Felix Salmon

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The world’s plutocrats are currently heading to a more “dynamically resilient” — and possibly more complacent – Davos. Don’t expect much introspection, and definitely don’t expect much debate on the hard-to-define “value of finance”.

At the DLD Conference in Munich today, Peter Thiel had an interesting take on the rise of financial services. America’s past 80 years, he said, can be divided into two periods: From 1933 to 1973, real incomes rose 350%; from 1973 to 2013, they rose just 20%. While Americans have remained optimistic about economic growth, Thiel thinks they’ve become uncertain about its sources. That uncertainty, Thiel says, drives Americans to try to benefit from the economic value of others rather than creating it themselves. Because of this, investing in markets generally takes priority over funding specific businesses.

Thiel’s theory of how America prefers to take risks may help explain why the financial reform has been so slow. Washington has been working on finalizing the Dodd-Frank financial reform laws for four years, and it will be another four before we know if it worked, the Washington Post’s Suzy Khimm writes. Along the way, regulators have missed 37% of their rulemaking deadlines. It’s not that the sweeping Dodd-Frank bill has been delayed in full — Jared Bernstein notes that the Consumer Financial Protection Board is thankfully up and running. But the wait to see the Volcker Rule, in particular, will be a long one, Dan Primack writes: Goldman Sachs has gotten around the rule by simply waiting for it to be finalized.

Thiel’s theory also helps explain why today’s reforms aren’t likely to change finance’s role in the economy, and why the white-collar service sector more broadly is a larger and larger part of GDP. It also provides a structural rationale for Bob Rubin’s twenty years of “extraordinary proximity to political power”. — Ben Walsh

On to today’s links:

What could go wrong
The new “holy grail” for money managers: leveraged bonds and derivatives - WSJ

Prophecies
A short history of wildly inaccurate predictions made at Davos – Andrew Ross Sorkin

Central Banking
Bank of Japan notices last decade or so hasn’t been great, raises inflation target – BOJ

Wonks
The case for deficit optimism – Ezra Klein
A conman faked a career as an economist and became an adviser to the World Bank – Independent
Inequality is holding back America’s economic growth – Joseph Stiglitz
Yes, you can have full employment “based on purchases of yachts, luxury cars, and the services of personal trainers” – Paul Krugman
Why financial markets are inefficient – Roger E.A. Farmer

Facebook
Feelings are hard to forget – Science

Missed Opportunities
Why we don’t have a la carte pricing in cable TV – Sports Economist

TBTF
Regulators have asked Germany’s biggest bank to simulate its own break-up – Bloomberg

Alpha
Long weight-loss, short eternal youth – NYP
A bunch of hedge fund managers jump in a freezing lake for some reason – Bloomberg

EU Mess
And now workers at 3 bailed-out Spanish banks are going on strike – Reuters

Oxpeckers
Lionel Barber’s full memo to FT staff outlining a “digital-first” strategy – Guardian

Bundesbank president Jens Weidmann gave a speech yesterday in which he warned of “increased politicisation of exchange rates” and a potential “devaluation competition” between currency zones. The speech was timely: it came as the Bank of Japan doubled its inflation target to 2%, adding fuel to the strong trend of the past six months, where the euro has been appreciating while the yen has been getting significantly weaker.

It’s easy to see what Weidmann is worried about here: according to UniCredit economist Marco Valli, a 10% rise in the euro’s value will reduce eurozone GDP growth by 0.8%. On top of that, Weidmann is certainly right that the Bank of Japan has become increasingly politicized, and it’s less independent than it used to be.

But it’s worth having a bit of perspective, here. Firstly the euro is still much more competitive, against the yen, than it was before the crisis. Here’s the five-year chart, which shows that if there’s any competitive devaluing going on, then Europe did it first.

And of course neither currency zone is really engaged in any kind of currency war at all — what we’re seeing here is just the natural consequence of growth expectations and the interest rates that result from them.

Interestingly, Weidmann kicked off his speech — well before the “independence of central banks in danger” section — by quoting economist Michael Woodford with approval: “Not only do expectations about policy matter, but (…) very little else matters.” And really all we’re seeing in Japan is the first real effort from the central bank to wrestle with the implications of that fact, and to try to force the Japanese population into a stance where it genuinely expects inflation rather than deflation. (Deflation, of course, is something of a self-fulfilling prophecy: if you expect prices to fall, then you’ll hold on to your money rather than spend it, which causes prices to fall.)

What’s more, the fact is that Japan is more likely to fail than to succeed: like most Japanese policy actions for the past couple of decades, this one looks like it’s too little, too late. When it comes to 2% inflation, the reasonable stance of the Japanese population is “I’ll believe it when I see it” — which in turn means that they’re not going to do either, any time soon.

I’m sure that the Japanese government is happy about the weakening yen. But these are not the opening salvos in some new currency war: instead, the yen should be getting cheaper, just because the Japanese central bank should be doing everything in its power to increase inflation expectations and nominal GDP growth. This move is what you’d expect if the yen moved in line with the kind of monetary policy that makes sense.

And as for central bank independence — well, that battle was lost during the financial crisis, I’m afraid. When it comes to globally coordinated policy actions, central banks should not be independent, and in general the more independent they are, the less effective they have been. Nominal independence is a good thing: we don’t want the finance minister announcing interest rate moves, as used to happen in the UK until about 15 years ago. Central bankers are like judges: they should be technocrats, rather than politicians.

But the fact is that the last genuinely independent central banker was Alan Greenspan, who blew two enormous bubbles and was in many ways the prime cause of the global financial crisis — mostly by being far too laissez-faire, and keeping interest rates far too low for far too long. Central bank independence gave him the kind of credibility that he’d never have had if the president had been setting the exact same monetary policy, more’s the pity.

For the time being, then, let’s not worry too much about central bank independence or about currency wars. Global interest rates are very low and are going to stay very low for the foreseeable future, and that’s pretty much all the monetary policy that the world has. Currencies will fluctuate, of course. But don’t blame central bankers for that.

I’m in Munich, for the DLD conference, where Ben Horowitz took the opportunity to introduce the Rap Genius guys to the European digital-media crowd. But it’s actually Horowitz’s partner, Marc Andreessen, who has the best explanation of what the investment is all about:

Back in 1993, when Eric Bina and I were first building Mosaic, it seemed obvious to us that users would want to annotate all text on the web – our idea was that each web page would be a launchpad for insight and debate about its own contents. So we built a feature called “group annotations” right into the browser – and it worked great – all users could comment on any page and discussions quickly ensued. Unfortunately, our implementation at that time required a server to host all the annotations, and we didn’t have the time to properly build that server, which would obviously have had to scale to enormous size. And so we dropped the entire feature.

Andreessen calls this “annotate the world“, and, as he notes in his post, it’s a very old idea indeed; the prime example is of course the Talmud, although you can probably trace it back to Socrates and even earlier. Up until now, however, annotation has been given short shrift on the web.

We’ve had a few other things instead: there’s commenting, of course, which is being constantly reinvented but never seems to be done well, and there’s also the kind of layered editing history one finds at Wikipedia, which is very hard to navigate. The promise of Rap Genius is to take the granularity and teleological iteration of Wikipedia edits, and make give them the visibility of a comments section.

But is the opposite possible? Recently, two different people told me on the same day that they were going to launch a comments section based on annotations — where readers comment on individual sentences or paragraphs or arguments, rather than a story or post as a whole.

The promise here is twofold: it helps the conversation stay on topic, and it also raises the possibility of really improving the original post, keeping it updated and accurate, all through crowdsourced technology.

I like the idea of moving from comments to annotations, if only because existing commenting technology just hasn’t worked well at all, and just about anything else would probably be an improvement. It shouldn’t be distracting, however, which is a problem: the annotations at Rap Genius are very obvious, because they’re the heart of the site, while most bloggers and news organizations would not want to give their commenters quite that much prominence. And of course it should be social: I’m certain to be particularly interested in the comments of my friends.

The first versions of these systems are going to be clunky and annoying — version 1.0 of anything always is. The only way to learn what works in practice is to roll something out and see what happens. But if this takes off, it could be a significant evolution in the way that we talk about web content. Right now, for instance, if I want to link to something somebody said on a web page, I’ll normally just end up linking from Twitter to an undifferentiated page, rather than to the specific thing being said. And more generally, the conversation around things like blog posts tends to happen mostly on Twitter and Facebook, where it’s easy to miss and almost impossible to archive.

It would be amazing if annotation could change all that, helping to make comments more on-point and also providing a centralized archive of the conversation around any given story. I doubt that Rap Genius will be the company to do that, but internet comments are more of a bug than a feature these days, and I do think that annotation is a very promising way of potentially addressing the problems they have.

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The full transcripts of the Fed’s 2007 Open Market Committee meetings are out! To financial nerds, this is a bit like opening Christmas gifts from five years ago: some things look quaint and misguided, others seem ahead of their time.

There’s no shortage of embarrassing nuggets in the Fed’s early discussions of the financial crisis. In a March meeting, Ben Bernanke believed the housing market would stay strong; even in December, he said “I do not expect insolvency or near insolvency among any major financial institution”. There’s also cattiness: Richmond Fed President Jeffrey Lacker, as Neil Irwin pointed out, appears to accuse then New York Fed president Tim Geithner of leaking information to Bank of America’s CEO.

The transcripts also reveal a very polite, measured group of singing canaries. Binyamin Appelbaum writes that in August that the Fed “began its long transformation from somnolence to activism”, eventually cutting rates and expanding the use of the discount window. To Cardiff Garcia, if there’s a “winner” of the FOMC’s transcripts it’s Janet Yellen. In September, Yellen warned of “utter devastation” in the private equity and mortgage markets, and “severe illiquidity” in the secondary markets for mortgages, securitized products and some interbank loans. A month later, Randall Kroszner was warning of a wave of mortgage rate resets. By December, Geithner was worrying about a “deep and protracted recession”, Eric Rosengren was fretting about derivatives, and Bernanke was sure that the crisis would eventually hit Wall Street (though several members of the Fed didn’t seem to agree).

There are two larger stories here: just how long it took the Fed to catch on to what would turn out to be the biggest financial downturn since the Great Depression — though it appears Jim Cramer’s August 2007 rant about the Fed’s lack of action was basically right. It’s also about the Fed’s puzzling over — and sometimes lacking — crucial economic data. In December, Kroszner complained about the lack of good data on the mortgage market and called for “hiring people who can analyse these things”:

Something that was disheartening to me is that the Mortgage Bankers Association said that they hope by early next year to be able to provide sufficient information to the market so that people can really assess on a loan-by-loan basis what’s in their CDOs, and that’s a real concern.  The information is simply not out there.  So it’s not just confidence or concerns. People are now looking carefully and saying, ‘I just don’t have the information to be able to make an assessment.’

– Ryan McCarthy

On to today’s links:

Crisis Retro
Tim Geithner’s legacy was cementing Too Big to Fail – Simon Johnson

Charts
This is why you’re fat, America - Sarah Kliff

Demographics
Congress adds six women, loses seven businesspeople and a mustache – Businessweek

Cephalopods
Goldman making 109% more market than last year (just don’t call it trading) – John Carney

TBTF
Morgan Stanley reaches “pivot point”, increases profit 23% – Dealbook

Politicking
House Republicans consider the positives of putting off national disaster for a few months – WaPo

Do The Right Thing
The honesty of the long-distance runner – El Pais

Leaders
Jamie Dimon, transparency illusionist – Jonathan Weil

Legitimately Good News
Finally, it’s getting harder to buy a house in America – Matt Yglesias

Legalese
“The shape in question doesn’t diverge considerably from the norm or what’s usual in that sector” – Bloomberg

Takedowns
Jason Linkins tears apart an infinitely silly trend story on guns – Huffington Post

Long Reads
The best long reads of 2012 – Readlists

Today’s WSJ article on political-intelligence shops, and one called Marwood in particular, is a bit of a peculiar fish, and I’m very glad that it comes while Matt Levine’s great post yesterday on SEC insider-trading investigations is still fresh in our minds.

As Levine shows, in a fantastic take on Sheelah Kolhatkar’s Businessweek cover story about the hunt to nail Stevie Cohen, the SEC is extraordinarily diligent when it comes to insider-trading investigations. It will look at literally millions of phone calls and other communications whenever it thinks that insider trading might have taken place, and it seems to work from the assumption that if a hedge fund takes a large position in a stock before a big piece of news is announced, then that’s prima facie evidence that something fishy might have been going on, and is probably worth investigating.

In this case, clients of Marwood — a political-intelligence agency featuring various members of the Kennedy clan — received a prescient note just before a very important FDA announcement which sent shares in Amylin Pharmaceuticals tumbling. A less diligent agency would simply stop there, and say OK, the note explains why various Marwood clients might have shorted the stock in the run-up to the announcement. But the SEC has kept on going, and has now issued subpoenas to Marwood, trying to work out whether it might have had inside information.

The WSJ story paints a pretty compelling case that Marwood was just smart, rather than insidery — that it genuinely earned its money in this case. But of course the SEC is going to be dogged here, and look under every rock, before allowing itself to come to that conclusion.

Still, as Levine reminds us, “SEC investigates run-up to big stock-price move” is not much of a story. So instead the WSJ zooms out a bit, and is running with a different headline entirely: “Buying ‘Political Intelligence’ Can Pay Off Big for Wall Street”. And here’s where the WSJ starts getting into much rockier territory. Sure, in this one case, Marwood came out with some very smart and valuable intelligence — although it only made money for Wall Street if you took the right action, and not all of Marwood’s clients did that. But beyond this one event, the WSJ actually presents no real evidence at all to buttress its headline. Instead, it basically rests the entire non-Marwood part of its thesis on this one thin paragraph:

The political-intelligence business has expanded rapidly over a decade as government decisions have come to play a growing role for some on Wall Street. Investors spend more than $400 million a year for such intelligence, according to Integrity Research Associates, which follows the research industry. Its founder, Michael Mayhew, said hedge funds tell him the “single largest source of gains for them has been what’s going on in Washington.”

It’s surely true that hedge funds pay a lot more attention to Washington today than they did a decade ago. But the WSJ never defines what it means by “political intelligence”, and I suspect that a huge amount of the business is just shops like Eurasia Group or Medley Global Advisors, thinking deep thoughts about political realities and charging their clients large amounts of money for them.

There’s that big number, though, too: would hedge funds pay $400 million a year for something if it didn’t give them a slightly bigger edge than that? Well, the fact is that they don’t pay $400 million a year for political intelligence. Michael Mayhew, the source of that number, is talking his book here, and the WSJ should have been much more skeptical. Because here is where the $400 million comes from:

Based on Integrity Research’s analysis, the global market for policy research and political intelligence services generated an estimated $402 mln in revenue in 2009. This is comprised of the following:

Between 40 to 50 independent research firms generated approximately $120 million in sales of monetary and legislative policy research in 2009.

Between 30 to 50 law firms, lobbyists, strategic consulting firms, and accounting firms also supported ancillary advisory practices for buy-side investors. We estimate that this segment generated slightly more than $36 million in revenue in 2009.

In addition, hundreds of broker-dealers or investment banks produce central bank and legislative policy research for their clients. Integrity estimates that approximately 1.5% of the total research revenues generated by investment banks should be allocated to this type of research. This would represent $246 million in equity commissions globally from institutional customers for policy research and political intelligence services.

While the number of independent firms that produce this type of research grew moderately from the 1970′s, growth in this segment has accelerated by almost 160% since 2000.

The first thing to note is that all of these numbers are generated by an Integrity Research black box, and there’s no particular reason to trust them, given that Integrity Research has every incentive to exaggerate them. The second thing to note is that the number of research shops isn’t growing, which means that any growth numbers have to be based on estimates of what total revenues were in 2000. Those estimates are unlikely to be particularly accurate.

But most importantly, some 61% of the total — $246 million — comes from what Integrity Research hilariously calls “total research revenues generated by investment banks”. Now I’m sure that Michael Mayhew isn’t a complete idiot, so he knows that investment banks’ research arms are loss centers, not profit centers. In fact, they don’t have any revenues at all. What he’s actually looking at is a completely different number: banks’ “equity commissions globally from institutional customers”. And then he’s saying that 1.5% of those institutional-customer equity commissions are attributable to the “central bank and legislative policy research” the banks put out.

This is just laughable. The commissions are paid for trades, not for policy research; no one thinks that a sell-side research note on the new Bank of England governor, say, is really worth any money at all. It’s just part of the service that banks provide their institutional clients.

If you strip out the fictional $246 million, and then apply a few grains of salt to Mayhew’s other numbers, the WSJ’s $400 million starts looking more like $100 million — spread between “40 to 50 independent research firms” and “30 to 50 law firms, lobbyists, strategic consulting firms, and accounting firms”. (The vagueness of those ranges is also worrying: how can Integrity Research estimate total revenues if it doesn’t even know how many political-intelligence shops there are to start with?)

Washington, pretty much by definition, is full of Washington insiders. Many of those insiders look at hedge funds’ budgets and see a road to huge riches. But I don’t see much evidence of that here: if the typical political-intelligence shop has more than two or three employees, they’re not making much in the way of profit. And it’s far from clear that their clients are actually making money from them, either.

Gary Sernovitz, a research analyst turned novelist, has 3,500 words in n+1 about Stevie Cohen, trading, and art collecting. That’s about 3,000 words too many: his core thesis is really pretty simple. Cohen’s art collecting, says Sernovitz, holds up a mirror to his professional life: both are about the “struggle against the mortality of the edge”.

The idea here is that contemporary artists and stock-market traders — both of which Cohen collects — are similarly searching for the “edge”: that original and unique thing which sets them apart from everybody else. And if you look at Cohen’s art collection, it’s long on pieces from radical artists’ “incandescent years” — the years when they were doing something shockingly new. That’s what Cohen looks for in art, and it’s what Cohen looks for in traders, too: not people doing the same thing as everybody else in a slightly better way, but people who aspire to doing something that no one else is even attempting.

The “edge”, in art and in trading, never lasts long, and Cohen is himself exceptional in that regard: he’s been generating alpha for much longer than most traders ever can. But crucially he has done that by collecting: he himself is no Picasso, reinventing himself in one genius new incarnation after another. Rather, he finds the people who have that edge right now, he hires them, and then, when they lose their edge, he’s ruthless about firing them.

When Cohen looks around his trading floor, then, he sees the same thing that he sees when he surveys his art collection: a group of extremely talented and mostly quite young men, at the peak of their powers, engaged in a doomed and heroic struggle against their own inevitable decline, which will coincide with somebody else’s rise.

I like this idea, although I have no idea whether it’s true or not; I can certainly see how it would appeal to a novelist. Cohen, in this telling, becomes a latter-day Dorian Gray — only in this case his pictures, which reflect the way he seeks to dominate the world by collecting exceptional talent, are on full public view.

Naturally, if this were a novel, it would have a tragic ending: Cohen’s hubris would lead inexorably to nemesis. But real life is not always that tidy. Cohen might be facing unusually large redemptions right now, but he’s already made his billions; his wealth is liquid, and he’s not going to let a few insider-trading investigations damage his legacy as an art collector.

A lot of art-world observers are not-so-secretly hoping that Cohen will get his comeuppance and be forced to sell a large chunk of his collection. But it’s not going to happen. Cohen’s a master collector: he’ll sell only if and when he wants to. And given that he’ll never need the money, it’s hard to see why he’d ever feel so inclined.

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Tomorrow, the world’s second-largest economy will release its economic growth figures. China’s growth, as Keith Bradsher writes, is expected to pick up again, for the first time in seven quarters.

The consensus says that China’s fourth quarter growth will come in at 7.8%, lower than the government’s targets of 8%. But even at a growth rate that’s more than double America’s, the world’s Very Serious People believe this is a precarious moment in China. Both Ian Bremmer and Nouriel Roubini list China as one of their top risks for 2013.

China is in the middle of one of the biggest Keynesian economic experiments in history. Last fall, after spending roughly $580 billion in post-crisis stimulus, China tried to bring its economy back to life with $156 billion more for the kind of roads, bridges and trains that Keynesians love. It’s also spending $250 billion a year, the NYT writes, to produce “college graduates in numbers the world has never seen before”.

While China is applying Keynesian solutions to its current problems, however, Tyler Cowen says China’s problem are more of the Hayekian variety. What Hayek called malinvestment — things like disastrously-constructed high-speed rail, bridges to nowhere and ghost towns — seems to be helping China’s political elite to become increasingly rich. All that stimulus, the argument goes, could lead to a bubble-ridden, half-finished wasteland.

A few other problems with China’s focus on government-driven growth. Besides the usual inflation worries, China, Nick Edwards writes, has one of “the world’s widest rich-poor gaps”, which threatens the country’s stability. To Peter Orszag, this is is particularly worrisome: researchers have found that no other country has made “the transition from middle to high income with high levels of inequality”. Though there’s some disagreement on whether China’s income inequality is improving or “dangerously high”, we still don’t have official data, nor will we get it in tomorrow’s promised figures. China’s government hasn’t released official income inequality statistics since 2000. — Ryan McCarthy

On to today’s links:

Alpha
On the trail of SAC’s alleged “black edge” in its trades – Businessweek

TBTF
We’ve made Too Big to Fail approximately 3 times worse – Andy Haldane
Spending billions of dollars on mortgage settlements fails to boost Bank of America’s earnings – Reuters
Citi spent $1.3 billion on settlements and legal expenses in the fourth quarter - NYT

Explained
Markets step in from stage left and have a McLuhan moment with DC - Neil Irwin

Anti-Goldbuggery
“The S&P has beaten gold over every 30-year period of history, ever” – Noah Smith

Oxpeckers
“These constructions acknowledge a truth: our actions are increasingly passive online” – Choire Sicha
How Pete Peterson captured the mainstream media – Remapping Debate

Wonks
“Even the driest definitions of human social development will inevitably carry a strong whiff of ideology” – Jay Ulfeder

New Normal
Running away to join the circus no longer a path to job security – LAT

Correlation
Party identification and gun ownership – Nate Silver

Listicles
“Genuine apocalyptic events” and 149 other things that scare smart people – Motherboard

Video
Extreme pogo sticking exists, and it’s rad – Devour

Facebook
Facebook is launching free calling for US iPhone users – WSJ

The Fed
Are you there, Ben Bernanke? It’s me, Matt – Not Graphs

Things We Are Not Linking To 
Wearing plaid = liberals embracing gun culture. BuzzFeed’s fake trend story

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In the unlikely event that you were harboring deep anxiety about the profitability of Goldman Sachs or JP Morgan, you can skip the Xanax. At the big banks, profits are very much back.

The new Goldman Sachs, Stephen Gandel writes, looks “a little bit like the old Goldman Sachs”. Goldman today reported that its fourth quarter profit rose 53% and full year earnings jumped 70%. The bank also pulled $6 billion in revenue from its own investments for the year, or 17% of its overall revenue. Goldman even found time to placate the rival — and overlapping — factions of employees and shareholders by cutting the amount of revenue going to employees, reports Lauren LaCapra. At 38%, Goldman’s compensation ratio is second lowest since the bank went public. Still, in absolute dollars, bank employees got a bump: comp rose 6% over last year.

Things were even better at JP Morgan: the bank set fourth quarter and full year profit records, an increase of 54% over last last year’s fourth quarter and 12% over 2011’s full year results. Despite the break-out profits, CEO Jamie Dimon was forced to accept just a $10 million bonus in penance for the botched trades in the bank’s Chief Investment Office.

While Wells Fargo enjoys the fruits of the mortgage market, John Carney points out that Goldman and JP Morgan are doing much the same in the corporate bond market. Fixed income underwriting fees for the year  were up 25% at Goldman and 79% at JP Morgan. Corporate America is apparently following Lloyd Blankfein’s sage advice to borrow at low rates, he notes.

There was one year-end review that wasn’t as glowing: JP Morgan’s internal report on the dissecting of Bruno Iksil. As Felix notes, the report doesn’t tell us much about how the CIO office’s losses ballooned into the billions. Also troubling, says Matt Levine, is the fact that no senior manager was getting anything but heavily massaged data; even if that information was accurate, it wouldn’t necessarily help them understand the CIO’s dizzying synthetic credit positions. — Ben Walsh

On to today’s links:

New Normal
Nearly a third of working American families don’t earn enough to pay for necessities – WaPo

JPMorgan
JPMorgan’s disastrous London Whale trade, an oral history – FT Alphaville

Facebook
Facebook new mission: become a social “engine of discovery” – Wired

Charts
The US government is morphing into “the world’s largest insurance broker” – Nate Silver
If there’s gonna be a global currency war, here’s how it’ll go down – Euromoney

EU Mess
Germany is taking back $36 billion in gold from foreign vaults – Bloomberg
Germany’s gold move could be a purely domestic move — or it could be much worse – Mohamed El-Erian
Let’s not canonize Mario Draghi just yet – Economist

Commodities
Did lack of Wonder Bread push bread prices up in December? – Heidi Moore

Oxpeckers
Some ads more native than some other ads – CJR
NYT reporter criticizes how much the kids spend; kids criticizes NYT reporters math – The Billfold

Housing
Goldman Sachs and Morgan Stanley chip into wrongful foreclosure settlement – AP

Alpha
Your next Treasury Secretary owns low-cost index funds, which is comforting – Tim Fernholz

Ugh
Insiders describe the costly foreclosure review process as a “facade” – Huffington Post

Remuneration
Bankers who need a $12 app to know if they got a crappy bonus shouldn’t be bankers – iTunes Store

Good Luck With That
Single men are moving to North Dakota in droves – NYT

TBTF
BofA wants to use its famed sense of timing to re-enter the mortgage market – WSJ

Yesterday saw the launch of Gobank, an exciting new bank from Green Dot. If you know about Simple, it’s at heart the same thing: mobile-first, no fees, very easy to use, and built by Real Internet People. (Green Dot acqu-hired Loopt for $43 million last March, giving it the requisite tech savvy to build Gobank; and indeed Green Dot itself was a Sequoia-backed startup, once upon a time.) At both banks, you basically do everything with either the app or your debit card — but although Green Dot is new to the bank-account space, it has been offering debit cards for many years, and so has pretty well-tested technology on that side of things.

Gobank does have some advantages over Simple. For one thing, as part of a large public corporation, it has more resources at its disposal, and is able to launch in fully-fledged form, with mobile check deposit, iPhone and Android apps, and the like. (At Simple, these things come slowly.) Gobank even offers you the ability to transfer money easily and directly from Simple, or any other checking account, straight into your Gobank account: you just type in your debit card number and your security code, and transfer as much money as you want. And because Green Dot has a lot of retail locations, it can offer something Simple will never have: free cash deposits.

More importantly, Gobank is, actually, a bank. (Simple, by contrast, is basically a smart front end built on top of Bancorp.) That means, at least in theory, that it can iterate more quickly than Simple, which needs to work with Bancorp in order to add features. And in terms of marketing, Gobank can sell itself as being a bank; Simple can’t.

Gobank is great news for consumers: it means that simple, no-fee, debit-card-based banking is really entering the mainstream, and might even get picked up by mid-sized commercial banks at some point. (It doesn’t make sense for banks with more than $10 billion of assets, because they can’t get the higher interchange revenue which makes Gobank and Simple workable.) It also means — I hope — that rip-off prepaid debit cards are going to become increasingly marginalized. Given the choice between a prepaid debit card and a Gobank account, it makes no sense at all to get the prepaid debit card: the bank account is superior, and cheaper, in all respects.

I asked Green Dot CEO Steve Streit about this yesterday, and he said that demand for prepaid debit cards rarely intersects with demand for checking accounts; he’s targeting Gobank at people who want a checking account, not at people who want a prepaid debit card. That’s fair enough. But as prepaid debit cards start looking more and more like bank accounts (think Suze Orman’s Approved card, or Amex’s Bluebird card, or Chase’s Liquid card), it’s pretty clear that they’re now going to have to start competing not only with other prepaid cards, but also with the likes of Gobank and Simple.

As far as Green Dot is concerned, Gobank is a big and important bet. Since its blaze-of-glory IPO in July 2010 at a first-day price of $44 per share, the company’s stock has gone steadily south. It rose yesterday, on the Gobank news, but gave up all those gains today: it’s now trading at just $13.30, which corresponds to a market capitalization of less than $500 million. I don’t know what Simple’s valuation is these days, but I’m sure that Green Dot would love to be credited with that kind of value, on top of its debit-card franchise.

I’m sure that Gobank will evolve over time: I don’t really understand the voluntary “membership fee”, for instance, and some of the gimmicks, like the “Fortune Teller” in the app which tells you whether you can afford a certain item, are not the kind of thing that people really want from their bank. But the technology looks solid, and it’s always encouraging when a company shows a willingness to cannibalize its existing customer base. (You can’t make free cash deposits onto a Green Dot prepaid debit card, for instance.)

So here’s hoping that Gobank is a big success, along with Simple and anybody else looking to enter this space. That’s really the best chance we have for the big banks to get forced to make their checking accounts much more user-friendly.

If you have a bit of time today, the official JP Morgan post mortem on the London Whale affair is well worth reading. The whole thing is 132 pages long, although the executive summary — which is very clearly written — is only 17 pages.

One thing the report certainly does is reinforce my conviction that you can’t hedge tail risk. The losses all took place in something called the Synthetic Credit Portfolio, which was described as a “Tail Risk Book” — something designed to make money “when the market environment moves more than three standard deviations from the mean based on predictions from a normal distribution of historical prices”. In other words, JP Morgan is well aware that market moves are not normally distributed, and therefore it has a whole derivatives book in place to protect itself against inevitable unexpected events.

The whole point about tail risk, however (a/k/a “black swans”) is that you can’t anticipate exactly what it’s going to look like before you see it. In this case, the biggest tail event was the publication of stories, in the WSJ and Bloomberg, talking about JP Morgan’s positions. Those stories had a massive effect on the mark-to-market valuation of JP Morgan’s positions At the beginning of the first trading day after the stories appeared, it looked as though JP Morgan might be facing a one-day loss of $700 million; in the event, the final official number was $412 million. Ina Drew, the person in charge of the portfolio, sent an email to JP Morgan’s CEO and CFO, in which she observed that the move was “an eight-standard-deviation event”.

The report doesn’t say how many eight-sigma events the CIO has ever seen: my guess is that this is the only one. But here’s an idea of how crazy eight-sigma events are: under a normal distribution, they’re meant to happen with a probability of roughly one in 800 trillion. The universe, by contrast, is roughly 5 trillion days old: you could run the universe a hundred times, under a normal distribution, and still never see an eight-sigma event. If anything was a black swan, this was a black swan. And it didn’t help JP Morgan’s “tail risk book” one bit. Quite the opposite.

Another thing the report does is show just how difficult it is for any large organization to actually implement what managers want. At JP Morgan, for instance — where the CEO has an unusually large degree of power and knowledge of what is going on — the whole firm was meant to be reducing its “risk-weighted assets”, or RWA, since the higher a bank’s RWA, the more capital it needs under Basel III. And yet somehow, by the time this directive trickled down to the London Whale, it had been watered down and misinterpreted to the point at which the office’s RWA actually went up — substantially — rather than down.

What’s more, there’s a constant theme running through the report of managers being told what they want to hear, rather than the truth, especially with regard to substantial losses. When those appear, no one wants to tell Ina Drew about them; instead, the traders do everything they can to try to either fudge the numbers or attempt to trade their way out of the position.

Interestingly, one way that numbers were fudged was to use the favorite tool of quants around the world, the Monte Carlo analysis. After the Bloomberg and WSJ stories appeared, for instance, one trader drew up an analysis of just how bad the position could get. He modeled nine extreme event like a “bond market crash” or a “Middle East shock”, and found that in six of them, the portfolio lost money, with the losses ranging from $350 million to $750 million. This analysis did not go down well:

This trader sent his loss estimates to the other on April 7. According to the trader who prepared the loss estimates, the other trader responded that he had just had a discussion with Ms. Drew and another senior team member, and that he (the latter trader) wanted to see a different analysis. Specifically, he informed the trader who had generated the estimates that he had too many negative scenarios in his initial work, and that he was going to scare Ms. Drew if he said they could lose more than $200 or $300 million. He therefore directed that trader to run a so- called “Monte Carlo” simulation to determine the potential losses for the second quarter. A Monte Carlo simulation involves running a portfolio through a series of scenarios and averaging the results. The trader who had generated the estimates did not believe the Monte Carlo simulation was a meaningful stress analysis because it included some scenarios in which the Synthetic Credit Portfolio would make money which, when averaged together with the scenarios in which it lost money, would result in an estimate that was relatively close to zero. He performed the requested analysis, however, and sent the results to the other trader in a series of written presentations over the course of the weekend. This work was the basis for a second-quarter loss estimate of -$150 million to +$250 million provided to senior Firm management.

In the event, of course, the portfolio ended up losing not $150 million, not even $750 million, but more like $6 billion, with some $800 million of those losses taking place in the six trading days leading up to April 30, long before the decision was made to liquidate the position. Which just goes to show how useful stress tests are. (Remember, the initial worst-case estimates were put together after the WSJ and Bloomberg stories appeared, which means that JP Morgan was acutely aware, at this point, of the risk that the market would move against them just because their positions were public.)

There is one big omission in the report — and that’s any discussion of how the ultimate losses in the portfolio grew to be so enormous. Where did the initial $2 billion estimate come from, and how did it grow to $6 billion by the time all was said and done? The report basically ends when the potential losses were made public, and doesn’t spend any time discussing how Jamie Dimon and his senior executives handled everything from there on in.

From the perspective of JP Morgan’s shareholders, there are two big things to worry about in this whole episode. The first is weaknesses in risk management, which the report goes into in great detail. The second is the way that senior management responds to a crisis, and whether it can do so while keeping its head and minimizing losses. On that front, the report is silent. Did a panicked reaction to the early losses result in a “dump everything immediately” response which ended up causing an extra $4 billion in damage? Who was responsible for those $4 billion in losses, and how avoidable were they? Those questions are never asked, let alone answered.

JP Morgan has looked in great detail at its crisis-prevention architecure: it’s time, now, too look at its crisis-response architecture, too. Because sometimes, it seems, the latter can cause more damage than the former.

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House Republicans are reportedly threatening to force a government shutdown — or even a default — to get the spending cuts they want.

This is all about the debt ceiling, of course. The US hit its statutory spending limit on December 31; since then, the Treasury Department has been using a series of “extraordinary measures” to keep the country from defaulting. Those measures, Treasury Secretary Tim Geithner, said into a letter to House Speaker John Boehner yesterday, could expire in mid-February. If they do, some 80 million payments a month could be at risk. Geithner does not say bond payments could be at risk, but that didn’t stop Fitch warning that it — just like S&P, last time around — might downgrade the USA as a result.

A bill resurrected by Republican Senator Pat Toomey would require Treasury to prioritize general debt obligations —  think bond payments — any time the US hits the debt ceiling. In 2011, Treasury suggested this kind of prioritization is “default by another name.” Similarly, Keith Hennessy, a former Bush Administration economist, says that “the sanctity of contracts and the US government’s credibility” are at stake: not paying benefits or bills, he writes, would be  ”the first step to becoming a banana republic”. President Obama echoed this critique yesterday in a press conference.

In practice, as Derek Thompson says, prioritization is frightening. “Some days, the government would get enough money to pay Social Security checks and Medicaid providers,” he writes. “Other days it wouldn’t”. And that’s assuming prioritization is even possible. Brad Plumer notes that every day Treasury gets about 2 million invoices from government agencies, which are processed automatically “dozens of times per second”. No one knows whether it’s is legal or even possible to pay bondholders with certainty while deprioritizing everyone else owed money by the government. JD Foster at the Heritage Foundation, for his part, thinks the Treasury Department will always pay bondholders first, even if the legality of doing so is murky.

The best outcome, of course, is that Congress votes to raise the debt ceiling before any such measures become necessary. For the other possible outcomes, check out Quartz’s Choose Your Own Adventure-style chart. — Ryan McCarthy

On to today’s links:

Housing
New foreclosure settlement cash “being distributed with no regard to whether a borrower suffered harm” – Joe Nocera

Oxpeckers
The one time publisher of Twain and Hawthorne publishes Scientology propaganda as “sponsored content” – Gawker

The Fed
Burning questions, uncontroversial answers — starring Ben Bernanke – Binyamin Appelbaum

Alpha
Dan Loeb is on a heroic quest to cut pay at Morgan Stanley (and boost his investment) – WSJ
Herbalife provides the same service as Alchoholics Anonymous: Social support – John Hempton

TBTF
JPMorgan gets a wrist slap from regulators who should’ve caught them – Lisa Pollack
Suddenly, everyone loves bank stocks again – Bloomberg

Regulations
How rating agency reform failed – FT

Remuneration
Morgan Stanley pleased to announce that 2012 bonuses will be paid in 2013, 2014 and 2015 – Reuters

Funny Because It’s Not True
“Coca-Cola announced that… all sweetened fizzy drinks will be voluntarily recalled” – Ken Layne

Long Reads
An extended argument that student debt can can make us better capitalists – Jacobin

Awesome
Walmart says it will hire any military veteran discharged in the last 12 months – Matt Yglesias

Hackers
How the legal system failed Aaron Swartz – New Yorker

Housing
The number of underwater homeowners fell by 4 million last year – Bloomberg

Right On
The quest for the right kind of stupidity – FT

Wonks
Both the Fed and the Treasury “emit interchangeable obligations that are in every relevant sense money” – Steve Waldman

Bold Covers Letters
“I have no qualms about fetching coffee, shining shoes or picking up laundry” – Business Insider

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The robots are coming for your job.

In the past few months there’s been a boomlet of very smart people worrying about the economic consequences of our increasingly robotic future. Kevin Kelly, in a cover story for Wired last month, describes this imminent — but not yet sentient — threat: “before the end of this century, 70 percent of today’s occupations will likewise be replaced by automation… robot replacement is just a matter of time”. He’s not worried, however, because “The one thing humans can do that robots can’t (at least for a long while) is to decide what it is that humans want to do”. You will always have a job; it will just consist primarily of telling robots what to do.

Robot servants and factory workers may give us more leisure time, but Noah Smith worries they’ll further erode labor’s declining share of national income. Even more problematic, they will cause “old mechanisms for coping with inequality break [to] down”. Paul Krugman agrees that a shift is necessary: if labor’s share if income continues to decline, “it makes nonsense of just about all the conventional wisdom on reducing inequality. Better education won’t do much to reduce inequality if the big rewards simply go to those with the most assets”.

How do you redistribute wealth from robots towards humans? Smith has a few suggestions, including incentivizing people to control their own capital (i.e. owning robots).

Today’s capitalists, however, might not be too pleased with technology’s ascendancy. Izabella Kaminska thinks that we have already reached the point where technology threatens business’s ability to generate returns on capital. That explains the rise of patent wars and other attempts to defend corporate profits with legal, rather than economic, moats. Kaminska has pulled together a great set of links examining the conflict between technology and capital.

This also isn’t the first boom in futurist, robo-economic theory. Bloomberg has a helpful look back at the American technocrats of the 1930’s. They thought increased productivity through mechanization had created the mass unemployment of the Great Depression, and that scientists should run the country as engineer kings. (A leading member of the movement turned out to be a fraud, and the movement was largely discredited academically).

This debate will continue, at least until the singularity arrives. Then humanity will end, or proceed infinitely, depending on your view. — Ben Walsh

On to today’s links:

Wonks
Finally, Nate Silver is wrong about something of national importance - ESPN
Very good reasons to delay the canonization of Tim Geithner – Mike Konczal
“Overthinking this sort of thing is exactly the right response. But they haven’t overthought it enough” – New Statesman
Mark Sanchez as a sunk cost – James Surowieki

JPMorgan
Jamie Dimon might have been responsible for something that wasn’t great – Bloomberg

Cephalopods
Goldman Sachs would like to delay, increase its UK bonuses by 5 percent – FT
Goldman’s new CFO excels at risk management and karate – Lauren LaCapra and Carrick Mollenkamp

#MintTheCoin
Sorry, the US won’t be getting a platinum coin and the attendant constitutional crisis anytime soon – Ezra Klein

Strange Bloomberg Headlines
“Brazilian Bikini Waxes Make Crab Lice Endangered Species” – Bloomberg

Alpha
Hedge fund leverage increases to highest level since 2004 – Bloomberg
Cat beats professional stock pickers, market – Guardian

Charts
A visual rundown of the relatively scarce data on gun control in the US – Liz Fosslien

Politicking
“Then they came for my assault rifle, and I said, “Assault rifles? You should have started with assault rifles” – McSweeney’s
Low growth delivers political paralysis, and political paralysis delivers low growth – Annie Lowrey

Unfortunate Because It’s True
“This dim view of America is sad-making” – Choire Sicha

Let’s nip this one in the bud, shall we? Here’s a headline from David Morrison at Credit Union Times: “CARD Act Has Kept Card Interest Rates High, Analyst Claims”. He’s talking about a 16-page paper from Tim Kolk, who’ll email you a copy if you ask him nicely and/or drop my name. But here’s the gist of his argument:

Since 2008, benchmark auto loan rates and mortgage rates have declined by 30% and 42% respectively while credit card interest rates have declined by only 3%.

If credit card interest rates had declined in an amount proportional to the mid-point decline of other lending products, then average credit card interest rates would have declined by 410 basis points since 2008.

The additional interest costs of these higher-than-otherwise expected interest rates are estimated at $28 billion annually.

Kolk even has a handy chart:

This seems clear, no? The spread between credit card rates and the prime rate used to be low, and then the CARD Act was introduced, and now it’s high. What’s more, says Kolk, “the great majority of the above rate increase can be attributed to CARD Act”, which introduced a host of consumer protections for credit card holders.

There’s no doubt that $28 billion is a lot of money, and that if Kolk is right, that would be a huge black eye and unintended consequence of the CARD Act. Fortunately, he’s not right, and there are three ways of showing that.

First, let’s zoom out a bit and show what’s happened to credit-card interest rates, and the prime rate, over the past 17 years:

What you can see here is that credit-card interest rates are much less volatile than the prime rate: they stay in a pretty narrow band between 12% and 16%, even as the prime rate has a much greater range. And while there are lots of relatively small moves up and down in credit-card rates, they don’t bear much relation to what’s happening with the prime rate, which moves slowly.

To put it another way: the prime rate is locked directly to the Fed funds rate: it’s basically set by the Fed. Credit card rates, by contrast, are not: the Fed has much less control over them. And so you’d expect the spread between the two rates to be pretty volatile. Which it is! What you might not expect, however, after reading Kolk’s paper, is that the spread came down after the CARD act came into force. Here’s the spread between the two interest rates: the red triangle marks the point at which the CARD Act was signed into law.

This is not the chart you’d expect from reading Kolk’s report — which, incidentally, never mentions when the CARD Act actually started taking effect. What you see here is a lot of more-or-less random ups and downs: for instance, the all-time low in the spread, of 552bp in May 2000, took place when the prime rate was a whopping 9.24%. Kolk would have you believe that this series should go down when the prime rate goes down, but in fact it’s more likely to go down when the prime rate goes up.

The one very clear trend — as you’d expect — is that when the country is in the midst of a gruesome credit crunch, the spread on credit-card interest rates goes way up. But then, after the CARD Act was introduced and liquidity started coming back into the system again, the spread started falling.

In any event, it’s just intuitively wrong that credit-card interest rates would mirror the Fed funds rate. The Fed does have a pretty strong effect on mortgage rates, and car-loan rates, because people shop for mortgages and car loans on the basis of where they can get the best rate. But credit cards don’t work like that. Their interest rates change in unpredictable ways, and in any event, when most people get a new credit card, they’re either taking advantage of a limited-time introductory offer, or else they’re fully intending never to pay any interest at all.

Credit card companies have a fiduciary responsibility to maximize their profits, and that in turn means they have to maximize the interest rates they charge. They’re good at doing that: like a magician, they force your attention to one place, full of shiny objects and bells and whistles, while quietly picking your pocket at the same time. They also take full advantage of behavioral economics, and the way in which we convince ourselves that we will be very fiscally prudent in the future, even if we weren’t in the past. They have every incentive to behave this way, and that’s exactly what they do, whether the CARD Act is in force or not.

Kolk has a series of perfectly valid points demonstrating that the CARD Act has reduced the amount of money that credit card issuers can make from their cards. That was entirely deliberate and intended. But there’s a common fallacy that if a company loses money in one area, it has to “make it up” somewhere else. In reality, the person in charge of that other area was always under pressure to maximize profits, even before the first area ceased to be so profitable.

In order for it to make sense for a credit card company to lower its interest rates, you need something of a perfect storm: not just lower rates, but also an environment where you want to increase your volumes, and an environment where you can gain new customers by advertising lower rates. Right now we’re just not there: credit card issuers aren’t so keen for new customers that they’re willing to lower their rates to get them, and in any case the people getting credit cards aren’t recklessly rolling over their balances, like they did before the crisis: instead, they’re still largely in deleveraging mode.

You wouldn’t expect credit card companies to be competing on interest rates, then — and they’re not. But that’s got nothing to do with the CARD Act. And regardless, as my chart shows, spreads and rates are both down significantly from when the CARD Act was introduced. Sometimes, regulation really does hit the companies it’s intended to hit, without much collateral damage.

Ginia Bellafante’s column this weekend is depressing on two parallel fronts. Firstly, and unmissably, there’s the way it’s shot through with a miserable kids-these-days condescension. You really couldn’t make this one up: Bellafante’s theme is that young people in New York often spend too much money on — wait for it — food. Back in her day, 20 years ago, “it was possible to go for very long periods without meeting even one 24-year-old who could tell you anything about sea urchin”. Sadly, that’s no longer the case:

Every generation of young New Yorker finds its own way to squander its meager earnings, and this one seems content to spend the money it makes on expensive, curated food with little sense that it is really squandering anything at all.

This is clearly idiotic: as Ben says in the comments, “if any young person is fortunate enough in this punitively expensive city to have the money to spend on a luxury that she enjoys, then carpe diem and bring on the sea urchin”. Different people, and different generations, like to spend their money on different things. I have much more money now than I did 15 years ago, and yet there are certain things I spent money on 15 years ago which would seem ridiculously wasteful to my present-day self. And that’s exactly as it should be, not least because the fundamental driving force of capitalism is that trade can be mutually beneficial, thanks to differences in the way that two people value the same thing.

Bellafante’s Exhibit A is Yaffa Fredrick, a 23-year-old production assistant at MTV who spends some $300 per week on food. Indeed, Frederick loves her food so much that she “works an additional 10 to 15 hours a week tutoring and baby-sitting” so as to be able to afford more of it. Good for her! Except, that’s not how Bellafante sees it:

It surely comforts modern parents who have spent fortunes educating their children to know that these children are spending money on pork belly and not, for instance, cocaine. But what solace can it offer to realize that $300 a week put into an S. & P. 500 Index fund over the past five years would have provided an annual rate of return of 10.34 percent and grown to $100,354 today? Even saving $300 a week at a 6 percent rate of return would have yielded about $91,000, Mark X. Chemtob, a financial adviser at Ameriprise, said, adding that in both cases, the sums would qualify for a down payment on a starter apartment in New York.

This is the point at which Bellafante’s column both jumps the shark and at the same time demonstrates just how invidious a certain strain of personal-finance thinking has become. Obviously, this line of thinking is profoundly silly. For one thing, five years ago, Yaffa Fredrick was 18 years old; there’s no conceivable way one could expect her to have been saving $300 per week over the past five years. Not when most of those five years were spent in college. And in any case, at no point during the past five years — or during the next five years, for that matter — can anybody save $300 per week at a 6% return. Even 1% is pretty impressive, these days. In order to get anywhere close to 6%, you need to take a serious risk of losing a large chunk of your money, and/or you need to tie your money up in some highly illiquid investment. Neither approach makes a great deal of sense for a 23-year-old who could need her money at any time.

On top of that is the ridiculous idea that accumulating “a down payment on a starter apartment in New York” is such an obviously wonderful thing to be able to achieve that it’s worth not eating food for five years in order to get there. I think Bellafante might make an exception for a stuffed pork loin once a year, and maybe whatever bare-minimum expenditure might be necessary for purely nutritional purposes. But basically, she seems to be saying that if you’re 23, then to a first approximation you shouldn’t be eating out at all, and instead you should take all the money you can scrounge up from tutoring and baby-sitting, and put it into an S&P 500 index fund.

There’s an inescapable conclusion from Bellafante’s column: if you’re just starting out in the big city, a 23-year-old living on a relatively modest paycheck, then it behooves you to spend an additional 10-15 hours per week doing things like tutoring and baby-sitting, just so that you can take the proceeds and invest them in the stock market. Never mind that no 23-year-old in her right mind would ever do such a thing.

There’s an interesting question, though, hidden behind this silly column: Why does Bellafante think this way? Why does she think that saving money today is better than spending it on food, and why does she think that buying an apartment is better than renting one, and why does she think that when you’re 23, future consumption is more important than present consumption, and underneath it all, why does she think about the consumption of young New Yorkers in terms of bizarre opportunity costs?

To answer these questions, you couldn’t do better than to read Helaine Olen’s new book, Pound Foolish: Exposing the Dark Side of the Personal Finance Industry. As it happens, Olen had an op-ed in the same issue of the NYT as Bellafante’s column, and her message is clear. First, if we don’t have money it’s not our fault: household net worth has been falling as living expenses have been rising and median incomes have been stagnating. There are deep structural reasons why most Americans don’t have any real savings; those reasons explain substantially all of the problem, as Elizabeth Warren, for one, never tires of explaining.

As those deep structural causes took hold, so did the number of Americans struggling with their finances. I’m not talking about the young free and single here: I’m talking about mothers, in particular, working very hard to feed and clothe and house their families, finding themselves perennially short at the end of the month, and as a result spiraling into credit card and other forms of debt. That’s a horrible situation to be in, and when you’re that desperate, you grasp at anybody offering solutions to your problems.

Hence the rise of the personal-finance industry: gurus like Dave Ramsey, David Bach, and Suze Orman, who promise that they have the solution to your financial woes. These gurus have become extremely wealthy peddling their messages, mainly because the natural demand for what they’re offering is very large and growing. And there’s one thing they all have in common: a message that you can fix these things on your own, and somehow, magically, become fabulously wealthy — or at least financially independent — even without earning more money.

You can’t, of course: that’s a myth. But it’s a powerful myth, all the same: just cut out a daily latte habit, and the next thing you know, you’ll be a millionaire! Whether she realizes it or not, Bellafante has internalized this kind of personal-finance snake oil — the advice that you can reliably expect double-digit returns by investing in the stock market; that leveraging yourself up and going hundreds of thousands of dollars in debt by buying “a starter apartment” is an entirely sensible financial decision; and that indeed it’s so important you should probably deprive yourself of restaurant meals for half a decade in order to get there.

In reality, none of these things are true. A single 23-year-old in New York is going to spend all the money she earns, one way or another, and that’s absolutely fine. Saving is a means of delayed gratification: it’s a way of trying to buy future consumption, and it’s not something that most of us are very good at, especially not when we’re 23, when the marginal benefit of present consumption is probably at its absolute zenith. There’s a time and a place for saving, of course. But that time and place is probably not New York city at age 23. And in any event, people on modest incomes don’t, in reality, become rich through saving. That’s a myth peddled by personal-finance gurus and amplified by financial-services professionals peddling savings products. And it’s curiously powerful.

Update: It turns out that Yaffa Fredrick does save a substantial amount of money after all: “about $450-$500 a month—split between a personal savings account and a 401(k)”. Indeed, it seems that she’s actually one of the most fiscally prudent 23-year-olds in New York. Which you would never have guessed from Bellafante’s column.

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Being boring continues to be highly profitable for Wells Fargo. The nation’s largest bank by market cap reported $5.1 billion in earnings today, another record quarter. Lending continued to grow, and the bank originated $125 billion in mortgages, up 2% from last quarter.

The FT’s Tom Braithwaite explains why Wells Fargo’s shares went down rather than up today: its net interest margins — the profit it makes on the difference between what it borrows at and what it lends at — continues to fall. The WSJ reports that banks like Wells Fargo have too many deposits and complain of having too few creditworthy borrowers:

Deposits reached a record $10.6 trillion at the end of 2012, according to Market Rates Insight Inc., a San Anselmo, Calif., firm that tracks deposit data. Meanwhile, the share of each deposit dollar that banks lend out hit a post financial-crisis low in the third quarter.

But is Wells Fargo’s business model still too opaque for investors or regulators to comprehend, as Jesse Eisinger and Frank Partnoy argue? Wells Fargo CEO John Stumpf was dismissive: the “company is pretty plain vanilla… I’ve never seen us be more transparent”. Matt Levine puts it a different way: “if Wells is a giant hedge fund, it’s a pretty boring one”. If Wells is putting its cash into opaque investments rather than lending it out, Levine writes, it’s mostly investing in very low-risk assets. Wells just has “more cheap funding than it knows what to do with”.

Wells shareholder Warren Buffett doesn’t share Eisinger and Portnoy’s worries. US banks, he says, “will not get this country in trouble, I guarantee it… The capital ratios are huge, the excesses on the asset side have been largely cleared out”. (Buffett is an investor in four of America’s seven largest banks.)

For the moment, those excess deposits seem to be invested very conservatively, which means that Buffett may be right. But there’s still nothing, really, to stop that cash from someday ending up in CDX.NA.IG.9. — Ben Walsh

On to today’s links:

Pivots
How Samsung shocked geeks and became the biggest tech company in the world – Farhad Manjoo

Bold Ideas
Japan’s central banker is heroically rolling out a 10.3 trillion yen stimulus – Matt Yglesias

Good News
Long-term unemployment is finally starting to fall (albeit slowly) – WSJ

Popular Myths
We’re actually a lot closer to closing the deficit than you think – CBBP

Right On
“The debt ceiling is arbitrary, doesn’t affect the deficit, and serves no real function in keeping spending down” – Jerrold Nadler

Charts
A cool new way to measure the labor market – The Atlanta Fed
Will the economy grow in 2013? Depends what you mean by “grow” – Calculated Risk

Boys Clubs
All 13 executives reporting directly to Citigroup’s new CEO are men – American Banker

Wonks
A cool profile of an MIT economist whose “natural experiments” are changing education – MIT

China
The world has two economies: China, and everyone else – Diplomat

Headline of the Day
“Professor attends conference” – Salisbury Post

The Fed
When central bank independence fails – Gillian Tett

Crisis Retro
Jack Lew and how we all forgot about financial reform – Heidi Moore

Big in Japan
“Infidelity phones” that hide people’s affairs – WSJ

Peak Pirate
Pirate retires to spend more time with treasure – BBC

Upgrades
Attention Thomas Freidman: Amtrak is upgrading its WiFi – Chicago Tribune

Alpha
39% of fund managers beat the S&P last year – Barry Ritholtz

#MintTheCoin
S&P says minting a trillion-dollar platinum coin wouldn’t lead to a US downgrade – Dave Weigel