Occupy; if nothing else, they did a fantastic job at putting a face on otherwise dry statistics.

But what Occupy has really given us is something much more important than that. It’s a new way of looking at the world we live in — a viewpoint characterized by equality and respect for all, combined with an unapologetic anger at where we’re at. That’s a viewpoint it’s pretty much impossible to find on Wall Street, or among Andrew Ross Sorkin’s sources. But it’s also a viewpoint held by millions of people around the country and the world. It’s probably too much to hope that Sorkin might start taking it seriously at some point.

Back in March, I worried that Kickstarter was morphing into SkyMall for Vaporware. While Kickstarter is great for creative projects which can be realized by small teams, so far there’s zero evidence that it’s a good way of providing startup capital for would-be businesses. I gave an admittedly extreme example, of the kind of ultra-high-tech industry which needs much more than a Kickstarter campaign in order to succeed.

Getting a product to market is hard. Even companies with business plans and executives and millions of dollars in funding — and a fully-functioning product — can fall down on that front. Look for instance at the Switch lightbulb: in July 2011, Farhad Manjoo of Slate said it would go on sale in October 2011 for $20. In August 2011, Dan Koeppel of Wired magazine ran an article saying that the bulb would go on sale in October for $30. But here we are in March 2012, there’s still no sign of the thing, and the company’s Facebook page is filling up with comments saying things like “I’m going to start my own company making a product that no one can buy. Hmm….what should I not sell? So hard to decide.”

Six months later, the Switch lightbulb still hasn’t arrived. And Koeppel’s article explains some of the good reasons why it’s really, really hard to make these things. For instance: in 2008, the US government offered $10 million to the first company which could produce a 60-watt-equivalent bulb which would draw less than 10 watts of electricity, be dimmable, and generally be at least as good, in all respects bar cost, as incandescents. Philips won the prize, even though, as Koeppel writes, the development costs of doing so were much greater than $10 million:

Coming up with a truly worthy LED bulb is enormously complex, requiring expertise in physics, chemistry, optics, design, and manufacturing… nobody has built such a multidisciplinary lighting product before.

Koeppel’s story was of a small startup company, Switch, which was competing against the three giants in the space — Philips, Osram Sylvania, and GE. But to give you an idea of what you need to compete in this space, Switch has received “an eight-figure investment” from one company alone, VantagePoint Capital Partners. VantagePoint is an investor in a few of these companies: another is BridgeLux, which, according to CrunchBase, has received a total of $210 million in venture funding.

All of which brings me to Lifx, a small group of guys who have just launched a Kickstarter for their revolutionary dimmable LED bulb. It even has wifi! The Kickstarter campaign is going really well so far: it has raised more than $600,000 just since Saturday, far exceeding its $100,000 goal. They claim that the mechanics of the bulb (as opposed to the electronics) are really nothing special:

We are using as many standard LED lighting components as possible. These components have undergone rigid testing and stood the test of time.

At the same time, however, they admit they are still “looking into all the options on the best type/brand of LED lamp to use in the production model”. And you only get a brief glimpse of the prototype in their video; it frankly looks pretty shabby. Their big still photo, on the other hand, is gorgeous: so gorgeous that it’s not a photo at all, just an illustration. Here, compare the Lifx illustration, on the left, with the glossy Condé Nast photo of a real-life Switch bulb, on the right:

The bulb on the light is quite lovely, in its own way, but also shows the kind of design compromises that real-life LED bulbs need to make: a big, heavy heat sink; clearly spaced LEDs, and so on. The illustration on the left, by contrast, looks just like a normal incandescent, only with the bottom half of the bulb replaced by a beautifully-contoured heat sink. You can’t see the LEDs at all.

The heat sink is crucial, especially if you want to put lots of wifi electronics into the bulb. The Switch bulb uses a patented thermally conductive gel to prevent the bulb from overheating; the Lifx bulb uses — well, we have no idea what it might use, since they’re not going into that level of detail. It’s pretty clear from the video that the prototype barely has a heat sink at all.

Lifx founder Phil Bosua, in the video, explains that what he’s doing isn’t cheap. “To produce Lifx at an efficient price point,” he says, “we need to buy thousands of RGB LED lamps, make dies for the outer casing, create custom-built computer boards, and finalize our onboard software and app development”. Does he really think he can do all that for $100,000, or even $1 million?

Put it this way: either Lifx is a genuinely revolutionary new LED bulb, or it isn’t. If it is, then it’s going to run into huge fights just on the intellectual-property front alone: I’m pretty sure they don’t have any important patents, at least on the hardware. And if it isn’t, then lots of people would be out there making LED bulbs, and Lifx would just be coming along to try to add some wifi-enabled control-this-from-your-phone whizz-bangery. (Which, Belkin, maker of the WeMo, might have some patent issues of its own.)

For while there are indeed a fair few LED bulbs on the market at this point, many of them substantially cheaper than the Lifx bulb, there are good reasons why none of them have really taken off. LED bulbs are undoubtedly the lighting device of the future; they just haven’t quite got there yet, and I can’t believe that Lifx has managed to solve the enormous problems that many huge companies have spent hundreds of millions of dollars trying — and generally failing — to fix.

All of which is to say that if the Lifx bulb ever ships, it’s going to be a gimmicky disappointment at best. The “white” light won’t be warm and rich, the illumination will come out in clumps rather than being even, the bulb will hum when it’s dimmed, the electronics will fail in the heat, etc.

And there’s a very real risk — I’d say it’s a probability — that the Lifx bulb will simply never ship at all. If Switch can’t do it, with their working prototypes and their patents and their tens of millions of dollars in funding, not to mention no desire that their bulbs be controlled from iPhones, then there’s no good reason to believe that Lifx can, as they’re promising, start delivering these things in March. Their last project, after all, was basically a collapsible cardboard box; it raised $184,500 — well above its $12,500 goal — and was meant to be delivered in July. The backers are still waiting; the most recent shipping date is mid-October.

The Lifx is priced at $49 per bulb, which means that you’re basically buying a basic WeMo switch and getting the LED bulb — and all the technology merging the two into one bulb-sized piece of hardware — for free. It just doesn’t seem likely.

Despite the fact that there’s really no reason to believe that the Lifx team can produce what it’s promising, in the first few days Lifx signed up five backers at the $5,000 level, each of whom was ordering “25 packs of four LIFX smartbulbs for resale”. That’s not actually allowed by Kickstarter any more, and they put an end to that after I asked about it. But still, there are lots of people putting in very large orders — already 108 backers have pledged $490 or more. Those people are going to be very disappointed if they end up receiving nothing.

These people aren’t just being seduced by a clever sales pitch: they’re being shepherded there by lots of very high-profile blogs, such as Wired and TechCrunch and Mashable and GigaOm. And, of course, Reddit, where at least there’s quite a lot of skepticism, not least when it comes to the question of how a phone can configure a lightbulb before the lightbulb knows what wifi network to join.

So my feeling is that both Kickstarter and the tech blogosphere should start being a lot more skeptical about the claims made in Kickstarter videos, where anybody can say pretty much anything. And anybody thinking about supporting Lifx should take a deep breath and just wait until the product exists, instead. It’s funded, now, so pre-ordering on Kickstarter doesn’t cause the product to get made, it just maybe gets you the product a couple of weeks earlier. And in return for that negligible upside, you’re taking on the risk of a huge downside — that you lose all that money entirely, with nothing to show for it at all.

Update: Lots of smart comments below, both defending Lifx and raising new problems — such as the need to get certification in multiple jurisdictions, since they’ll be shipping the bulb under their own trademark.

Lifx itself has three reactions to this post. First, they’ve made public the 12-step process for setting the Lifx bulbs up as part of your wireless network — it involves switching your phone to the Lifx network, configuring the Lifx bulb to your wifi network, and then switching your phone back to your own network.

Second is a comment from founder Phil Bosua:

Addressing the recent Reuters article: We originally had meetings with our Melbourne/Shenzen LED bulb supplier which proved the project to be viable but as the demand for the LIFX smartbulb continues to grow so will the scale of partners we work with. We have also recently had meetings with companies experienced in large scale LED light bulb manufacturing and will be utilising their experience and knowledge to attach the LIFX control chip into tried and tested LED light bulb technology.

We know that the demand for a smartbulb is clear. It takes a big vision, a lot of work and smart operations to revolutionize a main stay product and with your support this is what we are going to do.

And third is a comment on the Lifx tech blog:

An approach I’d really like to follow is “Please don’t feed the internet trolls“.  We must focus our complete attention on delivering your pledges and answering your questions and comments.  LiFx has attracted a lot of attention, not all of it good.  Some people are just waiting for a large KickStarter project to fail, without any regard for the interests of the supporters of that project.

We’ve all seen the Reuter’s opinion piece and I don’t want to waste time responding to it.  Primarily, because I don’t need to respond … thanks to “KenG_CA” whose comment at the bottom of that opinion piece has already made a rebuttal.  Thanks Ken … whoever you are !  I have nothing more to say about that piece.

So, if you think I’m an internet troll who just wants Lifx to fail and who doesn’t care about the supporters of the project, then you’re pretty much in line with the thinking within Lifx. But if you were looking for a more detailed response from Lifx, sorry — it looks like you’re not going to get one.

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Eleven days ago, Mario Draghi announced that the European Central Bank was ready to do what he’d been hinting at for months: buy unlimited amounts of sovereign debt to hold down borrowing costs in countries like Spain. Assuming, that is, that national leaders request aid and agree to the central bank’s conditions.

As a result, since Draghi’s announcement, the burden has been on Spanish Prime Minister Mariano Rajoy to formally apply for the aid. But his immediate reaction, like that of Italian PM Mario Monti, was noncommittal. As of last week, Rajoy was still recalcitrant, saying he didn’t “know if Spain needs to ask for” help beyond the €100 billion bank bailout it received in July, which was less than a sterling success.

Economic reality appears to be limiting the amount of time Rajoy has for consideration. Spanish 10-year debt is now yielding right around 6%, which means it has now essentially risen right back to where it was just before the ECB made its announcement.

Spanish banks, meanwhile, are losing deposits at an alarming rate, with a record €26 billion withdrawn in July alone. That leaves the country’s already shaky financial institutions with worsening loan-to-deposit ratios and a clear deficit of public trust. Catalonia, Spain’s wealthiest region, isn’t happy with the amount of taxes it is shipping to Madrid and wants its “own project”, separate from the current path of the rest county.

That said, Spain does appear to be tiptoeing towards asking for aid. Reuters reports that Spain “will set clear deadlines for structural reforms by the end of the month,” which would precede an official request for assistance. Still, the final decision has to be taken by Rajoy.

As Paul Murphy at FT Alphaville put it, markets are telling Rajoy what his only option is: call Draghi. — Ben Walsh

On to today’s links:

The Fed
Why the Fed’s latest move is “shamanistic economics” - New Economic Perspectives
QE3 will help a little but, but we “need more than a little bit of help” - Jared Bernstein
Banks can’t process mortgage applications fast enough for consumers to see QE3 benefits - FT

Crisis Retro
GM would really prefer if the US sold its stake now (at a loss) - WSJ

Tax Arcana
Questioning the defining economic policy of the last decade: tax cuts - NYT

Where Are They Now?
He hired Bloomberg, predicted the crisis, and committed insider trading just to prove a point - NYT

Orwellian
The puppetry of quotation approval – David Carr
The flack-to-hack ratio has exploded - Economist

#OWS
Occupy Wall Street launches “carnival of resistance” in downtown NYC - Bloomberg
A map of the #OWS anniversary protests - BI

Regulations
FDIC providing test prep to community banks for exams - American Banker
Why we can’t simplify bank regulation - Felix

Wonks
Study says “uncertainty” raised unemployment by at least 1 percentage point - SF Fed

Remuneration
Pandit’s compensation plan magically excludes the massively failed Smith Barney deal – Bloomberg

Politicking
“No single development has altered the workings of American democracy… so much as political consulting” - New Yorker

Good Pork
Reminder: frivolous sounding studies yield scientific breakthroughs - WaPo

Oxpeckers
How BuzzFeed uses data to track how much you love cats - FastCo

Hackers
Everything is broken and nobody’s upset - Scott Hanselman

Ron Perelman might be the single most notoriously litigious billionaire in the world, and so it’s probably a bit much to expect his latest lawsuit against Larry Gagosian to have much real substance to it. But what’s fascinating, reading the vast amount of news and commentary on the suit, is just how many people are taking it at face value. Even when they can’t agree on what that face value is.

What’s undeniable is that Perelman agreed to buy an as-yet-unfabricated Jeff Koons sculpture for $4 million. But was that a fair price? Emma Brockes, in the Guardian, says that $4 million was “an amount it didn’t turn out to be worth”, while Page Six says that Gagosian had “fraudulently undervalued” the sculpture at that price.

It’s easy to see why they’re confused: the Perelman complaint is inherently confusing. For one thing, there’s the torture it goes through trying to persuade itself that Larry Gagosian was acting as a fiduciary on behalf of Perelman:

The potent combination of Gagosian’s unparalleled knowledge and dominant position in the art world, along with the parties’ longstanding friendship, Gagosian’s position of trust in advising Plaintiffs regarding art acquisitions and value, handling consignments of works owned by Plaintiffs, and bidding for works of art on Plaintiffs’ behalf, made Gagosian a fiduciary of Plaintiffs.

This is all very silly: you don’t become a fiduciary because you’re friends, or because you’re knowledgeable, or any of these other reasons. In fact, the whole point of buying work from primary dealers like Gagosian is that they act as middlemen, on behalf of both the artists and the buyers. Gagosian was representing Koons; he had as much of a responsibility to Koons, if not more, than he had to Perelman.

Then there’s the whole question of the value of the sculpture. Perelman wants to have his cake and eat it, here: he’s basically saying that the sculpture was worth millions of dollars more than the $4 million he paid for it, but that at the same time he was somehow forced to sell it for just $4.25 million. By far the funniest part of Perelman’s complaint is where he says that “upon information and belief, the value of works by Koons increase as delivery dates draw close and can sometimes double in value shortly after delivery”.

This, in a nutshell, is Perelman’s case: when he bought the piece in 2010, he bought it at a fair price of $4 million, but when he bartered it back to Gagosian in 2011, it was worth much more than that, and Gagosian should have given him much more than $4.25 million in credit for it.

Of course, no one was forcing Perelman to barter the piece. As Gagosian’s suit lays out, Gagosian would much have preferred to be paid cash for the pieces that Perelman bought, rather than being paid in bits and pieces of other art, including the Koons sculpture. Perelman is rich enough to be able to find a couple of million dollars if he needs it; it was entirely his choice to part with the Koons at this particular valuation.

The reality of what happened here is that Perelman agreed to buy the Koons sculpture, on an installment plan. The sculpture was delayed — as many, if not most, Koons sculptures are. At that point, Perelman had a choice: he could wait for the sculpture to arrive, at which point he would own it, or he could ask for his money back. He chose the latter — and, in fact, Gagosian paid him an extra $250,000 for good measure.

What Perelman wanted to do — and what Gagosian wouldn’t let him do — was flip the sculpture, for much more than he paid for it, before it had even been fabricated. Finding himself unable to do that, he ended up taking Gagosian to court.

Now Gagosian, as Koons’s dealer, can get up to those kind of tricks: he reveals in his own suit (check out paragraph 36, on page 8) that he did indeed sell the as-yet-unfabricated Koons sculpture to someone else as soon as he got it back from Perelman. I wouldn’t be at all surprised if the sale price was significantly more than $4.25 million.

Perelman, here, basically wants to be able to get those extra millions. But he doesn’t know who Gagosian sold the sculpture to, and he doesn’t know how to sell unfabricated sculptures, and so he feels forced to go through Gagosian when he wants to sell his Koons. If he really knew the art market, he could have entered into a contract to sell the sculpture, as soon as it arrived, to any third party he wanted. But instead, he let it go, at more or less the price he paid for it. Because, although he’s a very rich man, he’s no art dealer.

Hidden between the lines of these suits is the invidious idea that contemporary art can and should rise in value extremely sharply, and that the people buying that art can and should make a large cash profit when they sell it. The truth, of course, is that it’s the dealers who make the large cash profits, because it’s the dealers who have all of the priceless information about which buyers are in the market for which works at any given time.

Collectors like Perelman want to free-ride on the work the dealers do, and they get upset when they aren’t able to. They’d be much happier if they just bought art they loved, at a price they were comfortable with, and didn’t try to make money at the same time. But then again, if they were that kind of person, they probably wouldn’t be billionaires.

Larry Gagosian, more than any other individual in the history of the world, has perfected the art of selling to billionaires. A large part of that sales pitch, I reckon, involves explicit or implicit talk about the rate at which the value of the art he’s selling is going to rise in the future. In that sense, the Perelman lawsuit is just Gagosian’s own rhetoric coming back to bite him: Perelman is asking for just recompense when he sells a work which has gone up in value since he bought it.

But this particular suit, I have to say, is utterly ridiculous, and will almost certainly get thrown out of court.

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Saving money — everyone hates it. Americans spent the period between the early 1980s and the financial crisis failing miserably at saving. In 1982 Americans saved 10.9% of their income; by 2005 the savings rate had fallen to just 1.6%.

Since the financial crisis, personal savings have rebounded, hovering between 3% and 5% ever since. But this relatively new boost in Americans’ savings, it turns out, is not equal opportunity. Nearly 30% of households don’t have access to a savings account, according to a FDIC report released this week. Another recent report suggests 28% of Americans have not saved anything at all.

The IMF has a new paper which looks at the relationship between income inequality and savings in America. (The gap between America’s rich and poor hit a 40-year high in 2011). “Lower income growth,” the authors write, “was linked to the drop in saving rates and growing indebtedness of American families”. The authors argue that without higher home prices or growing incomes, Americans are still not saving enough to fix their post-crisis financial situations.

Keyu Jin, who looks at the differences between Chinese and US savings patterns, finds big generational gaps in US savings: “the fall in savings in the US is largely due to higher borrowing by the young (rather than a fall in middle-aged Americans’ savings rate)”. Middle-aged Americans, Jin writes, actually increased their savings, relative to GDP, from 1992 to 2009.

If you’re worried that you’re not saving enough to keep up, the bad news is that you’re probably right. The rule of thumb says that you need to save at least eight times your final annual income to pay for retirement.

The good news, however, is that saving more is pretty much all you have to do. James Saft points to a new study by Putnam, which has an interesting conclusion: simply saving more and funneling it into your retirement account earned better returns than magically trying to pick the best funds or perfectly allocating your assets. — Ryan McCarthy

The CFA Institute recently interviewed 1,259 of its members from all around the world and from every aspect of the financial-services industry to ask them about Libor. And the results are clear:

Clearly no one believes that Libor makes any sense the way it’s currently set up. Libor, CFAs are agreed, should reflect actual interbank borrowing rates, not some hypothetical estimated rate at which banks think they could probably borrow if they wanted to.

What’s more, Libor submission should be a regulated activity (70% agree, 18% disagree); and the regulator should have criminal sanctions available to it (82% agree, 9% disagree).

As for the key question of what should be used as an alternative benchmark, responses varied, with no one rate in particular standing out as popular. But only 7% of respondents said that there was no alternative viable rate. Libor should be regulated, phased out, and replaced with something else.

All of which will take a little bit of time, but not a lot: less than 10% of respondents think it could take more than 3 years.

In the next year or two, we are going to see a succession of gruesome headlines around Libor manipulation: Barclays was only the first. As a result, even the big banks who contribute to Libor are likely to be quite keen to put this tarnished measure behind them. First change it, then render it obsolete. As quickly as possible. Even the professionals agree.

Is simplicity the new new thing? The front page of the new issue of Global Risk Regulator — the trade mag for central bankers around the world — features an excellent article by David Keefe about Sheila Bair, Andrew Haldane, and calls for a “return to simplicity”. Bair tells Keefe that “we’re drowning in complexity”:

“The public is tired of rules they don’t understand,” she said, adding: “We should be simplifying the rules, we should be simplifying the institutions for which the rules are made, but it’s going in the opposite direction.” …

Bair said she was in “wholehearted agreement” with Haldane’s attack on the complexity of regulation.

“Regulation”, in this context, means one very specific thing: Basel III, the new code governing the world’s banks. No one is advocating that it be abolished: it’s clearly much more robust than its predecessor, Basel II.

But if Basel II was horribly complicated, Basel III is much more complex still — and, as I and others have been saying for the past couple of years, that’s a real problem. Ken Rogoff puts it well:

As finance has become more complicated, regulators have tried to keep up by adopting ever more complicated rules. It is an arms race that underfunded government agencies have no chance to win.

More recently, bankers themselves have started saying the same thing: yesterday, for instance, Sallie Krawcheck said that the complexity of financial institutions “makes you weep blood out of your eyes”.

So perhaps there’s a consensus emerging that regulation needs to be simplified, trusting heuristics more while spending less time and effort complying with thousands of pages of highly-detailed rules. What matters is not whether financial institutions dot every i and cross every t, so much as whether they are behaving in a safe and sensible manner. After all, one of the main reasons that we haven’t seen any high-profile criminal convictions of bankers for their roles in the financial crisis is just that their compliance officers were generally very good at staying within the letter of the law. Which didn’t really help the system as a whole one bit.

But there are lots of very good reasons why even if we are reaching a consensus on this, that doesn’t mean there’s much if any chance of some new simple system ever actually coming into place.

For one thing, the window of opportunity has closed. In the immediate wake of the financial crisis, regulators found agreement that they should get tough: that had never happened before, and it’s likely that it will never happen again. Even in the Basel III negotiation process, national regulators tended to push hardest for regulations which would be felt the most by banks in other countries, rather than their own. But at least everybody was in the vague vicinity of the same page. Without another major crisis, no one feels any real urgency to implement yet another round of major regulatory change, especially before Basel III has even been implemented. And without that sense of urgency, nothing is going to happen.

And more generally, there’s a ratchet system at play here. It’s easy to make a simple system complex; it’s pretty much impossible to make a complex system simple. All of us live in a world of contracts and lawyers — and the financial system much more than most. Financial regulation will become simpler the day that contracts become shorter and easier to understand, which is to say, never.

How has the financial-services sector managed to make an ever-greater proportion of total profits over time? By extracting rents from complexity. As a result, any attempt to radically simplify anything in the sector is going to run straight into unified and vehement opposition from pretty much every bank and financial-services company in the world. (Note that Sallie Krawcheck, like Sandy Weill, only started criticizing bank complexity after she left the industry.)

So while banks opposed Basel III, at least they got increased complexity out of it, which means that the barriers to entry in the industry were raised. Which is good for them, and bad for the rest of us. Why did Simple, for instance, take so long to launch? Because it’s very, very difficult to create anything simple in today’s banking system. Complexity is here to stay, whether the likes of Bair and Haldane and Krawcheck like it or not. And with complexity comes hidden risks. Which means we’ll never be as safe as any of these people would like.

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The Federal Reserve today announced a third round of monetary stimulus, aka QE3, aimed rather directly at the housing market: the Fed will buy $40 billion of mortgage-backed securities a month indefinitely.

The Fed wants to lower yields on mortgage-backed securities and thereby lower mortgage rates for consumers. This is pretty darn close to “Uncle Ben’s Crazy Housing Sale” that Ezra Klein called for back in July. As the NYT’s Binyamin Appelbaum notes, QE3 has an open-ended timeline and variable targets: the Fed will buy mortgage-backed securities “until the outlook for the labor market improves”. For a close look at exactly what changed since the last Fed statement, the WSJ’s Phil Izzo has the tracked changes, which are significant.

The Fed says that its “highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens”. This, as Felix notes, is a big departure:

The job of monetary policy, in the famous words of Fed chairman William McChesney Martin, is “to take away the punch bowl just as the party gets going”. The Fed, here, is essentially disowning Martin, and saying that they’ll keep refilling that punch bowl with high-grade hooch even after the party is getting going.

Will it work in stimulating growth? Markets approved. Longer term, the picture is murkier. Matt Yglesias thinks the message that the Fed will keep rates low through a recovery is more important than the dollar figure. Tim Duy said before the announcement that the message would be more important than QE3 itself. In term’s of the policy itself, Mohamed El-Erian thinks the Fed is stuck in “policy purgatory: incapable of delivering the good economic outcomes it desires, yet unable to exit from an experimental policy stance that risks a widening array of collateral damage and unintended consequences“. — Ben Walsh

On to today’s links:

Charts
Why we need to worry that the US economy is very close to “stall speed” - FT Alphaville

Apple
The iPhone 5 is the greatest phone in the world, as well as cruelly boring and utterly amazing - Wired

Regulations
AIG is taking steps to avoid the Volcker Rule - Dealbook

Wonks
The mystery of why fewer women are looking for jobs - Matt Yglesias 
What official poverty rates miss: Widespread consumption inequality - Conversable Economist

Questionable
European banks just won’t stop palling around with Iran - WSJ

Bright Spots
The good news from a bad Census report: Obamacare is working – Mother Jones

Bad News
28% of US households conduct “financial transactions outside the mainstream banking system” - FDIC

Housing
How the government helps homebuyers in America’s richest communities - Reuters

Alpha
Full transcript of Ray Dalio’s interview - CFR

New Normal 
Non-shocking correlation of the day: fewer good jobs means more income inequality - The New Republic

HUH
“We do believe we are currently in a recession,” says guy nobody believes - Business Insider

Tim Kane, at the Hudson Institute, has a new paper out with a simple title: “The Collapse of Startups in Job Creation”. His paper is basically a slightly politicized version of the charts put out by the Bureau of Labor Statistics last month, under the headline “Entrepreneurship and the U.S. Economy”. The first two charts are particularly striking. The first one looks at the number of startups in America — companies less than one year old.

This shows a reasonably steady rise in entrepreneurship from 1994 to 2006, then a collapse as the housing bubble bursts, and — most worryingly of all — no recovery at all after the recession ends. Instead, we have significantly fewer startups right now than we did even at the depths of the recession.

If you look at the number of jobs at these startups, rather than the number of startups, the picture is equally bad, although the decline is older. This series peaked back in 2000, and has been declining ever since:

This doesn’t make a lot of intuitive sense. As Kane writes,

Economic theory suggests that the modern economy offers a better environment for even more entrepreneurship. First, there is a wider technology frontier to explore. Second, a wealthier society enables more individuals to explore rather than merely work to survive. Third, the shift to services requires less startup capital than manufacturing or agriculture. In other words, the downward trend in the rate of entrepreneurship should, in theory, have rebounded by now.

Kane thinks that it’s something to do with taxes and regulations; I don’t buy it. But he also has a globalization argument:

An American entrepreneur has zero tax or regulatory burden when hiring a consultant/contractor who resides abroad. But that same employer is subject to paperwork, taxation, and possible IRS harassment if employing U.S.-based contractors.

Are jobs at US startups effectively being offshored? I don’t know. But I do know that small business is where the jobs are, in this economy. Here’s the chart:

The green line, at the top, is the number of jobs at small businesses, with less than 50 employees. The red line, underneath it, is the number of jobs at medium-sized businesses, with somewhere between 50 and 500 employees. And the steadily-declining blue line, at the bottom, is the number of jobs at large businesses with more than 500 employees. Clearly, if we want to boost job creation, the best place to look is not the blue line but the green line. And equally clearly there has been an increase in the number of jobs at small firms overall, since the recession ended.

So if small firms in general are hiring again, what’s the problem with startups? Kane has run the numbers back to 1989, to come up with this chart:

There’s really nothing predictable about the dismal showing in the last three years of this chart — and especially not in the last two years, when we’ve had a recovery accompanied by record-low interest rates.

Admittedly, all of these numbers are low: at their peak, startups employed only a little more than 1% of the population, and now they employ a little less than 1% of the population. Concentrating on startups is not going to move the broader employment needle very much. But the dynamic here is surprising and troubling, all the same. Intuitively, if people can’t find work for an existing company, they should be more likely, not less likely, to go out and found a new company themselves, instead. But that doesn’t seem to be happening.

The only thing I can think of here is that for all that we think of startups as being largely high-tech things, in reality a huge number of them are in the construction industry, in one way or another. In a word, subcontractors. And no one’s starting new granite-countertop installation companies right now. But still, startups are a decent proxy for the dynamism of an economy. And these charts don’t bode at all well, on that front.

It’s basically the same thing that we’re used to at this point, but it’s got enough in the way of new bells and whistles to get people excited anyway — and boost economic growth. So, it’s a good thing, even if it’s not in any way revolutionary.

I’m talking about QE3, of course, although I could equally well be talking about the iPhone 5. You’ve heard more than enough already about the iPhone’s larger screen and new connector and so on and so forth, so let’s talk about monetary policy instead.

The main news isn’t the fact that the Fed is back in the market, buying bonds. Indeed, as Binyamin Appelbaum points out, QE3 in volume terms, at $40 billion per month, is significantly smaller than QE1 and QE2.

The innovation comes rather in the messaging. For instance, we haven’t seen anything like this before:

If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.

What this means is that QE3, unlike QE1 and QE2, has no set expiry date. The Fed’s not trying to kick-start the economy any more: instead, it’s promising a steady extra flow of monetary fuel for the foreseeable future — or at least until the labor market improves “substantially”. Which is likely to be a pretty long time.

That would be a big enough deal on its own, but the Fed went even further in the following paragraph, where they all but promised zero interest rates until mid-2015:

The Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.

The job of monetary policy, in the famous words of Fed chairman William McChesney Martin, is “to take away the punch bowl just as the party gets going”. The Fed, here, is essentially disowning Martin, and saying that they’ll keep refilling that punch bowl with high-grade hooch even after the party is getting going.

Of course, there’s wiggle room here, but the Fed has invested a lot in its own credibility, so it’s fair to believe that it’s going to do what it says it’s going to do.

And so while the headlines are all about QE3, the real innovation here is that the Fed is moving aggressively into the world of words rather than deeds. Buying bonds isn’t enough any more: the Fed is now trying to boost the economy by promising to continue buying bonds, in a zero-interest-rate environment, for many, many quarters to come. It’s the promise, rather than the purchases themselves, which is the main difference between QE3 and its predecessors.

In his Jackson Hole speech, Ben Bernanke had a whole section on “Communication Tools”, talking about the “use of forward guidance as a policy tool”, and saying that it has been pretty effective up until now. Today’s announcement is a huge bet on those tools, basically using them to a degree unprecedented in recent history.

The Fed is also specifically targeting mortgage bonds in particular, on the grounds that lower mortgage-bond yields will feed through into lower mortgage rates, which in turn will feed through into healthier housing prices. That’s a stretch: mortgage rates have not been falling in line with mortgage-bond yields, and in any case the relationship between mortgage rates and house prices is tenuous at best. But the Fed has to buy something, if it’s going to do QE operations, so mortgage bonds it is.

None of this is going to make any noticeable difference before the presidential election: it’s all marginal, really. But if it seems as though QE3 is having a bit more of a real-world effect than QE2 did — if, that is, it helps the job numbers rather than just the markets — then the lesson will be clear. The Fed’s balance sheet is a powerful tool to use — but its vocal chords might be even more powerful still.