Felix Salmon

For me, one of the more interesting tracks of the Aspen Ideas Festival is the series of conversations about education. Aspen is the natural habitat of America’s overconfident plutonomy: the kind of people who are convinced that since they have been successful themselves, they are therefore qualified — more qualified than education professionals, in fact — to diagnose problems and prescribe solutions. The ultimate example of this in recent weeks was the firing of Teresa Sullivan as president of the University of Virginia, by rich trustees who had no substantive beef with her at all. Instead, they just didn’t like her reluctance to sign on to various inchoate strategies, which sound great in a mass-market leadership book but which are unlikely to be particularly helpful in the context of a venerable educational institution.

These people have all read their Steve Brill, and have watched (or even funded) Waiting for Superman. They’re generally convinced that bad teachers are The Problem, and seem to think that that reforming the nation’s education system is a task somehow akin to akin to remaking General Electric. Measure everything, work out who’s good and who’s bad, and fire the underperformers: half of the problem is solved right there. Then, look at the great teachers, the inspirational ones, and the ed-tech innovators. If America’s remaining teachers just take a leaf out of their books, and start doing the things that work really well, that’s the other half of the problem addressed.

This year, however, the tone of the discussion was different — not least because the American Federation of Teachers appeared on the list of corporate underwriters, alongside the likes of Ernst & Young, Mercedes Benz, and Pepsico. (And Thomson Reuters, too.) The AFT is all too often considered to be some kind of reactionary force of darkness, interested only in ensuring that all teachers, no matter how bad, have jobs for life. But with the AFT literally setting the agenda at Aspen, that changed in constructive ways.

Education is horribly complex, but I think it’s still possible to put together a stylized model of the main forces at play. The dramatis personae would look something like this:

• The kids. Everybody claims to be working for the sake of the children, and accuses everybody else of ignoring their needs. This is possible because, until now, the kids haven’t really had a voice of their own. But that might be changing. Even if they don’t have some kind of formal seat at the table in Aspen, the ed-tech revolution might well see them engaging with apps and websites and other students in their class and around the world, essentially voting with their attention spans and with the data they collectively generate. And while much of that activity will be imposed on them by parents and teachers, much of it will come from the kids themselves. The study of how children choose to interact and learn is going to become much more empirical and quantifiable, and the consequences for education can only be positive.
• The parents. Can be stereotyped into two broad categories: call them active and passive. Active parents would be the educated middle classes, who helicopter their kids, second-guess their kids’ teachers, and take a very active role in their kids’ educations, often choosing where they live on the basis of how good the local schools are perceived to be. Passive parents would be much more prone to simply outsourcing the job of teaching their children to the school system, leaving it to do its job, either because they don’t feel that they know better, or because they’re simply too busy or overwhelmed to be able to engage with their children’s education in such an expensive and time-consuming manner.
• The teachers. Everybody agrees that teachers have an enormous influence on educational outcomes, although just how enormous is very hard to quantify. They like job security (don’t we all), and generally work extremely hard putting together lesson plans together using resources provided not only by their own school or school district, but also ideas and tools they find online. It seems reasonable to assume that the more they believe in what and how they’re teaching, the more enthusiastic and successful they’ll be.
• The teachers’ teachers. Education schools have one main role: to turn students into effective teachers. They also have a secondary role, of researching what works and what doesn’t in education. By all accounts, they’re not doing a particularly good job at either of these. The latter might (or might not) be improved with more funding for primary research; the former is harder still to improve. AFT chief Randi Weingarten’s latest big idea is to implement a kind of bar exam which all teachers would have to pass, whether they went to a formal teacher’s college or not — essentially moving the idea of test-based teaching up a notch from the classroom to the teacher academies.
• The management. Everybody from the principal, to the school board, to the mayor, to the state education department, to the federal education department, to the president of the USA. Collectively, they control the very large amount of money All of these people have ideas about what works, things that they want to change, and political and managerial constraints on what they can realistically achieve. They also tend to want to consolidate power wherever on the chain they happen to sit.
• The unions. Have a long history and a path-dependent future. No one would choose to have four-inch-thick contracts and the kind of adversarial relations with local politicians that we see in all too many American cities, including New York and Washington. But it’s entirely reasonable that teachers should have a union to represent their interests in the face of various managerial meddlers, most of whom in one way or another want to exert power downwards onto teachers. In many cities with Democratic party machines, the teachers’ unions can have substantial power.
• The ed-tech crowd. The educational possibilities inherent in a networked world of students and teachers with tablets and broadband are enormous, and we’re only just beginning to glimpse what might be achievable. Ed-tech people come in both for-profit and non-profit flavors; both of them tend to be very excited and bullish about America’s educational future, certainly once schools get properly wired.
• The reformers. Tend to be rich, well-intentioned, well-educated, and self-confident; they’re a bit like super-concentrated active parents, who are interested in the wellbeing of all kids, rather than just their own. They often love their own kids’ teachers, but are convinced that many other kids suffer greatly under bad teachers, and want to rectify that. They’re not shy about exerting their own substantial political influence, and in principle they’re happy to find common cause with the ed-tech crowd.

It seems to me that although there are always tensions between the management and the unions, the real fight here is between the teachers and the reformers. Both sides try to capture the management, with various degrees of success, and the result is all too often unhelpful fights and squabbles rather than constructive engagement and grown-up attempts to make sustainable and incremental progress.

One big axis of tension is between the long-term view of the teachers and the unions, on the one hand, and the shorter-term view of pretty much everybody else, on the other. Is it possible to radically transform an entire educational system during the tenure of a single elected official, or before your tween enters high school? Realistically, no, it isn’t. Good teachers and good principals stay in the same place for decades and tend to take a long view of things; politicians and parents and children and venture capitalists, on the other hand, don’t have that kind of luxury. As a result, they tend to want to do big, drastic things which could have immediate results, whether it’s nationwide testing, or vouchers, or charter schools, or a multi-billion-dollar wiring of classrooms, or a mass culling of underperforming teachers, or a large-scale move onto some trendy new online educational platform.

Such moves are always politically difficult, and that’s probably a good thing. There have been educational revolutionaries for as long as there has been education, and no system can work in a state of constant turmoil, with a succession of bright ideas replacing each other in a chaotic and endless process. Most of these ideas have been tested on a relatively small scale; almost none of them have shown lasting results at a large scale. Which, admittedly, is partly due to the fact that measuring results is incredibly difficult.

Which brings me to what I think is the greatest promise of the ed-tech crowd: the ability to collect large amounts of empirical data. This isn’t happening yet. But as technology inexorably enters America’s classrooms, a fabulously rich source of data should emerge, and will be a wonderful means by which to judge the competing claims of various different schools of educational thought. “Try everything,” said Eric Schmidt in his Aspen session, “and measure it”. Which seems like a great idea to me. It’s not easy: it will require, for one thing, the ed-tech crowd to come up with generally-agreed standards for anonymized educational data, and a universal agreement that all data should be made public — on an anonymized basis — rather than being kept secret on the grounds that it’s valuable proprietary information.

But there’s a really big problem here, and that’s the strong move on the part of reformers to fire underperforming teachers. The first thing you need to know if you want to fire the underperformers, of course, is who those underperformers are. And the best way to find that out is to use all that lovely new ed-tech data. As a result, teachers tend to be very suspicious of any attempt to collect data about them and their students: they fear that such moves are a means of collecting dubiously-reliable empirical evidence which will ultimately end up getting many of them fired.

In theory, teachers should be fine with sharing anonymized data; the only problems arise when that data is used in things like performance reviews. But in practice, once data starts being collected on an anonymized basis, it’s likely to be only a matter of time before principals or school boards or some other part of the management decides that the data is the obvious place to go when they want to start firing bad teachers. Even if the data wasn’t collected with that use in mind.

As a result, my feeling is that the ed-tech world should converge quite aggressively on a set of anonymized-data standards, and spend quite a lot of effort explaining to various management types that the data is great for comparing teaching methods, on an aggregated basis, or working out which technologies are getting the most enthusiastic uptake — but that it should not be used for comparing teachers, on an individual basis.

In which case, how should bad teachers be fired? I do have sympathy for reformers and parents who put that action at the top of their to-do lists, and I’m even willing to believe the assertion, which I heard a few times at Aspen, that a handful of bad teachers can end up significantly bringing down the performance of an entire school. At the same time, however, if you look at say Finland, or some similar educational system with very high outcomes, you’ll also find almost no teachers being fired. Or, to put it another way: if bad teachers can bring down the performance of a school, then good schools can bring up the performance of all their teachers. Look at the various super-principals who get occasional gushing media coverage: they can turn around schools, given time, and generally don’t need to fire many or even any teachers in order to do so.

Super-principals don’t scale, of course. But unless and until there is robust empirical evidence that the firing-bad-teachers approach significantly improves educational outcomes, my feeling is that it probably belongs in the “quick fix” bucket. And I’m suspicious, on principle, of all quick fixes: some of them work, but many don’t. And all too often the teachers who end up getting fired aren’t actually the worst teachers after all.

Zooming out a bit, I suspect that whether and how we fire teachers is not going to be the main determinant of future outcomes. And indeed I think that all of the efforts of the managers and the unions and the reformers are going to be much less important than any of them think. Instead, I’m most excited about the idea that all of them can get disintermediated, and that students and teachers and parents, from the bottom up, will start adopting new educational technologies which could end up having a profound effect on how America’s children learn.

A lot of ed-tech companies, quite naturally, are focused on selling their products to school boards, and on capturing some part of today’s substantial textbook budgets. I’m sure that some of them will find success that way. But I’m more interested in the technologies which bubble up from the students and the teachers and the parents, and which might then ultimately get ratified by the management, long after they have been broadly adopted in practice.

Places like Aspen tend to attract educational revolutionaries, many of whom give good speech. Some of them will end up inspiring teachers and students; others won’t. But I don’t think we should be trying to pick winners here. The only large-scale, top-down thing I’d be inclined to embrace would be wiring classrooms; everything else should be pushed down. School boards will empower principals, principals will empower teachers, and teachers will empower students. Instead of one-size-fits-all, we’ll have a vibrant, heterogeneous system customized not only to states and cities but even down to the level of the individual student. It will involve much of the current management giving up their power and control, but it’s probably inevitable, sooner or later. Let’s embrace it, and trust that the less we try to control the way we educate America’s kids, the better educated they’re going to end up being.

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Bob Diamond, the CEO of Barclay’s, is under increasing pressure (a $450 million settlement over charges of manipulating a key interest rate will do that). The governor of the Bank of England declined to call Diamond “fit and proper” to run the bank. For American readers, that’s British English for ‘I’m not saying he shouldn’t be fired, but…’

The Financial Times has called on him to resign, saying “if he had an ounce of shame, he would immediately step down”. The FT cites this almost too-poetic quote from Diamond: “Culture is difficult to define but for me the evidence of culture is how people behave when no one is watching”.

The vitriol isn’t new. In 2010, Bloomberg Markets wrote that “in some UK media and political circles, Diamond is the personification of a greedy banker, a symbol of all that has gone wrong in global finance”. Diamond’s public comments since have done little to change this view.

In 2011, he was called the “unacceptable face of banking” by Lord Mandelson, despite forgoing a bonus in 2008 and 2009. Last year, Diamond told Parliament that “there was a period of remorse and apology for banks, that period needs to be over…The biggest issue is ‘How do we put some of the blame game behind us?’…There’s been apologies and remorse, now we need to build some confidence”. (Diamond pulled in a $10 million pay package last year.)

Shareholders haven’t really agreed. Diamond faced angry protests at an April shareholders meeting as “the bank paid million-dollar bonuses to its senior executives while earnings and the share price fell”.

On Wednesday, Diamond agreed to forgo a bonus over the LIBOR scandal, but the limited, legalistic phrasing of Diamond’s new letter to Parliament won’t do him any further favors. He says that “the authorities found no evidence that anyone more senior than the immediate desk supervisors was aware of the requests by traders”, but is silent on the extent of his and the firm’s knowledge, irrespective of what regulators found.

Diamond also dodges the the issue of ultimate responsibility: “I accept that the decision to lower submissions was wrong”. He tries to get points for pointing to the “level and speed of [Barclay's] co-operation” with authorities. As Joseph Cotterill says, the problem is that cooperating fully with authorities is categorically different than fully informing them.

Unlike Jamie Dimon, Bob Diamond may not be able to fall back on his past performance and could only have his own missteps to point to. – Ben Walsh

On to today’s links:

EU Mess
The Spanish bailout is “effectively a back-door bailout of reckless German lending” - International Financing Review
Europe finally moves a bit closer to a banking union - WSJ

JPMorgan
By letting its risk manager retire  - rather than firing her – JPMorgan let her walk away with $21 million - Bloomberg
What happened to Ina Drew’s clawback? – Felix

Compelling
“Wicked problems” and why the health health care debate isn’t over - New Yorker

Must Read
Inside the staggering wealth of China’s political elite and its likely next president - Bloomberg

Investigations
Cameron issues a not-so-subtle attack on Bob Diamond - Bloomberg
A request for a Leveson-style inquiry into Britain’s banks - HM Government e-petition

Crisis Retro
“It is the worst deal in the history of American finance” - WSJ

Troubling
Wall Street is still ignoring next year’s “fiscal cliff” - Fortune
The odds of a deflationary global recession are rising - Business Insider

Wonks
“Maybe there are no good governmental nudges” - American Banker

Right On
An open letter to anyone who posts a picture of food on Instagram - McSweeney’s

Really?
“A Big Idea from Aspen: Ending Universal Suffrage” - John Carney

Oxpeckers
The subtle differences between “Star fucker” and “star-fucker” at the New Yorker - New Yorker

Charts
Corporate profits fall for the first time since the recession - NYT

Vox Pop
What healthcare professionals think of the SCOTUS Obamacare ruling - BuzzFeed

Odd Rebuttals
Economists do understand the economics of eggs - Globe & Mail

When he was testifying to Congress, Jamie Dimon hinted that there might be clawbacks of bonuses with the CIO group — the group which lost as much as $9 billion, shattered public trust in the bank, and turned Dimon from a hero into a goat.

Top of the list, when it came to clawbacks, had to be Ina Drew. She was in charge of the CIO, she let the London office become an uncontrollable beast, and she was paid eight-figure bonuses on the grounds that she was going a spectacular job of managing risk. Since we now know that she wasn’t doing a spectacular job of managing risk, JPMorgan not only can but must take some of those bonuses back. Otherwise, the lesson for JPMorgan executives will be clear: if your bets blow up after you’ve received your bonus check, don’t worry, it’s safe with you.

Well, guess what: Drew’s gonna get to keep her bonuses, according to Bloomberg’s Dawn Kopecki.*

Drew wasn’t fired; she was allowed to resign. As a result, she gets to keep, for herself, a whopping great slew of unvested stock and options. Understand: the whole point of vesting is as a retention device. You hand out stock which doesn’t vest for four or five years, as a way of ensuring that the employee in question hangs around for that long: they know that if they leave prior to the vesting date, that element of their compensation is worthless.

Unless, it seems, you work for JPMorgan: Drew had $17.1 million in unvested restricted shares and about $4.4 million in options, and all of them seem to have vested as of May 14, when she resigned. They were meant to incentivize her to work hard; instead, they have turned into a lovely farewell gift from the bank.

It’s unclear how much of that equity in JPMorgan was given to Drew as part of her bonuses over the past couple of years. But some part of it was. So if there was a clawback, JPMorgan would have wound up forcing Drew to forfeit some of her restricted stock. And it didn’t:

While Dimon told lawmakers in separate hearings this month that the company could claw back two years of bonuses, Drew’s pay probably won’t be affected, according to compensation consultants…

JPMorgan’s long-term incentive plan gives Dimon, with approval from the board, the right to reduce Drew’s restricted stock or to further defer vesting if her performance wasn’t satisfactory, according to an amendment to the company’s proxy statement on executive compensation. Restricted stock also can be deferred longer or forfeited if performance has “been unsatisfactory for a sustained period of time.”

If Drew had forfeited any restricted stock or options, the company would have had to disclose it in a public filing with the U.S. Securities and Exchange Commission, Glassner said. Securities laws require any changes in stock ownership to be reported within two business days of the transaction, according to the SEC.

This I think is a huge problem with clawbacks, at least when it comes to senior executives. They get their bonuses annually pretty much as a matter of course, whenever the bank makes a profit and quite often even when it makes a loss. Those bonuses are based on (usually high) unrealized profits, and (usually low) unrealized losses. If the profits in the final analysis turn out to be much lower, or the losses much higher, then the bonuses should retroactively be decreased. But in practice, doing that seems to require some kind of ex-post performance review, where the board determines that the executive’s performance was unsatisfactory.

Bank boards are rubber-stamping muppets, whose job is to never rock the boat. What’s more, the motion to clawback his key lieutenant’s bonus would have to have been put to the board by its chairman and CEO, Jamie Dimon, and I’m sure he could come up with a dozen reasons off the top of his head why he didn’t want to insert such unpleasantness into a board meeting.

So long as clawbacks require board action, I suspect they’ll remain all but nonexistent. Boards have long had the right to dock large amounts of compensation when they fire someone for cause, and that almost never happens. In the wake of the CIO blowup, two things are clear. Firstly, clawbacks will never happen to a current employee: you’ll never see someone continue in their job, while simply repaying a portion of a bonus which was, with the benefit of hindsight, incorrectly calculated. And secondly, clawbacks will almost never happen to ex-employees, either, especially not if they were trusted senior executives who have been allowed to resign rather than being fired for cause.

Or, to put it another way: if you thought that the existence of clawbacks might in itself work as a risk-management tool, think again. They’re an ultra-rare punishment device, not the routine compensation-adjustment mechanism they should be.

*Update: Adding in the Bloomberg citation by request.

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If you haven’t seen by now, or were, like President Obama, confused by CNN and Fox News – or are already fleeing for Canada – the Supreme Court upheld Obamacare today. The individual mandate, Chief Justice John Roberts wrote in his ruling, is not broccoli or car insurance. It’s effectively a tax (even if Obama didn’t want to call it one).

The court ruled that the penalty for not buying health insurance contained in Obamacare is part of Congress’s wide constitutional power over the tax code. Legal scholar Erwin Chemerinsky, in comments to NPR, put this into context: “Since 1937 not one Federal tax and spending program has been declared unconstitutional”. David Leonhardt helpfully points out that the tax code effectively penalizes Americans for all sorts of things – like not having children.

The economic impact of the ruling is immense. To the right, it’s the “biggest permanent tax increase in history”. To the left, millions more Americans will now have access to healthcare. (In the long term, some 30 million more Americans will have health insurance; the short-term benefits include adding some 3.1 million young Americans to the ranks of the insured.)

The ruling, Jared Bernstein writes, did have at least one dark cloud for Obamacare fans. The bill said the federal government could withhold all Medicaid funding from states that didn’t agree to expand Medicaid coverage to older and poorer Americans. The court shot that portion of the bill down, leading to worries that some states would begin withdrawing from Medicaid altogether. Josh Barro isn’t concerned; the choice is really “should we take this nearly free money from the federal government?”

There are murky long-term issues as well. Jonathan Chait and Tom Scocca both note that five justices ruled that a health insurance mandate not structured as a tax is unconstitutional. To Socca this reading of the Commerce Clause is a serious attack on congressional power over the economy: “Obama wins on policy, this time. And Roberts rewrites Congress’ power to regulate”. – Ryan McCarthy

On to today’s links:

Healthcare
The Supreme Court’s healthcare decision in one paragraph – SCOTUSblog

Legalese
A profile of Chief Justice Roberts, the man who just saved Obamacare – New Yorker
The economics of the SCOTUS healthcare decision – Mark Thoma
There goes the uncertainty crutch for healthcare companies – WSJ

New Normal
Markets can’t prosper without heavy intervention and liquidity injections – Deutsche Bank
Long-term unemployment is doing permanent damage to the US economy – OECD

Negative Indicators
Local governments in China are selling their luxury car fleets – Walter Russell Mead

Wonks
The market’s ability to price risk is “broken at a deep level” – Brad DeLong

JPMorgan
JPMorgan’s botched hedges could cost it up to $9 billion – Teri Buhl
“It’s getting less & less believable that JPMorgan exited 65-70% of its trade”– Lisa Pollock

Banks
Scandal or not, two graphs that show just how sharply interbank lending has fallen – Sober Look

This is Actually Happening
Elizabeth Warren and Scott Brown are arguing over who supported Dodd-Frank more – WaPO

Oxpeckers
News Corp board agrees to split the company up – WSJ
The long history of reporting on LIBOR’s inconsistencies – CJR

Alpha
Phil Falcone’s alleged piggish behavior made him some enemies – Dealbreaker

There’s no secret why Rupert Murdoch is breaking News Corp into two pieces. Amy Chozick explains:

News Corporation had evolved into a successful entertainment company with a newspaper problem, several people close to the company have said.

“The idea this was this integrated media company isn’t true,” said one of those people, who was briefed on News Corporation’s strategy but could not discuss its internal dynamics for attribution. “Everything else managed to do well, and the newspapers had become difficult and even toxic.”

It’s worth underscoring the fact, here, that Fox News, Sky News, and Fox Business are going to end up on the entertainment, rather than the news, side of the divide, while The Daily and HarperCollins join what News Corp describes as “some of the world’s most successful print, digital and information services brands”.

What does this mean for the much-vaunted Digital Convergence? It’s certainly happening in the narrow sense that we will all ultimately get our news and entertainment from things called “screens”, whether they’re phones or tablets or TVs or something as-yet uninvented. But the whole point about screens is that you don’t really look at the screen, rather than through it — to the content being displayed. And nothing shows the power of different types of news than what happened this morning, when the news broke that the Supreme Court had upheld Obama’s healthcare law.

As a rule, everything on the news side of Murdoch’s news/entertainment divide got it right, and everything on the entertainment side got it wrong. If you were watching ScotusBlog, or following the updates from Reuters, or even just trying to keep up with the flood of information on Twitter, the nuances of the decision came out quickly and accurately. If you were watching Fox News, on the other hand, or CNN, you would have been very confused by downright inaccurate reporting.

This is because TV news is ultimately much more an arm of the entertainment industry than it is of the news industry. Its star anchors get paid millions of dollars because they’re popular on TV, not because of their reporting skills; and while the occasional news magazine program will sometimes break news, newspapers and websites have always been the undisputed leaders on that front.

TV is still the leader in one area of news, however, and that’s live events. Which is why the CNN error caused such a big stir: because the timing of the Supreme Court decision was known in advance, there was a lot of anticipation about what the ruling might be, and Americans are hard-wired in such situations to turn to CNN, their trusted source for live, breaking, non-exclusive news. Liveblogs are all well and good, but live video by its nature is just a much more powerful medium for such events than anything text-based.

As we saw with CNN this morning, however, it also has serious reliability problems. And if we fast-forward to how the bipartite News Corp will look in a couple of years, I suspect that the WSJ’s live video feed covering the Supreme Court will be a much more reliable and intelligent guide to what’s going on than anything on Fox or even on CNN.

In other words, print media is converging on TV news, and will ultimately become the kind of trusted source of live-breaking news that CNN used to be. Meanwhile, TV news is never going to converge on the rest of the news industry; instead, it will drift further and further into the realm of entertainment.

All of which is to say that if you want to be a journalist, don’t work in TV. The pay might be better there, but if there’s any real journalism going on there right now, there probably won’t be in a few years’ time.

Last week, I bemoaned the end of the interbank market — a market which looks like it might never come back, and which certainly hasn’t been done any favors by today’s news that Barclays is paying $453 million to settle allegations that it manipulated the key interbank interest rate.

Now Steven Davidoff has an interesting take on a broader phenomenon — that of money-market funds. There are many big differences between commercial paper, on the one hand, and interbank lending, on the other — but those differences are narrowing, and the commercial paper market has to a first approximation become an entirely financial market, a place for banks and shadow banks to do their short-term borrowing while the interbank market remains closed.

According to David S. Scharfstein of Harvard Business School, who also testified last week, of the 50 largest issuers of debt to money market funds today, only two are nonfinancial firms; the rest are banks and other financial companies, many of them foreign.

Once upon a time, before the financial crisis, money-market funds were a mechanism whereby individual investors could make safe, short-term loans to big corporates, disintermediating the banks. But all that has changed now. For one thing, says Davidoff, “about two-thirds of money market users are sophisticated finance investors”. For another, the corporates have evaporated away, to be replaced by financials. In the corporate world, it seems, the price mechanism isn’t working any more: either you’re a big and safe corporate and don’t want to run the refinancing risk of money-market funds suddenly drying up, or else you’re small enough and risky enough that the money market funds don’t want to lend to you at any price. At this point, money-market funds control just $2.6 trillion, down a whopping $1.7 trillion from the $4.3 trillion they had before the crisis.

This is very similar to what is quite familiar in the interbank market: instead of a market where supply and demand are matched at a certain price, we have a market which simply isn’t clearing — where no deals get done at all. The corporates are out entirely, as are a huge swathe of the retail investors; what’s left is financial investors lending to financial borrowers, taking advantage of the fact that the shadow banking system doesn’t have the same kind of capital adequacy rules that the real banking system has.

All the more reason, then, to regulate these animals with a heavy hand. The industry is screaming blue murder, but the louder they shout, the less compelling they sound. As Davidoff says, the money-market industry’s argument basically comes down to saying that it’s important to make retail investors believe their money is secure, even when it isn’t. And that’s not the kind of argument that any regulator should have any time for.

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It’s always the emails:

“always happy to help,”…“Done…for you big boy,”

“Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”.

Those are the thanks sent to Barclays employees for manipulating key interest rates. The gloating, conspiratorial tone is in full public view now that the bank has settled charges with the CFTC, the Department of Justice and the FSA that it manipulated Libor and Euribor for just over $450 million. CEO Bob Diamond promptly apologized in a written statement, and he and three other top execs will forgo bonuses this year. Breakingviews’ George Hay notes that the scandal confirms the worst of the public’s view of banks and thinks that the “full costs of the affair for Diamond and Barclays will be more than just financial”.

The benchmarks in question represent the rate at which banks in Europe lend to one another. They’re calculated based on banks’ responses to surveys on current market interest rates (the full explanation is available here). The settlement documents show that Barclays submitted inappropriately low rates, aiming to keep Libor and Euribor artificially low. Sober Look has a great chart showing an example of just how off the mark Barclays’ rates were:

The importance of Libor and, to a lesser extent, Euribor, is hard to overstate. They are used to value of hundreds of trillions of dollars of financial instruments. Or as Matt Levine puts it, they “set the rates on pretty much all the loans and swaps in the world … CFTC order mentions $350 trillion of [over-the-counter] swaps, $10 trillion of loans, and $437 trillion of CME eurodollar contracts indexed to Libor alone”.

In that context, it’s fair to ask what’s $450 million compared with a scheme like that? Not much, proportionally. And Barclays won’t face criminal prosecutions, because of what the DOJ calls its “extraordinary cooperation”. Individual employees, though, are the subject of ongoing criminal investigation. – Ben Walsh

On to today’s links:

EU Mess
Former Spanish central bankers thought Spain would be just fine – NYT
Dalio: Germany might not save Europe – Zero Hedge
Full text: The EU’s latest proposal for a closer monetary union – European Union
Merkel will not accept debt sharing without increased budget control – Reuters

TBTF
Reverse synergy: Too-big-to-fail banks are currently worth less than the sum of their parts – Bloomberg

Contrarian
Why shareholders don’t actually own public companies and are hurting America – Jesse Eisinger

Crisis Retro
The market for “safe”, tax-exempt real estate-backed bonds is booming in Brazil – Brazilian Bubble

Takedowns
“Fiscal policy something something”: Central banks’ latest lame excuses – Economist

Scary
The IMF’s fully updated database of 147 banking crises – IMF

New Normal
How five terrible years for young workers could affect the election – Businessweek

Oxpeckers
WSJ intern fired for fabricating sources – Politico

RIP
Nora Ephron is dead at 71 – NYT

“In a way,” says Jeffrey Goldfarb today, “the scandal may have been the best thing to happen to News Corp,” on the grounds that Hackgate is likely to end up forcing Rupert Murdoch to spin off his newspapers, along with HarperCollins, into a new, separate company.

I can see what Goldfarb means: it’s probably fair enough, if you’re writing for a service like BreakingViews, to assume that whatever is good for a company’s share price is good for that company. But from a journalistic perspective, the news at News is much less good.

I was at the Loeb Awards gala dinner tonight, where the WSJ’s Jerry Seib won the Lifetime Achievement Award. He’s been at the WSJ since 1978, and in his acceptance speech he talked about the culture shock which descended upon the newspaper after it was bought by Murdoch. At the same time, however, he welcomed it: “there’s a reason it’s called the News Corporation,” he said — and he’s right. Murdoch, at heart, is a news man, and although most of his wealth is attributable to sports and entertainment, it’s clear that his heart is very much in journalism. Moreso, it should probably be said, than most of the Bancrofts who sold him the Journal.

In the short term, this makes sense. It would give the entertainment company more latitude to operate without the reputational baggage associated with News International, and if anything it would allow Rupert Murdoch to further consolidate his control of his newspapers, since the valuation of the spun-off company would be low enough that he could quite easily take it entirely private, if he wanted. Rupert Murdoch won’t be any poorer after this deal is done — in fact, he’ll be richer, thanks to the eradication of the “Murdoch discount” — and so his newspapers’ charmed lives as playthings of a billionaire who doesn’t care much about ROE is likely to continue either way.

But so long as the print properties remain public, shareholders are going to be even noisier about making them pay than they are right now. At the moment, News Corp shareholders mostly just want the newspapers to go away. But after the spin-off, shareholders in the new company will be agitating noisily for profits. Murdoch will ignore them, of course — but that kind of thing is difficult to ignore entirely.

Up until now, Murdoch has never really needed to worry very much about his newspapers’ profitability, because the rest of his empire was throwing off such enormous profits. That’s going to change. Even if he does take the papers private, none of his heirs particularly wants to inherit them. There’s a big question mark over the papers’ future, now, which will only grow as Murdoch gets older.

There’s also the fascinating question of what’s going to happen with Fox News. When News Corp loses most of its news properties, only Fox News and Sky News are likely to remain — and when big broadcast companies own news operations, those news operations tend not to perform very well. The fact that news is part of News Corp’s DNA has surely been a crucial factor in Fox News’s success; now that’s coming to an end, Fox News’s new overseers might view the channel in a significantly different light.

Again, nothing is going to happen overnight: Murdoch will continue to have personal control of both companies, and both will be run exactly the way he wants them to be run. But in the world of journalistic business models, I’ve always been a fan of being owned by a benign gazillionaire, who cares about more than just profits. Both Bloomberg and Reuters fall into that category, as do outfits such as the Atlantic, Condé Nast, and The New Republic. But Murdoch has always been the first billionaire you think of when you think “press baron”. And it’s foolish to believe that a change as big as this at the corporate-structure level will have no effect on his individual properties.

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It isn’t yet a full-fledged housing recovery, but it is good news of a certain kind: The Case-Schiller Index shows that average home prices increased 1.3% in April, after seven consecutive months of decline. April also showed the smallest year-over-year decline in home prices since September 2010:

What’s driving the tentative recovery? If you ask the National Association of Realtors, it’s partly because of shrinking home supply. Calculated Risk, who says it’s likely home prices have bottomed nationally, dismisses concerns about how backlogs of distressed homes may affect home prices:

Policy initiatives (refinance programs, emphasis on modifications, REO-to-rental and more) will lessen the downward pressure from distressed sales – and I also think any “overshoot” will be in real terms (inflation adjusted) as opposed to nominal terms. It is probably correct that any increase in house prices will lead to more inventory (sellers waiting for a “better market”), but that is an argument for why prices will not increase – as opposed to an argument for further price declines.

Binyamin Appelbaum wonders if an unusually warm winter could have influenced April’s numbers, as it influenced other economic indicators. Weather effect or no, April’s gains were also widespread, with 18 of 20 cities showing price improvement.

Mortgage lenders won’t like that Americans are more concerned about paying off car loans than home loans, though. Nor is it necessarily encouraging that when capital is needed for public housing, it comes not from state or local governments but from China. It’s also not good news, with credit hard to come by for many would-be home buyers, to hear of more difficulties at Freddie Mac. – Ben Walsh

Politicking
Mitt Romney’s history as a hedge fund manager (of sorts) – Fortune
Congress may delay America’s impending fiscal catastrophe by a few months – Bloomberg

EU Mess
Martin Wolf: Spain ‘s biggest mistake wasn’t fiscal – it was joining the euro – FT
Greece’s new finance minister is nicknamed “Mr. Euro” – Reuters

Wonks
“Stabilizing prices is immoral” – Interfluidity
We’re already in a “blindside recession” – John Hussman
Price stability, “happy shocks” and the problem with overabundance – Izabella Kaminska

Insert Fox News Joke Here
News Corp is considering splitting its news and entertainment businesses – WSJ

Charts
A helpful reminder that Treasury rates are falling as the federal debt is rising – Joe Weisenthal

Apple
Orbitz decides Mac users should see more expensive hotel listings – WSJ

Charts
Your pension is probably badly underfunded – WSJ
Actually September isn’t the worst month for financial crises – Post Libertarian

Intriguing
A new card that combines your credit cards into one – TechCrunch

New Normal
Modern London as an expensive, gated and foreign-owned skyscraper – Guardian
“Cities are living things, and the construction of the Shard is proof that London’s still very much alive” – Felix

Aditya Chakrabortty doesn’t like the Shard, the huge new skyscraper nearing completion next to London Bridge station, across the river from the City of London. It’s certainly a monument to the 0.01%: owned by the government of Qatar, and featuring Michelin-starred restaurants catering to guests at the five-star hotel; the hedge-fund managers who will rent out the office space; and of course the plutocrats in the 10 monster apartments (for sale at prices starting at $47 million or so).

Aditya’s not happy about this at all: the Shard, he says, “both encapsulates and extends the ways in which London is becoming more unequal and dangerously dependent on hot money”. The inequality point is inarguable, but it’s also inevitable, in any global financial center. And as for the dangerous dependence on hot money, that I’m less sure about.

Aditya cites “Who owns the City?“, a report from the University of Cambridge which shows that 52% of the City of London is now owned by foreigners, up from 10% in 1980. That’s a trend, not a hot-money capital flow: after all, the trend survived the financial crisis unscathed, even as property values plunged. He writes:

As the Cambridge team point out, the giddy combination of overseas cash and heavy borrowing leaves London in a very precarious position. Another credit crunch, or a meltdown elsewhere in the world, would now almost certainly have big knock-on effects in the capital.

I’ve read the Cambridge report, and I don’t really see them saying that at all. The closest they come is this:

For global financial office markets such as the City of London, functional specialisation not just in financial services but in internationally‐oriented financial services lock the fortunes of the occupier market to the state of the global capital markets; while growing international ownership and specialist global financial and real estate investment vehicles help to lock the investment and occupier markets together in a way that increases both upside and downside risk…

The locking together of occupier, investment, development and financing markets both within the City and across financial centres contributes to an inherent, systemic risk.

The point being made here, in less than crystal-clear language, is that the owners of the City are the same as the occupiers of the buildings in the City. Which means that if there’s a big bust in the world of international finance, the owners won’t just want to sell, they might well move out, as well — causing a double whammy to London office prices.*

But a reduction in London office prices is what Aditya wants! It would reduce inequality, and more generally it would provide a dividend of glossy and expensive real estate to a population which could never have afforded it on its own. That was Dan Gross’s point in Pop — while bubbles are bad for the people who invest in them, they’re generally good for the economy as a whole, which sees a lot of investment which would otherwise not have been made.

London’s a financial center, and like all other financial centers, it gets a lot of tax revenue from the financial industry. Come another credit crunch, that tax revenue will fall. But for the time being it makes sense to welcome the revenue, and the infrastructure improvements which international financiers are happy to pay top dollar for.

The fact is that new skyscrapers always cause an outbreak of nimbyish bellyaching. Here in New York, Christine Quinn, our probable next mayor, is refusing to come out and endorse a relatively modest addition to Chelsea Market, because although it makes sense from a city-wide perspective, the locals don’t like it. They never do.

But cities need density, and if they’re not going to degenerate into anachronism, they need big, expensive, modern skyscrapers. Especially if they aspire to being a financial center. Some of the criticisms of the Shard are just silly: the idea, for instance, that it somehow ruins the view of the Tower of London. What view of the Tower of London? You certainly couldn’t ever see it from London Bridge station, and in general the Tower is famous for being the least recognizable major landmark in London. I used to work as one of those tour guides on top of open-topped double-decker buses, for a summer, and I can assure you that long before the Shard was built, there was really nowhere you could get a good view of the Tower. Your best bet was to drive north across Tower Bridge, but even then the Tower itself just kind of shrinks into the riverbank, and a lot of tourists had no idea what they were meant to be looking at.

London is a city of large buildings on narrow streets (try finding the entrance to investment bank NM Rothschild one day), and the Shard is just the latest extension of that idea. I, for one, welcome it to the London skyline, even if I never set foot inside the place. It’s certainly a lot more interesting — and adds a lot more value to the city — than the bland mid-rise office buildings which Washington is doomed to, given its strict height zoning. Aditya’s right that the Shard hasn’t — yet — improved the lot of its immediate neighbors, but building nothing on that spot would hardly have been better for them.

I suspect that over time, the Shard will attract more money and gentrification to London Bridge in general, which is great news if your worry, like Aditya’s, is the area’s “deprivation and unemployment”. Cities are living things, and the construction of the Shard is proof that London’s still very much alive. And that, as Woody Allen would say, is definitely better than the alternative.

*Update: Colin Lizieri of Cambridge University writes to add that he was making another point, too: that diversification into office space in different financial centers is not really diversification at all, since the owners and occupiers of all that property are increasingly the exact same businesses, or at least very highly correlated ones.

It’s becoming something of a trend these days: good report, bad press release. The latest example comes from John Liu, the New York City comptroller, who is warning about New York’s bikeshare program. “LIU: BIKE SHARE PROGRAM PEDALS PAST SAFETY MEASURES” says the release (geddit?) — and certainly that’s the message received by the New York Times, which wrote up the news under the headline “Bike-Share Program May Mean More Accident Suits Against the City, Liu Warns”.

The report itself, by contrast, is much less alarmist, and mostly extremely sensible. Biking in New York is dangerous, for cyclists and pedestrians both, and it’s important to make it safer. Especially as thousands of new bikeshare riders are going to start wobbling their way around largely-unfamiliar streets. Here’s the scary chart:

The blue curve is the well-known safety-in-numbers effect: as biking becomes more popular, it also becomes safer. New York is an outlier here, and not in a good way.

Charles Komanoff has some on-point criticisms of Liu’s report, and if you read his report closely you’ll notice one big flaw in the chart. The x-axis shows bikers as a percentage of total commuters, while most bike trips in New York are not home-to-work commutes at all. If you included all New York cyclists, New York would have a higher ratio of cyclists, and fatalities per cyclist would go down. Put it this way: the chart is taking the total number of bike fatalities, and dividing it by the total number of bike commuters, rather than the total number of bicyclists as a whole. That results in low numbers for cities like Portland, where cyclists are much more likely to commute to work, and high numbers for cities like New York, where they’re much more likely to just be running errands, or shopping, or meeting friends.

That said, New York needs to become safer for cyclists and pedestrians both, and Liu has some very sensible proposals for helping it do that. The city should put a lot of effort into maintaing signage, bike lanes, and intersections, especially the most dangerous ones: the effect of that could be huge. It should expand the Safe Streets for Seniors program, which helps older New Yorkers navigate safely around vehicles of all types. It should educate bikers and drivers both on bike safety and the rules of the road; drivers in particular should look out to make sure they don’t cut in front of cyclists when making a turn, and also leave extra space when passing a cyclist just in case the biker has to swerve around a pothole.

The recommendations continue: kids should get taught bike safety at an early age. The “5 to ride” pledge should be promoted to all businesses with bike messengers or delivery people. There should be more police on bikes, and they should start handing out tickets to cyclists speeding through red lights or dangerously salmoning. On top of that, they should start ticketing cars and vans in bike lanes. And just generally be tougher on traffic. As the report says:

New York’s roads are an interactive, multi-modal system; increased enforcement from any surface modes will increase safety across all other modes. Through greater enforcement of speed limits and greater traffic signal compliance, the roads will be safer for all users.

Liu also wants to beef up New York’s overworked and largely ineffective Accident Investigation Squads; that’s a great idea. And he wants to collect lots of data on biking in New York and make it public. Which is a no-brainer.

Liu is also pushing to make helmets mandatory; I’m not such a fan of that idea. For one thing, I have yet to see any empirical data showing that mandatory helmets increase safety. And in general, insofar as a mandatory helmet law would reduce the number of cyclists, it would also reduce the safety-in-numbers effect. And as the chief fiscal officer of New York, he’s worried that increased biking might mean increased liability in terms of settlements paid out by New York City to injured cyclists. That worry seems small to me: as Komanoff says, the number of new cyclists will only increase the total by about 6%, and the $10 million of insurance that the bikeshare program has is much bigger than the $2 million to $3 million that New York has paid out annually in the past three years.

Overall, however, I’d say that the report is a very positive thing. And in that it stands in contrast to the press release, which quotes John Pucher of Rutgers University as saying that he “would expect at least a doubling and possibly even a tripling in injuries and fatalities among cyclists and pedestrians during the first year of the Bike Share program in New York”. I’ll happily take that bet: it’s ridiculously alarmist, such a rise hasn’t happened in other cities with bikeshare programs, and no such projection is made in Liu’s report. Liu also wheeled out the media-relations guy from AAA New York, of all people, to say that the best way to prevent cyclists incurring serious injuries is to force those cyclists to wear helmets. That’s just depressing: one would hope that a car-drivers’ organization might at least pay lip service to safer driving, rather than putting the onus entirely on the bikers.

I’m very excited about New York’s bikeshare program, and look forward to using it regularly. I hope that the increase in the number of cyclists will help bring a bit more civility to New York’s biking community, especially in terms of stopping at lights and riding in the right direction. Meanwhile, my biggest fear is that we’ll see the opposite: a bunch of people who have no idea what they’re doing, riding on sidewalks, salmoning, and generally causing chaos. I don’t think that’s probable, but it’s possible, and I look forward to Citibike and NYC doing everything they can to prevent it from happening. As they do so, Liu’s report — if not his press release — is likely to be quite helpful.

Steve Waldman is one of the most original thinkers on the internet, and I highly recommend you read his latest piece, “Stabilizing prices is immoral“. You might never think about central bankers quite the same way again, and indeed you could start thinking that they judge themselves according to how assiduously they service the interests of the rich and well-employed.

When central banks see consumer prices rising too fast, they raise interest rates to bring inflation back down under control. That’s a deliberate slowing of the economy as a whole, for the especial benefit of the kind of people who have a particular interest in low inflation. The beneficiaries, here, are lenders, and people who can’t assume that their salaries will rise with inflation. Meanwhile, debtors — and even the economy as a whole — would have been better off, at least in the short term, if the central bank hadn’t acted at all.

Now central banks act the other way, too: they cut interest rates when demand is too low. And when that happens, as Waldman says, the tables are turned:

Whether monetary or fiscal, an antideflationary response to a supply shock implies an increase in aggregate demand which helps keep marginal workers employed. Creditors and secure-but-stagnant job-holders lose out, as the increase in purchasing power they otherwise might have enjoyed via deflation is distributed to other parties.

So, what goes around comes around, right? Not so fast. I’m reminded of when I spent a lot of time looking into the equity premium — the excess return that investors get for holding stocks rather than bonds. Given that the equity premium exists, why doesn’t it get arbitraged away? A lot of the reason is that the premium has an annoying habit of turning up exactly when you don’t need it, and disappearing exactly when you do. Stocks do well when the economy is booming and lots of people have jobs and are getting raises. That’s when they don’t need to turn to their nest eggs. Conversely, in recessions, when people get laid off and need cash, stocks have a tendency to fall quite sharply, even as bonds do rather well.

As a result, there’s a good reason why investors like having bonds in their portfolio, even if they expect those bonds to underperform: there’s much more value to something which does well in bad times than there is to something which does well in good times.

And this is Waldman’s thesis about price stability: it helps out rich lenders in bad times, and helps out poor borrowers just when they don’t really need it.

Under a symmetric policy, creditors and the securely employed purchase their insurance against bad times by foregoing some benefit during good times. That’s still a fine deal. Their overall risk is reduced.

But the opposite is true for debtors, taxpayers, and marginal workers. Just when these groups need a break, when the economy is bad due to an adverse supply shock, they are hit with additional costs in the name of price stability. Sure, when things are good all over, they get some frosting on their cake. Their highs are higher, but their lows are lower. Symmetrical price targeting turns debtors, taxpayers, and marginal workers into high-beta speculators on the state of the broad economy, while reducing the risk exposure of creditors and secure workers. It represents a vast subsidy, a transfer paid in risk-bearing, from debtors, taxpayers, and marginal workers to creditors and secure workers.

But, I’m not completely convinced. Adverse supply shocks notwithstanding, the general rule is that central banks cut rates in bad times, and raise rates in good times. When they cut rates, that’s bad for lenders and good for borrowers. When they raise rates, that’s good for lenders and bad for borrowers. So if you’re a rich lender, you’re unhappy in bad times and happy in good times. Far from insuring the rich against bad times, the central bank seems inclined to kick them when they’re down.

What’s more, over the long term, economies tend to do better if they grow steadily: volatile inflation does no one any favors, compared to the alternative.

Still, I like Waldman’s idea of a government savings account paying 0% real interest to anybody with less than $200,000 to invest. It should be easy to invest your savings so as to protect their purchasing power; in fact, it’s hard. Back in 2010, I asked the world to invent a Gross World Product swap: basically, big multinational corporations could fund themselves at the rate of growth of the world as a whole, while risk-averse investors could buy a proxy which would very closely track global purchasing power. That hasn’t happened yet. So for the time being, a simple index-linked savings vehicle would be a great start. And, as Waldman says, it would be easy insurance against exactly the kind of supply shocks that Waldman is worried about.

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The BIS annual report is out, and you probably won’t read a more depressing economic brief this year. The gruesome details: Global economic growth in advanced economies was halved last year, to 1.6%, amidst an “abysmal fiscal outlook”; we have “a global banking system that is still dependent on economic support”; bank credit spreads are back at levels seen during the height of the crisis; and advanced economies would need 20 consecutive years of surpluses of more than 2% of GDP just to get to precrisis debt-to-GDP levels.

But the world’s central banks are also warning us about themselves. The consequences of endless low rates, the BIS writes, include reduced incentives for indebted nations to cut back and “the wasteful support of effectively insolvent borrowers and banks.” Explaining why world central bank holdings have doubled in the last decade, the BIS does not mince words about who’s to blame:

The extraordinary persistence of loose monetary policy is largely the result of insufficient action by governments in addressing structural problems. Simply put: central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed.

You wouldn’t be wrong to think that sounds a lot like Bernanke’s polite nudging of Congress over the last few years. To Matt Yglesias, the BIS report sounds like a series of excuses. Izabella Kaminska wonders if the world’s central banks have gone all Sartre. Scott Sumner, adding to the philosophical confusion, notes that some economists can’t even agree if the Fed’s post-crisis policies have actually increased the money supply or decreased it. Dismal science, indeed. – Ryan McCarthy

And on to today’s links:

Charts
The world’s billionaires in one chart – WashPo

Regulations
Ex-regulator, on the billion-dollar MF Global loophole: “It’s what the industry wanted” – NYT
Your pension fund, now even more underfunded – NYT
The CFTC would prefer to regulate in private – NYT

Remuneration
John Thain, Wall Street’s “Father of the Year,” and other silly banker awards – Bloomberg

New Normal
Old vs young: America’s raging economic resource battle – NYT
Prison REITs – Barron’s
September is the cruelest month (for financial crises) – Greg Ip

EU Mess
George Soros calmly suggests the EU has only three days to form a fiscal union – Bloomberg
The growing difference between what Angela Merkel says and what she does – David McWilliams
Real political union is fiscal union, and that means transferring wealth – Fistful of Euros
Schaeuble: “Excuse me, but the desire for improvement is a basic condition of human existence” – Der Spiegel
And now Cyprus has requested a bailout –Bloomberg

Welcome To Adulthood
Only 55% of new law school grads land a job within nine months – WSJ

Alpha
The market would like more high-yield bonds, if you’ve got any – Sober Look

Munis
Baltimore may sell advertising on its fire trucks. Syracuse may sell ads on its helicopters – NYT

Supremes
Scalia dissents: “Interior decorating is a rock hard science compared to psychology practiced by amateurs” – New Yorker

Baby Steps
Morgan Stanley advisers will soon send tweets from a library of pre-written messages no one wants to read – NYT

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Sony Kapoor has a very good post on the Spanish bank bailout today, explaining that when Spanish credit spreads rose in the wake of the bailout, that had nothing to do with the fact that bailout funds were senior to privately-held bonds, and everything to do with enforced austerity.

The clever thing about Kapoor’s post is that he explains this empirically, through simple force of arithmetic. Basically, channelling new money to a liquidity-constrained debtor is always good for existing creditors, even if the new money is senior. That’s obviously the case if the new money prevents insolvency, but it’s also the case if it doesn’t:

Imagine a country has an NPV of expected future primary surpluses equal to x euros, which defines its sustainable debt carrying capacity and that its debt stock is y euros; we don’t need to say whether x is bigger than y or not. Now on a date say the 1st of Jan 2013, it gets a public bailout equal to z euros. Its debt repayment capacity is x+z euros as it now has the equivalent of z euros in a bank and its total debt is now y+z euros. If y>x then y+z>x+z and nothing changes. Assume x = 0.8 y, then bondholders would face a 20% haircut, whether before or immediately after the public injection of z euros.

Now imagine that the z euros bailout is at a concessional rate of interest. Then it will improve the sustainability of debt, all else remaining the same and increase the potential pay out to private bondholders. Equivalently, if the country invests the z euros it obtains in NPV positive projects, the sustainability of its debt improves, making the outcomes for private bondholders more positive.

So why are Spanish bond yields now so much higher than they were before the bank bailout? Isn’t the bailout a good thing? Not necessarily:

There is one exception to this rule, which is when the conditionality accompanying a public bailout is so flawed that it makes the recipient country adopt policies that actually hurt growth prospects and reduce its debt carrying capacity thus increasing the likelihood of insolvency and the size of private sector losses. This is a big and legitimate fear given the current excessive focus on austerity in the Eurozone and may play some part in the panic around Spain.

The logic here is scary, but also entirely coherent: the more bailout funds a country gets, the more it ends up being forced into austerity programs which will ultimately do more harm than good.

On the other hand, there’s hope here, too. If Mediterranean Europe eventually manages to tear Germany away from its unhealthy austerity addiction, then all this extra liquidity in the Eurozone could trigger a significant tightening in sovereign yields. Even if it’s subordinating those bonds at the same time.

In the latest issue of the Atlantic, I have a short piece under the headline “The End of the Checkbook” — something which can’t come quickly enough, at least for me. The video above is a bit of fun, and the result could be easily tweaked just by changing the distance I walked to the ATM, but the fact is that even supposedly easy things, like depositing a check by taking a photo of it, are in reality quite hard and full of frustrations.

The time in the video is absolutely the minimum amount of time needed: it was done over a very fast wifi connection, in a well-lighted room, with all the necessaries, including a pen and my ATM card, to hand. A few days later I tried to deposit a couple of checks when I was at home, and the process took me a good ten minutes, partly because it was nighttime and therefore shadows kept on falling over the checks when I tried to photograph them. “Can’t read check. Please retake photo.”

I never write checks, but I still receive them with some regularity, nearly always in the mail. When the check is for a lot of money, I’m always a little bit astonished that people are still entrusting such large sums to the US Postal Service. And it’s not just the post office which can lose checks, either. I don’t open every single piece of mail I receive, and sometimes a letter which looks like junk turns out to have a check in it. Other times, a check is attached to the bottom of some long letter, after a perforation, and it doesn’t always look like a check at first glance. And then, once you receive the check, you have to remember to deposit it, rather than having it slowly drown in a to-do pile of paper somewhere.

All in all, I’m quite sure that over the 15 years I’ve been in the States, I’ve somehow failed to deposit at least a few checks along the way, and that most of the time it’s been entirely my own fault. It’s an incredibly anachronistic system, though, and I don’t really see why there’s such an onus on me to open my mail and recognize the check and successfully deposit the check. All of those things are easy enough that we get them right 99% of the time, but even at 99% accuracy we’re still talking about 3% of checks going undeposited. And no one would dream, today, of regularly using a payments system with a 3% failure rate.

But this is a collective action problem: it can’t be solved by any single bank, and the solution really needs to be imposed by an activist Federal Reserve. Which, sadly, has a laissez-faire attitude towards payments systems, and generally thinks it shouldn’t get involved. As a result, Americans are going to be living in a second-best world of physical checks for decades to come. We deserve better, and we’re not going to get it.